The law about how assets are shared on divorce is continuing to develop.
It is clear that where assets are “matrimonial property” and their value exceeds the needs of the parties, then this property is available to be shared.
Where the assets of the parties comprise “non-matrimonial property” then the position is less clear. The concept of non-matrimonial property applies to assets owned by one party prior to the marriage, assets that have been inherited, and assets acquired after the parties have separated.
There has been much debate, and different approaches adopted by the Court about how these assets should be dealt with. One approach favours a completely discretionary way of achieving fairness, and the other favours a more formulaic or arithmetical approach.
The dichotomy between the formulaic and discretionary approaches has also led to issues about the valuation of assets. If a Court adopts the arithmetical approach then it is critical to have a valuation of assets as they were at the start of the marriage as well as at the date it ended. The theory is that the value of assets brought into the marriage is treated as “non-matrimonial property”, but the increased value from that date, to the date when the marriage ended can be treated as part of the matrimonial “acquest” and is, therefore, matrimonial property subject to the sharing principles.
However, this approach has led to complexity and uncertainty when carrying out the valuation exercise. A whole series of recent cases have raised questions about the reliance which can be placed upon the valuation of shares in a private company.
To add to the complexity recent cases have considered the extent to which the Family Court can take into account “the latent potential” or “springboard effect” within a company. Williams J in IXvIY(2018) and Baker J in XWvXH(2017) considered issues which would not otherwise be reflected in a typical valuation, namely the value of the work carried out by a party within the business prior to the marriage.
Williams J stated in IXvIY(2018) that the issue boiled down to whether the pre-marital valuation should be subject to some form of indexation to reflect how the business grew on its own during the period of the marriage.
Williams J concluded “the weight of authority would support an approach which seeks to identify and take into account any latent potential that the business asset had when it was brought into the marriage by a party. The authorities would also support an allowance for the passive growth of that latent potential during the course of the marriage. How that is to be done would append on the facts of the individual case”.
In XWvXH(2017) Baker J stated that it was appropriate “to look… at the reality of what actually happened, rather than proceed on an artificial assumption of a straight line growth from the date of foundation of the business up to the eventual sale”. He concluded that there was “a significant, although unquantifiable latent potential in the company at the date of the marriage which is not reflected in the formal valuation”.
Normally the formal valuation is increased using this approach, thereby enhancing the value of the asset at the time that it was brought into the marriage. This has the effect of reducing the value of the matrimonial acquest available for sharing.
As such an approach is highly arbitrary, predicting how any particular Court will deal with this issue at a Trial is difficult, and creates uncertainty.