When assets aren’t divided 50:50. By Paul Read.
July 6, 2012 12 comments
Marilyn writes: Among non-lawyers, there prevails a belief that marital assets are simply divided 50:50 in a divorce. However it is a mistake to assume that this is always the case. As Paul Read, a solicitor based in our London office explains, when the assets include a business, the final outcome can be rather different.
As family lawyers we have developed a White v White reflex action. It takes the form of a certain legal response to cases involving long marriages, brought about by the landmark case of White v White .
This case changed the way surplus assets are divided upon the breakdown of a marriage after both parties needs have been met. It also gave us a great soundbite from Lord Nicholls:
“There is no place for discrimination between husband and wife and their respective roles.”
In practice, what this means is that there can be no distinction between a breadwinner and a homemaker when dividing up the couple’s assets. The parties are entitled to equal treatment. For long marriages, this has led to a general assumption that in most cases the assets will be divided equally. Cross-checked against the parties’ needs, a default starting point of 50:50 in more straightforward cases has evolved and seems eminently sensible.
However there are still a number of reasons why assets may not be divided equally after a marriage of, say, 25 years. A deviation from the principle of equality requires a reason such as stellar contribution, where one party has generated a vast fortune from his or her own unique skills and endeavours. A case in point would be Charman v Charman: the couple’s assets were assessed at £131 million. Mr Charman, a successful businessman, was ordered to pay his homemaker wife less than half of that (£48 million), because the court accepted that he had made a stellar contribution to the household finances.
Another common example would be where one party owned an asset before the marriage and that asset had never become mingled with the family finances. An inheritance, perhaps, which had remained in the sole hands of its recipient. In such circumstances, the party with the financial advantage would seek to retain more than 50 per cent of the assets and it is likely that if the other party’s needs have otherwise been met, there would be an unequal division. Few would argue with that.
These examples do remain very much the exception in long marriage cases, and 50:50 remains the division ratio of choice. But beware! If a business is involved, things may also not be as they first appear. This is particularly true if there is little prospect of a clean break, and there is going be continuing maintenance.
The fictional case of Frames v Frames
Take the fictional example of Mr Frames. Mr Frames is an optician, He has been married to Mrs Frames for 25 years. The couple decide to separate. They have a house, and a small cottage in Devon which they use at weekends. They also own a rental property, and a pension each.
Mr Frames is a partner in Frames & Co, which rents an area in a local shopping mall and also has an online presence. Mr Frames is 50 and earns around £80,000 net per year from his practice. Mrs Frames is 45 and earns around £14,000 net as a part time book-keeper.
Mrs Frames will require ongoing spousal maintenance. This is because her share of the assets will be enough to rehouse her, but it will not be enough to meet her income needs for the rest of her life or until she remarries. She estimates she will need a net sum of about £30,000-£35,000 per annum to live on. So she is hoping for about £15,000-£20,000 per annum from Mr Frames.
The couple’s assets are as follows:
Matrimonial Home: £500,000
Cottage in Devon: £250,000
Rental Property: £150,000
Mr Frames’ Pension: £50,000
Mrs Frames’ Pension: £50,000
Interest in Business: £250,000
On a first brush it is easy to assume that the assets will be divided equally. Surely that would be a sensible starting point? Such a division would provide £625,000 each, and there could be an arrangement to pay £17,000 to Mrs Frames, who would promise to look for full-time work and a review in the future.
As with many things, however, the devil is in the detail. Upon further investigation it is shown that Frames & Co has no assets, owns no property and has no director’s loan to return. The business is a cash-generating entity and the only capital value that can be attributed to it is a valuation based on goodwill or some ratio of turnover. But it is still worth this valuation, isn’t it? Well, perhaps in a strict commercial sense… But should it be included in the assets which stand to be divided between Mr and Mrs Frames? No. It is likely that Mrs Frames will obtain no interest whatsoever in the business of Frames & Co.
The real-life case of V v V
In 2005, Mr Justice Coleridge delivered the judgment in the case of V v V (Financial Relief) 2005 2 FLR 697. By coincidence the husband in this case was an optician, and in similar circumstances to our fictional Mr Frames. The case was heard on appeal from the local county court. Mr Justice Coleridge had to deal with the capital value of the husband’s company, and the extent to which a capital sum representing the company’s value would be included in the capital division. The wife contended for its inclusion into the asset schedule.
Mr Justice Coleridge first considered the basis of the company’s valuation. He concluded that for the purpose of these proceedings, it had no value save for its use as a vehicle to produce income.
He considered that the wife would receive maintenance from the husband and that the husband would obtain the money to pay this maintenance from the company, or at least in part from the company.
Mr Justice Coleridge then said (emphasis mine):
“There can of course be no hard and fast rule in relation to the extent to which the capital value of businesses are or are not brought into account but where (as here) there is no real value except as an income stream, to include it in circumstances where there is no suggestion that there should be a clean break, runs the serious risk, in my judgment, of double-counting. I consider that the proper approach in a case of this kind is for the court to treat such business assets as primarily a secure income of the parties, from which there has to be a substantive and unlimited order for periodical payments.”
The “golden goose”
In the fictional case of Frames v Frames then, it appears that the business will remain with Mr Frames in its entirety. No account will be taken of its capital value, because Mrs Frames will continue to participate in its profits via her maintenance.
At first sight this may seem to be at odds with the principles of equality as pronounced in White v White. However the wife continues to benefit from the asset – but through income rather than capital. As a matter of pure logic, it is faultless.
I am interested to note that between White v White and V v V came a case called N v N in 2001, in which the self-same Mr Justice Coleridge ordered that the business should be sold. He stated:
“Those old taboos against selling the goose that lays the golden egg have been laid to rest…”
Clearly, this is not quite the case. The circumstances of our case do not require a sale of the goose, rather its preservation.
In practical terms the effect of V v V is clearly significant for anyone who, unwittingly, may believe that asset division is a matter of simple mathematics and dividing by two.
So in the case of Frames v Frames, Mrs Frames will not retain £625,000. Instead, Mrs Frames will retain £500,000 and Mr Frames will retain £750,000.
If she chooses, it is possible that Mrs Frames could negotiate for more capital, at which point the capital value of the business would be relevant. She would accept a clean break in return. She could also decide to increase her own earned income to support herself, freeing her from the threat of having her spousal support reduced if she cohabits or stopped automatically if she remarries.
Either way, Mr Frames has dramatically increased his own financial position.
Paul Read was awarded an Honours Degree in Law by the University of Leeds and studied the Bar Vocational Course at the Inns of Court School of Law in London, specialising in civil and commercial litigation before being called to the Bar in 2004. He joined the in-house legal department of a global finance and media company in the City, before embarking on a successful sojourn into private business and developing a keen interest in family law.
Paul joined as a trainee solicitor in 2009 after completing the Legal Practice Course at BPP in Leeds, where he specialised in family law and advanced commercial litigation. Having already gained much experience with the firm’s high net worth cases, Paul is very much involved running the London office of Stowe Family Law.
July 6, 2012
Categories: Finances and Divorce