His Honour Judge Hess handed down this judgment following a four-day final hearing in the financial remedy proceedings between H and W. The dominant feature of the case was a business owned by H; the case illustrated the ‘well known caution which the courts have often expressed about company valuations’ [20].
Background
H (52) and W (38) met and began to cohabit in 2010, married in 2017 and separated in 2022.
H had UK Citizenship but was a citizen of ‘Country A’ by origin. H owned and ran a business which operates as ‘Company Y’ in ‘Country A’ and which has a subsidiary in the UK. W had previously had a career in events management, earning up to £50,000 pag, but was pursuing a competitive sports career as of 2021. W has aspiration which appeared ‘not to be unrealistic’ to compete for Team GB in the 2028 Olympics, but this goal was an expensive exercise funded (unwillingly, following their separation) by H.
The parties did not have any children of the marriage, albeit H had two children from a previous marriage. There was a slight issue over the duration of the marriage, but HHJ Hess dealt swiftly with that at paragraph 8(ix) of the judgment where he dismissed any suggestion of attaching less weight to the pre-marital cohabitation of the parties, citing GW v RW [2003] EWHC 611 (fam) and Miller v Miller [2006] UKHL 24. Therefore, the duration of the marriage was 11 ½ years and did not attract the specific considerations that befall short marriages.
Section 25 analysis
The majority of the asset schedule figures were agreed, although there were a few issues over the debt and tax liabilities to be included on H’s side of the schedule. However, the principal issue to be tackled by HHJ Hess was the valuation and matrimonial nature of Company Y.
Company Y: Valuation
The task of ascertaining the value of H’s 100% shareholding in Company Y was made difficult by the fact that H made a successful Daniels v Walker application, resulting in two competing expert opinions: Mr Jon Dodge (SJE) and Mr Paul Singleton (on behalf of H).
At paragraph 20 of the judgment, HHJ Hess observed that the two experts ‘represented a perfectly remarkable illustration of how competent professionals can take a reasonable position within a reasonable range of conclusions’. HHJ Hess cited from Versteegh v Versteegh [2018] EWCA Civ 1050 in a reminder of the difficulty inherent in valuing private companies for the purpose of financial remedies on divorce:
- There is likely no obvious market for a private company;
- Valuers using the same valuation method are likely to produce differing results (as in fact materialised in this matter);
- Profitability may be volatile, and so snapshot valuations may be unfair;
- The obvious difference between value based on opinion evidence and hard cash in exchange for shares; and
- Exposure to the real market is very different to a case where no one is suggesting the company should be sold.
In this case, the experts agreed on the EBITDA figure but differed over the multiplier to be applied to calculate an earnings basis valuation figure. They also differed, although to a lesser extent, on the net debt to be deducted from the figure. At paragraph 26, HHJ Hess weighs up how to tackle these differing opinions, both of which were persuasive and neither having the ‘better answer’ to questions posed by counsel. Consequently, HHJ Hess settled on splitting the difference: he used 7.2, being the midpoint of the multipliers proposed and £4.7 million, being the midpoint on the debt dispute.
Company Y: Matrimonial asset
The next step in the judgment was to determine the matrimonial nature of Company Y. H had held shares in Company Y since 2004, six years before the parties met. However, the growth in the value was of course an active, not passive, growth which meant that Company Y had acquired status as a matrimonial asset, at least in part.
The task here was made slightly easier for HHJ Hess as the experts agreed that the value of the shares in 2010 was £1,250,000 before tax. In determining how that value should be uplifted to reflect the passage of time, HHJ was drawn to Jones v Jones [2011] EWCA Civ 41. Counsel for H was able to successfully argue that the purchase of ‘Company Z’ by ‘Company Y’ in August 2010 (pre-cohabitation) was a ‘springboard’ event. As such, at paragraph 30, HHJ Hess doubled the valuation and applied an appropriate share index leading him to determine that £2.7 million of the £7.2 million company was non-matrimonial.
Application of section 25
Applying this analysis to the asset schedule of the parties, HHJ Hess determined that H would need to pay W a lump sum of £3.2 million in order to divide the matrimonial assets in the case equally between them.
In considering the income or earning capacity of the parties, H was considered to have a substantial income of c.£600,000 per annum net from Company Y. W had an earning capacity of £50,000 pag until 2021 and, despite her sporting goals, would be attributed with that earning capacity.
The standard of living enjoyed by the parties was a high one and it was reasonable to assess W as having income needs over her earning capacity. In dismissing the suggestion that there should be a whole life Duxbury Fund for W, HHJ Hess referred to the interim report of the Duxbury Working Party which concluded (at paragraph 4.3 of the Executive Summary) that calculations should no longer default to the life expectancy of the recipient.
Finally, this was a sharing case: ‘the starting point in the division of capital after a long marriage’ is that ‘fairness and equality usually ride hand in hand’. HHJ Hess agreed with Mostyn J in E v L [2022] EWFC 60 that there is a danger in elevating childlessness to a feature justifying departure from equality.
Outcome
HHJ Hess determined that W would receive a lump sum from H of £2.5 million. This was lower than the ‘equality’ lump sum of £3.2m and would mean a 38:62 split in favour of H over the matrimonial assets. The outcome reflected the difference between W’s ‘copper-bottomed’ assets and H’s ‘risk laden’ assets in Company Y.
The lump sum would be paid out as £300k in November 2024, £1 million in May 2025 and six further lump sums over six years of £200k. W’s existing salary from Company Y would be payable until the first two lump sums were paid. Following this, there is a clean break and no order as to costs. In coming to this conclusion, HHJ Hess considered the ways in which H could extract, in particular, £1million from the company and was satisfied it could be achieved ‘whether by sale, leaseback or otherwise’.
As such, this was a sharing case where there was a departure from equality in favour of H due to the unavailability of any assets outside of Company Y.
For the full judgment, click here.
