When it comes to dividing assets on divorce, the primary aim of the English Family Court is to achieve fairness. Of course, fairness can mean different things to different people depending on their situation.
Take a situation where an individual (let’s call him H) starts a business and puts a lot of work into it. After a few years, H gets married to W and they have a child. During the marriage the value of the business increases dramatically. H has continued to work in the business, developing it, and the income from it has been used to support the family. W has not worked in the business but has looked after the child who has a condition that needs significant care. H and W separate and need to decide on a financial settlement. How should it look?
- W argues that she should have half of everything that has been built up during the marriage – so 50% of the total assets after deducting the value of the business as it stood at the point when they married (increased to reflect inflation
- H says the notional value of the business at the date of the marriage should be increased to reflect a “spring board” effect from the work he put in before the marriage. He argues he should also be given credit for the fact that he personally has grown the business during the marriage and he has made a “special contribution” – he should therefore have more than 50% of the increase in the value of the business.
This situation arose in the recent case of XW v XH where H’s business had increased by about £460 million during the seven year marriage, having been worth about £30m when the couple married.
The first judge awarded W 25% of the increase in the business value – a sum of £115m. He considered that the business value at the time of the marriage should be uplifted to take account of the potential that had been created by H and also that it was relevant that H had by his own endeavours generated an increase in the value of the business during the marriage and he had made a “special contribution”. However, it wasn't clear how the judge had apportioned the impact of each of these different factors. The expert accountant had not put a figure on the latent potential in the business.
W appealed successfully. The Court of Appeal confirmed that wealth generated during the course of a marriage, even business assets generated solely by one party, will generally be shared equally on divorce. In certain very limited circumstances – specifically short childless marriages – it may be not be appropriate for the wealth generated to be shared equally, but in longer marriages and where there are children it should be assumed that there will be equal sharing.
The Court also disagreed that there had been a “special contribution” by H. The judge hadn’t weighed up the contribution that W had made, risking discrimination between the roles of the parties to the marriage. The judge had however been justified in reflecting the pre-marriage latent potential in the business, and there was no fixed formula or method which he was required to apply. Taking a broad brush approach, the Court of Appeal decided the correct method was to say that 60% of the increase of the value in the business was matrimonial property which should be shared equally.
The upshot was that W was awarded £145m (increased from £115m) with H having about £315m.
The takeaway points are that:
- Business wealth generated during a marriage, even by one party unilaterally, will generally be shared equally
- Business valuations are important, but ultimately a judge has a very wide discretion
- Pre-marriage contributions can have a significant impact on the result, but how they are taken into account can vary substantially from case to case.
Published: January 2020
A monthly briefing from Irwin Mitchell
January 2020
For general enquiries
0808 291 3524
Or we can call you back at a time of your choice
Phone lines are open 24/7, 365 days a year
