If the timing is right, a sale of shares between spouses within the fiscal year of separation would have no tax consequences and your accountant will have sufficient time to plan for your spouse’s exit from the company to reduce the tax payable on any financial settlement.

Of course, we don’t live in an ideal world and inevitably some couples will be unable to reach agreement on a financial settlement without recourse to the Courts. So do we have to slay the goose that lays the golden egg? In the majority of cases, the answer is most definitely, no. The Courts are prepared to find a creative solution to any conflicts of interest that may arise between spouses.

One issue which causes much controversy is the valuation of the business. One of the senior judges has described this as “more of an art than a science” (Coleridge J in R v R [2004]). There is no doubt, however, that the Courts will be slow to allow both parties to have their own expert evidence of the valuation. The instruction of a single, joint, expert valuer will be the norm and in most cases, it will be the cheaper option.

But is a valuation always necessary? If the business has no real value other than as an income stream for one of the spouses, a valuation will be irrelevant. To give a spouse a share of the capital of the business when the income from the business is financing maintenance for that spouse would amount to double counting.

In other cases, the value of the business will be relevant and will be one of the assets that the Court has to take into account when deciding how best to meet the needs of a divorcing couple and their children. If the business has to find funds to compensate an outgoing spouse, the next step will be to identify the potential source of those funds. The solution will be different in every case but possible options include:

1. Repayment of a director’s loan
2. With sufficient profits and cash in the company, the company could declare a dividend
3. The company itself could buy back the shares from the departing spouse

Often, the biggest problem in this situation is one of liquidity. The cost of borrowing might have a serious impact on the future trading of the business.

The Courts will look at the reality of the situation and that includes the impact of any order on other family members who may be employed by and reliant on the business for their own livelihoods. In the case of A v A [2004] Coleridge J rejected the argument of a husband (who was a minority shareholder in a family company) for a discount to the value of his shares. However, the judge did acknowledge that the husband should not be put under such pressure, to pay out his wife, that he might be forced to sell up. Instead, the judge considered what would be a realistic time frame for the payments and the husband was ordered to pay a lump sum over 20 years by 240 instalment payments.

What about a business run solely by one of the spouses? Does this fall within the definition of matrimonial property? The answer is not at all clear cut. In the recent case of Miller v Miller [2006] The House of Lords had to decide whether Mr Miller’s shares from a business in which his wife had absolutely no involvement fell within the definition of matrimonial property in respect of which the yardstick of equality would apply or whether they should be excluded from the fair division. The judges themselves came to different views on the definition of matrimonial property and whether, in fact this would include business assets even though, ultimately, they came to the same conclusion. One thing is certain, namely that the longer the marriage, the less relevant is the distinction between matrimonial and non matrimonial property.

At George Davies, the family team work closely with clients’ accountants and company advisors to ensure the best possible outcome for the family and for the continuation of the business. For advice on family issues affecting your business, contact the family team on 0161 236 8992

Disclaimer

The content of this article does not constitute legal advice. You should always consult a suitably qualified lawyer for professional advice about any specific legal matter of concern to you. George Davies Solicitors, its partners and staff do not assume any responsibility for information contained within this article and disclaim all liability relating to such information.

About George Davies Solicitors

George Davies was highly rated, in the North West, in 11 different categories of the 2006 Legal 500 review and in Chambers and Partners UK Directory. They specialise in all aspects of commercial law and boast a substantial Property Department within which sits a niche Construction team with experience in a full spectrum of construction law services. The firm was commended in the Legal 500 for their strong movements forward in a variety of property and construction deals and Chambers specifically mention its achievements in Construction. The Head of Construction, Catherine Kay can be contacted on 0161 234 8861 or emailed at catherinekay@georgedavies.co.uk

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