Finances on divorce increasingly complex

Family finances make divorce increasingly complex

Understanding and unravelling family finances during divorce can be a daunting prospect for many. Add to this the wider political and economic uncertainty created by Brexit and, perhaps, this might explain why some couples are apparently choosing to delay or avoid divorce altogether.

According to the latest figures from the Office for National Statistics (ONS), the overall rate of divorce for opposite-sex couples fell in 2017, representing a decrease of 5.6% since 2016. Divorce rates are at their lowest level since 1973, which is around forty per cent lower than their peak in 1993. The average duration of marriage at the time of divorce in 2017 was 12.2 years; this matches the high last seen in 1972.

Divorce looks to become increasingly thorny as couples disentangle their ever more complex financial and family arrangements in an unpredictable socio-economic climate.

Although property tends to be regarded as the biggest asset to be considered on divorce, this is not always the case.  Figures from the ONS show that, as at June 2016, private pensions were the largest component of the aggregate total wealth in England and Wales. Furthermore, changes in legislation have opened the door to greater flexibility in accessing pension pots, making them increasingly significant in divorce negotiations. As a result, many more spouses are seeking a share of pension arrangements on divorce.  Ministry of Justice figures showed a 43% increase in pension sharing orders, at 11,503 in the 2016-17 tax year, compared to 8,027 in 2015-16.  Pension sharing orders are issued by the Court to set out the share of a pension an ex-wife or husband will receive from their former spouse. As family lawyers will attest, pension sharing can present its own set of challenges, hence why it is important to seek the input of an actuary if you are seeking a Pension Sharing Order.

Like pensions, businesses can form a central part of a divorcing couple’s financial resources. Take, for example, the recent announcement by Amazon founder Jeff Bezos (the world’s richest man) that he and his wife are divorcing. Although England is unlikely to be the forum for this high-profile divorce, it nevertheless raises interesting questions about the treatment of business assets on divorce and how they should fairly be divided between spouses. In cases where spouses cannot reach a compromise, the Court has the unenviable task of deciding how to value and apportion these, often significant, companies. This can lead to bitter disputes, particularly in circumstances where a) experts themselves may be unable to agree the value of a company and the value itself may fluctuate b) the company may have been founded prior to the marriage, leading to arguments about what proportion is ‘non-matrimonial’ c) issues of liquidity can make extracting money from a company (so as to pay off a spouse) extremely problematic.

In the recent case of Versteegh v Versteegh four experts had given evidence and over £2 million had been spent in attempts by the parties to provide the Judge with evidence which would enable him to attribute a value to the husband’s company. The values given by the various experts ranged wildly. In consequence, the Judge, at first instance, felt unable either to ascribe a value to the company, or attempt to assess future liquidity, instead ordering that the wife should receive a shareholding in it as part of her divorce settlement. Awarding company shares to a spouse (so as to fairly apportion the risk-laden assets between the parties) is often referred to as a ‘Wells’ order after the 2002 case of Wells v Wells.

On appeal the wife in Versteegh v Versteegh argued that in declining to fix a value to the company, the Judge failed to ‘do his job’, and in consequence, his judgment was unfair. She sought to persuade the Court of Appeal that ‘Wells’ orders should only be made in the most exceptional cases, if at all, due to the wholly unsatisfactory result they produce. In this case, she argued, giving her shares in the company as part of her settlement prevented her from achieving a financial ‘clean break’ from her husband (with whom she had an unusually acrimonious relationship) and gave no foreseeable exit when she could anticipate realising her interest in the company. The Court of Appeal rejected this argument and, although acknowledging that Wells orders should be approached with caution, held that such orders are permissible, particularly in cases where Judges are unable to value a company or estimate its future liquidity with any certainty. This approach was upheld in the 2018 case of Martin v Martin where the Court of Appeal emphasised that valuations of private companies can be fragile and need to be treated with caution. Moreover, even when the Judge is able to ascribe a value, this does not necessarily mean that value carries the same weight as the value of other assets. Some assets (like company shares) carry greater risk and the Court stressed that this must be taken into account when dividing assets between spouses. In other words, in a case to which the sharing principal applies, the Court must seek to achieve a fair division of both the ‘copper-bottomed’ assets and the illiquid and risk-laden assets.

Liz Cookson, one of our family law experts, commented, “These cases emphasise the challenges faced by Family Courts dealing with company assets in the context of divorce.  Where a company represents a significant proportion of the assets, the questions of how to value value and apportion it can be a challenging one and must be given careful consideration. Ultimately, the Court’s approach will be to take account of all the circumstances of each individual case rather than adopting a ‘one size fits all’ methodology.

She added: “What is important is that the parties seek specialist, independent advice at an early stage with a view to reaching a sensible agreement.”

To discuss any family legal matter or issue, you can contact Elizabeth Cookson or the Family team on 01892 526344.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice.  The law may have changed since this article was published.   Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.