In this article, Senior Associate in our Divorce and Family team Lucy Gould considers the impact of the economic fallout from the Covid-19 crisis on valuations in financial proceedings on divorce.
A key factor in the adjudication of financial claims on divorce is the ‘sharing principle’. Broadly speaking, the assets built up during the marriage are to be divided equally between the parties regardless of which spouse made the financial contribution to their acquisition or in which spouse’s name they are held (absent any specific factors such as a greater need or ‘special’ contribution of one spouse).
Equality takes two forms. The first is in respect of value, which is determined as at the date of the Final Hearing (or the most recent disclosure before that hearing). The second is the more nebulous idea of balancing risk. The aim is to share broadly equally the risk profile of the assets, with each spouse receiving a mixture of risky and less risky assets.
Since the global lockdowns as a result of Covid-19, the exercise of valuing assets, often more of an art than a science even in ‘normal’ times, has become riven with additional complication and uncertainty.
For couples in the midst of divorce proceedings who might be relying on a valuation obtained at the end of 2019 or beginning of 2020, the question will be whether that valuation can still be relied upon. Or, should they obtain a new or updated report and incur additional cost and, possibly, delay to their proceedings? Other couples will be grappling with the terms of instruction for a new valuation and the weight that should be given to it in light of the current uncertainty.
Real property
One asset that will be relevant for most couples is the family home (along with any other properties owned). With estate agents in England now having recommenced in person viewings, the transaction data of the next few months will be watched with interest.
It is impossible for the judge in any given case to crystal ball gaze in respect of the property market. It remains to be seen whether the recent drop in activity in the property market will be short term and a rally across the board is imminent (aided by low interest rates) or whether a more marked shift in values will emerge, with, for example, city centre properties becoming less desirable but values holding up or increasing for larger homes with outside space away from city centres.
Previous case law would indicate that judges will rely on the updated valuation of a jointly appointed expert, even if that means a considerable variation in the value previously attributed to a property. This is what we saw in cases that followed the 2016 EU Referendum.
Shares in private companies/family businesses
Business assets that are not publicly traded present more complex issues for the court. Not all businesses are alike. Some will have effectively stopped trading with no short-term prospect of recovery in light of new social distancing norms (hospitality and entertainment, for example). Others may have experienced a complete hiatus but will expect a relatively swift recovery (wider economic climate aside) once lockdown restrictions are lifted (for example, hairdressers and smaller retailers). Some will have been impacted but adapted their working practices such that (again, wider economic climate aside) they have continued to trade as normal (for example, professional service firms). Some will have positively benefitted from the crisis (food retailers, delivery services and so forth).
The crisis has brought into sharp relief our interconnectedness. Even if, on the face of it, a business should be surviving or even prospering in the current climate, it may still be exposed due to the position of its suppliers and other elements on which the business relies.
In such circumstances, it also cannot be business as usual when it comes to expert valuations. Historical performance data cannot be relied on as an indicator of future performance. In this respect, the position must differ from 2008, which was overwhelmingly approached by the Family Court as a downturn one would expect to see in any economic cycle. A pandemic that abruptly shuts down large swathes of the economy is clearly outside the usual economic cycle and, therefore, cannot simply be marked on charts with certain assumptions applied as standard. What one would expect to see (and expect parties to cooperate with) is far greater communication between the appointed expert valuer and the relevant individuals in the business in terms of providing access to internal forecasting, business recovery plans and monthly (or even weekly) management reports and performance measurement metrics.
If, as expected, the crisis leads to significant unemployment and a general downward shift in trading conditions, judges will be faced with an unenviable task. While the court will always seek to disentangle the parties’ financial futures, it may be that judges consider the position to be too uncertain for any valuation to be cited with confidence, at least in the short term. If this is the case, one could foresee a trend towards outcomes that result in parties retaining shares in the same business. This may perhaps mean one party, who would otherwise not have remained involved, having a new class of non-voting shares or shares with specific, limited rights issued to them or even with attached buy-out conditions that apply in certain circumstances. This approach would avoid valuation issues and consideration of the allocation of risk between the parties.
General considerations
English law provides judges with broad discretion when allocating assets on divorce. This will be more determinative now than ever where the centrality or otherwise of valuation issues will be highly case-specific. For example, if the asset in question accounts for a relatively small amount of the marital pot then the precision of the valuation will be of less importance than if the asset in question makes up the vast majority of the marital pot.
The law provides that a professional valuation can only be introduced in evidence with the permission of the court. If permission is to be given, the judge has to find that the instruction of an expert is necessary to do justice between the parties. Or, put another way, that justice cannot be done without it. This is a relatively high threshold and the case law in recent years shows a marked trend in judges being openly critical of lengthy and expensive expert reports. Before parties reach the meat of the valuation evidence, they are likely to find themselves litigating its necessity.
If an updating report rather than fresh evidence is sought, the first port of call may be the expert. One would imagine the court will approve the instruction of a further report if the expert considers that their previous valuation has been materially impacted. While rare, it is also possible under the rules for the expert (whose duty is to the court, not the parties) to seek direction from the court.
Finally, the law provides judges with the jurisdiction to order not just a transfer but also the sale of an asset. Ultimately, an asset is worth what someone is willing to pay for it.
Covid-19 is impacting individuals and companies around the world in an unprecedented way. We have collected insights here to help you navigate the key legal issues you may be facing at this time.
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