W had acquired franchise interest in P companies with investment from a third party (J). Pre-marriage, two companies owned two franchise outlets with shares owned between W and J. H became involved in the management of P pre-marriage. The parties married in 2005. By their separation in April 2019 there were 14 separate P companies, all held between W and J.
W became increasingly less involved when the parties had children, and by the separation H was managing and operating P autonomously. All the businesses were successful and grew during H's stewardship. Two further companies were incorporated, a property company (S), whose shares were owned between H and J, and a new franchise company (C). S and C received intercompany loans from P. Bank borrowing and a rent due by C had been guaranteed and secured against P. As at the relevant date shares in C had no value. H did not seek transfer of W's shares in or sale of C. W wanted P to be released from securities and C's operating losses.
Experts for each gave evidence on how to account for bank liabilities and the intercompany loans. W argued that they would all impact the valuation of P as the court could only assume that they would trigger full liability to the bank given C had no value and could not repay the loans. At the relevant date no willing seller or willing buyer would ignore them or discount the extent of the exposure.
H's expert gave evidence that neither the purchaser nor seller of P would concede or succeed outright on the issue of these contingent liabilities when assessing the price. Money would likely be placed in an escrow account to ascertain if the debts crystallised. Neither expert was willing to offer a view on what the sum so placed might have been at the relevant date, or to calculate how the matter might otherwise be compromised.
Sale after proof
Lady Wise concluded that as at the relevant date the value, and so the value of S and C, would not be reduced by any portion of the contingent liabilities or indeed the intercompany loans. Most, if not all, sums due in terms of those potential liabilities (and the intercompany loans) would be placed in an escrow account to deal with the risk that some or all might not crystallise. Lady Wise commented that her approach accorded with the general rule that contingent liabilities do not normally reduce the net value of a company either in general commercial valuation or in proceedings of this type (
While the case was at avizandum, C was sold to the franchisor with the consequent full release of P from the bank contingent liabilities, but no funds were available to repay the intercompany loans.
H then sought to amend, proposing to introduce averments about the sale and subsequently a joint minute was received detailing the terms of the sale and its impact.
Lady Wise concluded that it could be appropriate to use hindsight in relation to a business asset as a crosscheck on a relevant date valuation already carried out. C was an item of matrimonial property in which both parties continued to have an interest at proof and in which both were involved as recipients of the sale price following proof. The contentious issue was the impact of the liabilities on the value of the companies in which only W was a shareholder, although it impacted also on H's interest in S. Lady Wise thought it would be wholly artificial to ignore what had occurred recently when sense checking that the decision not just on valuation, but on overall division of matrimonial property was the right one. She had concluded there was no significant difference between the decision in principle that she had already reached in relation to the contingent liabilities, as on sale of C none of these had in fact required to crystallise. Despite C being valued at nil, a deal had been done whereby the company was relieved of the contingent liabilities to the bank. No damages became due and no bank liabilities crystallised. The only matter about which there was a consequence was intercompany loans which could not be repaid. As these were always in a different category to the contingent liabilities because they were included as assets of P, it was clear that they were now unlikely to be repaid and required to be taken into account.
She concluded the non-payment of intercompany loans affected W's net resources but not the share valuations. This would be relevant only to the division of matrimonial property.
Balancing factors
Lady Wise considered it would be too extreme to disregard the two pre-marriage P companies for their value entirely. Under the principle in s 9(1)(d) of the Family Law (Scotland) Act 1985, account could be taken not just of the period of the marriage but also the earlier cohabitation. This argument, which would justify a substantial additional capital sum to H, was then balanced against W's arguments that raising the capital to pay H would incur a very substantial tax liability and the non-repayment of the intercompany loans. Transferring H's shares in S to W, Lady Wise awarded H a capital sum of £2,937,175, which included a notional award of £450,000 to account of the pre-marriage P companies, pared back to £300,000 to reflect W's arguments about tax and the intercompany loans non-repayment.
