A Recent Judgment of Mr Justice Mostyn:

Divorce & Matrimonial Finance

02 December 2022

Business Assets: Correct treatment of both a Directors Loan Account and a Discount from Par Value


Litigant in Person: The Appellate Court making the Appellant’s Case for Her

Mostyn J gave judgment on 28th October in Clarke v Clarke [2022] EWHC 2698 (Fam) on an appeal from HHJ Farquhar.  His Lordship described the judgment at first instance as an excellent one but increased the wife’s award substantially by correcting the decision relating to the business assets on two counts, namely the treatment of the Directors Loan Account and the Single Joint Expert’s discount from par value and also, by making the litigant in person’s maintenance needs case for her, despite her failure to do so herself at first instance and on appeal.  Thus, three interesting points arose, the first two providing salutary lessons and the third perhaps something of a surprise:

Directors Loan Account:

The husband was a 50% shareholder in a business (the fact that it comprised two limited companies being irrelevant for these purposes) .  The husband had a director’s loan account (DLA) by which he owed £239,500 to the business.  At first instance the Learned Judge calculated the husband’s overall assets by including the business’s value and deducting the £239,500 DLA owed to the company by him as a liability.  That approach might, on its face, sounds perfectly sensible.  However, as Mostyn J. pointed out, as this was a business in which the husband had a 50% interest and, as the DLA was also an asset, or chose in action, in the business’s hands, the husband’s total assets should have had added to them his share of that business asset.  That asset would of course be subject to tax and therefore would amount to less than the full £239,500 of his DLA liability but nonetheless it must appear on both sides of the balance sheet, not just as a liability, and thereby increase H’s assets substantially.

Discount from Par Value:

At first instance the SJE had applied a 20% discount to the husband’s share of the business value “to take account of the unquoted status of the company, the lack of marketability of the shares and the lack of overall control due to his percentage of the total shareholding.”  The Learned Judge was unhappy with the 20% discount thinking it too high in circumstances where the business was effectively run as a quasi-partnership and adopted a higher valuation that effectively included only a 15% discount.  His Lordship rejected that approach, saying that in reality, because the quasi-partnership that the husband had with his fellow 50% shareholder, in which they acted very much in concert, meant that any sale would be a joint one and, that therefore it was unlikely, on the balance of probabilities, that any discount would be suffered. His Lordship therefore applied no discount saying that this was a binary decision and that, in effect, the only alternative open to the Court had been the full 20%, so that, either a discount would be suffered in which case the SJE evidence was that it was 20% or, if there was likely not to be a discount suffered, then no deduction could be made.  I said that this was a salutary lesson but, in so far as His Lordship’s decision appears to say that this issue is a binary one, it may well be arguable in another case that the decision was fact specific and that the principle is otherwise:  Surely the Court’s duty is to find a fair valuation?  See for instance the approach in various chancery cases, including  Booth v Booth [2017] EWHC 457 (Ch):

“The task is to find a fair price. That may require no discount, it may require the full discount, it may require the full discount …. or it may require something in between”

Making the Appellant LIP’s Case for Her:

This is perhaps the most interesting aspect of this case in some ways:  The Appellant wife was a litigant in person. She had put her annual income needs at “a mere £26,481”, which the Learned Judge had of course accepted, though he thought it “modest”.  Nonetheless, on granting permission to appeal, one of the grounds formulated by the Court was in this respect.  Even so, the wife apparently “showed little interest” in this point in the appeal.  However, His Lordship considered the wife’s case  “much too low” and understood from her that she had pleaded her case on the basis that she thought she could only claim an amount to stave off destitution, and therefore His Lordship turned to consider “the question of how much encouragement the court should give to a litigant-in-person to take the right points”.

In reply, firstly,  His Lordship stated firmly that:

“A judge will be criticised as having abandoned impartiality and independence, and of having descended into the arena, if he or she takes a point favouring one party’s case which that party has not raised: see Villiers v Villiers [2022] EWCA Civ 772 at [135], [159]and [212] where I was roundly criticised for having raised what I thought was an insuperable jurisdictional obstacle but which point had not been taken on behalf of Mr Villiers.” [28]

And then His Lordship added, even more firmly, that:

It has been stated time and again, for example in Barton v Wright Hassal LLP [2018] UKSC 12, that no special concessions or assistance should be given to litigants-in-person.” [29]

But then His Lordship found a way:

“On the other hand, in a financial remedy case the court exercises a quasi-inquisitorial function. It would be a dereliction of its inquisitorial duty if it allowed a case to be decided under procedural

rules and customs which prevented a just decision being rendered on a particular set of facts because a litigant-in-person has, for whatever reason, chosen not to advance the relevant arguments applicable to those facts.” [30]

Some might suggest that perhaps that stands somewhat in contradiction to the previous clear statements of principle but, His Lordship held that, although “the judge’s approach to the needs question was conventional, and completely correct” [32] the Learned Judge had been in error in determining that as little as £26,000 per annum was a reasonable sum on which to formulate the wife’s Duxbury award [33] and His Lordship substituted £48,000 per annum, a sum that, as a Duxbury award, happened to be sufficient to justify transfer of the family home into her sole name, rather than the sale and division ordered at first interest.  Lucky lady.  And, it will be interesting to see what happens next.

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