In view of the name of this case HO v TL [2024] 2 FLR 175, and the fact that the family business was a hotel business, I really hope that it will become known as “The Hotel Case”. Anyway, it does deserve to become known, because it is another decision from Peel J of the type referred to by Edward Kenny in his article last month, i.e. a really useful authority that sets out fundamental points, and quite a lot of them in this case. What is more, the costs decision in this case is also reported HO v TL (Costs) [2024] 2 FLR 200 and fits into the same category
The Substantive Decision
This was a big money case, about £22m overall. The bedrock of the parties’ wealth was the husband’s greater pre-marital assets and extra-marital capital injections by his family, totalling £16,145,00. The wife’s pre-marital assets were £1,366,000. However, monies on the husband’s side which were originally non-marital in nature largely went into the family business and family properties. In 2005 the parties co-founded a hotel group. The business was the centre of the marriage and the family: the parties worked hard together to build it over many years. In 2017 the business was put into one of the husband’s family trusts. Through the trust structure the husband owned 90.25% of the business and the wife’s
family members 9.75%. It was common ground that H would retain the business The parties received consultancy income and dividends. H offered £5.9m, W sought £10.9m. Their combined costs were £1.5m. Peel J heard evidence from the parties and a business valuer and awarded W £7.75m.
My summary of the salient points held is as follows:
- Approach
The usual approach is a two stage process: computation then distribution. The main areas for computation in this case were the value of the family business and the accessibility of H’s trust interests.
- Business valuation
(i) It is for the court to determine the value. not the expert.
(ii) Valuations of private companies are particularly difficult and uncertain, with e.g. often no obvious market for the business, the potential for different valuers to produce very different results and the volatility of profitability.
(iii) The reliability of a valuation depends on e.g. whether there are comparables, what method of valuation is to be used, the parties level of control, third party interests, shareholder agreements, whether there is a market, volatility, reliability of forecasts, disputes about the assumptions made in the valuation.
(iv) The choices for the court will be (a) fix a value; (b) order sale; (c) divide the asset in specie (“Wells sharing”).
(v) Which of those choices to adopt will depend on the facts, e.g. whether the business predated the marriage or has its origins in non-marital wealth; whether both parties are involved in its strategy and operation; the ownership structure; whether sharing is practicable and how to ensure a fair allocation.
(vi) There is a difference in quality between copper-bottomed assets and illiquid/risk laden assets, which has to be assessed by the court in considering allocation of the assets.
(vii) In deciding how to reflect illiquidity and risk the court has three choices:
(a) Apply a discount for e.g. lack of control, lack of marketability, risk: an “accountancy discount”.
(b) Allocate the resource to reflect illiquidity and risk usually so as to give the party retaining the asset a greater share of the overall assets: a “court discount”.
(c) In the right case the valuation may include an accountancy discount and the court may apply a further court discount.
His Lordship rejected H’s case for a 1/3 discount as although there were some inherent risks they were not sufficient to justify an accountancy discount.
3. H’s Trust Interests
(i) The issue is whether the trustees would be likely to advance the capital immediately or in the foreseeable future.
(ii) The question is not one of control of resources but access to them.
(iii) The Court may frame an order which affords “judicious encouragement” to the trustees and is not bound to accept the say so of the trustees and the court can draw adverse inferences from the absence or silence of a witness.
(iv) Relevant factors include: the nature and purpose of the trust; whether the party is a main or principal beneficiary; whether distribution would damage other beneficiaries; the history of distributions or loans to the party; overall value and liquidity; whether the party has a close relationship with the trustees.
In respect of one of the three trusts, His Lordship took the view that it qualified as a nuptial settlement subject to variation and adjourned W’s application to vary it until any award is implemented. Of the other two trusts 50% of one and 38% of the other were to be treated as resources available to H
4. Sharing v Needs
(i) Where the result suggested by the needs principle is an award greater than that suggested by the sharing principle the former shall prevail.
(ii) It is therefore necessary to decide which assets are fully matrimonial and are therefore to be divided equally.
(iii) The value of the matrimonial properties and business total £11,531,066 of which 50% is £5,765,533. Over £10m are non-matrimonial on H’s side. Adding W’s own non-matrimonial property to the 50%, she would be entitled to £6,448,519 under the sharing principle.
(iv) Needs: Needs are an elastic concept and a fact specific exercise that includes the standard of living during the marriage, but not as an immutable guide, with consideration given to the length of the marriage, the applicant’s age and health, the source of the wealth, whether it is non-marital, and the duration for which needs are to be met in the future.
(v) His Lordship assessed W’s housing and capitalised income needs at £7.75m which was therefore greater than what she would receive under the sharing principle and prevailed, a sum which H can raise
from the sale of the business and loans from the trusts and which is fair in the circumstances of the case and amounts to 34.5% of the overall resources of £22,446,476.
The Costs Decision
Summary:
(i) Although the starting point in financial remedy cases is that each party bears their own costs, refusal to negotiate reasonably and responsibly is litigation conduct and it is not unfair for the party guilty of litigation misconduct to receive a sum less than their needs would otherwise demand.
(ii) Here the wife had not negotiated reasonably until late in the day and until then had maintained an unrealistic and speculative approach.
(iii) Parties had to understand that that to run an untenable case risked adverse costs orders.
(iv) W to pay £100,000 towards H’s costs, to be deducted from her award.
(v) It is incumbent on the legal team to explain clearly that a failure to negotiate reasonably on an open basis carries cost risks and that a costs order may be made even if it reduces the needs award. This applies in both big money and smaller money cases. The courts are increasingly willing to depart from the starting point of no order for costs to do justice to the party who has been put to unnecessary costs by the other party’s overstated proposals.
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