JV v MV

I have been hearing the parties’ applications for financial remedy orders following the breakdown of their marriage.

This is a long marriage and a broadly equal division of the parties’ wealth is agreed subject to several discrete issues. The big issue is how and when this is to be achieved in the particular circumstances which exist, namely that the bulk of their wealth is to be found in their 70% interest in a company which I will shorten to X.

The other issues relate to various non-business assets and liabilities which can be dealt with individually.

The parties are aged respectively 64 (H) and 62 (W). They met in or about late 1986. H was then an employee of a major industrial company and W had set up her own company.

They cohabited and then married in 1987. Then or soon after H left his employment and became a shareholder in W’s company.

The parties had four children. All are now independent.

The business activities became consolidated and increasingly successful.

In 2000 H employed Z, working from the basement of the parties’ home. Several months later in 2001 they incorporated a company together, and H became particularly focussed on running the business and specialising in the provision of technology for A industries and Z in providing technology for B businesses. In 2004, X was incorporated by H, Z and their wives.

W says that she began to feel increasingly unwelcome in the business and in 2007 it was agreed that she would retire from active employment albeit that she remained as company secretary of the group until 2015.

In 2004, X upon its incorporation became the subject of articles of association and a shareholders agreement. The effect of this was that the shareholding was divided between ordinary shares and preference shares. The ordinary shares have voting rights and effective management of X. The preference shares give the entitlement to dividends and the proceeds of an exit event. The shareholdings have been since the exit of Z’s wife as follows:

In 2010 X began to use consultancy companies. The operation of these companies is said to have been in accordance with the advice of the group’s then accountant. I am told that he advised that this was a tax efficient way of extracting funds from X. It is now accepted that this was not a proper way of trading and gives rise to substantial tax liabilities which face all three shareholders and, probably to a lesser extent, the company. I shall return to this.

Between about the start of 2016-2018 the parties separated but then reconciled.

Towards the end of 2017 a report was obtained from a firm of forensic accountants on the value of X. This flagged up a potentially significant tax liability in connection with the use of the consultancy companies.

Following their reconciliation in early 2018, the parties eventually separated permanently in August 2022.

In 2022 X was put on the market for sale and indicative offers for X were received in the bracket £33m-£95m but the sale was not progressed by the directors, who include H and Z but not W.

In August 2023 a conditional order was made and the parties swiftly commenced financial proceedings. The matter was duly allocated to the High Court, and I have conducted all hearings thereafter.

In January 2024 the parties instructed Gavin Pearson of Quantuma as a single joint expert to report on the value of the parties’ shareholdings in X and Daniel Sladen of K3 Tax Advisory as a SJE to report on the latent tax liabilities on the parties’ assets and the likelihood and quantification of potential tax liabilities in connection with their corporate entities.

The parties were initially keen that I should proceed with this case to an early final hearing, but I made it clear that I would not accede to such a course in the absence of disclosure to HMRC and some indication of what the likely tax liabilities were likely to be in circumstances where I was told that on a worst possible construction the liabilities could effectively wipe out the parties. I will come onto the information that has now become available but it is probable that the consequences are likely to be much less severe than once threatened.

X has no subsidiary companies but there were 7 related companies owned by the parties’, their children, H’s sister and Z and his family. These companies all raised invoices for consultancy services to X and received significant payments which were then divided between H and W’s family and Z’s family on a 70:30 basis in line with their preference share dividend rights in X. In fact, the consultancy companies did not provide any significant services to X.

As the consultancy payments did not pass the wholly and exclusively test, the payments should have been subject to corporation tax. It follows that X has a contingent liability in respect of those payments, together with any interest and or penalties that might arise.

In addition, X may have a PAYE liability in respect of the sums that were paid to the companies, albeit that it is currently intended to be treated as a dividends issue of the parties personally.

A separate but related issue is whether HMRC would allow the corporation tax that the service companies had paid to be netted off against the sums due from the group.

In levying penalties, HMRC use the following ranges:

The above is taken from the report of Mr Sladen, the SJE tax advisor. He posited a range of possibilities which included that the corporation tax issue could expose X to a liability of £15.7m and the parties to a PAYE issue of £14.3m. Indeed if maximum penalties were charged the scenario could be even worse.

W was keen to make the disclosure and H and Z had no real choice but to go along with her. They agreed to instruct tax solicitors to act on their joint behalf in their disclosure to HMRC.

As Mr Sladen made clear, he has had no involvement in the disclosure to HMRC which had not taken place at the time he wrote his report. I am more assisted for my purposes by the advice of the tax solicitors who have made the disclosure to HMRC and are able to assess the extent of the probable liability in the circumstances in which it has been disclosed. However, I must not shut my eyes to the fact that they may be being over-optimistic.

At my request, the parties through their solicitors wrote to the tax solicitors to ask for their views on the likely potential outcomes of the disclosure to HMRC properly caveated as to its somewhat speculative nature. The tax solicitors provided the following information and schedule:

As will be apparent, HMRC will work on the basis of 4 years payments due if they take the approach that there has been innocent behaviour on behalf of the taxpayer and 6 years if based on carelessness, either on the part of the taxpayer or their previous accountant. The tax solicitors do not give an indication as to which approach is the more likely and so for these purposes I shall take the mid-point between them. Both approaches are arguable. The mid-point figure for the company is about £60k and for H just over £2.5m, with the bracket ranging from £28.5k-£90.5k for the company and £830k-£4.2m for H. The higher figures are inclusive of penalties and all figures include interest but are estimated and subject to confirmation.

This has been a long and difficult process. H has suffered from ill health with substance abuse addiction issues going back over 20 years.

The parties separated in the period 2016-2018 during which time H committed a very serious abuse of trust in relation to the company in that he:

The revelation of these matters to W only a short while ago during the disclosure process to HMRC has caused W both shock and concern. This abuse of trust effected not only the company but W and to a lesser extent Z. It has led to what has been called the COP9 (Code of Practice) issue.

At the same time as the parties were instructing the tax solicitors, H instructed a separate firm of solicitors to disclose his behaviour in 2017. They inevitably had to accept that H’s conduct was deliberate and that he would be liable not just for interest but penalties as well. I am told that he has so far paid about £83k by way of tax with another £250k or thereabouts to come.

The problem that arises is whether H’s conduct will have any knock on effect on the big issue. Might HMRC take the view that this intentional behaviour infects or contaminates the whole of the default which is the subject of the investigation involving the company activities? I think that it would be illogical for HMRC to adopt this approach but it is not a matter for me.

The issue between the parties is what the impact should be in the event of HMRC determining that H’s behaviour in or about 2017 is the sole and direct cause of HMRC finding intentional wrongful behaviour in respect of the management companies. The potential consequences for the company and parties of such an approach would be disastrous. They would be likely to be wiped out financially. H says it would be disproportionate if his 2017 behaviour, involving in this context relatively modest sums of money, should be visited entirely upon him. He says it should be shared with W.

As I have indicated, I regard this outcome as unlikely to eventuate, but draconian as the result would be, I would regard it as even more unfair if W had to share in the consequences of this behaviour which happened whilst they were separated and of which she was totally unaware until a short time ago.

In 2019 H retired as CEO of X. In his Form E he described himself as “retired” and stated “I am currently an executive director of the company having retired as CEO in 2019(although I still occasionally offer advice to the current senior management for which I am not remunerated).” H said that that remained an accurate description.

Between about November 2024 – January 2025 H was hospitalised because of his medical issues. I have read a report on him from his treating psychiatrist and it is plain that he is far from functioning at his best. That said, his evidence was given coherently even if sometimes a little hesitantly.

Z has similar health problems. He too has substance abuse issues which H had described as being even worse than those of his own. Z stopped working for X in 2010 and appears to have played no role in the company at all thereafter until 2023. He was able simply to disengage whilst at the same time receiving very substantial dividends.

Both H and Z say that they are now more involved in the business but even putting it at its highest, H says that his work commitments are no more than a few days in a month.

H says that his involvement in the business gives him a purpose in life, that it is good for his well-being and that he gives added value to the management of the business by his advice and experience which is not replicated by others.

There has been no suggestion from the SJE that the company’s value would be reduced if H and/or Z departed. Indeed the prospectus for 2022 when the company was put up for sale, to which I will return, states that “none of the shareholders have been involved in the operations of the Company for over three years and accordingly they have decided that they wish to exit in full”.

The previous CEO had found the job too much and I am told that there was no obvious successor. H and Z conducted a beauty contest and chose a company to market the business.

Six offers were received. Four of them were in the bracket £33m-£50m, whilst two were much higher, namely £80m-£90m and £95m. These two highest offers were from competitors already known to X and who had a special interest.

The sale did not proceed for a variety of reasons. H told me that they felt that the prospectus provided by the marketing company had been over optimistic in its projections. He said that there was a dispute about the selling agents fees, although I cannot see that this could have been a significant factor and, far more important, it became apparent that the due diligence process would reveal the existence and extent of the tax defaults. H sought to add to these explanations, which were those given by him to the SJE, that the recruitment of a new CEO had increased their optimism about the future of the business but I do not accept that this was a material factor. Z said that the sale did not proceed because he thought that the business was worth £120m and the offers were too low.

Overwhelmingly, the failure to tackle the tax issue must have been fatal. W says, and I accept, that H said that the business would soon be offered for sale again.

Although it now fades into historical insignificance, this was not the first time that the company had been put up for sale. It had also been marketed in 2008 but only for a short period.

It is clear that their relationship is long-standing. At times it is closer than it is at other times. I accept that they do not always see eye to eye but, I have not heard of any single important occasion on which they have differed and failed to reach agreement. I draw attention to the following factors:

However, H says that Z is determined that he will not sell his shares in the business now and would exercise his rights of pre-emption to stop H doing so. He is determined that the business should not be sold.

The two statements sworn by Z gave little clue to the figure seen in the witness box. At times he was very discursive and failed to answer the questions put, deliberately or otherwise. On other occasions he was theatrical, self-contradictory and confrontational.

He and H first met in about 2000 when Z replied to an advertisement. Z said that he quickly realised that he was a better salesman than H, while H was better than him at dealing with management and administration of a business. They became friends and he said that they trusted one another.

In about 2007 their friendship ran into difficulties following some family tragedies which affected the Z household. As a result in 2010 Z decided that he could no longer work in the same room as H. He has not been to the companies’ offices since 2010 when he had a disagreement with H. In his first statement Z said that he had “no real active involvement with the company again (from 2010) until around 2023.” After various equivocations he stuck by that evidence. He says that he still did do some work for the business from home, but it became difficult to establish what that was because at times he appeared to be describing work that he did for other businesses with which he was involved. He says that he did not know about H’s misuse of the company accounts which led to the COP9 disclosure, but that when H recently told him he said that he was instantly forgiving as “people do silly things when they are in love”. The fact that this disclosure might lead to a vastly increased tax burden on Z did not bother him.

Z says that he was much involved in the sales process in 2022 and that the reason the sale did not proceed was that the offers received were simply not good enough. When pressed by me, he said that he thought that the business was worth £120m. It followed that, and in distinction to the evidence of H, the failure to deal with the tax default was not to his mind the explanation of the absence of a sale.

It is plain that he is antagonistic towards W. I do not accept his evidence that he is “indifferent” (in the sense of being neutral) towards her. He could not resist having a dig at her as a mother; he would not accept that his statement that he might report her to the SFO was a threat, or that his describing her as “you are persona non grata to me”, in any way impeded her ability to have confidence in the way that the business would be run.

He has had a long period of suffering addiction to heroin and crack cocaine. He says that this is now in the past.

He was clear that he wanted to go on with what he was doing in the business and that he wanted to grow it before finding a buyer. When I tried to establish from him when that might be, he produced a long answer which related entirely to his other business activities and concluded with him saying “we are all one group of subatomic particles” before suggesting that he was raising the debate beyond the intellectual capacity of the court.

I found his performance to be so erratic as to concern me as to how he might react to circumstances in future.

He remains cross with W for the report to HMRC. He takes the view that it was unnecessary. As a result of what she has done, he will be left with a large tax bill to pay.

It became apparent to me from his evidence that notwithstanding his asserted wish to see fairness as between H & W, I can have no confidence that respecting her rights and interests would be a matter of importance to him.

W’s revised proposal in respect of the business is as follows:

H’s proposal at trial was that he would:

The non-business assets: The parties are agreed that the non-business assets are to be divided equally. After various concessions were made during the course of the trial, the only issue left for me to resolve is whether an adjustment needs to be made for the much higher level of costs incurred by W than have been incurred by H.

H accepts, at least in theory, the disadvantage of his proposal. It would result in W remaining tied to H in the business for an indefinite period of time and wholly dependent on H and Z deciding when and if they are to sell the company. It would mean that she would have no say as to when if ever she might get out. Unless there is really no alternative, it is an inherently unattractive proposition. It was obvious from W’s evidence and mien that she was deeply upset at this prospect.

The parties have enjoyed a high standard of living. Leaving to one side the small pension that each has, their non-business assets total a little over £22m. To achieve equality a payment needs to be made by H to W.

W’s assets include a yacht and a home in [location 1] and she divides her time between the two. H lives in [location 2]. Each has substantial cash assets and is able to live comfortably.

According to each party’s 2023/2024 tax return, each received a gross dividend payment from X of a little over £1.6m on top of their relatively modest investment income. For 2024/2025 a dividend has been declared of £1.959m gross to each party. It is therefore plain that each party can meet their reasonable needs without difficulty.

Paragraph 7.1 provides that no shareholder shall be entitled to dispose of any interest in his shares in the company without offering the same for transfer to the holders of the other shares in the company.

Paragraph 7.2 provides the mechanism for fixing the price. In the absence of agreement, the directors shall request the company auditors to determine and certify in writing to the company the sum per share considered by them to be the fair value. For such purposes each share in the company shall be deemed to have a value equal to such fraction of the value of the whole of the issued share capital. In other words, there is to be no discount for a minority shareholding. Taking the current value given by the SJE of some £61m for the company and dividing that by 1,999 being the total of the ordinary and preference shares, each share has a value of £31k. If the auditors were to arrive at the same value as the SJE, that figure would be the prescribed price.

Paragraph 7.8 provides that a shareholder selling externally can only sell at the prescribed price or higher.

The effect of this is that it is not possible for W to sell her preference shares under the Articles of Association to an outsider because no one would offer a price matching the prescribed price. Any purchaser from outside the existing shareholders would almost inevitably require a minority discount but that discount would reduce the price below the prescribed level. It follows that the protestations of H that W can simply sell her shares are ill founded. The only buyers could be H or Z and neither expressed any interest in buying them.

H put forward a document setting out what he described as “safeguards re W’s 35% preference shares in X”. These are extensive but necessarily unsatisfactory. Amongst other things:

It is hardly surprising that W is aghast at the prospect of remaining in the company. She feels that she cannot trust either H or Z for all the reasons set out above. I do not make any finding as to whether H or Z would seek to do her down, but I regard her lack of confidence in them as entirely understandable.

What are sometimes called Wells sharing orders are made but rarely. The reasons are obvious:

It is argued strongly on behalf of H that a Wells order is the only way of doing fairness between the parties as it is impossible for the court to fix a fair value upon the parties’ interests in X in circumstances where the range of potential outcomes from the HMRC investigation is as wide as it is. I disagree.

There is consensus between the parties that the value of their 70% interest in X is £42.817m. After deduction of CGT at 24% their interest reduces to £32.540m. These figures are without any discount. This brings me to the argument about quasi partnership.

Mr Yates KC on behalf of W claims that everything about this business has the hallmark of a quasi-partnership. Mr Ewins KC on behalf of H said in closing submissions that the business was run as a quasi-partnership right up until the time in these proceedings when W wanted there to be a sale against the wishes of H and Z.

I agree with Mr Yates that the circumstances have the hallmarks of a quasi-partnership. It is not necessary for me to do a trawl through the well-known authorities but I have had regard to Ebrahimi v Westbourne Galleries Ltd [1972] 2 AER 492 and re Bird Precision Bellows[1984] 3 AER 444. I note particularly:

I have considered carefully Z’s expressed reluctance to sell. Despite my reservations about his behaviour, I consider that it is inconceivable that if H and W were to seek to sell their shareholdings Z would not sell his as well. The parties were close to selling in 2022. Neither H nor Z are in good health and neither is actively involved in the business. It is unlikely in my view that he would wish to contemplate remaining in the business without H, being left with a relatively small shareholding and a potentially unknown new owner. I also bear in mind that his resources which he outlined to the court are not very significant and an adverse HMRC result might well compel him to sell in any event.

I recognise that even though I find the business to be a quasi-partnership, it remains open to the court to find that there should be a discount applied. I do not think that the facts justify it in this case. Nor am I minded to apply a discount for reputational risk. If the results of the tax investigation are as the tax solicitors suggest, the very large bulk of the liability will fall on H personally. It will not be reflected in the company books. If a significant liability were to be imposed on the company, that would be in circumstances where HMRC have taken the harshest view and will probably result in the total loss of the company. In those circumstances a reputational risk would not arise.

I agree that I should not make an order for sale without providing for the opportunity for H to buy out W. I heard the horror expressed by both H and Z at the thought of any sort of borrowing but those views may change. It is right and proper that each party should know the figure for which the proceedings could be brought to an end without a sale. The sale process is also a lengthy and time consuming business which will place considerable demands on H and will have a necessarily uncertain outcome.

The formula must provide for H to pay a fixed sum and that there shall be a sale of the parties’ shares in the company if that sum is not paid by 1 September 2027 or 12 months after the determination by HMRC of the sums payable by the company and H, whichever be the later.

I do not agree with W that she should receive a fixed sum in the event of a sale of the parties’ shares. The figure that I have fixed for a buy-out is the best evidence by the SJE of current value. If there is a sale, it is likely to be some 3 years into the future and there is no reason why the actual figures achieved should not be used. That is fairer to both parties. I acknowledge W’s fear that H and Z might manipulate the process against her, but that needs to be guarded against in a different way.

W asks that I should order that the sum of £5m be paid forthwith. I have decided against taking such course. My reasons are as follows:

I do not accept H’s argument that I cannot fix a formula for the calculation of the lump sum payment.

I have determined that in the event of payment in full being made by H to W within the time period before a sale is required the lump sum in respect of the business assets should be £15.5m. This is a slight departure from an equal division so as to provide a division of 52.25:47.75 in favour of H. I regard this as a justified departure from equality so as to reflect:

In the event of W not being bought out, all the shares of H and W are to be placed on the market for sale forthwith and the proceeds of sale after costs of sale are to be divided equally, each paying, if not already paid, 50% of the tax liabilities attributable to them, personal and corporate, arising out of the HMRC disclosure save as referable to the COP9 issue.

Unless there are unforeseen tax consequences, I order H to transfer to W 160 preference shares so as to equalise their holdings. This has the approval of Z who will not seek to exercise any right of pre-emption. Upon payment of the lump sum in full, W must transfer back to H all her preference shares.

The new Forms H1 with which I have been provided show H’s costs to be some £1.203m while W’s costs come in at £1.609m. This is a difference of £406,284.

The main differences are to be explained by:

I have been referred to various authorities but it is not necessary to go through them. The Court should be careful about making a determination on an issue such as this without a clear view of how the disparity arose unless it can be said that by its very size it is obvious that it is unreasonable for there not to be an adjustment as between the parties. It is a truism that inevitably the sums spent by each side will differ.

I regard it also as important that I have not found that one side has behaved in this litigation in a reprehensible manner on the big issues so as to lead to a significant increase in costs.

I am not in a position to make a finding that the discrepancy is unreasonable or unjustified so as to lead to an addback. It has been explained.

The parties are now agreed that after adding back the COP9 payment made by H, these assets total £22.1m after payment by both sides of their outstanding costs.

A balancing payment is agreed to be due from H to W of £838,687, so as to leave each with £11.07m. From his share H will have to pay his outstanding COP9 liability. These calculations take into account the agreement now reached about chattels but exclude the parties’ agreement that H will pay W £585k in respect of one half of the outstanding sum owed by H’s sister to the parties.

W will exit the marriage with £11.07m plus £585k as above and £15.5m in the event of the business not being sold. From that she will pay her share of the tax bill save as is referable to the COP9 issue. H will theoretically exit with the same non-business value but which will of course be reduced by his COP9 liability and such part of the loan due from his sister that he chooses not call in. If he were to buy out W he will be left with a slightly more valuable asset on current valuations than she will receive but it will be at his election illiquid. If H does not buy out W, they will leave with equal sums from the sale of their aggregate shareholding.

In all the circumstances as I find them to be, I regard this to be a fair outcome for both parties.