Cusworth J. Financial remedy proceedings relating to the valuation and division of a high-value music catalogue as a key matrimonial asset.

Background

H and W were married for 16 years and had two children. H was a notable songwriter and music producer.

The primary dispute related to how best H’s music catalogue, which formed the majority of the couple’s matrimonial assets, should be valued and distributed.

Computation

Assets

W continued to live in the FMH in North London with the children (which had around £1.4 million equity). The parties owned three investment flats with a combined equity of around £220,000. Aside from this, the parties had various investments as well as pensions with a combined CEV of £740,000. However, the focal asset in this case was H’s interest in the music business.

The companies

H’s music business was divided into several different companies, namely:

• Catalogue Holding – which held Intellectual Property rights for the music catalogue;
• Studio – which owned the property and equipment;
• Studio Holding – a parent company for managing the studio and related interests;
• Future – a separate entity for future music publishing.

H and W held respective shares of 51% and 49% in each of these entities. Financial restructuring had taken place to facilitate the potential sale of assets, with H initially considering the sale of his company to another company, ‘ABC’. However, this did not come to fruition due to wider concerns about tax implications. Another company, ‘XYZ’, made a more favourable offer, but H declined this as he was preoccupied at the time with his mother’s illness and had concerns over market stability.

Valuation

In approaching the valuation of the business, Cusworth J recognised the vulnerability of valuations to a divergence of opinions, citing the cases of H v H [ 2008] 2 FLR 2092 and Martin v Martin [2018] EWCA Civ 2866. He concluded that the valuations must be approached in a clear and pragmatic way, guided both by the SJE valuation and other indicators to reach a fair outcome.

The SJE used a Discounted Cash Flow approach, applying a 9% Weighted Average Cost of Capital, accounting for industry growth rates though adjusted downwards to reflect the catalogue’s historical performance. The court found this approach to be reasonable, notwithstanding Cusworth J’s recognition of the fragility of DCF valuations and their speculative nature. The SJE had been moderate and balanced in his approach, which in any case was considered more reliable than earlier offers from ABC and XYZ. The court noted that whilst market offers provide practical guidance, H’s decision to not pursue the XYZ offer diminished its utility.

Tax implications

On liquidation it was likely that distributions would be subject to CGT. However, the SJE also indicated (on prompting from H) that they may also be caught by the Targeted Anti-Avoidance Rule (TAAR) if H remained in the music industry, which could cause distributions to be taxed as income at the dividend tax rate of 39.35%. Though there was a risk that HMRC could seek to claim repayment at the greater rate, the primary purpose of liquidation would be for the settlement of proceedings rather than reducing tax. As a result, the court declined to reduce the purported value of the business on the basis of speculative tax concerns.

Independent income

As well as the income H would receive from his music catalogue, the potential to receive income from deferred payments was also considered. H previously sold his interest in a joint venture ‘Independent’ receiving an initial lump sum plus a deferred income stream until 2049. This is paid twice a year but varies depending on the performance of music owned by Independent, creating an unpredictable but potentially substantial income stream. The court concluded it was of matrimonial character.

Assuming W retained the FMH, and H retained the three investment flats, the court held that the total value of assets to be divided was between £15m–£20m.

Distribution

Proposals

H proposed buying out W’s shares in the Catalogue Holding by way of lump sum, funded by a loan from Coutts. If it were to sell for more than anticipated, he offered a contingent sum of 50% of any net surplus. He proposed a 70% pension share and a transfer of his studio holding and future interests to himself. Given his commitment to repay Coutts, he sought to retain the independent income to maintain his cash flow. He offered £18,000 by way of child maintenance plus school fees.

W, by contrast, did not seek the outright sale of the IP in Catalogue Holding but wanted to continue to receive income from it. She also sought an income guarantee of £400,000 from Catalogue Holding and Independent with an entitlement to 50% of any higher receipts. She proposed remaining in the FMH as well as child maintenance of £30,000 per child plus school fees.

Outcome

The court decided there should be a clean break. To facilitate this, H would have to raise a figure equivalent to W’s 49% interest, based on the SJE value. This would be net of her share of the Studio Directors’ Loan Account of £650,000. It was reasonable for H to take on a bigger share of the outstanding DLA – just over £850,000 – plus responsibility for W’s 2025 tax bill, on the basis that much of the overspend was attributable to him.

To mitigate TAAR risk, the court said that H should delay any sale of the catalogue until his current contract with Big Co came to an end. If H opted for a buyout within two years, any future TAAR risk would be his own. If no buyout occurred prior to the expiration of the Big Co deal and it transpired TAAR did ultimately apply, the court held that the liability should be split in proportion to each party’s shareholding: 49% to W and 51% to H.

The court considered the Independent income stream to be matrimonial and so decided that it should be divided equally between the parties. In terms of the children, it was considered appropriate for H to pay £18,000 child maintenance plus school fees.

Whilst the precise amounts each party would receive was not certain, the court was satisfied that this resulted in a fair outcome for both parties, comfortably able to meet their respective needs. This was so notwithstanding the unpredictability of future income levels on the basis that they were likely to remain substantial in any case.