“Marriage, it is often said, is a partnership of equals. … The parties commit themselves to sharing their lives. They live and work together. When their partnership ends each is entitled to an equal share of the assets of the partnership, unless there is a good reason to the contrary. Fairness requires no less. But I emphasise the qualifying phrase: ‘unless there is good reason to the contrary’. The yardstick of equality is to be applied as an aid, not a rule.”1

It was perhaps inevitable that suggesting to the fertile minds of family lawyers that there may be a ‘good reason to the contrary’ when it comes to equal sharing would greenlight 20+ years of arguments over what is or is not ‘non-matrimonial property’ and ‘matrimonial property’ and whether the former has been ‘mingled’, ‘churned’, or otherwise ‘matrimonialised’.

The issue can be a particularly complex one in the context of valuations of private businesses: it is well known that current valuations of such companies when there is no evidence that it is in the throes of sale are an art and not a science and hence inherently fragile2 – but how should a valuer approach the task of providing not a current but an historic valuation and how should a court then treat the same?

The alternative approaches

There appear to be three alternative approaches that a valuer might adopt in relation to historic valuations.

The first approach is for the valuer to place him or herself in the position a valuer would have been in if asked to value the company at the date of marriage (or prior ‘seamless’ cohabitation) and provide a valuation on that basis. This is the ‘classic’ approach. In E v L [2021] EWFC 60 Mostyn J observed that:

‘[55] It is an iron principle of pure valuation theory that when advancing a historic valuation of an item the valuer has to be transported back in time to the date of that valuation and must formulate his/her opinion about the future maintainable earnings (the multiplicand), as well as the multiplier, using only the data available at that time. The valuer is not allowed to use actual knowledge of subsequent events to influence, let alone determine, the historic valuation being undertaken.’

The second approach is a ‘straight line’ apportionment as used by Mostyn J in WM v HM (Financial Remedies: Sharing Principle: Special Contribution) [2018] 1 FLR 313. Such an approach plots the value of the company at the date of incorporation (i.e. zero) at one end of a graph, the value of the company at the date of final hearing at the other end, and draws a straight line between the two. Mostyn J justified such an approach on the following basis:

‘[16] … a linear or arithmetical apportionment based on the respective periods of time before and after the marriage … seems to me to provide a useful heuristic3 basis for analysing the issue, which if commonly adopted would have the beneficial side effect of eliminating arid, abstruse and expensive black-letter accountancy valuations of a company many years earlier at the start of the marriage.

[20] The linear approach … resonates with fairness. It reflects my opinion of the true latency of the business at the time that the marital partnership was formed, and that, intrinsically, value is (at least) as much a function of time as it is of work or market forces. In argument, I asked “how could it be said that a day’s work in 1980 in creating this company was less valuable than a day’s work last week?”. In my judgment, the answer is that it could not.’

On appeal (Martin v Martin [2019] 2 FLR 291) it was held that Mostyn J had not been wrong to adopt such an approach. Moylan LJ stated as follows:

‘[127] Whilst it would be an improper fetter on a judge’s discretionary powers to elevate this approach above others, I agree with Mostyn J’s general observation about “the beneficial side effect of eliminating arid, abstruse and expensive black-letter accountancy valuations of a company many years earlier at the start of the marriage”. I also agree that, as he said, it “resonates with fairness” because it takes an overarching view of the weight to be attributed to the husband’s contributions to the business throughout its existence. I would add that it is also an approach which would be consistent with the overriding objective not least because it would save expense by limiting the scope for expensive and time-consuming investigations of the development of a business. It may be too frequent a refrain in this judgment, but the court is engaged on a broad analysis of fairness.’

It is of note, however, that in Jones v Jones [2011] 1 FLR 1723 Arden LJ (as she then was) rejected a linear approach stating as follows:

‘[60] … as a matter of principle, when valuing the non-matrimonial assets at the end of a marriage, the court should so far as it can look at what has actually happened and not at what might have happened. In parenthesis, I would add that, because of this principle of “reality”, I would reject the graphs provided by Miss Stone seeking to establish the values of the company at certain dates based on an artificial assumption of a straightline growth up to eventual sale …’

In WM v HM Mostyn J (at [16]) cited this paragraph and then noted that the other two judges (Sir Nicholas Wall P and Wilson LJ (as he then was)) did not mention this argument and stated that ‘I am surprised that it was so lightly dismissed or disregarded’. However the linear approach was also rejected by Baker J (as he then was) in XW v XH (Financial Remedies) [2019] 1 FLR 481:

‘[241] … As Arden LJ noted in Jones v Jones, the court must try to look as far as it can at the reality of what actually happened rather than proceed on an artificial assumption of a straight-line growth from the date of foundation of the business up to the eventual sale.’

The third approach is that adopted in SK v WL (Ancillary Relief: Post Separation Accrual) [2011] 1 FLR 1471 by Moylan J (as he then was) when he held that an historic valuation should be conducted with the benefit of hindsight as to what from the perspective of the historical valuation would be future events:

‘[30] … Valuations, when required, should be based on real and known events. This approach ensures that valuations are more likely to be closer to the reality of any given situation than the result achieved by ignoring known history. It is difficult also to see how the latter approach, of ignoring known facts, could be consistent with the court’s obligation to achieve a fair outcome based on the factors set out in section 25 of the Matrimonial Causes Act 1973. As Wilson LJ said in White v Withers LLP and Dearle [2010] 1 FLR 859, if the court is to discharge its duty (I emphasise) under the Act, it must be “furnished with true information about the parties’ resources”.’

In WM v HM Mostyn J expressed support for this methodology observing (at [14]) that ‘the evidence is certainly not confined to a strict black-letter accountancy exercise. It involves a holistic, necessarily retrospective, appraisal of all the facts and then the application of a subjective conception of fairness, overlaid by a legal analysis.’ He also cited (at [11]) an unreported decision of his own (WL v HL[2017] EWHC 147 (Fam)) in which at [41] he had agreed with Moylan J in SK v WL stating that ‘it is not merely legitimate but is realistic and right to use hindsight when making in family proceedings a historic valuation’.4 As noted above Arden LJ (as she then was) expressed a similar view in Jones v Jones at [60].

Mostyn J returned to this issue in E v L. He noted (at [56]) that ‘in financial remedy cases actual knowledge of subsequent events is generally used in order to fix a historic value of the asset in question’ but acknowledged that ‘[t]his is regarded by valuation purists as little short of heresy’.

This third approach is in many ways counterintuitive insofar as a hypothetical purchaser at the time would not have known what the future held. Hence its rejection by ‘valuation purists’. However, as Mostyn J stated in E v L:

‘[63] Blinding oneself to the knowledge of subsequent events, whilst conforming to the purity of valuation theory, obviously risks serious injustice. It must never be forgotten that the exercise has as its endgame a calculation which results in an award of hard cash to the claimant …

[66] I regard it as unreal, and a likely source of real injustice, for calculations to be undertaken to work out the scale of acquest (and thence the wife’s award), on historic figures which with hindsight are shown to be completely wrong. It is not consistent with “a broad analysis of fairness”.’

The author is unaware of any reported first instance decision other than SK v WL where this methodology has been adopted in the sense of actual later, known specific business-related events being used to inform a retrospective analysis. It is not the approach adopted in either WM v HM, Jones v Jones, or Robertson v Robertson5 [2017] 1 FLR 1174 although it should be noted that:

(i) in WL v HL [at [41] (cited in WM v HM at [11]) Mostyn J stated in relation to the use of hindsight when making a historic valuation in family proceedings ‘the pass has been sold in this regard when we uprate a historic figure with passive growth. For passive growth is obviously a post valuation event’; and

(ii) in E v L at [59] Mostyn J stated that in Jones v Jones the doubling referable to the movement in the FTSE All Share Oil and Gas Producers Index ‘was an application of passive growth, which was unquestionably a post-valuation event’.

It is also of note that SK v WL is a ‘post-separation accrual’ case resulting in a reduction in the wife’s award as a consequence of the husband developing and then selling his business several years after the parties’ separation (the business’s turnover had risen from £1.9m in the year of separation to £13m some four years later, due, in part, to the husband’s efforts).6

Latent value and passive growth

Quite separately to the issue of valuation the court will have to consider the issues of latent value and passive economic growth.

Latent value is the argument that because of the ‘heavy lifting’ in the development of the business prior to cohabitation/marriage, any snapshot value as at that point needs separately to identify (and then include) its springboard potential and hence the valuation should be subject to some form of indexation to reflect how it grew in value of its own momentum.7

Passive economic growth is where, without activity on his or her part, the company has substantially increased in value during marriage. Passive growth is to be contrasted with growth as a result of contributions of one sort or another made during the marriage, i.e. of activity, irrespective of whether such is achieved with the assistance of a springboard already in position or not (the latter activity/contribution over the marriage being a contribution to the marital assets (arguably) matched by the other party’s contributions in the course of the marriage).

An analysis of the case-law on this issue starts with Jones v Jones. After the breakdown of the marriage, the husband sold a company with net proceeds of sale of £25m which was (broadly speaking) the parties’ net assets at the date of the final hearing. On appeal Wilson LJ – at [33]–[51] – adopted the following approach so as to effect a division of the £25m into the part reflective of non-matrimonial assets and that reflective of matrimonial assets:

(i) the starting point was the valuation of the company as at the date of marriage, upon which the respective accountants were ultimately agreed – i.e. £2m net;

(ii) adjust (at [39]) ‘for the concept of latent potential or, in the judge’s word, the spring-board’. However it is important to note that Wilson LJ added:

‘I am concerned lest our decision in this case were to be misunderstood as generally encouraging an enquiry into whether the professional valuation of a company at a specified date should be subject to increase by reference to the presence within it at that date of springboard. Mr Pointer correctly submits that a professional valuation calculated by reference to future maintainable earnings will generally reflect the value of any such springboard. But there will be rare cases in which a judge may be persuaded that it has failed to do so; and in the present case this court must work on what in my view are clear findings by the judge, not subject to appeal, that at each of two different dates [i.e. the date of marriage and separation] there were spring-boards in place in the husband’s company which the respective professional valuations failed to reflect.’

The value of the company at that date was therefore taken as being £4m rather than £2m.8

(iii) adjust for passive economic growth.

Wilson LJ applied to the sum of £4m an increase representing the percentage increase in the relevant stock exchange index (the FTSE All Share Oil and Gas Producers Index) between the date of the marriage and the date of the sale, thereby lifting the figure from £4m to £8.7m (which was rounded up to £9m), which led to an award to the wife of £8m (i.e. £25m less £9m equals £16m which was divided in two).

It is of note that Arden LJ, whilst agreeing with Wilson LJ’s conclusion, disagreed with his treatment of the issue of passive and active growth, saying:

‘[60] However, I would query whether what Wilson LJ proposes in his judgment is really passive growth and reject the notion that the only growth that can be taken into account is passive growth. … if only passive growth is taken into account, the law rewards the spouse who buries her non-matrimonial assets in the ground rather than the spouse who actively manages them. The correct analysis in my judgment, in circumstances of the present, is that, where a spouse has a non-matrimonial asset of the present kind, he is entitled to that element of the company at the end of the day which can fairly be taken to represent the fruits of the non-matrimonial assets that accrue during the marriage, even if the fruits are the product of activity by him or on his behalf.’

Notwithstanding the above observation it is usually (but not always) the case that passive growth on pre-marital assets is non-matrimonial and active growth is matrimonial, whereas passive growth after separation on matrimonial assets is matrimonial whereas active growth is non-matrimonial. In relation to assets which are in place at separation see JL v SL (No. 2) (Appeal: Non-Matrimonial Property) [2015] 2 FLR 1202 per Mostyn J:

‘[41] … They remain matrimonial property but the increase in value achieved in the period of separation may be unequally divided. I emphasise may. Obviously passive growth will not be shared other than equally, and there will be cases where on the facts even active growth will be equally shared, as happened in Kan v Poon [(2014) 17 HKCFAR 414].’

It is sometimes said that the easiest method of calculating passive economic growth is to use an index of inflation although of course, as Wilson LJ observed in Jones v Jones (at [48]) ‘an increase reflective only of inflation would not be an allowance for growth in real terms at all’.

If inflation is to be used, be wary of RPI. The formulation of the RPI fails to meet international standards and has not been classified as a ‘national statistic’ by the ONS since March 2013 for a number of reasons including that it uses an arithmetic mean to calculate the inflation figure, while CPI uses a geometric mean (which normally results in the inflation figures calculated by RPI being higher than those under CPI). As the ONS’s National Statistician, John Pullinger, said at the time:9

‘Overall, RPI is a very poor measure of general inflation … Our position on the RPI is clear: we do not think it is a good measure of inflation and discourage its use. There are other, better measures available and any use of RPI over these far superior alternatives should be closely scrutinised.’

In cases where the pre-matrimonial asset is a small business which requires active management by the spouse it may well be difficult and somewhat artificial to value passive growth as was done in Jones v Jones. However a FTSE (or similar) index in a relevant industry may still be an appropriate tracker even where there will be differences between the fortunes of a small company and the large companies tracked by the index – Jones v Jones per Wilson LJ at [45]–[50].

It has to be acknowledged that the doubling of the value of the company to allow for its latent potential was (as Wilson LJ acknowledged at [43]) ‘highly arbitrary’. In WM v HM at [11] Mostyn J cited from his unreported judgment in WL v HL as follows:

‘[42] … Jones v Jones is a good example of the exercise of discretion in that the doubling of the initial figure £2 million to £4 million seems to be based more on instinctive feelings of fairness rather than being referable to any particular piece of evidence.’

Similarly in XW v XH (Financial Remedies: Business Assets) [2020] 1 FLR 1015 (overturning Baker J in XW v XH) Moylan LJ stated:

‘[114] … It is well-recognised, but worth repeating, that although the court in Jones started with this [£2m] valuation, the figure was then doubled because the judge had found that there was, what was called, “a springboard in place (which was) not reflected in the valuation”, at para [41]. The doubling of the valuation by Wilson LJ was, as he acknowledged, “highly arbitrary”, at para [43].’

In IX v IY (Financial Remedies: Unmatched Contributions) [2019] 2 FLR 449 Williams J (after referring to Jones v Jones, Robertson v Robertson, and WM v HM) stated:

‘[59] The weight of authority would support an approach which seeks to identify and to take into account any latent potential that a business asset had when it was brought into the marriage by a party. The authorities would also support an allowance for the passive growth of that latent potential during the course of the marriage. How that is to be done will depend on the facts of the individual case.’

Based on Jones v Jones it would seem that the issues of (possibly) latent value and (certainly) passive economic growth are ones for the court rather than the valuer. As Wilson LJ noted in the context of the latter (at [44]), ‘[t]his was not a subject canvassed before the judge or at the time of the hearing before us so, at our request, counsel have made short submissions in writing upon it’ although a court’s conclusion on these issues may be informed by having both an historic and current valuation for a company.

The court’s approach

The court is not bound to adopt any one of three approaches to historic valuations set out above. As ever each case turns on its own facts. In Martin v Martin Moylan LJ analysed how the court should look to utilise these valuations once received. He said:

‘[113] … a judge has an obligation to ensure that the method he or she selects to determine this issue leads to an award which, to quote Lord Nicholls in Miller; McFarlane, at [27], the judge considers gives “to the contribution made by one party’s non-matrimonial property the weight he considers just … with such generality or particularity as he considers appropriate in the circumstances of the case”. This provides the same perspective as Wilson LJ’s observation in Jones v Jones about “fair overall allowance”, at [34]. This was why Holman J was entitled in Robertson v Robertson to reject the “accountancy” approach, not only because it seemed unfair to the husband, but because he did not consider that this fairly reflected the relevant considerations in the “overall exercise of (his) discretion”, at [59]. Both of the latter cases concerned the development of trading companies and, in my view, these observations apply with particular force in such circumstances.

[125] … the exercise on which the court is engaged is not restricted to a single route to determining how the wealth is to be characterised for the purposes of the application of the sharing principle. The judge was not bound to adopt the approach adopted in Jones v Jones just as he was not bound to adopt the approach taken in Robertson v Robertson.’

These views build on earlier ones that Moylan LJ had expressed in Hart v Hart [2018] 1 FLR 1283 where (at [93]–[96]) he concluded that there is no single route to determining what assets are marital.

Similarly in XW v XH (Financial Remedies: Business Assets) [2020] 1 FLR 1015 (overturning Baker J in XW v XH) – having considered the approaches taken in Robertson v Robertson, WM v HM and Martin v Martin – the same judge said the following (original emphasis):

‘[114] What is being undertaken is a retrospective analysis to determine, by making (to repeat) “fair overall allowance” or by giving the weight the court considers just, what part of the current value of the asset should be treated as marital property for the purposes of the application of the sharing principle. … However, because the analysis is undertaken with the benefit of hindsight, a court is not bound to adopt the mathematical route adopted in Jones based on a prospective valuation as at the date of the marriage (ie one that ignores later, known, events) …

[117] … Martin not only endorsed the approach taken by Holman J in Robertson but also endorsed the approach taken by Mostyn J at first instance (in WM v HM). He had been “entitled” to adopt a straight line apportionment to the value of the company when determining what element of its current value was marital property, at para [125]. He was not “bound to adopt the approach adopted in Jones just as he was not bound to adopt the approach taken in Robertson”, at para [125]. It follows from this that, if Baker J had had the decision in Martin, I very much doubt that he would have rejected both the approaches as adopted in Robertson and Martin on the basis that to “insist on a linear or arithmetical approach would be to fall into the error identified (in my judgment in) Hart”, at para [241]. Contrary to Baker J’s conclusion, these approaches were not examples of the “imposition of constraints which are not needed to achieve, and which deprive the court of the flexibility required to achieve a fair outcome”, as referred to in Hart v Hart [2018] 1 FLR 1283, at para [97]. Rather, they are examples of the court undertaking the “broad assessment” endorsed by Hart, at para [96] and can be seen to be consistent with the principle that there is no “single route to determining what assets are marital”: Hart, at paras [93]–[96] and Martin v Martin [2019] 2 FLR 291, at para [112].’

Similarly in WM v HM Mostyn J stated:

‘[42] … It must be remembered that in this respect the court is exercising a pure discretion and whilst the case of Jones v Jones [2012] Fam 2 supplies a valuable guideline (that is to say it indicates the direction of travel) it is not supplying a tramline (that is to say a predetermined destination).’

As King LJ stated in Versteegh v Versteegh [2018] 2 FLR 1417 at [94] it is the following observation of Lord Nicholls in Miller/McFarlane ‘which continues to carry the day’:

‘[26] This difference in treatment of matrimonial property and non-matrimonial property might suggest that in every case a clear and precise boundary should be drawn between these two categories of property. This is not so. Fairness has a broad horizon. Sometimes, in the case of a business, it can be artificial to attempt to draw a sharp dividing line as at the parties’ wedding day …

[27] Accordingly, where it becomes necessary to distinguish matrimonial property from non-matrimonial property the court may do so with the degree of particularity or generality appropriate in the case. The judge will then give to the contribution made by one party’s non-matrimonial property the weight he considers just. He will do so with such generality or particularity as he considers appropriate in the circumstances of the case.’