Susan Maria Clarke v Richard Walter Clarke
| Jurisdiction | England & Wales |
| Judge | Mr Justice Mostyn |
| Judgment Date | 28 October 2022 |
| Neutral Citation | [2022] EWHC 2698 (Fam) |
| Docket Number | Case No: FA-2022-000188 |
| Court | Family Division |
[2022] EWHC 2698 (Fam)
Mr Justice Mostyn
Case No: FA-2022-000188
BV19D23919
IN THE HIGH COURT OF JUSTICE
FAMILY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Appellant appeared in person
Max Lewis (instructed by Stevens & Bolton LLP) for the Respondent
Hearing date: 20 October 2022
Approved Judgment
This judgment was delivered in open court. There are no reporting restrictions.
The appellant, Susan Clarke, appeals against the judgment and order of HHJ Farquhar dated 5 July 2022. Although her grounds of appeal were extensive, the permission to appeal granted to her by Sir Jonathan Cohen on 15 August 2022 was limited. She was allowed to appeal on two grounds only. However, on 17 August 2022 Sir Jonathan remitted one further issue to me.
The two grounds as formulated by Sir Jonathan are:
i) Whether the format of the order should provide for the appellant to receive a minimum sum [from the proceeds of sale of the matrimonial home] (“Ground 1”);
ii) Whether the sum awarded for maintenance, whether capitalised or not, should include a higher sum than £26,000 p.a .while the respondent is still working and earning a substantial income (“Ground 2”).
The additional issue remitted to me was expressed by Sir Jonathan in these terms in his order of 17 August 2022:
“2. The parties shall write a joint letter to the company accountant asking for a print-out of the respondent's director's loan account (DLA) for the period 1/1/20–1/7/22 and requesting him to confirm whether any part of the DLA has been taken by the respondent as dividends.
3. It shall be a matter for the judge hearing the appeal whether he/she permits the appellant to expand her appeal to encompass any argument she seeks to run out of the matters raised at paragraph 2 above.”
My reading of these paragraphs is that I can decide whether the appellant should be given permission to argue not merely that the judge erroneously dealt with the DLA both mathematically and factually, but also as to whether the overall value of the business was dealt with correctly. I shall refer to this issue as ‘Ground 3’.
Ground 3
I shall deal with Ground 3 first. The judge recorded that the respondent was a 50% shareholder in 2R Investments Limited and PCP Cladding Ltd. 2R Investments Limited is a holding company. It has no other purpose other than to hold subsidiaries. It was common ground that the respondent had an overdrawn DLA with the company, owing £239,500. That debt was an asset, a chose in action, of the company.
The respondent's interests in the two companies were valued by the company accountant at £753,653, of which £677,000 was referable to 2R Investments Limited and £76,653 to PCP Cladding Ltd. In his judgment at [33] the judge stated:
“After the hearing finished yesterday, I submitted a question to Mr Lewis in relation to the schedule of assets because it was not clear whether the valuation of the company in the sum of £755,000 ( sic, semble £753,653) was net of the director's loan account of £239,500 which is owed by Mr Clarke to the company, 2R Investments Limited. The accountants have clarified that whilst that is seen as an asset to the company and, therefore, is included within the figure of £755,000 clearly the asset to the company is a liability to Mr Clarke and, therefore, that has to be taken into account looking at the overall assets and I will do that in the distribution phase.”
And the judge went on in [54] to state:
“So the total for Mr Clarke would be in the sum of £1,262,350. From that he will have to be reduced by his director's loan account of £239,500 and also the tax on that loan of £94,243. That leaves him with a net figure of £928,607 and that compares with the figure of £989,400 in Mrs Clarke's name.”
In her submissions the appellant argued that £149,000 of the money borrowed from the company had disappeared and that the judge had failed to make findings about that disappearance or to take it into account in his judgment. That was not a submission that was encompassed by any of the permitted grounds. But as her submissions developed it became apparent to me that the value of the DLA debt had not been taken into account in the valuation of the company.
The enquiries made by the judge led the company accountant to write to the respondent's solicitor saying:
“The value of the loan has not been taken into account in the valuation on the basis that Richard Clarke has a personal liability for the same amount to the company.”
She replied saying:
“Just to be clear, does that mean it's included as part of the debtors balance to the company? If Richard owes the company something doesn't that mean the company has that as an asset?”
To which the accountant replied:
“Yes the company has a debtor balance for that loan which is an asset, but likewise Richard Clarke has a personal liability to the company.”
These emails were forwarded to the judge by Mr Lewis on 11 July 2022 with the message:
“We forwarded your question to the accountant, and the chain of emails is below.
The accountant has said that H's obligation to repay his directors' loan balance is shown as an asset of the company on its balance sheet.”
The judge accepted this and duly went on in [54] to attribute the debt to the husband personally as set out above in my para 6.
A careful reading of the emails would have made clear that the value of the debt as an asset had been excluded from the valuation of the company because it was said to be matched by the liability of the respondent to repay it. That this was so was confirmed by a letter from the company accountant to the respondent's solicitor written on 31 May 2022. This showed that the valuation of the respondent's interest in the companies did not include the value of the debt owed by him to 2R Investments Ltd. It captured only the values of three subsidiaries of that company.
I have to say that it must be wrong to exclude the sum from both sides of the equation given that as a debt it falls entirely on the respondent, while as an asset its value suffers discount and tax and then is divided between the respondent and his fellow shareholder. This is illustrated by the following example where a business is jointly owned by X and Y and is worth £1m, but where X has borrowed £250,000 from the company via his DLA. The value of X's interest in the business is correctly calculated in column A. This has the debt in on both sides of the equation. The calculation of the value of X's interest in column B, where the debt is left out on both sides of the equation, wrongly overvalues X's interest by £137,500:
| A | B | |
| value of business | 1,000,000 | 1,000,000 |
| omitted DLA amount | 250,000 | |
| 1,250,000 | 1,000,000 | |
| X's 50% | 625,000 | 500,000 |
| less tax | (62,500) | (50,000) |
| 562,500 | 450,000 | |
| less X's DLA debt | (250,000) | |
| value of X's interest | 312,500 | 450,000 |
In this case the result is that an asset owned by 2R Investments Ltd worth £239,500 was omitted in the calculation of the value of the respondent's business interests. The value given by the accountant of the respondent's interests was, as stated above, £753,653. This figure was calculated as follows:
Value of respondent's 50% share in 2R Investments Ltd
Value of respondent's 50% share in PCP Cladding Ltd
Value in both
It can be seen that in this calculation no account is taken of the value of the debt owed by the company by the respondent.
| Value of 100% of Premier Building Products | 576,000 | A |
| Value of 100% Premier Building Products (Anglia) | 1,355,000 | |
| less 10% discount for lack of control | (135,500) | |
| 1,219,500 | ||
| 66.67% | 813,041 | B |
| Value of 66.67% PSF Steel Ltd | 815,000 | |
| less 10% discount for lack of control | (81,500) | |
| 733,500 | ||
| 66.67% | 489,024 | C |
| Overall value of subsidiaries (A + B + C) | 1,878,065 | |
| Respondent's 50% | 939,033 | D |
| less 20% discount for lack of control, unquoted etc | (187,807) | |
| Value of respondent's share | 751,226 | E |
| Value of 100% of PCP Cladding | 212,000 | |
| Respondent's 50% | 106,000 | |
| less 20% discount for lack of control, unquoted etc | (21,200) | |
| Value of respondent's share | 84,800 | F |
| Value of both to respondent (E + F) | 836,026 |
| less CGT at 10% after personal allowance of £12,300 | (82,373) |
| Overall value of respondent's business interests | 753,653 |
I turn to the 20% discount that was applied in the valuation of the respondent's interest in both companies.
The judge explained that the accountant had applied this discount 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”. At [28] the judge observed:
“Discounts vary between 10 and 20 per cent and having seen many reports in previous cases of businesses those are the issues upon which discounts are applied because the ability to sell the company et cetera and, therefore, they are not unusual.”
If there were no 20% discount the bottom line figure would be £941,759 (G). The effect of the discount is to reduce the value by £188,106.
The judge was clearly uncomfortable with the 20% discount, and rightly so. He said:
“29. In his oral evidence Mr Clarke stated that he had been trading with his partner, Mr Shadforth, for many years and he would imagine that they would always take decisions jointly. There was an element as I discussed with Mr Lewis in what he described, he, Mr Clarke, described, as a quasi-partnership as is seen in the well-known case of G v G (Financial Provision: Equal Division) [2002] before Coleridge J. If all of those conditions are met, then...
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