COVID-19 – Do Diving Asset Values Justify Unwinding Divorce Settlements?

The value of many assets has been devastated by COVID-19 – but is that a good enough reason for setting aside divorce settlements agreed before the pandemic struck? A family judge considered that issue in a guideline case.

The case concerned a middle-aged couple whose 24-year marriage yielded three children before it ended in divorce. By far their biggest asset was a family business which, prior to the onset of the pandemic, was valued at about £3.5 million gross. The husband owned 51 per cent of the shares in the company with the remainder being held by the wife, who had never played an active part in the business.

Nine days prior to the imposition of the first lockdown, a consent order was signed whereby the wife was to receive 39.8 per cent of the marriage’s capital assets and 32.8 per cent of their pension funds. The quid pro quo for that uneven distribution was that, whilst the wife’s assets were copper-bottomed, the husband’s were entirely illiquid and subject to greater risk.

As part of the deal, the husband agreed to pay the wife a £1 million lump sum by instalments over a two-year period. The plan was that the company would buy back the wife’s shares and that the money required to do so would be raised by way of loans and by delving into the business’s cash reserves.

The husband subsequently applied to set the consent order aside on the basis that the business, which sourced many of its supplies from China, had been decimated by the pandemic. The company’s turnover was said to have fallen by 38 per cent and its healthy profits had been replaced by substantial losses. The husband asserted that the lump sum was no longer affordable on the basis that the company’s value had more than halved, that it was suffering severe liquidity difficulties and that its long-term future was bleak.

Ruling on the matter, the judge found that the pandemic was an extraordinary event that potentially opened the door to the husband’s application. By the date on which the consent order was signed, however, the government had issued a number of public warnings that COVID-19 posed a serious and imminent threat to public health and was likely to cause severe disruption for many months.

The husband could not have been expected to foresee the full consequences of the pandemic. He was, however, an experienced and successful businessman who should reasonably have foreseen the risk that the virus would have a significant impact on the company’s trading position.

Dismissing his application, the judge noted that neither husband nor wife were forced to sign the consent order, the terms of which they viewed at the time as sensible and fair. By agreeing to those terms, the husband chose to take the risk of divesting himself of liquid assets in order to retain control of the business. It had to be assumed that he was aware of that risk and knew what he was doing.

The company was trading through very difficult times but the husband had not given up on it and viewed it as remaining viable, albeit on a smaller scale than he had hoped for. Although he would have to bear the pain of complying with the consent order, the judge expressed the hope that a pragmatic and consensual way forward might be found that would ensure the survival of the business.