Chris Salter: Hello, my name is Chris Salter and welcome to
the junior family law podcast: a collaboration between
Burges Salmon, Mills & Reeve and Newton Kearns. Over the
next eight episodes, we'll be discussing a range of topics
likely to be encountered by junior family lawyers. The
podcasts are designed to be a practical and helpful
discussion through a series of topics you may encounter, as
you start out in your family law career.
I'm a solicitor at Burges Salmon, having trained in the firm
and qualified in September 2020. Today, I'm joined by
Michael Finnegan, a two year PQE solicitor at Burges Salmon,
and David Hickmott - a four year PQE solicitor at Mills &
Reeve.
In his inaugural episode, we're going to be discussing
section 2.11 of Form E in relation to business assets and
directorships. Michael, do you want to tell us how we'll get
to this stage? And why would you be looking at completing
section 2.11 of Form E.
Michael Finnegan: So a Form E is a detailed form setting out
the financial details of the party who's completing it. So
both parties in divorce proceedings need to complete one of
these usually, and it sets out the needs of the person
completing a lead children and both parties have detailed to
provide full and frank disclosure for family proceedings. So
the Form E is the usual way to do this, it can be exchanged
voluntarily, before proceedings have been issued, or as part
of the court timetable as part of the information gathering
process, which is necessary for settlement negotiations can
begin and basically it gives a full overview of both parties
financial position.
Chris Salter: Okay, so we will slowly start to work our way
through section 2.11 itself. If you want to follow this
through, you should be able to download from a link near
this podcast, the page of Form E, which we're looking at. So
the first book she'd want to fill in is the name of the
business. So David, what can you tell us about this?
David Hickmott: It's the most obvious box, but there are
still a few things to make sure you get right. Obviously,
first thing is to make sure that you've spelled the name
correctly, and made sure that you've recorded the actual
legal name, it's worth checking that on Companies House
because some businesses will trade under a different name to
that which they're registered under. So make sure that
you've got that right. There's other additional basic
information that you should include, such as the company
number, and in which jurisdiction that company is
registered, that's going to be relevant if it's registered
outside of England and Wales. And all of that ties in neatly
into the nature of the business as well. I'll just talk very
briefly about that. Again, you don't need to include a lot
of information here. Companies House will give you the basic
information, particularly if it's the other side's business,
you just need to put a very brief description of what the
company does. So if it's a trading company, what it's
producing, or marketing or selling. Note, if it's an
investment company, or if it's a company holding property.
Again, not a lot of detail needed, so just summarise it
briefly.
Chris Salter: So the next box you will see is a tick box,
which asked to identify if you're a sole trader, partner in
a partnership or shareholder in a limited company. Just
going back to basics very quickly. A sole trader is an
unincorporated company. So that could be the person who just
owns a tea shop is a very small business. So they have no
separate legal personality. A partnership, you generally
find farming partnerships. Again, they're not incorporated,
so you won't be able to find details on Companies House. The
one we're going to focus on mainly in this podcast. For the
rest of the form is where you have someone who is a
shareholder in a limited company. Limited companies are
governed by the Companies Act and means that the company
itself has a separate legal personality. That's why you'd be
a shareholder you own shares in the business rather than
owning it itself. With it being registered. That's why you
want to Companies House and find information such as the
shareholdings and the annual returns. So we're going to move
on. Once you've identified that you have a client who is a
shareholder in a limited company, you need to understand
that interests in the business. So Michael, how would you go
about doing this?
Michael Finnegan: So when you go on to the Companies House
paid for the relevant company, it will list the members in
the company and will also give an idea of the percentage
share they have and whether they have a controlling share in
the company. Also, the annual returns on the list of
documents filed with company house will give an idea of who
the shareholders are and what their share ownership shares
are. It's an annual return is essentially a snapshot of a
certain company at the anniversary of their incorporation is
a separate document. Through the accounts and the details of
shareholders, the directors the address all at the date of
that document.
Chris Salter: So, Michael, when looking at the annual
return, will the annual return tell you the percentage
shareholding of of that person shareholder? Or will you need
to work that out yourself, given the total number of shares,
and the shares which the individual client may hold?
Michael Finnegan: So when you look at the annual return, it
will have a number representing the overall shares and then
the number of shares owned by each of the members of the
company. So from that you can you can work out what share in
the company that each of the shareholders owns.
David Hickmott: Okay, great, David, if you have anything
you'd like to add at this part?
Just a couple of things to look out for. One is whether you
have corporate shareholders in the business, depending on
the type of business, the presence of a corporate
shareholder, might raise a flag of suspicion with the other
side. So it's worthwhile just explaining what they do, why
they're there. And the other issue is minority
shareholdings. If you own less than 50% of a business, then
arguably, you don't control it, you don't have the voting
rights. And that might have an impact on your client's valu
of the business. So that's worth flagging up right at th
beginning, that's going to be an issue. And the final i
just a reminder that when we say business interests, w
don't mean directorships or businesses that you work fo
directorships should be listed separately. Becaus
obviously, you can be a director or an employer of a compan
or a business, and not have any actual interest in th
underlying business
Chris Salter: So the next box is to look at when your next
set of accounts will be available. Companies which are
incorporated are required to file annual accounts with
Companies House. It is worth noting, though the accounts
generally run through a period for example, to the 31st of
July, however, they do take quite a long time to be
prepared. So if a company's end of the year is July, it may
not be until, for example, February, the following year,
before those accounts will be available. This is information
you could obtain from the company accountant or just by s
eaking to your client to find out when those accounts may n
xt be. Moving on to those company accounts. They are vital
nd needs to be provided with the Form E, as you can see at
he top, Form E helpfully tells you what documentation is
equired to be attached to the section. And at point A is
opies of business accounts for last two financial years. So
ichael, do you want to talk about company accounts where
ou might find them and what you should look out for in
hose accounts?
Michael Finnegan: So as Chris has mentioned, you need to
provide the last two years, company accounts. But that being
said, there may be some cases where in fact, you feel that
the last two years don't paint an accurate picture of the
company. Because for example, there might be special
circumstances which might mean the company performed better
than usual, but actually isn't going to be the case going
forward and you want to demonstrate this. So it may be you
want to provide slightly more than that. But that will
depend on the facts of the case. When you get the accounts
from Companies House, you might notice there are different
types of accounts available. So there are abbreviated
accounts for example, which are a summarised version of the
full accounts, and include the company balance sheet and a
reduced number of notes and don't have the profit and loss
account. As micro company accounts for smaller companies
with a smaller turnover and less employees, less for company
accounts, which have the the profit and loss account and the
balance sheet and detailed notes to the accountant. So these
are those useful when these are available, and have all the
essential elements of the full accounts. And they also
include an accountant's report and a director's report,
which gives further important information about the company.
If possible, it's useful for to obtain any of this
information from a company accountant because if there is an
accountant, they're likely to know more about the accounts
and can answer any questions you can have which the client
might not be able to answer. So if you can make contact with
an accountanrt, and then that's always a good plan.
In terms of when the next accounts are due, you can you can
usually assume this based on if you don't know for sure you
can usually assume this based on when the previous ones were
prepared for tend to be done to the same period every year.
Again, this might be a question for the accountant, it might
be something they're working on, they might be able to give
you some draft accounts. That's often the case in terms of
what the accounts show that there's important aspects on the
accounts to look out for which is things like the balance
sheet profit and loss account. As I mentioned, the
shareholders funds, the shareholders funds is a good one to
look at when looking at the interest your client has in that
in that company because it shows what their interest in the
company actually is. And it's also important to know any
dividends that the client might be receiving and if they
change year on year, and it's so you might be worth
explaining why they've changed. With partnership accounts,
for example, usually look at the drawing that is often with
with these types of business with partnerships, people can
often meet some of their personal expenditure from those
accounts. So it's useful to look at too.
Chris Salter: It is also useful in that it can show trends
in the business. Company accounts show the year that
accounting for and the previous year as well as you can
identify year on year whether the business is going in a
positive or negative direction. As Michael explained, that
may be another time where you'd want to look at previous
sets of accounts to see if that trend continues. The Form E
also asked in this section, if there's been any material
change since the last accounts. This could well be COVID or
a similar situation, which generally impacted the business
world or for that individual business, something may well
have happened, which is causing a negative or positive
impact on their accounts. As accounts only prepared
annually, the snapshot which you get may not be indicative
of the current state of play of the business. So here you'd
want to explain in general terms, if the business is doing
particularly well or badly and give reasons as to why. It
may also be that new competitors have entered the market or
new products, which again could have a positive or negative
impact on the business. Again, here just a brief explanation
of what they may be. The next box here looks at any sums at
both the business for directors loan account. Here, you only
want to reference money which is owed to your client. For
example, a directors loan account could be where your client
has sold a previous business for let's say 5 million pounds,
and has invested that 5 million pounds into the new
business. Therefore your client is owed that money from the
business, which is reflected on his directors loan account.
So that needs to be stated there as its money which should
be effectively taken out of the business because it's owned
by your client. There's also what's known as a reverse
directors loan account, this is where the balance is nil. So
your client may have put no money into the business. So it's
not owed anything but continue to draw money out of the
business. If there is a reverse directors loan account, you
do not want to include that here. Because Form E is only
looking at cash and liquidity within the business. You
should provide a shedule of your directors loan account with
Form E, although there's no requirement for you to do so. It
may preempt any questions which come up from the other side
sisters after you exchanged Form E. It's also really
important to note that there could be tax consequences with
directors loan account. Ultimately, DLAs are income so they
will be taxed at some point. There are also specific laws
around how long money can stay outstanding on directors loan
accounts before they are due. The next box on Form E looks
at the estimate of the current value of your business
interest. David, how would you go about tackling this box?
David Hickmott: What you would put in this box is partly
dependent on the type of business that you have. For
example, if it's a business that simply holds properties,
you might be able to do a straight valuation of the
underlying assets. Equally, if it's a consultancy business,
for example, it may be that the value of the company is
effectively zero because the value is in the work that the
consultant is doing rather than the business itself. If you
have a shareholding in a trading company, it becomes a lot
more complex. It may be that you just want to say that a
formal valuation is going to be needed further down the
line. Valuing shareholdings can be really complicated. And
there are a few things to look out for in terms of just
having a clear idea about value and having an idea about the
kind of expert that you might be looking for. So think about
if there have been any recent sales of other shares, or
offers to purchase the business, that might give an
indication as to value. So for example, if you own 20% of
the shares in a business, and you know somebody else has
just sold their 20% share, and you know the value that will
give you a good indication about what your share is worth.
Similarly, if you own the whole business or you own majority
share in the business, and you are aware of an offer in the
last month or so, to have the business purchased. Again,
that might be a really helpful indication. Valuations can
also be based on revenue. So have a look at the kind of
profit that's being generated year on year and how that's
changing. It may be worth having a friendly accountant or a
business, valuer, to act as a shadow expert. That is
somebody who's not instructed on a joint basis, not an
expert approved by the court, but is available to your
client to answer questions and provide advice, which can be
particularly useful if y ou're having to wade through a
long, detailed or complex valuation further down the line.
So if it is going to be complex, it's likely that you will
need a formal business evaluation, you will need an expert
appointed by the court. And a single joint expert is going
to be necessary.
Chris Salter: David that's that's great. And really
interesting. Have you got any stories you can give about
when you've been trying to complete these sections yourself?
Any good case studies you can mention?
David Hickmott: I think one of the challenges is persuading
clients that business valuations unnecessary. I think
sometimes clients think that a business is simply the
underlying assets or simply the cash that it has in the
bank. A good example, and something I've dealt with recently
is a consultancy business, where the client is insistent
that the company has no underlying value. That might be the
case. But it's important for clients to understand that
there are additional things to think about. So for example,
a company may have a client list, which is worth money, a
company may have a degree of goodwill, which is associated
with a brand name and brand recognition. And that is the
kind of thing that is intangible but has a value to it. And
it's important to make sure that clients realise this and
realise that it's a complex question. And that it may be
money well spent, think about instructing experts or
agreeing to instruct experts early in the process, rather
than becoming entrenched in this idea that a business is
just what it has in the b
Chris Salter: And I would echo that and say that I've
experienced similar issues in the past when trying to think
for a value for this business. because later on in this
series, there's going to be a podcast on appointing experts,
which will include the appointment of experts to value a
business, they will be looking at that point at the business
as a going concern, but you need to get to a stage first,
where you value all the parts of the business to help come
up with the overall business value. I've had situations in
the past where businesses own property where they own fleets
of vehicles, or trademarks. And maybe the case that they
also need to be valued separately, before they can feed into
an overall valuation of the business is many moving parts,
which needs to be pulled together when we're looking at
value, which is why as you said, David, it may not
necessarily the best place in Form E to actually assign a
value to a business. Michael, do you have anything to add at
this stage?
Michael Finnegan: Going back to a few of the different
things we've mentioned when talking through section, it
reminds me of a case I had some time ago where we had a
company where the wife had put in around 20 to 25 million,
most of which were nearly all of which was was property
which was owned by the company, the company as a whole power
was was owned by her two daughters, and they were the
shareholders. But in essence, as we've discussed with with
directors, loans accounts, this this money was owed to our
clients, but there was a company have been set up as an
investment company to benefit her daughters, and enable them
to inherit as tax efficiently as possible. So in reality,
our client was never actually going to receive any of this
money back. But on first glance, everything there was a
company in which she had put 20 million pounds roughly into
and was owed that amount back. So it was sort of it had to
be presented in such a way that the other side wouldn't see
this and just think that was, you know, 20 million pounds,
it's going to come back to her someday, but actually, to
provide as much documentation as possible liaise with the
accountants, and be able to present that in such a way that
the other side could understand upon reading Form E exactly
what the purpose of the company was, why it had been set up
and what's going to happen with it and the fact that our
company and the fact that our client wasn't actually going
to benefit from that company.
Chris Salter: That's really interesting. And just following
on from DLA and potential tax consequences, might what would
you put in the box about any capital gains tax that may be
payable on the disposal of your business interest?
Michael Finnegan: Well, the tax is obviously something which
is really important because we are looking to ascertain the
net value of the business or the net value of our clients
interest in the business. There may be capital gains tax
payable in the event of a sale also, if, for example, you
have a very small business, then the allowance of 12,300
pounds, tax free may be something that's relevant on top of
this It's useful to think about when there are reliefs
available. So for example, business business assets disposal
relief, which was previously entrepreneurs relief might be
available, which would cut CGT to 10%, as opposed to 20% if
the company qualifies, and they're also potentially other
tax reliefs available to defer or reduce the tax. But this
is obviously something that we would need to speak to an
accountant about. So again, if there's a company accountant,
we can speak to them and ask them for if they can put
together a tax calculation in the event that the business
was sold in six months or 12 months or now even what the tax
consequences would likely be. Similarly, if an experts
provided a report, it might be that in the instructions to
the expert, we've already asked them to provide an estimate
of the tax that will be payable in the event of the sale of
a business and if anything can be done to mitigate tax in
the event of a sale. So it's certainly something you would
want to, to preempt when you were instructing an expert. But
yet others say otherwise, an accountant is usually able to
help with that kind of stuff. And it's, it's something which
is sometimes overlooked, or TBC'd. But it's something that's
really important if you can get a tax figure in there.
Chris Salter: Okay, great. That's really interesting. And
then that now leads us to the last box, which is the net
value of your interest in any business after capital gains
tax liability. So as you may have guessed, as you've
listened to this podcast, our indication is that you may
want to leave this box blank. Or as Michael said, TBC, there
are many issues which needs to be identified before you want
to assign a value to a business. And it may well be that
experts need to be appointed before you can do so. If you do
leave it blank or TBC. I don't see a call criticising a
solicitor for doing that, as there are many moving parts and
it'd be so difficult to tie down a value for business,
especially in a large limited company, which could have
multiple millions worth of turnover. Well, that brings us to
the end of section two point 11 or Form E, and the end of
this first podcast in this series. Thank you very much for
listening. As I said at the start, this will be a series of
eight podcasts and the other seven will follow over the next
coming weeks and we'll continue to look at various sections
of Form E, there will also be a podcast which we'll look at
children issues, nuptial agreements, and as we've alluded to
throughout this podcast, the instruction of experts. Thank
you.