Good Times, Bad Times. What
Led Zeppelin didn’t tell you…
Jason Speed
Senior Manager,Chase de Vere
Scotland
Stephen Kavanagh,CEO
Chase de Vere
UK
Good times, bad times
How to build a portfolio that can
weather all market conditions
Bad things aren’t obvious
when times are good
After all, you only find out who is swimming
naked when the tide has gone out. Warren Buffet
Bet on every horse
in the race
It’s a race where you can
change your bets in-play
Don’t outstay your welcome
Great performance is often a warning sign.
Always be liquid
You don’t want to be forced to sell your
holdings at the wrong time
Think long term
Don’t invest in anything you aren’t
prepared to hold onto for at least 5 years
Follow the herd
And you’ll make the same mistakes
as everyone else
Claire Christie
Associate
Shoosmiths
PROTECTION OF ASSETS
Claire Christie
31 October 2014
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11
Protection of assets from divorce

Almost 45% of marriages in the UK end in divorce. Divorce cases are the second
most common type of civil action after debt cases in Scotland.

Legislation regulating financial provision on divorce – Family Law (Scotland) Act
1985 (The 1985 Act).

The 1985 Act contains 5 principles and several subsidiary factors to guide the
Courts in making awards of financial provision on divorce or nullity of marriage.

These provisions were adopted in their entirety by the Civil Partnership Act 2004
although, for obvious reasons, different terminology is used. The word “marriage” is
replaced by “civil partnership”, “matrimonial property” becomes “partnership
property” and “divorce” becomes “dissolution”. For the avoidance of doubt, any
reference to divorce will also include dissolution or annulment.
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The 5 Principles
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THE 5 PRINCIPLES set out in s.9 (1) (a) to (e) of the 1985 Act:
s.9 (1)(a)
“The net value of the matrimonial property should be shared fairly between the
parties to the marriage”.
s.9(1)(b)
“fair account should be taken of any economic advantage derived by either party
from contributions by the other, and of any economic disadvantage suffered by
either party in the interest of the other party or of the family”

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s.9(1)(c) ( economic burden of children)
s.9(1)(d) ( financial dependency – periodical allowance)
s.9(1)(e) ( serious financial hardship )

Although any of the above principles can be adopted individually or simultaneously
to justify a claim for a capital sum, for the purposes of today’s talk, I will focus on
those principles likely to be most relevant to you – S 9(1) (a) and (b).
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13
The definition of matrimonial
property

Section 10 of the 1985 Act -“Snapshot” of assets and liabilities taken at date of separation
(“relevant date”). The Act aims to share joint efforts or income of the parties during the
marriage.

Assets

Matrimonial assets comprise all the property belonging to the parties or either of them at
the relevant date which was acquired by them or him during the marriage but before the
relevant date otherwise than by way of gift or succession from a third party.

Exceptions to general rule:-


(a) Pensions and endowment policies (apportionment required).
(b) A property acquired before the marriage for use as family home and any
furniture
therein.

Liabilities

Matrimonial liabilities comprise any debts incurred by the parties or either of them –
- (a) before the marriage so far as they relate to the matrimonial property, and
- (b) during the marriage, which are outstanding”

NB. It does not matter in whose name these assets and liabilities are held, provided they
were acquired during the period of marriage.
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 What IS included in the definition of
property?


Every kind of property is potentially included:
Home and contents, cash, investments, pension rights, insurance policies,
transferable tenancies, unexercised insurance policies, transferable tenancies,
unexercised share options acquired during the marriage, private number plates,
milk and fishing quotas, demutualization payments.
 What IS NOT included?




Property acquired prior to marriage (subject to aforementioned exceptions)
Property acquired by gift or succession provided it remains in substantially
the same form.
Property held in trust for a third party (note s18 of the 1985 Act – setting aside
provisions)
Guidance in s.10(6) of the 1985 Act.
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Converted Assets

What happens if an asset has changed form during the marriage?

Ultimately it is a matter for the discretion of the court as to whether the asset in
question should be regarded as “matrimonial property” or “non-matrimonial property”.
Real risk that this will be treated as falling within the definition of matrimonial property
and will be included in the “matrimonial pot” for “fair” division.
Section 10(1) confirms that “fair sharing” of matrimonial property is “equal sharing”
unless “special circumstances” apply.
“Special circumstances” may include:(a)
the terms of any agreement between the parties regarding
ownership or
division of the matrimonial property.
(b)
the source of funds or assets used to acquire any of the
matrimonial
property where those funds or assets were not derived
from the income
or efforts of the parties during the marriage.
(c)
the destruction, dissipation or alienation of property
(d)
the Nature of the matrimonial property and use of it
(e)
the actual or prospective liability for any expense of valuation or
transfer
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WHITTOME V WHITTOME (NO 1 1994 SLT 114)

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Husband had acquired his shareholding from seven different transactions: Transfer without consideration of 300 ordinary shares in Christian Salvesen Ltd. from the
husband’s great uncle to him;
The advance of the husband’s share of capital in a family trust;
An increase in authorised share capital in Christian Salvesen Ltd. (bonus issue to existing
shareholders);
The advance of the husband’s share in the capital of his parents’ contract of marriage trust;
Variation of the husband’s parents’ contract of marriage trust and absolute vesting in the
husband of his 7% share;
Deed of Gift by the husband’s mother of further shares;
Flotation of Christian Salvesen Ltd., re-organisation of share capital, adoption of new Articles of
Association and alteration to Memorandum of the company, sub-division of ordinary shares and
bonus issue to existing shareholders and re-registration of the company as a Plc.
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WHITTOME CONT.
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
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As a result of the decision in Whittome, it is likely that the following factors will be taken into
account by the Courts when considering whether or not such property should be considered
matrimonial property: Signs of some “effort on the part of the benefiting party”.
Financial contribution (other than administrative costs).
Where trusts involved - consider closely the terms of the Trust Deed and what was envisaged
by the settlor.
Why something has been changed and whose decision it was to make that change.
The changes to company structure, has the nature or persona of the company changed? have
additional subsidiary companies been brought in? has the company been bought over, etc.
anything which changes the continuity of the shareholders’ interest.
Where there has been an increase in value of a pre-marriage asset this will only be relevant if
there has been direct financial contribution to that asset by the holder of that asset during the
marriage or such a significant change to the nature of the asset as to bring it within the
definition of matrimonial property.
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Problems with “Special Circumstances”

Even if the court accepts that “special circumstances” exist, it is not a given that
there will be any departure from equal sharing of the larger “matrimonial pot” as a
result (Jacques v Jacques 1997 SC (HL) 20.

The nature of the asset acquired using non-matrimonial funds may be important.
Case law to the effect that non-matrimonial funds put into a family home should be
given less credit than non-matrimonial funds used to acquire any other asset during
the marriage (Cunningham v Cunningham 2001 FLR 12).

Cost of litigation (financial and emotional).

Cases all turn on their own facts. Wide discretion given to court – can be difficult for
advisers to predict outcome.
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Application of principles of 1985 Act –
Case study 1




John has lived all of his life at his family’s farm in Perthshire. The farm has been in his
family for generations. Upon reaching the age of 25, John is assumed as a partner into the
farming partnership with his father and uncle in 1996.
A few years later, John meets Stephanie, a Fund Manager in the city and after a whirlwind
romance, Stephanie decides to give up her job in the city and live with John on the farm.
They marry in 2000 and go on to have 3 children over the next 4 years. John works every
day on the farm and Stephanie takes care of the children, feeds the workers and helps with
the milking, even in the cold winter months.
John, his father and his uncle decide to convert the partnership into a private company
limited by shares in 2005. Six months later, John’s father dies and John inherits his father’s
shares in the company. The business continues to grow until they are supplying major
supermarket chains all over the UK. They enter into an agreement to purchase a
neighbouring farm to enable further expansion and given their financial results to date, their
bank manager is very accommodating.
Meanwhile, Stephanie is becoming a bit fed up with the country life. She is tiring of the early
morning starts and all the homebaking. John refuses to change his lifestyle or move away
from the farm and this begins to take its toll on the marriage. John and Stephanie decide to
separate.

Question 1
case?
- Will any of the farm form part of the matrimonial property in this

Question 2
-
What are the implications for John’s uncle?

Question 3
-
Could any of this have been avoided?
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Case study 2

John is a partner in a family farming business inherited from his father in 1996. In
1998, John marries Stephanie, an investment banker in the city who continues to
work after the marriage. In 2010, John and his brother, who is also a partner, are
approached by Best Milk Dairies Ltd who wish to buy the farm due to the high
quality of its dairy stock. John and his brother agree to remain on the farm in
management roles. They each acquire shares in Best Milk Dairies Ltd to the value
of £250,000. Shortly thereafter, John and Stephanie decide to separate. There are
no children of the marriage.

Question 1
-
Does it matter what Stephanie does for a living?

Question 2
-
What are the implications for John’s brother?
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Desire to achieve “fairness”

Huge range of possible outcomes on divorce where special circumstances apply.
Courts reluctant to see anyone walk away empty handed - wide discretion and they
will use it!

Final safety net - after considering and applying the five s9 principles, the court then
has to check that the result those principles produces is “reasonable having regard
to the resources of the parties” (s 8(2) of the 1985 Act and use of s9(1)(b)
arguments).

Always risk involved in litigation but with source of funds argument it’s more like
Russian roulette.

Need for good knowledge of case law and good poker skills!
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Flower of Scotland - Ante-nuptial
contracts

Increasingly more popular due to: higher rates of divorce, greater financial vulnerability,
generational wealth, people marrying later in life, rise in second marriages.

Provide an extra layer of protection to non-matrimonial assets. Particularly important to assets
which are vulnerable to changes in form.

Can provide reassurance for the less wealthy party by not only “ring fencing” assets but by
including specific provisions for financial provision if the marriage comes to an end.

Careful drafting required giving close consideration circumstances of the parties (e.g. do you
need to consider other jurisdictions?).

Specialist advice essential – especially in England

Fair and reasonableness test ( s.16 of the Family Law (Scotland) Act 1985).

A very cost effective way of protecting non-matrimonial assets and anything which derives there
from for entire duration of marriage.
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In summary: forewarned is
forearmed

A disregard for matrimonial property can have disastrous consequences, a wise business
decision taken to save £1million of tax could result in £50million worth of assets being brought
into the “matrimonial pot”.

Inherited or gifted assets are not ‘safe’. Trusts are not automatically ‘safe’. Consideration should
always be given to the personal circumstances of the individual concerned. Professional
advisors should be offering clients the opportunity to seek family law advice.

Reliance on sources of funds or special circumstances argument is a high risk, stressful and
expensive strategy. The impact of such claims can be huge, and, occasionally, may even result
in the sale of a family business

Contracts can be entered into before and after the date of marriage (pre and post-nuptial
agreements).

Don’t forget cohabitants! – Even if marriage not yet in contemplation moving in together now has
legal significance. Cohabitants now have a right to apply to the court for financial provision on
cessation of cohabitation by death or otherwise (Family Law (Scotland) Act 2006).

It may be that after taking advice the client would continue on with the original plans undeterred,
however, by that time we will hopefully have alerted our clients to the potential pitfalls so that
they can’t come knocking on our door at a later date with those dreaded words ‘but you never
told me...’.
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Further information?




Claire Christie
Associate
T: 03700 868062
E: [email protected]
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Chris Scott
Key Account Manager
Ageas Protect
How wide is the Business
Protection Gap?
The Background
There were 4.8m private sector businesses in
the UK at the start of 2012, employing 23.9m
people
Source: Department for Business Innovation & Skills, Business Population Estimate for UK and
Regions 2012, October 2012
For adviser use only. Not to be shown to retail customers.
4.9 million
private sector
businesses
in the UK
Business population - by size
75% sole
Sole proprietor
proprietor
Micro (1-9)
20% micro
Small (10-49)
Medium (50-249)
4% small
Large (250+)
1% medium
0.2% large
Source: Business
population estimates 2013
Department for Business
Innovation and Skills
For adviser use only. Not to be shown to retail customers.
24 million are
employed in
private sector
businesses
Employment - by size of business
17% by a sole
proprietor
Sole proprietor
15% by a micro
business
Micro (1-9)
Small (10-49)
15% by a small
business
Medium (50-249)
Large (250+)
12% by a
medium business
41% by a large
business
Source: Business
population estimates 2013
Department for Business
Innovation and Skills
For adviser use only. Not to be shown to retail customers.
Quick quiz
What scenario would have the biggest effect on your business?
A. The business premises were badly damaged by fire
B. A business owner suffered a critical illness or died
C. A key employee suffered a critical illness or died
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
What scenario would have the biggest effect on your business?
A. The business premises were badly damaged by fire
(23%)
B. A business owner suffered a critical illness or died (57%)
C. A key employee suffered a critical illness or died
For internal use only.
Source: L&G Business Research June 2013.
(4%)
Quick quiz
On the loss of a key person, what % of businesses felt their
business would not last 18 months?
(31%) (41%) (51%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
On the loss of a key person, what % of businesses felt their
business would not last 18 months?
(31%) (41%) (51%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
And what % did these businesses have cover in place
for this happening?
(43%) (63%) (83%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
And what % did these businesses have cover in place
for this happening?
(43%) (63%) (83%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
51% of businesses have some form of business borrowing,
what is the main vehicle for this?
A. Credit Card
B. Bank Loan
C. Overdraft
D. Directors Loan
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
51% of businesses have some form of business borrowing,
what is the main vehicle for this?
A. Credit Card
(20%)
B. Bank Loan
(16%)
C. Overdraft
(21%)
D. Directors Loan
(20%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
What % of the businesses were aware that the debt
would need to be replayed on death?
(55%) (65%) (75%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
What % of the businesses were aware that the debt
would need to be replayed on death?
(55%) (65%) (75%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
And what % of businesses had taken out cover for this?
(32%) (52%) (72%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
And what % of businesses had taken out cover for this?
(32%) (52%) (72%)
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
What is the shortfall in business protection for UK businesses?
A. £135 million
B. £1.35 billion
C. £1.35 trillion
For internal use only.
Source: L&G Business Research June 2013.
Quick quiz
What is the shortfall in business protection for UK businesses?
A. £135 million
B. £1.35 billion
C. £1.35 trillion
For internal use only.
Source: L&G Business Research June 2013.
Example
Business valued at
£500,000
Jim –
Managing
Director (60)
Jane –
Finance
Director (50)
Jules –
Sales Director
(40)
Shareholding
40%
40%
20%
Worth
£200K
£200K
£100K
Salary
£50K
£40K
£35K
Value to the business
20%
20%
40%
Loans
£100K (Director)
£50K (Bank)
For internal use only.
Jim dies suddenly…..what happens
To the business?
•
Business loses founder and driver of business
•
Impossible to replace
•
Orders not fulfilled
•
Customers lose confidence
•
Profits fall
•
Staff jobs on the line
•
Monies need to be found to pay off Directors Loan and Jim’s family for his shares
•
Does Jim family come into business?
•
Would competitors want to buy the shares?
For internal use only.
Jim dies suddenly…..what happens
To Jim’s family?
•
Unbearable loss to family
•
Shares are now with them
•
They want to sell to the business
•
They do not want to get involved in the business
For internal use only.
With Protection in place
The pay-out will:
•
Absorb the business’s immediate losses
•
Provide cash to advertise, recruit and train a replacement for Jim
•
The business now has the money to pay Jim’s family for the value of the shares
•
And to pay Jim’s family for the Director’s Loan
•
Allow the business to continue to operate
•
Keep the current staff with no redundancies
For internal use only.
The Solution
Business valued at
£500,000
Jim –
Managing
Director (60)
Jane –
Finance
Director (50)
S’holder Protection
(to age 70)
40% of £500k
= £200k
40% of £500k 20% of £500k
= £200k
£100k
Keyperson Cover
(5 year term)
Loans
(5 year term)
Total
10 x £50k
= £500k
10 x £40k
£400k
£100k
£50k
?
?
£ ? to protect the business
For internal use only.
Source: Ageas Protect - 23 October 2014.
Jules –
Sales
Director (40)
10 x £35k
£350k
?
Final question?
How much do you think it would be to cover the business for their
needs?
A. £1,000 per month
B. £1,500 per month
C. £ 500 per month
For internal use only.
Source: Ageas Protect - 23 October 2014.
Final question?
How much do you think it would be to cover the business for their
needs?
A. £1,000 per month
B. £1,500 per month
C. £ 500 per month
For internal use only.
Source: Ageas Protect - 23 October 2014.
The Solution
Business valued at
£500,000
S’holder Protection
(to age 70)
Jim –
Managing
Director (60)
Jane –
Jules –
Finance
Sales
Director (50) Director (40)
£200K
(£80.51)
£200K
(£75.35)
£100K
(£13.07)
£500K
(£143.91)
£400K
(£83.26)
£350K
(£21.79)
Loans
(5 year term)
£100K
(£35.70)
£50K
(£43.96)
Total
£ 260.12
£ 202.57
Keyperson Cover
(5 year term)
£ 34.86
£ 497.55 to protect the business
For internal use only.
Source: Ageas Protect - 23 October 2014.
Questions?