Family: Capital values in uncertain times

In a world of great financial uncertainty, the issue of resources is likely to become acutely relevant in financial provision divorces. Under s 8 of the Family Law (Scotland) Act 1985, it has always been the case that a court, in making a financial award, must ensure the award is reasonable having regard to the parties’ resources. What effect will COVID-19 have on the resources of many of our clients?

Where separation took place pre-COVID-19, the values attributable to some assets may have since been materially affected. Although we currently have an upsurge in property values, the keen-eyed will have noticed the clear rider in valuation reports caveating that the market is likely to be unpredictable due to the unique circumstances, and valuations can rise and fall dramatically.

Agents in practice regularly ignore the distinction between relevant date and current date values of heritable property on transfer, no doubt as a consequence of a relatively stable property market over the last few years. As property values face the possibility of artificial inflation or even a future crash, s 10(3A) takes on much more potential significance, with appropriate warnings and explanations to the client being necessary concerning possible loss. Wallis v Wallis 1993 SC (HL) 49 considered the injustice of the relevant date value being applied on transfer where a property boom meant a windfall to the transferee. Section 10(3A) was designed to add flexibility to take account of that.

In the current crisis, there may be good reason to invite a court to invoke s 10(3A)(b) (additional subs (2B), where the court considers that, due to exceptional circumstances, the appropriate valuation date should be a date as near to the date of transfer as the court may determine). Such provision opens up the possibility of arguing for a much more cautious approach to valuation during the pandemic.

Equally, other assets such as shares, investments or business interests may fluctuate in value due to the fact that, while the value may still be significant, there are insufficient resources with which to raise funds to meet any award. The court does have the option in s 12(3) to order payment of a capital sum by instalments, and it is entirely possible that this could be over a number of years. The issue of resources is normally a matter for proof.

Due before the deadline

In an unreported case we were involved in, the operation of the husband’s business was particularly vulnerable to lockdown restrictions, and the court was prepared to structure the substantial capital payment in a way which reflected his need to stagger the way he raised the necessary funds. The court identified the capital award as being his liability, and made it payable “by” three dates over the following three years, with a lump sum being paid annually. Interest would not start to accrue on any payment until the day after the payable “by” date.

Following extract of the divorce decree, the wife served an inhibition in execution on the husband to protect her award. When the husband sought to sell a property, he moved for restriction of the inhibition to allow the sale to proceed, but with no proposal to release the net proceeds to the wife. The husband argued that the money was not “due” until the next payment date, so the inhibition could not be used to extract payment as that would defeat the court’s careful structuring of payments to reflect the impact of COVID-19.

The motion called before the Inner House, where the case was under appeal. The wife argued that the whole capital award was still “due”. The husband had merely been given dates from which interest would begin to run if part payment had not been made. The intention was always that he should pay the award when funds allowed. The inhibition should not be restricted or recalled unless all the free sale proceeds were to be paid over to the wife to account of the capital award.

Although there was no written decision, the subsequent interlocutor upheld the wife’s arguments, recalling the inhibition in return for the sale proceeds being paid to her immediately, and making clear that the same consideration would apply to any future recall or restriction, irrespective of payment “by” dates. A capital award may indeed be payable by instalments, but still be due. Only the impetus to pay the award may be delayed by the court until a certain date.

The foregoing, whilst thought to be a niche issue, serves as a reminder to ensure that careful consideration is applied when structuring staggered capital awards. Such technicalities may become increasingly relevant during COVID-19. Having a clear grasp of the distinction when it comes to enforcement and recovery is invaluable in a world where debt seems to be more readily forgiven, and utilisation of protective tools for your client will become increasingly important.