COVID-19 has had an impact on all of us whether we like it or not. The shockwaves sent out by this virus have been a horrendous burden for a great number or people and for others it has prompted them to adopt an outlook where they are much more appreciative of the little things in life.
It is the day-to-day impact on our every day lives which is what I want to touch upon today. There has been a great deal of media coverage on the increase in the amount of divorces as a direct consequence of the COVID-19 pandemic, in particular when we were in full lockdown. What hasn’t been covered in as much detail is whether or not COVID-19 impacts on the most contested part of a divorce – the finances.
How will it impact? Will it even impact at all? Who is most at risk of it impacting? What are the negatives and the positives to be gained?
Well, the answer, as so commonly spouted by legal professionals to so many questions, is……”IT DEPENDS!”
Take for example, a couple who are divorcing, where one party owns and works in a small restaurant in central London. The COVID-19 pandemic has meant that fewer people are travelling into town, less people are going out to eat and they simply can’t make ends meet. The restaurant closes and they are out of business. The financial impact here is obvious – they have less capital derived from the value of the business and lower income because they are not earning. There is, therefore, less to divide up between the parties. Financial decisions will ultimately need to be taken to minimise the financial loses of the family and allow them to both continue with their lives financially independent of each other (if this is even possible in the short term).
Many businesses will have taken a financial hit due to COVID-19. Fashion, retail, hospitality, leisure, travel, restaurants and pubs have been the hardest hit. In 2019 BC (Before COVID-19), valuing a business was a complex task, but one which was passed to a credible accountant who would look at the figures and come up with a valuation based on the history of the company. What happens though, when you need to value a business that has had an extraordinary event thrown at it that is not quantifiable and is also something no one has ever had to deal with before?
For the purposes of financial proceedings on divorce, there will be much disagreement as to how that business is valued. I am not a financial advisor and I am not an accountant and so I cannot go in to detail about the way in which the value is determined. But I will say this, a detailed examination of the financial position of the business at the time of the financial proceedings will need to be undertaken – having full regard to how that business has been able to manage due to the pandemic. Specialist advice will need to be sought because ultimately the level of risk in connection with the business will be higher especially with the businesses that are struggling. Alternative methods of dealing with the business asset will also need to be considered if it can in fact be valued. The methods will undoubtedly need to be strategic for both sides. Do you share the assets differently to account for any uncertainty in the markets? Do you seek for the non-owning spouse to have an interest in the business to share the risk of it? Do you stage lump sum payments so that they are payable over a period of time to account for an upturn or downturn in performance? There is NO definitive answer. We have to look at each case on its own very individual set of circumstances and then adapt and adopt a pragmatic and practical approach that can assist in moving forward.
Whilst all of the above seems like doom and gloom, what about the business and companies who have reaped huge financial benefits from the COVID-19 pandemic. Those who have seen an upturn in business that they would never have otherwise have seen had COVID-19 not existed – food suppliers, gardening retailers, online fitness businesses, distribution companies, etc.
Thought needs to be given to the increase in value of those businesses and whether that increase will be sustained in the short, medium or long term.
How you will approach the situation will depend on what side of the financial fence you are sitting on and whilst the answers are not clear, concise or even remotely apparent at first glance, it is definitely food for thought.
Loretta Orsi-Barzanti, Associate Solicitor
Posted on Wednesday, 16th September 2020