Forensic Accounting Case Studies

Matrimonial

Often the family company is the largest single asset to be taken out of the marriage by a spouse, and its value can be a large component of the matrimonial balance sheet. And it is seldom for sale, because the spouse who built it will wish, or need, to continue to operate it.

Case 1

The ultimate special purchaser

Chris acted as shadow expert for the wife in a case where the spouses owned a specialist IT company half each. The company was making huge trading losses, but its intellectual property was of great interest to an American company.

Advice from Chris

The husband was in complex negotiations with the US buyers, whilst Chris was advising the wife’s family lawyers (including Nicholas Hytner QC) on company sale & purchase and tax planning issues etc, in a way which would not spoil the negotiations.

An order by consent was achieved, and the sale went through. Since the husband was being paid by instalments and received a handsome remuneration package to stay with the company, he agreed to pay his wife by instalments.

But then what happened?

A couple of years later the husband reneged on the deal, and the wife had to sue for the final instalments of the amount due to her. At the hearing, she won. The case is reported as Wood & Rost [2007] EWHC 1511 (Fam), and the first paragraph of the judgment reads:

“If Charles Dickens were alive today, the twists and turns of this litigation, conducted at vast expense, would provide him with ample copy for a 21st century sequel to Bleak House”.

Case 2

Where has the trade gone?

Chris is also experienced at locating hidden assets and diverted businesses. In one case, a husband had an IT company which, as well as selling hardware, provided a range of maintenance, support and training services. But his business appeared to be declining, him saying that he would not be able to pay his wife a suitable sum in the divorce settlement.

Why was the husband’s trade declining?

Chris captured a print from the website when all such services had been listed. He then inspected the husband’s sales records, and found that regular income from many customers petered out.

The husband contended that these services were no longer worth pursuing. Then a few months later, Chris captured a print from the website of the new girlfriend, who also had an IT company, and – remarkably! – found that all the missing services were now listed on her web site.

Time for the husband to retreat!

The husband knew he had been caught out, and he very quickly reached a generous settlement with his ex-wife.

Case 3

Divorce the spouses, but don’t divorce the companies

A husband and wife were equal shareholders in two companies. One company ran a big waste transfer company, and the other owned a huge quarry from which road gravel was extracted and the waste went to landfill; and this was quite an asset, being in the Surrey green belt.

Should ownership of the two companies be divided?

The wife’s lawyer proposed that a fair division of assets should start with the husband taking the waste business and the wife taking the quarry. Chris saw this as a daft proposal, for where would the husband put his landfill, and how would the wife refill the quarry?

Heck, no!

Chris saw that there was a “marriage” between the two companies, and that they should not be “divorced”. He valued the combined businesses, the husband took them both out of the marriage, and a settlement was reached with the wife whereby she took the matrimonial home and other assets to balance.

A clean break, which suited both parties, was achieved.

Case 4

Is the Business worth a million pounds or zero?

The wife had a rich daddy who paid for a forensic accountant to value the husband’s businesses. That expert’s opinion gave a total value of £1million. Application was made to the court for this expert’s report to be admitted, and permission was given provided that the husband could also instruct an expert. So Chris, acting for the husband, then valued the businesses, which had huge losses and pressing creditors, at £nil.

Why the difference?

Chris recognised that the other expert, a beginner, had taken an over-optimistic view of the businesses so as to reach an opinion of value which was hopelessly optimistic.

Who was right?

The hearings went part-heard several times. Whilst being cross-examined, the husband said he was forced to declare himself bankrupt, and all his businesses collapsed.

Good news: Chris’s zero valuation was right. Bad news: he never got paid!

Court proceedings would have been in neither party’s interests.