Separation and the division of relationship property is a stressful and uncertain process under normal circumstances. This will only be exacerbated during a global pandemic.
We are only beginning to see the impacts of Covid-19 and the lockdown. The wider impact on assets such as businesses, investments, superannuation, Kiwisaver, and company shares remains to be seen. However, we are likely to see a significant reduction in valuations for many assets (excluding those companies producing hand sanitiser or manufacturing face masks…). In turn, this could impact on relationship property negotiations, proceedings before the Court, and recently concluded s21A agreements which concern shareholdings in affected companies.
It’s happened before
Although we are undoubtedly in unprecedented times, facing the outbreak of a novel virus and a Government imposed lockdown, which is already having significant, devastating, effects on businesses globally, extraordinary events with catastrophic financial impacts have certainly occurred before – the Canterbury Earthquakes, and the Global Financial Crisis are two distinct examples.
Valuations of companies, shares, superannuation, properties, and other assets suffered during these events, and they undoubtedly will during the fallout of Covid-19. While circumstantially unique, inferences can be drawn from those events as to how valuations of certain assets may be treated by the Courts for relationship property purposes.
Valuation date - the starting point – section 2G
Section 2G of the Property (Relationships) Act 1976 (Act) provides a starting point for the valuation of property. Subject to any contracting out agreement between the parties, the value of any property subject to an application under the Act is to be determined as at the date of the hearing of that application by the Court.
However, the Court retains a discretion to decide that the value of the property is to be determined as at another date. The Courts discretion under section 2G may be exercised where the increase or decrease in property value cannot be dealt with under section 18B and 18C of the Act (which relate to compensation for post separation contributions or dissipation of the relationship property), but there is nonetheless a need to impose a non-hearing valuation date.
Where the increase or decrease in value is attributable to circumstances which are outside of the parties’ control, or is not directly related to the parties’ conduct, section 2G will apply and it may be appropriate for the Court to exercise its residual discretion to assess valuation date at some other time.
The purpose of the Act should also be borne in mind, which is to provide for a just division of the relationship property between spouses or partners when their relationship ends. Any division of relationship property must achieve justice between the parties. Whether justice is achieved when property suffers a substantial fluctuation in value, will be an intensely factual question.
Effect on settlement agreements and relationship property orders
Parties can agree to settle the division of relationship property outside of the Court process by agreeing terms and entering a section 21A agreement to record those terms. If no application has been made to the Court, the parties are free to select the valuation date of the assets.
A significant drop or increase in value may be grounds to have a section 21A agreement set aside under section 21J of the Act. Under that section, the Court has discretion to set aside an agreement if it would cause serious injustice. In deciding whether the agreement would cause serious injustice, the Court must have regard to a range of factors including whether the agreement has become unfair or unreasonable in light of any changes in circumstances since the agreement was made.
An example is the case of Tennison v Tennison where the Family Court made an order to set aside a settlement agreement on the basis that giving effect to the agreement would cause serious injustice. In that case, the former husbands once thriving business was severely affected by the Canterbury earthquakes. The business had a value of $1,310,000 (agreed for the purposes of the s21A agreement) prior to the earthquake. At the date of hearing, the business was valued at nil (for the husband) and $680,000 (for the wife). The loss in value of the shareholding, combined with other factors, made it impossible for the husband to meet payment obligations under the agreement. Even though the wife would suffer some hardship if the agreement was set aside, the Court found the husband’s circumstances compelling, and concluded that the agreement had become unfair and unreasonable.
Unfortunately, Tennison v Tennison did not address the question of the applicable valuation date of the company where it had suffered a significant decrease in value. The Judge commented only that: “I accept that the valuation of shares is essentially a speculative issue”.
The Court also has a general power to make orders or give directions to give effect, or better effect, to various previous orders made under the Act, or to extend, vary, cancel or discharge those orders. This ancillary power has been used by the Court to revisit valuations of property and companies and make adjustments to give effect to orders made. It is conceivable that this power could be used where an asset subject to relationship property orders has suffered a large drop in value subsequent to the order being made.
Ultimately, where parties have recently concluded settlement agreements or have had orders for property division made by the Court, the agreement or orders may be reviewed if the value of the property involved has been significantly affected as a result of Covid-19 and the associated economic response. This is particularly so where a decrease in value may mean that the division of property is no longer equal or is seriously unjust in the circumstances.
Wynn Williams is a member of SCG Legal, a global network of more than 110 independent law firms with both legal and public policy practices serving businesses in all 50 U.S. state capital cities and the District of Columbia, as well as capital cities and major commercial centers in more than 50 countries. SCG Legal has developed a COVID-19 Global Resource Center, which is focused on up-to-date legal and public policy developments from more than 25 different countries and most U.S. States. To access it, visit scglegal.com/coronavirus-resources.