Liquidity in High-Net-Worth Divorce

When wealth exists but cash does not 

A person may be worth R50 million and still be unable to pay a R10 million divorce settlement without selling property, borrowing heavily or damaging the business that created the wealth. 

That apparent contradiction lies at the heart of many high-net-worth divorces. 

The matrimonial estate may include valuable businesses, commercial property, farms, investment structures, retirement interests, shareholder loan accounts and private-company shares. On paper, the parties may be wealthy. In practice, very little of that value may be available as cash when the divorce settlement must be implemented. 

This is the liquidity problem. 

It is not simply a disagreement about what an asset is worth. It is a separate and equally important question: 

How can the financial consequences of the divorce be implemented without destroying the value that is supposed to be divided? 

A settlement may be mathematically equal but commercially impossible. Conversely, a settlement structured around liquidity can preserve a viable business, protect employment, avoid unnecessary forced-sale losses and still provide the other spouse with a fair, secured and enforceable route to payment. 

For business owners, their spouses and professional advisers, the distinction between asset value and available cash should be considered at the beginning of the divorce—not after settlement terms have already been agreed. 

Wealth, value and liquidity are different concepts 

Net worth generally measures the value of a person’s assets after deducting liabilities. 

Liquidity measures how quickly and reliably those assets can be converted into usable cash, without unacceptable loss or wider financial damage. 

Consider a spouse whose estate includes: 

• private-company shares valued at R40 million; 

• a shareholder loan account of R8 million; 

• commercial property with a net value of R12 million; 

• retirement interests worth R7 million; 

• vehicles and other assets worth R3 million; and 

• available cash of R500 000. 

The person may have a substantial net estate, but an immediate obligation to pay R20 million could still be impossible without: 

• selling shares; 

• disposing of property; 

• raising finance; 

• withdrawing money from the company; 

• selling non-core assets; or 

• agreeing to staged payment. 

Each option has different legal, tax and commercial consequences. 

This is why four questions must be kept separate: 

1. What is the asset? 

1. What is it worth? 

1. How liquid is it? 

1. How can its value be delivered through the settlement? 

Valuation answers only the second question. 

Why the liquidity problem is common in high-net-worth divorce 

High-net-worth estates are often built through long-term ownership and reinvestment rather than through accumulated cash. 

The business is the principal asset 

Entrepreneurs frequently reinvest profits in: 

• staff; 

• inventory; 

• equipment; 

• technology; 

• property; 

• working capital; 

• expansion; and 

• debt reduction. 

The result may be a valuable enterprise with limited free cash. 

A valuation may attribute significant value to expected future earnings. That value is not necessarily available immediately. It may depend on: 

• the continued involvement of the owner; 

• future contracts; 

• customer retention; 

• access to finance; 

• stable trading conditions; 

• key employees; and 

• the company remaining adequately capitalised. 

If a settlement requires a large amount to be extracted immediately, the payment may undermine the very assumptions on which the business valuation rests. 

Company cash is not automatically the shareholder’s cash 

A company is a separate legal person. Its bank balance does not belong directly to its shareholders. 

Company cash may be required to pay: 

• salaries; 

• suppliers; 

• taxes; 

• lenders; 

• rent; 

• inventory; 

• operating expenses; and 

• capital expenditure. 

Distributions by a South African company must comply with the Companies Act, including the applicable solvency and liquidity requirements and proper corporate authorisation. The fact that a shareholder needs money for a divorce does not itself make the company’s funds lawfully or commercially available for withdrawal. Companies Act 71 of 2008 

The value of the shares and the amount that can safely be extracted from the company are therefore not the same thing. 

Valuable property may take time to realise 

Residential, commercial, agricultural and development property may represent substantial wealth but can take months—or longer—to sell. 

Liquidity may be reduced by: 

• mortgage bonds; 

• co-ownership; 

• long-term leases; 

• zoning restrictions; 

• development risk; 

• transfer delays; 

• tax; 

• transaction costs; 

• poor market conditions; and 

• disputes over occupation or control. 

A property valued at R20 million does not mean that R20 million is available for division. 

The realistic figure may be substantially lower after deducting debt, commission, transfer-related costs, tax and other liabilities. The timing of receipt also matters. A valuation dated today does not create cash today. 

Private-company shares do not have a ready market 

Listed shares can ordinarily be sold through a recognised market. Private-company shares cannot. 

A sale may be restricted by: 

• the memorandum of incorporation; 

• a shareholders’ agreement; 

• pre-emptive rights; 

• board or shareholder approval; 

• financing agreements; 

• regulatory requirements; and 

• the absence of willing buyers. 

A purchaser may also distinguish between: 

• the value of the company as a whole; 

• the value of a controlling shareholding; 

• the value of a minority interest; 

• the value of shares that cannot easily be sold. 

Marketability, voting rights, control, dividend history and dependence on the founder may all affect what a buyer will actually pay. 

A headline valuation should therefore not be mistaken for readily realisable proceeds. 

Shareholder loan accounts may not be recoverable on demand 

A shareholder loan account may show that a company owes money to a spouse. Its accounting value and practical recoverability may nevertheless differ. 

Relevant questions include: 

• Does the company have sufficient cash to repay it? 

• Is repayment subordinated to a bank or other creditor? 

• Is the loan interest-bearing? 

• Is there a repayment date? 

• Has it been ceded or pledged? 

• Is the amount disputed? 

• Would repayment breach lending arrangements? 

• Would demanding repayment prejudice the business? 

• Is the company solvent? 

A loan account shown at R8 million may not necessarily be worth R8 million in immediately available cash. 

The legal claim and the payment mechanism are separate issues 

The parties’ matrimonial property regime determines the nature and extent of their proprietary rights. 

Liquidity determines how those rights can be satisfied. 

Marriages subject to the accrual system 

Under the Matrimonial Property Act, the spouse whose estate shows the smaller or no accrual may acquire a claim equal to half the difference between the accruals of the respective estates when the marriage is dissolved. The Act distinguishes the existence and calculation of the claim from the practical question of how it is paid. Matrimonial Property Act 88 of 1984 

Section 10 expressly allows a court, on application by the person against whom an accrual claim lies, to defer satisfaction of the claim on conditions that may include: 

• security; 

• interest; 

• instalments; and 

• the delivery or transfer of specified assets. 

This is particularly relevant where the estate is valuable but illiquid. 

However, deferment should not become an excuse for indefinite non-payment. The receiving spouse should not be expected to carry all of the owner’s business or credit risk without suitable protection. 

A deferred settlement should therefore address: 

• the payment period; 

• interest; 

• security; 

• default; 

• acceleration; 

• reporting obligations; 

• restrictions on disposal or further borrowing; and 

• what happens on death, disability or insolvency. 

Marriages in community of property 

Where spouses are married in community of property, the joint estate ordinarily has to be divided upon divorce. 

The division may become difficult where the joint estate contains: 

• a family business; 

• several properties; 

• agricultural assets; 

• retirement interests; 

• vehicles; 

• investments; and 

• substantial debt. 

The legal entitlement to a share of the joint estate does not make every asset immediately divisible or saleable. 

The parties may need to consider whether: 

• assets can be allocated between them; 

• a balancing payment is required; 

• selected assets should be sold; 

• the payment can be financed; 

• a staged implementation is necessary; or 

• a formal realisation process is required. 

Valuation is only the beginning 

High-net-worth divorces often become dominated by arguments over a single number: the value of the business or asset. 

That number is important, but it does not by itself produce a workable settlement. 

A proper analysis should distinguish between: 

The law: what claim or proprietary right exists. 
Valuation: what the relevant asset or interest is worth. 
Liquidity: what cash can realistically be produced and when. 
Settlement design: how the entitlement will be delivered fairly and securely. 

Defining the asset correctly 

Where a business is involved, the relevant interests may include: 

• ordinary shares; 

• preference shares; 

• shareholder loan accounts; 

• partnership interests; 

• claims against related entities; 

• intellectual property; 

• rights under shareholder agreements; 

• beneficial interests; 

• personally owned property used by the business; and 

• contingent rights. 

The company may own valuable assets, but the spouse ordinarily owns shares or another legal interest—not the company’s underlying property directly. 

Confusing the value of the company’s assets with the value of the spouse’s legal interest can distort the settlement analysis. 

Choosing the valuation date 

Business values can change materially during divorce proceedings. 

A company may: 

• gain or lose a major customer; 

• acquire additional debt; 

• dispose of property; 

• pay dividends; 

• restructure; 

• experience economic disruption; or 

• suffer a change in management. 

The valuation date should therefore be identified clearly and consistently with the applicable legal issue. 

In accrual matters, the statutory framework provides that the claim arises at dissolution of the marriage. Matrimonial Property Act 88 of 1984 

Choosing the valuation method 

The appropriate method depends on the nature of the enterprise or asset. 

An expert may consider: 

• maintainable earnings; 

• discounted cash flow; 

• net asset value; 

• market multiples; 

• going-concern value; 

• realisation value; or 

• a combination of methods. 

A property-holding company, professional practice, farming operation, retailer and technology business should not automatically be valued in the same way. 

The valuation may also need to address: 

• dependence on the owner’s personal effort; 

• non-recurring income or expenses; 

• personal expenses paid by the business; 

• related-party transactions; 

• excessive or understated remuneration; 

• contingent liabilities; 

• customer concentration; 

• debt; 

• working-capital requirements; 

• restrictions on transfer; 

• minority interests; and 

• the recoverability of loan accounts. 

Stress-testing the settlement 

Once a provisional value is established, the settlement should be tested against actual cash flow. 

Questions may include: 

• Can the company make the proposed distribution and remain financially viable? 

• Can the owner raise personal finance on reasonable terms? 

• What security will a lender require? 

• Will financing breach existing covenants? 

• How long will a property sale take? 

• What will remain after debt, costs and tax? 

• What happens if the business loses a key client? 

• Can the instalments still be paid if interest rates rise? 

• Will the settlement impair working capital? 

• Does the owner have sufficient income after the settlement to meet continuing obligations? 

A settlement that works only under optimistic assumptions is not robust. 

Tax can materially change the value of a settlement 

Two assets with the same market value may not be economically equivalent. 

Compare: 

• R10 million in cash; 

• a property valued at R10 million but carrying debt and disposal costs; 

• private shares valued at R10 million but lacking a ready market; 

• a retirement interest valued at R10 million but governed by statutory and tax rules. 

Each may carry a different: 

• tax exposure; 

• time to realisation; 

• transaction cost; 

• risk profile; 

• income stream; and 

• level of control. 

SARS confirms that transfers of assets on divorce may have capital-gains-tax implications and that roll-over treatment may be available where the necessary legal formalities are satisfied. SARS guidance on divorce of spouses 

Roll-over treatment does not necessarily eliminate the tax consequence permanently. Depending on the transaction, it may defer the consequence and carry the relevant tax history into the hands of the receiving spouse. 

Tax consequences can therefore affect the practical value of assets transferred or sold as part of a divorce settlement. Different treatment may apply depending on whether an asset is held personally, through a company or through a trust. 

SARS publishes current capital-gains-tax guidance and applicable rates, which should be confirmed before any settlement is finalised. Current SARS capital gains tax guidance 

Tax advice should be obtained before—not after—the settlement is signed. 

A divorce agreement does not bind outside creditors automatically 

A settlement between spouses cannot ordinarily rewrite the contractual rights of a bank or another creditor that was not party to the agreement. 

This becomes important when one spouse agrees to: 

• retain a bonded property; 

• assume responsibility for a loan; 

• take over a business debt; 

• indemnify the other spouse; or 

• remove the other spouse from a guarantee. 

In FirstRand Bank Limited v S.M.B and Others, the High Court held that a divorce settlement allocating ownership and repayment responsibility between former spouses did not bind the bank. The bank retained its rights under the original lending arrangement. Read the judgment on SAFLII 

A spouse may therefore remain liable to the creditor even where the settlement says that the other spouse will pay. 

A properly designed settlement should address: 

• whether the creditor’s consent is required; 

• whether refinancing is necessary; 

• when the other spouse must be released; 

• what happens if release is refused; 

• interim payment responsibility; 

• indemnities; 

• security; 

• deadlines; and 

• default consequences. 

An indemnity between spouses is not the same as a release by the creditor. 

Practical ways to solve the liquidity problem 

There is no single correct structure. The solution should reflect the asset mix, the parties’ needs, the applicable law and the commercial risks. 

Asset-for-asset division 

One spouse may retain the business while the other receives: 

• property; 

• investments; 

• retirement interests; 

• cash; 

• other realisable assets; or 

• a combination of assets. 

This may reduce the cash required, but the comparison should be made on a net, risk-adjusted and tax-aware basis. A liquid investment portfolio may be more useful than a private minority shareholding carrying the same headline valuation. 

Deferred payment by instalments 

A balancing payment or accrual claim may be paid over time:

• the capital amount; 

• payment dates; 

• interest; 

• security; 

• acceleration on default; 

• early-payment rights; 

• reporting obligations; 

• restrictions on asset disposals; 

• events of default; and 

• consequences of death, disability or insolvency. 

Deferred payment shifts risk to the receiving spouse. That risk should be recognised and controlled. 

Security for deferred payment 

Possible forms of security may include: 

• a mortgage bond; 

• a pledge of shares; 

• cession of a loan account; 

• guarantees; 

• life insurance; 

• cession of sale proceeds; 

• escrow arrangements; and 

• agreed restrictions on further encumbrances. 

Existing creditors may already hold stronger security. The proposed protection should therefore be investigated rather than assumed to be effective. 

Orderly sale of selected assets 

The parties may agree to sell non-core assets instead of disrupting the main operating business:

• investment property; 

• a holiday home; 

• listed investments; 

• vehicles; 

• non-operating entities; 

• surplus land; 

• excess equipment; or 

• other discretionary assets. 

The agreement should address: 

• who manages the sale; 

• the marketing period; 

• valuation; 

• reserve price; 

• appointment of agents; 

• price reductions; 

• costs; 

• tax; 

• occupation; and 

• allocation of the proceeds. 

External financing 

The owner may borrow against: 

• property; 

• investment assets; 

• shares; 

• future cash flow; or 

• another form of security. 

Financing may provide immediate cash and preserve the underlying asset, but it also creates new risk. Affordability should be tested against realistic income and cash flow—not merely asset value. 

Temporary economic participation 

In some cases, the non-operating spouse may retain a limited economic interest until the payment obligation is satisfied:

• preference rights; 

• a temporary shareholding; 

• participation in specified sale proceeds; 

• a secured return; or 

• another agreed economic mechanism. 

Such arrangements require careful design. Continued co-ownership may prolong conflict, interfere with governance and expose both parties to further business risk. A clean break is often preferable, but not if the proposed clean break is impossible to implement. 

When alleged illiquidity requires closer investigation 

A claim that the estate is illiquid may be genuine. 

It may also be exaggerated, manipulated or created strategically. 

Warning signs may include: 

• unexplained reductions in salary or dividends; 

• sudden increases in liabilities; 

• unusual related-party payments; 

• transfers of shares or loan accounts; 

• undervalued disposals; 

• newly created entities or trusts; 

• inconsistent management accounts; 

• delayed financial statements; 

• unexplained cash movements; 

• changes in accounting treatment; 

• personal expenses moved between entities; 

• unusual loans to associates; and 

• selective or incomplete disclosure. 

The correct response is evidence-based investigation—not assumption. 

Depending on the case, relevant documents may include: 

• bank statements; 

• annual financial statements; 

• management accounts; 

• tax returns; 

• budgets; 

• loan agreements; 

• shareholder agreements; 

• board minutes; 

• debtor and creditor reports; 

• cash-flow forecasts; 

• asset registers; 

• property records; and 

• trust or related-entity documentation. 

A business may genuinely lack available cash even while carrying substantial value. Equally, claimed illiquidity should not be accepted without proper disclosure and analysis. 

A practical framework for settlement planning 

A high-net-worth divorce involving illiquid assets should ordinarily begin with a complete financial model rather than a demand based only on a headline valuation. 

That model may include: 

1. a verified asset and liability schedule; 

1. the applicable matrimonial property regime; 

1. identification of disputed or excluded assets; 

1. independent valuations where required; 

1. tax-adjusted and debt-adjusted values; 

1. liquidity classifications; 

1. cash-flow forecasts; 

1. financing constraints; 

1. creditor and third-party rights; 

1. settlement options; 

1. appropriate security; and 

1. default remedies. 

Assets may be classified as: 

• immediately liquid; 

• realisable within three months; 

• realisable within six to twelve months; 

• realisable only through refinancing; 

• realisable only through disposal; 

• subject to third-party consent; or 

• not realistically realisable without material value destruction. 

This converts an abstract argument about wealth into a practical plan for implementation. 

The role of professional advisers 

High-net-worth divorce is rarely resolved optimally through legal analysis alone. 

Depending on the estate, the advisory team may include: 

• family-law attorneys; 

• forensic accountants; 

• business valuers; 

• tax advisers; 

• corporate attorneys; 

• financial planners; 

• bankers; 

• restructuring specialists; 

• property experts; and 

• fiduciary advisers. 

Accountants and financial advisers may know that a client is wealthy while also understanding that the business cannot safely fund a large immediate payment. 

They may also identify inconsistencies between claimed illiquidity and: 

• historic dividends; 

• related-party flows; 

• available finance; 

• discretionary spending; 

• asset disposals; or 

• management accounts. 

Early collaboration can help prevent a settlement that: 

• creates avoidable tax; 

• breaches finance arrangements; 

• compromises a company’s solvency; 

• leaves one spouse exposed to a creditor; 

• destroys a viable business; or 

• leaves the receiving spouse with an unsecured promise. 

What should be addressed at the first legal consultation? 

Where a divorce involves a business, property portfolio, trust, private shares or other substantial assets, the first consultation should begin identifying: 

• the matrimonial property regime; 

• the known assets and liabilities; 

• business and ownership structures; 

• disclosure gaps; 

• immediate preservation risks; 

• likely valuation requirements; 

• liquidity constraints; 

• creditor exposure; 

• possible tax issues; 

• settlement structures; and 

• the experts who may be required. 

Early advice does not resolve every valuation or liquidity question immediately. It can, however, ensure that the right questions are asked before positions become fixed and before a commercially unworkable settlement is proposed. 

Conclusion 

The central challenge in many high-net-worth divorces is not identifying wealth. It is converting legal entitlement into practical value. 

A company may be valuable while lacking distributable cash. Property may be worth millions but take time to sell. A shareholder loan account may appear substantial but be difficult to recover. A retirement interest may carry value but be governed by specific statutory mechanisms. A divorce agreement may allocate debt between spouses without releasing either spouse from the creditor. 

The solution is neither to ignore value in the name of preserving the business nor to insist on immediate cash without considering whether the extraction will destroy the asset. 

The better approach is to separate the questions: 

What is the legal entitlement? 
What are the assets worth? 
What cash can realistically be produced? 
What structure will deliver a fair, secure and enforceable outcome? 

When those questions are addressed early, the parties and their advisers can compare realistic options, preserve value where appropriate and avoid settlements that look fair on paper but fail in practice. 

Liquidity is not a secondary accounting detail in high-net-worth divorce. 

It is often the issue that determines whether the settlement succeeds. 

Speak to a South African high-net-worth divorce attorney 

Where a divorce involves a business, property portfolio, trust, shareholder loan account or other substantial but illiquid assets, early legal advice can help identify the valuation, disclosure, tax and settlement-structure issues before positions become fixed. 
 
Martin Vermaak Attorneys advises on complex South African divorce matters involving businesses and substantial assets. 

If your divorce involves substantial assets but limited available cash, professional legal advice can help you understand the options for structuring and implementing the settlement.

Author: Martin Vermaak, B.Proc, LLB
South African Attorney | Director, Martin Vermaak Attorneys | Over 20 years’ experience in divorce and family law

Disclaimer: This article provides general information about South African family-law and financial issues. It is not legal, tax, valuation or financial advice. The appropriate treatment of assets, businesses, retirement interests, trusts and tax consequences depends on the facts, the matrimonial property regime and the relevant legal and financial instruments. Specialist advice should be obtained before a settlement is concluded.