The division of assets in divorce is often made more complex when a family business is involved. The leading case White v White in 2001 established the principle that although both parties may make different contributions to the marriage, those contributions should be considered equal, and so the role of the home maker is considered no less valuable than that of the breadwinner, and there has to be good reason for the division of assets to be unequal.
It was stated in the White case that the “old taboos against selling the goose that lays the golden egg have been largely laid to rest……”. However the Judge went onto say “…. if it is necessary to sell her, it is essential that her egg laying abilities are damaged as little as possible in the process”. All well and good, but it is clear that business assets are now more vulnerable that in the past, unless safeguarding steps are taken to protect them.
A spouse may never have set foot in their partner’s business, but this would not stop a claim against the business assets, directors’ loan accounts, cash in income streams, or even force its sale. Whether the business is significantly affected, or even sold, much would depend upon whether there are sufficient non-business assets of the marriage available to be transferred to the other spouse as an offset against their claim against the value of the business, or an offer to pay a lump sum by instalments is rejected or unsuitable. In a situation where there are no “surplus assets” the Court will consider the housing needs of the parent with care of any children, and any additional assets (including the value of the business) and apportion them by reference to the needs of each party and the ability to provide for their needs, and in these circumstances this may result in sale of the business to raise capital.
The first step in the process is the mutual exchange between the spouses of full and frank financial disclosure of their respective income and capital positions, to include a valuation of the business. Accountants may need to be jointly instructed to investigate the future profitability of the business, its open market value, and consider the tax implications of any funds being extracted from the business to satisfy a spouse’s interest.
So what can be done to protect business assets? It could be possible to protect assets by transferring them into a company. This is likely to work (as held by the Supreme Court decision in Prest v Petrodel) so long as there are no elements of “impropriety”, or and the assets have not been transferred with the intention of “evading” a liability and/or an attempt to hide behind “the corporate veil” to hide the real players running the company. However, unless these elements are present the “corporate veil” is likely to be kept intact, and so it is unlikely this case will, as some had claimed, close this particular loophole in divorce settlements; although it is a very important decision with significant implications.
In the recent case of Prest v Petrodel Resources Ltd & Others , Mr and Mrs Prest transferred to a group of companies several residential properties in London during their marriage. In subsequent divorce proceedings Mr Prest did not admit to having any personal interest in the shares of the companies, and failed to reveal the identity of the shareholders. The question the Supreme Court needed to make on appeal was whether the Court had the power to order the transfer of the properties to the wife given they belonged to the husband’s companies and not the husband personally. It decided it did, inferring an intention that the companies held the properties on trust for the husband because the purchase monies (probably) came from him and the companies had been used to conceal the true beneficial ownership.
A more straight forward way of protecting business assets would be to enter into a pre or post nuptial agreement which regulates what should happen to family assets if the relationship breaks down. Recent case law has confirmed that such agreements are enforceable and will only be interfered with in very limited circumstances.
If the business is started post marriage, it may be sensible to structure it to deal with the possibility of a marital breakdown in, for example a partnership agreement, or if an incorporated company by drafting the articles of association setting out how the shares are to be held/distributed/valued upon marital breakdown.
Taking all this into account, if any of you out there are business owners contemplating marriage or divorce may consider it is essential to obtain legal advice as soon as possible, especially for example farming families where the majority of assets are acquired to inheritance or lifetime gift.
To find out more contact Anita Garside at our Newark office or another member of our finance team at one of our offices across Lincolnshire and Newark.