By Sonny Patel, solicitor at RFB Solicitors in London.
Every year around 150,000 married couples divorce, according to the Office of National Statistics.
Advisory service Relate says long working hours are a growing source of marital conflict – bad news for hard-working entrepreneurs.
The divorce of a business owner can have a devastating effect on his or her business, not just through the stress and disruption of the proceedings, but in particular through the cost of any final settlement. A spouse may never have set foot in their partner’s business, but if a marriage breaks down they could still claim against the business assets or even force its sale.
Historically, the courts have been reluctant to force the sale of a business against the wish of the party who wanted to continue the venture. It was thought better that the business be allowed to continue to operate, so that it could provide a source of income in the long run. However, the approach of the courts in recent leading cases has made it difficult to prevent all assets, including business assets and trust funds, being taken into account.
The legislation governing the distribution of assets upon divorce gives judges a wide and far-reaching discretion to divide assets according to the particular circumstances of the case. However, the principles governing the exercise of that discretion have been shaped through case law.
The overriding principle guiding the courts in deciding how matrimonial assets should be divided was set out in the landmark divorce case of White v White in 2001. This case established the principle that although both parties may make different contributions to the marriage, those contributions should be considered equal. In other words, it is wholly wrong to discriminate against the “homemaker” (typically, but certainly not always, the wife).
The role of homemaker is therefore considered no less valuable than that of the breadwinner. This is especially true of long marriages (taken now to mean marriages of 10 years or longer).
Since White v White, when a court is asked to decide how matrimonial assets should be divided, the court must test its proposed decision against the “yardstick of equality”. This is not strictly the same concept as a presumption of equal division, but in practice, in the absence of compelling reasons why this approach should not be followed, it will mean a 50-50 split of all assets – including the family business.
Problems for the entrepreneur
Serious problems can arise for a small business owner in particular, if there aren’t sufficient liquid assets, aside from the business itself, to satisfy a spouse’s claims. In these cases the business is particularly vulnerable.
Numerous other contentious matters can arise between a divorcing couple – for example, if an entrepreneur granted their partner a share in the business. If their partner then refused to sell that share, they could use the nuisance value as leverage in settlement negotiations.
Another source of dispute can arise when the business comes to be valued. It is imperative to try to agree a value beforehand, and to get a consensus as early as possible so costs don’t escalate.
Whatever the form of the company, there are further complications as to how the interest in that business is to be valued. In a partnership, for example, the question of existence and valuation of goodwill can be problematic, and realising an interest in the business may be difficult unless partners are willing to buyout that interest or new partners are available.
Businesses run by a sole trader on the other hand may have no value beyond the earning capacity of the person running it.
So what can be done?
When a court is asked to decide how matrimonial assets are to be divided between estranged spouses, the court must “have regard to all the circumstances of the case, first consideration being given to the welfare while a minor of any child of the family who has not attained the age of eighteen” (section (25) Matrimonial Causes Act 1973).
The provision of “all circumstances” can include the existence of a prenuptial agreement. Contrary to popular belief, prenuptial agreements are not binding in English law, although the court will consider it and decide in the circumstances what weight should be attached to the agreement. Prenuptial agreements will hold more weight if both parties are properly advised when the agreement is drawn up, if they both understand the terms of the agreement, give full financial disclosure, and were not subject to any pressure to sign.
Another way to afford protection to the business as an ongoing concern in the event of divorce is to build a pot of assets unconnected to the business, to fund any future divorce settlement. However, the financial realities of running a small business may make this a near enough impossibility.
Consideration could be given to placing assets in trust prior to marriage. However, they would certainly not be 100% safe as the courts have sweeping powers to disregard instruments they find to be designed to defeat financial claims.
The murkier waters of divorce law may lead some to consider the use of offshore bank accounts. However, it is important to understand that in divorce proceedings, the parties owe a strict duty of full and frank disclosure to each other, and the court has the power to make punitive financial orders against any party who is caught trying to mislead the court as to the extent of their wealth.
Conclusion
The court has become much more likely to make orders which could ultimately demand that a family business is sold in order to meet one party’s liability to another because of precedents set in recent case law.
Consequently, one can expect lawyers to concentrate on the value of family businesses and how those businesses could contribute towards any capital settlement fund arranged to settle such a liability.
Given the developments in divorce case law with regards to business assets, it is advisable that any business owner contemplating marriage or divorce should seek legal advice at the earliest opportunity.
Sonny Patel is a solicitor with the Family Law team at RFB Solicitors. Sonny can be contacted on 0207 613 1402 or at s.patel@rfblegal.co.uk.
