The treatment of business assets on divorce can often lead to confusion, complication, protracted negotiations, or unnecessary Court proceedings. This doesn’t need to be the case, and if the valuation of the business is dealt with promptly and constructively, at an early stage, a lot of the issues and tension which can arise, can be avoided.
Often the spouse who is the non-business owner may mistrust the information provided by the business owner, or any associates of the business, such as the company accountant. This doesn’t mean the information being provided is inaccurate, but it could be considered tainted if there is mistrust regarding other financial disclosure provided by the business owner.
Therefore, it helps to obtain a valuation from a Single Joint Expert (SJE) at the earliest opportunity. The SJE can produce evidence, not just in relation to the value of the business, but also wider issues which affect the division of matrimonial assets, such as liquidity and tax consequences, which are important to both parties. Further information on valuing business can be found in this blog.
It is important to consider whether the entirety of the business is “matrimonial” or whether some should be considered as “non-matrimonial”. For example, a business set up prior to a relationship, may be considered, in part, as non-matrimonial, and there may be an argument that the pre-marital element should be ringfenced, and not shared with the other party.
Questions can be put to the SJE in this regard, and backdated values obtained. In F v F (Financial Remedies: Premarital Wealth) [2012] the Court considered the impact of premarital wealth, stating this contribution could not be ignored. In this case, the company had been set up by the husband prior to the marriage, and had been a “central plank of the family finances throughout the marriage”. The Court held that the value of the company at the time of the marriage, and the increase due to the “passive growth” indexation should be excluded and therefore counted as non-matrimonial, in order to achieve fairness in the division of the matrimonial assets. It is therefore vital that your lawyer understands the history of the business, to advise if such arguments can be made, and responded to.
There have been stark comments made against business owners who try to hide behind the corporate veil, to protect assets from their ex-spouse. One clear example of this is in Prest v Petrodel Resources [2013]. In this case the Supreme Court was critical of the lack of disclosure provided by the husband, and his companies, and, as a result, drew adverse inferences. The Court concluded that the husband had provided monies to purchase properties that were in fact held by the companies. Following on from that, the companies were therefore considered to be held on trust for the husband, and constituted property which the husband was “entitled, either in possession or reversion”. This therefore enabled the Family Court to pierce the corporate veil, and they were taken into account as part of the settlement.
The Court, when considering businesses on divorce, must consider the risk element. The value of a business is not necessarily fixed, and it is often not as easy to sell a business, in the same way that you can more readily sell a family home. When looking at dividing the assets, the Court needs to consider the risk associated with the business, as the company may be a “risk laden” asset, and comparing it pound for pound compared against a “copper bottomed” asset could prove fatal. This was explored in the case of Wells v Wells [2002] 2 FLR 97. The question of “why should one party receive all of the plums leaving the other with most of the duff?” was asked by Nicholas Mostyn QC, sitting at that time as a High Court Judge, in the case of GW v RW (Financial Provision: Departure From Equality) [2003].
There are many practical considerations that ought to be considered at the point the marriage breaks down, especially if both parties are employed by the business (as is often the case). More information can be found here.
It may also be possible for the parties to engage an independent person (such as a barrister) to provide an Early Neutral Evaluation on specific issues, for example whether any or all of the business should be considered non-matrimonial, and therefore outside of the matrimonial pot for division, and by taking early pragmatic steps, it may reduce future conflict.
Finally, it is crucial to take into account the tax implications of any financial order covering business assets, so that one party is not unfairly, or unknowingly, penalised by tax implications arising from the divorce settlement. This can be covered by the SJE within their report.
Each business is individual, and the treatment of the business by the Court differs case by case. It is crucial that in the event of a divorce, or even a possible divorce, advice is sought early to protect you and the business’ future. If you are seeking advice please don’t hesitate to contact a member of our family team at info@brethertons.co.uk.
https://www.brethertons.co.uk/