PERSONAL LEGAL FAMILY LAW
The fate of a family business after a divorce13/08/2009
Pre White v White
Historically, the courts were reluctant to disrupt or interfere with the husband’s business, as it was generally viewed to be a source of income for the family. Therefore, a financial settlement was ordered based on the wife’s reasonable requirements.
The post White era
White v White, fundamentally changed the way the courts dealt with a family business on breakdown of the marriage, by making it very difficult to prevent business assets from being added to ‘the pot’.
It was held that business assets could be matrimonial assets and the principle of the “yardstick of equality” was formed. This principle states that the husband may be the “breadwinner” in the family and the wife the “homemaker”, but for all intents and purposes their contributions to the marriage will be viewed as equal. The longer the marriage, the more this is said to be true.
This means that as a starting point, there will be a 50/50 division of the matrimonial assets (including the family business). Therefore, the spouse may claim an interest in the business, the business may have to be restructured, or as a last resort, the court may order the sale of the family business in order to finance the divorce settlement. The above options may occur despite the spouse never being involved in the family business or having even stepped foot on the premises.
The courts will only depart from “the yardstick of equality” with very good reason. For example, where the husband can demonstrate an outstanding “stellar” contribution to the matrimonial assets. Such departures from the 50/50 split are very much limited to “big money” cases, where the husband has accumulated a wealth of extensive business knowledge.
However, even in such “big money” cases, the business running spouse rarely manages to depart from the 50/50 split by any great amount. For example, Sir Martin Sorrell, who founded his fortune in advertising, argued that his £100 million fortune was as a result of his “stellar contribution”. He was successful at court, but yet was awarded only 60% of the family assets.
What problems has White created for the entrepreneur?
The courts will very rarely order a family business which is producing an income to be sold, in order to settle the finances to the other spouse. However, one year on from White, the case of N v N (financial provision: sale of company) came before the family courts. This case demonstrated that where it has proven impossible for the parties to reach agreement on the division of assets, sale of the company could result.
In N v N, the courts gave the husband three years within which to come up with sufficient funds to pay a 3rd and final instalment to his wife. The result of this order being and the courts were aware of this, that the husband was going to be unable to achieve this without selling the family business or undertaking a complete structural overhaul of the business.
N v N demonstrates the problems businesses can face, when there is not enough liquidity in the company to satisfy the other spouse’s claims. Further problems can arise where both partners in the marriage hold a share in the company and the other refuses to sell. Commonly, the most contentious point between a divorcing couple is the value of the company and a particular spouses interest in it. In partnerships, there is also the value of goodwill to be taken in to account.
What will the courts want to know?
As mentioned above, the value of the business is the most important factor. Prior to White, the courts were reluctant to have the business valued for fear of incurring further expense. Now this has all changed and if anything, the more detailed the valuations that can be provided, the better. This requires the joint instruction of an accountant, who can go away and look at the accounts, assess the liquidity and capital in the business and assess its future prospects.
Also of importance will be who started the company and when, i.e. was it before or during the marriage, in order to better calculate whether the business is matrimonial or non-matrimonial property. Similarly, the courts will be interested to know what type of business it is, whether there are any 3rd parties involved and how the business has been financed. For example, the matrimonial home might have been remortgaged in order to provide a loan to the business.
Are there any ways around it?
There are different ways of reaching a divorce settlement, depending on the type of business. Such options can include transfer of the matrimonial home into the sole name of the wife, in exchange for the husband keeping the family business. Or the provision of regular maintenance to the wife, or the sale of business assets to provide a lump sum.
Use of the business to settle financial claims will depend primarily on whether there is any liquidity in the company, whether there are any assets that could be sold to raise cash and the tax consequences of these methods. Consideration would also have to be given to protection of any 3rd parties in the company and the likelihood of the company continuing to be successful in the future.
Other options include the company buying back its own shares, offering new shares to a 3rd party outsider, raising a private loan by the company increasing the business spouse’s salary or finally, the company repaying a loan to one of the parties.
The courts have developed new ways to deal with the family business, where it has not been possible to release cash from the business immediately. In R v R (Lump Sum Repayments), the family business consisted of a farm. The husband was unable to raise the sums needed straight away, so the court granted him the option of paying a number of lump sums to his wife over many years, to prevent him having to sell the farm, which had been in his family for generations. Similarly in R v R (Financial Relief: Company Valuation), the husband was delaying finding the money to settle his wife’s claim. So the courts offered him a discounted lump sum if he could come up with the required funds now, rather than later.
What protection can I put in place in the event of a divorce?
Pre-nuptial agreements are not binding in English law at present, but if one has been entered in to by the parties to the marriage, who have both been properly advised and understand fully the terms of the agreement, then the court will consider its contents and decide how much weight should be attached to it.
Whatever the courts decide, consideration is always given to any children of the family under the age of 18 years and the circumstances of each individual case. There is no hard and fast rule as to dealing with a family business on divorce.
Due to the fact that this area is so broad and can become incredibly complicated, it is advised that anyone who has an interest in a business should seek legal advice sooner rather than later, if they are contemplating a divorce.
At Tollers Solicitors we have a team of family, commercial and trusts lawyers all willing to give private, personal and professional advice to our clients when such a time arises.
For further advice please contact the head of the family department, Alan Peck, at Tollers Solicitors in Northampton, on 01604 258523.