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Divorce and the Family Business

Date Added 05.12.23

Every business has its own set of challenges and a family business is no exception. Family relationships and the differing needs of various family members within a business can be awkward to manage to everyone’s satisfaction. However, if one member goes through a divorce, this can have a significant effect on not just the parties to the divorce but also the other members of a family business. So it is important to understand divorce and the family business.

Lack of Understanding

The recent publication of the “Fair Shares” research from Emma Hitchings, a Professor of Family Law at Bristol University, brings attention to the lack of consistency in approach and legal understanding of divorcing couples and the resulting effect this has on final financial arrangements. She concluded that “many divorcees showed a considerable lack of financial and legal knowledge…”

The Fair Shares study finds a lack of knowledge among divorcees across multiple variables including finances, what they are entitled to and the legal processes. This highlights the significance of improving awareness and comprehension of the affiliated variables and obtaining this information from credible sources to achieve a fair settlement, especially when it comes to assets such as a family business.

Alongside the study, Bristol University also mentioned that the reports come as calls for “reform are under consideration by the Law Commission and the controversial Divorce (Financial Provision) Bill in the House of Lords has been presented to Parliament, which would make equal sharing of assets the default position”. This further highlights the ever changing environment surrounding divorce, reinforcing the need for education before going forward.

Disclosure

In order for a party to a divorce to understand the value of the claim that they can make it is essential for both parties to give and receive full and frank disclosure of their financial circumstances.  This allows a legal advisor access to relevant knowledge, enabling them to advise the most appropriate approach to a financial settlement and to finalise a proposal which meets the needs of their client and the children of the family.

What can a court order on divorce?

Where couples have been married the court has a very broad discretion to vary ownership of assets held by either party.  The court can, amongst other things:

  • Order a lump sum payment from one party to another;
  • Order the sale of an asset and determine how the proceeds should be divided;
  • Order the transfer of an asset from one party to another, including from joint names;
  • Order a transfer of part or all of a pension from one party to the other.

Relevant Factors which affect a financial settlement

The court will try to establish what assets have accrued during the parties’ relationship and what has accrued from outside the marriage. In the majority of cases, the court will look to give each party a fair share of the matrimonial assets and will start by asking themselves if an equal share of these assets will produce a fair outcome. If the matrimonial assets are insufficient to meet the needs of the parties, the court can go beyond the matrimonial assets and bring into the settlement the non-matrimonial assets. Most cases are based on the needs of the parties however in limited circumstances the court can approach a case based on a sharing or compensation approach which can produce a different outcome.

Business interests can include assets that have been inherited or handed down in the form of a family investment company (FIC), as well as those that have been built up during the course of the marriage. Therefore, the court’s approach can be key to the settlement’s outcome. With business interests, the court will also have to consider the risk, returns and general characteristics of the business asset to assess how the values should be divided or offset against other assets held.

The court has a number of other statutory criteria which they have to take into consideration when they settle financial arrangements.  Most commonly these include the following:

  • Minor children of the family are the court’s first consideration;
  • The ages of the parties;
  • The length of the marriage;
  • The needs of the parties;
  • The standard of living which the family had during the marriage;
  • The contributions each party made during the marriage, which included non-financial contributions such as looking after the home or children.

Common Issues with business interests on divorce:

Business assets can often be substantial in value compared to other assets and there may not be enough to offset the values. Business interests are often illiquid and it may be difficult or inappropriate to sell them. The court may have to consider if the company has any surplus funds which can be drawn against or whether re-financing the company to provide compensatory capital is available. The court can also consider a series of lump sum orders or delaying the finalisation of a financial settlement until sufficient assets can be made available. There is always a risk however where the business asset is large compared to other non-business assets that the party retaining the business asset is left with little else in the way of liquid capital.

How can we help?

We can advise you on a financial settlement if divorce is something that you are facing or considering. We can also assist to make provision which is of a more controlled and predictable nature by providing you with a nuptial agreement (which can be made before or during the marriage) which sets out what each of you will receive in the event of your divorce. Whilst these are not automatically binding on the court in this country providing such agreements are entered into after open disclosure of your financial circumstances with legal advice and in the absence of any undue pressure they will be upheld so long as they are fair.

We can also produce partnership and company documentation relating to the business which can control the transfer of any business interests in the event of marriage breakdown or make it a requirement that anyone having such an interest in the business, must enter into a nuptial agreement to protect the business.

If you are part of a family business and need help or advice dealing with a divorce and the family business and are unsure where to start … Talk to Tollers on 01604 258558. Our experienced legal teams are here to guide you through the process.

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