Divorce and the Family Business

28/01/2019

One of the most difficult circumstances in which to resolve financial matters between divorcing parties is where there is a privately owned family business owned by one or both of the parties. Michael Sheville explains.​

It is often the case that the business is the source of the parties’ income which over time has allowed the parties to accumulate assets and upon which their future income is dependant.

When dealing with financial issues following the parties’ separation and where there is a private family business, a number of questions arise.These include, but are not limited to (i) how the company is to be valued; (ii) how to balance risk as there can be no guarantees as to the future performance of any business; (iii) the amount of capital, if any, that could extracted from the business now or in the future; (iv) transfer of shares between the parties; and (v) tax issues arising out of any such transfer.

There may be a shareholders agreement dealing with the ability for the shares to be transferred between the parties and how those shares are to be valued. Any such document must be identified and considered as quickly as possible.

In most cases it will not possible or even practical to sell the business, and the Court cannot guess how successful or otherwise the business may be in the future.

The Courts have urged parties in these situations to do all they can to negotiate or mediate a settlement without the intervention of the Court. Frequently the parties will have options open to them which the Court simply cannot consider due to the finite range of orders the Courts are able to make.

In such negotiations it is important for the parties to realise that there is a great advantage in retaining secure assets such as the house, or savings, in whatever format they have been accumulated. This should be reflected in the financial settlement. This may often leave the spouse retaining the family business with a greater percentage of the overall assets.

These issues have been recently reconsideredby the Court of Appeal in the case of Martin v Martin, which concluded in 2018.The Judge at trial simply divided the assets equally even though the husband was largely left with shares in a private company and therefore retained the risk laden assets.

On appeal, the Court of Appeal determined that the Trial Judge had not acted correctly when he took the valuation of the company in that case to be equivalent to cash.The Court of Appeal was clear that where there were assets with ‘different levels of risk’… ‘as a matter of principle, the Court must take this into account when applying the sharing principle’.

Putting this plainly it is clear that the Court needs to take into account the nature of any assets as well as their value.

As every case, where there are such matters to consider, will be based on different facts, it is difficult if not impossible for the Courts to provide any definitive guidance as to how risk laid assets should be considered, as opposed to secure assets but the starting point is clear.Consideration must be given to the level of risk attributable to an asset which by its nature is not a fixed capital asset. Furthermore, one party should not be left with all the risk laden assets without some consideration being given to this in the overall division of the parties’ assets. This may well result in the party that keeps the risky assets actually retaining over 50% of the total assets. 

MORE INFORMATION

If you find yourself in a similar siuation then it is imperative that you enlist the help of a trsuted qualified professional. Our Family Law Team have significant experience in advising on complex divorces, including those involving a family business. Contact a member of our Family Law Team​ for more information today. ​This article was written by Michael Sheville, Partner at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of January 2019.

28/01/2019

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