Family Businesses in a Divorce

If you work in a family business you will know how important it is to stop personal emotions affecting your role within the business. Divorce can be a traumatic process for anyone but it is often made worse in circumstances where a husband or wife (or both) run a business. This can have an impact not only on the husband and wife, but also the business itself and its employees.

If both parties work in the business, it is unusual for them both to continue to do so after a divorce. Therefore, a decision has to be made as to its future. Issues for the couple to consider will include whether there is any capital value to the business, whether the true value of the business is found in the skills of the parties, or whether the business is simply a vehicle for producing income. Often the ongoing income from the family business is likely to be essential and therefore, selling the business may not be the best option. The court will usually be reluctant to enforce a sale of a business and to put to an end to an income stream that is needed to meet the family’s needs. A sale could also dramatically affect third parties such as employees. This will also need to be considered. Other options therefore include transferring the business into the sole name of one of the parties with the other party receiving a larger share of the other matrimonial assets such as the family home to compensate them, or awarding the other spouse an ongoing maintenance order which could be funded from the business income.

If there is to be a sale or a transfer of an interest in a business then it is essential that a couple receive good accountancy advice as well as good legal advice.

Family lawyers are currently awaiting the decision of the Supreme Court in a case called Prest which could dramatically affect how the Courts deal with business assets within divorce proceedings. Family lawyers previously assumed that any business which a husband or wife were involved with, would automatically be taken into account as part of the assets in the event of a divorce in exactly the same way as the family home and any other capital, and that the Court could make an order against those Company assets. However Prest looks at the conflict between family law and corporate law and whether the Court can make an order against corporate assets in the event of a divorce.

In Prest the husband had a number of properties tied up as assets of a company. The initial approach taken by the court was to assert that those properties were matrimonial assets. However on appeal it was held that the properties were assets of the company as a legal entity itself, and that under company law any assets owned by the company are not owned by the people who run the business. The family Court could therefore not make an order against those assets in favour of the wife.

Whatever the outcome of Prest, the best way to protect the business is to consider the implications of a divorce before it happens. A prenuptial agreement which provides for how the business will be dealt with in the event of a divorce is an excellent way of confirming the party’s intentions before any animosity arises. Whilst prenuptial agreements are not currently legally binding in this country, they are being given increasing weight by the courts.

If you would like any advice on this matter please contact Phil Thorneycroft on 01752 292239.