EXPERT GUIDE
October 2015
Divorce Law 2015
Expert guide: Divorce Law 2015 United Kingdom
Jay Patel jay.patel@howardkennedy.com +44 (0) 20 3755 5650
The Court’s approach to dividing business assets on divorce By Jay Patel
Your business is usually your most valuable asset, next to the family home. Any business interests and the value contained in them can generally be taken in to account as a marital asset to be divided on divorce or dissolution of a civil partnership and as a result, you may feel that the inevitable stress of divorce is compounded by fears for the welfare of your business. This article explains how the courts deal with business assets in the context of financial settlement proceedings. When can business assets be excluded by the Court? The rule is generally that any assets, including business assets, need to be taken into account when deciding the division of assets on divorce, or dissolution of civil partnership. The exception to this rule was considered by the Court of Appeal in the 2005 case of V v V. The husband in this case owned a share in his optician’s practice which was a limited company. It was the husband’s case that 8
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the company had no capital value as it had no real assets or Director’s loans and could not be sold as it was needed to provide an income for the family. The wife argued that the business had a capital value for the husband as he would benefit from the goodwill associated with the business on sale.
Where a business has no real value except as an income stream, the proper approach is usually for the court to essentially disregard it when assessing the couple’s capital assets. The court should treat the shares as an income stream and assess them primarily in the context of any order it might make for maintenance.
The judge had to deal with the capital value of the husband’s company and the extent to which a capital sum representing the husband’s interest in it could be included in the capital division. The judge considered that for the purpose of matrimonial proceedings the business was of little real value, save as an income-producing vehicle. Given that the husband in the case would be likely to use this income to pay maintenance to the wife, the judge was concerned that by counting the ‘value’ of the business as a marital asset to be divided between the parties, the court would be compensating the wife twice in respect of the same asset.
What are the options available to the Court when the business has If you and/or your spouse own a real value over and above existing business outright or have a signifias an income stream? cant shareholding in the business the Court will almost invariably require a The first step will be to value the valuation of the business to assess business, in order for the court to the parties’ assets. The parties are properly assess the options that it required to file a statement with the has e.g. extracting capital from the court which requires the owner of business, or funding maintenance the business to provide an estimate payments from the income the busi- of the current value of the business ness produces. Wherever possible and to explain the basis upon which the Court will look to preserve the estimate is based. business and may allow the party who owns the business to retain it in Valuing a business can be complicatexchange for giving the non-owning ed and may depend on: party a greater share in the other • whether the business is a limmarital assets. ited company, sole trader or partnership; Are there any circumstances in • the profit the business makes which the Court would order the and is expected to make in the fusale of the business? ture; and
The court has considered this issue in the 2001 case of N v N. The court ordered the sale of the business as there were insufficient other assets to meet the parties housing needs. The judge said that “those old taboos against selling the goose that lays the golden eggs had been laid to rest”. Valuing a business
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Expert guide: Divorce Law 2015 United Kingdom
• the assets, such as property or stock, owned by the business. The simplest option is often to instruct the accountants of the business to perform the valuation, but there are occasionally disputes as to the identity of the valuer and, where the parties are unable to agree, it is open to the Court to direct the appointment of a single joint expert to value the business. This person will be an independent Accountant who will be directed by the court to assess the business, with a focus on the issues between the parties. Usually the report includes an analysis of the value of the company, the capital that can be extracted, the tax consequences of doing so and the income available. How to protect your business in a divorce Given the above, there is clearly 10 October 2015
much at risk if you are a business owner facing divorce proceedings. The court has wide ranging jurisdiction to make orders but there are ways to protect your business. • You could enter in to a partnership, shareholder and/or operating agreement to protect the interests of the other owners of the business. These agreements might include a prohibition against the transfer of shares without their approval, or the right for them to purchase the shares or interest of one or both of the divorcing parties so that they can maintain their control of the business. • The business or your share in it is likely to be considered a marital asset, which is capable of being divided on divorce, particularly if your spouse has been active in the running of the business. You should therefore think carefully about involving your spouse in your business without taking advice first. It would be a good idea to take advice from
a matrimonial solicitor as to the potential repercussions of: o transferring shares to your spouse for tax reasons; o employing your spouse in the running of the business; or o asking or allowing your spouse to invest money in the business. The greater your spouse’s involvement in the business, the larger the share they may be entitled to claim. • When contemplating marriage, a pre-nuptial agreement is likely to go some way to protect any business interests generated prior to the marriage. If you get to divorce without having taken any measures to protect your business assets, there is the option to negotiate a settlement on the basis that you retain your business interests in exchange for some of the other marital assets. If negotiations are unsuccessful you can be assured that the court will usually, despite
the court’s comments in N v N, try to exhaust all avenues before selling the goose that lays the golden eggs. Jay acts for high net worth individuals in divorce cases involving substantial assets including companies and off shore assets held in trust. He has extensive experience in international work including child abduction, applications for leave to remove children permanently abroad and complex financial work. Jay has represented a number of high profile individuals in business, media and sport, in particular working closely with the Iranian and Indian communities. Jay is an accredited member of the Law Society’s Family Law Panel. He is also a Resolution accredited family mediator helping separating couples to make important decisions with regard to their children and finances without recourse to court proceedings. October 2015 11