Three in Bed

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According to the Government’s report on small firms 2010-2015, we are living in the SME Golden Age with an increase in small businesses rising a staggering 760,000 since 2010, to a record 5.2 million. But in the excitement of launching, only the few are aware of the implications a divorce could have on the business further down the line.

Are you aware of the implications a divorce could have on your business?

Most small business owners are between the age of 35 and 54. Recent ONS data has highlighted a rise in divorce rates for people aged 40-44. So consider the scenario: three people own a business together and all is well until one of them announces that he is getting a divorce. What they haven't yet realised is that any stake in a business is considered a matrimonial asset which means it can be fought over along with the house, the car and everything else.

As the number of start-ups grows, our family law team has found itself representing a growing number of people in divorce cases where one party owns an interest in a business. And most are both surprised and devastated to discover that the courts could make an order which forces the business to raise enough cash to pay off the divorcing spouse.

Case study

We were recently instructed to represent a husband who was the Managing Director and the main shareholder in a company which he had built over a period of two decades. He was distraught to learn that his stake in the business was a ‘matrimonial asset’. As a result, his interest in the business was to be accounted for in the financial proceedings ancillary to the divorce. The court held the power to take all relevant assets into consideration when making a final order distributing the matrimonial assets between the divorcing couple.

Although he and his wife jointly owned their matrimonial home and had both pensions and savings, the value of the husband’s shares in the company exceeded the value of all other assets put together. Because they had been married for over 10 years, the court was initially leaning towards asking the husband to liquidate part of his interest in the business or otherwise borrow against it to pay his wife her share as part of the settlement.

But despite the wife’s view that the husband could raise the capital from his company, we and the forensic accountant we instructed were able to prove that his borrowing capacity was limited, and that his future income could only be preserved by ensuring that he was able to continue in the business as it was.

Finally an agreement was made that it was in the best interests of the children if their father could continue to maximise his income from the company and retain his shareholding in full. The wife was persuaded to agree a 60/40 split in the husband’s favour which means she was awarded all other assets. Further, the wife secured an appropriate level of maintenance for herself and the children as her former husband continued to earn well from the business.

Marriage and business: post and pre-nuptials

The lesson is that any business can very quickly be under threat from a relationship breakdown regardless of whether or not both spouses are directly involved in it. The recent Supreme Court ruling in Sharland and Gohil means there will be even stronger focus on full disclosure of assets in the future. Alison Sharland and Varsha Gohil won their arguments that they had been misled by their ex-husbands who had hidden fortunes from them.

Anyone with a stake in a business should seriously consider either a pre- or a post-nuptial agreement to protect themselves and the business from a future divorce. The aim is clarity for everyone involved, including other potential business partners, about what will be considered a matrimonial asset and to which length a court can go in ordering either a loan against a stake in the business, or the liquidation of assets to pay the divorcing spouse.

Being married without a pre-nup does not spell disaster. Anyone who is in business with other parties where some or all are already married can still suggest that everyone signs a post-nup. This would set out, for example, whether the business interest is to be included in the pot of matrimonial assets in the event of divorce, or in the event it is to be included, provide clear terms and acceptable time frames for valuing an interest or raising cash. This could also detail how income is taken from the business for the purposes of spouse maintenance and meeting other family financial commitments.

Accountancy expertise is essential for business owners who are already heading for a divorce without a pre-nup, to help estimate what each partner’s share of the business interest is worth. This will help them understand how best to prepare the business for a forensic investigation and possible fundraising options to fund a divorce settlement. It is sometimes also possible for a business partner to ‘intervene’ into divorce proceedings that could affect their company, and expert legal advice will be essential here.

Assets used by the business, such as premises that are held within a SIPP could be problematic if a pension sharing order is made. The scheme trustees will need to raise cash to meet it fairly quickly, so they should be warned about this possibility. Spouses who are involved in a business, sometimes for tax purposes, could have a stronger claim on divorce. This one, however, may be a risk where the benefits outweigh the potential future obstacles.

Although rarely a romantic prospect, pre-nups can play a vital role in securing the health and future of a business, as long as they are fair and everyone affected understand why they are put in place and how it might affect them in the future.

Emma Pearmaine is a Partner and Director of Family Law Services at Simpson Millar. She has built up a wealth of experience in family law including divorce law, ancillary relief and child matters. Emma is an experienced Collaborative Lawyer and also offers a range of Mediation Services. She is a member of the Law Society's Family Law Panel and Resolution - First for Family Law, and a Trustee for domestic violence charity, the Corporate Alliance.

First published in Accountancy in February 2016


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