In Part 1 of this blog, I consider the impact of divorce on business assets. In Part 2, I shall consider the potential impact of divorce on others involved in the business and the practical implications that this may have on the business. Throughout this blog reference to marriage, divorce and spouses should also be taken to refer to civil partnerships, dissolution of civil partnerships and civil partners.
The business interest in question, whether shares in a limited company, an interest in a partnership or LLP, or that of a sole trader, will need to be disclosed to your spouse if you are involved in financial proceedings, during or after a separation. As a minimum, you will need to disclose copies of your business accounts for the last two financial years and a copy of your last tax assessment relating to any income you receive. If you are also employed by your business, you will need to produce P60/P11D for the last financial year and your last three payslips.
Some business interests will have a capital value, such as shares in a limited company. If your business interest was acquired during your marriage, then it is likely to be considered a matrimonial capital asset. If your business interest was either wholly or in part acquired prior to your marriage and/or your business was inherited/gifted, then some or all of your interest may be considered a non-matrimonial asset. This does not mean that it will be excluded from consideration, but it may be treated differently because it is seen to represent a financial contribution made by you unmatched by an equivalent contribution by your spouse.
If you are a sole trader or if you operate your business under an umbrella company for tax purposes, it may have no capital value where it is simply a means for you to earn an income (unless there are assets or retained profits).
Valuing a business asset is not always straightforward and may require the input of a forensic accountant, which can be costly. Experts may be appointed by the court or there may be value in instructing an expert to provide shadow advice as part of the process.
Business interests may also be relevant when considering the resources of the marriage and the business party’s income (actual or potential). There may be issues over what it would be reasonable for a party to earn from a business or what cash could be realised. This may be particularly relevant if one party is seeking maintenance either for themselves and/or any children or where money is required to meet housing or other capital needs.
Business assets are inherently different to other matrimonial assets: they are largely considered illiquid (assets that cannot easily be sold or exchanged for cash without a substantial loss in value) and often risk-laden. As such, consideration should be given to whether a financial settlement achieves a fair division of both the ‘copper-bottomed’ assets (property, savings which are generally regarded as liquid) and illiquid assets (e.g. an interest in the company).
The general approach of the court is that they do not like to interfere with business assets. It would be extremely rare for a court to order the sale of a business. A court may order (or you may agree with your spouse) to transfer shares held by you in a limited company to them. However, this will largely depend on whether any third parties also hold shares in the company, whether they consent to the transfer and whether such transfers are permitted by the company’s Articles of Association. Alternatively, if your spouse has a share in your business a court may order (or you may agree) for their shares to be transferred to you. If you wish to preserve all your business interest, it may be that you consider offsetting your spouse’s interest in the business against your interest in some other matrimonial asset, such as the family home.
Piercing the Corporate Veil
A company is a separate legal entity distinct from its owner and controller. In extremely limited circumstances, the courts may ‘pierce the corporate veil’ and make orders for assets held in the name of a company to either be sold or transferred to the other spouse. This will only be permitted if the court finds that the other spouse is, in fact, the true beneficial owner of such asset and that the corporate veil is being used to evade or frustrate the other spouse’s entitlement to such asset.
In summary, if you or your spouse has an interest in a business and you are getting divorced, be prepared to:
- provide full disclosure of your business interest and income or make sure this information is provided;
- have your business interest formerly valued, if it is not agreed with your spouse or consider shadow advice;
- consider how the business interest can be used to fund a financial settlement on divorce in a tax-efficient way;
- consider whether you wish to preserve your business interest or share it with your spouse, and the risks involved or look at other ways to ensure the value is taken into account.
Our team of family solicitors are experienced in financial issues, especially surrounding business interests. They will look at all the issues and their importance to you and advise how to address these in the most appropriate, sensitive and cost-effective way. Please get in touch.