Divorce and the Family Business

Divorce and the family business


Alison Bull, Legal Director, Addleshaw Goddard LLP's Family Law Group

In families where the husband and wife have been in business together, or perhaps either or both have worked in a long-established business set up by the family of one of them, the business is often the most significant asset that the family may have. In a divorce situation, the existence of a family business can cause a great deal of difficulty and emotional distress.

There may be issues about the extent of the interest of either or both spouses in the business.  Are they partners in the business, directors or shareholders if the business is a limited company, or just employees? Were the arrangements always informal, and now it is very difficult to agree on what the factual position actually is?  Perhaps one spouse (often but not always the wife) was involved for "tax reasons" on the advice given many years ago by the then family accountant?

What will happen to the business?  Must it be sold and if so, can it be sold, or will one spouse buy out the other's interest?  Is there enough liquid cash, or can it be raised by borrowing or some other means, to enable one spouse to be bought out?  Should both spouses have a "share" in the business at all?

The law governing financial settlement on divorce has changed significantly in recent years, and continues to evolve as cases are determined by the courts. Each case has to be considered on its facts, since family arrangements often differ significantly. The first stage is to identify exactly what assets there are, and where there is a family business, that will usually need to be valued. Then consideration has to be given to how the value of that business should be taken into account, and what should happen to it.  A case where both parties have worked in the business for 20 years and have been married throughout that time, is very different to a case where, say the husband set up the business, the wife had limited involvement, and they have only been married for 2 years.

Take for example the case of Victor and Verity (based to some extent on the case of V v V [2005] 2 FLR 697). They have been married for over 30 years and have 4 adult children. The family own the family home, and a small property now occupied by Victor (which is fully mortgaged).  Verity has an interest in a property company, which she says owns properties for other members of the family (the children and grandchildren). Victor has a shareholding in an optician's business that provides him with a good income (£90,000 net per annum), which would stop if that shareholding were sold.
 
The judge orders that Victor should pay maintenance to Verity of 40% of his net income, rather than 50%, so recognising that the marriage has ended and it is Victor that is earning the money. He finds that Verity's interest in the property company should be left out of account, because it is a type of "family arrangement", and although it provides her with some financial benefit in terms of being able to borrow against the properties through the company, she would not be able to easily sell the properties and realise capital. Victor's shareholding has no value over and above that of being an income-producing asset, because the business has no undrawn capital within it, other than essential working capital, and must be retained in order to generate an income to maintain Victor, and Verity (by way of the maintenance order). To do otherwise would be tantamount to "double-counting". The family home is to be sold (if Verity is unable to raise sufficient funds to buy out Victor's share) and the equity divided equally between Victor and Verity.

If Victor did not have to pay maintenance to Verity from his income (perhaps because she had an income of her own from another source), then his shareholding may have been attributed with a capital value.  Also if Verity had been able to establish an argument that she should be compensated for having a lower income capacity due to her commitments during the marriage as wife and mother, then perhaps she would have achieved a maintenance order of 50%.

You can contact Alison at alison.bull@addleshawgoddard.com
Direct line 0161 934 6433.  See also our website www.addleshawgoddard.com