How to protect your business and assets during divorce proceedings

Wondering how to protect your business and assets during your divorce?

Our latest blog looks at some of the considerations of the court during financial remedy proceedings.

Have you set up a business prior to your marriage, or does your spouse have an interest in your business or is an employee? During this newsletter, we will explore the definition of matrimonial assets, considerations of the court during Financial Remedy Proceedings and how you can protect your business and other assets during divorce with both Pre-Nuptial and Post-Nuptial Agreements.

Divorce can be a highly emotional and expensive process. The family assets which once met the needs of one household now need to be shared between two. This can create animosity, particularly when one spouse feels they may have contributed more financially to the relationship than the other. Divorce can be much more complicated for business owners.

The process for dealing with the parties financial affairs during divorce, if they cannot agree a division of assets is called Financial Remedy Proceedings. This is dealt with under the Matrimonial Causes Act 1973 and the court will consider the factors set out at section 25 of the Act to determine a fair settlement for both parties, considering all the circumstances of the case. 

Matrimonial Assets

Matrimonial assets are those assets obtained during the course of the relationship, usually from the point the parties start cohabiting up to the point of separation. This includes but is not limited to property, land, savings and investments, pensions and business interests. 

Non-matrimonial Assets

Non-matrimonial assets are those assets attained either before or after the marriage, which a spouse cannot realistically expect to be considered matrimonial. The Court will, in most circumstances, take these assets into consideration when deciding the financial settlement, as they are assets available to meet at least one of the party’s needs. For instance, if the divided matrimonial assets will not sufficiently provide for the ex-spouse and any children’s welfare to maintain the standard of living during the marriage.

Often, a business incorporated post-separation is generally regarded as a non-matrimonial asset (however there are exceptions). 

Financial Remedy Proceedings

At the outset of the proceedings the Court will expect evidence of when the assets were acquired, the value of those assets as well as the parties alleged contributions to the acquisition of those assets. In relation to businesses, it is of particular importance to explore whether the business was incorporated before or during the marriage and by whom, and whether or not your spouse has made contributions to the running of the business, whether this is by working in the business or running the household to allow the other spouse to run the business to its maximum potential.

The Courts will further consider whether the business is capital-rich and income poor or a capital-poor and income rich business. The Court will consider the business structure as well as any future plans for the business. The Courts do avoid, where possible, impacting the viability of the business. However, the Courts do always consider balancing this against the continuing needs of the family concerned in the proceedings and the other assets which may be available for distribution. The Court will also consider the liquidity of business assets if this is the only option available.

As an alternate to withdrawing capital to meet the requirements of an order made by the Court, the Court may look to award a maintenance order to minimise the impact of the business and its day-to-day running.

If the business is owned by one party, but the other is employed in it, for example as a bookkeeper or secretary, and the parties can no longer work together in the business as a result of the divorce this will often give rise to Employment Law disputes. 

Pre or Post-Nuptial Agreements

If you own a business or have a substantial interest in a business, it may be appropriate to consider entering into a pre-nuptial or post-nuptial agreement to ring-fence your business and its assets. These agreements are primarily used to protect family wealth in the event of a divorce; they enable a party to safeguard assets brought into the marriage which can include inherited and business assets. They can be updated as and when there is a change in circumstances.

Whilst these agreements are not legally binding in England and Wales, if prepared and executed correctly the Court will consider them as good evidence as to the parties intentions in the event of a divorce. It is important to note, for consideration of the court, the agreement must be fair and account for each party’s needs. 

Advice for your business

If you are a business owner or have a substantial interest in a business, you should try to keep your business finances separate and avoid using business capital other than income for the benefit of the family.

Consider the implications of involving your spouse in your business. During separation, this could give rise to a claim that your spouse has made a contribution to the business’ success or could later give rise to Employment Law claims.

It can be a daunting and stressful period for a business owner to consider protecting their business assets during divorce. However, obtaining expert advice at the earliest opportunity is paramount.