October 2015

Divorce Law 2015

EXPERT GUIDE

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expert guide: divOrce Law 2015United Kingdom

Jay Pateljay.patel@howardkennedy.com +44 (0) 20 3755 5650

The Court’s approach to dividing business assets on divorceBy Jay Patel

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.

What are the options available to the Court when the business has real value over and above existing as an income stream?

The first step will be to value the business, in order for the court to properly assess the options that it has e.g. extracting capital from the business, or funding maintenance payments from the income the busi-ness produces. Wherever possible the Court will look to preserve the business and may allow the party who owns the business to retain it in exchange for giving the non-owning party a greater share in the other marital assets.

Are there any circumstances in which the Court would order the sale of the business?

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

If you and/or your spouse own a business outright or have a signifi-cant shareholding in the business the Court will almost invariably require a valuation of the business to assess the parties’ assets. The parties are required to file a statement with the court which requires the owner of the business to provide an estimate of the current value of the business and to explain the basis upon which estimate is based.

Valuing a business can be complicat-ed and may depend on:• whether the business is a lim-ited company, sole trader or partner-ship;• the profit the business makes and is expected to make in the fu-ture; and

Your business is usually your most valuable asset, next to the family home. Any business interests and the value contained in them can gen-erally be taken in to account as a mar-ital asset to be divided on divorce or dissolution of a civil partnership and as a result, you may feel that the in-evitable stress of di-vorce is compounded by fears for the wel-fare of your business. This article explains how the courts deal with business assets in the context of fi-nancial settlement proceedings.

When can business assets be ex-cluded 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 com-pany. It was the husband’s case that

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 busi-ness had a capital value for the hus-band as he would benefit from the goodwill associated with the busi-

ness on sale.

The judge had to deal with the capital val-ue of the husband’s company and the ex-tent to which a capi-tal sum representing

the husband’s interest in it could be included in the capital division. The judge considered that for the pur-pose 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 count-ing the ‘value’ of the business as a marital asset to be divided between the parties, the court would be com-pensating the wife twice in respect of the same asset.

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expert guide: divOrce Law 2015United Kingdom

a matrimonial solicitor as to the po-tential repercussions of:o transferring shares to your spouse for tax reasons;o employing your spouse in the running of the business; oro asking or allowing your spouse to invest money in the business. The greater your spouse’s involve-ment 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 mar-riage.

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 ba-sis that you retain your business in-terests 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 individu-als in divorce cases involving substan-tial assets including companies and off shore assets held in trust. He has extensive experience in international work including child abduction, appli-cations for leave to remove children permanently abroad and complex fi-nancial work. Jay has represented a number of high profile individuals in business, media and sport, in partic-ular 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 re-gard to their children and finances without recourse to court proceed-ings.

• the assets, such as property or stock, owned by the business.

The simplest option is often to in-struct the accountants of the busi-ness 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 ap-pointment of a single joint expert to value the business. This person will be an independent Accountant who will be directed by the court to as-sess the business, with a focus on the issues between the parties. Usu-ally the report includes an analysis of the value of the company, the capital that can be extracted, the tax conse-quences of doing so and the income available.

How to protect your busi-ness in a divorce

Given the above, there is clearly

much at risk if you are a business owner facing divorce proceedings. The court has wide ranging jurisdic-tion to make orders but there are ways to protect your business.• You could enter in to a partner-ship, 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 di-vorcing parties so that they can main-tain their control of the business.• The business or your share in it is likely to be considered a mari-tal 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 in-volving your spouse in your business without taking advice first. It would be a good idea to take advice from