Domestic splits can can have impact on business assets
How the courts treat business assets can be one of the most disputed financial aspects when a marriage breaks down. It is vitally important that any business owner gives due consideration to this possibility as part of their overall succession planning.
This is particularly important in partnership where a marriage breakdown can be said to be completely outside the control and knowledge of all but one of the partners, and if not prepared for can cause uncertainty and division. In Northern Ireland the prevalence of SMEs and family businesses gives particular significance to this eventuality.
So, what goes into the 'pot'?
This somewhat crass phrase provides an image of what goes into the 'pot' to be divided at separation or divorce. What the parties own at this stage can be described as 'matrimonial property' (MP) - broadly speaking, assets acquired during the course of a marriage; and non-matrimonial property (NMP) - generally assets you brought into the marriage or acquired after separation.
This is not always clear and often it is the business assets owned solely/jointly by one party which cause problems. For example:
1. Pre-acquired asset - say a business was owned by one party before the marriage and thus is a NMP? This is not always the case, for example:
(a) the business is the only asset to the marriage and the financial needs of the other party will only be met by dividing this asset;
(b) income from the business during the marriage was used by both parties;
2. Inheritance/gifts - it is often the case that capital invested in the business came from family inheritance or gifts. Does it follow therefore that this should be excluded? The courts do generally agree but it is not always easy to tease apart the notional percentage of a business to be excluded.
For example, Mr A and Mrs A married in 1990. Mr A started a business in 1991 with £50,000 family inheritance representing 100% of capital investment. In 2014 at separation, the business is worth £250,000. A loan of £20,000 in joint name secured against the home was raised in 2006 and invested. Mrs A also carried out unpaid work for the business including preparing accounts. The court will likely put a portion of the value of the business into the 'pot'.
Issues to be considered:
1. Succession planning - it is imperative that this is accounted for in any business but one must also consider the possibility of a marriage breakdown as an event to be prepared and accounted for.
2. Fixed assets - the more property owned by a business, the more can conceivably go into the 'pot' - unliquidated value is not as easily identifiable and thus less capable of division.
3. 'Buy-out' of equitable interest - often the non-owning party will take settlement by way of increased maintenance/lump sum to relinquish a business interest and where possible this should be planned for to protect the business from possible division.
4. Devaluing assets - this is unfortunately a regular aspect of matrimonial disputes. In October 2015 the Supreme Court determined that a 2012 settlement be set aside on the basis of fraud. In this case Mr S did not advise the court that the business was about to be sold publicly which resulted in a ten-fold increase in value (after the settlement was agreed).
- Rachael McKee is head of the family and litigation team at Walker Legal
- Contact Walker Legal at 6 Bridge Street, Portadown, BT62 1WL, tel: 028 3833 7591 and Scottish Provident Building, 7 Donegall Sq West, Belfast, Co Antrim, BT1 6JH, 028 9091 8461