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How divorce can hit family businesses

Personal issues can have commercial effects when relationship breakdown hits the boardroom.

The emotional and financial fall-out from a marriage breakdown can be significant. A cursory review of the tabloids reveals that divorce affects even those normally insulated from life’s troubles by wealth.

Resolving financial issues following family breakdown is not simply a business deal. Even hardened business people can find this the toughest time they have experienced.

At times like these, everyone needs support from specialists who understand both the emotional and legal issues they are dealing with.

The specialist family team at Ward Hadaway have substantial experience advising on financial issues arising from both divorce and cohabitation breakdowns where there are complex and business assets involved.

The financial impact can be particularly significant in cases where family businesses are involved, as the recent case of Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395 demonstrated.

In that case, the Court of Appeal overturned an earlier decision which required the husband to settle the wife’s financial claims by transferring property held by companies of which he had control and ownership.

The Court of Appeal reminded the family court that companies have a separate legal identity and that the properties did not belong to the husband so they could not just be transferred in this way, even though most family law commentators consider this decision results in a real unfairness to the wife.

Although the case is being appealed to the Supreme Court at the moment, the question is whether, and to what extent, corporate structures can be used to protect assets from future claims – the so-called “cheat’s charter” which the current outcome of Petrodel v Prest has been labelled.

Extracting a fair settlement in circumstances where the family wealth is tied up in a business can be challenging. There is generally a concern on all sides not to “kill the goose that lays the golden egg” – in other words not to harm the family business which has provided the family with their income, perhaps for a significant period.

The Family Courts have to balance this, however, with ensuring that everyone gets a fair outcome, and this can have a real impact on the business, the way it is run and the money which it makes.

Another potential complication is where both parties work together in the business. We have dealt with cases where it is possible for that to continue, perhaps with a carefully worded Shareholders’ Agreement or Partnership Agreement, to ensure conflict is not simply stored up for the future.

In the majority of cases, however, one party prefers to extract themselves from the business, and often a Compromise Agreement is needed to ensure that this is done in such a way that no future claims lurk in the background.

Our divorce lawyers calls upon our specialist commercial and employment colleagues in Ward Hadaway to assist in these cases.

There is also no point in achieving a settlement which leaves one party with a large and unexpected tax bill, so advice on the tax implications of any changes in the business ownership or structure is necessary at an early stage.

The fall out from Petrodel v Prest is not yet known as the case has been appealed to the Supreme Court and should be heard in March of this year.

What is clear, however, is that family breakdowns involving businesses will continue to be challenging and those involved need practical, business focused legal advice on how to navigate their way to a solution.

Our experience and close co-operation with specialist colleagues in Ward Hadaway’s commercial, pensions, insolvency, employment tax and corporate teams, ensures our clients get the best possible all-round practical business advice as well as legal advice on what can be a difficult and demanding process.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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