BTO Family Law partner Lesley Gordon provides some clarity to the subject of family businesses and divorce.
Everyone has been glued to their televisions recently catching up on the latest season of “The Crown”.
This latest season has seen the Prince and Princess of Wales get married, tour Australia and culminated in the Queen calling a family meeting to try and reconcile the couple so as to try and avoid a separation which would damage the “family business”.
Whilst none of us commoners have the Queen at hand to try and resolve our marital disputes, there are 4.8 million family-owned businesses in the UK, and so many will understand some of the pressures and problems that can be faced by those running a family business in the face of separation and/or divorce.
Family Businesses and Divorce
With this in mind, we are here to bring some clarity to the subject of family businesses and divorce.
Firstly, in reading this blog you should be aware of the general reference made to businesses (or interests in businesses). In Scotland, there are many vehicles through which a family business could be run. For example, the business could be set up and run as a company, with you and/or your spouse owning shares in that company (be that private or public), as well as possibly being directors of that company.
Or, it could be that one or other of you is a sole trader or perhaps you and/or your spouse are a partner or partners in either a general partnership or limited liability partnership (LLP). The structure of the business, and the interest that you hold will be of vital importance (as will the documents that regulate the business) to your family law solicitor.
In any event, the family business will normally only be taken into account in a divorce (or dissolution of a civil partnership) where the company, or partnerships, is classed as ‘matrimonial property’.
A business will be classed as ‘matrimonial property’ where it was set up or bought after the parties were married or became civil partners. Therefore, if you, or your spouse, bought or set up, a business prior to the date of marriage and neither the ownership nor its structure, has changed, then it would not normally be classed as matrimonial property.
However, if the ownership and/or structure of the business has changed during the course of the marriage then it could mean that the business is now viewed as ‘matrimonial property’.
Additionally, where your business is a sole trader or a partnership, any increase in the value of your cash reserves within the business whilst married might also be classed as matrimonial property – even if the business was acquired prior to the date of marriage. There are always exceptions to the rules!
Any business interest which falls within the definition of matrimonial property would require to be valued and taken into account in coming to a ‘fair division of the matrimonial property’.
Now, whilst this may sound like an issue – it does not necessarily need to cause any great concern. A ‘fair division’ can (and usually is) achieved without affecting the operations of the family business.
Retention Of Business
You can structure matters that see you retain your interest and/or control in the business so long as the assets retained by you and your spouse are fair overall. This balancing exercise can include instalments of capital if resources are stretched.
In practice, Scottish courts would be reluctant to transfer shares of the business to a spouse who had no prior involvement in the running of the business.
From our experience, Scottish courts would be unlikely to force a spouse to sell their business, or do something which affects its value, or puts it at (or its workforce) at risk. But, if the business-owning spouse is not able to offset the value of their business against the other assets, then, in theory, the court may order the business to be sold to fund an equalising payment.
A Complicated Situation
As will be clear, the situation is complicated and so it is always best to get legal advice at the earliest opportunity in order to provide the utmost protection to you and your family business.