Guide

Divorce: protecting your assets

Gateley Legal

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In this episode, Vanessa Gardiner a Legal Director in our Family team, discusses the interplay between business ownership, assets and marriage.

In this episode:

  • An outline of the importance for business owners to protect their assets before entering a relationship or marriage.
  • An overview of the documentation required to protect a business and assets in prenuptial and postnuptial agreements.
  • The process of mitigating against claims.
  • Advice on how a spouse can protect their assets when going into business with a partner.

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This episode is part of our straight talking business success podcast series. Learn more about the series and what we cover. This podcast is available on iTunes, Spotify and Soundcloud.

Read the transcript:

Host: Welcome to Straight Talking Business Success, your guide to growing and developing your business. Today, we're joined by Vanessa Gardiner, a legal director in our Reading family team, and we're going to be discussing business ownership, assets, relationships, marriage, and the interplay between all of those different factors. To begin with, Vanessa, who should be listening to this podcast?

Vanessa Gardiner: Anyone who is in a relationship or married, but is also a business owner or has an interest in a business.

Host: Okay, excellent, so quite broad, then. This is going to apply to quite a few people. So, to begin, why is it important for business owners to protect their assets before entering into a relationship or marriage?

Vanessa Gardiner: When you get married, it's important to understand that the law gives both spouses the right to make financial claims against each other within future divorce proceedings. So, basically, marriage gives rise to claims against each other's capital, property, real or otherwise, pension funds, and income. When you enter into a relationship outside of a marriage, those claims do not actually exist unless you can prove a trust of property. So, it's a completely different situation, so you should always be thinking if you aren't going to be getting married, "How am I going to be affected by this?" I'll focus more on the claims which arise within marriage and divorce proceedings, because the courts have a very extensive discretion, and they can make extensive orders in relation to that capital property, and obviously, businesses fall into that.

Host: Okay. So, firstly, for business owners, how important is it for them to think about protecting their assets before entering into a marriage or relationship?

Vanessa Gardiner: It's really important to think ahead as a business owner and to protect those assets that you already have. You want to protect the integrity of your business and your business interests, and it's important to understand that those financial claims that you can make against each other in divorce proceedings can have a serious effect on your business. The family court, for example, can, in fact, make orders transferring shares in a company from one spouse to the other. They can include the value of your business, business interests, share values, into account when they're looking at division of capital. So, it's really important to think ahead about, "What do I need to do to mitigate those claims against my business, especially if I want to keep my business intact?"

Host: So, how easy is it to mitigate against those claims? Could you talk me through the process?

Vanessa Gardiner: You will need to take legal advice, initially, really, when you're thinking about creating the business, or if you already have created the business, about what changes you might need to make to take into account the risk that can be involved in divorce proceedings. So, if a spouse is going to be involved or have an interest in a business, or you're going to give them shares, you really need to fully consider and take advice on the implications of doing so. Will, any of those shares have voting rights? Should those shares be sold back to the company rather than a third party? Particularly if we're talking about a family business where you want to really keep it in house, and you don't want some independent third party coming along because a spouse has decided to sell their shares.

Host: Sure.

Vanessa Gardiner: So it is... There are lots of things you can do, but you do need to think ahead.

Host: What type of documentation is required to do this?

Vanessa Gardiner: Well, your starting point is going to be your company documentation, making sure that it clearly reflects the intentions of the parties, because it's important to understand that whilst in family court proceedings, the court does have wide discretion and can make extensive court orders, they are also still bound by the law, company law and trust law, and therefore, if provision has been made in contractual documentation, the court cannot override that contractual documentation. It will be bound to uphold them.

Host: Okay.

Vanessa Gardiner: So, that's your important starting point. But there are other documents within family proceedings that we can advise you on that can assist as well. Basically, what we're talking about are if you're unmarried, you're talking about relationship or cohabitation agreements, and if you're married or getting married, you're looking at prenuptial and postnuptial agreements. I'm going to focus on the prenuptial and postnuptial agreements, and it's very important, again, to understand they are not at this point automatically legally binding.

Host: Okay.

Vanessa Gardiner: The law does not say that if you sign a prenuptial agreement or postnuptial agreement, the court is bound by it. The case law has moved on so far in this area that if an agreement is drawn up and specific guidelines that have been set down in case law are followed, there's almost an assumption that the court will uphold the terms of that agreement unless needs of a party or needs of a child are not going to be met.

Host: Okay.

Vanessa Gardiner: So they have real strength behind them now. And you can make provision for a business and what should happen to a business or shares within that agreement, and they're taken into account as part of the overall settlement.

Host: Okay. So, what are the risks involved for business owners if they do decide to include their business, their company assets, in that matrimonial pot when entering into a marriage?

Vanessa Gardiner: Well, unfortunately, it's not within the gift of individuals to choose what actually goes into the matrimonial pot. It's defined by statute.

Host: Okay.

Vanessa Gardiner: So, every capital asset that is held in a spouse's name, joint names of a spouse and a third party, or individually, initially starts off within what we call the matrimonial pot as a matrimonial asset. Now, there is case law which determines what is a matrimonial asset, what is a non-matrimonial asset, or what is a pre-matrimonial asset or a post-separation asset. And there's lots and lots of case law that we can use to try to mitigate your circumstances in hope of perhaps excluding or ring-fencing a value or an asset in its entirety from being included, but this is all really technical legal argument, and you're very much in the hands of your lawyers and the courts if you find yourself going down this route.

Vanessa Gardiner: So, get your documentation in order, take your advice at the start; otherwise, you are running something of a lottery. As much as we advise and run these arguments frequently, ultimately once you're in court, if you end up at a final hearing, it's going to be a judge listening to who's giving evidence, looking at the needs of the parties, the standard of living, the needs of a child, as well as your business and business interests, and making orders on your behalf that you are going to be bound by.

Host: Sure, when arguably, you could've firmed all of this up in advance and had it out contractually.

Vanessa Gardiner: As far as you possibly can.

Host: Yeah.

Vanessa Gardiner: There are steps that you should and can be taking.

Host: Thanks, Vanessa. So, moving on from that point, what are the rights of business owners once they have protected their assets? Is the spouse involved in this process?

Vanessa Gardiner: Absolutely. The rights of the business owner are generally unaffected. You've entered into your documentation, presumably, to achieve what's in your best interests, protect those assets, but also involve that other person as far... or exclude them as far or as much as you want to. But if you're entering into a pre- or a postnuptial agreement, then both parties have to be actively involved in that process of preparing the documentation. It's best practice for both parties to receive legal advice, although a failure on one party's side to do so absolutely does not invalidate the agreement, especially if that person is an educated person, they're intelligent, they understand that effectively, they're entering into a legal document, and they understand that this will impact on the outcome within divorce proceedings.

Vanessa Gardiner: There's plenty of case law that says you should get legal advice, but if one person refuses, you can't make them, and the court has to look at all the circumstances of the case there. But ultimately, it's a process of disclosure, of negotiation. And it has to be entered a reasonable period before the marriage, otherwise, we'll make you do a postnuptial agreement as well, just to make sure it's hammered home that everybody agreed before, everybody agrees after the marriage, and then you can also avoid allegations of duress, so undue influence, you maybe sign on the day of the wedding. Anything like that, you want to avoid any kind of potential satellite litigation about the validity of the prenuptial agreement to start with, before you even get into the divorce proceedings. So, doing everything properly from the beginning is always going to make it far smoother within the divorce proceedings.

Host: Excellent. So, moving on from looking at prenuptial and postnuptial agreements, for those looking to enter into a relationship or a marriage, and coming at this from the perspective of two people who are already married or partnered, but who are looking at entering into business together, potentially as equal shareholders. How would they go about protecting themselves and their assets in that scenario?

Vanessa Gardiner: Taking legal advice from your company, commercial/corporate lawyers, basically, making sure the appropriate documentation is being drawn up. And it's really important to understand that you may be married or you may be partnered, but if you're going into business together, you may have conflicting interests. It doesn't mean to say that because you're married, you're both going to agree on how the business should be run, or what should happen at the end of it, so you need to make sure that you're both represented and you're both... I would say both represented. You want to make sure that what's being drawn up is in your interests as well as the interest of the business. So, you need to be taking advice at the beginning to make sure that you are signing up to what you think you're signing up to, because you may find you can't change it later.

Host: Okay. What should the individuals in that scenario be thinking about? What are the key risks that are...

Vanessa Gardiner: Well, the key risks are that if you end up in divorce proceedings, you may well find that you're no longer involved in the business that you're running. You may find that as part of the financial settlement, you decide to give up your share. Or, we've had couples where the court have said, "Well, you've both got an interest in this business. We can't decide who should run this business, so you're stuck together to sort it out between yourselves. Actually, the business stays as it is, and you're going to have to sort that out separately after the divorce proceedings are over."

Vanessa Gardiner: So you can find yourself... It's not always for the court to decide if you should stay in business or not. All the court are interested in is how much money does your business make, what is your business worth, in terms of income, but also, is it salable? What's the capital value? That is all the court are actually interested in. What is this asset worth, and what can we do with it, and what's within the scope of our powers? Two people want to stay in business together who are getting divorced, it's not really the court's problem. But it is their problem after the event if they have to go into further litigation to deal with those business interests.

Host: Okay. Okay, so if we're thinking about putting measures in place before entering into business, what do those measures, those agreements look like?

Vanessa Gardiner: If you're intending on going into business equally, and you intend your company documentation to reflect that, then you need to be thinking about how you break a deadlock. So, there needs to be a mechanism in place to determine, "In the event of the breakdown of the marriage, what are we going to do with the business?" So you need to be thinking about that in advance, and you can be taking your legal advice when you're drawing up your company documentation about what that would look like. But ultimately, if there are contractual provisions in place, the court isn't going to interfere with those. They'll look at the documentation that will be disclosed within the proceedings and say, "Right, well, you've already got a mechanism here to deal with it. All we're interested in is, how do we extract the value out of this business and make sure that each of you either retains... one of you retains your interest, or the other one's being bought out."

Vanessa Gardiner: So, the court will respect your contractual provisions, as long as the two of you also intend to follow them. But if you don't, again, there's not a lot .... the court isn't always going to make that decision for you. It very much depends on the individuals, the circumstances of the case, and also the type of business .... smaller businesses, bigger businesses that can be more or less involved.

Host: Of course.

Vanessa Gardiner: Some businesses are far more simplified than others. So, every case we look at turns on its own facts turns on its own circumstances and turns on the needs of the parties and those of the children involved. So, we're always working within a framework, but adapting that framework to every different client that comes in front of us.

Host: Okay, excellent. So, there's recently been some interesting talk around the privacy of individuals in marriage when cases like this come to court. Could you talk a little bit more around this?

Vanessa Gardiner: Sure. So, what you probably don't think about is whether or not you have a right to privacy from your spouse. And particularly if you're in business together, this is something that you need to think about. So, a husband and wife do not waive their right to privacy of their confidential documents simply because they're married, or simply because they're married and in business together. The example of, I leave a piece of information about the business on a desk in an open-plan office I share with my spouse, he would have every reason to think that that's not a confidential piece of documentation, he can read it. I lock it away in a filing cabinet, I take the key with me, he finds my key, goes into my filing cabinet, rifles through this documentation, well, I have a right to privacy and confidentiality of those documents.

Vanessa Gardiner: So, within divorce proceedings, you have to understand what documentation you have a right to disclose that belongs to your spouse, and what documentation you do not. And you really can get into trouble in court proceedings if you breach your spouse's right to privacy. You cannot just pitch up with whatever documentation you've managed to rifle through and get your hands on because you think that it will benefit you. The moment you read something that you realize is private and should be private, you should stop reading and hand over or put back. You are entitled to memorize it; you are not entitled to take copies of it.

Host: Okay.

Vanessa Gardiner: You have to be rather careful. In a particular case that came about, which brought this all to the fore, was the Imerman case, where we're talking about hundreds of thousands of pages of business documentation, a severe breach of privacy, which hence got all the attention. But what it's really important for everyone to understand is, if it does not belong to you, you should assume that it is private and confidential, unless you have a very good reason for believing that it isn't. And within divorce proceedings, if someone fails to disclose a document, and you know that document exists, you have a right to specifically request that that document be provided. If you happen to have a copy of it, you do also have to jump through a number of procedural and technical hoops to explain how you came into the existence of it, prove that you did not breach their privacy, and then the court has to determine if it's relevant, and then it can be brought into the proceedings.

Vanessa Gardiner: But it is really important that you do not just take another person's document, and if you take it to your solicitor and they refuse to take it from you, this is because they can get in trouble as well. We cannot be taking documentation that does not belong to you or us or your client. You'll be in as much trouble as your client if you're doing that. So, don't be offended when they say, "You have to hand that back."

Host: Okay.

Vanessa Gardiner: But it is important to understand because there are severe legal consequences for breaching privacy. It's a civil claim that becomes, again, satellite litigation that has to be resolved as to whether you can even bring the documentation in before you can rely on it within divorce proceedings. It's all-time, it's all money, and it's very complicated and technical, and it is something you do not really want to be getting tied up in. If you're not sure, ask your solicitor; they will tell you very clearly whether you can use that documentation or not.

Host: So, we talked about the individual here. There are certain protected assets. If they're in a company, does that company not own assets? Where does the line sit Vanessa?

Vanessa Gardiner: So, yes. Company is a legal entity all by itself, and the company can own property, it can own assets. And within divorce proceedings, in the first instance, the family court cannot go behind the corporate veil, and it cannot redistribute those assets and say, "I'm going to take that property that's owned by that company and give it to the spouse." It cannot do that. But if it's part of the proceedings, it becomes a legal argument, and actually, that property or those assets owned by the company are in fact held on trust for one of the spouses, and you would need very good evidence to prove that that was the case, then the company... Then, sorry, the court can find that those assets can now be brought into the matrimonial pot, and they're now an asset to be divided.

Host: Okay.

Vanessa Gardiner: So, be very careful if you think you can hide assets in your company, because a good lawyer is going to look very closely at when those assets were put into the company, what the circumstances are, what is your partner saying or your spouse saying about how those assets were treated previously. We look at all the circumstances, and the court's role is investigatory. And if questions are raised, they have to be answered, and if they aren't answered satisfactorily, the court can make adverse inferences. That is the extreme discretion of the court. They can decide, without necessarily completely having proven the facts, that if they believe all the circumstances show that somebody actually is the owner of those assets, or that they're owned on trust for the benefit of that spouse, they will bring them into the proceedings.

Host: Yes. Okay.

Vanessa Gardiner: And you cannot get away from it; the court will make that order.

Host: Once that's ordered, that's final?

Vanessa Gardiner: It's full and final, and it's enforceable.

Host: Okay.

Vanessa Gardiner: It will happen whether you like it or not.

Host: Okay. One to consider.

Vanessa Gardiner: Yes.

Host: Excellent. Thank you, Vanessa. So, we've covered quite a lot today. Are there some summary points or kind of key takeaways that you want to cover off at the end now?

Vanessa Gardiner: I think the starting point and the endpoint is just always to take advice. Take as much advice as you can when you're setting up a business about how you want that business to be set up, about what involvement you want your partner or your spouse to have in it, and don't be afraid to ask the hard questions and have the hard conversations early doors about what your expectations are if that relationship breaks down.

Vanessa Gardiner: Because when the relationship breaks down and you're in the hands of the lawyers, you are subject to statute and case law, and if there is no contractual basis for how your shareholdings or your company's going to be... your interest in your business, sorry, are going to be dealt with in a divorce, then you may well find orders being made that you don't like, that you don't agree with, and shares are being transferred and that that will be the end of it. Try to mitigate those circumstances as much as possible. Take the advice about setting up a business, take the advice about the prenuptial or postnuptial agreements, and try to put in as many mechanisms to minimize the risk, to protect the integrity of your business interest.

Host: So, for anyone who's considering these types of things, potentially moving their business in another direction, you're happy to take those questions if they need advice?

Vanessa Gardiner: Absolutely, in terms of what the risks might be to them in divorce proceedings or the risk to their business, and we can link in with our corporate team as well to make sure that they get the right business advice at the same time.

Host: Excellent. Thank you. Vanessa's details are supplied along with this podcast, so if any of this is relevant, please do contact her.

Host: Thank you for listening to Straight Talking Business Success. To find out more about the series, please visit gateleyplc.com/businesssuccess. From here, you can subscribe for updates, meet our speakers, and get more information on all of the topics that we've covered.

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