By Aleena Mills – Lawyer at MBA LawyersThe Impact of Divorce on a Business or Company

 

Divorce and separation can be extremely unsettling at the best of times, let alone when the couple are both business or company owners. Not only does the separation impact the parties’ ownership, but there are broader effects on third-party stakeholders in the business/company and even employees. 

 

It is also the case in many separations that one party has been the primary operator of the business/company and knows the ins and outs of the operations and finances in much more detail than the other. 

 

Where there is a husband and wife in business together, it is essential that we have a clear understanding of the business, how it runs, and an idea of the assets, liabilities and profitability. This involves a review of the business/company financial statements and tax returns. It also usually involves working with the accountant. In doing this, we can form an understanding of any potential family law issues that need to be either fixed or at least clarified so that our client is fully aware of the ‘lay of the land’ in the context of their settlement. 

 

Just some of the issues arising from a separation in the context of business ownership are:

 

  • Sometimes there are company loans owing to or from the husband or wife that require special treatment in the property pool. 
  • Sometimes there are Division 7A (tax) liabilities. 
  • Sometimes the parties have provided guarantees in relation to business loans that they need to be released from if they are going to exit the company/business as part of the settlement.
  • Sometimes the parties, or one of them, have taken money out of the business or company as a way of meeting their joint living expenses, but these monies need to be characterised, which will almost always result in tax issues.  

 

All these matters need to be ironed out, and often liabilities crystalised, to have a clear understanding of the assets and liabilities that form the property pool available for distribution. We also need to know these things to understand the risks to our clients in taking a particular course of action, such as retaining a company along with all the liabilities. 

 

Typically, unless the parties can agree on the value of their interest in a company or business, a joint expert, usually a forensic accountant, is engaged to assess this. If agreed by the parties, or if ordered by the Court, that expert is usually able to undertake forensic exercises in addition to the valuation if there are discrete issues within the company that requires investigation. 

 

Family Courts are typically reluctant to interfere with businesses being conducted in their ordinary course, so one of the parties usually will be free to continue to run the business/company until the property settlement is resolved. However, the Court can make injunctions to compel action, or to prevent action, in relation to a business or company. 

 

One example may be that if a court is satisfied that a party is starting a high-risk activity on top of normal business, the likely result is that the value of the business will reduce significantly (thereby reducing the value of the property pool available to be divided between the parties), the court may see fit to injunct the party from undertaking that high-risk activity. These types of orders are typically made to preserve the parties’ entitlements pending the determination of the proceedings. 

 

If you are going through a separation and you are running a business or company, it is crucial to get experienced legal advice to assist you to achieve the best possible outcome. Call our Family Law team at MBA Lawyers today on 07 5651 2000 for an initial consultation.