Where either or both parties to a divorce have an interest in a business, this will often bear relevance to the division of assets between the parties, as the business is a financial resource available to the parties (section 25(2(a) Matrimonial Causes Act 1973).
When considering what orders to make in relation to assets on divorce including businesses, the court will consider legal principles of needs, compensation and sharing (White v White, Miller v Miller, McFarlane v McFarlane).
The Court has two main considerations when dealing with businesses:
- Establishing a valuation of a business;
- Deciding how the value should be reflected in any financial division.
For the purpose of this article, I do not intend on discussing the valuation of the business but will focus on how any value should be reflected in the financial split.
When considering how to treat a business on divorce, the court will aim to achieve a fair outcome which considers the following:
- dividing assets to give parties a proportionate share of liquid and illiquid assets;
- applying discounts to illiquid assets received by a party; and
- transferring shareholdings between parties.
How businesses are dealt with on divorce will often depend upon whether the business is considered in full or in part to be a matrimonial or non-matrimonial asset.
A business or part of its value may be considered non-matrimonial where it was:
- Established before the marriage;
- Grown significantly post-separation due to one party’s efforts.
Where a business is considered a matrimonial asset it will be subject to the sharing principle. The starting point is that its value should be shared equally. Even in circumstances where a business or part of its value is considered non-matrimonial, it is not subject to the sharing principle however the court will still have consideration for it as an available resource when considering the needs of the parties.
If the Court has determined that a business is a relevant resource when considering the finances of the parties, it has the power to make the following orders:
- the transfer of shares from one party to the other (section 24(1)(a) of the MCA 1973);
- the sale of shares in a private limited company (section 24A, MCA 1973) (this is extremely rare);
- Where a business valuation is based upon a future income stream, the court may order ongoing spousal maintenance taking into account the income that can be generated;
- A lump sum order could be paid from one spouse to the other;
- A deferred lump sum based upon a percentage of the proceeds of a future sale.
Therefore, whilst the court does have the power to order the sale of a business, it will rarely come to the conclusion that that is the best solution and instead look at what other orders are available. Most importantly, however, there is no set formula and each case turns on its own facts.