Derbyshire Legal Talk: January 2009

Legal Talk with Nelsons.

Question: My husband and I are both directors and shareholders in our family business. We have been married for 20 years but I would now like a divorce. What rights will I have in the business if I divorce my husband? My husband has said that it would probably be best if I simply resign but I have worked in the business for 10 years and helped set it up. I feel I have a financial stake in the business and wondered if I am entitled to any compensation? What should I do?

Answer: Coping with the legal, practical and emotional difficulties following a marital split can be hard enough, but divorcing spouses who are also business partners often face further complications.As a starting point on a marriage breakdown, a spouse is generally entitled to the value of their shareholding within the company, and to the amount, if any, standing to the credit of their directors' loan account. On a different note, so far as partnerships are concerned, the Court will first look at the partnership agreement, if there is one. If there is no partnership agreement, then the court will draw inferences from the extent that the spouse has played a part in the business or financially contributed to the business.Often, the crucial question for the Court will be 'Can money be raised to "pay off" a spouse?' It may be possible for part of a business to be sold, or for the remaining director or business partner to borrow money, or transfer borrowings to raise money. It may also be possible for a company to purchase its own shares, subject to meeting various conditions which are set out by the Companies Act. A spouse may be entitled to an enhanced order where contributions to the welfare of the family, and in particular to the business, have been exceptional or outstanding. This will be of particular relevance where a spouse has been a director, shareholder or partner in a family business, and has played an active role in that business.One important thing is never to forget the importance of the business as a source of income to both parties and the family as a whole. Active participation by a spouse, either by working in the business or by providing finance, will greatly enhance his or her contribution to the welfare of the family, and no doubt the performance of the business. This may lead to an enhanced entitlement.Recent case law has shown that, in determining a spouse's entitlement to financial relief, the Court should look to rules relating to the break up of a business partnership rather than simply looking to provide an income for a spouse to continue living in the style to which they have become accustomed. Case law shows that contributions made by spouses to family businesses and their legal entitlement, will be more readily recognised than they have been in the past. In this case in any event you indicate that you are a director and a shareholder within the business so your legal entitlement stems from that very fact. As with all financial issues within a matrimonial breakdown, it is all down to negotiation to reach a satisfactory conclusion.

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