Business and Divorce: How splitting can break-up a business
We’ve written blog posts in the past about the importance of understanding how assets are split when you go through divorce proceedings. Whether it’s cars, property or cash in the bank, everything is accounted for as the courts attempt to reach a fair and reasonable outcome for the couple in question.
However, where do people stand when it comes to a business, especially when jointly run? This question has been at the heart of a fierce and expensive legal battle recently, when a couple, who ran a company that supplies towels to hotels and spas throughout the UK, decided to divorce.
While they have assets of around £10million, their legal fees are currently spiralling out of control to the point where even the judge involved has labelled the court battle as “crazy”. In today’s post, we’d like to discuss this case with you, as well as talk you through the business of dividing assets when you’re a cohabiting couple.
What’s the story?
Barbara Cooke, 57, and Michael Parker, 54, were joint directors of BC Softwear when their bitter divorce battle began. The company describes itself as a luxury bathrobe and towel supplier to some of the finest hotels and spas in the country, and saw the couple’s wealth grow to assets of around £10million.
However, their solicitors fees have so far amounted to a staggering £1.5million. With an agreement far from being reached at this point, the High Court Judge implored the couple to try and reach a settlement to avoid any more “crazy” fees.
According to reports, Mr Justice Holman said that if the pair were fighting over £100 million, spending £1million on lawyers would be proportionate to their wealth, but they are far from being in that wealth bracket, and their current legal fees represent 15% of their assets so far.
He commented: “I have come across litigation that loses all sense of costs proportionality, but I have rarely come across it on this scale – this is crazy.” He added that while he could not stop the fight in court if litigation had become their hobby, if the “war” continues there may be no more money left.
He said: “’People can just litigate to the end and bankrupt themselves. Ultimately, if there is nothing left at the end, there is nothing left at the end, but it won’t be Maseratis, will it? It will be a beaten up old Ford if you’re lucky.”
How does this relate to me?
While it might not be millions hanging in the balance for many couples, in a country home to many thousands of entrepreneurs, the idea that a business owner could enter a bitter legal battle regarding the division of their company, is a very real reality.
This doesn’t just affect married couples either; in a divorce court, things are more straightforward as assets go through a process of analysis. For cohabiters however, waters are far murkier and we have seen many clients suffer because they were not aware of what claims their partner could make on their business
With this in mind, it’s important to understand what could happen to your business should you split from your partner, even if you weren’t legally married. On the other hand, if you’ve been working for a business that you and your partner ran together, but you weren’t legally the owner, it’s vital that you are aware of your rights.
Can I make a claim?
If you lived with your partner as a couple, but weren’t legally tied before your split, you don’t automatically have a right to any share of the business as an asset. However, you could be entitled to a claim for compensation if your ex-partner won’t honour certain commitments. The criteria for this are if:
- You’ve run a business together
- You were promised a share in it, or
- You’ve contributed to it financially
To prove any of these, in England or Wales, you first need to show you had a ‘beneficial interest’ in your ex-partner’s business. In Scotland legalities are slightly different; you must prove you’ve suffered an ‘economic disadvantage’, or your partner has obtained an ‘economic advantage’. You have one year from the date of your separation to submit your proof of these criteria.
It’s vital that you consult a legal professional at this point for several reasons; they will be able to advise you on the steps you must take, tell you what evidence constitutes as proof, help you to craft your case and so on. Most importantly, they will be able to give you an indication of your success, as claim proceedings can be very costly both financially and emotionally, so it’s worth knowing where you stand before you make any mistakes.
One of the costliest parts of this process is instructing a business valuation, which can only be done by the owner of the business. The valuation depends on several factors including the structure of the business (is it a limited company or sole trader?), its assets (anything owned by the company directly, such as property), and its earnings.
The structure of a business can have a huge impact on the valuation. For example, a sole trader business means the owner controls everything and the process can be straightforward. However, in a partnership, other people are usually involved which makes valuation difficult. With a limited company, the process is only simple if you or your ex-partner own all business shares.
What if we disagree?
The valuation and claim process will always be difficult, but some parties can be more uncooperative that others. In fact, couples who are separating may not even agree on how much the company in question is worth. In a bid to rescue their business, owners may deliberately undervalue their business, but the other side to this is that the person making a claim may overvalue it. Therefore, although expensive, getting experts to evaluate the true value of a company is the only way to get a fair result.
You could even decide to use a mediator instead and avoid the courts altogether; this is where an independent third party helps you and your partner to reach an agreement. They can still give you legal advice, but you will always be able to discuss these sessions with your solicitor before decisions are made.
Whatever you decide to do, it’s important that you seek professional legal guidance. Whether you’ve just started divorce proceedings and are concerned about the future of your assets, or you’re interested in hearing your position as a cohabiting couple, don’t hesitate to get in touch. You can call us on 020 7381 8111, or email us at email@example.com.
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