Business Assets and Divorce, can I protect my business from a divorce? It’s a question many business owners worry about when they are about to or have started going through a separation. However, for many years now it has been possible to protect business assets from a divorce (for married couples) by way of a Binding Financial Agreement (BFA). BFAs can now also be used to protect a business where there has been a breakdown of a de facto relationship.
What is a BFA?
A BFA is an agreement signed by a couple prior to, during a relationship or post separation. They are generally drafted by lawyers. For a financial agreement to be binding, the law requires that each party obtain independent legal advice, before signing the Agreement, regarding:
- The effect of the Agreement on the rights of the party;
- The advantages and disadvantages, at the time that the advice was provided, to the party of making the Agreement.
BFAs signed before a marriage are sometimes referred to as “pre-nuptial agreements”.
What can the BFA say?
A BFA can provide that in the event of a separation one party is to retain their business interests and the other has no entitlement to it. Provided these documents have been properly prepared and advised upon by a lawyer they are usually legally binding.
BFAs are often used by couples where one or both have business interests at the time they start the relationship which they want to protect. They are more commonly used when it is a second or subsequent relationship for both parties and especially where they have some significant wealth to protect and they are unlikely to have children together.
People wishing to enter in to a BFA are usually surprised by the cost and the amount of legal work involved in preparing and advising on a BFA. They can be very complex and require a great deal of skill.
But they haven’t been taken up as much as expected for a few reasons:
- If done properly they are expensive;
- Some people don’t want to bring it up in case it sours the relationship (and sometimes it does!);
- Sometimes one party to the relationship is advised by their lawyer not to sign;
- There are several grounds set out in the Family Law Act upon which a BFA can be set aside such as duress or unconscionability.
- It is usually so hard to predict what a business interest and a couples’ other property might be worth (or not worth) many years down the track and what may occur during the relationship. Therefore it is hard to know now what might be fair then;
- There have been cases where well prepared and advised upon BFAs have been set aside by a court;
- There have been other cases where BFAs have been set aside for minor technicalities or problems with interpretation.
Protecting the business
Generally if one party agrees for the other to retain their business interests they have to get something out of it to compensate. So for example, one person might end up with their business interests and the other with the majority of the other property such as the house and/or the super.
For a person bringing a business or business interest into a relationship a BFA is particularly important. Whilst nobody enters a relationship expecting a separation, in the event the relationship doesn’t work out there is a risk they could lose the business they have worked so hard to establish. This is especially so if the business expands and increases in value during the relationship. Even more so if it has been a long relationship.
If by the time it comes to divide up their property the business represents a large part of the property available for distribution and there is no agreement, the court or Arbitrator might have no alternative than to order for the business to be sold. Alternately it could order one person to retain the business but be required to pay the other an enormous amount of money which will be difficult to borrow.
Rather than specifying how all of the property of the parties is to be divided if there is a separation, a BFA can simply provide that one party is to retain the business. All of the other property can then be divided as agreed or if there is no agreement, as ordered by a court or awarded by an Arbitrator.
Can a BFA be set aside by a court?
There are several grounds upon which a BFA can be set aside by a court. While there is no specific requirement of fairness or reasonableness in the Act, the case law identifies that unless a financial agreement is fair and reasonable it will be vulnerable to challenge.
In essence, one-sided agreements may look good on paper, but are difficult to uphold in Court when challenged. Further, generally there is nothing to lose for an applicant in challenging such financial agreements.
There are some issues that are critical to minimising the risk that a BFA might be set aside, namely:
- Compliance with the legislation;
- Full and frank disclosure (including valuations and an appreciation of wider family interests);
- The Agreement being carefully drafted in consultation with both parties and their legal representatives;
- Fairness and equity in the provisions, including fixing a reasonable amount for any maintenance;
- Adequate preparation of the Agreement;
- Each party having independent legal representation assisting them in making an informed and voluntary decision; and
- Neither party engaging in any overbearing conduct placing unreasonable pressure, influence or demands on the other party.
Isn’t there a risk?
Signing a BFA before or early in the relationship does carry considerable risk. At that time nobody can predict how long the relationship will last, what will happen during the relationship or what property will be there at separation. By entering a BFA you run the risk you might have been entitled to more property after separation if you hadn’t signed. On the other hand there is the certainty of knowing what you will receive in the event of separation. That might avoid the cost, stress and delay of going through negotiation, litigation or Arbitration to divide it all up.
Business Assets and Divorce – Speak to a Professional For Advice
Dealing with business assets and divorce is a complex matter. If you want to try to protect your business it is important to get good professional advice before or at any early stage of the relationship. The earlier the better. Having a BFA can save a lot of heartbreak and bitterness for a business owner.