There are no hard and fast rules about how business assets are divided in a divorce. In many cases, one person will retain all of the business assets because it has been primarily their business. But it probably won’t be straightforward. Often the other party has an interest in business as a shareholder or partner or as trustee and\or beneficiary of a trust. In those cases, they will probably need to relinquish their interest for the other party to retain the business.
In a minority of cases, it will be necessary for assets in the business to be divided. This will generally only occur where it is feasible to separate the assets. For example, a business may consist of parts which can be divided such as a business that has a number of stores or locations.
Any division of the business assets is going to have a major impact on the business. Not only will it distract the business owner’s attention from operating the business, but it is also likely to have major effects on the cash flow and profitability of the business. It is also likely to incur significant liabilities including tax liabilities.
Binding financial agreements
It’s possible to enter an agreement with your spouse or partner about how assets are to be divided up in the event of a separation. These are known as Binding Financial Agreements (BFAs). Those agreements can be entered into before or during the relationship. They apply to married and facto couples. It may be possible to agree in advance about who gets to keep which business assets. Doing that may avoid the business being sold if there is a separation. It also gives both parties some certainty about who gets to keep what following separation. That may lead to a more harmonious separation which has less impact upon the business should separation occur.
For a BFA to be binding both parties are required to obtain independent legal advice before signing. There is quite a bit of skill involved in drafting a BFA and they usually don’t come cheap. If they are not fair or have not been properly prepared or advised upon, they can be set aside by a court.
What if the business assets can’t be divided?
If it is not feasible for business assets to be divided there can be negotiations about which person is to retain the business and how that would work. It usually involves one person retain the business and the other receiving other assets or superannuation so they get their fair share. Other times the person retaining the business will need to borrow a significant amount of money to pay to their former partner.
But there are cases where the value of the business is so significant that it is not feasible for one person to retain the business and borrow enough money to pay the other. In those cases, there may be no alternative than for the sale of all or part of the business. However, this is rare. To do that might deprive one or both parties of their livelihood and mean they have to set up a new business or find another job. For this reason, it is generally avoided.
Another alternative is for one or a number of major assets of the business to be sold, such as a property. Doing that may generate enough liquid funds that the business does not need to be sold because cash and/or other assets can be transferred out of the business to party.
But what if there is no agreement?
If there is no agreement about how business assets are to be divided then it will be up to a judge or Arbitrator to make a decision. They will decide who gets to keep the business or if it has to be sold or if it can be divided. That generally only occurs after they have been extensive negotiations between the parties and the lawyers.
Court proceedings and/or Arbitration are expensive and time-consuming and stressful. For this reason, the vast majority of property settlement cases are resolved through negotiation.
What about business liabilities?
Liabilities are more difficult. Ordinarily, the person who retains the asset assumes any liability associated with that asset. But it is difficult if there are guarantees or there are joint debts and the creditor is not willing to release one of the parties from debt. These situations make it more difficult to resolve the matter through negotiation.
Under Part 8AA of the Family Law Act the court has the power to make an order which is binding on a creditor requiring them to release one party from a guarantee or liability. This power is seldom used. When it is the courts are careful to try to avoid making it more difficult for the creditor to recover the debt.
What if there is a bankruptcy?
It is not uncommon for one of the parties to go bankrupt (often through tax debts). The situation the trustee in bankruptcy becomes a party to any court proceedings. However, the superannuation of the bankrupt spouse does not become part of the estate in bankruptcy. What usually happens is that the trustee in bankruptcy enters into negotiations with the non-bankrupt spouse to attempt to divide up the net matrimonial assets (but not the superannuation) by agreement.
If there is no agreement it is up to the judge or Arbitrator to divide the net matrimonial assets between the trustee in bankruptcy and the non-bankrupt spouse and to divide the superannuation between the parties.
If it appears the relationship is doomed it is a good idea to consult with your accountant and engage an experienced specialist family lawyer at an early stage. That is likely to help to make the process of dividing up the business assets as painless, prompt and inexpensive as possible. It’s also likely to put you in a stronger negotiating position so you can be proactive rather than reactive.