Harriet Martin
Posted on 30 Apr 2019

Claims against the family company on divorce

The English Family Court has the power to order that UK residential property and other assets owned by a family company should be taken into account when making a financial settlement on divorce.

There are three main ways in which the Court is able to do so. The assets may be:

  1. deemed to be the subject of a 'nuptial settlement';
  2. taken into account as a 'financial resource' of one of the spouses; and/or
  3. held beneficially on 'resulting trust' for one of the spouses (as in Prest v Petrodel[1]).

The first of these routes can be potentially the most intrusive for those interested in the corporate structure.

  1. Companies as nuptial settlements

Commonly, the term 'nuptial settlement' is used to describe traditional trust arrangements only (see the 'protecting family wealth' article).

However, in DR v GR[2], Mostyn J specifically included in the definition of a 'nuptial settlement':

'a family company which… makes some form of continuing provision (which includes the provision of accommodation) for both or either of the parties to a marriage'.

The effect of this is that a family company which holds residential property occupied by a family member and his or her spouse as the matrimonial home may be treated as a nuptial settlement.  

Where the company is in turn owned by a trust of which the spouses are formal beneficiaries, this would make the argument for the existence of a nuptial settlement even stronger.

  1. Practical consequences

Important practical consequences of a company structure becoming caught up in matrimonial proceedings are set out below.

  • The company may be joined as a party to the matrimonial proceedings.
  • It may not be possible to identify which assets within the structure are at risk from the claim.
  • The applicant spouse may seek a freezing order or may enter notices on the register of underlying property.
  • The company's everyday business activities (for example its ability to borrow) may be affected adversely.
  • The company directors may:
    • decide to participate in proceedings (or be required to do so) in order to defend the company's assets; and
    • risk being in contempt of court if they do not comply with any order made against the company's assets.
  1. Steps to mitigate the risks

The following steps can be taken to reduce the risk of company assets being claimed on divorce.

  • Ensure that no 'provision' is made to the spouses directly from the company, for example the company might:
    • distribute any benefit in the form of dividends up from the company and via the trustees of the head trust; and
    • make sure that any remuneration that is paid to a spouse employed within the corporate group's business is of market value and fully recorded.
  • Prevent the status of one of the components of the corporate structure as a nuptial settlement from 'infecting' the entire structure by (for example):
    • making sure different individuals manage the head trust and the corporate group beneath;
    • accurately describing the corporate relationships in the companies' accounts;
    • ensuring that transactions between companies within the same group are on arm's length terms; and
    • considering whether a matrimonial home held by a family company should instead be held as part of its own separate trust arrangement.

The team at Michelmores regularly advises:

  • families how to protect assets against divorce;
  • family companies on how to manage a company to best protect company assets;
  • individuals who would like to obtain information from company directors in respect of company assets; and
  • spouses who would like to claim assets held within a structure as part of divorce proceedings.

For more information please contact Jonathan Riley or Harriet Martin.

 

[1] Prest v Petrodel Resources Ltd [2013] UKSC 34

[2] DR v GR (Financial Remedy: Variation of Overseas Trust) [2013] EWHC 1196