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:
- deemed to be the subject of a 'nuptial settlement';
- taken into account as a 'financial resource' of one of the spouses; and/or
- held beneficially on 'resulting trust' for one of the spouses (as in Prest v Petrodel).
The first of these routes can be potentially the most intrusive for those interested in the corporate structure.
- 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, 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.
- 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.
- 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.