The corporate implications of divorce
If you’re a business owner going through a divorce or separation, it pays to think about what kind of effect the split will have on your business.
Under the law, a company is an independent legal identity, with the same rights as a person. When courts make decisions regarding property settlements, who owns what in a company or business will also be considered.
In a recent case, a couple had divorced after a relationship of 11 years.
The husband had two previous marriages and eight children, and had started his business decades ago. He owned 50 per cent of the company, and a second company owned the other 50 per cent. The husband had 99 per cent of the shares in the second company.
The courts decided on a property settlement, but the wife decided to appeal that decision and the initial property settlement was set aside and a re-trial was ordered.
In between the two property settlement trials, the husband transferred all his shares in the second company to his children.
During the re-trial, the wife asked the court to consider whether the corporation was a “mere puppet” of the husband or a separate legal entity.
The husband contended that, as he had transferred all his shares, he was no longer in control of the company. But it was the wife’s position that, as the shareholders were his children, he was in fact still in control of the company and that the company was the “alter ego” of the husband.
In the end, she did not have enough documentation to support her claim and the appeal was dismissed, however the wife did end up receiving a larger property settlement than had initially been decided.
In property settlements, it’s common for people to argue that a corporate entity and a person should be considered as one and the same. And that means that the assets of the company should be considered as being available for the asset pool, as part of the property settlement.
An analysis of a company’s constitution and shareholders agreement is needed before using the argument that the company is a “mere puppet” of the person.
It is also necessary to consider the extent to which the Corporations Act may impact the rights and obligations of the shareholder, including whether there are rights and obligations conferred by the Act that supports a finding that the corporation is a “mere puppet” of the party.
This can be a complex area of law and it’s important that you get the right legal advice if you, or your spouse, control or own a company.
There are a number of ways to protect your business before marriage, but if separation has already happened and there are no agreements in place, the fate of your business is in the hands of the judicial system.
If you need help with separation, divorce, finalising a property settlement or any other aspect of family law, please contact Michael Lynch Family Lawyers on: (07) 3221 4300 or email: [email protected]