I am often involved in cases in which the business is the largest asset in the case. Yet what if there is insufficient liquidity in the case generally – and within the business itself – to be able to effect an immediate clean break on divorce?
The Covid-19 crisis has only accentuated the challenges.
Where a Financial Order might have assessed the value of the family business, say at £1m in January this year, what’s to be done if the business is now worth a fraction of that valuation in July – through no fault of the owners, but as a consequence of the Government’s lockdown?
According to the Office of National Statistics there’s an average of just under 9,000 companies a month going into administration or liquidation having to file for bankruptcy. (It makes for rather grim reading, but the figures for June were better than May…).
This is a complex area of Family Law, and particularly now that we are in very uncertain economic times.
A Financial Order is usually ‘cast in stone’ in terms of the division of capital assets between parties on divorce. What can be varied is any Order for Maintenance. This is capable of being varied up or down, depending on the change in circumstances between the date of the original Order and the date of the application for variation.
It is much more difficult to change any capital Order, and it is very unusual for a Court to grant any such application.
Even where there is sufficient liquidity, the spouse owning the business might feel that a clean break solution involving a payment from him to her (or her to him) of an equal lump sum in return for him/her keeping the business would not be a fair sharing of the risk. These kinds of cases require a bespoke solution carefully crafted depending on the facts of the case.
Some of the important questions that we have to deal with are the following:
- Should there be an order for payment of a lump sum over time to affect a delayed clean break?
- If there is to be a lump sum payment should a discount be applied to the value of the business to reflect possible future risk?
- If a lump sum payment is to be made over time, should it be variable? Should the person who has to pay it provide some form of security?
- Should there be interest payable and if so at what rate?
- Should there be a transfer of shares in the business from one spouse to the other?
- Would a suitable alternative be a lump sum order in the event of the future sale of the business?
Each of these possible solutions carries possible advantages and disadvantages.
Matters such as these can involve some complex issues but solicitors need to try and find a practical solution.
Financial Orders are of interest in their own right. We’ll revisit this topic in more detail in the coming weeks.
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The above is accurate as at 16 July 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.