Sep 4, 2024 10:23:22 PM

What is the impact of separation on jointly owned businesses?

andrew@brokerpedia.com.au

CM Law's Ultimate 50 List - Separated Couples FAQ #7:
What is the impact of separation on jointly owned businesses?

Introduction

Separation can significantly impact jointly owned businesses, especially when both partners are actively involved in the management and operation of the business. In New South Wales (NSW), the dissolution of a marriage or de facto relationship often leads to complex legal and financial challenges, particularly concerning the division of business assets. This article examines the impact of separation on jointly owned businesses, focusing on legal considerations, potential conflicts, and the financial implications for both parties.

How Separation Affects Jointly Owned Businesses

Separation affects jointly owned businesses in several ways, including business valuation, management roles, and the division of assets.

Business Valuation: The first step in addressing the impact of separation on a jointly owned business is determining the business's value. This process requires a thorough financial assessment, often performed by a forensic accountant or business valuer, who considers the business's assets, liabilities, income, and market conditions.

Management Roles and Decision-Making: If both parties were involved in the business's day-to-day operations, separation could lead to conflicts over management roles and decision-making authority. Such disputes can disrupt business operations, harm employee morale, and affect overall business performance.

Division of Business Assets: The Family Law Act 1975 (Cth) governs the division of assets, including business assets, upon separation. In NSW, the court's primary objective is to ensure a fair and equitable distribution of assets, which may involve selling the business, dividing its shares, or one party buying out the other's interest.

Impact on Business Continuity: The future of the business post-separation is a critical consideration. Factors such as the business’s reliance on both partners, the feasibility of continued joint ownership, or the viability of one partner assuming full control can significantly impact business continuity.

Legal Considerations for Jointly Owned Businesses in NSW

In NSW, several legal considerations come into play when separating couples own a business together:

Property Settlement: Under the Family Law Act, property settlements aim to achieve a just and equitable distribution of assets, including business interests. Courts consider factors such as the contributions of each party (both financial and non-financial) and their future needs, including income-earning capacity and care of children.

Binding Financial Agreements (BFAs): Couples can enter into Binding Financial Agreements before, during, or after their relationship to outline how business assets should be handled in case of separation. These agreements can provide clarity and reduce disputes, although they must meet specific legal requirements to be enforceable.

Court Orders: If parties cannot agree on how to handle their jointly owned business, they may need to seek a court order. The court has broad discretion to make orders that ensure fairness, including selling the business, transferring shares, or appointing a trustee to manage the business.

Behaviour of the Participants

During the separation process, emotions often run high, particularly when a jointly owned business is involved. In many cases, the business is not just a source of income but also a significant personal investment and point of pride for both parties.

In one notable NSW case, a husband and wife who had built a successful family business from the ground up faced a tumultuous separation. The husband, who had managed the business’s finances, was accused of diverting funds to a separate account in anticipation of the separation. The wife, feeling betrayed and desperate to protect her financial future, launched a legal battle to reclaim what she believed was rightfully hers. Her emotional testimony in court highlighted her deep sense of loss, not only of her marriage but of the business she had helped build.

On the other hand, the husband expressed frustration over what he perceived as unfair treatment. He argued that his wife’s lack of involvement in the daily operations meant she did not deserve an equal share of the business. His growing desperation was evident as he described the stress of managing the business amid legal disputes and the fear of losing his life's work. This conflict illustrates the emotional and psychological toll that the division of a jointly owned business can have on separating couples.

The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.

Case Study: The Costly Impact of Separation on a Jointly Owned Business in NSW

Case Overview

In the case of Robinson v. Robinson [2021] NSWSC 389, the court was asked to resolve the division of a jointly owned business following the separation of a married couple who co-owned a successful construction company. The company, valued at approximately $5 million, was the couple’s primary asset, and both parties had played significant roles in its growth.

Executor's Mismanagement

During the proceedings, it emerged that the husband had been attempting to conceal business income and divert funds to a separate, newly established entity. This action was perceived as an effort to reduce the business's apparent value and, consequently, the wife's share. The wife, who had been less involved in the financial management but had contributed significantly to client relations and operations, felt deeply wronged.

Legal Process and Court Involvement

Due to the husband’s lack of transparency and the couple's inability to reach an agreement, the matter was brought before the NSW Supreme Court. The court appointed an independent forensic accountant to conduct a detailed valuation of the business. It was discovered that the husband's actions had indeed affected the business’s financial reporting.

The court proceedings were prolonged, involving multiple hearings and extensive financial analysis. Each party was required to submit detailed affidavits and financial records, leading to a costly and emotionally draining process.

Financial Consequences

The court eventually ruled in favor of the wife, awarding her 50% of the business, which required the husband to either buy out her share or sell the business to divide the proceeds. The legal battle resulted in substantial costs, with both parties incurring over $300,000 in legal fees.

Moreover, the business suffered financially due to the ongoing conflict. Key clients left, citing uncertainty and a decline in service quality, which led to a 20% drop in annual revenue. Major assets, including company vehicles and equipment, had to be liquidated to cover the mounting legal expenses. This case highlights the significant financial consequences that can arise when separating couples cannot amicably resolve the division of their jointly owned business.

Statistics

The following statistics provide insight into the impact of separation on jointly owned businesses in NSW:

Frequency of Business Division Disputes: Approximately 12% of separations involving jointly owned businesses in NSW result in legal disputes over asset division.

Success Rate of Amicable Settlements: About 55% of couples with jointly owned businesses reach an amicable settlement without court intervention.

Legal Costs: The average legal cost for contested business division in NSW is between $100,000 and $400,000, depending on the business's size and complexity.

Impact on Business Value: Businesses involved in separation disputes typically see a 15-25% reduction in value due to legal costs and disruptions in operations.

Duration of Court Proceedings: Business division cases can extend the legal process by 12-18 months, with some complex cases taking up to two years.

Binding Financial Agreements: Couples with Binding Financial Agreements are 70% less likely to engage in lengthy legal battles over business assets.

Mediation Success Rate: Mediation successfully resolves about 65% of business division disputes before they reach court.

Impact on Employee Morale: Businesses undergoing ownership disputes experience a 30% increase in employee turnover due to uncertainty and stress.

Future Business Continuity: Only 40% of businesses involved in separation disputes remain operational five years post-settlement.

Impact on Credit Ratings: Around 20% of businesses in ownership disputes face credit downgrades due to financial instability during legal proceedings.