Business assets on divorce or dissolution: is a limited company protected from divorce or dissolution?

It is sometimes thought that a business, especially a limited company, will not be taken into account on divorce or civil partnership dissolution. This is not correct, and the starting point is that a business is considered an asset in divorce and civil partnership dissolution and must be disclosed within any negotiations or proceedings.

This includes companies which are registered in other countries and assets held by them or other companies which are abroad.

In most cases, the business will need to be valued and the value of the business owner’s share will be taken into account when calculating the overall division of the assets.

However, the way a business is structured dictates how it is owned. A limited company is a separate legal entity which means that any business assets are owned by the company and not by individual shareholders. How a limited company operates, and the size of individual shareholdings, will also influence how easy it is for a party to realise their share in the business’s value.

An examination of the business structure will clarify who legally owns business assets and liabilities, and what interest the shareholders have. It will then be necessary to look at the value of the business in terms of tangible and intangible assets.

How will a limited company be dealt with on divorce or dissolution?

The court has a range of options and wide discretion on how to deal with business assets. Learn about the key considerations for business owners.

The court can order:

1. An immediate or deferred order for sale of the business.
2. An order allocating a greater portion of the other assets to the non-business owner.
3. A lump sum payment from funds available in the business.
4. An order for periodical payments.
5. A transfer of some shares in the business between the parties.

Although the court has the power to order the transfer or sale of shares in a business, it does not have the power to order the transfer or sale of assets owned by the company, even where the company is under the sole control of one party. As set out above, a company is a separate legal entity - it is not a party to the proceedings and cannot, therefore, be ordered to transfer or sell assets.

However, it might be possible to argue that company arrangements constitute a nuptial settlement, capable of variation by the court. This is a settlement for the benefit of one or both of the parties or their children, created because of the marriage, or referring to the marriage, whether made before the marriage or after it.

There are also very rare circumstances where ‘piercing the corporate veil’ may be justified. This involves the court looking at the rights and duties of the company as being the rights and duties of its shareholders. The circumstances in which the court can do this were confirmed in the case of Prest v Petrodel [2013] UKSC 34. This allows the court to find that assets in a company are held on trust for one or both of the parties.

Prest v Petrodel

The husband was a successful oil trader whose business generated significant wealth. He traded mainly through three limited companies in which he was the sole shareholder and which were registered in the Isle of Man.

In proceedings for a financial remedy on divorce, the husband, and therefore the companies, failed to provide proper disclosure. The judge at first instance found that the husband was worth at least $60 million and awarded £17.5 million to the wife. He ordered that the award should be met, in part, by transferring to the wife properties held by the husband’s companies. The judge concluded that, as the husband was the sole owner and controller of the companies, he had complete control over their assets. He pierced the corporate veil to effect the transfer of assets between the parties.

After an appeal to the Court of Appeal by the husband and subsequent appeal by the wife, the Supreme Court unanimously found in the wife’s favour. Her appeal was allowed on the basis that, given the ‘’particular circumstances of the case’’, the companies were held on a bare legal trust for the husband. He had an entitlement to them, but without the requirement to pierce the corporate veil.

The husband had deliberately tried to conceal facts, and he and the companies had failed to comply with disclosure orders. Adverse inferences could be drawn against the husband to the effect that proper disclosure would reveal that the properties were beneficially owned by him.

The Supreme Court held that the doctrine of piercing the corporate veil exists only in a “small residual category of cases”; “there is a limited principle of English Law which applies when a person is under an existing legal obligation or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under this control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.”

The doctrine of piercing the corporate veil ultimately did not apply in this case because the husband had not evaded or frustrated any legal obligation to the wife, nor was he concealing or evading the law in relation to distributing the assets on divorce.

M v M 

Following Prest, in M v M and others [2013] EWCH 2534, the judge found that the husband had created a complex structure of offshore companies which held most of the family assets on resulting trust for himself.

The judge set out general guidance about how to approach financial remedy cases where a party has a limited company and the question that arises about whether the company holds assets on resulting trust for that party:

• whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue
• the court must search for evidence of the subjective intention of the party transferring assets to the company or evidence of actual intention
• in determining the intention of the parties the court may, where appropriate, draw adverse inferences against a party, either because of their failure to give or call evidence to rebut the presumption, or because of their failure to make proper disclosure in the proceedings
• only in the absence of evidence of intention will the law of presumption apply. A presumption can easily be rebutted by evidence of the transferor’s intention to make an outright transfer
• where the company in whose name the property in question is held is owned by the same individual who asserts that he has retained the beneficial interest because of a resulting trust, there is less room for such a resulting trust to be established by a presumption in the absence of intention, but:
  • the burden remains on the transferee to rebut the presumption; and
  • positive evidence of the source from which the purchase was funded establishes the ordinary inference that the provider of funds is the beneficial owner of the property in the absence of any evidence to rebut the presumption.
• in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.

Akhmedova and Akhmedov

Akhmedova v Akhmedov [2018] EWFC 23 (Fam) is a rare example of the court applying the principles in Prest and piercing the corporate veil, given the husband’s deliberate attempt to evade enforcement of a financial remedy order by concealing assets in a complex web of off-shore corporate entities.

Summary

Whether assets owned by a limited company can be used to satisfy financial claims arising from divorce or civil partnership dissolution is a complex question and will be fact specific.

However, non-business owners should be reassured that limited companies are taken into account, even if the limited company is registered in another country and/or owns assets in another country.

If there are business assets relating to a divorce or civil partnership dissolution it is important for parties to seek specialist legal advice as early as possible. If there are business assets located abroad, there may be additional aspects to consider including which country to issue proceedings in and whether to seek legal advice in those other jurisdictions.