As widely reported, Michael Prest, the founder of an oil company was ordered by the Supreme Court to hand ownership of luxury properties to his wife as part of a £17.5 divorce settlement. A web of offshore holding companies and subsidiaries had been set up to disguise ownership of the assets.
The court’s decision gave the red card to disclosure “cheats” – signalling the end of deliberately hiding business assets in a divorce settlement.
So what are the ramifications of this judgement for owners of SME businesses whose marriages fall apart?
Financial disclosures in a divorce settlement may send a shiver down the spine of business owners; however they are designed to ensure that both parties in a divorce receive fair settlements. Here are my critical dos and don’ts on disclosing your financial and business assets.
- Do be open and transparent. It is a myth that this ruling gives carte blanche to aggrieved ex-spouses to grab business assets. No one, including the Courts wants to see businesses brought to their knees. That won’t change if your business is well run and accountable. However, if a lawyer spots anomalies, such as large amounts of money being taken out of a business or being used to cover expenses, then a judge could rule that there has been a deliberate attempt to conceal company assets. In such cases the judge may decide to be less sympathetic to the business owner and to look more closely at the business assets in a financial settlement.
- Don’t set up a new company as a means of protecting assets. If you set up a new business shortly before separating a judge will, understandably, be suspicious. No matter that there may be legitimate tax reasons for doing so, a wary judge or lawyer could see such an action as a deliberate attempt to hide property and other personal assets within a corporate structure.
- Do make a full and frank disclosure of your financial assets. You will be asked to complete what is known as a ‘Form E’ and provide evidence of your assets and finances in the UK and abroad including bank statements, business accounts, tax returns, mortgage statements, valuations of any assets, such as pensions, property together with evidence of any financial liabilities. Lawyers collate this documentation and exchange it with your ex’s lawyer as part of the divorce negotiations.
- If you refuse to submit documentation, or if vital paperwork appears to be missing, then a lawyer may believe that you have not made a ‘full and frank disclosure’ and can apply to the courts for a judge to deal with the financial matters. You could be fined or even imprisoned – almost certainly you will face additional costs, particularly if lawyers have to pay for specialist help to track down your missing finances.
- Don’t set up a secret bank account. However tempting it may be to syphon off assets into an undisclosed bank account, including an off-shore one, you will be found out. Divorce lawyers know every trick in the book and will ask questions if money seems to be missing. They may employ forensic accountants to track down your missing money and family courts have the power to question your accountant, financial advisor and bank manager about your finances.
- Do aim to be collaborative. Financial settlements are a critical, yet often challenging part of divorce and a collaborative approach, favoured by my own firm, can help to resolve matters in a less confrontational manner than going to court. In collaboration the couple and their lawyers will work closely as a team to help reach an amicable agreement.
- Remember an open and fair settlement will be a lasting solution. If, in the future, your ex discovers that everything had not been disclosed he or she can ask the court to look again at any settlement and overturn it if necessary. The result is emotional upheaval and costs.
No SME business owner going through a divorce should have reason to fear this landmark ruling as long as he or she plays fair and avoids the temptation to conceal business and personal assets.