A decree absolute is not the absolute end

Business Insights

Peter Morris, a partner in the family law team of Shoosmiths LLP, debunks some common myths and misconceptions surrounding divorce

When it comes to relationships or their breakdown, an alarmingly large number of people still cling to common, popularly held assumptions they believe to be true, but in fact are utterly false.

For example, most people assume that the grant of a Decree Absolute not only legally ends a marriage, but also draws a line under any financial obligations or commitments divorced couples have towards each other - of particular significance if the divorcing parties are involved in a family business.

That is a mistaken assumption. It may well come as news to many people that, although the Decree Absolute does legally end the marriage in England and Wales, it does not end the financial ties between the divorced parties.

Financial arrangements in divorce

This is of particular importance for family businesses. Historically, the courts sought to protect family firms from being heavily involved in a matrimonial settlement, ‘ring-fencing’ the business. However, the position changed following the case of White v White 2001, where on appeal to The Supreme Court, the wife was awarded 40% of the matrimonial assets (a family farm trading as a partnership) amounting to almost £1.69m which resulted in the business having to be sold. The courts have adopted a consistent approach of ‘fairness’ in dividing matrimonial assets – including family businesses - since then.

A claim could be made on your financial assets at any time

Family businesses can be protected in the event of divorce or separation by the use of pre and post-nuptial contracts, often prepared alongside shareholders or partnership agreements. This can ensure that valuable business assets continue to be enjoyed by future generations. However, unless there is a ‘clean break’ order in place, your ex-partner can make a claim on your financial assets at any point in the future, even if you acquired the money after your relationship legally ended.

There is no time limit in place, so a claim could be made at any time, often years after the divorce itself. Often this happens because an ex-spouse feels the divorce settlement was unfair at the time, and in hindsight they consider that an informal financial arrangement was not sufficiently generous. Perhaps the ex-husband or wife acquires a considerable amount of money after the divorce, frequently through an inheritance or a sale of a business, so the temptation to make a claim for a share of this new found wealth is great.

Clean Break Orders

The only way to provide certainty and protection against a financial claim being made against you in the future after a divorce is to obtain a Court Order in the form of a Clean Break Order. This can be made without a court hearing if an agreement is reached. Disclosure of basic financial information is required and a small court fee is payable. The court can make a Clean Break Order any time after the divorce has reached the Decree Nisi stage. There will be legal costs to pay to prepare the order but these costs are insignificant compared to the risk that significant financial losses could be suffered further down the line should a former spouse bring a claim.

Financial Remedy Orders

Without a Clean Break Order to rely on, a business owner may be faced with an application for Financial Remedy Orders issued by their former spouse linked to their earlier divorce. This can be a stressful, time consuming and expensive process. Both parties must provide full financial disclosure supported by valuation evidence and undergo detailed forensic analysis. The court has a wide discretion to impose a financial arrangement it considers to be fair based on the current value of assets, including any business interests and pensions.

Get the right expert advice

It is important that divorcing spouses, especially if a family business is involved, get help from experts in all the matters arising from a divorce. These issues may be too complex for the inexperienced as there are many traps for the unwary, so specialist solicitors will be required. Input from other professionals will also be required to deal with valuation and taxation implications to ensure the business is not at risk for the future, while at the same time achieving a settlement which is fair and reasonable.

For further information contact:

Peter Morris, partner, Shoosmiths Family Law Team

Email: peter.morris@shoosmiths.co.uk

Tel: 03700 86 7357