What happens with the family business following a separation?
When a party to either a marriage or de-facto relationship has control over a family business, the breakdown of the relationship will often lead to the operation of the business coming under close scrutiny as part of a subsequent property dispute.
It is common for parties and their lawyers to turn to the company's accountant for specific details surrounding the company's financials. This article looks to explore the role of the accountant within this specific context, and takes a look at how accountants can assist their clients to stay afloat during the storm.
Reporting and disclosure obligations: What is required?
Under the Family Law Rules 2004, parties involved in a financial case have a duty to make full and frank disclosure of their financial circumstances. If a party does not comply with their obligations, the other party can seek for an order to be made by the court compelling the other party to provide the documents. Additionally, subpoenas may be issued upon the company's accountant, bookkeeper or even the company's banks.
Alternatively, if both parties to the relationship are directors of the family business, they have the individual power to request relevant company documents from the company's accountant.
It is not uncommon for one party in a relationship (usually the higher income earner) to either draw a salary from the family business or to receive distributions from a family trust fund, whilst the other party takes on a role as the homemaker and carer of the parties' children. In these types of family structures, there are various factors for the Family Court to consider when determining whether the higher earning party should provide ongoing financial support to their former partner (i.e. "spousal maintenance").
For example, the Family Court will consider the age, health, income, property and financial resources of the parties, whether they care for the children and how the duration of the relationship may have affected the earning capacity of a party.
There are a range of spousal maintenance orders that can be made, including:
- An order for a party to be paid weekly periodic spousal maintenance;
- An order for a party to be paid a weekly amount from the family business or trust;
- If a party has a claim for unpaid distributions from a trust, an order which is binding on the trustee (once joined to the proceedings) can be made to ensure the distributions are paid to the party
- An order for the sale of assets, including property owned by the family business or trust to provide the party with funds; or
- An order for one party to service the mortgage and outgoings of the family home from drawings made by them through the family business or trust.
Business v personal expenditure: Keeping things separated could be the key to survival
Another common occurrence in family law matters is where parties use company accounts for both personal and company related expenses. If one of the parties continues to use the company accounts for their own personal expenses, the other party may seek orders to put a stop to this behaviour.
Similarly (and in line with this), injunctions may be sought in order to restrain the party running the business from doing certain things. For example, a party can seek an order to restrain the other party from disposing of and dealing with the funds held in the company accounts (unless it is in the ordinary course of business).
The Family Court also has the power to join the company (or if there is a trust, to join the trustee) to the proceedings and to impose restraints on them.
How can complications be avoided?
Coleman Greig encourages accountants to advise their clients on the avoidance of intermixing company funds with personal expenditure, as in order to avoid any unnecessary complications, parties should only use funds in company accounts for genuine business expenses. There is an expectation in these matters that directors and office holders know the difference between personal and company funds. Ignorance is not an excuse.
As readers will now be aware, when a separation does occur, the way that the family business has been run (both during the marriage and post-separation) is likely to come under scrutiny. With this in mind, it is important for accountants to ensure that their clients are not misusing company funds, and if they are, clear advice should be given with regard to the implications of such misuse.
In most cases, lawyers are not accountants (and vice versa), which is why we turn to accountants for advice when we need to dissect and understand the financials of a family business. It is important that clients understand the impact of their obligations, not just from a family law perspective, but also as the director or office holder of the family business.
If you have any queries relating to any of the information in this article, or you would like to speak with one of our Accredited Family Law Specialists with regard to your own family law matter, please do not hesitate to get in contact with Coleman Greig's Family Law Team.