Protecting your business from a relationship breakdown
by Debbie Dunbar & Maretta Twentyman - Morrison Kent
Shares in a company owned pre-relationship will usually be classified as the owner’s separate property, and therefore not available for division in the event of a relationship breakdown. However, if relationship property (such as income earned during a relationship) is applied to a separate property asset, an interest in that asset can be created for the non-owning spouse/partner.
Take the example of a husband who owned and operated an IT company prior to the relationship with his wife. The shares in that company would ordinarily be his separate property as they were owned pre-relationship. If however, during the relationship, the business needed a cash injection and either partner’s incomes were used to invest in the business, any increase in the value of the company would become relationship property to be divided equally between the couple following separation.
Our law is clear – if relationship property is applied to a separate property asset, so long as that contribution is more than minimal, the whole of the increase in value will be relationship property (and therefore available for division).
Contributions made by a non-owning partner/spouse to a separate property asset can also create an interest. For example, even if cash had not been put into the business, but instead the wife assisted with the accounts and administration of the company, those direct contributions would also create an interest for her in any increase in value.
It should be noted that it is not only financial or direct contributions that can create an interest for a non-owning party in separate property assets – indirect contributions (such as domestic contributions) may also qualify.
The best way to protect a separate property asset from a relationship breakdown is to enter into a relationship property agreement (commonly referred to as a contracting out agreement or ‘pre-nup’). It is important that expert advice is obtained when entering into an agreement of this nature as such agreements can be set aside by our courts.
In order for a contracting out agreement to be binding it must be:
- In writing and signed by both parties;
- Each party must have their signature witnessed by their independent lawyer;
- The same lawyer that witnesses a party’s signature must provide that person with independent legal advice as to the effects and implications of the agreement and certify that they have done so.