Are Your Business Assets Relationship Property?

Posted on April 28, 2015 in Commercial , Relationship Property (Tags: Family Law, Relationship Property) Relationship-property-scales.jpg

Johann Wolfgang von Goethe said “If I love you, what business is it of yours?” This may sum up how some business owners feel about the division between their business and their personal lives. However, life is never completely black and white. Businesses and relationships can change and if you are in business, it is important that you let your business advisors, particularly your lawyer, know what is happening in your personal life and relationships. This is because of the implications of the Property (Relationships) Act 1976 (“the PRA”).

If you are in a marriage, a civil union or a de facto relationship then the PRA applies to you. If your marriage, civil union or de facto relationship ends after three years (either by separation or death), the PRA requires an equal division of relationship property between you and your partner.

You may think that all of your business assets are your separate property and that your spouse or partner would have no claim to them if you separate. However, this is not necessarily the case.

A very recent (March 2015) judgment from New Zealand’s highest Court, the Supreme Court, highlights the fact that relationship property, trust assets and business assets can easily become intermingled and may be treated by the Courts as inseparable.

The case is that of Mr and Mrs Thompson, who were married for 31 years and had 5 children. During the course of the marriage they established a very lucrative health foods and dietary supplements business. Mr Thomspon worked in the business, presumably while Mrs Thompson raised the family. Mr and Mrs Thompson separated in 2002 and before the division of their relationship property was completed, the business was sold in 2006 for $72.3 million plus a payment to Mr Thompson of $8 million in consideration for him personally agreeing to a two year restraint of trade.

The Supreme Court has declared that the post separation payment of $8 million to Mr Thompson for the restraint of trade is relationship property. (The sale proceeds of the business had already been treated as relationship property).

The restraint of trade was personal to Mr Thompson in recognition of his industry knowledge and expertise. However, the Supreme Court held that the $8 million payment was to protect the goodwill of the business. The shares in the business, although held by a trust, were effectively treated as relationship property and therefore the payment for the restraint of trade was also declared to be relationship property.

This case is a good reminder that business assets can be treated as relationship property.

If you are considering starting up in business or if you are already in business and you have concerns about the implications of the PRA and whether your separate property is protected, you need to speak to your lawyer. The PRA does provide for partners and spouses to “contract out” of its provisions, although there are very strict rules about how this can be done. Colloquially this is known as signing a “pre-nuptial” agreement.

It appears that Mr and Mrs Thompson had not signed a contracting out agreement. It has taken over 12 years since they separated, and a lot of litigation, for the division of their relationship property to be finalised. Getting good legal advice early on in your relationship and in your business life, may help prevent something similar happening to you.

Stephanie Pettigrew