The first working Monday of the year – which falls today – is one of the crunch times for divorce for business owners, a Cambridge family law expert has revealed.

Red Hot Monday, as it is known, traditionally sees the dam burst following festering festive stress for company bosses, according to Jackie Wells, a partner and head of the family law team at Taylor Vinters.

Owners may not only be looking at the dissolution of their marriage but also the division of their business assets, she warns.

Writing exclusively for Business Weekly, Wells says: “Michelle Mone, co-owner of MJM International Ltd (including the Ultimo lingerie brand) is just one of the many business owners announcing a marriage breakup following the Christmas and New Year’s break.

“‘Red Hot Monday’ is a busy time for law firms, when prospective new clients call in with plans and queries about how to instigate a breakup. This can be a complicated process, particularly for business owners such as Mone, who founded her company in 1996 with her husband of 19 years, and is one of the UK’s most successful businesswomen.

“Recent statistics show that the divorce rate rose by 5.7 per cent in 2010, having fallen during the recession in 2008 and 2009. Rather than mending broken relationships, have couples simply deferred separation? What themes have emerged for business owners facing divorce in the current climate?

“There are competing theories about the effect of an economic downturn on relationship breakdown. One is that at times of economic uncertainty, which can include negative equity, job security and the inability to fund two homes, couples are reluctant to introduce further instability into their lives. They might try to batten down the hatches and weather the relationship until economic storm clouds have passed.

“On the other hand, the financial pressures of recessionary times can actually pressure some to strategically end a relationship at the lower ebb of their finances in order to secure a more favourable settlement.

“Divorce courts retain wide powers to redistribute assets between couples in order to achieve a fair outcome. When quantifying what is in the ‘marital pot’, the value of any business asset is likely to be taken into account, in most cases.

“How business assets are treated depends upon provenance. Where a business has been built up during the course of a marriage, the law will not discriminate between the contribution of one spouse as entrepreneur/breadwinner and the other as homemaker.

“Once the financial ‘needs’ of both parties and any dependant children have been met, any surplus wealth – including that tied up in a family business – will be subject to the ‘sharing’ principle. In the case of a longer marriage, this is likely to point towards an approximately equal division of the overall assets.

“Divorce courts can depart from the ‘sharing’ principle, however, when the business was well-established prior to the marriage – or has been passed through the generations.

“Assessing the value of a private company in the current climate is especially challenging when conditions are variable and prospects differ across various sectors. The courts usually appoint a single joint expert (usually a forensic accountant) to produce a neutral valuation report. Increasingly, such reports are acknowledging the short-term basis of the expert’s analysis, resulting in parties seeking second opinions from shadow advisers. This all adds to the cost.

“In a downturn, the extent to which it is appropriate to use the family business to fund a divorce settlement is more finely balanced. The ability to get money out of a company is more of an issue when cash reserves are low, loan to value on borrowing is an issue and the feasibility of generating dividend income is impaired.

“In the current climate, it may be even more unfair for one party to retain the business asset (and the latent risk associated with it), leaving the other with more copper-bottomed assets or cash and that may point to both parties retaining an interest – even where that is not ideal from a management point of view.

“What can business owners do to limit the fallout from marriage breakdown?Sometimes, where parties cannot agree on valuation or asset allocation, court intervention is the only option. Litigation, however, is a time-consuming, expensive and stressful process that can be detrimental to the running of the business. Fortunately, there are alternatives to litigation that lend themselves particularly well to cases involving business assets.

“Mediation: A mediator’s role is to facilitate discussion between couples, assisting them in reaching agreement on integral issues. A mediator must remain neutral and cannot give advice; and agreements are not binding until each party has been independently advised by a lawyer. Mediation can work well for business owners, especially those who already have an idea about how they would like to resolve their financial issues, but who need fine tuning and reality testing on the ideal outcome.

“Collaborative family law is another alternative. Under the collaborative model, the majority of the negotiations are conducted in a series of ‘four-way’ meetings between parties, all with their respective lawyers present. This model lends itself well to cases involving businesses or financial complexities because the parties have their lawyers on hand throughout the discussions (as opposed to meeting separately under the mediation model). The collaborative model is more cost effective in that it cuts down on the need to ask questions and seek clarification outside the process.

“Neither mediation nor collaborative law is a soft option in terms of the duty to give a full and frank financial disclosure. Under both models, it is usual to involve a ‘neutral’ financial expert who will look at valuation and tax issues. In the four-way meetings, however, they can assist in brainstorming and recommend options that would have the least impact on businesses.

“Do pre-nups make a difference? A pre-marital contract, or ‘pre-nup’, is an agreement entered into prior to marriage when couples wish to pre-determine financial outcome should they divorce. Pre-nups can be used to exclude certain assets, which could be shares in a business, from the marital pot.

“In England and Wales, pre-nups are not currently enforceable as of right. The court, however, must take into account the existence of a pre-nup; the weight to be attached to it will vary from case to case and the onus will be on the spouse trying to walk away from the terms of the agreement to persuade the court that it would be unfair to hold them to it at the point of the divorce.

“Currently, the status to be accorded marital contracts is under review by the Law Commission. Where there is pre-acquired wealth – whether in the form of business interests or otherwise – the existence of a pre-nup properly entered into is likely to be highly influential; business owners contemplating marriage should consider one.

“Other things to bear in mind: When looking at how business assets should be treated in a divorce, the court will look at how they were treated during the marriage. A spouse, for example, who holds shares in his or her own right or who is a company officer or business partner – irrespective of whether they have an active day-to-day role – is indisputably in a stronger position.

“While it might make sense from a tax point of view to gift shares to a spouse so that he or she can enjoy the dividend income, or indeed a salary at a lower marginal tax rate, thought should be given to the ramifications. In fact, it can be very helpful to negotiate, in calmer times, shareholders and partnership agreements setting out what would happen in the event of a divorce.

“To be sure, divorce is stressful for business owners at any time, and especially in an economic downturn. In an increasing number of cases, the only fair solution is to allow both parties to retain an interest in the business, enabling a more equal spread of the risk.

“In such circumstances, it is imperative that a spouse who does not have any active control over the business is adequately protected by the appropriate documentation, ensuring that his or her shares are treated on the same basis as those as the other key players.

“Whether opting for mediation, collaboration or assisted solely by solicitors, it is essential that business owners are well informed about protecting and distributing their business assets during the difficult times of a separation.”

• Jackie Wells is a partner and head of the family law team at Taylor Vinters, specialising in financially complex divorce cases. She is a mediator and collaboratively trained lawyer practising in both Cambridge and London and can be contacted via email at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone on +44 (0)1223 225293 or +44 (0)20 7382 8000.