Can Business Cash Reserves Be Included In The Divorce Settlement?

Cash held by a business is not treated in the same way as money sitting in a spouse’s personal savings account. This is particularly important where the business operates as a limited company. The company has its own legal identity and its money does not simply belong to the spouse who owns its shares.

That does not mean company cash can be ignored during a divorce. The value of the business, the income it can produce and the financial resources available to its owner can all be relevant to the eventual settlement.

The more difficult question is usually how much of the cash genuinely needs to remain in the business.

Why do businesses hold cash reserves?

There can be perfectly good commercial reasons for keeping substantial amounts of cash within a business.

A construction company, for example, may need to allow for delayed payments and retentions. A professional practice might want enough cash available to cover several months of salaries and other costs if fee income falls. Another company may be preparing to buy equipment, recruit staff or move premises.

Some businesses simply need more cash than others. Seasonal trading can make this particularly important, with money accumulated during profitable months needed to carry the business through quieter periods.

A healthy bank balance therefore does not necessarily mean that the company has surplus money available to its owner.

Can retained company cash be taken into account?

Under section 25 of the Matrimonial Causes Act 1973, the court considers the financial resources available to each spouse alongside the other circumstances of the case. A business interest can form an important part of that assessment.

Cash held within a company may affect its value. It can also be relevant when considering the income the business is capable of producing. If a company is holding substantially more cash than it needs, for example, there may be scope for some of that money eventually to be distributed to its shareholders.

The structure of the business matters. There is an obvious difference between money held by a sole trader and money in the bank account of a limited company. In the latter case, owning the company does not mean a spouse can simply take its cash.

Other shareholders may have an interest. Creditors need to be considered. A director also continues to owe duties to the company.

Partnerships bring their own issues, with the partnership agreement, capital accounts and the individual partner’s rights all potentially affecting what money is actually available.

What if only one spouse owns the company?

A spouse does not acquire a direct right to half of a company’s bank balance simply by being married to its owner.

Instead, attention is likely to be given to the shares themselves and the value and income associated with them. A business established or developed during a marriage may represent a significant matrimonial asset. A business that existed before the marriage can raise different questions, although its value and the income it provides may still matter, particularly where the family’s needs have to be met.

Things can become more complicated when both spouses own shares.

Their respective shareholdings do not always tell the whole story. Different classes of shares can carry different voting or dividend rights, and a shareholders’ agreement may restrict what either person can do. One spouse may have run the company for years while the other held shares primarily for tax or family-planning reasons.

Third-party shareholders are another important consideration. If somebody else owns part of the business, the company’s cash cannot simply be treated as though it belongs to the divorcing couple.

How much cash does the business actually need?

This is often where the real disagreement arises. Suppose a company has £500,000 in its bank account. One spouse may see £500,000 that could contribute towards the settlement. The business owner may see the next six months’ payroll, a corporation tax payment and money already earmarked for new equipment.

Neither the headline bank balance nor the owner’s explanation necessarily answers the question. The figures need to be looked at in context.

Accounts and bank statements are an obvious starting point, but cash-flow forecasts and evidence of forthcoming liabilities can be just as important. The company’s previous behaviour may also reveal a great deal.

Consider a business that has historically paid most of its profits to its owner as dividends. If it suddenly starts accumulating much larger cash reserves around the time of the separation, there is likely to be a question about why its approach changed.

The reverse can also be true. If the company has consistently kept enough money to cover several months of operating costs, the current reserve may simply reflect normal business practice.

Planned expenditure needs similar scrutiny. A genuine commitment to buy machinery next year is different from a general ambition to expand at some point in the future. Contracts, budgets and previous spending patterns can help establish the difference.

Keeping a sensible contingency fund is not the same as trying to shield money from a spouse. The difficulty is deciding where one ends and the other begins. There is no cash figure or number of months’ expenditure that will be appropriate for every business.

Taking cash out of the company may have consequences

Even when a company appears to have surplus cash, getting that money into the hands of its shareholder is a separate issue.

There may be tax to pay. A dividend must be supported by sufficient distributable profits and properly declared. Taking money as salary or a bonus has different tax consequences. Using a director’s loan account raises another set of considerations.

It may therefore be necessary to establish what could actually be extracted from the company, after tax, without damaging the business.

A £300,000 cash balance does not necessarily mean that £300,000 is available to fund a divorce settlement.

There may also be commercial restrictions. Removing a large amount of money could leave the company struggling to meet its commitments, affect borrowing arrangements or reduce its ability to withstand a downturn.

That can be counterproductive for both spouses. If too much money is extracted, the family may receive cash now at the expense of reducing the value and future earning capacity of one of its most important assets.

Can one spouse keep the business?

This is often the most practical outcome. Rather than trying to divide a private company or extract large amounts of its cash, the business-owning spouse may retain the shares while the other spouse receives more of the couple’s other assets. These could include property, investments or pensions.

This is generally referred to as offsetting. It can allow the business to continue operating and, importantly, avoid leaving former spouses tied together as shareholders after their divorce.

There will not always be enough other property to achieve that neatly. A lump sum might instead be paid over time, allowing funds to be generated without requiring a large immediate withdrawal from the company.

Transferring shares is another possibility, but it can create practical difficulties if it leaves former spouses financially connected through a privately owned business. A sale of some or all of the business may occasionally need to be considered, although forcing a viable business to be sold is not automatically the answer.

Ultimately, the existence of substantial cash reserves is only part of the picture. The important questions are why the money is there, how much the business genuinely needs and what financial benefit the company can realistically provide to its owner without undermining the business itself.