Private Limited Companies and Divorce: Essential Guidance for Business Owners

Divorce can be one of the most stressful events in a person’s life. When one or both spouses own a private limited company, the process can become significantly more complex. Business owners are often understandably concerned about how divorce may affect their company, their income, and their long-term financial security.

This article explains how the court treats private limited companies on divorce, what powers the court does and does not have, and what practical steps business owners can take to protect their interests.

How Does the Court Treat a Private Limited Company on Divorce?

When dealing with finances on divorce, the court’s role is to achieve a fair outcome by applying the principles set out in the Matrimonial Causes Act 1973.

Shares in a private limited company are considered an asset of the marriage and are therefore available for division on divorce, regardless of whether the shares are all owned by one spouse or by both.

What Powers Does the Court Have?

It is usually impractical and undesirable for both spouses to remain involved in the business.

The court has a range of options when dealing with shares in a private limited company.

The Court Can:

• Order the sale of shares
• Order the transfer of shares from one spouse to the other
• Offset the value of retained shares against other matrimonial assets, such as property or pensions

The Court Cannot:

• Order the sale of assets belonging to the company itself
• Order the transfer of assets owned by the company

Limits on the Court’s Powers: The Corporate Veil

The court can only “pierce the corporate veil” in very limited circumstances. This may occur where a person was under an existing legal obligation or restriction, and deliberately used a company under their control to evade that obligation.

In most divorce cases, the court will respect the company’s separate legal status and focus instead on the value of the shares and the income they generate.

Financial Disclosure and Business Information

Full and frank financial disclosure is a fundamental requirement in divorce proceedings. Where a spouse owns a private limited company, this usually includes:

• Full financial statements for the last two financial years
• A valuation of the shares, usually in the form of a letter from the company accountant

In most cases, a Single Joint Expert (SJE) is instructed to provide an independent valuation of the business. This helps ensure fairness and avoids the cost and conflict of competing valuations.

How Is a Private Limited Company Valued on Divorce?

There is no single method of valuation that applies in every case. The appropriate approach will depend on the nature of the business.

Common Valuation Methods Include:

Balance Sheet Valuation

This method looks at the company’s net assets and is most suitable for property or investment companies, however it should be cross-referenced against other valuation methods.

Discounted Cash Flow

This approach assesses future cash flow, discounted for risk using external data and the valuer’s professional judgment. It is often used for more complex or established businesses.

Earnings Multiples

This involves calculating weighted average earnings (EBITDA) and applying an appropriate multiple based on published information and the valuer’s judgment.

Does a Private Limited Company Always Need to Be Valued?

Not necessarily. If the company is simply a vehicle for the business owner’s income, for example a consultant working with one client, the court may focus primarily on income rather than capital value.

Each case will depend on its specific facts.

What If a Third Party Owns Shares in the Company?

Where shares are owned by a third party (such as a business partner or family member), it may be necessary to join that person to the court proceedings. This allows them to have a say in what happens to the shares.

This can significantly increase complexity and costs, as:

• The third party will usually need separate legal representation
• More parties mean more legal work

Early legal advice is essential in these situations.

Practical Considerations Following Separation

Divorce often raises immediate practical and commercial concerns for business owners, including:

• Is the spouse an employee of the company, and therefore have employee rights?
• Is the spouse likely to set-up a competing company?
• Does the spouse have access to business bank accounts or financial information?
• Dividends must be declared in line with shareholdings
• Managing director’s loan accounts, which can be a convenient way to extract funds but may carry tax and legal consequences if not repaid within nine months of the financial year end

Addressing these issues early can help avoid costly disputes later.

How Can Business Owners Protect Themselves?

Pre-Nuptial and Post-Nuptial Agreements

Pre- and post-nuptial agreements can play a crucial role in protecting business interests. While they are not automatically binding, the courts have made clear that:

“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications, unless in the circumstances prevailing it would not be fair to hold the parties to the agreement."

When properly drafted, these agreements can significantly reduce uncertainty and conflict.

Shareholders’ Agreements

A well-drafted shareholders’ agreement can also provide valuable protection, including:

• Restrictions on transferring shares without shareholder consent
• Buy-back provisions triggered by divorce
• Pre-emption rights allowing other shareholders to purchase shares before they are transferred externally

Get Expert Legal Advice Early

Divorce involving a private limited company requires careful handling to protect both personal and commercial interests. Early advice from an experienced family law solicitor can help you understand your options, manage risk, and plan strategically for the future.

If you are a business owner facing separation or divorce or considering steps to protect your company, we recommend seeking tailored legal advice as soon as possible.