When Family Law and Corporations Law Cross Paths

It is not uncommon for matrimonial property in this day and age to comprise of shareholdings in corporate structures and trust arrangements. Like all other property, these interests will need to be divided in the event the relationship breaks down irretrievably.

Below is a case study to demonstrate how Corporations Law and Family Law can often overlap.

Nancy* and Sam* are in their mid-40’s. They have been married for 25 years and have 2 adult children. Their marriage has broken down irretrievably and they have been separated for 10 months. Both parties are legally represented.

Their asset pool is made up of the following:

• Matrimonial property, encumbered with a mortgage.
• 2 investment properties encumbered with mortgages.
• A trading company where Sam* is the sole director and shareholder.
• Some joint savings and vehicles in their personal names.

Although Sam* is the sole director and shareholder of the company, Nancy* has worked in the company since its inception and has intimate knowledge regarding the company’s trade, she has also been instrumental in securing some of the company’s major contracts.

Both parties have made significant financial and non-financial contributions to the asset pool. There are no factors that need to be considered (care of young children, illness, earning capacity etc.) that would justify as a basis for an adjustment in favour of the other party in accordance with section 75(2) of the Family Law Act 1975.

Sam* and Nancy* cannot agree on the division of the asset pool by assigning any interests. Neither party wants directorship or shareholding of the company, given the fact that they believe they will not be able to run the company successfully without the involvement of the other party, such an arrangement would not be tenable pursuant to section 81 of the Family Law Act 1975 which requires that orders regarding financial settlement finally determine the relationship between the parties.  Given the current economic status and the nature of the business the company engages in, it is unlikely that the company will be able to be sold. Both parties would like to retain the matrimonial property at the exclusion of the other. The only agreement between the parties and their solicitors is that the property pool, based on contributions, should be divided equally.

Through negotiation and mediation, the parties and their respective solicitors have agreed that the only way forward is to enter into consent orders, liquidating all assets, including the assets of the company, and dividing the net proceeds equally between the parties.

The question is, does the Federal Circuit and Family Court of Australia (FCFCOA) have jurisdiction to make orders regarding a company and the company’s assets? A company is after all its own legal entity in its own right making it a third party to any legal proceedings.

All capital in a company (shares, credit loan accounts, assets) are considered property in accordance with section 79 of the Family Law Act 1975.

Section 90AE of the Family Law Act 1975 gives the FCFCOA the power to bind a third party when making an order altering the property interests of the parties to a marriage, that section specifically makes reference to directors and companies, subsection 4 states that among other things, the FCFCOA must be satisfied as to any taxation consequences (if any) on the third party.Part VIIIAA of the Family Law Act 1975 furtherexpands the power of the FCFCOA to make orders binding third parties.

The case of In the marriage of Fonda (1997) established that where there is no shareholder or director other than the spouse/s, then the company would be considered an alter ego of the spouse/s.   

In addition to the above, section 1337C of the Corporations Act 2001 confers jurisdiction to the FCFCOA with respect to civil matters arising under the corporations legislation, this, in effect, makes the FCFCOA able to not only hear matters relating to corporations law, but to also have access to all of the remedies and relief available pursuant to that Act, including, but not limited to winding up and deregistering a company. 

Much of the value of the company is retained in the assets and equipment the company owns.

Given that it is clear that the FCFCOA has the jurisdiction to deal with the company as part of the matrimonial asset pool, it was agreed between the parties that a detailed minute of consent orders would be drafted encapsulating the following:

1. That all real estate property would be sold with the net proceeds being distributed equally between the parties.

2. That any funds held in bank accounts under the names of the parties would be distributed in equal shares to the parties with joint accounts being closed.

3. That the parties would each retain their own vehicles and superannuation.

4. That at first instance the parties would do all things necessary to sell the company, failing which, all assets of the company would be sold, either privately or by public auction, all outstanding loans owed by the company, including amounts owed to the Australian Taxation Office be paid, with the net proceeds being distributed equally between the parties. The company would then be wound up.

The practice of family law does not just require a practitioner with thorough and updated knowledge in family law legislation, practice and principles, but also a solid understanding of other areas of law. Family law matters will often include property law, criminal law, and, as per the example above, corporations law. In drafting settlement documents for a financial agreement between spouses, a good family lawyer will ensure that all aspects of your financial situation have been considered and that you are being afforded the best outcome based on your circumstances. Our firm has solicitors well versed in family law, with the benefit of having proper knowledge of other areas of law that may come into play when making decisions about your family law matter. Make an appointment today.