Family Law Changes Impact on Business

• November 2004

Changes to the Family Law will now give marriage breakdown the potential to have far reaching effects on business and may change the way Financial Institutions lend money to people in a marriage or long term relationship.

Professional advisers, including accountants, will need to be on top of this legislation, as it will have far reaching implications for their clients. Given the prevalence of the breakdown of marriage and the potentially catastrophic consequences that can have, it will now be necessary for all financial plans to take into account these changes to the legislation. From December 17th, when the amendment comes into effect, divorce will not only be an issue for the parties to the marriage, but also for the viability of businesses connected to the marriage, and third parties who may have loaned money on security, whose rights may be modified or extinguished by an Order of the Court.

The Family Law Amendment Act 2003: What it means for Business

The Family Law Amendment Act 2003 gives the Family Court very broad powers to rewrite Company and Trust Structures and to make orders affecting the rights of third parties, including Financial Institutions who may have loaned monies to the parties to a marriage. This includes the ability to reallocate debt between the parties to the marriage

The Court can also make orders which will prevent a third party from exercising its rights to sell property or to take legal proceedings, such as for the appointment of Receivers and Liquidators.

The Court now has the power to alter and control:

  • Family trusts;
  • Family companies;
  • Situations where a spouse is the beneficiary of a trust;
  • The exercise of a creditors power of sale;
  • Rights of a person to repossess property of a party to a marriage.

The Rights of Third Parties

Before making an order the Court is required to ensure that the third party has been afforded “procedural fairness”, namely that it has been notified that an Application has been made to the Court for Orders which affect the rights of that third party and to then afford that third party the opportunity to make submissions to the Court about the proposed Orders.

The Court is also required to form some view as to whether or not, if the Orders are made, the debt or other rights of the third party will be protected and, in particular, to ensure that the person who is to take over any liability has the capacity to meet those obligations.

This has far-reaching implications.

The question of the capacity of a person to make payments is an accounting exercise that may involve analysis of undetermined tax liabilities, the consequences of the repayments of Directors Loans, the taxation consequences of any particular Order and the impact of the Order on the profitability of the business.

Importance of the Changes for Professional Advisers

If professional advisers, such as accountants, do not have a full grasp of the legislation, clients may
find the viability of their business, or it’s various structures under threat if a partner or shareholder’s marriage breaks down. Also, without adequate advice and representation, third parties may discover that the burden of loan repayments has being passed to an individual, or in circumstances, that increase the likelihood of default.

Our legal expertise both in Family and Commercial Law is underscored by our strong industry awareness and experience, which gives our clients the benefit of accurate, detailed and up-to-date professional advice. Should you have any queries or concerns relating to issues faced by clients, or possible precautions that may be taken in the face of the upcoming reforms, please do not hesitate to contact us.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued, or any information herein relied upon.