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HOW CAN I PROTECT MY BUSINESS ASSETS IF MY MARRIAGE FAILS

MaltevonAnrep-Casual-onwhiteMost young people marry with little or no assets or savings so they don’t worry about protecting something that doesn’t exist yet. Therefore, Marriage Contracts are rarely utilized in most first marriages. The exception is if there is a substantial differences in wealth between the bride and groom, particularly, where one has inherited or expects to inherit an ongoing family business. Marriage Contracts can be used effectively to ensure that the business is not adversely affected by a subsequent divorce or separation. The more common situation where Marriage Contracts are utilized is where a business owner experiences a failure in his or her marriage and wants to be able to preserve the business assets to pass on to the children before entering into a second spousal relationship or marriage.

A Cohabitation Agreement is she very useful when two persons, who are cohabiting or intend to cohabit and who are not married to each other. They can enter into a contract in which they agree on their respective rights and obligations during cohabitation and on separation or on death. If the parties to a Cohabitation Agreement marry each other, the Agreement is deemed to become a Marriage Contract. A Marriage Contract is when two people who are married to each other or intend to marry, enter into an agreement in which they agree on their respective rights and obligations during the marriage or on separation, divorce or on death. These Agreements and a Separation Agreement are generically known as Domestic Contracts. The pre-requisites of a valid Domestic Contract is that it be in writing, signed by the parties and their signatures are witnessed. Those are the technical requirements as set out in the Family Law Act. However, there are a number of other pre-requisites to establish a valid and binding Domestic Contract which will not be subsequently set aside by a Court.

A Court may set aside a Domestic Contract:

  • if a party failed to disclose to the other, significant assets or significant debts, or other liabilities existing when the Domestic Contract was signed; and
  • If a party did not understand the nature or consequences of the Domestic Contract;
  • if it is found that the contract does not meet objectives set out in the Divorce Act.

Courts are reluctant to set aside the Agreements freely entered into between informed individuals who are committed to structure their financial affairs in a number of different ways that suits their particular circumstances.

In determining whether a Court will uphold the validity of a Marriage Contract, consideration is given to the following four basic issues:

  • was the Agreement entered into voluntarily;
  • was there adequate financial disclosure made and;
  • did the parties have Independent Legal Advice before signing the Agreement;
  • does the Agreement adequately comply with the provisions of the Divorce Act.

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i) A voluntary Agreement is one entered into by the parties of their own free will without undue influence, coercion or pressure. Duress includes not only violence or threats of violence to the person, but also other forms of intimidation including economic duress that may coerce the will of another.

ii) The next requirement is full and frank financial disclosure. A duty to make full and honest disclosure of all relevant financial information is required to protect the integrity of the negotiated Agreement. A deliberate failure to make such disclosure may result in a Court ruling that the Agreement is not enforceable, particularly if it is substantially at variance from the objectives of the governing legislation. The parties can waive requirement of financial disclosure but that waiver should be explained in the Agreement to protect its integrity.

ii) The requirement of Independent Legal Advice is to protect against the defence “I didn’t understand what I was signing”. The lawyer has a duty to explain not only the terms of the Agreement but also the rights and obligations contained in the relevant legislation so that each party understands why certain claims could be made and what their obligations are in relation to such claims.

iv) Section 15.2(6) of the Divorce Act states that spousal support should:

(a)       recognize any economic advantages or disadvantages to the spouses arising from the marriage or its breakdown;

(b)       apportion between the spouses any financial consequences arising from the care of any child of the marriage over and above any obligation for the support of any child of the marriage;

(c)       relieve any economic hardship of the spouses arising from the breakdown of the marriage; and

(d)       in so far as practicable, promote the economic self-sufficiency of each spouse within a reasonable period of time.

A Court will first examine to see if a signed Domestic Contract is inherently unfair on the face of it. If so, a Court will carefully examine the circumstances of how the Agreement was negotiated and look for ways to set it aside. If the Agreement appears to meet the objectives of the legislation, the Courts are much more reluctant to set such an Agreement aside. The purpose of a Marriage Contract can be to exempt a business from claims by the spouse who does not have an ownership interest. Usually, the business is the source of ongoing income. If there is an inability to pay an equalization of net family property obligation because the major asset consists of the business, there is a risk that a part ownership of the business could be transferred to the other spouse or the asset could be ordered to be sold in order to satisfy an outstanding equalization payment. The idea is “not to kill the goose that laid the golden egg”. In order to protect the integrity of the business or to enable the owner of the business to pass it on to children of a prior marriage, a Domestic Contract which exempts that business from the equalization of a net family property calculation or from any claims by the other spouse can be utilized. In drafting a Marriage Contract, care must be taken to ensure that none of the following assertions by a disgruntled spouse will be successful:

  • I didn’t understand what I was signing;I was emotionally depressed and unable to think;
  • I didn’t know the full value of the assets and liabilities;
  • I just wanted to get it over with and was determined to end the stress and anxiety;
  • I didn’t get proper advice from my lawyer;the Agreement is grossly unfair.

Some Agreements contain an Acknowledgment, in writing, that the Agreement was negotiated in an impeccable fashion. This means that the terms of the Agreement were negotiated as opposed to dictated by one party, that there was no undue pressure applied by one party to have the other agree, that there was full financial disclosure ideally in the form of sworn financial statements and that each party had their own lawyer explain the Agreement and their rights and obligations themselves.

A Marriage Contract is the best way to protect a business from adverse claims arising from the break-up of the marriage of its owner and, if carefully prepared, avoids the stress and cost of a trial. If no agreement is in place dealing with ownership, value and potential claims to the business, both parties may well be exposed to a lot of time and expense in retaining Certified Business Valuators and lawyers to sort out those issues by means of negotiations, mediation, arbitration or a court decision after a contested trial.

 

The foregoing information is provided to you for information purposes only. We caution you to obtain legal advice specific to your situation in all circumstances.

Malte von Anrep, Q.C.  is a senior partner at Lancaster Brooks & Welch, practicing Family and Civil Litigation law – he may be contacted at our St Catharines Office at 905-641-1551

 

 

 

 

 

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