Where a family company exists and you and your ex or partner are involved in the running of the business or have financial interests in the business, then important questions arise as to how the family court will treat the family company. Often it is the case the parties involved or who are interested in the family company have little knowledge of how the company itself functions or operates.

The purpose of this blog is to inform those people whose knowledge of the operation and structure of Companies is minimal, notwithstanding that they may be a director, member and shareholder and to explain how the Family Court of Australia treats a family company. It will also assist with understanding key areas you need to consider to protect your interests in the business, company.

What is a company?

Let’s start with the question of what is a company?  When a company, whether a family company or not, is created it exists as a separate entity from you or your ex-partner. As a result the company can own property, it can sue and be sued by others.

You and your ex-partner can be directors or hold office positions and you can be members and shareholders whereby you hold shares in the company.

Under company law principles, however you are not the legal or equitable owner of any property owned by the company.

In any event, the Court will need to determine whether the Company holds assets and determine their value or whether the Company merely generates an income and is a financial resource for the parties.

Who are the interested parties in a Family Company?

(a) The company itself;
(b) The board of directors;
(c) Shareholders also known as members of the company.

The role of Directors

A director is defined by the Corporations Act 2001(Cth) as:

(a) a person who:
  (i) is appointed to the position of a director; or
  (ii) is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position;

and

(b) unless the contrary intention appears, a person who is not validly appointed as a director if:
  (i) they act in the position of a director; or
  (ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.

Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body.

A very important question that will need to be considered where there is a dispute about whether specific transactions or functions can occur, will be the question of control. In other words, the question will be who in fact makes the decisions and drives the family company. It may be the case that both husband and wife are directors of the company, but only one of them makes the decisions as director for the family company.

What are the obligations of the Director?

Directors have duties imposed upon them by the Corporations Act. These duties include:

(a) Acting with care and diligence and making sure that you have the proper information about the financial position of the family company;
(b) Acting and exercising your powers in good faith and in the best interest of the family company;
(c) To not use improper influence to gain an advantage for yourself or someone else, to not cause detriment to the company;
(d) To not operate the company it is insolvent, i.e. a company is insolvent when it is unable to pay its debts when they are due to be paid;
(e) To ensure that the company keeps proper bookkeeping records.

If you are a director or shareholder of the family company, you have the right to inspect the family company’s books and accounts and minutes of meetings and resolutions that have been made.

Along with rights as director come responsibilities of ensuring that the company is functioning properly and meeting all its payments and obligations. If you are a director and have chosen to remain non-active, then you still may be liable for transactions of the company, unless there are extenuating factors that preclude your liability.

Types of Shares

Knowing the type of share that you hold is very important in family law matters as this will affect the value of the shares and ultimately the value of the assets you may hold.

If you hold shares in the family company, they can be held in varying types which will effect voting rights and participation in the company.

(a) Ordinary Shares – members can receive dividends as well as assets of the company;

(b) Preference shares – this entitles the member to fixed dividends which is paid before dividends are paid to ordinary shareholders. If you hold preference shares, you may not have voting rights;

(c) Redeemable preference shares – Shares issued on the terms that they may be redeemed by the company at a later date, either by payment out of profits which would otherwise be available for dividends or out of proceeds of a fresh issue of shares.

If you are going through a relationship breakdown then you will need to provide or ascertain the value of the family company, the shareholdings for each member and what assets the family company holds.

Tax Implications

Where orders are made for a family company to make a payment or transfer property owned by the company as part of a settlement, then it is very important that tax implications are considered. The payment or asset may incur capital gains tax, stamp duty, division 7A taxes and GST. It is for this reason that careful consideration must be given to such issue.

The information provided here is of a general legal nature only. Specific advice must be sought for individual matters.

If you require further information about family companies and your family law matter contact us.