Written by Michael Sinclair, Partner & Nikita Gush, Articled Student
Many business owners wonder how their business will be affected by their separation or divorce. They are concerned to what extent their family law proceedings could intrude on the operation of their business. Recent case law has shed light on the issue of how the courts deal with interests in companies when parties divorce.
If you are divorcing your spouse, one of the legal issues you will face is determining how your property and debt should be divided. The Family Law Act explains that as a general rule spouses are both entitled to equal interests in family property and equally responsibilities for family debt as of the date of separation.
Family property includes all property and land that you and your spouse acquired during your marriage, up until the date of separation. It also includes the increase in value in excluded property, which includes, for instance: property you owned as of the date you began to live together; gifts from third parties; inheritances; interests in certain kinds of trusts; certain kinds of injury settlements; or, insurance payments.
What if we own a company?
If you and/or your spouse own or have interests in a company you might be wondering if the company or assets the company owns would be considered “family property”. Generally, registered companies in British Columbia own their own property, which means that even if you own all the shares, the property owned by that company is not yours, it is the company’s. That can be a problem if you are seeking to restrain or pursue assets owned by the company as they are not normally parties in a family law proceeding.
Powell v Powell, 2016 BCSC 1197
In 2016, the BC Supreme Court decided that if you could prove that your former spouse’s company purchased property with family assets or money, you can bring a claim against that company in addition to your divorce proceedings to obtain compensation for your interests in the property.
The facts of Powell v Powell involved a couple, Mr. and Ms. Powell, who were married in 2007 and separated in 2014. In 2016, when the court made its decision, they were still in the middle of their divorce proceedings.
At the time of their separation, Mr. and Ms. Powell owned three properties and a company together. In 2015, the husband decided he wanted to purchase a fourth property. He did so by withdrawing $200,000 from three mutual lines of credit that the former couple had secured against the three properties they had bought during their marriage. He bought this fourth property in the name of the former couples’ company. He took all of these actions without the consent of his former wife.
Ms. Powell argued that she had an interest in the fourth property even though it was not registered in her name, but in their company’s name. Mr. Powell argued that it was the company that owned the property and that Ms. Powell simply owned her shares in the company.
Although this case was mainly about whether or not Mr. Powell could add their company as a party to their divorce proceeding, the court took an opportunity to discuss the fact that Mr. Powell had used the parties’ mutual lines of credit to assist their company in buying a property.
The Court’s Decision
Mr. Justice Wilson explained that, “in other words, assets have been moved into the Company and beyond the reach of [Ms. Powell]. In these circumstances, the application would potentially have a resulting trust claim given the use of her assets to acquire the [fourth property], which claim could stand alone from the family law proceeding.”
What does this mean?
Typically, if a company owns property it does so as its own ‘legal person’ and an individual—whether they are a shareholder of the company or not— would not normally be able to claim a personal interest in it.
In the context of the facts of Powell v Powell, the court suggests that Ms. Powell could assert a claim to company’s property because her former husband bought it with family money. Even though it was not Mr. Powell’s intention to buy this property for the partial benefit of his ex-wife, because he purchased it with family funds and then registered it in the name of their company, just out of his ex-wife’s reach, the court permitted the wife to add the company as a party to assert a claim in it. So in this case, the court made an exception to the rule that a company’s assets are separate from the assets of the shareholder.
Where does this leave us?
There are several take-aways from this decision. Lawyers often add companies as parties in family law proceedings as a matter of course. This decision stands for the proposition that it will be the exception rather than the rule that companies can be added as parties. That is important as it can be costly and disruptive for companies to be improperly added as parties to a family law proceeding.
Secondly, where assets are transferred into a company, this case provides authority to pursue that company. By adding them as a party the claiming party can seek orders preventing the company from disposing of that property, to protect that property and to potentially obtain judgment against that company.