After a recent Court of Appeal ruling, insurance tycoon John Charman complained that the record £48m divorce settlement he was ordered to pay his ex-wife could have a negative impact on his business.

Here Ceri Price, Partner and Head of the Family Department at Harding Evans Solicitors looks at the implications divorce claims can have for the financial health of businesses and examines how small company owners in particular can protect their enterprises in such situations.

Marriage breakdown is traumatic anyway, as parting couples argue over arrangements for children and assets such as homes, cars or even CD collections.

But stress levels can shoot even higher still when one of the assets concerned happens to be a business. This applies whether both partners were involved in the company or, more commonly, where one spouse played no active part in the enterprise.

As the recent case of AXA boss John Charman and his ex-wife Beverley highlights, non-active spouses can have a major legal claim on the value of a business, even if they had no direct role in it.

The Court of Appeal accepted her lawyers’ argument that, as the family’s ‘homemaker,’ Mrs Charman provided the support her former husband needed to build his £131m insurance empire. She was therefore entitled to what turned out to be the largest divorce payment in British legal history - £48m compared to the £20m he had previously offered her.

After the ruling Mr Charman was quoted as saying: “Why is it right that I should have to destabilise my business and career to provide her with a great deal more money?”

Whatever the fairness or otherwise of the ruling, the reality is that taking a large sum of money from any business to settle a personal matter, such as a divorce, can be damaging.

In a typical small owner-managed business it could soak up financial reserves earmarked for investment or, worse, it could impact severely on cash flow.

Dividing a business is wholly different from ‘cashing in’ the value of a non-productive asset such as a house. It’s unlikely the company’s business plan factored a hefty divorce payment into its financial projections and you can be sure the timing of such a claim will never be convenient for the firm.

Since 2000, British divorce settlements have been growing rapidly. Divorce now affects at least two in every five marriages, and business people, with their pressurised lifestyles, are probably hit harder than most.

So how can firms be protected from the financial cross-fire of their owners’ divorce, or how can bosses fund divorce settlements without losing control of their businesses?

Two key factors should be remembered. Firstly neither party gains from damaging a profitable business and, secondly, attempts to hide assets from the court are short-sighted and can backfire on the party concerned.

Most importantly both sides, working through their teams of legal and other professional advisers, must agree a realistic value for the business. Many ex-spouses of company bosses are wildly optimistic about what the enterprise is worth.

There are several valuation methods, so it’s vital the sides agree which approach reflects reality. The agreed figure should somehow reflect the sum – either through loan or venture capital – that the owner could realistically raise against the firm’s value to pay off his or her spouse.

What needs to be borne in mind is that many small firms only function because of the owner’s expertise and contacts. The idea that a chunk of the enterprise could simply be sold like any other piece of property is a dangerous fantasy.

Of course happily married people don’t naturally plan for the eventuality of divorce. Nevertheless it’s sensible, even when the marriage is stable, to keep the liquidity of the business under review. In other words ensure some aspect of the enterprise could be converted into cash to meet a divorce claim, without damaging the structure of the organisation.

Another option is to offer the former spouse shares rather than cash. This avoids taking money out of the business at the wrong time and allows more breathing space for owners to raise funds to buy their former marriage partners out gradually. However, if the break-up has been messy, this continuing link might not suit either side.

In addition, owners may decide their businesses are potentially worth much more in years to come. Therefore they might prefer to sacrifice the lion’s share of personal assets – house, cars and other such items – in order to retain complete control of the enterprise and stand to make a healthy profit if it is sold later on.

This is a perfectly legitimate entrepreneurial gamble. If the owner’s ex-spouse accepts such a settlement, she or he can’t make further claims just because the business becomes more valuable than they expected.

However they would have every right to re-open the case if the business owner deliberately hid some of the firm’s assets from the Court. It is not uncommon for company bosses to put funds offshore or transfer company assets temporarily to a third party to keep the firm out of the ex-spouse’s reach.

If this comes to light during the case, the court is likely to take a tougher line and disbelieve other claims that the party might make about their assets. Even if it doesn’t come to light until later, the spouse can still apply for the case to be re-opened.

It is also important to remember the cardinal rule of full and frank disclosure. Clients can’t instruct lawyers, for example, to stay quiet about hidden assets, because, as officers of the court, they are professionally bound to divulge what they know. Added to that, failure to disclose, which is currently a civil matter, is likely to become a criminal offence in the future.

Another temptation to avoid is trying to run down the business in the short term to decrease its value in the eyes of the court, or alternatively making rapid spending decisions to depress current profit figures. In our experience, judges see right through this. In addition it can be extremely difficult to pull a business back on course if things have been allowed to slip.

Business owners could protect their enterprises through pre-emptive measures. Although pre-nuptial agreements are still not 100% binding in the UK – unlike the USA – they do carry some weight with the courts and should be considered as a useful way to manage the risks to business assets.

They can be of great assistance in recording what assets each partner brought into the marriage and can also note officially how successful the business already was before the relationship began.

Such agreements would be particularly helpful in second or subsequent marriages where both parties are more likely to bring significant assets to the table.

The probability of greater recognition for UK pre-nuptial agreements increased recently following supportive comments from senior judges. Ironically these were the same judges who had just set a new payout record by upholding a £48m award against insurance boss John Charman.