The falling out of any two spouses may be a messy affair. Questions of the heart more often than not, supersede legal considerations. Any matrimonial dispute may take over every aspect of one’s life, such as the future of the children, financial instability and also where one is to live. An added consideration for those who are in business is whether a personal separation will affect the future of the business, the assets and liability of that business, and how partnerships are going to be effected by such a split.
This article is intended to give an insight into some of the aspects of the legal and practical implications of the corporate world, when there is a matrimonial dispute.
Shares in a business or a company are an asset as any other assets. The rules pertaining to assets are identical when one is investigating how best to divide the assets in general. First of all, one has to ascertain whether the assets form part of the community of acquests or whether these are paraphernal. The date of marriage is used to determine whether the assets are part of the community of acquests or not. However, it is not the sole marker. If a spouse inherits shares, those shares will be his or her paraphernal property. If a spouse held shares before marriage, then those shares do not form part of the community of acquests and therefore, the sole property of that spouse. In a separation, the spouse holding those shares will be entitled to keep them in full after the separation. However, if the business was set up in marriage or else shares within a company were acquired in marriage, then a full discussion on the division of those shares must be held.
The division of any assets, including shares in a company and a business in general, may take place in a variety of forms. The spouses may choose to continue to own the business together even after a separation or else one spouse may buy the other out. Valuations of the shares of a business or a corporate vehicle may be essential in order to reach a fair and equitable resolution.
This is a straightforward solution; however, life is not straightforward and there can be many complications in dealing with businesses that the spouses may be involved in. A business may have substantial debts and therefore, this fact may have a considerable bearing on these discussions when dividing the business among the spouses.
The general rule listed in the Civil Code states that all extraordinary acts of administration of the community of acquests have to be taken by both spouses. However, there are exceptions to this. Article 3124 of the Civil Code states:
“Normal acts of management of a trade, business or profession being exercised by one of the spouses, shall vest only in the spouse actually exercising such trade, business or profession even where those acts, had they not been made in relation to that trade, business or profession, would have constituted extraordinary administration.”
Therefore, the law is providing that a spouse who is involved in any business does not need the consent and approval of the other spouse who exercises the normal administration of the business, which includes trade debts and business loans.
However, the key phrase is “normal acts of management”. The Court, in a recent judgement Josephine Grima v. Saviour sive Salvu Grima, delivered on 27th June 2019 by Mr Justice Grazio Mercieca, held that when there are cases where a business is already burdened with heavy debts, the fact that the spouses enter into more debts cannot be interpreted as a normal act and therefore, would require the consent of the other spouse. If the consent is not sought and on the contrary the situation is hidden from the other spouse, the Court held that this situation is illegal and abusive. This was echoed by Mr Justice Joseph Zammit McKeon on 29th November 2019 in Sylvana Tanti v. Noel Tanti, Antoine Tanti u Maria Perret. In this case the Court held that it is normal that companies have overdrafts and loans and therefore, such banking facilities or else purchasing stock on credit, are considered as normal management and therefore are legal if they are part of the normal course of the business.
The fact that no consent was given by the other spouse may have a very serious consequence, because that transaction may be declared null and void. Therefore, if a business debt is not a normal act of management requiring the consent of the other spouse but this consent is not given or asked for, the said business debt may be declared null and void as well as not being charged to the community of acquests. The spouse who should have sought the consent of the other spouse, could be lumped with the whole debt; in which case the other spouse should not be asked to pay.
A frequent question lawyers receive is whether the income of business forms part of the community of acquests and therefore whether both spouses have a right of reward of the businesses that their spouses have made. The law in my opinion is very clear. Article 1320(b) of the Civil Code states that the fruits of property of any of the spouses, even if paraphernal, are part of the community of acquests. Therefore, any income, whether in the form of dividends or in the form of drawings, derived from the business, is the property of both spouses.
In the case of paraphernal property of any business, although one spouse may own the shares in that business, the other spouse may enjoy the fruits of that business. Therefore, in the case of separation proceedings, the income raked from business will not go solely to that spouse who owned the shares in the company, but the wealth accumulated from that company will be divided between both spouses equally. Obviously after the separation that latter spouse will no longer enjoy the fruits of the business concern.
Therefore, the complexity of the corporate world may be simplified by following a few rules irrespective of whether the shareholders have a matrimonial dispute or not. However, if there is a matrimonial dispute, the path to a resolution may be that easier if these rules are kept in check.
Avv. Malcolm Mifsud
Avv. Maria Camilleri
This article may also be accessed on the Commercial Courier
For more information you can contact one of our Team Members at Mifsud & Mifsud Advocates.