Division of Corporate Assets Upon Separation
What happens when a couple is trying to divide their assets after separation and matrimonial property is tied up in a corporation?
It often happens in separation that one, or both, people’s assets are tied up in a corporation and are not easily separated out or identifiable for division.
Family property division is predicated on the idea of fair and equitable division for both parties. Historically, wives have been at a distinct disadvantage because in traditional family structures the husband was the “bread winner” and accumulated the assets while the wife assumed a role dedicated to upkeeping the household. Obviously, as times have evolved, and family structures have evolved with it, and that has been rightfully challenged. In response to the inequity surrounding traditional relationships the law has evolved to view the couple as a true partnership. If a couple assumes a traditional relationship structure, the person staying home upkeeping the household and raising kids is seen to have contributed equally to the success of the relationship as the party who has worked and become successful in their career.
Accordingly, it is typical for relationships to have an equal division of asset upon the breakdown of the relationship, even if one party worked in the home and one in business.
Complicating the concept of equal distribution of assets are scenarios where the couple’s assets are tied up into a corporation.
If both parties are equally invested and involved with a corporation it is a relatively easy situation in which one party can essentially buy the other out for their shares, or they can coexist within the corporation either as active or silent partners.
If only one party has been involved with and invested in a corporation, however, the complications rise. The law views all assets that the couple accumulates during the course of the relationship to be family assets and, as such, subject to division upon dissolution of the relationship. However, a corporation is viewed as a separate legal entity from its shareholders. A separate legal entity which is not financially responsible for the debts of the shareholders. Legally, these two concepts are at loggerheads.
For many years this legal conflict has created many unjust results whereby one party can simply hide their assets in a corporation to avoid giving assets to their former spouse.
To combat this, the courts have relied on a legal concept called “piercing the corporate veil.” This refers to a situation in which the courts may put aside the division of liability between a corporation and its shareholders and hold the corporation liable for debts of the shareholders.
Aubin v Petrone, 2020 ABCA 13 set out the test for such an action in Alberta in a family law context. The separate identities of a corporation and its shareholders may be set aside on the basis of:
- Whether the spouse behind the corporate veil has complete control of the corporation;
- Whether the spouse is using that control to commit a wrong or unjustly deprive the other spouse of his or her rights; and
- That the misconduct is the reason for the loss of the other spouse.
A party need not be a sole shareholder, or even a majority shareholder, for this remedy to take effect.
If the test is satisfied, the non-corporate spouse may be compensated for their share of the corporate asset through cash payment by the corporation, they may be given shores or corporate property to satisfy fair and equitable division of family property.
By using this test, courts attempt to ensure that both parties to a relationship, regardless of what role they may have had in that relationship, are given fair consideration on the division of property.