Tear Them Down to Pieces: The Marriage Between Divorce and Corporate Insolvency

Since its invention, the limited liability company has provided firm protection for company assets against the personal liabilities and obligations of shareholders and directors. Riding on the back of the House of Lords’ decision in Salomon v Salomon [1897] AC 22, it is generally accepted that the company, as a legal entity, is separate and distinct from its members and shareholders. This feature is one of the key advantages of incorporation as opposed to other forms, such as Sole Proprietorships and Partnerships. Therefore, company assets are not available for distribution in divorce proceedings. 

And yet, for all the strengths and virtues of the limited liability company, it is vulnerable at the hands of the shareholders and directors.

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The company is an inanimate object and often relies on the collective actions of the shareholders and directors to drive it. In this light, the dynamics of the relationship between directors and shareholders is a significant determinant of whether the company succeeds or not. This is particularly true for companies where the directors and shareholders are married couples. Good times positively impact the business. Fair times keep the company on an even keel. But tumultuous times in the personal lives of these married couples expose the company to challenges.

In essence, divorces do have ripple effects. They affect relations between children and parents, between family members, and between the principal actors (i.e., husband and wife). They can impact children and their future if care is not taken. In summary, a divorce affects joint enterprises between the man and the woman, and the company is an example of such a joint enterprise.

Introductory Case Study

To set the tone for this discussion, let’s consider the reported Court of Appeal case of Knudsen v. Knudsen [1976] 1 GLR 204-216. Here are some background facts: The wife was a Ghanaian. The husband was a Danish national. The husband gave evidence that the marriage had broken down beyond reconciliation. In support of this, the husband complained about:

• Frivolous trips taken at will by the wife.
• Acts of violence by the wife, including using an axe to destroy furniture inherited by the husband from his father.
• The wife smashing the husband’s hunting trophies from Ghana.
• The wife tearing up books inherited from the husband’s mother. All these were properties of sentimental value which cannot be replaced.
• The wife destroyed other property and attacked the respondent with a cutlass.
• The wife exhibited conduct that made it impossible for the husband to hold on to a job in his chosen profession.
• The wife wrote a letter to the husband’s employer, which led to the husband being forced to resign from his appointment.

In concluding that sufficient grounds had been established for the grant of a divorce, the Court of Appeal explained that: “The law does not require men to have the patience of Job”.

But back to the discussion: the question is whether couples engaged in these dramatic sets of facts can reasonably be expected to stay in business considering the state of their relationship?

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