My family business is being ruined by disputes. What can I do?

This article is written for family businesses who are in the middle of a dispute and where swift action is required. If your business is going through a dispute but it is not yet at this stage, you may benefit from reading “Mediation, arbitration and the steps to take to resolve disputes in family businesses”.

Any dispute between family members is difficult and uncomfortable, and these feelings tend to escalate when they concern business or money. Though many disputes can be resolved through ADR (Alternative Dispute Resolution), where there are hurt feelings and damaged ties it sometimes means that court proceedings become inevitable.

We often see cases where a business has not been set up properly. Close family ties can lead people to believe that disputes and subsequent legal proceedings from family members are highly unlikely and therefore they fail to create the legal documents that evidence the true nature of the business relationship. If a dispute happens down the line, the parties involved can have conflicting opinions about whose responsibility it was to manage certain elements of the business. 

This article aims to explain the remedies you can seek from the court in instances like these, and it highlights the importance of setting up a business properly, even when it is with members of your family.

Should I seek an injunction?

Where there are concerns arising from the fact that a family member, through the business, has access to someone's property or bank account it may be appropriate to seek an injunction from the court. This would prevent that family member from misusing the funds of the business or the property. An injunction is a very serious application, but it can be a fast method to secure assets of the business and stop any wrongful use.

An injunction is an order by the court that either prevents someone from doing something (prohibitory) or orders them to perform a specific act (mandatory). It can also be used to freeze the use of accounts or assets.

However, this is a discretionary remedy that a court will only grant if it is ‘just and convenient’ to do so. Whether it will be just and convenient depends on the facts of the case but generally the court will consider:

•  if compensation would sufficiently compensate the applying party; and/or
•  if constant supervision would be required by the injunction; and/or
• if it is not considered fair by the court or if they feel it is not necessary for protecting the assets in question.

If any of these apply, then it is unlikely that an injunction will be granted.

As is evident from the above, the threshold for an injunction is high, but it can be a means to quickly secure the assets of a business if a party is at risk of dissipating funds or misusing assets.

Who is in charge here?

Where the true nature of the business relationship is disputed, as is often the case in family matters, a party may seek a declaration as to their rights and the facts. This is known as declaratory relief.

A declaration by the court does not order the parties to do anything; rather it is a statement about the rights of the parties, the existence of facts or a principle of law. The usefulness of this is that it can end and/or avoid further arguments between family members as the court will provide a clear answer in the dispute. This can facilitate settlement between the parties and avoid further court proceedings.

Like injunctions, this is a discretionary remedy. A court won’t necessarily make a declaration just because one party has established the rights, facts and principles of a case. There are established principles which are followed by the court:

• there must be a real and present dispute between the parties;
•  each party must be affected by the court’s declaration concerning the question; and
• the court must consider whether the grant of declaratory relief is the most effective way of resolving the issues raised – in doing so they must consider other ways of resolving the issue.

What about compensation?

Perhaps the most common form of remedy granted by the court is damages. This is a monetary award to the successful party to compensate them for a loss or damage they have suffered.

In a business dispute, damages will often be calculated by looking at lost profits suffered by the business or by the party. As disputes often arise out of money issues, damages are an important remedy in disputes and can help compensate an aggrieved member of the family for their loss.

But there is a drawback. In order to obtain damages, traditional court proceedings are required and these can be lengthy and costly. Furthermore, they won’t provide an instant result.

In summary

Whilst there are methods, as set out above, to secure business assets, the risk is that where there is a lack of documentation confirming the set-up of the business, it can make it more challenging to evidence the true intentions of the parties.

For partnerships, if there is no partnership agreement or appropriate documentation in place, then the default provisions of the Partnership Act apply. Essentially, these set out the rules of the partnership, including that partners must share equally in capital and profits (regardless of initial contributions) and partners must contribute equally to losses.

In a dispute involving family member partners, these default provisions can have a huge effect. They mean that in the event of a dispute, regardless of what each party feels they have contributed over the years, the partners must share the profits and losses made by the business, and do so equally. This can leave one partner worse off financially even though they  contributed more than the other partners during the course of the business.

Family members sometimes think setting up a limited company is unnecessary when everyone involved in the business is part of the family. This can also lead to disputes and harm in the future. The major benefit of a limited company is that the liability for shareholders ends at the money they invested. Without a limited company - even though the risk will be spread amongst your family - the liability will extend to your personal assets, which means that creditors are able to take money and property from you.

The benefit of setting up your business properly is twofold. First, it makes the position and responsibilities between family members much clearer and reduces the chance of disputes. Second, it limits your liability to creditors and makes your business venture much less risky. Remember too, that legal documentation will assist should there be any falling out, as these will help to enforce the originally agreed terms.

It should be made clear that the remedies mentioned above are far from guaranteed and that court proceedings should always be viewed as a last-resort measure.

When setting up a new business with family members  you may feel as if  disputes are impossible, or at least, extremely unlikely. You are probably right, but unfortunately we see instances where even the closest family has been torn apart by unforeseen arguments. It is always best to set up your business properly as it will help avoid the risk of financial harm, offer you safeguards, help each family member to know where they stand, and give you a good foundation upon which to grow and develop your business.

If you are setting up a business or experiencing a family and business related dispute you need help with then please contact one of our team. I work in our Chelmsford office and can be contacted on 01245 453825 or [email protected].