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As the saying goes, “Never do business with friends or family”. While many people running family businesses understand the importance of appropriately documenting their business arrangements, it is not uncommon to come across those who don’t. This is why there is a significant amount of litigation occurring when family relationships deteriorate and breakdown.

Late last year, the Supreme Court of Queensland decided in Nolan v Nolan [2014] QSC 218 that a woman who had worked with her ex-husband and her ex-husband’s family for eighteen years, was entitled to a share of the family business. Her entitlement was because of the financial and non-financial contributions she had made to the “common endeavour” over the years.

Naturally, the woman’s former parents-in-law did not want any share of their business to go to the woman who was no longer in a relationship with their son. In making this decision, the Court took into account the following facts:

  • The woman had been made a partner from at least 1993, and when there was a restructure in 2004 became an equal shareholder with her ex-husband and his parents.
  • The accounting and banking documents substantiated the fact that the farming enterprise was a common endeavour. In particular, the farming venture used the family name, it was clear that the whole of the family was looked at in terms of tax minimisation schemes and all finance applications to banks took into account all business and personal assets of all family members.
  • The farm management deposits, including those in the name of the woman, were treated as assets of the common endeavour and listed as assets of the trust.
  • The books showed that the profits were given to a trust for the collective benefit of the whole family.
  • The woman assumed responsibilities as co-borrower and guarantor for business loans.
  • She also worked outside of the business which gave her family an income stream so, when the drought hit, they did not have to take as much money out of the business by way of drawings from the partnership or trust.
  • Clearly, whilst a good result for the woman this was not a good result for her former parents-in-law.
  • She did the invoicing and banking for the business.

This case is a timely reminder that family members should document business arrangements from the outset and make changes to those documents as necessary throughout the years they are in business together.

Hanrick Curran can prepare business valuations to be used at the time of initial documentation and indeed progressively each year to underpin these arrangements. Please contact your Hanrick Curran adviser to discuss if you have all the necessary documentation in place.

Thanks to Michael Klatt from Mullins Lawyers for contribution to content.