Protecting Business Assets During Separation: Section 106B Clawback and Pre-Separation Restructures

What "protection" actually means

Many business owners ask whether they can structure their affairs so that a former spouse cannot reach the business in a property settlement. The honest answer is no, not in any reliable way. The Family Court has wide powers under section 79 of the Family Law Act 1975 (Cth), and section 90SM for de facto relationships, to alter property interests. The anti-avoidance provisions in section 106B and the powers to vary or set aside orders in section 79A reach transactions and restructures designed to defeat a claim.

What good planning can do is reduce ambiguity and protect the business operationally. Specifically, it can:

• Document the value of business interests at the start of a relationship, so that contributions can later be identified and valued.
• Separate personal and business finances cleanly, so that disputes about co-mingled funds do not dominate the property settlement.
• Establish, in advance, how a separation will be handled financially, through a Binding Financial Agreement.
• Maintain the operational continuity of the business through the disruption of separation, protecting employees, customers, and suppliers.

The right time to plan is well before separation is contemplated. The closer to a separation that planning occurs, the more limited the available options become, and the more likely any restructure is to be challenged.

Before a relationship: structuring and Binding Financial Agreements

Pre-existing business interests

Assets brought into a relationship are recognised by the Family Court as initial contributions. The longer the relationship, the more those initial contributions are weighed against subsequent contributions of both parties. Documenting the value of business interests at the start of cohabitation, through a contemporaneous valuation, current financials, and a clear schedule of assets, is significantly more straightforward than reconstructing the position years later.

Binding Financial Agreements

A Binding Financial Agreement made under Part VIIIA of the Family Law Act allows parties to agree, in advance or at any other point, on how their property will be dealt with in the event of separation. BFAs can be made:

• Before marriage or before commencement of a de facto relationship
• During a relationship
• After separation but before a property order is made

A properly drafted BFA can quarantine pre-existing business assets, establish how the future growth of the business will be treated on separation, and set out the financial arrangements between the parties without reference to the four-step process the Court would otherwise apply.

BFAs are subject to strict procedural requirements. Each party must receive independent legal advice, written certificates of advice must be exchanged, and the agreement must be signed before it takes effect. BFAs can be set aside on grounds including unconscionable conduct, material non-disclosure, fraud, and impracticability of performance. The drafting and process matter as much as the substance: defective BFAs are common, and they are typically discovered only at the moment they are needed.

Corporate and trust structures

Holding business interests through corporate or trust structures, with carefully drafted constitutional documents (shareholder agreements, trust deeds, partnership agreements), can:

• Define the rights of pre-existing shareholders or beneficiaries
• Restrict transfer or assignment of interests
• Provide pre-agreed mechanisms for valuation and exit

These structures do not place assets beyond the Court's reach. They can, however, affect how the Court approaches a settlement, particularly where third-party interests are genuinely involved.

During the relationship: ongoing measures

Maintain clear records

Throughout the relationship, keep accurate records of:

• Contributions to capital, including any borrowings to fund the business
• Loans between the spouse and the business or its entities
• Distributions to either spouse, including dividends, salary, drawings, and trust distributions
• Business expenses paid through personal accounts, and personal expenses paid through business accounts

These records become critical at the point of separation, where the financial history of the relationship is reconstructed for the Court.

Avoid co-mingling

Where possible, maintain a clear separation between business and personal finances. A spouse's labour in the business should be properly characterised: paid as wages, treated as a partner contribution, or formally documented as a non-financial contribution. Untreated, this work becomes a major source of dispute at trial.

Update arrangements as circumstances change

A BFA made before marriage may need to be updated as circumstances change: major business acquisitions, capital raising, expansion into new markets, the birth of children. An out-of-date BFA can be challenged on the basis that it no longer reflects the parties' circumstances at the time of separation.

At separation: practical and legal steps

Do not dispose of business assets

Section 106B of the Family Law Act permits the Court to set aside transactions made to defeat a claim. This applies to transactions made by either spouse, or by entities under their control. In practice this includes extraordinary distributions, sales of plant or land, restructures, and transfers between corporate entities. Even apparently routine business decisions can be challenged if their effect is to remove value from the property pool.

Avoid extraordinary changes to operations

Routine business operations are unaffected. Decisions outside the ordinary course, particularly those that materially change the financial position of the business or the spouse, should be made only after legal advice. The risk is not only that a transaction will be set aside; it is also that the credibility of the business owner at trial will be damaged.

Obtain a contemporaneous valuation

Both parties benefit from obtaining a current valuation of the business early in proceedings. Valuations obtained close to the date of separation are typically given more weight than those produced in the lead-up to trial, when the incentives to overstate or understate value are at their highest.

Disclose fully

Family law proceedings impose comprehensive disclosure obligations under the rules of the Federal Circuit and Family Court of Australia. Failure to disclose can result in costs orders, adverse inferences against the non-disclosing party, and orders being set aside under section 79A. Full and frank disclosure is also a precondition to a valid BFA. The temptation to withhold information is one of the most common, and most costly, mistakes a business owner can make.

Plan interim arrangements

A practical interim arrangement covering income, household expenses, and ongoing business operations is often more important in the early weeks than the eventual final orders. Disputes about who can access company funds during proceedings are common, disruptive, and can damage the business unnecessarily. Sensible interim arrangements, often documented in writing, reduce the temperature of the dispute and protect the asset that funds both households.

Common mistakes

Restructuring once separation is contemplated

Anti-avoidance provisions catch transfers of assets that occur once separation is in contemplation. Restructuring at the eleventh hour is rarely effective. It can also create credibility problems at trial that go well beyond the original transaction.

Treating BFAs as simple documents

A BFA is one of the most heavily regulated agreements in Australian law. Pro-forma BFAs, BFAs prepared without independent advice, and BFAs that fail to address material assets all fail at the point they are needed.

Underdocumenting contributions

Where a spouse's contribution to the business is unclear, for example where one spouse worked in the business without formal wages or where personal funds were injected without record, disputes often turn on the proper characterisation of those contributions. Clear, contemporaneous records remove ambiguity.

Mixing personal and business expenses

Add-back arguments at trial often turn on personal expenditures paid through company accounts: cars, travel, family holidays, school fees. Maintaining a clean separation reduces dispute.

Ignoring the long-term picture

Structuring decisions made for tax reasons can have unexpected family law consequences when relationships end years later. Periodic review with both family lawyers and commercial advisors is sensible, particularly at significant life moments: marriage, the birth of children, major business expansion, or transition planning.

Working with the right advisors

Most business owners interact with several professional advisors: accountants, commercial lawyers, financial advisors. Before and during a separation, these advisors need to coordinate. A decision made for tax reasons can have family law consequences. A commercial restructure may be reachable under section 106B. A trust distribution may be characterised differently at trial than in the accounts.

A family lawyer with commercial experience can:

• Identify family law risks in proposed commercial structures
• Coordinate with accountants on the family law implications of business decisions
• Draft and advise on BFAs that fit with the existing commercial arrangements
• Strategise on the timing and structure of negotiations

The earlier this coordination begins, the more options remain available.