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Paying the equalization without breaking up the business
A business can be worth a great deal and still be short of cash. That tension becomes dangerous in a divorce, because the equalization is due in money while the value stays tied up in the business. The law knows tools of its own for exactly that situation; they work only where they are used in good time.
Karcher Rechtsanwälte in Frankfurt am Main, Germany, focusing on uncontested divorce and international family law. Advice in German, English and Spanish.
Part of our guide Assets & accrued gainsWhy something that is not liquid gets equalized
The equalization of accrued gains works with values, not with account balances. A business can enter the balance sheet with a seven-figure sum and still have hardly any free funds, because the value sits in plant, orders and customer relationships. The equalization claim, however, is money § 1378 BGB, due in one sum once the divorce becomes final. The real danger for a business lies in that gap between tied-up value and the payment owed, less in the valuation itself.
Where that gap is noticed only late, usually only expensive ways out remain: pulling liquidity out of the business, taking on loans, selling shares. In most cases that can be avoided where the course is set early.
The cap
The first barrier sits in the statute itself: the equalization claim is limited by the value of the assets present after deducting liabilities at the end of the matrimonial property regime § 1378 (2) BGB. You never owe more than is actually there. Since the 2009 reform the relevant cut-off date is the moment the divorce application becomes pending § 1384 BGB, brought forward so that nobody can move assets aside between the application and the final order in order to push the limit down artificially.
How does deferral under § 1382 BGB work?
The central lever is deferral. On the debtor’s application, the family court can defer the equalization claim where immediate payment would come “at an untimely moment” or would otherwise hit the debtor with unreasonable harshness, weighed against the creditor’s interests § 1382 BGB. For an owner-managed business that is the standard case of an interest worth protecting: the claim in one sum would eat into the substance.
Deferral is not a waiver. The deferred sum bears interest § 1382 (2) BGB, and the creditor can demand security § 1382 (3) BGB. The application is made in the pending equalization proceedings. Set up properly, deferral turns a payment that threatens the existence of the business into a bearable, plannable burden.
Transfer instead of payment: the exception
As a mirror image, the law knows a lever for the other side: on the creditor’s application, the court can order the transfer of individual assets where a pure payment in money would be grossly inequitable and the transfer is reasonable for the debtor § 1383 BGB. That stays a rare exception, limited to identifiable individual items, and it gives the other side no control over the business. For running the business it stays the case that you pay money and keep the firm.
How can I prevent it?
The best moment to defuse the liquidity trap lies before the dispute. A prenuptial agreement with a modified regime can take the business out of the equalization or settle the terms of payment from the outset: instalments, deadlines, security. How far that reaches and where judicial review sets limits is set out under excluding or modifying the equalization of accrued gains by prenuptial agreement.
Where such an agreement is missing, what decides is the clean use of the cap and of deferral. Both presuppose a solid figure, though, and that arises only from the valuation: how a business is valued in the equalization of accrued gains. Where you do not know the other side’s assets, the route runs first through the right to disclosure; the frame is explained by our page on assets & accrued gains.
Liquidity is rarely the only subject in all this. What else comes together in an entrepreneur’s divorce, that is variable remuneration in maintenance, occupational pension schemes in the pension rights adjustment and discretion towards fellow shareholders, is set out on divorce for entrepreneurs and executives.
Whether the cap, deferral or a contractual solution is the right route depends on the figures in your case. These instructions are handled by Dietrich Karcher, attorney at law: more than 30 years of civil law, plus years in real estate and financing, among other things as head of the property department at a state bank. Whether a payment is bearable he therefore judges not only in legal terms. In a confidential first conversation we sort out how the equalization can be carried without eating into the substance.
Attorney at law · focus on family law
Admitted since 2010, more than fifteen years of experience in advising and representation. The contact for new instructions at Karcher Rechtsanwälte in Frankfurt-Gallus.
Legal notice: This article is provided for general information and does not replace legal advice in an individual case. Any laws, deadlines and amounts mentioned reflect the state of affairs at the time of publication and may change. A binding assessment requires a personal consultation.