How to use a Binding Financial Agreement to Protect Business Assets

Business owners face the ever-present challenge of safeguarding their hard-earned assets. Whether you're an entrepreneur launching a startup or an experienced business owner, protecting your assets is paramount. One effective tool for achieving this goal with respect to relationship breakdowns is the binding financial agreement (sometimes referred to as a ‘prenuptial agreement’).

Understanding asset Protection and structuring

Asset protection involves implementing strategies to shield your assets from potential risks, such as debts, legal proceedings, or property settlements for family law purposes. Proper structuring of your business and personal affairs can significantly mitigate these risks.

In Australia, the Family Law Act 1975 (Cth) allows couples enter into a binding financial agreement (BFA). A BFA is a legally binding contract between parties that outlines the division of assets and liabilities in the event of a relationship breakdown. While BFAs are commonly associated with marriage, they can also be utilised by de facto couples.

A BFA allows individuals to protect their assets before, during or after a relationship, including marriage or de facto relationships. This is what sets a BFA apart from a ‘prenuptial agreement’ – a BFA can be entered into at any stage of a relationship.

The power of binding financial agreements

Through a BFA, couples can proactively establish how their assets will be distributed in the event of their separation, thereby implementing an agreement that will help that couple avoid lengthy and costly legal proceedings in the future. In the absence of such an agreement, the couple will need to negotiate consent orders or litigate their matter in Court.

Assets that can be dealt with through a BFA are any current assets owned individually or jointly by the couple, which include personal assets as well as business assets. They can also include any future assets that the couple may receive, such as an inheritance or a large payment due to the sale of a business or business asset. Individual or joint debt can be dealt with in a BFA too.

It is not possible to deal with parenting matters or maintenance payments for children through a BFA, so the parties will need to obtain separate advice about parenting matters.

Protecting business assets

A BFA can be a critical tool for business owners looking to protect their business assets.

A well-written BFA can safeguard both personal and business assets and debt by:

  • Clearly outlining whether any assets are separate or excluded property. This distinction can be crucial in the event of a separation, by ensuring that the business remains intact and unaffected by a breakdown of the relationship;
  • Clearly stating how assets included in the BFA will be distributed between the parties. For example, if only one party will retain an interest in a business, the BFA will include provisions to ensure the transfer of all assets relating to that business to that party; and
  • Allocating responsibility for debt, if relevant.

Key considerations when dealing with a business through a BFA include:

  • Appropriate identification and description of business structures and assets. If there are multiple companies and trusts involved, it is critical to ensure they are properly accounted for (particularly if they are intended to be excluded);
  • Agreeing to a value of business assets, which may require an independent valuer to be appointed;
  • Provision for future changes in the business structure or business assets, including a planned or anticipated sale of the business; and
  • Provision for the management of debt and whether any of the parties’ personal funds are required to pay off debt incurred by the business.

It is critical that parties seeking to deal with business assets as part of a BFA engage a solicitor that is well-versed in business structures and has experience in advising business-owners in family law property settlements.

Requirements of a binding financial agreement

BFAs are complex legal documents and must strictly comply with the legislation. They may also be overturned in the future if they are not prepared correctly.  It's crucial to ensure that a BFA complies with the requirements set forth by these laws to ensure its validity and enforceability 

There are several requirements that must be met for a BFA to be binding, including:

  • The agreement must be in writing;
  • It must refer to the correct section of the Family Law Act, being the authority under which it is made;
  • It must be signed by both parties, but only after each party was given independent legal advice about its rights; and
  • It must be accompanied by a certificate from the lawyer for each party confirming the independent legal advice.

Can a binding Financial agreement be challenged?

Both parties must make a full disclosure of their assets prior to entering into a BFA. BFAs usually contain a schedule of assets and liabilities of the parties to record what was disclosed.  Non-disclosure or inadequate disclosure can be grounds to void a BFA.

Other grounds upon which a BFA can be challenged are:

  • Failure to comply with statutory requirements;
  • Dishonest conduct by a party (such as non-disclosure of assets);
  • Use of the agreement for an improper purpose (such as trying to defeat creditors);
  • The agreement is defective; and
  • A material change in circumstances, which would make the enforcement of the agreement unfair. The birth of a child after the execution of the BFA is an example of this.

Benefits of early planning

While it's never too late to implement asset protection strategies, early planning is the most effective approach.

By establishing a BFA before entering into a relationship or marriage, individuals can proactively protect their assets and minimise potential conflicts in the future. However, for couples already in a relationship, it's not too late to create a BFA to safeguard your assets moving forward.

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