New Zealand: Domestic (mis)trust and the corporate veil

Some say that limited liability companies are the spark plugs (or their silicon equivalent) of western capitalism. Others say that treating a company as a separate legal person (as the famous – to lawyers – case of Salomon decided in 1897) is a damnable fiction when, as an old saying has it, it has no body to kick and no soul to harm.

An important decision last month by the UK's highest court also tells us that a company is not expected to have a residential house to live in.

The case of Prest v Petrodel Resources Limited [2013] UKSC 34 has substantial international intrigue. Mr and Mrs Prest are citizens of both Great Britain and Nigeria. Mr Prest primarily resides in Monaco. He owns a number of companies incorporated in the Isle of Man. What those companies do is something of a mystery. Something to do with oil maybe, but one could charitably say that Mr Prest kept his cards close to his chest.

Mr and Mrs Prest divorced and so began the contest over division of assets. Mr Prest did not participate in that contest willingly. In fact, Lord Sumption described his conduct as "characterised by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders."

The first instance Judge found that Mr Prest's fortune in his various companies was worth around £37.5m. The issue was whether the Judge could order those companies to transfer some of their assets to Mrs Prest to satisfy the Judge's determination that Mrs Prest was entitled to a £17.5m lump sum payment. The Judge decided that he could use a provision of the UK matrimonial property legislation effectively to pierce the corporate veil and require Mr Prest's companies to transfer their assets to Mrs Prest.

The Court of Appeal strongly disagreed and held that this (relatively common) practice of the Family Division of the High Court "must now cease" as it was "an approach to company owned assets in ancillary relief applications which amounts almost to a separate system of legal rules unaffected by the relevant principles of English property and company law."

To the Supremes then to sort this issue out. Lord Sumption adopted the starting point in Lord Keith's speech in the 1978 case of Woolfson that "it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts" and then tested this observation in a thorough review of English authorities.

His Lordship then set out what he considers the rule to be regarding piercing the corporate veil (at [35]):

I consider that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.

And having revealed the law relating to the corporate veil, His Lordship then proceeded, as only judges can do, to decide the case on different grounds, by confirming that on the facts Mr Prest was the beneficial owner of his companies' assets and therefore there was no need to pierce the corporate veil in any event. Lord Sumption also observed that where a company holds property primarily for the purposes of providing a matrimonial home, the facts are quite likely to justify an inference that the property was held on trust for the spouse who owned and controlled the company.

The other four law Lords agreed with Lord Sumption but proceeded to engage in an intellectually stimulating debate over whether the doctrine of piercing the corporate veil is a doctrine at all or has any value to the law since it is so seldom actually invoked. They agreed to keep it around – just in case.

The lessons for New Zealand are that using corporate structures to evade legal responsibilities or conceal assets, especially in a matrimonial context, and even more especially for the matrimonial home, will not be permitted. And for the legal romantics, it will be comforting to know that Salomon is not dead, even if the judicial needle remains ready to pierce that corporate veil in the yet to be revealed situation where it is appropriate.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Authors
Justin Graham
 
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