UK: You Can't Touch This!

Last Updated: 18 February 2013
Article by Appleby  

Hailed by some as a victory for wealthy individuals seeking to safeguard their assets, the recent landmark English Court of Appeal judgment in Petrodel v Prest has caused shockwaves in the arena of family law and reversed, at least for now, the court's power to plunder company assets in divorce cases.

The case in question centres upon the high-profile divorce case of Michael and Yasmin Prest and has been described by one of the appeal judges as "truly extraordinary". Mr Prest, a Nigerian born oil tycoon based in Britain and founder of energy company Petrodel resources, separated from his wife of 15 years. In the subsequent divorce proceedings in the High Court, he sought to argue that Petrodel's assets did not belong to him but were held on trust for his birth family because his father had provided the initial capital, or seed money, subject to that trust. His evidence was found to be "deceitful and shambolic" and such manoeuvres were trenchantly dismissed. Mr Justice Moylan at first instance concluded that the whole structure was for Mr Prest's benefit alone and in his control and he was able to change the structure and distribute the wealth within it as he wished; "Petrodel is Mr Prest and Mr Prest is Petrodel". Drawing adverse inferences against Mr Prest, the judge concluded that he was worth £37.5m and awarded his wife £1.5m.

Relying upon the powers conferred by s.24(1)(a) Matrimonial Causes Act 1973 which provides for the transfer or settlement property by one spouse to another to which the spouse is "entitled either in possession or reversion", Mr Justice Moylan concluded that the "corporate structure was used as a repository for the family wealth" and therefore there existed "no legal impediment to his procuring the transfer of assets held by the companies in his name" as they were his "alter ego".

A fundamental principle of company law confers a separate legal personality upon a corporate structure and considers its assets to belong beneficially to the company itself and not its shareholders but considering himself freed of such constraints by s.24(1)(a), Mr Justice Moylan ordered the transfer to Mrs Prest the London properties and shares held by Petrodel subsidiaries, to be sold and the proceeds applied in satisfaction of the lump sum ordered. Three of the companies appealed.

The Court of Appeal comprised of two commercial judges, Lord Justice Patten and Lord Justice Rimer, and one family judge, Lord Justice Thorpe. By a majority decision the Court of Appeal rejected with resounding force the more liberal interpretation that judges in the Family Division have adopted over many years.

In the lead judgment Lord Justice Rimer rejected the notion that there should be a different approach between commercial and family cases and that wives should be "entitled to a preferential exemption". It was held that Mr Justice Moylan's finding that the London properties were property to which the husband was entitled, was not justified. His sole control of the companies did not render him the beneficial owner of such assets and so 'entitled' to them within the meaning of s.24(1)(a) MCA 1973. A finding that they were 'effectively' his property was not good enough. Lord Justice Rimer considered that this finding was wrong, as shareholders of a company have no interest in, let alone entitlement to, the company's assets, and he posed the rhetorical question 'why should family justice be regarded as different from any other sort of justice?'.

Lord Justice Patten declared that the current practice of Family Division judges 'to adopt and develop 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, must now cease.'

The principles governing the division of assets in divorce proceedings has evolved considerably since the landmark House of Lords case of White v White in 2000, favouring the concepts of sharing and compensation and resulting in ever more generous settlements for wives. In the words of Lord Justice Thorpe, this judgment presents "an open road and a fast car" to wealthy individuals who seek to restrict the assets available for division in divorce proceedings. A disappointing decision for many wives who confront on divorce a tangled web of companies used to shelter their husbands' wealth.

In his dissenting judgment Lord Justice Thorpe said, "Once the marriage broke down, the husband resorted to an array of strategies, of varying degrees of ingenuity and dishonesty, in order to deprive his wife of her accustomed affluence. Amongst them is the invocation of company law measures in an endeavour to achieve his irresponsible and selfish ends. If the law permits him so to do it defeats the Family Division judge's overriding duty to achieve fairness."

This is not the first time in recent years that the Court of Appeal has consigned long-standing family case law to the judicial equivalent of the naughty step. Two years ago, in Imerman v Tchenguiz and others, the Court of Appeal took the Family Division to task for maintaining, for almost 20 years, a practice in relation to disclosure in ancillary relief proceedings that was incompatible with the general law of confidentiality.

The shockwaves created by Petrodel v Prest are yet to reach our shores and be considered by our courts and the wording of our equivalent of s.24(1)(a) is slightly different. In any event, the fat lady in England is yet to sing. Mrs Prest has made an application to appeal to the Supreme Court (which has now replaced the House of Lords as the ultimate appeal court for English cases) seeking to overturn the Court of Appeal's decision and permission has been granted. The appeal to the Supreme Court is due to be heard on the 5 and 6 March 2013, so watch this space...

As originally appeared in JEP, Law & Accountancy Supplement – February 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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