UK: Prest – Piercing The Corporate Veil? Or Going Around?

Last Updated: 24 June 2013
Article by James Lister

The Supreme Court's much-publicised judgment in the case of Prest v Petrodel Resources Limited [2013] UKSC 34 was handed down on Wednesday 12 June 2013.

The plight of Mrs Prest had drawn much attention from the press at each stage of the procession of her case though the Courts, and the Supreme Court's ruling is no exception.

The Facts

Mr and Mrs Prest were married in 1993 and had four children during the course of their marriage. The marriage broke down and Mrs Prest petitioned for divorce in March 2008, obtaining a decree absolute in November 2011. Mrs Prest applied for ancillary relief against her husband on 11 March 2008, and following many months of contested litigation obtained judgment against her husband on 4 October 2011.

The circumstances in which Mrs Prest obtained judgment in October 2011 are worthy of exploration. In her application for ancillary relief, Mrs Prest joined five companies that she alleged (on various bases) were owned, wholly or partly and/or controlled by her husband, and in turn that these companies were used as vehicles for her husband's assets. The reason Mrs Prest was interested in the property assets of the companies (rather than Mr Prest's shareholdings in the companies themselves) was because they were UK property, rather than offshore company shareholdings, making enforcement against them materially simpler. The first instance Judge (Moylan J) set out the principal issues that he considered he needed to address:

  1. The extent of Mr Prest's wealth including the nature and extent of his interest in the respondent companies; and
  2. Whether or not he had the ability or power to make orders directly against properties and shares held in the names of some or all of those respondent companies.

The findings made by Moylan J have been well reported and were considered at the time to be in keeping with the Family Division's usual approach to such matters. In his judgment, Lord Sumption summarised the position that Moylan J had taken, saying:

"For some years it has been the practice of the Family Division to treat the assets of companies substantially owned by one party to the marriage as available for distribution under s.24 of the Matrimonial Causes Act, provided that the remaining assets of the company are sufficient to satisfy its creditors"

This refers to the order eventually made by Moylan J – having found that Mr Prest had (including his company assets) wealth of approximately £37.5m, Moylan J ordered Mr Prest to pay a lump sum of £17.5m to Mrs Prest, together with £24,000 per annum and school fees for each of the 4 children. He also ordered Mr Prest to pay Mrs Prest's costs, with an interim order for £600,000 to be paid immediately.

Moylan J's basis for this order was that he considered, pursuant to s.24 of the Matrimonial Causes Act 1973 ("MCA") that he had jurisdiction to order Mr Prest to transfer directly or to procure the transfer of the matrimonial home and seven properties held by the Respondent companies to Mrs Prest as he held that they were assets to which Mr Prest was "entitled, either in possession or reversion" within the scope of s.24 MCA. Moylan J found that there was no "principle of law which entitled him to reach the companies' assets by piercing the corporate veil", but held that he did not need to pierce that veil – instead he had jurisdiction under the MCA to order Mr Prest to procure the transfer of the seven properties to Mrs Prest.

Court of Appeal

On appeal by three of the Respondent companies to the Court of Appeal, the Court overturned Moylan J's orders, saying that the practice (referred to above by Lord Sumption) of the Family Division was beyond the court's jurisdiction unless:

  1. The corporate personality of the company was being abused for a purpose which was in some relevant respect improper; or
  2. On the facts of the case it could be shown that an asset legally owned by the company was held in trust for the husband

As the judge had found neither to be the case at first instance, the Court of Appeal found that the orders should not have been made at all. Patten LJ had summarised the position most concisely in the Court of Appeal, saying that the Family Division had developed:

"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"

which he said "must now cease".

Supreme Court

Mrs Prest appealed the findings of the Court of Appeal, resulting in this judgment. Lord Sumption said that there were three possible bases for how the company assets might be available to satisfy the £1.75m order in favour of Mrs Prest:

  1. By "piercing" the corporate veil to transfer the company assets to Mrs Prest; or
  2. Through s.24 MCA; or
  3. If the properties were held by the companies on trust for Mr Prest (when, having a beneficial interest in them, Mr Prest could be ordered to transfer them to Mrs Prest)

The Corporate Veil

Lord Sumption analysed the complex case history of attempts in different circumstances to pierce the corporate veil. He clarified this term itself, saying that "it means disregarding the separate personality of the company". Starting with the leading authority on the separation of identities between company and shareholders of Salomon v A Salomon and Co Limited [1897] AC 22, Lord Sumption analysed attempts to pierce the corporate veil, referencing Woolfson v Strathclyde Regional Council 1978 SC(HL) 90, which suggested that there was a basis for piercing the corporate veil "only where special circumstances exist indicating that it is a mere façade concealing the true facts".

Lord Sumption referred to the approach taken by the Family Division, which sought to create an "effective jurisdiction to distribute the property of the marriage upon a divorce", but he concluded that the approach of the Family Division was not correct. Lord Sumption emphasised that general legal principles were the same whatever division of the High Court or county court any particular case was being heard in.

In scrutinising the doctrine of piercing the corporate veil, he distinguished between cases of 'concealment' (which he said are not actually piercing the veil at all) and 'evasion'. On evasion he said that was a limited general principle "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".

Lord Neuberger also emphasised that the occasions on which the possibility of the application of the doctrine occurred are going to be extremely limited.

Whilst Mr Prest had acted improperly in very many respects (refusing to comply with almost every order made including for disclosure), there was no evidence that the company structure was set up to avoid obligations in the ancillary relief proceedings, but the purpose was the legitimate grounds of wealth protection and the avoidance of tax. Accordingly, there was no justification for the application of the principle of piercing the corporate veil.

S24 MCA

Largely because of his findings in relation to piercing the corporate veil, Lord Sumption said that he found it "impossible to say that a special and wider principle applies in matrimonial proceedings by virtue of s.24 MCA", and as a result Mrs Prest's appeal on this point also failed.

Trust Arrangements

This was then the last basis on which Mrs Prest could have hoped to succeed in her appeal to have the companies' properties transferred to her, if she succeeded in arguing that the properties were in fact held on trust for Mr Prest by the companies themselves.

It was here (with a real sense that the Supreme Court wanted to find in Mrs Prest's favour) that the Supreme Court drew inferences from Mr Prest's years of "persistent obstruction, obfuscation and deceit and [his] contumelious refusal to comply with rules of court and specific orders"

Lord Sumption went back to the findings of fact by Moylan J concerning the holding of the various properties by the companies in question. He said that the court was entitled to draw inferences from Mr Prest's failure to give evidence or produce documentation in relation to the properties and the companies, so that it could be inferred (on different bases for each) that each property was in fact held on trust for Mr Prest by the companies. These included the transfer of some properties for only £1 consideration, and the allegation that the purchase monies had originally been provided at a time before the companies ever existed. The lack of explanation for any alternative structure by Mr Prest allowed Lord Sumption to find that:

"Since no explanation has been forthcoming...there is nothing to rebut the ordinary presumption of equity that [the company] was not intended to acquire a beneficial interest in [the properties]"

This in turn allowed Lord Sumption to restore Moylan J's orders in respect of the properties that they should be transferred to Mrs Prest under s.24 MCA.

Comment

It is widely being reported in some press releases that the Prest case is a victory for spouses of wealthy company-owning husbands or wives. In fact, if anything the practice of the family courts in having more ready access to company assets has been curtailed. The important discussion on the rare opportunities to pierce the corporate veil highlights that this route is unlikely to assist any spouse in a successful attack on the company assets: instead, the resulting trust route is going to have to be explored. If the assets have been acquired for value in the ordinary course of business and evidence is provided to this effect, no presumption will arise of a resulting trust, and the spouses' claims under s.24 MCA is unlikely to succeed, leaving the company's assets intact.

The only comfort in the judgment is the comment on the matrimonial home, where Lord Sumption said:

"where the acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole...agent of the company...judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband's beneficial ownership"

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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