UK: The Position Of Companies In Matrimonial Proceedings Following The Case Of Prest –v- Petrodel Resources Ltd & Others 2013 UK SC34

Last Updated: 4 July 2013
Article by Sarah Higgins

Supreme Court Judgment 12 June 2013 on appeal from the Court of Appeal (on appeal from Moylan J)

Facts

Mr and Mrs Prest were dual Nigerian and English nationals. It was a 15 year marriage with four children. There were seven companies in the Petrodel Group all of which were joined by the wife to her application.

There was no longer an issue about the former matrimonial home which was being transferred to the wife (subject to charges) and she was also ordered to receive a lump sum of £17.5 million, £24,000 per annum for each child and school fees. The husband had only paid the school fees. He was also ordered to pay costs (and the companies were jointly and severally liable to pay a proportion).

The husband has not come well out of the case in that court referred to his "persistent obstruction, obfuscation and deceit, and contumelious refusal to comply with rules at court and specific orders". Evidence for the companies was provided by Jack Murphy, director of PRL who refused to attend for cross examination saying that he was in "bad health" which the judge did not believe. The judge at first instance ordered that various properties should be transferred to the wife. Section 24 of the Matrimonial Causes Act 1973 provides that a court may order that "a party to the marriage shall transfer to the other party ..... such property as may be so specified, being property to which the first mentioned party is entitled, either in possession or reversion".

The Court of Appeal upheld a challenge by the companies and so the wife appealed to the Supreme Court. In the Court of Appeal, Patten LJ said 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.

Lord Sumption, giving the leading judgment, confirmed that legally a company is a legal entity distinct from its shareholders. This is also economically fundamental, since limited companies had been the principal unit of commercial life for more than a century. Their separate personality and property are the basis upon which third parties deal with them.

In this case the husband treated the companies' cash balances and property as his own and drew on them and the group was "effectively .... the husband's money box which he uses at will". This did not mean, however, that the corporate veil does not matter where the husband is in sole control of the company.

There was a discussion as to what piercing the corporate veil means. Properly speaking it means disregarding the separate personality of the company.

Lord Sumption referred to the case of Nicholas in 1984 where the Court of Appeal overturned the decision of a judge to order a husband to procure the transfer of a property belonging to a company in which he held a 71% shareholding. The Court of Appeal suggested that the result might have been different had it not been for the position of the minority shareholders and Cumming Bruce LJ thought that in that situation the court does and will pierce the corporate veil and make an order which has the same effect as an order that would be made if the property was vested in the majority shareholder. However, for instance Munby J in A –v- A 2007 said that the relevant legal principles which have to be applied are the same in the Family Division as in the other divisions.

Lord Sumption referred to the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrong doing. He went on to talk about the concealment principle and the evasion principle. The evasion principle is where there is a legal right against the person in control of a company which exists independently of the company's involvement, and the company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. This was not the case on the facts in Petrodel.

The court decided that if there is no justification as a matter of general legal principle for piercing the corporate veil, there is not a special wider principle which applies in matrimonial proceedings. "Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different. If a right of property exists, it exists in every division of the High Court".

However, a spouse's ownership and control of the company and ability to extract money will be relevant to the court's assessment of its resources. But that does not mean that the court has the power actually to transfer those assets from a company to a spouse. Moylan J considered that it was enough if the husband had the practical ability to procure their transfer, whether or not he was the beneficial owner. Lady Hale agreed that section 24 of the Matrimonial Causes Act does not give the power to order a spouse to transfer property to which he is not entitled. S 24 does not include property over which the husband has such control that he could cause himself to become entitled. The court can order the transfer of the shares, but in a case like this where the shareholder and the company are both resident abroad, this is likely to be ineffective. Obviously the reason why the wife was interested in the properties was because they were in England.

Resulting Trusts

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]"

The husband did not co-operate and inferences were drawn against him. The court agreed that judges exercising family jurisdiction are entitled to draw on their experience and take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing.

Matrimonial Home

This was not pursued on appeal and the matrimonial home was being transferred to the wife. The court suggested that in the case of the matrimonial home the facts are quite likely to justify the inference that the company was held on trust for a spouse who owned and controlled the company.

Nuptial Settlement

The wife sought to argue that the companies constituted a nuptial settlement but leave was refused to argue this and the court decided that that was not seriously arguable.

Comment

The conclusion is that piercing the corporate veil should only be invoked where the 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 coverage on Prest has been somewhat confusing; some reports hailing the Prest case as a victory for wives of wealthy company owning husbands. Mrs Prest was successful on the facts in that the properties were to be transferred to her, although subject to charges, but she was unsuccessful in many of her arguments. In fact, if anything the practice of the family courts in having more ready access to company assets has been curtailed. The 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 spouse's claims under s.24 MCA are unlikely to succeed, leaving the company's assets intact.

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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