UK: Divorce: Which Side Are You On?

Last Updated: 9 August 2013
Article by John Darnton

Warring couples frequently make the newspapers but very few disputes actually reach the Supreme Court. Their Lordships' decision in Prest and Petrodel (Prest v Petrodel Resources Ltd and others [2013] UK SC34) was especially eagerly awaited because it highlighted the tension between those on the one hand who felt that family judges should have all the tools necessary to achieve a 'fair' result between parties on divorce and, on the other hand, those who considered that limits needed to be imposed to ensure that family judges did not overstep the mark.

The financial dispute following the breakdown of the marriage between Michael and Yasmin Prest has a long and well publicised history.  The detailed circumstances are complicated but for present purposes the background to the appeal to the Supreme Court can be stated simply.

The husband, Michael Prest, wholly owned and controlled various companies belonging to the Petrodel Group.  One of those companies was the legal owner of five residential properties in the UK and another was the legal owner of two more.

Mrs Prest brought financial claims and these were initially dealt with by a High Court judge, Moylan J.  He had available to him a number of powers contained in the Matrimonial Causes Act 1973 ('the 1973 Act'). His main difficulty was that the properties that he wished to transfer to Mrs Prest were owned by the two companies.  He concluded that there was no general principle that entitled to him to reach the companies' assets by 'piercing the corporate veil' but he went on to conclude that there was a wider jurisdiction available to him under Section 24(1)(a) of the 1973 Act.  By that section, the 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'.  He therefore made an order that the various properties be transferred to the wife.  In the Court of Appeal, three of the companies challenged that decision on the ground that there was no jurisdiction to order their property to be conveyed to the wife.  The majority in the Court of Appeal agreed and criticised the practice of the Family Division of treating assets of companies substantially owned by one party to the marriage as available for distribution under Section 24 of the 1973 Act.

Mrs Prest then appealed to the Supreme Court.  Somewhat unexpectedly, the Supreme Court unanimously upheld her appeal.

The main points to come out of this important decision would seem to be as follows:

  1. The court confirmed that the decision in Salomon v A Salomon & Co Ltd [1897] AC 22 ("Salomon") remained good law.  Essentially, subject to very limited exceptions, a company is a legal entity distinct from its shareholders.  It has rights and liabilities of its own which are distinct from those of shareholders.  Its property is its own, and not that of its shareholders.  In Salomon the House of Lords held that these principles applied as much to a company that was wholly owned and controlled by one person as to any other company.
  2. The Supreme Court (the leading judgment was given by Lord Sumption) examined the extent to which the 'corporate veil had truly been pierced' in earlier reported cases where the concept had made an appearance.
  3. The Supreme Court confirmed that it was possible, in very exceptional circumstances, to 'pierce the corporate veil' but questioned whether this was a principle or doctrine as such.  In his judgment Lord Walker stated "I am reluctant to add to the discussion but for my part I consider that 'piercing the corporate veil' is not a doctrine at all, in the sense of a coherent principle or rule of law. It is simply a label – often, as Lord Sumption observes, used indiscriminately – to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate affirmed by the House of Lords in Salomon". (Para 106).
  4. The Supreme Court determined that the ability of the court to 'pierce the corporate veil' should only be utilised in very limited circumstances.  Lord Sumption stated "I conclude 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." (Para 35).  Lord Clarke indicated that he agreed with Munby J in Ben Hashem v Al Shayif [2009] 1 FLR 115 where Munby J had suggested that the court only has the power to pierce the corporate veil when all other more conventional remedies have proved to be of no assistance.  Lord Clarke concurred that the situations in which piercing the corporate veil may be available as a fall-back are likely to be very rare.
  5. It may still prove difficult to apply the formulation of Lord Sumption but, as Lord Neuberger explained, to an extent it is based on the principle that "fraud unravels everything" and this highlights how hard it may be to invoke the doctrine in practice.
  6. The Supreme Court therefore decided not to pierce the corporate veil in this case.  Lord Sumption found that "Whatever the husband's reasons for organising things in that way, there is no evidence that he was seeking to avoid any obligation which is relevant in these proceedings.  The judge found that his purpose was 'wealth protection and avoidance of tax'.  It follows that the piercing of the corporate veil cannot be justified in this case by reference to any general principle of law."
  7. Their Lordships were critical of any suggestion that different principles could be applied in family cases.  Lord Sumption had this to say: "Courts exercising family jurisdiction do not occupy a desert island in which general legal principles are suspended or mean something different.  If a right of property exists, it exists in every division of the High Court and in every jurisdiction of the county courts.  If it does not exist, it does not exist anywhere."
  8. The court stressed the limits of Section 24(1)(a) of the Matrimonial Causes Act.  This is the provision that the original judge, Moylan J, had sought to rely on and it provides that the 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 Supreme Court confirmed that that section does not give the court power to order a spouse to transfer property to which he is not in law entitled.  The words 'entitled, either in possession or reversion' referred to a right recognised by the law of property.  Lady Hale confirmed at paragraph 88 that there was nothing to suggest that the words of Section 24 (1)(a) should be read to include "property over which the first-mentioned party has such control that he could cause himself to become entitled, either in possession or reversion".  It was not just a matter of control.
  9. The Supreme Court allowed Mrs Prest's appeal declaring that the seven disputed properties vested in the companies PRL and Vermont were held on trust for the husband.  The court was satisfied that the circumstances by which the companies came to own the properties were such as to give rise to a resulting trust the effect of which finding was that the companies held the properties on trust for Mr Prest. As the court concluded that the properties were beneficially owned by Mr Prest the court had the ability to direct that they be transferred to Mrs Prest.
  10. The court stressed that the role of the court in family cases was an inquisitorial one and that if a party failed in their duty to give full and frank disclosure of all material facts relevant to the exercise of the court's powers the judge was entitled to draw 'adverse inferences'.  Lady Hale emphasised that the court was entitled to "draw such inferences as can properly be drawn from all the available material, including what has been disclosed, judicial experience of what is likely to be concealed and the inherent probabilities, in deciding what the facts are."  The Supreme Court therefore determined that there was sufficient evidence to enable it to reach the conclusion it did as to the beneficial ownership of the properties.  To a significant extent, the court was influenced by the fact that the companies had received the properties gratuitously and that valuable consideration had not been given for them.

Conclusions

(i) The court reaffirmed the correctness of the Salomon decision and the sanctity of a corporate entity.  Whilst acknowledging that circumstances could exist that would justify 'piercing the corporate veil' the message given loud and clear was that this would only happen in truly exceptional cases.  As Lord Sumption stated, the recognition of a much wider jurisdiction would cut across the statutory schemes of company and insolvency law.

(ii) In future we may well see more claims seeking to rely upon a resulting trust argument.  Lord Sumption stressed that, whether assets legally vested in a company were beneficially owned by its controller, was a 'highly fact-specific issue'.  In his view, it was not possible to give general guidance going beyond the ordinary principles and presumptions of equity.  He did, nonetheless, venture to suggest that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.  In many cases, the occupation of the company's property as the matrimonial home of its controller would not be easily justified as being in the company's interest, especially if it was gratuitous.  The intention would normally be that the spouse in control of the company intended to retain a degree of control over the matrimonial home which was not consistent with the company's beneficial ownership.  Although entirely genuine structures could be established, judges exercising family jurisdiction were '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'.

(iii) Careful thought will therefore need to be given to the use of the type of structure whereby an offshore trust holds shares in a company which in turn owns a property, especially if that property is to be used as the matrimonial home.  Of course, in a situation where the husband is the shareholder, an order could always be made for the transfer of those shares to the wife but query whether or not such an order would be recognised and enforced in the offshore company jurisdiction.

(iv) The judgment emphasises the importance of properly created, documented and run structures.  Mr Prest's failure to properly document loans or capital subscriptions and the manner in which he withdrew funds from the companies without proper authority assisted the court to conclude that he had funded the purchase of the properties.

(v) In an earlier case of Hope v Krejci, Mostyn J had referred to the concept of 'telescoping' where a nuptial settlement was varied and the judge ordered the underlying property owned by the offshore trust via an offshore company to be transferred to the other spouse.  In that case, Mostyn J referred to telescoping as the 'piercing of the corporate veil'.  In future, this type of order is probably outlawed.

(vi) An interesting issue that remains is the possibility that the purchase of a property by a company for use by a married couple could constitute a nuptial settlement capable of variation by the court within divorce proceedings.  Mrs Prest sought leave to argue the point in the Supreme Court but this was refused.  In paragraph 53 of his judgment, Lord Sumption suggested that the point did not appear to be 'seriously arguable' but potentially it could remain a live issue in the right case.

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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