Family law: Prest into a corner

By 7 November 2012financial, Law news, News
[Update: the case did go to the Supreme Court and you can find out what happened here.]

To warn you: this is one of our rare blogs about new case law. We don’t talk hardcore law very often (we aim to raise awareness about practical matters surrounding divorce/dissolution and a lot of the decisions that come out of the courts are peripheral to this), but this is important so we thought we couldn’t let it slip by. A couple of weeks ago the Court of Appeal released a judgment in the case of Petrodel v Prest that restricts the ability of estranged spouses and civil partners to access any family assets that have been put into companies controlled by the other spouse/civil partner. Although this particular case concerned massive money, the decision may well have far-reaching effects that extend down to the “ordinary person” too.

The husband and wife in this case are an international couple in their 50s who made their main home in London. There are four children. The husband is “a reclusive oil baron” and did not play nicely in the court proceedings that surrounded his divorce: he has regularly disobeyed court orders, failed properly to disclose the extent of his assets, and gave untruthful evidence at the final hearing. The main problem that the wife faced, however, was that very little of the family’s extreme wealth (possibly hundreds of millions of pounds, on the wife’s case) was held either by her or her husband but was instead held by a number of companies wholly owned and controlled by the husband, “The Petrodel Group”.

The husband pleaded poverty, telling the court that he was in debt to a level of about £48m, and offering the wife a settlement of around £2m. The court didn’t believe him. It found that he was worth around £37.5m, and that the wife’s award should be £17.5m. The court made a finding that the companies were the husband’s nominees/agents – his “alter ego” – and because they were effectively being used as a repository for the family’s wealth, orders could be made against the companies that they should transfer property to the wife in settlement of her claims.

The companies appealed, and were successful in convincing the Court of Appeal that properties they held were not legally available for distribution to the wife on her divorce. The two commercial judges sitting in that court felt strongly that as there was no impropriety in setting up the companies to carry the wealth, which was done for valid tax reasons, there was no basis on which husband could be said to own the assets within them. The companies are separate legal entities, albeit ones that are wholly owned by the husband; the court cannot look through them (known as “piercing the corporate veil”) in order to get to the assets it feels are required to satisfy a wife’s claim. The two Lords Justice of Appeal said that this practice that has been going on for years in the family court must end, as it is not commensurate with the law as set down in statute and case law from the higher courts, and as applied by other court divisions.

Lord Justice Thorpe was the other judge hearing the appeal, and gave a robust defence of the lower court’s decision to look through the company structures for the family’s assets. He was the only judge in the Court of Appeal on this case with a family law background, and felt that a decision to overturn the initial judgment and disapprove of the practice of “piercing the corporate veil” in family cases would “present an open road and a fast car to the money maker who disapproves of the principles developed by the House of Lords that now govern the exercise of the judicial discretion in big money cases.” Angrily, he points out,

“In this case the reality is plain. So long as the marriage lasted, the husband’s companies were milked to provide him and his family with an extravagant lifestyle. That was only possible because the companies were wholly owned and controlled by the husband and there were no third party interests. Of course in so operating them the husband ignored all company law requirements and checks.

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 his 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 a fair result.”

But Thorpe LJ was outvoted. As a result of this majority decision, assets sheltered from tax and protected from personal creditors by a company structure, even in a company owned wholly by one person, may well be moved even further beyond the reach of a spouse/civil partner in divorce or dissolution proceedings. The rules that we thought applied to give the court the ability to orchestrate a fair outcome in such cases have been changed in a way that can only lead to the potential for injustice across the board of family cases. Big money cases are one thing, but what if circumstances conspire to mean a family’s sole asset, for example their home, turns out to be owned by a company incorporated and solely owned by one party rather than personally by either or both of the spouses? What then of a corporate veil that could, if its owner was so minded, leave half of the family homeless and completely without resources?  It’s true that a judge has the power to transfer shares just as it can transfer other assets, but this approach was not taken in Prest.

On a philosophical level, this case clearly raises interesting questions about whether commercial legal principles should apply to private couples in family breakdown. Is one-size-fits-all law appropriate or desirable? Well, it seems that the Supreme Court may get the chance to answer that question: the wife’s request for permission to appeal has just been approved. We wish her luck. In the meantime, we simply have to do the best we can to facilitate fairness and justice between separating couples. If you would like to chat to any of us about anything raised in this blog, do give us a call on 01223 443333.