This morning the Supreme Court handed down its long awaited decision in the case of Petrodel v Prest. This case hinges on the power of the family courts to “pierce the corporate veil” in order to satisfy divorce claims. The Supreme Court press summary is here if you’d like the official version, or stick with us for the highlights.
Michael Prest is a reclusive oil baron worth a reputed £37.5m, although his repeated failures to disclose his assets have meant that at best that figure is approximate. In 2011 he was ordered to pay his former wife Yasmin £17.5m, which was made up of property and assets held by various companies, all controlled by Mr Prest. The High Court decided that the companies which owned the family’s assets were essentially alter egos of Mr Prest, as such he was entitled to their assets, which allows the family court to make orders in relation to them.
The Husband himself was refused permission to appeal that award due to repeated flouting of court orders. However as the companies’ assets were targeted by the award and the companies – being separate legal identities – thought this was unfair, they applied for permission to appeal it, and took the case forward themselves.
We wrote about the decision in the Court of Appeal last November, and you can read that here. Essentially the Court of Appeal was split along a major fault line with a family judge on one side and two Chancery (commercial) ones on the other. The two Chancery judges won the day here, saying shareholders like Michael Prest have no interest in, let alone entitlement to, a company’s assets and these cannot therefore be attacked by divorce courts. The Chancery judges were very critical of the family court for adopting an almost separate system of legal rules unaffected by general principles of company law.
Lord Justice Thorpe, the family judge in the minority in the Court of Appeal bewailed the decision as presenting “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”.
So, what did the Supreme Court do?
Well Lord Justice Thorpe’s open road now has a speed camera, and the fast car has had its engine downgraded. The seven justices allowed the wife’s appeal and said that she was entitled to the company properties, although taking pains to ensure that the judgment was carefully framed not to be of general application because of the very specific factual circumstances of the case. The result has come as a surprise to most family lawyers, who expected the court to go the other way.
The court found a creative way to ensure the wife got her money without disturbing the accepted principles of company law or putting family law/justice on a collision course with them. It was, said the court, in the circumstances of this case, permissible to draw inferences that the companies held the properties on trust for the husband. The judges inferred from the available evidence and surrounding circumstances that the companies had the legal title to the disputed properties in their name, while the husband had provided the funds to buy them and was actually beneficially entitled to them. The existence of this trust meant that the properties could be subject to the powers of the court to redistribute assets in matrimonial proceedings and could be transferred to the wife. The Court of Appeal was overruled.
In a wider context, the Supreme Court held that there is a principle of English law which enables a court in very limited circumstances to “pierce the corporate veil” by looking behind the company to see who is involved in it and what their interests are. Strictly speaking the court did not pierce the veil in this case – it was not necessary, because they could infer the existence of a trust. Piercing the veil will only be permissible “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 but only for the purpose of depriving the company or its controller of the advantage which they would otherwise have obtained by the company’s separate legal personality”.
What this means in practice is that if a party tries to hide assets in a company under his or her sole control in order to evade responsibilities to his or her spouse, the court may have access to the company assets in order to achieve fairness in the divorce courts. This will be a rare case. However there is no general power in matrimonial cases to disregard corporate structures and assets owned within them. The family courts must respect general laws of property ownership.
The Supreme Court has tried hard to limit the ability of family judges to interfere with company structures, fearing, perhaps a flood of corporate dismantling in the courts. On the other hand, this decision encourages full disclosure by litigants of their assets by showing the implications of failing to be clear in court about your financial position: failure to ‘fess up may mean the court draws inferences about what has happened.
Despite all the press coverage the facts of this case are quite specific – not all company assets will be held on resulting trust, and the circumstances where the veil can be lifted are limited. The most interesting point of principle is, in our view, an increasing willingness of judges to draw adverse inferences from a factual situation in order to make sure that someone who is determined not to play by the rules cannot evade the orders of the court.
The case and judgment are quite complex, so if you would like to talk it through with us, do give us a call on 01223 443333.