Company assets on divorce – ‘piercing the corporate veil’

On Thursday 12th June 2013 judgement was delivered by the Supreme Court in the case of Prest v Petrodel Resources Limited and others [2013] UKSC 34 which dealt with the treatment on divorce of assets which, it were alleged by the husband, owned not by the husband but by a group of companies.

The case dealt with a financial application made on divorce by Yasmin Prest, the wife of multi-millionaire businessman, Michael Prest, primarily analysing the true wealth of Mr Prest, who it was noted had made various attempts to conceal the extent of his assets.

The history of the case

Part of the original Order provided that the wife, Yasmin Prest, should receive seven properties owned by two companies known as the Petrodel Group. The original judge found that the companies were wholly owned and controlled by the husband, Michael Prest.

This order was appealed by the Petrodel Group (as a distinct identity, rather than Mr Prest himself) on the basis that the Court could not compel Mr Prest to personally deal with property and/or assets which he had no personal interest in and in fact were owned by the companies. The Court of Appeal found in favour of the Petrodel Group.

Yasmin Prest  took the case to the Supreme Court, questioning whether the Court had the power to order the transfer of the properties to Mrs Prest given that they legally belong not to Mr Prest but to his companies. The Supreme Court found that “the properties were held by the husband’s companies on a resulting trust for the husband” and as such were capable of being dealt with by the husband in his own right. In summary, the Supreme Court unanimously held that, “in the circumstances of the case…the properties were…property to which the husband is entitled, either in possession or reversion”.

The anticipation of the legal profession

The family law profession (and indeed no doubt the corporate/commercial profession) had been waiting with baited breath on the judgement, as the outcome would have huge implications for those clients involved in cases where there are elements of company ownership.

Throughout the long history of case law in the family courts there has been a battle between the ‘corporate veil’ and the question of matrimonial assets. Company law dictates that a business has its own identity and legal standing and therefore its assets are the ownership of the company and not the individual shareholders. This causes difficulty for family lawyers as an individual may be able to ‘hide’ assets within a business in order to keep it out of the matrimonial pot.

The question therefore as to what extent the court can ‘pierce the corporate veil’ and identify any business assets as matrimonial assets had been hotly contested in this particular case, with significant ramifications for both sectors of the law.

The legal test

In handing down the judgement, the court found that the negative outcome of the specific legal tests did not allow them to ‘pierce the corporate veil’ and disregard the companies’ separate identities, but that the particular circumstances of this case meant that the properties were held on trust by the companies for the husband and so enabled them to be transferred for the benefit of Mrs Prest.

The reaction

The judgement of the Supreme Court in overturning the Court of Appeal’s decision has come as something of a surprise to most of the family law profession. In both applications the majority of those providing the judgements had backgrounds in commercial matters rather than family law. During the case it was widely thought that the relatively straight-forward nature of company law would prevail over the wide-ranging discretionary nature of family law.

It is of course worth noting that such discretion still exists notwithstanding this judgement. Family law decisions continue to be heavily ‘case-specific’ and Lord Sumpton’s lead judgement explicitly states “in the particular circumstances of the case”. The complex nature of Mr Prest’s various businesses and indeed the individual factors of the case suggest that many more cases of this nature will be subject to similar amounts of scrutiny, despite the detailed judgement.

You can read the judgement here to appreciate the complexities of the case.

The conclusion – seek advice!

If you are separating or divorcing and you own a business or are a company director, this ruling is likely to have a major bearing on your own personal circumstances. Also, if you are the husband or wife of somebody with an interest in a business then you may wish to address your rights as a result.

You can contact one of our family law experts for advice on 0113 201 4900, who will be able to provide you with assistance regarding your own personal circumstances.

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