THE BLOG

Lifting the Veil: Tycoons, Divorce and Enforcement

13/06/2013 17:49 BST | Updated 12/08/2013 10:12 BST

Running a successful, tax-efficient company is not always straightforward.

The bigger it becomes, the more it may diversify. Trading in an ever greater number of countries can lead to the setting up of a multitude of subsidiaries with offices in far-flung parts of the world.

It can sometimes be difficult for tax authorities to establish the precise structure of companies in order assess what their liabilities may be. Major brands such as Google and Apple have recently come in for criticism due to their use of offshore havens and offices in corporation-friendly regimes, such as Ireland.

Imagine, then, how complicated it can be for a husband or wife trying to pin down and then get access to assets during divorce proceedings which may have benefited former spouses but were ultimately owned and controlled by their businesses.

A so-called "corporate veil" exists, which is a legal principle distinguishing personal and company assets. A company is usually established to protect the personal assets of those involved in a business as it limits the amount that can be paid to creditors to the assets of the business. It can also provide tax benefits.

In divorces, assets held by companies in which a spouse has an interest are taken into account but the court has limited powers to deal with such assets due to the legal structures in which they are contained.

That could change because of a ruling by the Supreme Court in the case of Nigerian oil tycoon Michael Prest and his ex-wife, Yasmin. The judgement has clarified the grounds upon which such challenges can succeed and may open the door to similar claims.

Mr and Mrs Prest separated in 2008 after a 15-year marriage during which they had four children. Following their divorce, she was awarded the matrimonial home and a lump sum payment of £17.5 million, just under half his estimated total wealth.

Mr Prest was ordered to procure the transfer to his ex-wife of seven UK properties, owned by companies in which he has an interest, as part payment of the lump sum.

However, the order was not fulfilled as Mr Prest maintained that the properties were not his but belonged to the companies and, therefore, the court did not have the power to order their transfer.

Last year, the Court of Appeal upheld Mr Prest's argument but Mrs Prest pressed on and took her case to the Supreme Court.

It decided that the companies were in fact holding the properties in question on trust for Mr Prest and that it does have the power to order that he procure their transfer and that he should honour the original settlement.

The ruling is significant in that it sends out a strong message about how determined the courts are to ensure the enforcement of divorce settlements.

Some commentators have suggested that the ruling is bad for business or even cements London's fabled status as "divorce capital of the world". I would contend that neither is strictly true.

In the future, as now, judgements in divorce cases will remain fact-specific. Upon the evidence given, the Supreme Court Justices concluded that the properties owned by Mr Prest's companies were held on trust for him.

An earlier hearing had seen him described as "unreliable" with company employees used as "stooges" to support his assertion as to why he could not - and should not - implement the settlement which had been ordered.

One would therefore anticipate that correctly run companies need have nothing to fear.

Courts in London and elsewhere in England and Wales will also continue to ensure that wives and husbands receive what is fair on divorce. That is not a new development.

What is novel, though, is the likely spur which the Prest ruling will give to the number of divorce cases in which companies find themselves embroiled, where it is alleged that the company holds assets on trust for one of the spouses.

I suspect that will also be true of cases involving businesses of relatively modest means and not just the multi-million pound corporations run by the likes of Michael Prest.

The judgement does not provide carte blanche for parting couples to raid each other's company stakes. However, lifting the "corporate veil" a little higher means that someone's unwillingness to give a former spouse their rightful share of assets just because they may be formally owned by a business is a less sturdy defence than it has been before.