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Landmark Divorce Ruling Doesn't Tackle 'Cheat's Charter'

13/06/2013 20:11 BST | Updated 13/08/2013 10:12 BST

This week the UK Supreme Court upheld an appeal by the wife of an oil tycoon, arguing that a number of properties owned by her husband's company should be included in their divorce settlement.

The case (Prest v Petrodel) drew much interest, not only because of the big money involved, but also because it pitted two areas of the law against each other - family law and commercial law.

Those in Mr Prest's corner argued that to uphold his wife's claim would risk destabilising a fundamental part of the legal structure governing the ownership of companies. Meanwhile, family lawyers argued that a judgment in his favor would establish a "cheat's charter" - effectively incentivising wealthy spouses to hide assets from their other half by tying them up in complex business structures.

In fact, the court found a way to look after Yasmin Prest's interests without giving spouses special access to company assets. But, in doing so, it still amounts to a blow to many seeking a fair outcome where assets are held in this way.

The case first hit the headlines in 2011 when a High Court divorce Judge ordered Mr Prest to transfer 17 properties, with a value of about £17.5 million, to his wife. The complication was that the properties were not legally owned by Mr Prest but by a Nigerian oil company - Petrodel Resources.

However, the company was co-founded by Mr Prest and he had complete control over its finances, using them for his and the family's benefit - so the judge ruled that Mrs Prest had a claim to a significant portion of its value. After Mr Prest successfully appealed the decision, the case made its way to the Supreme Court.

The main contention was that the purpose of limited companies is to encourage entrepreneurship - if a business has debts and goes under, those debts remain with the company and not with the founder - and this has been the case since the 19th century. So it's valid to ask why a family court should be entitled to dismiss this legal structure which is so vital for a successful business community.

Actually, in its decision the court has in fact made it much harder for divorcing couples to pursue property owned through limited companies. The trend that had been starting to develop of the court being able to "pierce the corporate veil" in circumstances where a limited company is, in reality, a person's alter ego has now been stopped. Mrs Prest managed to be successful not by going through the corporate veil but by being able to show that Mr Prest had directly benefitted from the properties in question. The court was also somewhat critical of Mr Prest which no doubt resulted in it trying to find any way it could to assist Mrs Prest.

In this respect, the judgment effectively holds up the 'cheat's charter' argument. It allows any wealthy individual with a competent legal advisor to organise their affairs to severely restrict their spouse's entitlement in a divorce, as long as no-one can establish a link between the two.

Whether Mr Prest's failure to defend his position dissuades others from following in his path or means certain limited company structures now sit alongside pre-nups as a powerful tool in protecting assets remains to be seen.

Of some comfort, however, is just how far the Supreme Court was willing to go to try and achieve a fair outcome in this specific case.