Last month, the Court of Appeal delivered it's controversial judgment in the case of Petrodel Resources Ltd & Ors v Prest & Ors.
The decision of the Court of Appeal means that in financial proceedings arising out of divorce, the starting point is that family court judges may not make orders against company-held property. The practical effect of the decision is that if a spouse ties up their assets within the structure of a legitimate limited company, they may avoid their financial obligations on divorce.
The pertinent facts of the case are as follows:
The parties were both 50. They were married in 1993 and had four teenage children. The husband was in the oil trade. The parties were very wealthy and their matrimonial home had been worth in the region of £4 million. The husband had acquired eleven other properties in London, all bar one of which were in the name of three Isle of Man companies collectively known as the Petrodel Group. The husband's wealth was estimated to be in the region of £37.5million.
The outcome of the case turned on whether it could be said that the husband was "entitled" to the properties held by the Petrodel Group and therefore whether those properties were part of the matrimonial assets and therefore available for division.
In the first instance decision the High Court concluded that the husband was indeed "entitled" to the properties held by the companies. The trial judge, Mr Justice Moylan, said:
"In this case the husband can without inhibition acquire the properties and shares which the wife seeks because in effect, the companies are his nominees or agents.... There exists no legal impediment to his procuring the transfer of the assets held by the companies into his name. In the language of the cases they are his 'alter ego'."
Consequently, Mr Justice Moylan ordered that the companies in the Petrodel Group transferred properties to the wife to satisfy a capital award of £17.5 million.
However, the companies appealed the decision and the case was then heard by the Court of Appeal. In his Court of Appeal judgement, Lord Justice Rimers view was that:
"[The 1897 case of] Salomon is House of Lords authority affirming the distinction between the separate legal personalities of a company and its corporators...It is not open to a court, simply because it regards it as just and convenient, to disregard such a separate identity and to appropriate the assets of a company in satisfaction either of the monetary claims of its corporators' creditors or of the monetary ancillary relief claims of its corporator's spouse."
In other words, a company is a separate legal entity and owns assets in its own right. A company cannot and should not be stripped of its assets to satisfy the personal debts of the directors or shareholders.
Lord Justice Rimer concluded that, despite the fact that the husband was the 100% owner of the companies, and that in practice he could deal with the companies' assets as he wished, it did not follow that he was the beneficial owner of the assets. He concluded that the husband was therefore not "entitled" to the properties held by the companies, and that the High Court was wrong to order the companies to transfer properties to the wife.
The saving grace for the economically weaker party in this type of scenario is that if they can demonstrate that their spouse transferred property to a company with the specific intention of defeating their claims, then the court may still disregard the corporate structure and make orders against company held property. This is known as "piercing the corporate veil". In this case the company structures had been set up for the purposes of asset protection and tax avoidance and the whole family had benefited from the arrangements throughout the marriage. The trial judge therefore found no impropriety linked to the use of the corporate structure to avoid or conceal liability, and therefore the corporate veil could not be pierced and the corporate structure could not be disregarded.
The implications of the decision have divided the legal community. One view is that the decision finally reins in the family court judges, sometimes accused of making orders that ride roughshod over strict principles of property and company law.
On the contrary, it is undeniable that the decision emasculates the family court and limits its powers to look at the reality of a couple's financial affairs. In this case the Court found that the Husband had, and would continue to have unrestricted access to the wealth held by the Petrodel Group and yet concluded that he was not "entitled" to it - a conclusion that a lay person is likely to find puzzling. The wife's legal team went further and highlighted the sinister ramifications of the decision, commenting that "Devious men who want to avoid making fair provision for their wives will rejoice at this decision".
The Court of Appeal decision is not yet the final word on this challenging issue. Mrs Prest has been given permission to appeal to the Supreme Court. The Supreme Court decision is likely to become the definitive authority on the interaction between the family law jurisdiction and the commercial world. The legal community will be following the case with keen interest.
If you require any further information about the issues raised, please contact Sonny Patel or any other member of the Family Team at Seddons for further information.