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Family Law or Company Law – which takes precedence?

Posted
July 15, 2013
Family Law

At long last, the Supreme Court has finally handed down its decision in the hotly contested case of Prest v Petrodel. This decision would determine whether Family Law takes precedence over Company Law and would clarify whether one spouse’s assets, although legally owned by a company, could become directly vulnerable to financial claims made on divorce. In this article, three different perspectives are offered on the implications this decision could have on Family Law, Company Law and Insolvency. Background to decision Mr and Mrs Prest were of dual British and Nigerian nationality, but were domiciled in the UK and divorce and financial remedy proceedings were issued here by the wife. The key issue at hand concerned a number of companies, which belonged to a group known as the “Petrodel Group”.  The Petrodel Group was found at first instance to belong solely to the husband. One company in the Petrodel Group was the legal owner of the matrimonial home and five other residential properties whilst another company was the legal owner of two residential properties. Mr Justice Moylan, who presided over the first hearing in the Family Division, quantified the wife’s entitlement at £17.5 million and ordered that these seven properties be transferred to her in partial settlement of this lump sum.  His reasoning was that there was no general principle that entitled a court to transfer company assets by piercing the corporate veil but that section 24 of the Matrimonial Causes Act 1973 gave him a wider jurisdiction to pierce the corporate veil, if it was found that the property capable of being transferred belonged to one party. The Petrodel Group successfully challenged this order in the Court of Appeal, and Mrs. Prest appealed to the Supreme Court. Supreme Court decision 

1.   There is only a limited power to pierce the corporate veil where "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" (Lord Sumption). There is no doctrine of “piercing the corporate veil”. It is a label loosely used to describe disparate occasions on which some existing rule of law produces apparent exceptions to the rule first established in Salomon v Salomon in 1897, that a company has a separate legal personality. Whilst the Supreme Court would not rule out a doctrine, it reaffirmed that it would only be available to use if no other principle was available. It has never been correctly and effectively exercised in the English courts. 

2.   Section 24 of the Matrimonial Causes Act 1973 does not give the court any greater power to pierce the corporate veil than is available under common law. 

3.   As Mr. Prest transferred the properties to the Petrodel Group, sometimes for as little as £1, it was held that the Petrodel Group held them on a resulting trust for him, and that he was therefore the beneficial owner. Therefore, in the words of Section 24, he was "entitled, either in possession or reversion" to them such that the Petrodel Group could be ordered to transfer them to Mrs. Prest. The matrimonial home This decision will be of limited use in most cases as it is fact-specific, however Lord Sumption did venture to suggest that in the case of a matrimonial home held via a company "the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company"  which owned it, especially where neither spouse was paying the company rent.

Company Law implications It is a long-established principle in English Company Law that a company has separate legal personality and is independent from its shareholders. Merely owning a company has not been sufficient reason for the courts to pierce the corporate veil in legal proceedings and transfer company assets to another party. In this case it was key to the Supreme Court’s decision that the husband rather than the companies had originally provided the funds with which to purchase the properties. In accordance with trust law, the court held that instead of the properties being assets owned by the companies, the companies were holding these properties on trust for the husband as they had not paid a market price for them. The husband was therefore the beneficial owner of the properties so the court could transfer those assets to the wife without piercing the corporate veil. The court was also influenced by the fact that the husband had deliberately sought to conceal facts, failed to disclose evidence as required and failed to comply with court orders. It is important to note that the Supreme Court made it clear that the decision does not give the green light to family courts to transfer company assets to a spouse purely because the other spouse is the sole owner and controller of the company. What this decision does mean is that business people cannot deliberately hide assets in companies in order to prevent those assets being part of the divorce settlement. Insolvency law implications 

In instances where individual seeks to hide assets from creditors  this decision affirms that other avenues should be used first, for example Transactions defrauding creditors (s.423 Insolvency Act 1986), Transactions at Undervalue (s.239 Insolvency Act 1986), dishonest assistance and beneficial ownership claims such as Resulting Trust, which was the basis on which this case was decided. Only if none of these entitlements exist, would the court listen to arguments around “piercing the corporate veil”. Even then the decision is likely to be based on true rights of possession and reversion. The article was written by Gavin Pickering, Emma Cregan and Hana Khodabocus of stevensdrake For more information call 01293 596900 or visit www.stevensdrake.com This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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