Prest v Petrodel: The corporate veil has not been pierced, but I can read the word ‘fairness’ through it
14th June, 2013
The long awaited decision in the case of Prest v Petrodel Resources Limited & Others has today been seen as a victory for fairness and common sense in cases where the reality of the nature of assets are in question.
By way of background, in 2011 Mr Justice Moylan ordered Mr Prest, the founder of the Nigerian energy company Petrodel, to pay £17.5m to his former wife Mrs Prest, in payment of their divorce settlement.
Moylan J was concerned that given Mr Prest’s behaviour in the proceedings, ignoring previous orders made against him, he would be unlikely to make payment and therefore made a provision that Mr Prest should transfer 14 properties held by the company to his former wife as part payment. In addition Moylan J found that Mr. Prest had deliberately sought to conceal his interest in the properties in his evidence and lack of disclosure.
Moylan J also stated that there was no general principle that entitled a court to transfer company assets by ‘piercing the corporate veil’ but that there was a wider discretion to pierce the veil under of s24(1)(a) of the Matrimonial Causes Act 1973 which allows the court to transfer property to the other party which Mr Prest would be “entitled to either in possession or reversion”. Mr Prest appealed.
In October 2012, the Court of Appeal agreed with Mr Prest and decided that Moylan J had been wrong.
The Court of Appeal, which interestingly was made up of two commercial judges and one family judge who disagreed with his fellow judges in their decision, ruled that the properties did not belong to Mr Prest but rather belonged to the company and therefore not properties within the scope of s24(1)(a) of the Matrimonial Causes Act 1973 as property which may be subject to an order for transfer to the other party which he would be “entitled to either in possession or reversion”.
The majority judges, both of commercial backgrounds, also added criticism of the family courts for routinely treating company assets as assets to be dealt with in the divorce under s24 MCA 1973. This caused concern for many family practitioners and seemed to create a “cheats charter” for the ‘money makers’ and against well established principles of family law.
Interestingly, at the appeal Mrs Prest filed a Respondent’s Notice which stated that if s24 MCA 1973 was not an argument which succeeded the court should uphold Moylan J’s order on the basis that the companies held the properties on trust for the husband. At the Court of Appeal, the two commercial judges did not agree stating that such an argument would be “not only difficult but impossible”.
Mrs Prest then appealed to the highest Court, the Supreme Court, where all seven judges gave more credence to Mrs Prest’s submission and who today ruled in her favour allowing the appeal on the basis of the above, her second of her two main grounds of appeal and re-instating Moylan J’s original order.
The Court, led by Supreme Court Justice Lord Sumption and made up of five commercial judges and two family judges, re-asserted one of the most fundamental commercial law principles – that the company must be a distinct entity and independent from the individual controlling it and its shareholders and that ownership of a company would not entitle the corporate veil to be pierced to claim against its assets unless there had been circumstances of fraud or dishonest use of the company whereby the veil could be pierced but only to deprive the company or owner the advantage they would have obtained by the companies separate legal personality.
Family judges had traditionally been more flexible and liberal in their views as to the entitlement of company assets in divorce settlements where they felt it ‘fair and reasonable’ to allow claims to be made where assets had been used to fund the family’s lifestyle.
The court therefore took the view that although Mr Prest ran the companies and used them as a ‘private piggy bank’, there was no impropriety which was sufficient to pierce the corporate veil but due to the circumstances in which he had provided the funds for the purchase of the properties for the companies, the companies
therefore held the properties upon trust for him by way of a beneficial interest for the husband. This beneficial interest was capable of being transferred as per the order of Moylan J under s24 MCA 1973 and therefore the Supreme Court directed that this should happen.
Therefore assets held in the name of a company which in reality are owned beneficially by a spouse can be subjected to claims by the other spouse and ordered to be transferred by the court.
The Supreme Court did, however, reject the first point of Mrs Prest’s appeal that s24 MCA 1973 could be construed to include property owned by a company, thus re-enforcing the strict commercial rules and protecting assets of companies properly run and where the company does actually own its own separate property.
Lord Sumption SCJ also stressed the importance of proper disclosure of financial assets and the potential damage non disclosure could bring where the court could, in its experience, draw inferences as to what is being hidden.
The decision will be sweet music to those concerned that a spouse has hidden or protected assets and a sour pill for wealth protection professionals and ‘cheating spouses’ seeking to protect and evade claims brought upon divorce.