Sarah Higgins, family partner at law firm Charles Russell, examines the impact of recent high-profile English divorce ruling on the issue of “piercing the corporate veil”.

There have been some contradictory reports as to the effect of the Supreme Court Judgment of Prest. Some reports hail the case as a victory for wives of wealthy company-owning husbands, others have said that the position of company structures in divorce cases has been strengthened.

When an English court makes a matrimonial financial order, it can order maintenance, capital and pension sharing. The obligation is to make an order which is fair in all the circumstances of the case.  There is an obligation on both parties to make full disclosure so that the court has all the facts necessary to make a fair order.

The former matrimonial home was being transferred to the wife (subject to charges) and was not part of the argument in the Supreme Court. The court  also ordered that she should  receive a lump sum of £17.5 million, £24,000 per annum for each of the four children, and school fees.   The husband had only paid the school fees. He/the companies were also ordered to pay costs. 

The first  judge ordered that various properties in companies’ names should be transferred to the wife. The court has the power to order the transfer of property between spouses, but it has to be property to which the transferring party is “entitled”.

The Supreme Court confirmed that legally a company is a legal entity distinct from its shareholders.  Limited companies had been the principal unit of commercial life for more than a century.  Their separate personality and property are the basis upon which third parties deal with them.  

In this case the husband treated the companies’ cash balances and property as his own moneybox.  This did not mean, however, that the corporate veil does not matter where the husband is in sole control of the company.

There was a discussion as to what piercing the corporate veil means.   Properly speaking it means disregarding the separate personality of the company.     

The court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing.  The court decided that if there is no justification as a matter of general legal principle for piercing the corporate veil, there is not a special wider principle which applies in matrimonial proceedings.  

However, a spouse’s ownership and control of the company and ability to extract money will be relevant to the court’s assessment of its resources.   But that does not mean that the court has the power actually to transfer those assets from a company to a spouse.  The court can order the transfer of the shares, but in a case like this where the shareholder and the company are both resident abroad, this is likely to be ineffective.  The wife was interested in the properties because they were in England.  

Resulting trusts

The Supreme Court said that the court was entitled to draw inferences from Mr Prest’s failure to give evidence or produce documentation in relation to the properties and the companies, so that it could be inferred that each property was in fact held on trust for Mr Prest by the companies. For instance, some properties were transferred for only £1 consideration.

The court agreed that judges exercising family jurisdiction are entitled to draw on their experience and take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing.  

The court suggested that in the case of the matrimonial home the facts are quite likely to justify the inference that the company was held on trust for a spouse who owned and controlled the company.

Nuptial settlement

The wife sought to argue that the companies constituted a nuptial settlement but leave was refused to argue this and the court decided that that was not seriously arguable.  

Comment

The conclusion is that piercing the corporate veil should only be invoked where the person is under an existing legal obligation which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. Mrs Prest was successful on the facts in that the properties were to be transferred to her, although subject to charges, but she was unsuccessful in many of her arguments.  In fact, if anything the practice of the family courts in having more ready access to company assets has been curtailed. The discussion on the rare opportunities to pierce the corporate veil highlights that this route is unlikely to assist any spouse in a successful attack on the company assets: instead, the resulting trust route is going to have to be explored. If the assets have been acquired for value in the ordinary course of business and evidence is provided to this effect, no presumption will arise of a resulting trust, and the spouse’s claims are unlikely to succeed, leaving the company’s assets intact.