Courts can "pierce" corporate veil in limited circumstances
Seven Supreme Court Justices unanimously allowed the wife’s appeal in oil tycoon Michael Prest’s divorce from his wife, Yasmin, opting for a trusts approach rather than directly “piercing” the corporate veil in a case that has significant implications for divorce and company law.
The Court’s decision to uphold the wife’s appeal in the case means companies wholly owned and controlled by Mr Prest must transfer various properties to Mrs Prest, in Prest v Petrodel Resources Ltd [2013] UKSC 34.
Delivering the lead judgment, Lord Sumption said the courts could, in limited circumstances, lift the corporate veil, when “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.
“The court may then pierce the corporate veil but only for the purpose of depriving the company or its controller of the advantage which they would otherwise have obtained by the company’s separate legal personality.”
However, Lord Sumption added that this principle did not apply to the present case because the husband did not evade or frustrate any legal obligation to his wife. The Court also rejected the argument that a broader principle applies in matrimonial law by virtue of s 24(1)(a) of the Matrimonial Causes Act 1973.
It ruled that “the most plausible inference from the known facts” was that each of the properties was held on trust by the companies for the husband. The reason the companies failed to disclose evidence and co-operate with the court was to protect the properties, which suggested proper disclosure would reveal them to be beneficially owned by the husband. Therefore, there was no reliable evidence to rebut the most plausible inference from the facts.
Mr Justice Moylan in the High Court initially ordered Mr Prest, whose net assets were estimated to be £37.5m, to pay his wife £17.5m plus £24,000 per annum and school fees. This was to be partly paid in the form of properties belonging to Mr Prest’s companies. The companies appealed and the Court of Appeal held that the corporate veil could not be pierced unless there was dishonesty or fraud.
Geraldine Morris, solicitor and head of LexisPSL Family, said: “The Supreme Court’s decision to allow the wife’s appeal in Petrodel v Prest has come as a surprise to many family lawyers. It had been anticipated that the appeal would fail on the basis that established company law (per Salomon v A Salomon and Co Ltd [1897] AC 22) would defeat the appeal on the basis that the corporate veil should not be pierced in family cases save in very exceptional cases. However, the Supreme Court upheld the decision at first instance of Mr Justice Moylan, but for the different reason that the companies held assets on trust for the husband as he had provided the funds to purchase properties owned by the companies.
“The impact on the approach taken previously by the Family Division in such cases shouldn’t be disregarded however, the Supreme Court was clear that Salomon would apply in the majority of cases and that no special meaning should be given to s 24 of the Matrimonial Causes Act 1973. The success of the wife’s argument regarding trusts was also bolstered by the lack of evidence put forward on this point by the companies and the husband, which was criticised by the Supreme Court.”
Robin Charrot, family partner at Mills & Reeve, said: “This ruling will severely limit the availability of this so-called 'cheat's charter'.
“However, it is important to note that the reason used for the ruling was not the same as that used by the original trial judge. The Supreme Court specifically stated that they were not piercing the corporate veil, and that family courts cannot simply give company assets to wives just because the sole owner and controller of the company is the husband.
“The justification for the Supreme Court's decision was that the husband, and not the companies, had originally provided the funds for the properties to be bought. So, applying trusts law principles, the companies held the properties in trust for him, he was 'entitled' to them, and therefore the court could transfer them to the wife.
“In this respect, the husband and the companies have got their comeuppance, because although there was no conclusive evidence of him providing the funds, the court said it could draw that conclusion where the husband and the companies had been deliberately obstructive.
“This is the result that most people will believe to be the fair outcome - giving the divorcee the share of assets they are owed.”
