Wednesday, 12 June 2013

Prest v Petrodel: Winning the Battle but Losing the War?

The Supreme Court today gave judgment in Prest v Petrodel. The case is about post-divorce financial arrangements, and asks what happens if one party has significant resources held by a company which he or she controls. The Supreme Court held that these assets should be taken into account by a family court judge when assessing the overall wealth and assets available to the couple. However, the judge is not then entitled to 'pierce the corporate veil' and order the company to discharge liabilities owed by one spouse to the other unless the company had been set up specifically to avoid those liabilities. That was not so on the facts of this case, though as it happened the properties owned by the companies in question were owned on bare trust for the husband, and therefore the court could order them transferred to the wife.

The consequence of that was that the wife won her appeal and the original order of the High Court Judge was restored (having been overturned in the Court of Appeal), but the reasons for doing so were different from those accepted by the High Court Judge. In terms of the legal principles, the Supreme Court unanimously upheld the Court of Appeal, meaning that the practice of some family courts of quietly ignoring the corporate veil must indeed now cease (as the Court of Appeal said at para 161). This seems like a case where the wife won her battle, but family law lost the war.

Piercing the Corporate Veil?

In law, an incorporated company has its own legal personality, and is a different legal actor from any individuals who are involved with it. Consequently, it can follow that the company is liable for things that it does, but the individuals within the company are not personally liable. The corporate veil refers to this divide between the company and the individuals. If the corporate veil is 'pierced', it means, basically, that this divide is ignored, such that either the company is (for example) made to discharge liabilities owed by an individual, or that an individual is (for example) made to discharge liabilities owed by the company.

As Lord Sumption says at para 16, there are many circumstances where similar things happen but which do not involve piercing the veil in the strict sense. So the controller of a company can be personally liable for its actions when acting as the company's agent or as a joint actor; and a company can be said to act on behalf of an individual, or to own property on an individual's behalf, if it acts as his nominee or trustee.

The Supreme Court judgment explains at length about the meaning of the corporate veil and the circumstances in which it may be 'pierced'. A 2009 decision by Munby J in the High Court provided a useful summary of the approach, and Lord Sumption summarised that decision at para 25:
Munby J formulated six principles ...: (i) ownership and control of a company were not enough to justify piercing the corporate veil; (ii) the court cannot pierce the corporate veil ... merely because it is thought to be necessary in the interests of justice; (iii) the corporate veil can be pierced only if there is some impropriety; (iv) the impropriety in question must ... be 'linked to the use of the company structure to avoid or conceal liability'; (v) to justift piercing the corporate veil, there must be 'both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or façade to conceal their wrongdoing'; and (vi) the company may be a 'façade' even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transaction. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done.
For Lord Sumption, the 'wrongdoing' in question needed to relate to an attempt to evade liability; in other words, that the company was being interposed in an attempt to protect the individual who controlled the company from having to discharge existing liabilities that he owed. (It may be noted that a majority of the Justices (Lady Hale, Lord Wilson, Lord Mance and Lord Clarke; see paras 92, 100 and 103) were cautious about being too firm in saying that this was the only route to piercing the veil.) That would apply to matrimonial proceedings if, for example, during the breakdown of the parties' relationship, the husband set up companies and moved his assets into them. However, it did not apply to Prest because the companies were genuine and had been up and running for years before the parties' marriage broke down.

Matrimonial Proceedings

The big question underlying the Prest appeal was whether proceedings for financial orders following divorce, governed by the Matrimonial Causes Act 1973, fell outside this general approach or not. In other words, was a judge in the family court entitled to pierce the corporate veil in circumstances that fell outside the general rule?

The clear answer from a unanimous Supreme Court was: no. The MCA allows the court to redistribute any property to which a party is 'entitled'. The whole point of the corporate structure is that the individual is not 'entitled' to the assets within it; they are owned by the company. If the company has been set up as a sham, or the assets have been placed in it intentionally to attempt to avoid liability under the MCA, then normal principles would allow the corporate veil to be pierced. But if, as in Prest, the family has simply arranged their finances in whole or in part using company structures, then the MCA does not offer any way to access those assets.

That does not mean that such assets are ignored by the family court. Quite the contrary: by s 25(2)(a) the court is required to have regard to the 'income, earning capacity property and other financial resources' of each spouse. Consequently, the family judge is entitled to make enquiries into assets held in companies when assessing what the overall wealth of the family before the court is, and thereafter to take into account the existence of such assets when deciding what would be a 'fair' distribution of the parties' resources.

However, if the assets are held by a company then, in the normal run of things, those assets themselves cannot be interfered with by the court. The court will have to use its powers to make orders that achieve 'fairness' as best it can without interfering with that property itself. So it can make orders that affect other property; and it can make on-going maintenance orders that rely, for example, on the husband receiving dividends from his companies in order that he can meet the maintenance requirements to his former wife; and in some cases it could order that shares in the company be transferred to the wife. But property owned by the company itself cannot be interfered with by the family court.

Discussion

The wife in Prest won her appeal, in the sense that the original order in her favour (that certain UK properties be transferred to her name) was restored by the Supreme Court. Looking at the bigger picture, though, the reasoning of the Supreme Court leads to the implication that many similar cases will not end up the same way.

The wife in Prest was able to succeed because the Supreme Court was satisfied that the companies actually held the properties on trust for the husband as bare trustees. The properties had in fact been bought by the companies with the husband's money (rather than with money in the companies), and ordinary trust law principles say that if X buys property with Y's money then, absent other information, X will be held to be a trustee of that property, holding it for Y. With such a straightforward trust (called a bare trust) the beneficiary (the husband) is absolutely entitled to end the trust at any time and take the property for himself. He is therefore 'entitled' to it in the MCA sense of the word, and so the properties were available to be transferred to the wife.

Lord Sumption cautions against making general statements of principle in the application of this doctrine, but nonetheless suggests that as regards the matrimonial home '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' (para 52). That may be so, but it would be overly optimistic to think that this assumption will be of any great help in achieving results which are 'fair' overall.

Of course, the family home is an important asset for most families; but for those with the kind of wealth to be making use of corporate structures for 'wealth management', the home is likely a drop in the ocean. If this is the only asset that, in practice, is available for the family court to transfer to divorcing wives, the overall effect will indeed by, as Thorpe LJ said in the Court of Appeal, to give 'an open road and a fast car' to the spouse attempting to keep assets out of the hands of his former spouse.

Prest therefore leads us to a good result on its facts (though note Lady Hale's caution about whether the wife might still be getting a raw deal: para 96), but it is hard to be overly optimistic about future cases ending up the same way.

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