Ancillary Relief and the Corporate Veil
On 12th June 2013 the Supreme Court handed down the much-anticipated judgment in the case of Prest v Petrodel Resources Limited & Others [2013] UKSC 34; [2013] 3 WLR 1. This case provides guidance on the limited occasions when Courts hearing financial remedy applications can look to corporate assets as part of their deliberations.
Summary of Factual Background
Husband was born in Nigeria and Wife in England. Consequently, both parties had dual Nigerian and British nationality. The parties were married in 1993. The Wife petitioned for divorce in March 2008 and the Decree Absolute was pronounced in November 2011. The former matrimonial home (FMH) was situated in England, but the Husband was found to be resident in Monaco from 2001 to the present date.
Husband wholly owned and controlled a number of companies belonging to the Petrodel Group. Originally, seven companies of the Group were involved and all were joined to the Wife's application for ancillary relief. However, of those seven companies, a company named PRL was the legal owner of the FMH, as well as the legal owner of five further residential properties in the United Kingdom. A second company, named Vermont, was legal owner of two further residential properties in the UK.
First Instance Decision
Moylan J was the judge of first instance and found that the husband was the sole beneficial owner and controller of the companies and had net assets in the region of £37.5 million. Numerous orders for disclosure were either ignored or evaded by the Husband and various attempts were made by him in evidence to conceal the extent of the company’s assets.
Moylan J, in his order of 16th November 2011, ordered that the Husband should transfer the FMH to the Wife, as well as £17.5 million as a lump sum and periodical payments at 2% whilst the sum was outstanding. Furthermore, the judge ordered the Husband to procure the transfer of the seven UK properties to the Wife, in partial satisfaction of the lump sum.
In making the above order, Moylan J concluded that there was no general principle of law that allowed him to “pierce the corporate veil”, as the authorities showed that corporate personality could not be disregarded, unless it was being abused. In this case, the judge found that there was no relevant impropriety, but went on to say that s24 of the Matrimonial Causes Act 1973 offered a wider jurisdiction to applications for financial remedy proceedings, so allowing him to “pierce the veil”.
Moylan J found that the FMH was held by PRL on trust for the Husband, but made no corresponding findings about the other seven UK properties and refused to make a declaration that Husband was the beneficial owner of those seven properties.
The Court of Appeal
Perhaps unsurprisingly, the three relevant respondent companies appealed the order of Moylan J, asserting a lack of jurisdiction to order the transfer of corporate property to meet Husband’s judgment debt.
In allowing the appeal, Rimer LJ’s leading judgment held that the practice developed by the Family Division, of treating the assets of companies substantially owned by one party to the marriage as available for distribution under s24, was beyond the jurisdiction of the court unless:
(i) The corporate personality of the company was being abused for a purpose which was in some relevant respect improper; or
(ii) On the particular facts of the case it could be shown that an asset legally owned by the company was held in trust for the husband.
The Court considered that Moylan J had rejected both of the above situations and that he ought not therefore to have made the order.
Furthermore, Patten LJ said that the Family Division had developed “an approach to company owned assets in ancillary relief applications which amounts almost to a separate system of legal rules unaffected by the relevant principles of English property and company law” and that this practice “must now cease”.
The Supreme Court
The Wife then appealed to the Supreme Court and the matter was argued before their Lordships in March 2013.
In his leading judgment, Lord Sumption JSC provided that (para. 9), “there are three possible legal bases on which the assets of the Petrodel companies might be available to satisfy the lump sum order against the husband:
(1) It might be said that this is a case in which, exceptionally, a court is at liberty to disregard the corporate veil in order to give effective relief.
(2) Section 24 of the Matrimonial Causes Act might be regarded as conferring a distinct power to disregard the corporate veil in matrimonial cases.
(3) The companies might be regarded as holding the properties on trust for the husband, not by virtue of his status as their sole shareholder and controller, but in the particular circumstances of this case.”
What followed was a detailed analysis of the case law relating to corporate personality and the limited circumstances when the courts will ‘go behind’ this protection (para 27):
“In my view, the principle that 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 is well established in the authorities… I would not for my part be willing to explain that consensus out of existence. This is because I think that the recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse. I also think that provided the limits are recognised and respected, it is consistent with the general approach of English law to the problems raised by the use of legal concepts to defeat mandatory rules of law.”
Lord Sumption concluded at paragraph 35:
“There is a limited principle of English law which applies 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 for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil….I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course.”
In application to the instant case, Lord Sumption found that the piercing of the corporate veil could not be justified in this case by reference to any general principle of law. Similarly, and in agreement with the Court of Appeal, Lord Sumption found that s24 did not provide any “special and wider principle”. This meant that Lord Sumption arrived at the following conclusion (para 43):
“The only basis on which the companies can be ordered to convey the seven disputed properties to the wife is that they belong beneficially to the husband, by virtue of the particular circumstances in which the properties came to be vested in them. Only then will they constitute property to which the husband is “entitled, either in possession or reversion.””
His Lordship went on to clarify that the evidence in this case of beneficial ownership by Husband depended on the presumptions that could be properly made due to Husband’s “persistent obstruction and mendacity”. He also went on to comment that, although financial proceedings are “in form adversarial”, they have a “substantial inquisitorial element”:
“The judge's findings about the ownership and control of the companies mean that the companies' refusal to co-operate with these proceedings is a course ultimately adopted on the direction of the husband. It is a fair inference from all these facts, taken cumulatively, that the main, if not the only, reason for the companies' failure to co-operate is to protect the London properties. That in turn suggests that proper disclosure of the facts would reveal them to have been held beneficially by the husband, as the wife has alleged.” (Para 47)
In reversing the Court of Appeal’s decision and upholding the order of Moylan J, albeit on different grounds, Lord Sumption inferred that the seven UK properties were beneficially owned by the Husband and so held on trust for him by the companies. His Lordship concluded with some general advice (para 52):
“Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of 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. In many, perhaps most cases, the occupation of the company's property as the matrimonial home of its controller will not be easily justified in the company's interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company's beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband's beneficial ownership.” (Emphasis added)
Commentary
Whilst at first glance this case looks like a great victory for those (usually wives’) solicitors that seek to obtain orders over company assets, the judgment actually provides an affirmation of corporate personality and an implied rebuke of Family Division practice. In fact, the rebuke is not particularly well hidden (para.37):
“Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different. If a right of property exists, it exists in every division of the High Court and in every jurisdiction of the county courts. If it does not exist, it does not exist anywhere.”
So, in fact this case might, or perhaps should, lead to fewer instances of ‘corporate veil piercing’ and greater scrutiny of the company-related case law by judges considering financial remedy applications.
However, this case does provide useful confirmatory dicta about former matrimonial homes in corporate ownership (see para.52, as set out above), as well as setting out clear guidance on those limited circumstances when the ‘corporate veil’ can and should be ‘pierced’. In short, these are:
a) 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; and/or
b) When a beneficial interest in a corporate asset can be shown or inferred to the spouse, by reference to the particular circumstances that led to the title being vested in the relevant company.
The above case summary and commentary is for interest only. Any person seeking to rely upon this case should, of course, consult the full judgment, available at http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2013_0004_Judgment.pdf.
