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Prest: 'Evasion' will make the court look behind corporate personality

Following judgment in VTB v Nutritek [2013] UKSC 5, Mrs Prest was cautioned on several occasions not to hold her breath with regard to a favourable outcome in her own appeal to the Supreme Court. So no doubt Mrs Prest is now breathing a hearty sigh of relief after a unanimous Supreme Court allowed her appeal last week. Sumption SCJ's leading judgment was very clever. Successive courts had taken a particularly dim view of the litigation conduct of the husband and the companies, and the “abject failure of the husband to comply with his disclosure obligations”. Everyone knew what the fair and just result was – but could this be at the expense of well-settled principles of company commercial law? Ultimately the Supreme Court, perhaps “pour encourager les autres”, found that on a factual basis the properties could be said to be held on trust for the husband, not because of his status as sole owner and shareholder but because the particular facts of the case justified this conclusion. Sumption SCJ determined that there ?was nothing in the scope of section 24(1)(a) of the Matrimonial Causes Act 1973 that permitted Moylan J to dispose of the properties that were the subject of the dispute, in the way in which he had. Likewise, family practitioners were once again reminded that “courts exercising a family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different.” So the law applies in all divisions equally. So far, so good. Commercial litigators have always held this as a truism. But, interestingly, there was confirmation of sorts that the doctrine of “lifting” or “piercing the corporate veil” is a tool which is available to the courts but exists in very confined circumstances. Neuberger SCJ considered that he had been strongly attracted to the idea of giving the controversial doctrine its quietus. Walker SCJ posited that it was not a doctrine at all but a label used somewhat indiscriminately by the courts to overcome the hurdle of separate juristic personality of a body corporate. Clarke SCJ decided that there was a doctrine of piercing the corporate veil although its limits were not clear. That being said, Clarke SCJ considered it could be deployed by courts only where more conventional remedies have proved to be of no assistance. Ultimately however, the definition Sumption SCJ considered is the one which is likely to be applied in the future; that is “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 Supreme Court referred to the above, at time, as the “evasion principle” and Clarke SCJ cautioned us all not to be encouraged to think that an extension to this principle was likely to be easy to establish – “it is not”.So what are practitioners to think? Ultimately, in almost all cases, attacking an opposing party on the basis that a court should “pierce the corporate veil” will not succeed. Given the Supreme Court's guidance, other, more attractive arguments will be capable of being deployed in any event. Only after these have been exhausted and a client can demonstrate that they fall within the “evasion principle” should a court be invited to go behind corporate personality.

Prest: transfer of assets to corporate structures will be harder to challenge

Family lawyers' hopeful anticipation of the judgment of the Supreme Court in Petrodel v Prest has been misplaced. Those voices shouting about a new dawn in the treatment of assets held in limited companies in financial remedy proceedings can fall silent. Prest does not herald this. While the Supreme Court judgment does afford Yasmin Prest a claim over assets held by a limited company, to get to this result the court confirmed that the corporate veil doctrine survives intact (despite Lord Walker expressing doubt as to whether any such doctrine properly exists) and upheld the view of the Court of Appeal that section 24 of the Matrimonial Causes Act 1973 did not assist. Instead, on the facts of the case and based on an inference derived therefrom, Mrs Prest obtains her remedy. The reasoning behind this is so fact-specific that the judgment can easily be distinguished. Working backwards The reasoning used by the court is also open to criticism as being the result of having started at the conclusion to be reached, and then working backwards. It can be in no doubt that Mr Prest's approach to the proceedings was open to criticism: "characterised by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders" (Lord Sumption at [4]). Moylan J at first instance found that Mr Prest was the sole beneficial owner of the companies and made a lump sum order, applying section 24. The Court of Appeal found that Moylan J had on the facts rejected both the improper abuse of corporate personality argument and the trust argument and as such should not have made the order that he did. Lord Sumption in considering the beneficial ownership of the properties noted at [45] that the special features of ancillary relief proceedings such as: a quasi-inquisitorial nature; the burden of proof, a main factor inhibiting the drawing of adverse inferences, cannot be applied in the same way as in civil proceedings; and judges can draw on their experience and "take notice of the inherent probabilities" when faced with an uncommunicative spouse. For all of these reasons, the court concluded that on the facts it was entitled to draw an adverse inference. The inference drawn from the companies' non-disclosure was that this was to conceal Mr Prest's ownership; the inference from Mr Prest having purchased the properties was that on transfer to the companies they held the properties on a resulting trust for him. Thus, having upheld the "doctrine" of the corporate veil; having concluded that section 24 does not apply, the court fell back on inferences drawn from non-disclosure and initial funding sources to disregard the legal ownership of the properties and declare that they are held on resulting trusts. It sits uncomfortably that separate legal personality and ownership can be disregarded based on such inferences, which have the feel in the circumstances of this case to be a device to achieve the result required. The fact that such inferences will, absent such blatant disregard of disclosure orders, be extremely difficult to draw and will be easily rebuttable with clever planning likely leaves the result in Prest as an academic anomaly. In the absence of such extreme non-compliance, it now appears settled that a party can avoid assets falling within the matrimonial pot by transferring them into corporate structures.

Prest: a very English solution

In Prest v Petrodel the Supreme Court kept company law principles intact and used property and trust law to reach a fair conclusion - but not all agree with Lord Sumption. Hazel Wright takes a closer look at the decision, while our commentators share their own take on the longer-term implications of the decision (see box below)

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The Supreme Court's judgment in Futter v HMRC and ?Pitt v HMRC has clarified the law of mistake, but, argues ?John Toth and Hannah Batten, that clarity may not ?help mistaken trustees in future

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PII Focus | The solicitors market: an attractive proposition for insurers from October

2012 saw the rise of the unrated insurer. It was an unhappy experience for a number of firms, as indemnity partners all over the country became experts in the eligibility criteria for the Financial Services Compensation Scheme. The Law Society published its first ever advice on “insolvency of a qualifying insurer”. Our regulators continue to make it clear that they do not vet, approve, or regulate, qualifying insurers and the benefits of a rated provider are being pressed heavily on us, by the rated providers. “Financial strength” will resonate through their typeface in the marketing material this summer. It is possible that the solicitors market will become even more attractive for both rated and unrated insurers this year. With effect from 1 October 2013, firms without insurance will no longer go into the ARP. They will have 90 days to obtain cover with a qualifying insurer; if they don't get it they will have to cease practice. All of this, together with changes from October 2012, means that the financial burden of those firms and the ARP on qualifying insurers will continue to reduce. 2012 saw a modest reduction in the total premium income for qualifying insurers. 2013 is unlikely to see a significant change, one way- ?or the other.So who are the winners and losers and where is the smart money this year? Estimates for the 2012/3 year of indemnity suggest that up to a quarter of firms took out their insurance with unrated insurers. Almost of those were small firms – sole practitioners or two to five partner firms. In the meantime the claims experience is not getting any better in the areas typically undertaken by smaller firms. Some insurers saw increases in the number of residential property transaction, and trusts and probate claims continuing from 2011/12. Some firms will continue to feel  pressure to pay the lowest price. Whether this is enough to buy them financial strength will turn predominantly on their claims history and risk management. There are though some new factors. Insurers will be looking closely to see whether firms have embraced the introduction of COFAs and COLPs to overhaul and improve their risk and financial management systems. Client acceptance procedures and funding arrangements are the key areas to be able demonstrate strong systems and supervision in. Changes to CFAs, the introduction of DBAs and the continued expansion of third-party funding are all areas affecting a firm's financial stability and law firm stability has shot up the agenda of insurers over the last year.For the larger commercial firms 2012 saw rates levelling out for those with a typical claims history. Fifty per cent of the total premium was attributable to the top 100 firms and the insurance was divided between just six insurers. The financial strength of the provider has not been jettisoned amongst the top 100. Those difficult conversations on premium quotes between the insurance partner and the managing partner have their limits. The greater concern is perhaps on the excess layer programme. Higher value claims are increasing for some and rates are likely to respond accordingly.  152 ABSs have now been licensed by the SRA alone and present, particular challenges for insurers in defining the scope of the cover for legal activities and integrating it with the other cover for the firm. The ABS will inevitably attract some with an entrepreneurial streak and will be the vehicle for new business models. A number of non-UK bar associations looked on askance at the development of the ABS in this jurisdiction. In July 2011 the German Federal Bar Association reported “We believe this to be a serious threat to the independent professional judgement of the lawyer employed by such a firm.” The introduction of any new regime attracts doubt and criticism but ABSs are here to stay. There will be some knocks along the way and the German Federal Bar Association will tell us “we told you so” when inevitable serious professional misdemeanour occurs. But one of the key factors in managing these particular risks, and the factor that the careful insurers will be looking out for, is the infusion of each of the big four ethical rules from the SRA's Code of Conduct into the firm's culture and systems. If the firm gets that right, then not much else can go wrong. If it gets it wrong, then the ingredients are all there for real trouble. The limit of the SRA's penalty imposing powers for an ABS is a whopping £250,000,000.