All's fair: lifting the corporate veil in divorce proceedings

The family courts have been ?grappling for years with cases ?dealing with financial provision on divorce where family wealth derives from assets held by companies, or in some cases, where assets are difficult to ascertain or value. The decision of the Court of Appeal earlier this autumn in Petrodel Resources and Ors v Prest and Ors [2012] EWCA Civ 195 shocked family practitioners and created what some commentators have hailed as ?a ‘cheats’ charter’.

The judge at first instance ordered companies in which Mrs Prest had argued Mr Prest effectively had a majority shareholding to transfer certain company assets to her.

By a majority decision, the Court of Appeal allowed the appeal brought by the companies, finding that Moylan J was wrong in concluding that the assets of those companies belonged beneficially to Mr Prest himself. Lord Justice Rimer stressed the need to recognise the distinct legal personalities of companies and their shareholders. In the absence of any impropriety, such as the company being a mere façade to ?shield wealth from the reach of the court, an order against company-owned property cannot be made.

Commercial lawyers will not find this decision controversial. Since Salomon v A Salomon & Co Ltd [1897] AC 22, it has been accepted that a company is a separate legal entity distinguishable from its individual members. As such, shareholders have no interest in, let alone entitlement to, the ?assets of a company in which they hold shares. However, in the family courts there is a long line of authority, following Nicholas v Nicholas [1984] 1 FLR 285, allowing the transfer of company assets to a spouse, notwithstanding the rule in Salomon. The family court’s general approach has been that where family justice so requires they will act, provided that such an order will ?not prejudicially affect any other person with a real interest in such company.

In Prest, however, Rimer J stressed that wives should not be entitled to a ‘preferential exemption’ to longstanding laws in the commercial sector.

Abolishing differences

The Court of Appeal seeking to abolish any difference of approach between the family and commercial courts is perhaps unsurprising. However, for family practitioners, there are difficulties with this decision. In the commercial sector, parties are bargaining at arm’s length to reach commercial deals. In contrast, in family cases, there is no arm’s length dealing, and, if a spouse is able to hide assets behind a corporate structure, a just outcome in financial remedy proceedings may be impossible to obtain. It has been said that the case raised issues about the law being used for morally questionable ends, demonstrating another retreat from equitable principles.

The outcome of this case is all the more controversial because of Mr Prest’s behaviour in the conduct of the proceedings. He was alleged to be deliberately evasive and to have refused to provide full and frank disclosure throughout. Thorpe LJ concluded that his evidence was “both deceitful and shambolic”. The principal issue at first instance was therefore for the court to ascertain the nature and extent of his wealth, including in relation to “his ownership” of various companies, which had been joined to the proceedings. In fact, due to Mr Prest’s non-disclosure, Moylan J was only able to arrive at a conservative estimate of his wealth (£37.5m) and concluded that it would be impossible to make orders against his shareholdings given that they were “shrouded in the mist of concealment, subterfuge and lies”. To provide Mrs Prest with £17.5m, her fair share of her husband’s wealth, Moylan J ordered the husband to procure the transfer of assets consisting of three properties and some shares owned by companies to her. Given that Mr Prest’s own actions meant that looking to the company assets was the only way that the court might seek to achieve fairness, it seems perverse that he was then able to rely on established company law principles to defeat his wife’s claim to a fair share of his wealth. As Thorpe LJ states in his dissenting judgment, “the husband resorted to an array of strategies, of varying degrees of ingenuity and dishonesty… Amongst them is his invocation of company law measures in an endeavour to achieve his irresponsible and selfish ends. If the law permits him so to do it defeats the Family Division judge’s overriding duty to achieve a fair result.”

The case of Imerman v Imerman [2012] EWCA Civ 908 highlighted the difficulties in exposing a spouse’s concealment of assets through investigation which might breach confidentiality. Any information gained through such investigation, or “self-help disclosure”, may be excluded from proceedings. This, coupled with the Court of Appeal’s decision in Prest, may allow an unscrupulous spouse to conceal assets, without any means of redress for the injured spouse, who is prevented from obtaining or relying on evidence which may prove such concealment or to establish the impropriety required in order to allow a claim on company-owned assets. Family practitioners await with interest the outcome of mother of three Varsha Gohil’s attempt to force government departments to disclose evidence about her husband’s foreign dealings. Bhadres Babulal Gohil is serving a ten-year jail term for money-laundering and fraud involving millions of pounds.

Family court reach

Some have argued that the Court of Appeal’s decision in Prest could lead to a rise in company investment intended to put assets out of the reach of the family courts. However, what is clear from the Court of Appeal’s judgment is that the long-standing commercial law principles which will allow the court to pierce the corporate veil and treat company assets as those of the spouse-shareholder continue to apply.

For example, in the case of Guilford Motor Co v Horne [1933] Ch 935 it was held that the court can pierce the corporate veil where it is clear that the company is a sham or a façade. This principle was expanded in the case of Trustor AB v Smallbone and others (no 2) [2001] EWHC 703 (Ch), where it was held that to rely on this exception there must also be some impropriety in the use of the company structure as a sham. Therefore, if impropriety can be shown in the establishment of the company in question, or the transfer of assets to it, the court will look beyond the distinct legal personalities of the company and the spouse and will access assets of the company in order to achieve a fair distribution between spouses.

The difficulty will be in cases where assets have been transferred into corporate structures for legitimate purposes, but the ownership of those assets will inevitably lead to a perceived injustice, leaving one spouse much worse off than the other. One example where the court refused to pierce the corporate veil was the family case of Hashem v Shayif & Anor [2008] EWHC 2380, which was relied on by Mr Prest’s counsel. In this case the company was owned by the husband and the children, with the husband owning the largest share amounting to 30 per cent. The wife argued that the children had no input into the management of the company, which was completely controlled by the husband and served as his ‘alter ego’. While the court acknowledged that the husband was the controlling influence in the company, it had predominantly been set up as a tax saving measure. As this was a legitimate purpose, the court held that ?there was no impropriety linked to the use of the company as a sham.

Arbitrary value

These sorts of issues will only arise in cases where it is not possible, or suitable, for the court to order a transfer of shares in such companies. Where a share transfer is possible, a fair distribution of the value of family companies may be more readily achieved. This was not possible in Prest because the court decided that the offshore third party nominees who legally held the shares did not accept Mr Prest’s beneficial ownership. This was despite the wife having filed a respondent’s notice to the effect that the properties were held by the companies on trust for the husband.

Even where ownership is accepted ?then there are considerable difficulties which may arise in valuing interested in a private limited company. The Court of Appeal explored this issue in Jones v Jones [2011] EWCA Civ 41, and found that the “latent value” in a private company should be taken into account when deciding the value of a non-matrimonial asset brought into the marriage by one spouse. However, there will inevitably be difficulties in actually quantifying such latent value and indeed, in his judgement, Lord Justice Wilson recognised that such a decision will be arbitrary. This decision arguably paves the way for those with an interest in a company which pre-dates the marriage to seek to artificially inflate the value of the non-matrimonial property which will be excluded from sharing with their spouse.

Richard Todd QC who represented ?Mrs Prest confirmed they would be appealing. It was widely expected that so controversial and important is this decision that leave to appeal would be granted. The Court of Appeal did grant permission to appeal to the Supreme Court on 21 November 2012. This is a relief to practitioners. Further guidance is urgently needed as to how the family courts are to achieve justice in circumstances where, under established principles of commercial law, an unscrupulous spouse may be ?able to avoid a fair sharing of ?matrimonial assets.