Lost in translation: lifting the corporate veil in divorce

Sometimes it seems as if the family jurisdiction and the property and company jurisdictions are separated by a common language.

Last month the Supreme Court gave judgment in VTB v Nutritek [2013] UKSC 5, and on 5 and 6 March 2013 heard the wife's appeal in Petrodel Resources Ltd & Ors v Prest & Ors [2012] EWCA Civ 1395. Both cases involve the piercing of the corporate veil '“ the former in a commercial context, the latter in the course of an application for financial orders in divorce proceedings. Both have been watched closely by commercial and family practitioners alike.

Nutritek, as a precursor to the judgment in Petrodel gave an invaluable insight into the analysis of the Supreme Court on the question of piercing the corporate veil. The argument run on appeal by VTB has been called a novel one but, essentially, it was an attempt to extend the principle of piercing the corporate veil further than simply a principal providing a remedy to one which allowed for a defendant, Nutritek, to be brought into the jurisdiction. This was a step to far for Lord Neuberger.

It was argued on behalf of Nutritek that, in fact, it was never appropriate for courts to pierce the corporate veil and previous decisions could all be explained by reference to different legal principles. The appeal itself however was interlocutory and therefore did not deal with the questions of law that arose in the ordinary way. As Lord Neuberger put it on the issue of whether the principle of piercing the corporate veil existed: 'It would be'¦ wrong (absent special circumstances) to decide an issue of such general importance if it was unnecessary to do so.'

Lord Neuberger did, however, in positing his view that the principle exists, adopt the reasoning of Munby J (as he then was) in Ben Hashem v Al Shayif [2009] 1 FLR 115: 'It is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the ?company by them as a façade to conceal ?their wrongdoing'¦ at the time of the relevant transaction.'

Divisional lines

Crucially perhaps, Moylan J found no impropriety in Petrodel but followed Nicholas v Nicholas [1984] FLR. As already reported in Solicitors Journal, the companies in Petrodel have denied 'root and branch' that there is any implied authority in section 24(1)(a) of the Matrimonial Causes Act 1973 to pierce the veil of incorporation. It will of course remain to be seen whether the wife's attempts to surmount the finding of a lack of impropriety are successful but this must at least be doubtful in light of Lord Neuberger's reasoning in Nutritek.

In considering whether it was open to a judge at first instance to pierce the corporate veil with reference to section 24(1)(a), MCA 1973 the Court of Appeal in Petrodel split across divisional lines. Thorpe LJ, a specialist family practitioner and judge of the same division before sitting in the Court of Appeal, preferred the wife's position (as did Moylan J at first instance), and followed the line of authority in Nicholas Rimer and Patten LJJ, both commercial chancery practitioners and judges of the Chancery Division prior to the Court of Appeal, found in favour of the companies who had brought the appeal.

That particular judgment also saw colourful language being deployed by all three Lords Justice. Thorpe LJ, having considered Rimer LJ's 'powerful' and 'cogent' judgment regarding the Nicholas line of authorities, considered that: 'if this court now concludes that all these cases were wrongly decided they present an open road and a fast car to the money maker who disapproves of the principles developed by the House of Lords that now govern the exercise of the judicial discretion in big money cases'. This approach found a mirror in the submission made by Richard Todd QC; that the companies' position was in essence a 'cheats' charter'.

Rimer LJ, in considering Moylan J's judgment at first instance described it as 'heretical' to suggest that 'the total control that a single individual is (and will always be) entitled to exercise over the affairs of his one-man company is a feature resulting in the company's assets becoming assets ?to which he is 'entitled' and, therefore, to which the company is not entitled'. ?Moylan J's conclusion otherwise was 'internally inconsistent, contrary to principle and wrong'.

Patten LJ, in support of Rimer LJ's criticism of the Nicholas line of authority, stated simply, '[it has] led judges of the Family Division to adopt and develop 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. That must now cease.'

The wife in Petrodel should not, therefore, hold her breath. The Supreme Court empanelled to hear the appeal has only two judges with specialist family law backgrounds, the other five being from commercial or chancery backgrounds. It remains to be seen whether judgment is split across divisional lines depending on the legal background of the justices. A consideration more in accord with Rimer and Patten LJ's ?is likely.

Hard facts

It would be naïve to suggest that the outcomes in Petrodel and VTB are or will be down to whether particular members of the judiciary have a 'family' or 'non-family' pedigree. It is worth noting that Lord Walker is said to have a degree of sympathy for the 'family law' approach in this appeal. However, there has always been an uneasy suspicion of family law by those outside the specialism, that practitioners deploy various dark arts to obviate what appeared to be established legal principle in the pursuit of 'idealistic' notions of 'fairness' and 'best interests'. Quasi-inquisitorial proceedings were anathema to many. To put it in the context of Petrodel, as Rimer LJ states: 'A one-man company does not metamorphose into the one man simply because the person with a wish to abstract its assets is his wife.'

Sadly it is not be possible to do justice to the arguments put on behalf of the wife and the companies within the confines of this article. It seems generally accepted that Richard Todd QC '“ leading counsel for the wife '“ has had the tougher time, arguing as he had to that section 24(1)(a) permitted the court to deal with property to which one party is entitled in possession or reversion. Tim Amos QC for the companies did not get off lightly. However, the more traditional chancery-based interpretation and submissions ought to have found favour with a majority of the Supreme Court. As other commentators have noted, he advocated for a judgment that 'put the law back into family law'.

Perhaps we should just consider all of this a stern reminder from the appellate courts that the law operates across all divisions equally '“ however 'unfair' the result might seem. All first-year undergraduates will recognise the maxim, 'Hard facts make bad law.' Yet in achieving 'good law', have we lost the opportunity for family courts to do justice to spouses who fall victim to the other's corporate chicanery? If the Supreme Court accept the companies' arguments, which many consider it will by a majority, will we see the Matrimonial Causes Act 1973 turn into the 'scarecrow' prophesied by Richard Todd QC?