Prest: a very English solution

"Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different", Lord Sumption said delivering the lead judgment in Prest v Petrodel [2013] UKSC 34 last week (see Supreme Court upholds wife's appeal in Prest v Petrodel).

How then do judges get to grips with non-disclosing parties, who hold assets in companies which they control but which are separate entities? The Supreme Court found a credible way, by changing the emphasis of the earlier decisions and looking again at evidence. ?The intangible nature of some of the alleged facts led to inferences, which led to the use of trust law.

Michael Prest is the sole controller of seven companies in Petrodel, an offshore group whose assets included the family home and five other properties all in London. Throughout the High Court hearing he was evasive and deliberately misleading, deciding that the companies would not file evidence. Moylan J however got the right answer in the first instance: the key lay with the London properties. He followed the conventional route in interpreting the Matrimonial Causes Act 1973 so as to allow companies' wealth to be treated as being the equivalent of the assets held on a bare trust or where the companies were the husband's nominees. Although he was overturned by the Court of Appeal, the Supreme Court restored his original order. Sumption SCJ set out three ways to bring into play the assets of the companies.

Piercing the corporate veil

Despite encouragement in earlier cases, such as Mostyn J in Kremen v Agrest (No 2) [2011] 2 FLR 490, Lord Sumption refused to pierce the corporate veil.

In Ben Hashem v Al Shayif [2009] 1 FLR 115 Munby J looked at the different approaches, and confirmed that there must be impropriety and misuse by a controller in order to conceal wrongdoing. In a contrast to the situation with trusts which must be a sham from formation, he held that a company could be a façade even where not created in order to deceive. On the facts, this did not apply to the Petrodel companies.

Lord Sumption also rejected arguments based on section 24 (1) (a) of the Matrimonial Causes Act 1973. While a judge can take account of the ownership and control of a company, this legislation does not extend to ordering the company's assets to be transferred to the wife. To stretch the law to allow for an order against a company in this way is to "cut across the statutory schemes of company and insolvency law", he said. Particularly for trading companies, creditors, minority shareholders and third parties, this would be a real problem.

Despite the paucity of supporting documents in Petrodel, including simple items such as completion statements and loan documents, it became clear that the companies owed substantial sums. The husband had alleged himself to be £48m in debt, and it does seem there was about £9m of debt secured on the London properties.

Trust solution

Instead, Lord Sumption set out the issue as one of resulting trust. The husband was transferring the London properties into company ownership for neither apparent reason nor proper compensation. The wife believed him to be the beneficial owner. Moylan J had considered this true, but had not gone into detail. The Supreme Court traced each property's history, filling in gaps left open by the husband, and found that the properties were beneficially owned by the husband. The idea of a company as a nuptial settlement was not argued, nor in Sumption SCJ's view arguable.

The companies were widely expected not to lose, because of the 'corporate veil' defence. Although they won that battle, they lost the war on trust law grounds and now have to disgorge property assets and pay legal costs. Many will have wanted the wife to win, not least because of the husband's deliberate flouting of both rules and orders throughout the litigation. She did win but it is not every case that can use this fact-specific judgment, and it may be that enforcement will leave her without a proper settlement, not least because of liquidity problems. Comfort can be taken that the Supreme Court wanted above all to avoid injustice although it took the full armoury of trust, company and property ?law to do so.

 

What will the Prest decision mean in the years to come? "Achieving fairness in matrimonial disputes through inferences and resulting trusts" - Ann Northover, Forsters "‘Evasion’ will make the court look behind corporate personality" - Tom Bailey, Steeles Law "Transfer of assets to corporate structures will be harder to challenge" - Chris Bryden, 4 King's Bench Walk