Prest: the precedent

On the face of the Petrodel v Prest outcome, Yasmin Prest, has won. Michael Prest, who had ignored and flouted court orders throughout the process and who argued that assets held in various corporate organisations were beyond the reach of the family courts secure behind the corporate veil, has lost.

Going forward, family courts will be able to invade corporate structures and transfer assets out of those structures to a spouse on divorce. Further, it has previously been suggested the Family Law Division of the courts has its own special place in legal doctrine to be able to do what neither the Queen’s Bench nor the Chancery Divisions can do.

But is that what the Supreme Court actually said? The answer is an emphatic no.

In his leading judgment, Sumption SCJ said: “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 higher courts and in every jurisdiction and in the county courts. If it does not exist, it does not exist anywhere.”

In the Court of Appeal, 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”. He concluded: that practice “must now cease”.

Ancillary relief

The appeal to the Supreme Court arose out of proceedings for ancillary relief following a divorce between Michael and Yasmin Prest. The two wed in 1993 and during the marriage the matrimonial home was in England. Yasmin petitioned for divorce in March 2008.

Michael Prest was not party to the appeal in the Supreme Court, which concerned the position of a number of companies belonging to the group known as the Petrodel Group, which the judge at first instance, Moylan J, had found to be wholly owned and controlled (directly or through intermediary entities) by the husband.

The Supreme Court had to decide whether it had the power to transfer seven properties owned by the group of companies to the wife, given that they legally belonged to the companies and not to the husband.

At first instance, in November 2011, Moylan J ordered that the husband should procure the conveyance of the matrimonial home (also held in a corporate structure) to the wife and that he should make a lump sum payment to her of £17.5m plus maintenance.

He ordered costs in favour of the wife. The judge ordered the husband to procure the transfer of the seven UK properties legally owned by the companies to the wife in partial satisfaction of the lump sum order. He further directed those companies holding the properties to execute such documents as might be necessary to give effect to the transfer of the matrimonial home and the seven properties.

Yasmin Prest alleged, among other things, that her husband used the corporate entities to hold legal title to the properties that belonged beneficially to him. Neither Michael nor the companies during the course of the proceedings complied with orders to produce completion statements on the purchase of the properties and evidence of the source of the money used to pay the purchase price.

The companies were joined to the proceedings only because they were alleged to be trustees for the husband of the shareholdings and the properties and because orders were being sought for their transfer to the wife. The companies failed to file a defence, nor did they comply with orders for disclosure. The Supreme Court concluded that the companies’ refusal to cooperate was deliberate.

Relevant impropriety

At first instance, Moylan J held he could not pierce the corporate veil under the general law without some relevant impropriety, and declined to find that there was any. The Supreme Court agreed. The husband had acted improperly in many ways. He misapplied assets of the companies for his own benefit, but in doing so he was neither concealing nor evading any legal obligation owed to his wife at that time, nor was he concealing or evading the law relating to the distribution of assets of a marriage upon his dissolution.

The legal interest in the properties was vested in the companies, not in the husband, long before the marriage broke up. Whatever the husband’s reason for organising his affairs in that way, there was no evidence that he was seeking to avoid any obligation in the family proceedings. Primarily, he had set up the corporate structures he had for “wealth protection and avoidance of tax”.

The Supreme Court, therefore, found that piercing the corporate veil could not be justified in this case by reference to any general principle of law.

The court went on to say that the judge at first instance had been wrong to find that there was a special and wider principle in matrimonial proceedings by virtue of section 24 (1) (a) of the Matrimonial Causes Act 1973, which empowered the court to order one party to the marriage to transfer to the other assets owned by a third party (in this case, various companies).

It further concluded that where assets belonged to a company owned by one party to the marriage the proper claims of the other can ordinarily be satisfied ?by directing the transfer of the shares in the companies.

In summary, therefore, the Supreme Court found that this was not a case on the facts were it would justify piercing the corporate veil. Second, section 24 (1) (a) of the Matrimonial Causes Act 1973 did not give the courts the powers to transfer assets from one spouse to another when those assets were actually owned by a separate legal entity (in this case, various companies).

The court concluded that the only basis on which the companies could be ordered to convey the seven disputed properties owned by the companies to the wife was if they belonged beneficially to the husband. Only then would they constitute property to which the husband was entitled either in possession or reversion and therefore meeting the test of the section 24 (1) (a) of the Matrimonial Causes Act. To establish whether the properties were held on trust by the companies for the husband required a detailed examination of the evidence, which was incomplete and obscure.

The Supreme Court specifically said that where assets are legally vested in a company and it is argued that they are beneficially owned by its controller, this would be a highly fact-specific issue and it was not possible to give general guidance. The court did, however, suggest that in the case of the matrimonial home, the facts are likely to justify the inference that the property was held on trust for a spouse who owned and controlled a company, which was the legal owner of the family home.

The failure on the part of the husband and the companies to provide full and frank disclosure meant that the court in this particular case was able to draw inferences as to the ownership of the properties and therefore able to declare the existence of a trust.

High hurdle

We have a clear indication from the Supreme Court that the family courts and any other division has a very high hurdle to overcome to be able to pierce the corporate veil.

Even in the case of Prest, notwithstanding the conduct of the husband and the companies ignoring and flouting court orders, the Supreme Court did not find sufficient evidence to entitle the courts to pierce the corporate veil. Section 24 (1) (a) of the Matrimonial Causes Act does not give the Family Division the right to ignore the principle of the corporate veil.

The Supreme Court, based on the facts of this particular case was able – because of the conduct of the husband and the companies – to draw adverse inferences in reaching the conclusion that the companies were holding the properties in trust for the husband.

The Supreme Court, however, issued a cautious note, that while in this case, such was the extreme conduct of the husband and the companies it was possible to draw the necessary inferences to support the wife’s case, this was not a licence for a court to engage in pure speculation in future cases.

On paper, Yasmin Prest has won. It is hoped that, given the time it has taken and the cost involved, it will not simply be a pyrrhic victory.

Lesley Smythe is a partner in the family team at DWF 

Read our interview with Jeremy Posnansky QC, who represented Yasmin Prest

‘The preserve of the wealthy’ “In principle, the Supreme Court’s ruling could impact on cases where the assets are relatively modest. Whether they are owned beneficially by the company or held on trust for the company’s owner, will be a question of fact, and this will be determined on a case-by-case basis and is not dependent on the value of those assets. “In practice, however, these arguments are likely to remain the preserve of the wealthy, where there are complex corporate structures registered offshore.  “Where the company and its owning spouse are based in the UK, there are simpler and more cost-effective approaches available. Shares in a company fall within the definition of property that can be transferred from one spouse to the other by the courts. That makes an investigation into their beneficial ownership unnecessary. If a court order is ignored, there are a number of sanctions to encourage compliance, including, in extreme cases, committal to prison.  “The problem in Prest was that the companies and Michael Prest were abroad. It was effectively about enforcement. Even though Yasmin Prest won, she might still not get all of her money, because the properties are heavily mortgaged. “The decision clarifies a number of issues including that company structures remain an effective means of protecting wealth and minimising tax, provided they are set up properly and the evidence to support the ownership of their assets is robust enough to withstand possible future challenge on a divorce.” Nigel Shepherd is a partner at Mills & Reeve

 

‘Judgment is useful for private client advisers’ “The Supreme Court upheld the principle of the corporate veil, but by deeming the companies’ assets to be held on trust for their shareholder, also highlighted the limits of corporate vehicles in the context of divorce and, indeed, asset protection. “While seen by many as a fair judgment, Prest is likely to encourage practitioners to find new and sophisticated ways of protecting their clients’ wealth. One development is the increasing use of ‘trigger event’ provisions, which seek to remove certain powers or privileges on the occurrence of a certain event. One trigger could be filing divorce papers, which might lead to an automatic and irrevocable removal of the individual as a beneficiary of a discretionary trust. “An alternative in the context of corporate vehicles is the use of split-share capital. A client may personally hold ‘A’ shares in a company, which provide voting control but no economic rights, while the economic value attaches to ‘B’ shares, which are held by a discretionary trust. It remains to be seen whether this sort of structure might have led to a different result in the case of Prest, but at a minimum it provides an extra layer of defence. “Above all, Prest emphasised that timing and foresight is essential in an asset protection context. Assets will be far better protected through structures set up in advance and through mutual agreement.” Glen Atchison is head of the private client practice and Chris Moorcroft is an associate at Harbottle & Lewis