Expert analysis of the Prest judgment

The Supreme Court has handed down its ruling on the key Prest vs Petrodel Resources case today, inflicting a blow against people trying to keep their wealth from their spouses by putting it into companies.

We will have expert analysis from top lawyers and accountants about what it means here all today.

The case is of importance because it has decided that the assets of a company owned by a divorcing spouse may be added into their personal wealth when working out how much the other spouse should receive as a divorce settlement.

The judgement said: 'The Supreme Court unanimously allows the appeal by Yasmin Prest and declares that the seven disputed properties vested in the companies are held on trust for the husband on the ground (which was not considered by the courts below) that, in the particular circumstances of the case, the properties were held by the husband’s companies on a resulting trust for the husband, and were accordingly “property to which the [husband] is entitled, either in possession or reversion”.'

You can read the Supreme Court's explanation below and download its complete judgment here ( ).

 

Expert reaction and analysis

Jeremy Posnansky QC, partner in Farrer & Co, representing Yasmin Prest, says:

'I'm delighted for Mrs Prest, whose calm determination to obtain a fair and just outcome has been vindicated by this decision. It puts reality and fairness back into this area of family law, while at the same time giving proper respect to company law.

'The Supreme Court’s decision shows that dishonest husbands can’t cheat their wives by hiding behind a web of deceit and a corporate façade

'The decision means that manipulative spouses can't evade their responsibilities by artificially using a corporate structure to protect their assets in the event of a divorce.

'The judgments aren't only important for matrimonial law, but also for company law and entrepreneurs. It's the most authoritative review and refinement of the law about piercing the corporate veil since 1897.'

 

Caroline Holley, Farrer & Co, representing Yasmin Prest, says:

'The Supreme Court has dealt a blow to dishonest spouses everywhere and taken this important opportunity to send a clear message that those seeking to avoid responsibilities to their divorcing spouses and children will not be allowed to succeed.

'It is often said that difficult cases make bad law. However, this difficult case has resulted in a judgment which clarifies and confirms the approach which family courts have adopted for many years, preserving the courts' ability to carry out their primary objective – achieving fairness.'

 

Farrer & Co say:

'The English family justice system received a boost today as the Supreme Court ruled that divorced husband Michael Prest must transfer to his former wife, Yasmin Prest, properties held by companies owned and controlled by him, as part of a £17.5m divorce award.

'The Supreme Court ruling reinstates an original decision of the High Court in 2011, which provided that 13 properties, including the former family home in West London, must be transferred to Mrs Prest in part payment of the court's divorce award. Mr Prest and several companies in whose names some of those 13 properties were held, appealed the decision, arguing that the properties were owned by his off-shore companies and not by him.

'In October 2012 the Court of Appeal allowed the companies' appeal (Mr Prest's permission to appeal having been withdrawn when he failed to meet certain conditions), overturning the order for transfer to Mrs Prest of some of the properties.

'Today the Supreme Court allowed Mrs Prest's appeal of the Court of Appeal decision and agreed that her former husband was the beneficial owner of the properties. In a victory for former wife, Yasmin Prest, the highest court in the land confirmed that the companies must transfer the properties to Mrs Prest to satisfy the divorce award in her favour.

'The decision is of major importance not only for family law and divorcing couples, but also for company law and entrepreneurs. The judgments of the Supreme Court consider the law about properties held by companies on trust for their owners and, in the most important review since Victorian times, the law about “piercing the corporate veil”.'

 

Withers' Family team partner James Copson says:

'The Supreme Court has delivered a chink of light through the corporate veil. It should be emphasised that this is strictly limited to family law cases, which are, by their very nature, in a special category distinct from arm's length commercial arrangements.

'Putting assets into corporate structures for wealth protection reasons might not now protect that wealth against divorce claimants. Wealth planning professionals are going to have to devise new ways to prevent the potential erosion of family wealth following a divorce.

'One-man companies are once again open to attack on divorce. Judges will still look elsewhere first to satisfy a divorce settlement, but the mist that has shrouded them following the Court of Appeal ruling has now been cleared.'

 

Sandra Davis, family partner and head of family law at Mishcon de Reya, says:

'On the facts of this case the Supreme Court's decision is a fair one. Leaving to one side the facts of this particular case, there remain many legitimate wealth planning, protection and preservation reasons why a husband and a wife may choose to transfer marital or solely owned assets to corporate structures.

'If this happens prior to a marriage or was an agreement reached during it, the court will hold the husband and wife to those arrangements if the marriage ends.

'As in the case of Petrodel v Prest, the problem arises when these structures are arranged unilaterally by one of the spouses. In that case it is usually the wife who will be seriously disadvantaged unless she is able to finance a costly legal wrangle to prove either impropriety or that assets which appear to belong to a company are in reality held on trust for her husband.'

 

William Longrigg, family partner at Charles Russell LLP, says:

'This is a surprise result but a good result. Fairness has been achieved in that the 'dishonest' party has not got away with keeping the assets out of the reach of his wife. The Supreme Court decided that, by virtue of the particular circumstances in which the properties came to be vested in the companies, the companies held those properties on trust for the husband. The law has not been compromised (ie company law has not been ignored) and the facts of this case have been interpreted robustly.

'The main arguments of the wife were that the husband was 'entitled' to the properties on the basis of the way in which he ran the companies and that he had treated the companies as his own piggy-bank. It was established that there was no 'impropriety' on the part of the husband sufficient to 'pierce the corporate veil' and that this was unnecessary if the properties were held in trust for him.

'Because the properties are held in trust, the supreme court approved an order transferring them to the wife as they are entitled to do.'

 
John Darnton, partner at law firm Bircham Dyson Bell, says:
'The Supreme Court has just handed down its judgment and there are some surprises, not least the fact that the court gave a unanimous decision upholding Mrs Prest's appeal from the Court of Appeal.

'Interestingly the Supreme Court did not consider it necessary to 'pierce the corporate veil' in this instance concluding that the facts meant that the properties to be transferred to Mrs Prest were held by the husband's companies on a resulting trust for the husband and were therefore property to which he was entitled. This line of argument had not previously been run.

'The Supreme Court held that there were limited circumstances were it would be appropriate to 'pierce the corporate veil' and this would be when 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 decision would therefore not appear to open the flood gates. In future more ingenious arguments may need to be marshalled to get at assets not directly owned by the parties to the dispute but is seems that the court was keen to ensure that a form of 'matrimonial law' did not develop in alongside conventional property/corporate law.'

 

Katie O’Callaghan, a solicitor in the Family team at Boodle Hatfield says:

'The findings of the Supreme Court will come as a relief to the vast majority of family lawyers who were concerned about the effect of applying strict company law principles, more commonly used for arms-length transactions, to a divorce scenario between two spouses.

'However, the Supreme Court found in favour of the husband’s companies in relation to most of the arguments put forward on their behalf. It only found in favour of the wife on the specific facts of the case by making presumptions that the properties were held on trust for the husband and inferring that his failure to make full and frank disclosure meant that he was covering up evidence which would show that he effectively owned the properties.

'It remains to be seen whether the Supreme Court would have reached a different conclusion if the husband's conduct throughout the litigation had not been so poor.

'The decision is likely to result in more claims by spouses (usually wives) that assets held within companies are actually beneficially owned by their spouse. However, company law practitioners will take comfort in the fact that the majority of the arguments put forward on behalf of Mr Prest’s companies, which were based on the structure of corporate law, were upheld by the Supreme Court.

'It is likely that these arguments will be relied upon in the future by unscrupulous spouses who try to hide assets behind a corporate structure in order to defeat his/her spouse’s financial claims on divorce. Despite the fact that the wife lost on most of the points argued on her behalf and the Supreme Court is only meant to make decisions on important points of law not fact, it is pleasing to note that the Supreme Court found in favour of the wife on the facts to ensure that she received a fair and reasonable outcome.'

 

Charmaine Hast, head of the family department at London law firm Wedlake Bell, says:
'The unanimous Supreme Court decision reconstitutes what English law has always stood for, which is transparency and the inability to hide behind the skirts of corporate and trust veils.

'The law of England and Wales has always led the world in never being afraid to pierce the corporate veil in family law, and it is extremely satisfying to know that the Law Lords, of which Lade Hale is the only family Lady Lord, have come to their decision unanimously.

'I believe this ruling will cut down on legal costs being incurred unnecessarily by parties in contemplation of divorces, even if it is a long way down the line and a possibility, planning their affairs so as to circumvent justice, which now they cannot do.

'This will help England to continue leading the world on transparency, disclosure and frankness, and in being incapable of hijack.'

 

Robin Charrot, family partner at national law firm Mills & Reeve, says:
'This ruling will severely limit the availability of this so-called 'cheat's charter'.   
'However, it is important to note that the reason used for the ruling was not the same as that used by the original trial judge. The Supreme Court specifically stated that they were not piercing the corporate veil, and that family courts cannot simply give company assets to wives just because the sole owner and controller of the company is the husband.
'The justification for the Supreme Court's decision was that the husband, and not the companies, had originally provided the funds for the properties to be bought. So, applying trusts law principles, the companies held the properties in trust for him, he was 'entitled' to them, and therefore the court could transfer them to the wife.
'In this respect, the husband and the companies have got their comeuppance, because although there was no conclusive evidence of him providing the funds, the court said it could draw that conclusion where the husband and the companies had been deliberately obstructive.
'This is the result that most people will believe to be the fair outcome – giving the divorcee the share of assets they are owed.'

 

Geraint Jones, private client adviser at London accountancy firm Reeves, says the Prest ruling was nuanced and did not 'pierce the corporate veil':

'This seems a very clever, pragmatic solution that the court has come up with to preserve the corporate veil but still have justice seen to be exercised
'The preservation of the corporate veil is important for British business and competitiveness abroad. It had to be preserved and has been. While this ruling does demonstrate that hiding things in a corporate structure will not necessarily work, it is by no means a green light for wives. The corporate veil has, in my view, been retained.'
 

Caroline Gordon-Smith, partner and head of family at law firm Stevens & Bolton, says:

'After a five-year long legal battle, Mrs Prest has finally succeeded in her claim for financial provision on divorce. Today’s decision, which was a unanimous one between all seven Supreme Court justices, represents a victory for the recognition of reality. 

'The alternative would have made it possible for a determined and business-savvy husband to shelter his wealth from the divorce courts by using a legitimate corporate structure and would have heralded a new and uncertain dawn for family lawyers and those the system has, until now, sought to protect.

'The paternalistic protection afforded by the courts has triumphed: unhappy wives in England and Wales can once more be assured that this jurisdiction remains the divorce destination of choice.'

 

William Healing, Family Law Partner at Kingsley Napley, says:

'Today the court has parted the corporate veil. The decision is a blow against cheating spouses who seek to evade their responsibilities using company structures. The judgment is a victory for the family courts and fair sharing of assets.

'On the facts of this case the court found the husband had, during the marriage, pillaged company assets as if they were his own. He had claimed at the time of divorce that offshore companies, owning valuable London properties, were in fact independent from him.

'The companies were, in reality, engaged in the oil business and it was the husband who had funded the property purchases. The court could not tolerate the husband’s fiction and the properties were found ultimately to be for the husband’s benefit. The court could transfer the properties to the wife.

'This decision sends the message that London remains a fair place to determine divorce proceedings.'

 

Tom Farley-Hills, Family practice partner at London law firm Harbottle & Lewis, says:

'This decision is based not so much about the corporate veil and in what circumstances it can be pieced (although there is further examination of that in this judgement) but more about the reality of ownership of assets.

'Just because an asset is owned by X Ltd in law doesn’t mean that X Ltd actually owns it. Spouses who consider an asset (such as the property they and their family live in) safe from the divorce courts power to transfer or sell property because it is owned by a company need to consider the following two points before they take on the courts (a) are they the controller of the company and (b) whether those company assets are in reality owned by its controller.

'Whether they are owned by the controller will depend on a number of things such as the type of asset and the nature and timing of it being acquired or transferred to the company.

'Spouses whose homes are owned by the other spouse's company can rest a little easier following this decision.'

 

Marilyn Stowe, senior partner at Stowe Family Law, the UK’s largest specialist family law firm, says:

'The Supreme Court’s decision is a victory for common sense. The case was heard by five commercial judges, alongside two family lawyers. We predicted the Supreme Court would uphold what is, after all, a fundamental principle of corporate law and they have.

'Company law is relatively rigid, and does not permit the court to look behind the corporate veil except in the rarest of circumstances. The family courts take a more practical and flexible view. Family judges considered they could in certain circumstances include company assets in a divorce settlement. The Supreme Court has restated the law.

'In the case of Petrodel v Prest, the Supreme Court concluded that the properties at stake belonged “beneficially” to the husband, with the properties held by the companies “on resulting trust” for him. It is an ingenious way around the problems presented by this case, which leaves England’s reputation as the “divorce capital of the world” for wives intact.'

 

Background

The Court of Appeal found for Michael Prest last October, saying the company should not be taken into account, a verdict some lawyers called 'a cheat's charter' because it would allow spouses to hide their wealth in companies. The case has caused a great deal of contentious comment.

 

The Supreme Court explains its judgment

There are three possible legal bases on which the assets of the companies might be available to satisfy the lump sum order against the husband: (1) that this is a case where, exceptionally, the Court may disregard the corporate veil in order to give effective relief; (2) that section 24 of the 1973 Act confers a distinct power to disregard the corporate veil in matrimonial cases; or (3) that the companies hold the properties on trust for the husband, not by virtue of his status as sole shareholder and controller of the company, but in the particular circumstances of the case [9].

After surveying the authorities, the Court holds that there is a principle of English law which enables a court in very limited circumstances to pierce the corporate veil. It applies when 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 court may then pierce the corporate veil but only for the purpose of depriving the company or its controller of the advantage which they would otherwise have obtained by the company’s separate legal personality.

In most cases the facts necessary to establish this will disclose a legal relationship between the company and its controller giving rise to legal or equitable rights of the controller over the company’s property, thus making it unnecessary to pierce the veil. In these cases, there is no public policy imperative justifying piercing the corporate veil.

But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is consistent with authority and long-standing principles of legal policy. [35] The principle has no application in the present case because the husband’s actions did not evade or frustrate any legal obligation to his wife, nor was he concealing or evading the law in relation to the distribution of assets of the marriage upon its dissolution [36]. Some of the concurring judgments reserve the possibility of a somewhat wider test, but not in respects which affect its application to the present case.

The Court rejects the argument that a broader principle applies in matrimonial proceedings by virtue of section 24(1)(a) of the 1973 Act. The section invokes concepts of the law of property with an established legal meaning which cannot be suspended or taken to mean something different in matrimonial proceedings [37]. Nothing in the statutory history or wording of the 1973 Act suggests otherwise [86-9].

General words in a statute are not to be read in a manner inconsistent with fundamental principles of law unless this result is required by express words or necessary implication [40]. The trial judge’s reasoning cut across the statutory scheme of company and insolvency law which are essential for protecting those dealing with companies [41].

It follows that the only basis on which the companies could be ordered to convey properties to the wife is that they belong beneficially to the husband, by virtue of the particular circumstances in which the properties came to be vested in them [43].

After examining the relevant findings about the acquisition of the seven disputed properties, the Court finds that the most plausible inference from the known facts was that each of the properties was held on resulting trust by the companies for the husband.

The trial judge found that the husband had deliberately sought to conceal the fact in his evidence and failed to comply with court orders with particular regard to disclosing evidence [4]. Adverse influences could therefore be drawn against him. [45]. The Court inferred that the reason for the companies’ failure to co-operate was to protect the properties, which suggested that proper disclosure would reveal them to beneficially owned by the husband [47]. It followed that there was no reliable evidence to rebut the most plausible inference from the facts [49-51].

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