The case of Petrodel v Prest has pitted family lawyers against their commercial colleagues. The former have been shouting ‘fairness’ (for families) while the latter retort ‘but that’s not company law’. As presaged amongst legal commentators, the Supreme Court have found a ‘third way’ to sooth the warring factions but, like many ‘third ways’, it potentially throws up more problems and more opportunities for litigation than it solves.
The facts: Mr Prest made his millions trading oil. He ensconced his wife and their four children in a luxury property in London. The legal title to the property was held by one of his companies. Mr Prest’s wealth also included a portfolio of seven properties in London. By the time of the divorce, these properties were also owned by various companies, of which he was the majority (if not sole) shareholder and controller.
Due to the complexity of the companies’ structure, rather than order a transfer of shares to Mrs Prest, the High Court decided that her husband should facilitate the transfer of the matrimonial home to her together with the seven properties as part of the ‘clean break’ to be achieved between them.
The companies successfully appealed to the Court of Appeal arguing that the Court had no jurisdiction to order the transfer of their properties to the wife. They relied on the basic company law principle that a limited company is a separate legal entity, the assets of which belong to the company and not to its shareholders and that the ‘corporate veil’ can only be pierced in limited circumstances – none of which applied here.
A neat solution?
Mrs Prest appealed to the Supreme Court. Her appeal succeeded on one ground, namely that the companies were holding the properties beneficially for her husband. As such, the companies could be and were ordered to transfer the properties to Mrs Prest while leaving the corporate veil intact. The judges held that Mrs Prest was right when she had alleged that the husband had used the corporate defendants to hold the legal title to properties that belonged beneficially to him. A neat solution to a knotty problem.
Like every case, this one turns on very specific facts. Lord Sumption states with great clarity that ‘whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity.’
There is no doubt that Mr Prest’s conduct during the proceedings, which was ‘characterised by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders’, did little to help his cause. Nor did the fact that one of the key players in the companies failed to turn up at court to give evidence.
The companies also failed to comply with orders requiring them to disclose documentation concerning the purchase of the properties. In the absence of evidence, the court considered that it was ‘entitled to draw all proper inferences against a party whose conduct shows that he has something to hide’.
Does this ruling mean that all company assets are potentially at risk if the shareholder owns and controls the majority shareholding and then he or she divorces? How is an investor or any entity contracting with that company able to assess the risk that a key company asset may be found not to belong to the company at all but beneficially to a shareholder and thus the asset just exists on paper? Prest is silent on these points.
Normal rules no longer apply
Although the court admits that it has given ‘no general guidance’, Lord Sumption did ‘venture to suggest… that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company… In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous.’
This potentially undermines basic assumptions when analysing company accounts. A further layer of due diligence may now need to be carried out to determine in what capacity (where as trustee or nominee) the company assets are being held – or should a property in which an agent of the company lives (possibly with his family) not even been included in the accounts? How would this affect the company’s and the spouse’s tax returns?
Although this case is highly unusual due to the lengths Mr Prest was prepared to go to deny his wife’s legitimate financial claims against him, the consequences of the Supreme Court’s decision may be far reaching. It is good news for non-earning spouses that the courts will look at the reality lying behind company structures to ensure that family wealth cannot be ‘lost’ within its folds.
But, the fact remains that this ‘third way’ may prove to be a minefield both for innocent third parties and for advisors with corporate clients.
Emily Brand is a partner in the Family team at Winckworth Sherwood. She recently represented Michelle Young in her successful application to commit her estranged husband, Scot Young, to prison in their long running dispute concerning his alleged missing assets of £400 million. She can be reached via email: firstname.lastname@example.org