Alexander Dumas once said that the chains of marriage were so heavy that it took two to bear them, and sometimes three. As parties to modern divorces are finding out, that marital third is not necessarily a bit on the side but can be a mighty corporation, their assets and the corporate veil. When the third in your divorce is a large corporate, what do you do?
Up until last year, the law stated that a ‘corporate veil’ distinguished a company from its shareholders; the effect on divorce meant that the assets of a company owned by the husband or the wife could not be taken into account when working out a financial settlement.
But in 2013, the Supreme Court’s judgment in the case of Prest v Petrodel changed this. From Prest emerged the now accepted wisdom that where company assets are held on trust by the company for the benefit of one of the spouses in financial proceedings on divorce, those assets may form part of the financial award to be made to the other spouse.
The Supreme Court invoked trust law principles to reach its final decision. Less charitable family lawyers believe the very fact that the court had to resort to complex trust law to fill the gap to achieve justice is the clearest possible indication that existing family legislation is not doing its job. The rest of us are just thankful we at least have clarity that rogue spouses who had hoped to be able to hide behind the corporate veil remain within the reach of the family courts.
In much the same vein, it comes as something of a surprise to many that the family court has powers to order third parties in divorce proceedings to disclose relevant information and to join companies to those proceedings as interested parties.
For many – particularly in-house lawyers in investment banks, private banks and companies in the financial services sector – this reality only dawns when a High Court order lands on their desk requiring the company or the bank to supply what is invariably confidential information to the court.
The application to court will have been made by the solicitors acting for the wife (usually) of one of their senior employees or board members. Panic stations! Then usually follows one of two thoughts, both of which will be wrong: the first will be that they can resist the order because it was made without notice to the company; the second will be that they can resist providing the information because it is confidential.
In fact, orders for disclosure against third parties in family proceedings are routinely made without notice to the third party. So too are banks and companies joined to such proceedings. The Family Procedure Rules, unlike the Civil Procedure Rules, specifically permit this.
Arguments about the confidentiality of the information sought are unlikely to find favour with the judges of the Family Division who will invariably point out that financial proceedings on divorce are held in private and that the proceedings – and any information disclosed within the proceedings – are confidential. The position is rather complicated by the fact that the press can attend most hearings, but this is a topic for another day.
The prospect of disclosing sensitive or confidential information within proceedings invariably gives rise to serious concerns about who that information will reach and whether confidentiality will in practice be preserved.
Family lawyers, particularly those acting for the spouses of senior bank employees, are only too aware of the sensitivities around disclosure of information. Increasingly, they are choosing to make third-party disclosure applications against banks and companies as a means of quantifying a spouse’s earning capacity, identifying future remuneration or the value of contracts for sale of the company which may have been confidentially agreed but which a spouse refuses to disclose.
At the same time the spouse and her advisers may seek to attract press interest in the proceedings to raise the stakes. This ménage à trois means that a business can find itself in the seemingly impossible position of reconciling its duties to shareholders, the court and its senior staff.
Being drawn into the inquisitorial arena of family proceedings is undoubtedly an uncomfortable position for any business to find itself in. Candidly, commercial litigators or Chancery lawyers lack an understanding of the Family Division.
Establishing a careful strategy from the outset which combines an understanding of the unique culture of the family courts and the issues of commercial confidentiality is essential. With the right strategy in place, the court’s requirements can be met with little or no disruption to the business.
Davina Katz is a partner at Schillings and head of Schillings Family. She featured in the Spear’s Top 50 Family Lawyers Index published last month and frequently acts for large financial institutions and companies joined to divorce proceedings