Briefing

Prest: a guide to the emerging principles

Posted by : Kate Allass and Adam Carvalho | Date posted : 14/08/2013

In this article, Kate Allass and Adam Carvalho discuss 4 key principles which have emerged from Prest -v- Petrodel [2013] and report on how the Court of Appeal is already putting them into effect.

Background

The facts of Prest are now well known, and were reported more fully here by Jeremy Posnansky QC who represented Mrs Prest in the proceedings.  By way of brief refresher:

  • Yasmin and Michael Prest married in London in 1993. By 2008, their marriage had broken down.  Mrs Prest petitioned for divorce and applied for financial relief.
  • Mr Prest was an oil trader who carried on business – and held much of his wealth – through certain 'Petrodel Group' companies registered in the Isle of Man, St Kitts & Nevis and Nigeria. 
  • At the end of the first stage of the proceedings, the High Court found that Mr Prest was worth at least £37.5 million and ordered that he should make a lump sum payment to Mrs Prest of £17.5 million. 

The issue which then arose was how the award was to be satisfied, it being pretty apparent to the court that Mr Prest was unlikely to make the lump sum payment.  The key question was this: could the court order the transfer of properties held in the name of companies in the Petrodel Group to satisfy the financial order?

The judge in the High Court said 'yes', relying upon a construction of section 24(1)(a) of the Matrimonial Causes Act 1973 which had been endorsed in previous Family Division cases. He therefore ordered five of the Petrodel companies to transfer to Mrs Prest 13 properties in London and St Kitts & Nevis, including the matrimonial home.  This order was later overturned in the Court of Appeal, but on 12 June 2013 the Supreme Court reversed the Court of Appeal's verdict, and reinstated the original High Court decision. It did not do so on the basis of the statutory construction employed by the High Court judge, but by finding that the properties were owned beneficially by Mr Prest.

In the course of determining whether the Petrodel companies could be ordered to satisfy Mr Prest's liability under the financial order, the Supreme Court gave extensive consideration to the effect of its decision on the 'corporate veil' principle.  This refers to the concept that a validly incorporated company has its own distinct identity and property, which is kept separate from the liabilities of its owners and controllers by a robust 'veil' which can only be pierced in exceptional circumstances.

 

Principle 1:  The court may pierce the corporate veil if the company is used to evade liability 

Giving the leading judgment for the Supreme Court, Lord Sumption commented that the corporate veil may only be pierced where the corporate personality of the company is being abused for the purpose of wrongdoing.

Lord Sumption expanded upon this general proposition by setting out the first of two principles, which he described as "the evasion principle", which would enable the Court to disregard the corporate veil where:

  • a legal right exists against a person who owns or controls a company;
  • that right would exist whether or not the company was involved; and
  • the company has deliberately been placed between the parties to defeat that right or frustrate its enforcement.

In these circumstances the court may be entitled to pierce the corporate veil to the extent that is necessary to deprive the controller of the advantage which he would otherwise have gained from the interposition of the separate corporate personality.  This principle will be of limited application and is likely to apply only as a last resort, to 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".

In the Prest case, the properties in question had been acquired by the Petrodel companies long before the marriage broke down, and there was no evidence that Mr Prest had made these arrangements to evade his responsibilities in divorce proceedings.  Indeed, it is common for "non-doms" to buy properties in the UK through offshore structures for a number of reasons, including tax planning and confidentiality.   Accordingly, Lord Sumption concluded on the facts of Prest that the court was not entitled to pierce the corporate veil and treat the properties as belonging to Mr Prest.

 

Principle 2:  Concealment is not evasion

Lord Sumption identified a second basis on which the corporate veil has historically been challenged.  This, he labelled "the concealment principle", which consists of:

  • a legal right which exists against a person who owns or controls a company;
  • that right would exist whether or not the company was involved; and
  • the company has deliberately been placed between the parties to conceal the identity of the real actors.

The key distinction between the evasion principle and the concealment principle is this.  It is not necessary to pierce the corporate veil to look behind a façade which has been erected to conceal a reality that the owner or controller of the company is the true owner of its assets.  The court is entitled to do this in any event, without disturbing the notion that a company is legally separate from its owner.

On this analysis, a number of cases which have previously been categorised as "piercing" the corporate veil in fact have involved no such thing.

 

Principle 3:  The Matrimonial Causes Act 1973 cannot be used to cut through the corporate veil

The Matrimonial Causes Act 1973 allows judges to take account of the ownership and control of a company, and the Family Division has recently developed a practice of using this statute as a basis for ordering a company's assets to be transferred to a wife. 

The Supreme Court closed the door on this practice, finding that it was beyond the court's jurisdiction and that it "cut[s] across the statutory schemes of company and insolvency law". However, the Supreme Court did confirm that in calculating the parties' relevant financial resources the matrimonial court could properly have regard to a spouse's ownership and control of a company and the practical ability to extract money or money's worth from it.

 

Principle 4:  The court may draw adverse inferences from a refusal to give evidence

Mr Prest's conduct in the litigation was characterised by Lord Sumption as involving "persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with the rules of court and specific orders".  He and the Petrodel companies had refused to disclose highly material documents relating to the purchase and ownership of the properties, and Mr Prest had been a "wholly unreliable witness".

It was this – rather than the evasion and concealment principles – which proved to be Mr Prest's undoing.  Lord Sumption endorsed the existing rule that the court is entitled to draw adverse inferences when a party chooses to remain silent about matters on which it reasonably could be expected to give evidence.  He said that, whilst this did not give rise to a licence to speculate, judges in the Family Division were "entitled to draw on their experience and to take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing".

On this basis, on the specific facts (so far as available) and from inferences properly to be drawn, the Supreme Court ruled that the relevant London properties were held by the companies on resulting trust for Mr Prest by virtue of the particular circumstances in which the properties came to be vested in them.  Therefore the properties were assets belonging to Mr Prest and the corporate veil did not come into play to prevent them from being transferred to Mrs Prest.

It is worth noting that the "inherent probabilities" may not always indicate that an uncommunicative litigant intended to retain beneficial ownership.  In many cases involving offshore companies, there are good reasons for them to receive and hold assets absolutely (for example, for tax planning purposes) and the inferences drawn in Prest do not always follow naturally.  In this respect, the decision in Prest is extremely fact specific and may be of limited application to future cases on the drawing of adverse inferences.

 

Recent application

Lord Sumption's evasion and concealment principles did not form part of the court's formal decision.  However, on 25 July 2013, the Court of Appeal confirmed in the case of R -v- Sale [2013] that the Supreme Court had intended the principles enunciated in Prest to be of general application across the board, and it proceeded to apply it to a case involving a criminal confiscation order.

In Antonio Gramsci Shipping Corp -v- Aivars Lembergs [2013] the Court of Appeal refused to pierce a corporate veil and considered that the principle was unlikely to be extended by the court far beyond the existing evasion and concealment principles, noting that "further development of the law will be difficult for the Courts".

In Jetivia SA -v- Bilta (UK) Ltd (in liquidation) [2013] the Court of Appeal considered Prest in the context of the insolvency regime.  It endorsed Lord Sumption's recognition that the corporate veil plays a vital role in protecting the interests of innocent parties who deal with a company and may have valid claims against it.  Especially if the company is insolvent, those parties would suffer if a spouse of the controller/owner could cut through the corporate veil and claim a prior interest in its assets. 

It is notable, however, that an inference that assets are held on resulting trust for the controller of a company is equally unsettling for third parties who have operated on the basis that those assets are at the disposal of the company.  To the detriment of third parties, it may reduce the company's solvency and its ability to meet liabilities.

 

Practical implications

  • Piercing the veil: The court will be more comfortable with dealing with concealment cases than it will any actual attempt to pierce the corporate veil on the grounds of the evasion principle. This underlines the importance of service providers maintaining proper corporate documentation to record the rationale behind a particular structure.  Provided that it cannot be shown that a structure has deliberately been put in place to intervene between the owners and potential claimants, it is unlikely that the court will pierce the corporate veil.
  • Silence may not offer protection: Companies under attack should consider carefully whether silence is the best option. The refusal to provide adequate disclosure and unwillingness to give evidence appear to have backfired for Mr Prest and the Petrodel companies.  Again, service providers will wish to ensure that they document the acquisition of their assets and the terms on which they are held, to prevent inferences being drawn that those assets are held on trust.  This will be particularly important where the company is controlled by a single individual and there is no obvious link between the asset and the business of the company.
  • For lenders: Some of the properties transferred to Mrs Prest are subject to mortgages, and secure monies which have been loaned to Mr Prest's business ventures.  The mortgages were not set aside on the transfer and, depending upon their impact on Mrs Prest's ability to recover the full £17.5m awarded to her, there is scope for further litigation. 

This highlights the general issue about the implications of the judgment for banks which have made loans secured against properties owned by offshore companies.  In particular, there may be concerns that the ownership of such properties is unclear and that attempts to enforce security might, in the light of Prest, increasingly be complicated by arguments that a property – particularly a matrimonial home – is not owned by the offshore company but on resulting trust for the company's owner. 

The Prest decision has already been relied upon and referred to multiple times in judgments handed down in the two months since it was released by the Supreme Court. We expect that it will continue to prove influential across the board. 

 

Kate Allass is a Partner and Adam Carvalho an Associate in the Disputes team at Farrer & Co LLP.

If you require further information on anything covered in this briefing please contact James Price (james.price@farrer.co.uk), or your usual contact at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, 14 August 2013