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On 12 June 2013, the Supreme Court gave its decision in the case of Petrodel v Prest, in which Caroline Holley and I acted for Mrs Prest. The importance of the case extends far beyond family law and into vital aspects of company law.
What was the case all about?
Yasmin and Michael Prest were married in London in October 1993. They have four children, aged between 11 and 16. Their marriage broke down in 2008. From the early 1990s, Mr Prest had carried on business as an oil trader. He had three main Isle of Man registered companies through which he traded: Petrodel Resources Ltd, Vermont Petroleum Ltd and Petrodel Upstream Ltd. The companies were part of a group known as the Petrodel Group. Other associated companies were Petrodel Resources (Nevis) Ltd, a company incorporated in St Kitts and Nevis, and a Nigerian company known as Petrodel Resources (Nigeria) Ltd.
Mrs Prest's claim for a financial order arising from the divorce was heard in the High Court by Mr Justice Moylan in 2011. The hearing lasted three weeks, largely because of the complexity of Mr Prest's business and financial affairs and because, as Mr Justice Moylan decided, his financial disclosure was so incomplete and misleading. In his judgment, the judge said (among other adverse comments about the husband's evidence and disclosure), "I regret to say that I have found the husband to be a wholly unreliable witness. The husband is clearly an extremely intelligent, articulate and astute individual. I formed the clear impression that he regards the proceedings as a game in which he has sought to manipulate the process to his advantage." The judge also held that Mr Prest operated and controlled the Petrodel group and its assets for the benefit of his immediate family: "The wealth within the group is the family’s wealth to which the husband has unrestricted access. I am satisfied that the husband is both the effective owner and controller of the whole of the Petrodel corporate structure."
As to Mr Prest's wealth, the judge said: "I consider that, conservatively, the husband must be worth at least $60 million, ie approximately £37.5 million." His conclusion was that: "a fair award which achieves justice in this case is to provide for the wife to receive resources totalling £17.5 million. This is more than sufficient to meet the wife’s needs and, in my judgment, is also a fair share of the likely overall worth."
Because of Mr Prest's misconduct of the proceedings, including the fact that he had failed to comply with orders of the court before the final hearing, Mr Justice Moylan made an order that 14 properties in London and Nevis should be transferred to Mrs Prest in part-payment of the £17.5 million. In doing so, the judge decided that the wording of the relevant statutory provision (section 24(1)(a) of the Matrimonial Causes Act 1973) permitted such orders to be made. One of those properties was the former matrimonial home in West London. All except one property were held in the names of companies owned and controlled by Mr Prest; the one which was not in the name of a company was in Mr Prest's own name.
The three companies and Mr Prest appealed to the Court of Appeal. Mr Prest's appeal was dismissed at a preliminary stage, because he failed to comply with orders which had been made by the Court of Appeal. The companies' appeal was allowed, by a majority (2-1) decision. Lord Justice Rimer and Lord Justice Patten applied strict company law principles and said that the trial judge had been wrong to require properties held by the companies to be transferred to Mrs Prest. They said that the trial judge had misconstrued the provisions of the relevant statute. They said that previous case law going back 30 years had been wrongly decided. They dismissed Mrs Prest's alternative argument that the companies held the properties on trust for the husband and that he was the beneficial owner. The Court of Appeal therefore set aside the relevant parts of the order made by the trial judge. In the majority judgments of Lord Justice Rimer and Lord Justice Patten, extensive consideration was given to the body of case law, going back to 1897 (Salomon v A Salomon and Co Ltd  AC 22, and many cases since), about the separate legal identity of a company and whether, and if so in what circumstances, the court can "pierce the veil of incorporation" and treat the assets of a company as those of its owner and controller.
The effect of the Court of Appeal decision was to prevent the transfer of the London properties to Mrs Prest, thereby making it more difficult and a more lengthy process for her to obtain the £17.5 million awarded to her. The Court of Appeal did not reduce the award of £17.5 million. The Court of Appeal recognised the importance of its decision, not only for Mrs Prest but for others who might be in a similar position. It therefore gave her permission to appeal to the Supreme Court.
The Supreme Court heard Mrs Prest's appeal on 5 and 6 March 2013. Because of the wide importance of the case, it was heard by a panel of seven Justices. Mrs Prest renewed the arguments which had been canvassed in the Court of Appeal. Her appeal was allowed (7-0) and the original order of Mr Justice Moylan was restored. The companies and the husband must transfer the properties to her.
The appeal was allowed on the basis that the companies did indeed hold the properties on trust for Mr. Prest; he was the beneficial owner. The Supreme Court did agree with the Court of Appeal's interpretation of s.24(1)(a) of the Matrimonial Causes Act 1973 and closed off that route for future cases. The Supreme Court also considered at length the history and implications of more than 110 years of case law about companies, their separate legal identity, and the question of piercing the corporate veil.
The leading judgment in the Supreme Court was given by Lord Sumption. He analysed the evidence about the properties, their purchase, and the conduct of the husband and the companies. He held, with detailed reasons based on the history, that the properties were all owned by the husband beneficially and that the companies held them on trust for him. He referred to the "defective character of some of the evidence which, he said, was "almost entirely due to [Mr Prest's] persistent obstruction and mendacity." In part, the conclusions about ownership were based on inferences, properly drawn. In relation to this, Lord Sumption said: "The concept of the burden of proof, which has always been one of the main factors inhibiting the drawing of adverse inferences from the absence of evidence or disclosure, cannot be applied in the same way to proceedings of this kind as it is in ordinary civil litigation. These considerations are not a licence to engage in pure speculation. But judges exercising family jurisdiction are 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."
In relation to company law issues, others will comment in greater detail and what follows is a limited summary. The Justices were unanimous in deciding that, although not applicable in this case, there are circumstances in which the corporate veil may properly be pierced. Lord Sumption said that the case law was "characterised by incautious dicta and inadequate reasoning, but "the consensus that there are circumstances in which the court may pierce the corporate veil is impressive". He would not be "willing to explain the consensus out of existence." He demonstrated that there have been two principles: "the concealment principle" and "the evasion principle". The concealment principle was "legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing." The evasion principle was different, he said. "It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil."
Lord Sumption's conclusion in relation to the corporate veil and the ability to pierce it was as follows: "I conclude that there is a limited principle of English law which 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 for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil. … … For all of these reasons, the principle has been recognised far more often than it has been applied. 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, I believe, consistent with authority and with long-standing principles of legal policy."
Almost finally, let me explain the title of this piece. In the course of his dissenting judgment in the Court of Appeal, Lord Justice Thorpe referred to the overriding principles of matrimonial law which require the courts to provide a fair share of the marital assets and to meet the needs of both parties. He said that if the pre-existing law which allowed family courts to transfer assets held by a one man company was overturned, it would present "an open road and a fast car to the money maker who disapproves of the principles developed by the House of Lords that now govern the exercise of the judicial discretion in big money cases". In accepting Mrs Prest's argument that the Petrodel companies were merely trustees of the properties and held them for the husband beneficially, the Supreme Court has deployed its Stinger and stopped the speeding jalopy in its tracks.
Legal commentators will have a field day with the judgments of the Supreme Court. Indeed, there is something for (almost) everyone in this decision. It will please family lawyers, by putting reality back into this important corner of family law and ensuring that a judge's fair award is satisfied, not flouted. It will please company lawyers and corporators, whose fortresses will remain impregnable if their companies are properly run and really do own the assets held in their names. It will not please dishonest husbands who seek to deceive and who manipulate the truth.
If you require further information on anything covered in this briefing please contact Jeremy Posnansky QC (Jeremy.firstname.lastname@example.org 020 3375 7000) or your usual contact at the firm.
This note is intended as a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2013
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