For some considerable time now, the English judiciary have been telling matrimonial lawyers that they are not so very special and should behave accordingly.
Mr Justice Munby (now the President of the Family Division) told us in A v. A that we should give the same respect to trusts as do our colleagues in Chancery. The Court of Appeal held in Imerman v. Tchenguizthat a person is entitled to keep information and documents confidential, even from their husband or wife in the context of a divorce. The Supreme Court in Prest v. Petrodel Resources, in which Farrer & Co successfully acted, confirmed that we must respect the essential rule of separate corporate personality. Lord Sumption said, "Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different."
With those words of admonition ringing in our ears, Mark Fenton and I recently acted for a wife in the High Court in a case which overturned established matrimonial practice to respect the rights of companies and their directors.
The relevant facts of C v. C, in simple terms, were as follows. Over thirty years the family had acquired a London property portfolio valued in the tens of millions. Two companies, D Ltd and R Ltd, held title to the properties. The wife and the parties' adult son were directors; the husband and wife were equal shareholders.
A third company, C Ltd, managed the properties: it collected all rents, paid the mortgages, and accrued very considerable cash reserves from the balance. The husband was the sole director. The wife and son had been directors, but in the aftermath of the separation the husband had caused their removal. The husband was the sole shareholder. There was considerable acrimony between the husband and the son, whom the husband accused of acting "hand in glove" with the wife; harassing him; improperly operating a new business in competition with C Ltd; and more.
At the end of January, 2015, the wife and son as directors of D and R agreed various corporate resolutions. The intended effect was to bring to an end C's position as manager of the portfolio. The resolutions recorded the total breakdown in trust between the husband, and the wife and son, meaning that there could be no effective communication between the directors of the various companies; and gave a number of further reasons to justify putting arrangements on a new and commercial footing. The husband sought an injunction to prevent these resolutions from being placed before a directors' meeting.
Traditionally, the husband would have been on relatively strong ground. Since the Poon case in 1994, it was arguable that the divorce court had the power to interfere in company administration. There the husband had sought an injunction preventing his wife from placing proposals before a directors' meeting which would have removed him from office as managing director, and put her in his place. The only shareholders of the company were the husband, wife and her siblings. Although Mr Justice Thorpe mentioned in passing that the company was a "separate legal entity", he granted the injunction because the parties' rights and duties as directors and shareholders took second place to the need to "hold the ring" in the divorce.
C. v. C changed the law. After a litigation history which is too burdensome to repeat here, Mrs Justice Roberts denied the husband his injunction. She found that—
- the basic anti-avoidance provisions in family proceedings (section 37 of the Matrimonial Causes Act 1973) were directed to prevent dealing with property by spouses: D and R were companies, with separate corporate personality, and so were not susceptible to such an injunction (and, while the wife personally could in theory have her duties as director circumscribed in that way, the son could not);
- the subsidiary power under which injunctions might be granted (section 37 of the Senior Courts Act 1981) was only available to the husband if he could demonstrate that the facts gave rise to a "cause of action" (in other words, a legitimate civil claim) but here, they did not;
- the Family Division had no generic "inherent jurisdiction" to make an injunction on tests different to the two statutory powers;
- Poon had to be "scrutinised carefully" in the light of the Supreme Court's judgment in Prest, and might not necessarily be a robust pillar on which to found an application for an injunction.
As a result, C v. C offers strong support for the notion (which is uncontroversial and obvious to anyone with a background in commercial law) that, even in the context of a divorce, spouses are entitled to and should exercise their rights as directors and shareholders consistent with their duties to the companies. The Family Division will no longer automatically act to prevent them doing so; it will respect the rights of companies to act as independent entities. We have, rightly, fallen into line.
If you require further information on anything covered in this briefing please contact Nicholas Bennett (email@example.com; 020 3375 7103) 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, May 2016