12 June 2013

Supreme Court ruling: Petrodel v Prest [2013] UK SC 34

The Supreme Court has found in favour of Mrs Prest, with the size of her award at £17.5m remaining unchanged. What is of particular interest in this case, is the interplay of family and corporate law, and the remarks made in the Court of Appeal that the family court could not run by its own set of rules, but must be consistent with other divisions of the High Court. Also, the family judge Thorpe LJ in the Court of Appeal memorably warned that fairness between the parties to a divorce was crucial, and that the wrong decision would represent “an open road and a fast car to the money maker.”

The Supreme Court had to rule on whether the court could order the transfer of various English properties to the wife, based on the fact that they are legally held by the husband’s companies, not by the husband.

Corporate advisers will undoubtedly be pleased by this Judgment. The family law approach adopted since the obiter dicta remarks in the case of Nicholas v Nicholas [1984] is now bad law. Since Nicholas, where a husband/wife effectively owned and fully controlled a company, such that the company and spouse seemed to be one and the same, the company was regarded as their alter ego. This enabled the court to treat company assets as property belonging to that spouse and to transfer them to the other upon divorce. This allowed “piercing of the corporate veil” in inappropriate circumstances according to Rimer LJ in the Court of Appeal in this case. The principles in Salomon v A Salomon and Co Ltd [1897] that a company has a separate legal identity from its shareholders had to be respected. The “alter ego” approach derived from Nicholas is no longer available, and the Supreme Court has held that piercing of corporate veils will only be available in very limited circumstances. Lord Sumption, who gave the leading judgment, agreed with Mr Justice Moylan in the High Court, who held that he could not pierce the corporate veil absent some relevant impropriety, which he did not find – which would have involved the misuse of the company structure to evade a legal obligation owed to his wife in the proceedings. The purpose of holding the properties in this manner was found to be one of wealth protection and the avoidance of tax rather than avoiding relevant matrimonial obligations.

Mrs Prest was successful because on the specific facts of the case, and using well established equitable principles, the companies holding the matrimonial home and other London properties were found to be beneficially owned by the husband, meaning the companies are holding the legal title on trust for the husband.

This conclusion was reached by an examination of how the properties came to be owned by the companies. The Court reached this decision by applying a number of presumptions and drawing inferences from the evidence, which was somewhat limited given that the husband had failed to comply with court orders or to make full disclosure. This is one of the most interesting aspects of the case, and reminds us all of the very wide powers of the court to draw inferences and make decisions based on the same, which may be of a very far-reaching nature. So, humble resulting trusts have won the day.

For more information contact: Ann Northover

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