By Kirstie Law, Partner in Family. Article first published in the Family Law Journal April 2013.
Kirstie Law outlines the background in Prest v Prest and the issues before the recent appeal in the Supreme Court.
Family practitioners await the outcome of the Prest case which has now been heard in the Supreme Court.
At first instance, Moylan J conservatively estimated Mr Prest’s wealth to be at least £37.5m and ordered him to give almost half that to Mrs Prest. He ordered the transfer to her of certain company assets, by the companies concerned, three Isle of Man-registered companies under her husband’s control namely, Petrodel Resources, Petrodel Upstream, and Vermont Petroleum.
Mr Prest applied for leave to appeal arguing that, under customary Nigerian law, he was head of his extended family, and held his company assets in trust for them. The Court of Appeal gave him permission on the basis that he provide security for costs; he failed to do so and his appeal was dismissed. However his companies also appealed. The Court of Appeal allowed the companies’ appeal, finding that Moylan J was wrong to have transferred the company assets to the wife. It concluded that the fact that Mr Prest held 100% of the shares in the companies in question, did not mean that the assets of those companies belonged beneficially to Mr Prest himself. The corporations had a separate legal personality and therefore, they and not Mr Prest, owned the properties. Rimer LJ stressed that in the absence of any impropriety, such as the company being a mere façade to shield wealth from the reach of the court, an order against company-owned property cannot be made.
This controversial decision of the Court of Appeal, shocked family practitioners and created, what some commentators have condemned as a ‘cheats’ charter’. Richard Todd QC argued for Mrs Prest in the Supreme Court that if not overturned, the decision would “reduce the Matrimonial Causes Act to being nothing more than a scarecrow” and that “the Matrimonial Causes Act, put into law to give divorcing spouses a fair share of their assets, would be rendered useless”. Thorpe LJ, equally graphically, described this as giving the dishonest husband “a fast car and an open road”.
In essence, Mrs Prest’s case in the Supreme Court, is that her ex- husband and his companies should fail in their attack on Moylan J’s order, for three reasons:
(1) The Act, including in particular s.24(1), represents a statutory power, separate from the common law rule that a corporate veil should not – save very exceptionally - be pierced. That power enables the transfer of assets, which the husband has or may reasonably obtain. His interest in company assets may reasonably be ascertained and that value transferred to the wife.
(2) Alternatively, the assets nominally in the companies’ names, were in fact held on trust by the companies for the Husband. That beneficial interest could be uncontroversially transferred to the wife. Such a transfer would be subject to the third party rights of the mortgagees (but not the rights of the unsecured creditors).
(3) Failing (1) and (2), on company law principles, the corporate veil should be pierced.
For years the family courts have been grappling with cases dealing with financial provision on divorce, where family wealth derives from assets held by companies, or in some cases, where assets are difficult to ascertain or value. Our commercial colleagues may not have found the Court of Appeal decision controversial at all. Since Salomon v A Salomon & Co Ltd  AC 22, it has been accepted that shareholders have no interest in, let alone entitlement to, the assets of a company in which they hold shares.
With family law however, The Matrimonial Causes Act requires the Court to look not only at what a spouse has now but at resources to which a spouse is or might become entitled to in the future; it does this in both sections 24(1) and 25. In matrimonial law, the Court may, in an appropriate case, take notice of the fact that a spouse not only controls a company, but (subject to third party interests) may dispose of it at his will.
The fact that assets are held by a company, even an alter ego company, can limit a spouse’s, and thereby a court’s, dispositive powers. The reality of those limitations can be considered in each particular case but, there is arguably no requirement for an absolute rule that there can be no transfer of assets held by companies. Family courts typically direct expert accountancy evidence to ensure that a proper picture of a couple’s financial position is put before the court.
In the majority of cases, even if assets are held by companies, provision can be made without there being any issues about the corporate veil. For example, provision can be made from other, non-company, resources. A transfer of shares may be a solution (it was argued by Mr Todd QC that this was not possible in Prest due to the whole management being so much in the husband’s hands, that “ he had already woven such a web of deceit in respect of ownership of these shares, that it would be impossible to ever work out what the position is”). Where, therefore, a spouse's legitimate claim can only be met by company assets, Mrs Prest argues the Court can look to the powers vested in it by s.24(1) and, in doing so, have regard to the powers and control of the other spouse. Typically, an alter ego spouse can vote to declare dividends and ultimately liquidate the company and thereby acquire its surplus assets. In such a situation the Court can either (i) pierce the corporate veil in accordance with section 24(1), or (ii) “telescope” that process into a short period of time, facilitating the same outcome.
In the family courts, there is a long line of authority, following Nicholas v Nicholas  1 FLR 285, allowing the transfer of company assets to a spouse, notwithstanding the rule in Salomon. This has occurred where family justice so requires, provided that such an order will not prejudicially affect any other person with a real interest in such company. But in Prest, Rimer J stressed that wives should not be entitled to a ‘preferential exemption’ to longstanding laws in the commercial sector.
Again, perhaps the approach taken by the Court of Appeal seeking to abolish any difference of approach between the family and commercial courts is unsurprising. However, for family practitioners, there are difficulties with this decision. In the commercial sector, parties are bargaining at arm’s length to reach commercial deals. In contrast, in family cases, there is no arm’s length dealing, and, if a spouse is able to hide assets behind a corporate structure, a just outcome in financial remedy proceedings may be impossible to obtain. As Mr Todd QC put it, ‘It would be a simple matter to incorporate a company, or better still use a company already incorporated, in order to retain assets and make them judgement-proof in a case such as this.’
Historically, the courts have recognized the need to pierce the corporate veil when doing so is demanded by the interests of justice. The courts’ willingness to pierce the corporate veil in those exceptional circumstances in which the interests of justice so require, is best illustrated by Re a Company  1 BCC 99,421. The Court of Appeal’s endorsement of this exception is perhaps clearest in Cumming-Bruce LJ’s judgment:
“In our view the cases before and after Wallersteiner v. Moir  1 W.L.R. 991 show that the court will use its powers to pierce the corporate veil if it is necessary to achieve justice, irrespective of the legal efficacy of the corporate structure under consideration.”
More recent authority suggests that the courts no longer accept the interests of justice as a sufficient ground on which to pierce the corporate veil (Adams v Cape Industries  Ch. 433, per Slade LJ, at 536). Mrs Prest argues this more recent authority is based on a decision made per incuriam, and so should be overruled or the court should decline to follow it in the Prest case. This is because the decision of the Court of Appeal in Cape Industries was reached without the Court’s attention being drawn to the significant decision of the Court of Appeal in Re: a Company
Mrs Prest further argues that the decision in Cape Industries has, by removing the Court’s discretion to look beyond the corporate veil when justice so demands, unduly restricted the subsequent development of the law in this area. The fact that this restriction was imposed without considering the merits of an exception, which gives the Court the discretion to respond in exceptional circumstances to the interests of justice, undermines the foundation of this more restrictive approach.
Mrs Prest asks that in exceptional circumstances in which (i) property has been held by a corporate structure that is wholly controlled by one party to the marriage, (ii) making that party’s shareholding the subject of an order under section 24(1) of the Act is both impractical and unlikely to be enforceable in practice, and (iii) that property has overwhelmingly been used for the benefit of the parties to the marriage, the Court should have the discretion to pierce the corporate veil, to make that property the subject of an order under section 24(1) of the Act, in the interests of justice. Such a narrow and precisely restricted exception would, she submits, enable the Court to respond to the demands of justice without unduly compromising certainty.
The outcome of the Court of Appeal decision is all the more controversial due to Mr Prest’s behaviour in the conduct of the proceedings. He was deliberately evasive and refused to provide full and frank disclosure throughout. Thorpe LJ concluded that his evidence was “both deceitful and shambolic”. The principal issue at first instance for the court to ascertain was the nature and extent of his wealth, including in relation to “his ownership” of the various companies. In previous hearings in the lengthy divorce campaign, Mr Prest was criticised by a judge who told him he was treating the case ‘as a game’, by claiming to be £48m in debt, when in fact his Petrodel companies had an annual turnover of almost £2.5bn. In fact, due to his non-disclosure, Moylan J was only able to arrive at a conservative estimate of Mr Prest’s wealth (£37.5 million), and concluded that it would be impossible to make orders against his shareholdings, given that they were “shrouded in the mist of concealment, subterfuge and lies”.
Given that Mr Prest’s own actions meant that looking to the company assets was the only way that the Court might seek to achieve fairness, it seems perverse that he was then able to rely on established company law principles to defeat his wife’s claim to a fair share of his wealth. Mr Todd QC drew the Supreme Court’s attention to the fact that the businessman had also ignored orders to pay massive legal costs, although his companies were financing the four children through ‘the finest public schools, with a bill exceeding £100,000 per annum’. Mrs Prest having obtained an interim maintenance order of £270,000 a year had been receiving just £150 cash per week - £7,800 per annum – “a little bit less than the minimum wage”.
Since the case of Imerman v Imerman  EWCA Civ 908, family practitioners and their clients have been grappling with difficulties in exposing a spouse’s concealment of assets through investigation which might breach confidentiality. Any information gained through such investigation, or “self-help disclosure”, may be excluded from proceedings. This, coupled with the Court of Appeal’s decision in Prest, may allow an unscrupulous spouse to conceal assets, without any means of redress for the injured spouse. They are prevented from obtaining or relying on evidence, which may prove such concealment or to establish the impropriety required, in order to allow a claim on company-owned assets.
Some have argued that the Court of Appeal’s decision in Prest could lead to a rise in company investment intended to put assets out of the reach of the family courts. What is clear from the judgment, is that the long-standing commercial law principles which will allow the Court to ‘pierce the corporate veil’ and treat company assets as those of the spouse-shareholder, continue to apply. If impropriety can be shown in the establishment of the company in question, or the transfer of assets to it, the court will look beyond the distinct legal personalities of the company and the spouse and will access assets of the company, in order to achieve a fair distribution between spouses. The difficulty will be in cases, where assets have been transferred into corporate structures for legitimate purposes, but the ownership of those assets will inevitably lead to a perceived injustice, leaving one spouse much worse off than the other . As Mr Todd QC argued, “it would result in Mr Prest and his companies coming away with tens of millions of pounds, while the wife is reduced to claiming benefits.” The question remains as to whether the Supreme Court will provide a solution? Judgement is not expected before the Summer!