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Petrodel v Prest: hiding assets behind the corporate veil?

1 November 2012 2 Comments

prest e1351768937983 150x150 Petrodel v Prest: hiding assets behind the corporate veil?Monkey Business Images/Rex Features
By Geraldine Morris

For a long time family lawyers and the family courts have made the best of the creaking mechanism for financial provision that is the Matrimonial Causes Act 1973 (MCA 1973) (much amended…). Procedural changes are made but in terms of the interpretation of the MCA 1973 itself, case law is king. The family courts “make do and mend” so that the nearly 40-year-old primary legislation is fit for purpose. But the Court of Appeal last week decided that that the company law case of Salomon v A Salomon and Company, Limited [1897] AC 22 applies as much in the disposition of ancillary relief proceedings as in other proceedings.

The decision in Petrodel and others v Prest and others has caused concern amongst family lawyers. The Court of Appeal reversed the first instance decision of Moylan J (Prest v Prest [2011] EWHC 2956 (Fam)) and the order that provided for the husband to transfer £17.5m from company assets to the wife on the basis that he was unlikely to transfer assets from his personal resources. In a lengthy judgment Patten LJ and Rimer LJ allowed the husband’s appeal against the order with family judge Thorpe LJ dissenting.

The position had previously been relatively clear: a long line of authorities in family cases confirmed that in extreme cases, where a spouse has clear control over corporate assets, those assets cannot be hidden behind the “corporate veil” and instead the veil can be “pierced”. In the first instance decision, Moylan J summarised the guidance as follows:

  • ownership and control are not in themselves sufficient to pierce the corporate veil;
  • even where there is no unconnected third party interest the veil cannot be pierced only because it is necessary in the interests of justice;
  • the veil can only be pierced if there is impropriety;
  • the impropriety must be linked to the use of the company structure to avoid or conceal liability;
  • in order to pierce the veil, both control by the wrongdoer and impropriety must be demonstrated; and
  • a company may be a façade even though originally incorporated without deceptive intent.

The husband’s control of his company in Petrodel was described by Moylan J as follows:

“…the husband was the effective owner of the Petrodel Group. He controlled every business decision. The directors acted merely on his instructions. Throughout the seven or eight years that he worked with the husband and Petrodel, the directors, according to Mr Le Breton, acted only on the husband’s instructions. There was also significant expenditure through Petrodel for the benefit of the husband, the wife and the children but Mr Le Breton was not aware of any significant sums being spent for other family members. There are also investments made through the company which were not business opportunities but were, he said, ‘private commitments that (the husband) chose to make’.”

The husband had failed to provide full disclosure, his litigation conduct was in issue and he was described as an unreliable witness. So, from a Family Division perspective, a textbook case for piercing the corporate veil. But not apparently from the perspective of commercial law.

In allowing the husband’s appeal, Rimer LJ said: “The judge’s different conclusion that such properties were, or were “effectively”, the husband’s property was based on reasoning that was internally inconsistent, contrary to principle and wrong.’ In a lengthy analysis he concluded that corporate assets ‘…cannot be looked to in order to satisfy the personal obligations of the corporators, any more than the latters’ personal assets can be looked to in order to satisfy the obligations of the company.”

In unusually strong language Thorpe LJ, dissenting, said:

“If the court now concludes that all these cases [prior authorities] were wrongly decided they 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.”

Has the Family Division (and the higher courts) been getting this wrong for so long? Judicial discretion, within clear boundaries, is key in family cases. No one is better placed to assess the evidence and the parties themselves than the judge at first instance but Rimer LJ in Petrodel highlighted what he considered to be a flaw in the judgment at first instance, that Moylan J “… had to be satisfied that they [the company assets] were the husband’s beneficial property: and a finding that were ‘effectively’ his property (whatever that may mean) was not good enough…”

Family courts have to be, on occasion, creative and fluid in approach while applying the relevant law. Rimer LJ took a more rigid approach to the definition of property, saying: “The nature of the court’s inquiry as to the beneficial ownership of a particular asset will be the same as it would be in a case not arising under the s 24 [of the MCA 1973] jurisdiction: ‘property’ for the purposes of s 24(1)(a) cannot and does not mean something different from ‘property’ in other contexts.”  There are two sides to this story: it could be argued that on this occasion the will to be “fair” after hearing the evidence meant that the court at first instance lacked the precision required when piercing the corporate veil, or alternatively that a more fluid approach was need to achieve a fair order?

The wife is apparently appealing to the Supreme Court; family lawyers will watch with interest.

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2 Comments »

  • Craig Rose said:

    Very interesting, Geraldine. Following on from the Imerman judgment a couple of years ago, do you think that the Court of Appeal is consciously seeking to bring the principles developed in the Family Division into line with the general law where the two have diverged?

  • Geraldine Morris said:

    Thanks Craig. I think it probably is indicative of a move in that direction but there is also an argument that the Prest decision at first instance isn’t the best example of the correct application of the principles established in earlier family cases. Also as mentioned above, lack of reform to primary family law is long overdue and family case law has developed around gaps. The Law Commission is looking at aspects of this with a report due in autumn 2013.