Hey presto

Sunday, 01 September 2013
Nicholas Le Poidevin examines the UK Supreme Court’s judgment in Prest v Petrodel Resources Ltd.

The Supreme Court gave judgment on 12 June 2013 in Prest v Petrodel Resources Ltd.1 The wings of the Family Division may have been clipped but it has not been grounded; whether its prey will notice any difference is questionable.

History

For years now, when making financial orders – formerly ancillary relief – the Family Division has been accustomed to treat the assets of companies substantially owned by one spouse as available for distribution under s24 of the Matrimonial Causes Act 1973, at least when the remaining assets were enough to satisfy its creditors. Such an order – an order against the companies themselves – was made at first instance in Prest.

The husband was an oil trader who owned and controlled a number of companies, which in turn held seven residential properties in the UK. The husband’s conduct of the proceedings was ‘characterised by persistent obstruction, obfuscation and deceit’,2 but Moylan J managed to assess his resources at GBP37.5 million (USD60 million).

The Family Division may no longer seize the assets of a company simply because a spouse controls it

The judge held that the wife should receive GBP17.5 million and ordered the companies to transfer the properties to the wife.3 Some of the companies challenged the order, arguing that the court had no power to make it. The Court of Appeal agreed, by a majority,4 and the wife went to the Supreme Court.

Note that Prest was not about the rule that what the family court considers when fixing the quantum of an award is the resources available to each spouse, not merely the assets they actually own.5 If one spouse can rely on distributions from a company, quantum will be fixed accordingly. Instead, Prest deals with the question what assets can be called on by the court to satisfy the award. Where the respondent owns a company, the shares will be assets that can be called on even if the company’s own assets are not. The difficulty for an applicant comes when both the respondent and the company are resident out of the jurisdiction, in countries that may not enforce an order of the English court.6 Seizing the corporate assets in England has been the obvious response. The husband in Prest was resident in Monaco and some of the companies were Manx companies; what mattered was whether the family court could get at the companies’ assets.

Decision of Supreme Court

Lord Sumption gave the main judgment and began the legal analysis by reaffirming the familiar proposition from Salomon:7 a company is a legal entity distinct from its shareholders even if it is owned and controlled by a single person. So there were only three ways in which the assets of the companies could be made available to satisfy the award against the husband:

  1. the court might pierce the corporate veil;
  2. s24 of the 1973 Act might confer a suitable power; or
  3. in the circumstances, the properties might be held on trust for the husband.

Piercing the corporate veil

The doctrine of piercing the corporate veil has been expressed incoherently, much of the authority containing ‘incautious dicta and inadequate reasoning’.8 In VTB Capital plc v Nutritek International Corporation9 the Supreme Court recently declined the opportunity to decide whether the doctrine existed at all. In Prest, Lord Neuberger was tempted simply to kill it off,10 (Emphasis added.) Evasion, not concealment, is the test. Even then, the doctrine applies only when no other remedy is available, and the relief must be limited to defeating the particular evasion.11 But some members of the court considered that there might be other occasions, though they would be rare, on which the court would disregard a separate corporate personality.12

So stated, the doctrine did not help the wife. Her husband had treated the companies’ assets as his own, but that did not justify the court in doing the same.13 The corporate structure had been created for wealth protection and tax avoidance; there was no evidence that the companies had been set up to evade any obligation owed to the wife.14 Such evidence may be available in some cases, but the doctrine is still unlikely to be useful. Even if the possibility that a financial order will be made can be described as an existing liability within Prest, which is doubtful, there will be a more satisfactory remedy under s37 of the 1973 Act: that section empowers the court to set aside a disposition intended to defeat a claim.

So the Family Division may no longer seize the assets of a company simply because a spouse controls it. That is not merely a matter of doctrinal purity. Third parties dealing with a company are entitled to look to its assets to satisfy liabilities owed to them. It has been said in the past that allowances would be made for known creditors, but the evidence is often inadequate, and the Supreme Court recognised that the family court lacked capacity to conduct the notional liquidation that would be needed to establish what its liabilities were.15

Section 24

A second contention for the wife was based on s24(1)(a) of the 1973 Act. That section confers the power to order one spouse to transfer to the other ‘property to which the first-mentioned party is entitled, either in possession or reversion’. The contention was that the husband was ‘entitled’ to the companies’ assets because he could in practice do as he pleased with them.

Moylan J accepted the contention and so did Thorpe LJ in his minority judgment in the Court of Appeal, but the Supreme Court rejected it. The law of property is the same throughout the legal system and ‘entitled’ means ‘entitled’.16 The 1973 Act contains nothing to indicate that the court can order one spouse to transfer property that is not theirs to transfer.17 though it is unclear whether they meant that it was not arguable as a proposition of law or not arguable on the particular facts.

Beneficial ownership

The wife lastly argued that the properties were held by the companies on trust for the husband. It followed that the husband was entitled to them under s24(1)(a), and there was no obstacle to an order for the companies to transfer them to the wife.

The contention was, in legal terms, entirely orthodox; it depended on the facts. Moylan J had not decided it and the majority in the Court of Appeal had dealt with it cursorily.18 In the Supreme Court the facts were closely examined and the wife succeeded on this contention alone.

The matrimonial home, if held by a company owned by one spouse, would typically be held beneficially by that spouse

The question whether assets vested in a company were beneficially owned by its controller was said to be highly fact-specific,19 as it plainly is, but its treatment by the Supreme Court is of general interest. The evidence in Prest was incomplete and obscure – a common feature of such cases – and that was almost entirely because of the obstruction and mendacity of the husband – also a common feature.20 The court began by drawing attention to the inferences that could properly be drawn when an absence of evidence was attributable to one party. In family cases, the applicant would be applying for a financial order because finances would have been the responsibility of the respondent, usually the husband, and the applicant would therefore be dependent on the disclosure and evidence of the respondent to ascertain the extent of the claim. The Court encouraged family judges to use their experience and take notice of the inherent probabilities to decide what an uncommunicative husband was hiding.21

In Prest, acquisitions by the companies for a nominal consideration and acquisitions by them using funds inferred to have been provided by the husband were treated, in the absence of contrary evidence, as leaving with or conferring on the husband personally the beneficial interest in the properties.22

The future

This will be the main battleground in the future. Lord Sumption suggested that the matrimonial home, in particular, if held by a company owned and controlled by one spouse, would typically be held beneficially by that spouse. He considered that the spouse’s control of the home would be hard to reconcile with the company’s beneficial ownership, and a corporate purpose might be hard to discern.19 Lady Hale thought the company would ‘often’ be a nominee of property for the husband.23

Given the encouragement to draw inferences from silence, a company controlled by one spouse and wishing to resist a claim for provision will now in practice have to provide evidence to show that it acquired its assets for itself and not as nominee for its controller. Even then, when family judges are faced with the choice between a finding of fact that will permit an award they think fair and a finding that will not, it is hard to imagine that they will often opt for the latter. So the Family Division will continue to seize the accessible assets of companies owned by one of the spouses, though doing so will now require a finding of beneficial ownership of those assets.

The Supreme Court did not deal with the common case of a company held by a trust. Hitherto, where the trust is a nuptial settlement and so liable to variation under s24(1)(c) of the 1973 Act, it has been assumed that the court may, on that ground alone, make orders directly against assets of a trust-held company.24 Unless a company itself can be a nuptial settlement, it must now be wrong to do so. No doubt a trust-held company, like any other, can be a nominee for a spouse, but if the trust is genuine, a nomineeship will be rare.

Otherwise it is questionable how far Prest will make a difference, but its insistence on an orthodox application of property law is welcome. 

Prest v Petrodel and Singapore

For a Singapore angle on this issue, the starting point is District Judge Lim Hui Min’s essay, ‘Matrimonial Assets and the 3rd Party – To Start a New Fight, To Join in the Fray, To Speak From the Sidelines, Or to Live in Blissful Ignorance’, published in the Singapore Academy of Law Journal in 2003. In Singapore, the court probably has the power to make orders against third parties in divorce proceedings. Lim Hui Min DJ thought that where a party intervenes in or is joined to the proceedings, the court may make any orders it sees fit in relation to that party. The unanswered question is whether the Singapore court would decide in the same way as the UK Supreme Court in Prest v Petrodel if similar facts occur.

There is no case law directly on the point, but I would say the Singapore court would consider Prest v Petrodel persuasive authority. This is because Singapore has tried to retain familiar English commercial law to facilitate its standing as an international commercial hub. Recently, Chief Justice Sundaresh Menon, in his address to the Singapore Academy of Law and Chancery Bar Conference 2013, said: ‘In a globalised world where disputes are increasingly multi-jurisdictional, the courts should, where possible, endeavour to achieve the harmonisation of commercial laws and avoid divergence.’ Thus, it is foreseeable that the principles on piercing the corporate veil and resulting trust in Prest v Petrodel would be applied in Singapore.

However, it is unlikely that the facts of Prest v Petrodel would occur in Singapore, for two reasons. First, in an Asian context, it is likely that the residential property would be owned by a family company where the shareholding will be held by family members and close associates. In such a case, the courts will probably not consider the residential property to be held on a resulting trust for a particular family member or associate. Second, recent changes in stamp duty law mean future acquisitions of residential property using a corporate vehicle will be an unattractive option in Singapore.

Tang Hang Wu is a Professor at the School of Law, Singapore Management University, and Co-head of Trusts and Private Wealth Advisory at TSMP Law Corporation.

  • 1. [2013] UKSC 34
  • 2. [2013] UKSC 34 at [4]
  • 3. [2011] EWHC 2956 (Fam)
  • 4. [2013] 2 WLR 557
  • 5. Matrimonial Causes Act 1973, s25(2)(a)
  • 6. [2013] UKSC 34 at [40]
  • 7. Salomon v A Salomon and Co Ltd [1897] AC 22 (HL)
  • 8. [2013] UKSC 34 at [19]
  • 9. [2013] 2 WLR 398
  • 10. [2013] UKSC 34 at [79]/ but in the event the court has decided that it does exist, though in a pretty restricted form.

    The whole court seemed to agree that the doctrine could be invoked 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’.[2013] UKSC 34 at [35], [81], [96], [97], [103];qu. Lord Walker at [106]

  • 11. [2013] UKSC 34 at [35], [62], [69], [103]
  • 12. [2013] UKSC 34 at [100]-[102], [103], [106]
  • 13. [2013] UKSC 34 at [15], [36], [41]
  • 14.  [2013] UKSC 34 at [36]
  • 15. [2013] UKSC 34 at [41]
  • 16. [2013] UKSC 34 at [37], [40], [58], [86]–[89], [97], [103], [104]
  • 17. [2013] UKSC 34 at [40]/ The objections to such a jurisdiction are really the same as the objections to a wide doctrine of piercing the corporate veil.

    An alternative statutory authority might be found in s24(1)(c), which authorises the court to vary an ante-nuptial or post-nuptial settlement in favour of the applicant. In this context, ‘settlement’ has been given a broader meaning than anything recognisable by an equity lawyer and the possibility was canvassed that a company might itself be a settlement. The Supreme Court declined to entertain the submission as not being ‘seriously arguable’, [2013] UKSC 34 at [53]

  • 18. [2013] 2 WLR 557 at [153], [159]
  • 19. a. b. [2013] UKSC 34 at [52]
  • 20. [2013] UKSC 34 at [43]
  • 21. /[2013] UKSC 34 at [44]–[45]
  • 22. [2013] UKSC 34 at [47]–[51]
  • 23. [2013] UKSC 34 at [93]
  • 24. Hope v Kreji [2013] 1 FLR 182; DR v GR [2013] EWHC 1196 (Fam)
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Nicholas Le Poidevin

Nicholas Le Poidevin QC TEP is a Barrister at New Square Chambers.

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