Introduction

When will a court take the assets of a company to satisfy a personal liability of a third party? Or to put i t more broadly, when will a court disregard the legal pers onality of a company and "pierce the corporate veil"?

Unti l last week, the answer to this fundamental question had been uncertain for the best part of 80 years . Much depended on which court was being asked to answer the question. The Chancery Division of the High Court adopted a restrictive approach based on the va gue concept of "impropriety". In contrast the Family Division demonstrated a willingness to see companies as mere alter egos of the sole shareholder, on the ground that it was "just and necessary". In practice a di fferent law was applied depending on which court was being asked the question.

However, the decision of the Supreme Court in the case of Prest v. Petrodel Resources Limited & Others [2013] UKSC 34 cuts through the thickets and brings much needed clarification and certainty, particularly for offshore jurisdictions where complex corporate s tructures are the norm.

The facts

Mr and Mrs Prest met in 1992. They married a year later and had four children. Throughout the marriage they l ived principally in London but also in properties in Nigeria and the Caribbean. They l ived to a very high s tandard. The husband had been prominent and successful in international oil development and trade.

Between December 1995 and January 2004 Mr and Mrs Pres t transferred to a group of companies known as Petrodel ("the Group") s e ve n re sidential properties in London. The principle companies within the Group were incorporated in the Isle of Man. The ownership of the Group proved to be di fficult to establish because Mr Pres t did not admit having any personal interest in the shares of the Group and declined to say who the ultimate shareholders were. Following the parties’ separation Mrs Prest brought proceedings against her husband for financial relief.

Initial High Court Decision

The trial judge ordered Mr Pres t to transfer to his wi fe the London properties owned by the Group on the grounds that the court had a wide discretion to pierce the corporate veil under section 24 of the Matrimonial Causes Act 1973 ("the Act"). The tri al judge ’s reasoning was that Mr Pre s t was the true owner of the Group because the management of the companies within the Group was always under hi s control.

Court of Appeal Decision

The Group appealed. The principle issue on appeal was whether that trial judge was correct in di s regarding a basic tenet of company law, which is that the power to deal with the assets of a company l ies with the company i tself.

The Court of Appeal [2012] EWCA Civ 1395 (Rimer, Patten and Thorpe LJJ) held by a majority that the trial judge was wrong and that the practice of the Family Division to treat assets of companies substantially owned by one party to the marriage as available for distribution was beyond the juri sdiction of the court unless (i) the corporate personality of the company was being abused for a purpose which in some respects was improper, or (i i ) on the particular facts of the case it could be shown that an asset legally owned by the company was held in trust for the husband. The effect of the Court of Appe al’s decision was to deprive Mrs Prest of the benefit of the lump sum order and to give the husband a windfall. This met with some interesting news paper headlines along the lines of "cheat’s charter".

This decision also brought to the surface for the first time the underlying tensions between the Family Divi sion and the Chancery Division. Rimmer LJ said the a pproach of the trial judge was "astonishing and does not begin to pass muster" [pa ragraph 105]. Whi l e Patten LJ cri ticised the Family Division’s a pproach which he said almost amounted to "a separate system of legal rules unaffected by the relevant principles of English property and company law. That must now cease" [paragraph 161].

Thorpe LJ (who was a judge in the Family Division for some 8 years) saw things rather differently. He a dopted the trial judge’s reasoning; namely power equals property. He concluded that whilst the ma rri age lasted the husband’s companies were mi lked to provide him and his family with an extravagant lifestyle. Once the marriage broke down, the husband invoked company law measures for hi s ends to deprive his wife of her accustomed affluence. If the law permits him to do this it de fe at’s the ove rriding duty of the Family Division judge to achieve fairness and provides "an open road and fast car’" to the money ma kers of marriage [paragraph 63].

Supreme Court Decision

Against this background of open warfare between di fferent branches of the judiciary, Mrs Pres t appealed to the Supreme Court. The question on the appeal was whether the court has power to order the transfer of the seven properties to the wi fe given that they did not belong to the husband but to hi s companies?

The Supreme Court held unanimously that there is a principle of English law which enables a court in only very l imited ci rcumstances to pierce the corporate veil. It applies only when a person is under an existing legal obligation or liability or subject to an existing restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control [paragraph 35]. This principle did not as sist Mrs Prest because the properties were trans ferred to the Group long before the marriage broke up and there was no evidence by so doing that he was seeking to evade any obligation.

The Court a lso re jected the tri al judge’s conclusion that there was a broader principle in matrimonial proceedings to pierce the corporate veil by vi rtue of section 24 of the Act [paragraph 37].

However, that was not the end of the matter because the Court went on to conclude that, on the facts , the Group held the properties on a resulting trus t for the husband by vi rtue of the particular ci rcums tances in which the properties came to be ves ted in them. In consequence the Group was ordered to convey the properties to Mrs Prest [paragraph 47].

Comment

The decision has been welcomed by many commentators as closing a loophole in divorce settlements. The Financial Times (15 June 2013) s a id the ruling "will affect anyone seeking to protect personal assets by putting them into a corporate structure".

This is taking the consequences of the decision too far. There are clearly legitimate reasons to protect personal assets that will not be vulnerable to attack. However, it i s a very important decision with s ignificant implications, particular for offshore juri sdictions.

First, a court will only pierce the corporate veil in very l imited circumstances. It was noted by the Supreme Court that there has never in fact been a successful or appropriate invocation of the doctrine of "piercing the corporate veil" in the 80 years s ince the argument was first considered, which in itself is a startling conclusion.

Secondly, for the first time the Court has s et out a clear formulation of what is relevant "impropriety" and when the doctrine should be invoked. At i ts he a rt is the concept of "evasion" of a liability and "control" of a company. If these two elements are absent the doctrine will simply not apply. These requi rements undoubtedly narrow the doctrine. Thus a company's assets will not be vulnerable to attack in circumstances where it has received assets from a thi rd party for a wholly legitimate reason, although alternative legal rights and duties might ari se.

Thirdly, there can no longer be any room for divergence of approaches between the Chancery and Family Divisions given the clear statement that section 24 of the Act does not have a broader principle of piercing the corporate veil.

Fourthly, however, there might be a divergence when i t comes to the drawing of adverse inferences from non-disclosure. Lord Sumption said that unl ike ordinary civil litigation, family proceedings have a substantial inquisitorial element because there i s a public interest in the proper maintenance of (usually) the wife and the children. It will be re ca lled that the Group’s offshore dire ctor failed to provide information and attend court for cross-examination. As a result the Supreme Court drew adverse inferences. Lord Sumption said that:

"It is a fair inference from all these facts, taken cumulatively, that the main, if not the only, reason for companies’ failure to co-operate is to protect the London properties. That in turn suggests that proper disclosure of the facts would reveal them to have been held beneficially by the husband, as the wife has alleged" [paragraph 47].

This could clearly have significant implications for di rectors of offshore companies. Much will depend upon the particularly ci rcumstances of a given case but what is clear i s that the Family Division might draw adverse inference if an offshore company fails to comply with directions and/or intervenes in the proceedings. The situation is likely to be different in the Chancery Division.

Fifthly, the one real surprise of the decision is the finding that the seven properties were held by the Group on a resulting trust for the husband. The trial judge had ruled out a resulting trust on the fa cts . He concluded that the Group "was set up and has been used for conventional reasons including wealth protection and the avoidance of tax". The implication of that finding can only mean that the wealth of the companies belonged beneficially to the companies and that there was no presumed intention that the husband s hould have a beneficial interest in the properties.

In the Court of Appeal Rimer LJ agreed and said that "I consider, nothing in his judgment that could enable this court to find that he ought nonetheless to have found that the specific properties held by PRL and Vermont…….belonged beneficially to the husband" [paragraph 153].

The Supreme Court disagreed and inferred an intention that the Group held the properties on trus t for the husband because the purchase monies (probably) came from the husband and the Group was being used to conceal the true beneficial ownership [paragraph 52]. We will have to wait and see how this aspect of the decision plays out. However, it would not be a surprise i f courts were more wi lling to l ift (as opposed to pierce) the corporate veil where corporate s tructures were not genuine and were being used to conceal the identities of the real actors. Those involved with offshore companies will need to be alert to investment advisors who are also settlors and/or beneficiaries, assuming the role of shadow di rectors, for example.

Sixthly, a somewhat puzzling aspect of the decision i s that the companies within the Group were all incorporated within jurisdictions other than England and Wales. There was however, no expert evidence as to any foreign law governing the operation of any of the companies and the appeals were argued on the basis that English law applied not only to their operation but also to the resulting trust that arose on the transfer of the properties to the Group. This might be an important consideration in the future, i f offshore companies become embroiled in di sputes in England.

The likely approach of courts in Guernsey

Guernsey courts have historically applied English authorities when considering the test to be applied in piercing the corporate veil: see Carton-Kelly and Callaghan (as liquidators of Dobb White & Co and Trustees in Bankruptcy of S Gangar and White) v Butterfield Bank (Guernsey) Ltd, Royal Court of Guernsey, 6 November 2008. It i s likely therefore that the new formulation of the test would be applied by courts in Guernsey, particularly as they have implicitly accepted a duty to uphold the reputa tion of Guernsey as a major financial centre that might suffer i f i t were not willing to both assist victims of wrongdoing and deter wrongdoers: Durant Intl Corp v AG (2006) JLT 112.

Although the concept of a resulting trust is not recognised under Guernsey law, the outcome would probably have been the same because a court in Guernsey would have considered the presumed intention of the parties at the time the properties were transferred to the Group: see Pirito v. Curth GLR 2003 -2004, 218.

Conclusions

The decision in this case offers a level of comfort to thos e who administer offshore trusts and underlying companies. An English court will not s imply disregard the separate personality of a compa ny a nd appropriate a company’s assets unless (1) a company i s incorporated for the purpose of evading an existing liability and (2) it is under the control of the evading party. These s ituations will be rare.

However, it i s likely that the courts will be more wi l ling to look behind companies where they are being used to conceal the reality of the real actors who are lurking behind the scenes.