Introduction
Issue
Corporate veil
Facts
First instance decision
Court of Appeal decision
Supreme Court decision
Comment


Introduction

The Supreme Court recently issued its judgment in Prest v Petrodel Resources Limited, following an appeal from the Court of Appeal. In doing so, the Supreme Court ordered a divorced husband, Michael Prest, to transfer to his former wife, Yasmin Prest, properties held by companies owned and controlled by him, as part of a £17.5 million divorce award. The leading judgment was given by Lord Sumption.

Although the case revolved around a dispute concerning financial provision on divorce, the decision has potentially wider implications.

Issue

The Supreme Court had to consider whether it is open to the court, in ancillary relief proceedings, to treat the assets of a company of which a spouse is sole controller as being assets to which that spouse is 'entitled' for the purposes of the Matrimonial Causes Act 1973.

In reaching its decision, the court had to consider the law surrounding the piercing of the corporate veil.

Corporate veil

The doctrine of the corporate veil holds that a company is a separate and independent legal person that is distinct in law from its members. The concept is central to the existence of a corporate body. The court may 'pierce the corporate veil' only when it deems it appropriate and absolutely necessary to look behind the status of the company as a separate legal entity, distinct from its shareholders. In so doing, the court will consider which individuals, as shareholders, direct and control the activities of the company.

The corporate veil may be pierced if there is some form of wrongdoing that involves the fraudulent or dishonest use of the corporate personality for the purpose of concealing the true position.

In the past year, the concept of the corporate veil (and the court's ability to pierce it) has been the subject of substantial judicial scrutiny and academic commentary. This is largely as a result of VTB Capital Plc v Nutritek International Corp ([2013] UKSC 5). VTB was the English claimant in an action to recover around $225 million loaned to RAP, a Russian company, for the purpose of RAP's proposed acquisition of Nutritek. RAP defaulted on the loan and VTB also learned that the security it had taken for the loan was of significantly lower value than it had been led to believe. VTB claimed that, among other things, the loan facility agreement should be enforced against individuals who were not party to it, which VTB argued could be achieved by piercing the corporate veil.

Following the decisions at first instance and on appeal, the Supreme Court reached a unanimous decision that it would be contrary to prior authorities and principles to extend the circumstances in which the corporate veil can be pierced (for further details please see "The corporate veil remains drawn: VTB Capital plc v Nutritek International Corp").

Prest has been long awaited because of its potential to reshape the law in relation to the piercing of the corporate veil.

Facts

Mr and Mrs Prest (who had dual British and Nigerian citizenship) had their matrimonial home in London, but the court determined that Mr Prest was based in Monaco. Mr Prest was a wealthy businessman operating in the oil sector.

As is often the case, the divorce proceedings were acrimonious and protracted. At various stages, Mr Prest was reticent and resisted providing accurate information relating to his income and assets. Indeed, the court found that Mr Prest took steps to conceal details of his wealth from the court and demonstrated flagrant disregard for court orders to provide corroborative information of his personal and commercial interests.

First instance decision

The trial judge found that as the Petrodel companies were effectively owned and controlled by Mr Prest, he was their alter ego, and so the properties that were legally vested in them were, in reality, assets available to Mr Prest. Accordingly, the court found that those properties could be applied to satisfy Mrs Prest's divorce settlement. The court assessed Mrs Prest's entitlement at £17.5 million. The court was plainly convinced that Mr Prest was likely to attempt to avoid making payment to Mrs Prest and ordered that seven UK properties nominally owned by the "Petrodel group" be transferred to Mrs Prest.

Court of Appeal decision

It came as little surprise that the Petrodel group companies challenged the first instance decision in the Court of Appeal. Their main argument was that the family court could not simply depart from long-established company law principles relating to the separate legal personality of companies. The Court of Appeal considered the practice of family courts seeking to do precisely that under the Matrimonial Causes Act 1973 in cases where the company is wholly or largely owned by the spouse. The Court of Appeal rejected this approach in Prest.

Instead, overturning the High Court decision and following various authorities, the Court of Appeal held that the corporate veil should be pierced only in circumstances where:

  • there is deliberate abuse of a corporate entity (ie, to hide behind the corporate veil) for improper purposes; and/or
  • the specific facts show that the assets are genuinely held on trust for a party to the proceedings.

Supreme Court decision

On June 12 2013 seven members of the Supreme Court allowed Mrs Prest's appeal. However, as in VTB, the court could not be persuaded to pierce the corporate veil. Rather, Mrs Prest succeeded because of the specific facts of her case and not because of any modification of the law in relation to the preservation of the corporate veil. The court found that the manner in which the seven properties had become vested in the Petrodel group companies meant that, in fact, the properties were held on trust for Mr Prest, such that he was their beneficial owner. The fact that Mr Prest had sought to conceal this fact in evidence, and that both he and the companies failed to cooperate with disclosure, permitted the court to infer that Mr Prest and the companies were attempting to hide the true beneficial ownership of the properties.

In reaching its conclusion, the Supreme Court confirmed that the Court of Appeal's analysis of the circumstances in which the corporate veil may be pierced was correct. Divorce cases are not a special case in which the court may depart from the doctrine of the corporate veil. However, in applying those exceptional circumstances, the Supreme Court held that Mr Prest had not deliberately attempted to stymie Mrs Prest's claim. In the light of this finding, Mr Prest had not used the corporate structures for wrongdoing.

Comment

The judgment is important for businesses holding assets that could be vulnerable to pursuit by spouses in divorce proceedings. The decision will also be of note to those engaged in advising high-net-worth individuals in relation to their marital affairs.

In many respects, Prest has done nothing to reshape the court's attitude towards piercing the corporate veil. The decision may well assuage the concerns of corporates insofar as it adheres to long-held company and trusts law principles. The case confirms that it is possible to pierce the corporate veil, but only in a small category of cases where a company has been created or structured in some way to frustrate the law.

In cases where the ostensible title to company assets is established, the Supreme Court has demonstrated that an attempt to deceive the court could result in inferences being drawn that may precipitate the transfer of those assets, even where the corporate veil remains firmly in place.

For further information on this topic please contact Adam Forster at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (adam.forster@rpc.co.uk).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.