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Corporate wealth protection on divorce given boost by English Court of Appeal

13 November 2012

In Petrodel Resources Ltd & Ors v Prest & Ors [2012] EWCA Civ 1395 ("Prest"), the English Court of Appeal has delivered a startling ruling which will have far reaching effects for wealthy individuals seeking to protect their assets on divorce.

For over 25 years, the English family courts have developed a practice of making orders against the assets of a company that are considered to be the alter ego of one spouse in order to meet a capital award made in favour of the other spouse on divorce (following obiter dicta comments made by the Court of Appeal in Nicholas v Nicholas (1984) FLR 285; see also Mubarak v Mubarak (No.1) [2001] 1 FLR 673). This practice developed notwithstanding the cornerstone principle of company law jurisprudence that an incorporated company has a separate legal personality and that its assets belong beneficially to the company itself, not to its shareholders (Salomon v A Salomon & Co Ltd [1897] AC 22). The course adopted by the family courts (which effectively prevented spouses from hiding behind the corporate veil) was said to be open particularly in circumstances where the company was deemed to be under the control of one spouse, there were no third party interests and the company was used during the marriage as a vehicle for funding the family's lifestyle.

The previous practice of the family courts has now been decisively rejected by the Court of Appeal in Prest.

In Prest, the husband and wife, both in their fifties, separated after 15 years of marriage. They had lived to a very high standard. There were four teenage children. The husband enjoyed a successful career in international oil exploration and production, trading through a complex group of on-shore and off-shore companies which he had established ("the Petrodel group"). At trial, the task of understanding the Petrodel group structure, and the true nature of the husband's interest in it, was made virtually impossible by the husband's comprehensive failure to give full and frank disclosure of his finances. Thorpe LJ, who later described the husband's evidence at trial as "deceitful and shambolic" noted that "there was almost no length to which he was not prepared to go in order to attempt to defeat or diminish the wife's claim." On divorce, the husband argued he had no capital assets and, in fact, had liabilities of around £48 million. The husband proposed a package for the wife that amounted to a little over £2 million. The wife asserted that the husband's wealth was worth tens if not hundreds of millions of pounds. She sought a capital award of £30.4 million.

Decision at first instance
By the time of the appeal, it was established that the shares in the company at the head of the Petrodel group (incorporated in Nevis) were held on trust for, amongst others, the husband. However, the husband did not hold any shares in the subsidiary property-owning companies, although he was the CEO and was found to have acted, in substance, as a shadow director' in relation to one company.

At first instance, the High Court (Moylan J presiding) concluded that the husband was the effective owner and sole controller of the various companies in the Petrodel group, notwithstanding that the ultimate shareholding was not vested in him. Looking to the reality of the situation, Moylan J based his conclusion on a finding that the husband had unrestricted access to all of the assets held within the Petrodel group such that he could "change the structure and distribute the wealth within it to himself and/or his family as […] he wishes."

On that basis, Moylan J assessed the husband's wealth (inclusive of the various company assets) as being worth at least £37.5 million, and accordingly awarded the wife £17.5 million. As well as transferring the matrimonial home to the wife, the court satisfied the remainder of the capital award by making orders inter alia requiring the husband to transfer various properties owned by subsidiary companies in the Petrodel group to the wife. This included several properties situated in London which were owned by subsidiaries incorporated in the Isle of Man. The subsidiary companies appealed against these orders.

Court of Appeal decision
By a majority (Rimer and Patten LJJ), the Court of Appeal allowed the appeals.

In the Court of Appeal's view, the trial judge had treated the company assets as if they belonged to the husband - this was plainly wrong. Such an approach could only be contemplated in those very limited circumstances where it was justified to pierce the corporate veil. In the instant case, there was no requisite impropriety, and thus no basis for piercing the corporate veil. On the contrary, the husband and the wife had transferred the disputed assets into corporate vehicles for wealth protection and tax planning purposes earlier in the marriage. As Patten LJ noted, "Married couples who choose to vest assets beneficially in a company for … conventional reasons including wealth protection and the avoidance of tax cannot ignore the legal consequences of their actions in less happy times." While the wife's capital award was drastically cut (she was essentially left with just the matrimonial home), it remains to be seen whether she will appeal the decision to the Supreme Court. The powerful judgments of Rimer and Patten LJJ would seem to cast doubt on the prospects of a successful appeal.

The ruling in Prest is the latest attempt by predominantly chancery jurists sitting in the Court of Appeal to 'stamp-out' what are perceived to be irregular practices in the family courts (see, for example, Tchenguiz v Imerman; Imerman v Imerman [2010] EWCA Civ 908, [2011] Fam 116 and the deprecation of the so-called 'Hildebrand rules'.) It also echoes a ruling given by Holman J in the High Court decision of Gowers v Gowers [2011] EWHC 3485 (Fam), [2012] 1 FLR 1041, which also turned on a fundamental misapplication of company law by the family court at first instance.

The Prest decision must be seen as a major victory for wealthy individuals seeking to safeguard assets on divorce. It will now be much more difficult to obtain and enforce capital awards against spouses who have placed their assets in legitimate corporate structures (particularly where they retain no shareholding in the property-owning company). In his dissenting judgment, Thorpe LJ noted that the effect of the decision will be to "present an open road and a fast car" to the money-maker who wishes to avoid the principles which now govern the exercise of judicial discretion in 'big money' divorce cases, most notably the starting point of equality in dividing matrimonial capital assets.

From a Jersey perspective, it is worth noting that the ruling in Prest turned on the proper construction of s.24(1)(a) of the Matrimonial Causes Act 1973, which allows the English court to transfer property on divorce to which one spouse "is entitled, either in possession or reversion". The equivalent property adjustment provision under Jersey law uses slightly different terminology. Nevertheless, while Jersey awaits a test case in this area, the Court of Appeal decision in Prest is likely to be highly persuasive authority, resting as it does on well established principles of company law.

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