The recent decision of the Court of Appeal in Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395, shocked the family law world. It has left many concerned about the potential effects it may have on future financial remedy proceedings, and some adamant that it has provided moneymakers with an easy way to protect their assets from their former spouses.

Petrodel v Prest concerned financial remedy proceedings between Michael Prest and his wife, Jasmin Prest, which commenced after they filed for divorce in 2008. The parties married in 1993 and lived to a very high standard during their marriage. Although the exact ownership structure was unclear, it was thought that Mr Prest was the owner and controller of several companies within the Petrodel Group.

Mr Prest was found to be evasive, failing to disclose the information necessary in order for the companies to be accurately valued, maintaining that he was worth far less than his wife believed. Mrs Prest argued that Mr Prest was indeed the owner and controller of the companies and that the trial judge could make orders directly against properties and shares held in the name of some of the companies as part of her settlement, as her husband was entitled to these properties and shares.

Debate centred around the meaning of a party’s entitlement to property as contained in section 24(1) of the Matrimonial Causes Act 1973 (the 1973 act). This section states that the court can transfer property from one party to another in financial remedy proceedings if the former is entitled to the property ‘in possession or reversion’. The well-established principle that a company is a separate legal entity to its shareholders and that a ‘corporate veil’ hangs between them, emanating from Salomon v Salomon, was also central to this case.

In October 2011, Mr Justice Moylan heard the case at first instance and reviewed the authorities on this topic, with particular focus on Nicholas v Nicholas and Ben Hashem v Al Shayif. In the former it was held that where the shareholding of a company is such that the minority interests can be disregarded for practical purposes and the relevant party has ownership or control of the company, the court can pierce the corporate veil and make orders directly against the company’s assets.

In the latter, Mr Justice Munby determined that to pierce the corporate veil, it is, in fact, necessary to show not only that the relevant party has control of the company, but that there has been impropriety. Such impropriety must involve the company structure being used as a means to conceal or avoid liability. This latter approach is clearly more in line with the original principles derived from Salomon v Salomon.

Mr Justice Moylan determined that Mr Prest was entitled to the properties in accordance with section 24(1) of the 1973 act because he had complete control over them in terms of their management and operation, therefore preferring Nicholas v Nicholas. He decided that he could, therefore, make orders for the transfer of the properties to Mrs Prest. Mr Prest and the respondent companies appealed to the Court of Appeal. The controversial judgment of the court, allowing the appeal, was delivered in October 2012, sparking disbelief in family lawyers.

Lord Justices Rimer and Patten, who are traditionally commercial law judges, held that the ‘property’ to which section 24(1) referred meant the property to which Mr Prest was beneficially entitled. They extoled the principles of Salomon, namely that there is a distinction between the separate legal personalities of a company and its shareholders and it made no difference to such distinction that the company had a single shareholder with total control over its affairs.

A company's assets belong beneficially to the company and that its shareholders have no interest in, or entitlement to, them. They considered that there might be factual circumstances in which it would be legitimate for the court to pierce the company's corporate veil and, to an appropriate extent, disregard its separate identity. This could only be done in certain limited circumstances, however, predominantly where there was impropriety in the shareholder's use of the company, specifically impropriety involving misuse of the corporate structure for the purposes of concealing wrongdoing.

As no impropriety was found in this case (the company structures being set up for tax avoidance and asset protection, not for defeating Mrs Prest’s claims), the Court of Appeal rejected the claim that the properties were properties to which Mr Prest had any entitlement.

Some are of the view that family law judges frequently make orders that ignore the principles of property and company law and that this decision is both welcome and overdue, helping to rein them in. Lord Justice Patten, for instance, stated that the approach of the Family Division judges has resulted in there almost being a separate system of legal rules regarding company law in the Family Division. One could also argue that if the financially stronger party has set up a company structure to defeat the claims of their spouse to their assets, this would constitute impropriety and enable the court to ignore the company structure and make orders against the company’s assets. Further, a company may have creditors whose claims may be overridden by matrimonial settlements.

However, if a company structure is already in place for the usual reasons and simply has the added benefit of protecting the majority shareholder’s assets from a financially weaker spouse, as in this case, this decision will prevent a court from making orders against these assets, despite the shareholder having control over them. Here the court found that Mr Prest had unrestricted access to the Petrodel Group’s wealth but concluded that he was not ‘entitled’ to it in the requisite sense. It is not difficult to see why many find this decision confusing and regard it as unfair.

Lord Justice Thorpe, who has a family law background, dissented in the Court of Appeal and stated that this decision presented ‘an open road and a fast car to the moneymaker’, adding that it would defeat ‘the Family Division judge’s overriding duty to achieve a fair result’.

Despite these differing views, what is clear is that this decision has greatly reduced the division’s ability to use discretion to achieve fairness in family proceedings, something which is central to family law itself. Mrs Prest has permission to appeal to the Supreme Court in March, however, and so you can be sure that the family law world will be watching this space.

Sarah Foreman is matrimonial and family law assistant solicitor at Vardags Solicitors, the UK leading family law boutique