Piercing the corporate veil

Even we were surprised by the rasp of admonition from the Court of Appeal last year in Petrodel Resources Ltd v Prest. Rimer and Patten LJJ identified a particular practice followed in the family courts, which Moylan J at first instance had adopted when giving judgment in the financial claims on divorce between Michael and Yasmin Prest (pictured). That practice was: where a spouse was the only shareholder of a company, which held assets but did not have third-party creditors, those assets could be transferred directly to the other spouse in settlement of his or her claims. Allowing the companies’ appeal, Rimer LJ described Moylan J’s reasoning as ‘heretical’; Patten LJ thundered that the practice ‘must now cease’. The unintended effect was of a Victorian maiden aunt impressing on some unruly charges the need to behave with rectitude and sobriety henceforth.

In truth, that practice was treated with extreme caution by the profession. For most matrimonial lawyers, it was only used where nothing else would do. Its elision of corporate and personal assets struck many as a bridge too far.

The Supreme Court’s judgment on Mrs Prest’s appeal, handed down on 12 June, confirms that there should be no such practice – the rock of separate corporate personality upon which Salomon is built will be respected by us too. So, while the judgment offered a welcome and successful outcome for Mrs Prest, it clarified matrimonial law, rather than breaking fundamentally new ground.

Mrs Prest’s appeal was allowed on the basis that, on the particular facts of the case, the companies held the properties on trust for Mr Prest. He was thereby ‘entitled’ to them, and so there was no difficulty with their being transferred to his wife. This was against the background of his ‘persistent obstruction, obfuscation and deceit’ and repeated refusal to comply with orders. Surprisingly, an application for his committal only led to a fine – it left one wondering quite how flagrant a party’s breach needed to be to meet with imprisonment. The judgment includes an elegantly phrased excursion into when and how the ‘corporate veil’ might generally be pierced.

In whipping the Family Division into line, Prest is the latest in a trend. The Court of Appeal in Tchenguiz v Imerman told us that there was nothing special about financial claims on divorce that permitted one spouse to fish for, or through, the other’s confidential financial information. In Granatino v Radmacher, the Supreme Court held that we should now treat pre-nuptial agreements with much greater weight. The right (perhaps the duty) of English judges to exercise their independent unfettered discretion over financial claims, even if the parties themselves had already decided what the outcome should be, was diluted.

In the same vein, Sir James Munby, president of the Family Division, has been telling us to get in line for years. His analysis in A v A in 2007 that ‘there is not one law of "sham" [trusts] in the Chancery Division and another law of "sham" in the Family Division’ was quoted by Lord Sumption with approval. Sir James has also remarked on the contrast between the seeming readiness of judges in matrimonial cases to grant ‘without notice’ freezing orders as compared to their Chancery brethren.

This trend is part of a wider tension in financial claims on divorce, between followers of judicial discretion and of greater codification. Many readers will know that such claims are decided by reference to the list of factors set out in section 25 of the Matrimonial Causes Act 1973, with (historically) very considerable discretion given to individual judges. When the act first came into force, the court’s objective was to 'place the parties, so far as it is practicable and, having regard to their conduct, just to do so, in the financial position in which they would have been if the marriage had not broken down and each had properly discharged his or her financial obligations and responsibilities towards the other’. But this instructive ‘tailpiece’ was repealed by an act of 1984, and nothing put in its place.

In 2000, the House of Lords held in White that the appropriate objective was ‘fairness’. This might be an equal division of the assets, but it might well not. Their lordships tried again in 2006 in Miller v McFarlane. They explained that there were three justifications for redistributing assets on divorce: need, sharing and compensation. But they declined to hold that, for example, inherited property should always be retained by the recipient, or to create a formula for the quantification of maintenance.

So will English law retain a ‘bespoke’ approach, where judges with decades of experience in high-value divorces provide their ‘feel’ for fairness in a particular case? Or will judges be required to work from a property regime and a code for maintenance? The recent Law Commission consultation paper Matrimonial Property, Needs and Agreements indicated that the latter might be preferred.

Standing back, we should consider whether matrimonial matters fit comfortably into the ‘ordinary’ civil framework, even at the exalted level of the Supreme Court. Lord Sumption recognised that the burden of proof cannot apply to family proceedings in the same way, because parties and the court depend on candid disclosure from the other side to ascertain the extent of their claim. He tentatively suggested ‘many, perhaps most’ cases where a matrimonial home is held by a ‘one man’ company would be difficult to justify as being in the company’s interest, and so a finding that a spouse was beneficially entitled to the property might have a greater chance of success.

Finally, Lord Sumption’s specific finding as to Mr Prest’s beneficial ownership of the properties was in spite of Moylan J declining Mrs Prest’s invitation to do so, and in the face of a cursory dismissal of the argument by the Court of Appeal. Would he have troubled to make that finding in a straightforward commercial dispute? Did Mrs Prest’s financial needs and potential plight encourage him to investigate the position more fully? Perhaps matrimonial cases have something worth getting fired up about after all.

Nicholas Bennett is an associate in the family team at Farrer & Co, which acted for Mrs Prest