Should companies be afraid of the Divorce Lawyer?

 After the recent Supreme Court Ruling in the case of Prest vs Petrodel Mark Mosley, Head of Family Law at Vncents Solicitors explains why Company Shareholders need to be aware of the facts and not the media speculation.

The media headlines have been such that Company Share holders/directors must be wondering what on earth has divorce law to do with the separate legal entity which is a Ltd Company

Mark Mosley Partner comments on the recent Prest vs Petrodel Resources Limited Supreme Court ruling that in some quarters is being hailed a Landmark ruling that may have significant impact on Ltd Companies as separate legal entities.

The Supreme Court has unanimously allowed the appeal of Mrs Prest. The Supreme Court held that the piercing of the corporate veil could not be justified in the instant case by reference to any general principle of law and that it was impossible to say that a special and wider principle applied in matrimonial proceedings. However, on the evidence, the husband had, at all relevant times, been the beneficial owner of the properties which therefore were held on resultant trust for him. That was the only basis on which the companies could be ordered to convey the properties to the wife.

The husband, Mr Prest, must transfer to Mrs Prest, properties held by companies owned and controlled by him, as part of a £17.5m divorce award.
Mark comments that the central question is has the Supreme Court opened up Ltd Companies to claims by divorcing couples. In lawyer speak has the corporate veil been pierced. Some will argue this decision in Prest has shattered the veil and was long overdue; others will argue it depends on the circumstances. What is true is whichever school of thought you’re in there will be more litigation where family interests also include companies and trust which holds company assets/shares?

The decision in Prest is of importance not only for family law and divorcing couples, but also for company law. However the media headlines are not the whole story.
The appeal concerned the position of a number of companies belonging to the Petrodel Group that were wholly owned and controlled by Mr Prest. One of the companies was the legal owner of five residential properties in the UK and another was the legal owner of two more. At issue was whether the court had power to order the transfer of these seven properties to the wife given that they legally belong not to the husband but to his companies.

Mark adds that under the Matrimonial Causes Act 1973 there is no doubt a court can order transfer of property that is owned by either Husband or Wife, solely or jointly. The question in Prest could it if the property was owned by a Ltd company whose share holding was owned solely by either the Husband or Wife.
In the High Court it was held that there was no general principle that entitled the Judge to reach the companies' assets by piercing the corporate veil. The Judge nevertheless concluded that a wider jurisdiction to pierce the corporate veil was available under section 24 of the 1973 Act. In the Court of Appeal, three of the companies challenged the decision on the ground that there was no jurisdiction to order their property to be conveyed to the wife. The majority in the Court of Appeal agreed and criticised the practice of the Family Court of treating assets of companies substantially owed by one party to a marriage as available for distribution under section 24 of the 1973 Act.

Mrs. Prest appealed to the highest court, The Supreme Court. Lord Sumption, giving the lead judgment of the Supreme Court, held that the properties were held on bare legal title on trust for the husband. The beneficial interest was capable of transfer and the Supreme Court directed that this should happen, a decision which was supported by all seven Justices of the Supreme Court.

So the big Question are companies going to find themselves inundated with claims from spouses of shareholders. Once again the Headline in the news and papers doesn’t tell the whole story or even give the whole judgment.
Lord Sumption who gave the lead judgment said in that judgment

“There is nothing in the Matrimonial Causes Act and nothing in its purpose or broader social context to indicate that the legislature intended to authorise the transfer by one party to the marriage to the other of property which was not his to transfer. Secondly, a transfer of this kind will ordinarily be unnecessary for the purpose of achieving a fair distribution of the assets of the marriage. Where assets belong to a company owned by one party to the marriage, the proper claims of the other can ordinarily be satisfied by directing the transfer of the shares."

Mark comments that here lies at least in part an explanation as to the decision in Prest and why Ltd companies should be cautious but there’s no need to panic.Some may argue where does this leave a Ltd Company where part of the shareholding is held by non family 3rd parties. Mark adds Lord Sumption was quite clear they have nothing to fear when he said “There is nothing in the Matrimonial Causes Act and nothing in its purpose or broader social context to indicate that the legislature intended to authorise the transfer by one party to the marriage to the other of property which was not his to transfer.” Clearly if either spouse held shares in a company with others then the property of that company is not that person to transfer. Straight away the Supreme Court is reassuring Shareholders and directors there is nothing to fear.

Mark further comments that Mrs Prest’s own lead lawyer sums up the impact of the Supreme Court’s decision .Jeremy Posnansky QC, partner in Farrer & Co said of the Supreme Court decision the importance, is twofold.

"First, it shows that the courts will look at the reality of a particular situation and won't be easily misled, so the fact that an asset may be held in the name of a company doesn't necessarily mean that it's owned by the company.

Secondly, and of importance to entrepreneurs and company lawyers, the Supreme Court has largely reinforced the separate identity of companies and made clear that it will be very rare that the corporate veil can be pierced."

Mark adds this decision whilst important may not be as dramatic as the media made it out to be. The Supreme Court is saying to couples if you seek to hide assets and frustrate a court’s decision by using the Ltd Company status as a shield we will not allow you to do that in certain circumstances. This is consistent with the Courts approach generally in informing spouses to act properly and fairly and abided by courts decisions. To Ltd Companies the Supreme Court is saying you have nothing to fear from this decision as your legal entity as a company will rarely be affected in this way.

So Directors don’t panic but do take advice because when the court makes landmark decisions every word and meaning is poured over by Lawyers looking for the loopholes.
 

For more information on this topic you can reach Mark on 0800 310 2000.