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Stripping Away the Veil of Deceit: Prest v Petrodel

John Wilson QC of 1 Hare Court analyses the Supreme Court’s judgment in the landmark case of Prest v Petrodel and considers its implications for family lawyers.

John Wilson QC, 1 Hare Court

 

 

 

 

 

 

John Wilson QC, 1 Hare Court

In the 24 hours since the Supreme Court published its landmark decision in Prest v Prestodel Resources Ltd & Others ("Prest") there has been a tsunami of commentary upon its consequences.   So great has been the interest generated, amongst company and insolvency lawyers as well as family lawyers, that it is unnecessary, in this article, to recite either the material facts of the case or the convoluted procedural history that followed the presentation by Mrs Prest of a petition for divorce in March 2008.  Instead, the focus here is on the Supreme Court's conclusions in relation to "piercing the corporate veil", the relevant provisions of the Matrimonial Causes Act 1973 ("MCA"), the employment of evidential presumptions and the finding that the beneficial ownership of the residential properties which were the subject of Moylan J's original order lay with Mr Prest.

Piercing the corporate veil
The startling conclusion, as stated by Lord Neuberger, was that there has never in fact been a successful or appropriate invocation of "the doctrine" of "piercing the corporate veil" in the 80 years since the argument was first considered in Gilford Motor Co Ltd v Horne [1933] Ch 935 – see paragraph 79.   Such a conclusion had given rise to the temptation (not succumbed to) to give "the doctrine" its quietus.  "The doctrine" is perhaps not even a doctrine.    Lord Sumption stated at paragraph 16 that it referred to the exceptions to the principles set out in Salomon v A Salomon & Co Ltd [1897] AC 22, namely to those circumstances where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control.   Whilst Lord Neuberger and Lord Clarke referred to the "doctrine", Lord Mance referred to it as "a metaphor" (paragraph 98) and Lord Walker was of the view, at paragraph 106, that it:

"…is not a doctrine at all, in the sense of a coherent principle or rule of law.  It is simply a label – often as Lord Sumption observes, used indiscriminately – to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22"  (emphasis added)

The use of words such as "pierce", "lift", "veil", "mask", "façade" or "sham" has not assisted. Lord Sumption, at paragraph 28, described the latter two terms as "protean" meaning, in one dictionary definition, "readily taking on various shapes or forms".  Lord Neuberger cited academic commentary to the effect that "(t)he inherent imprecision in metaphors has resulted in a doctrinal mess" and referred to Justice Cardozo's reference to the "mists of metaphor" in company law, which "starting as devices to liberate thought … end up often by enslaving it."  "(P)iercing' seems to happen freakishly.  Like lightning, it is rare, severe and unprincipled." 

Lord Sumption undertook a masterly survey of the relevant authorities and, in doing so, sought to eschew metaphor and imprecision and to penetrate through to the nucleus of legal principle that lies at the core of the "doctrine's" invocation.    It is a specific principle that the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest.  The same legal incidents will not necessarily apply if they are not (see paragraph 18).   "Fraud unravels everything".   Although the maxim is primarily applied in cases of contract it illustrates a broader principle governing cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty.    The authorities show that there are very limited circumstances in which the law will treat the use of a company as a means of evading the law as dishonest for the purpose of the maxim.

In Ben Hashem v Al Sharif [2009] 1 FLR 115 Munby J surveyed the family and non-family cases on "piercing the corporate veil" and formulated six principles from these cases:

(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice;
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The "impropriety" in question must be "linked to the use of the company structure to avoid or conceal liability";
(v) To justify piercing the corporate veil, there must be "both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or façade to conceal their wrongdoing;
(vi) The company may be a "façade" even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions.  The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done.

It was implicit in the above formulation that resort to piercing the corporate veil should only be in circumstances where there was no other remedy available against the wrongdoer.     The Court of Appeal in VTB Capital v Nutritek International Corpn [2012] 2 Lloyds Rep 313 ("VTB") adopted Munby J's formulation subject to two qualifications.  Firstly, they disagreed that it was not necessary for there to be no other available remedy before resort should be had to piercing the veil.    The Supreme Court roundly disagreed with this.    Secondly, the Court of Appeal stated that it was not enough to show that there had been wrongdoing: "the relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts."  On this point the Supreme Court in VTB agreed with the Court of Appeal.

Lord Sumption concluded that two distinct principles, the concealment principle and the evasion principle, lay behind the words "façade" and "sham".  At paragraph 28:

"The concealment principle is legally banal and does not involve piercing the corporate veil at all.   It is the imposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant.  In these cases the court is not disregarding the "façade" but only looking behind it to discover the facts which the corporate structure is concealing.  The evasion principle is different.     It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.  Many cases will fall into both categories, but in some circumstances the difference between them may be critical.  This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil."

It should be noted (see paragraph 103 per Lord Clarke) that the distinction between these two principles was not discussed in the course of legal argument before the Supreme Court.  

With the concealment principle the company is a "façade" and, whilst being wary of metaphor, the court "lifts the corporate veil".   With the evasion principle the company's involvement is a sham and the court "pierces the corporate veil."   On Lord Sumption's analysis in Gilford Motor Co v Horne relief was granted against Mr Horne on the concealment principle and against "his" company on the evasion principle.   To that extent the corporate veil was pierced.  However (paragraph 29):

"It does not follow that J M Horne & Co Ltd was to be identified with Mr Horne for any other purpose {other than granting an injunction to prevent Mr Horne's breach of covenant}.  Mr Horne's personal creditors would not, for example, have been entitled simply by virtue of the facts found by Farwell J, to enforce their claims against the assets of the company."

Similarly, in Jones v Lipman [1962] 1 WLR 832 the relief granted against Mr Lipman was done on the concealment principle and the relief against "his" company was done on the evasion principle.

In all the other cases that were considered, in Lord Sumption's view, the proper analysis was that relief was being given on the concealment principle rather than the evasion principle so that the issue of piercing the corporate veil simply did not arise, even when the court in question proceeded on the basis that this was what in fact was being done.  For the evasion principle to be engaged the "owner" of the company has to use the company's separate legal personality to evade a liability which would otherwise lie on the owner.   In Horne and Lipman the real actors had a liability which arose independently of the involvement of the company and the evasion principle was accordingly engaged.  At paragraph 34:

"These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality.  It may be an abuse of the separate legal personality of the company to use it to evade the law or to frustrate its enforcement.  It is not an abuse to cause a legal liability to be incurred by the company in the first place.  It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller's because it is the company's."

Having cited with approval the principles set out by Munby J in Ben Hashem v Al Sharif  Lord Sumption summarised his understanding of the limited place for "piercing the corporate veil" at paragraph 35:

"I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.  The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality.  The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.  Like Munby J in Ben Hashem, I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course."

At first instance in Prest Moylan J had held that there was no "impropriety" sufficient to permit the corporate veil to be pierced.    The Court of Appeal agreed, as did Lord Sumption.   He explained this, by reference to the concealment and evasion principles, at paragraph 36:

"The husband has acted improperly in many ways.  In the first place, he has misapplied the assets of his companies for his own benefit, but in doing that he was neither concealing nor evading any legal obligation owed to his wife.  Nor, more generally, was he concealing or evading the law relating to the distribution of assets of a marriage on its dissolution.  It cannot follow that the court should disregard the legal personality of the companies with the same insouciance as he did.   Secondly, the husband has made use of the opacity of the Petrodel Group's corporate structure to deny being its owner.  But that, as the judge pointed out at para 219"is simply [the] husband giving false evidence".   It may engage what I call the concealment principle, but that simply means that the court must ascertain the truth that he has concealed, as it has done."

The properties in question had been vested in the companies long before the marriage broke up and for reasons of wealth protection and the avoidance of tax.   Whatever the husband's reasons for organising things in this way there was no evidence to show that he had been seeking to avoid any obligation which was relevant to the financial remedy proceedings.

The other members of the Court broadly agreed with Lord Sumption's analysis.  Lord Neuberger was of the view that in both Horne and Lipman the concealment principle was engaged but not the evasion principle so that there was no need to pierce the corporate veil.   Having given consideration to consigning the "doctrine" to history he concluded that it would be wrong to do so as it represented a "potentially valuable judicial tool to undo wrongdoing in some cases where no other principle is available" provided that it is possible to discern or identify an approach to piercing the corporate veil which accords with normal legal principles, reflects previous judicial reasoning (so far as it can be discerned and reconciled), and presents a practical solution (paragraph 80).   On that basis he accepted the formulation by Lord Sumption at paragraph 35 of his speech.  Lady Hale (with whom Lord Wilson agreed) expressed some doubt as to whether or not every case could be classified using the concealment and evasion principles and stated that these principles may in fact be examples of the broader principle that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business.  Similarly, Lord Mance was not prepared to "foreclose all possible situations which may arise".  He described piercing the corporate veil as "a final fall-back" and cases where it was likely to be appropriate were likely to be "novel and very rare" (paragraph 100).  Because the distinction between the concealment principle and the evasion principle had not been the subject of argument or submissions Lord Clarke was of the view that it should not be definitively adopted until such time as it had been the subject of detailed submissions before the court.

The Matrimonial Causes Act
The principal issue before the Court of Appeal was whether or not Mr Prest was "entitled" to the properties legally owned by the companies for the purposes of s.24(1)(a) of the MCA.  Although Moylan J held that the former matrimonial home was beneficially owned by Mr Prest he made no findings as to the beneficial ownership of the other properties in respect of which a claim was made.   Mrs Prest relied upon the long standing Court of Appeal authority of Nicholas v Nicholas (1984) FLR 285 and upon Mubarak v Mubarak [2001] 1 FLR 673.  Moylan J had found that Mr Prest had complete control over the companies and was in a position to procure the transfer of the properties to Mrs Prest.  In those circumstances, Moylan J held that Mr Prest was "entitled" to the properties for the purposes of s.24(1)(a).  The majority in the Court of Appeal (Rimer and Patten LJ) concluded that Nicholas and Mubarak had nothing to say about the ordinary meaning of s.24(1)(a).   If the assets belonged beneficially to the companies then Mr Prest was not "entitled" to them within the meaning of s.24(1)(a).   In the opinion of Rimer LJ the equation that "power equals property" was heretical.  It ignored the fundamental principle that the only entity with the power to deal with assets held by it is the company.  "Entitlement" can only mean "beneficially entitled".   The Supreme Court agreed.

In Lord Sumption's view, if there was no justification as a matter of general legal principle for piercing the corporate veil he found it impossible to say that a special and wider principle applied in matrimonial proceedings by virtue of s.24(1)(a).  At paragraph 37:

"An "entitlement" is a legal right in respect of the property in question.    The words "in possession or reversion" show that the right in question is a proprietary right, legal or equitable.   This section is invoking concepts with an established legal meaning and recognised legal incidents under the general law. Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different.    If a right of property exists, it exists in every division of the High Court and in every jurisdiction of the county courts.   If it does not exist, it does not exist anywhere."

And at paragraph 41:

"The recognition of a jurisdiction such as the judge sought to exercise in this case would cut across the statutory schemes of company and insolvency law … These schemes are essential for the protection of those dealing with a company, particularly where it is a trading company like PRL or Vermont.  The effect of the judge's order in this case was to make the wife a secured creditor.    It is no answer to say, as occasionally has been said in cases about ancillary financial relief, that the court will allow for known creditors.  The truth is that in the case of a trading company incurring and discharging large liabilities in the ordinary course of business, a court of family jurisdiction is not in a position to conduct the kind of notional liquidation attended by detailed internal investigation and wide publicity which would be necessary to establish what its liabilities are."

Lady Hale and Lord Wilson agreed:  Lord Sumption's  analysis of the meaning of the words "entitled, either in possession or reversion" was supported by a consideration of the statutory history of the phrase which Lady Hale traced back to 1857 (see paragraph 87).  There was nothing in the language, the history of the phrase or of Law Commission report leading to the Matrimonial Proceedings and Property Act 1970 to suggest that the words should be read to include "property over which the first-mentioned party has such control that he could cause himself to become entitled, either in possession or reversion."  Nor could it be said that s.24(1)(a) was intended to give the Family Division an express power to pierce the corporate veil in circumstances where no other division could do so.

The courts' powers under the MCA were limited.    Reliance could be placed on s.25(2)(a) which required the court, when exercising its powers under s.24, to have regard to the "income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future" so that Mr Prest's ownership and control of the companies and his practical ability to extract money or money's worth from them were relevant to the court's assessment of what his resources really were.  This consideration may affect the size of any lump sum or other financial order made but it did not follow that his worth could be boosted by his access to those assets or that those assets were made specifically transferable to the other party pursuant to s.24(1)(a).

Similarly, a wife may be able to pray in aid s.37 of the MCA in order to reverse transactions made by a husband for the benefit of a company which he owned or controlled.   At paragraph 40:

"Section 37 is a limited provision which is very far from being a complete answer to the problem, but it is as far as the legislature has been prepared to go."

The transactions in this case between the companies and the husband preceded the breakdown of the marriage by many years and so there was no room for an application of s.37.  However, Lady Hale expressed the view that, if there was a transaction that was apparently caught by s.37, the exception for bona fide purchasers for value contained in s.37(4) might not apply to a company where the controlling mind of the husband was acting with the intention of defeating a wife's claims.

The drawing of adverse inferences in the Family Division
It has often been stated in recent years that the Family Division applies precisely the same law as is applied in other Divisions of the High Court.   There is not, for example, one law of "sham" for the Family Division and another for the Chancery Division (see Munby J in A v A & St George's Trustees [2007] EWHC 1810 (Fam), [2007] 2 FLR 467).  Indeed, this is the bell-beat of Lord Sumption's speech.    In Mubarak v Mubarak [2001] 1 FLR 673 Bodey J whilst expressing the view that in an ideal world the Family Division and the Chancery Division should adopt a common approach, stated that different considerations do frequently pertain:   the company approach, on the one hand being predominantly concerned with parties at arm's length in a contractual or similar relationship; the family approach, on the other hand being concerned with the distributive powers of the court as between husband and wife applying discretionary considerations to what will often be a mainly, if not entirely, family situation.

Lord Sumption recognised that this difference of context could have particular application in family cases to the treatment of evidence and the drawing of adverse inferences.

In J v J [1955] P 215  Sachs J said:

"In cases of this kind; where the duty of disclosure comes to lie on a husband; where a husband has – and his wife has not – detailed knowledge of his complex affairs; where a husband is fully capable of explaining and has had the opportunity to explain, those affairs, and where he seeks to minimise the wife's claim, that the husband can hardly complain if, when he leaves gaps in the court's knowledge, the court does not draw inferences in his favour.  On the contrary, when he leaves a gap in such a state that two alternative inferences may be drawn, the court will normally draw the less favourable inference – especially where it seems likely that his able legal advisers would have hastened to put forward affirmatively any facts, had they existed, establishing the more favourable alternative."

More recently, in NG v SG (Appeal: Non-Disclosure) [2011] EWHC 3270 Fam Mostyn J began his judgment with these words:

"The law of financial remedies following divorce has many commandments but the greatest of these is the absolute bounden duty imposed on the parties to give, not merely to each other, but, first and foremost to the court, full frank and clear disclosure of their present and likely future financial resources.  Non-disclosure is a bane which strikes at the very integrity of the adjudicative process.   Without full disclosure the court cannot render a true and certain and just verdict.    Indeed, Lord Brandon has stated that, without it the court cannot lawfully exercise its powers (see Jenkins v Livesey (Formerly Jenkins) [1985]  AC 424.   It is thrown back on inference and guess-work within an exercise which inevitably costs a fortune and which may well result in an unjust result to one or other party."

Mostyn J, in that case, conducted a review of the relevant authorities and, at paragraph [16] sought to draw the threads together.  He said:

"Pulling the threads together it seems to me that where the court is satisfied that the disclosure given by one party has been materially deficient then:

(i) The court is duty bound to consider by the process of drawing adverse inferences whether funds have been hidden;
(ii) But such inferences must be properly drawn and reasonable.   It would be wrong to draw inferences that a party has assets which, on an assessment of the evidence, the court is satisfied he has not got;
(iii) If the court concludes that funds have been hidden then it should attempt a realistic and reasonable quantification of those funds, even in the broadest terms;
(iv) In making its judgment as to quantification the court will first look to direct evidence such as documentation and observations made by the other party;
(v) The Court will then look to the scale of business activities and at lifestyle;
(vi) Vague evidence of reputation or the opinions or beliefs of third parties is inadmissible in the exercise;
(vii) The Al-Khatib v Masry technique of concluding that the non-discloser must have assets of at least twice what the claimant is seeking should not be used as the sole metric of quantification;
(viii) The Court must be astute to ensure that a non-discloser should not be able to procure a result better than that which would be ordered if the truth were told.  If the result is an order that is unfair to the non-discloser it is better that  the court should be drawn into making an order that is unfair to the claimant [in the light of the citation of J v J [1955] P 215 it would seem that a 'than' is missing prior to 'that' in this citation]."

Lord Sumption echoed these sentiments and observations.    He cited with approval, and subject to a modification, the dicta of Lord Lowry in R v Inland Revenue Commissioners, Ex p TC Coombs & Co [1991] 2 AC 283, 300:

"In our legal system generally, the silence of one party in face of the other party's evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence.  Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case.  But, if the silent party's failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified."

The modification concerned drawing adverse inferences in claims for financial remedies (paragraph 45):

"… which have some important distinctive features.  There is a public interest in the proper maintenance of the wife by her former husband, especially (but not only) where the interests of children are engaged.  Partly for that reason, the proceedings although in form adversarial have a substantial inquisitorial element.    The family finances will commonly have been the responsibility of the husband, so that although technically a claimant, the wife is in reality dependent on the disclosure and the evidence of the husband to ascertain the extent of her proper claim.    The concept of the burden of proof, which has always been one of the main factors inhibiting the drawing of adverse inferences from the absence of evidence or disclosure cannot be applied in the same way to proceedings of this kind as it is in ordinary civil litigation.  These considerations are not a licence to engage in pure speculation.  But judges exercising family jurisdiction are entitled to draw on their experience and to take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing.  I refer to the husband because the husband is usually the economically dominant party, but of course the same applies to the economically dominant spouse whoever it is."

The conduct of Mr Prest and the companies
The criticism of Mr Prest and the companies was extremely harsh.   Mr Prest's conduct was "characterised by persistent obstruction, obfuscation and deceit and a contumelious refusal to comply with rules of court and specific orders (per Lord Sumption at paragraph 4).  He showed an "evident determination to frustrate the wife's claims on him" (paragraph 11).    The defective character of the evidence as to his financial position was "almost entirely due to his persistent obstruction and mendacity" (paragraph 43).  Neither Mr Prest nor the companies had complied had complied with orders for the production of completion statements in relation to the purchase of the properties in dispute and the companies failed to file a defence to Mrs Prest's claims or to comply with orders for disclosure (paragraph 47).  He said:

"The judge's findings about the ownership and control of the companies mean that the companies' refusal to co-operate with these proceedings is a course ultimately adopted on the direction of the husband.  It is a fair inference from all these facts, taken cumulatively, that the main, if not the only, reason for the companies' failure to co-operate is to protect the London properties.  That in turn suggests that proper disclosure of the facts would reveal them to have been held beneficially by the husband, as the wife has alleged."

Beneficial ownership of the properties
The Supreme Court's conclusions as to the beneficial ownership of the properties other than the former matrimonial home will have come as a surprise to many practitioners.   Moylan J did not make findings to the effect that the properties were beneficially owned by Mr Prest.   If he had done so there would have been no problem about applying s.24(1)(a) of the MCA.  Rimer LJ, in the Court of Appeal, said at paragraph 84:

"The judge added that there was "also the separate issue of whether the companies hold the shares and the properties on trust for the husband as his nominee".  If the answer to that was yes, the route to the order sought by Mr Todd was straightforward: because if such shares and / or properties were so held, they were plainly "property to which [the husband was entitled], either in possession or reversion" within the meaning of section 24(1)(a).  In the event, the judge declined to answer that latter question in the affirmative."

Rimer LJ, understandably, concluded that Moylan J, by implication, accepted that the properties, apart from the former matrimonial home, were beneficially owned by the companies.     How could the Supreme Court get round this?  Lord Sumption, interpreted Moylan J's decision on the basis that, given his conclusions about s.24(1)(a), determining the beneficial ownership of the properties was not a question that he needed to decide so that, on that basis the question in fact remained open.  At paragraph 46, Lord Sumption set out the chronology in relation to the acquisition of the various properties between 1995 and January 2004.     It was significant that PRL did not commence trading until 2001.    It was necessary to consider each property individually.     Three of the properties had been transferred into PRL for a nominal consideration of £1 during 1995 and 1996.  The source of the original payment for the three properties could only be Mr Prest personally and on that basis, there being no explanation from him to the contrary, the company held those properties on resulting trust for him as beneficial owner.   Two further properties were acquired by PRL from Mr Prest in August 1998 and August 2000 for substantial consideration.    As PRL had not at this time commenced trading the money PRL provided, in the absence of any satisfactory evidence to the contrary from Mr Prest, must also have come from him and so, again, the presumption of resulting trust applied and he was to be treated as the beneficial owner.     The final two properties were acquired by Vermont for substantial consideration in 2001 and 2004.  However, Vermont did not commence trading until 2010.    The funds for the 2001 purchase came from PRL at a time when it had not started trading and so, again, in the absence of any explanation to the contrary from Mr Prest, the monies for the acquisition of this property came from him and a resulting trust applied making him the beneficial owner.      Although the property acquired in 2004 was acquired with money provided by PRL which had started trading in 2001 (i) the ownership of residential investment property in London appeared to have nothing to do with the oil trading business in which PRL was then engaged, and (ii) by 2004 a consistent pattern could be discerned by which the husband caused properties to be acquired with funds provided by himself.  If the final property was an exception to this practice it was a break from the past and, in the absence of any explanation from either Mr Prest or the companies Lord Sumption concluded that he was the beneficial owner of this property as well.

General points
A belated attempt to argue that the companies constituted a nuptial settlement was not permitted to proceed by the Supreme Court.   However, the question as to whether a company, like a pension scheme in Brooks v Brooks [1996] AC 375, remains an open question.     Another question that arises is as to where, at the end of the day, the result in the Supreme Court leaves Mrs Prest.    Lady Hale, at paragraph 96, expressed her fervent hope that Mrs Prest would gain some benefit from the outcome of the litigation "although in the light of the mortgages which apparently encumber the properties I am not optimistic that she will."   The actual extent of the equity that will be released to Mrs Prest as a result of the judgment of the Supreme Court is far from clear. 

There was a failure on the part of the husband and the companies to provide any proper disclosure as to the extent to which these properties were encumbered.    At paragraph 33 of the judgment of Thorpe LJ in the Court of Appeal it is recorded that Moylan J was able to value the London properties at £11.3 million gross and £9 million net.   At paragraph 76 Rimer LJ repeated that the properties had a combined gross value of £11.3 million but there was an indebtedness to Ahli United Bank (UK) plc of £1.9 million and an indebtedness to BNP Paribas which, on one view, may have been about $7.6 million (say £4,850,000).  However, it is clear that the exact extent of the indebtedness is simply not discernible. 

Some conclusions
The outcome in Prest came as a very great (and welcome) surprise to many family practitioners, not least because there was, perhaps, an assumption that Moylan J had found that the companies were in fact the beneficial owners of the properties.    In particular, many practitioners had assumed that the Supreme Court would be far from unanimous in its conclusions (whatever they were to be).    In a sense it was a pyrrhic victory for Mr Prest (sorry the companies) in that they succeeded on all the main legal arguments but lost on the facts.   It remains to be seen whether it is also a pyrrhic victory for Mrs Prest.

It also remains to be seen whether or not this does in fact represent a great victory for wives more generally.     The Supreme Court carried out a very specific fact based analysis of the seven property transactions and they were able to establish, particularly in the absence of evidence to the contrary, that all the monies for the acquisition of those properties had come from Mr Prest so that he was beneficially entitled to them under the presumption of resulting trust.      Certainly, his failure (and that of the companies) to engage and to provide proper disclosure has cost him dearly.   If there is a lesson for the economically dominant party in a marriage it is that there may be considerable dangers in failing to comply with one's duties of full and frank disclosure and in breaching court orders.     However, there was sufficient evidence in this case to raise inferences going beyond speculation that the relevant monies for acquisition had come from him.     This was a case where all but one of the properties had been acquired at a time when the companies were not trading and consequently not in a position to provide capital of their own for the purposes of the acquisition of properties.  The only property acquired after PRL started trading was treated as being sui generis with the earlier acquisitions in the absence of evidence to the contrary.  In addition, the companies were not property investment companies so that the acquisitions fell outside the normal run of their businesses.

On the above basis, therefore, Prest was very much decided on its own facts.    The decision may have been very different if (i) the properties were acquired at a time when the companies had their own resources to do so, (ii) the companies were properly described as property investment companies and were acting in the course of business, (iii) the properties were outside the jurisdiction of England and Wales and (iv) Mr Prest and the companies had given proper explanatory disclosure in accordance with their obligations.

It is a commonplace in tax cases that go to the highest court that one loophole will be closed only for another to open elsewhere.  The Supreme Court has done the profession a great service in setting out with such clarity the law in relation to piercing the corporate veil and as to the proper interpretation of s.24(1)(a).   However, it may be that this clarity of exposition will act also as a road map for dishonest husbands going forward.  They are likely to ensure that the pitfalls that brought down Mr Prest are avoided in their cases.  

Family law practitioners are going to need to have a good grasp of basic company law principles.     There will undoubtedly be other conundrums that require resolution.  By way of example, a husband "lends" £1 million to a company controlled by him and this "loan" appears in his director's loan account and then the company purchases a property which by the time of the divorce is worth £10 million.   It would appear that in those circumstances the most that the wife would be able to go after would be the director's loan account with perhaps notional interest on the loan.   If the director's loan account was transferred to her as a chose in action she may be able to sue the company for the £1 million and then enforce any resulting judgment against the property.  However, this is not ideal.  Similarly, it would be open to the wife to seek a transfer of the shares in the company but that may be of little value and unenforceable if the company is registered abroad.

As Nicholas Mostyn QC observed in TL v ML [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263, when third party interests are engaged in financial remedy applications it is important that (usually) the wife pleads her case properly and fully so that the nature of the claim being brought can be understood.   Mrs Prest pleaded in this case that all seven properties were beneficially owned by Mr Prest.     It will be imperative going forward that any claim against a third party is properly pleaded.    Similarly, on the subject of disclosure it will be important to see the company accounts and to have sight of the minutes of board meetings and of any resolutions in respect of property acquisition together with documentary evidence as to the flow of money for the purposes of acquisition.

Finally, as to "piercing the corporate veil" it is now entirely clear that the Family Division is in no better position than any other division when it comes to attempting to do so.  Insofar as there are dicta to the contrary they should not now be followed.   However, the helpful identification of the concealment principle and the evasion principle may assist practitioners in establishing that a true and accurate analysis of what precisely a husband and his companies have been up to and whether in those circumstances it is possible simply to look behind the façade and see what the true actors are up to.    Certainly, the prospects of successfully piercing the corporate veil going forward would appear to be slender.     

The principles enunciated in the Supreme Court may also have relevance in ToLATA cases where a property has been acquired by a company rather than an individual.    No doubt we shall be seeing more cases where a company is interposed in circumstances where the parties are cohabiting but neither in a marriage or a civil partnership.

John Wilson QC
13th June 2013