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The Corporate Veil Intact: Ancillary relief and businesses after Hashem v Shayif

When can a partner get hold of corporate assets in ancillary relief proceedings? Caroline McNally of Farrers looks at the lessons of the recent judgment in Hashem v Shayif

Picture of Caroline McNally
Caroline McNally, Farrer & Co

Comprising 339 paragraphs, Mr Justice Munby’s comprehensive judgment in the case of Hashem v Shayif [2008] EWHC 2380 (Fam) may appear a daunting read.  However, it makes recommended reading for specialist ancillary relief practitioners as it provides a detailed analysis of, amongst other issues, the law relating to piercing the corporate veil; that is, when the Court will or will not treat the assets of a company as belonging to one of the parties to the marriage.

Background and the Proceedings
The facts are complicated and the proceedings drawn out.  In a (rather large) nutshell, the husband was 60 and resident in Saudi Arabia.  The wife was 49 and a UK citizen and resident.  Their civil marriage took place in October 1998.  The husband had been married three times previously.  (In fact, Bennett J held that the current marriage was void as the husband was still married to his third wife).  The husband had four adult children by his first marriage.  There were no children of the marriage between the husband and wife. 

The marriage finally broke down in July 2004 when the parties separated. The wife issued her Form A in December 2004.  At the centre of the litigation was a Jersey company Radfan Limited (‘Radfan’) which was incorporated in 1988.  The shares were held as to 30% by the husband, as to 20% by each of his two sons and as to 15% by each of his two daughters. 

At various times the company had held properties in the UK.  By the trial date, two properties remained held by the company and the wife occupied one of them.  After an argument between the parties in August 2000 the wife returned to the UK (having previously been based in Saudi Arabia with the husband) and broke into one of the properties and changed the locks.  From then onwards the wife was based in that property and the husband would visit her there. 

The case began as a claim for ancillary relief in which the wife alleged that the two UK properties were, in reality, owned by the husband.  In April 2006 Radfan issued proceedings in the Chancery Division to make good its claim to the properties. Despite objections from the company, those proceedings were transferred to the Family Division.  In October 2006 Roderic Wood J ordered that the company be joined as second respondent to the ancillary relief proceedings and injuncted the husband from disposing of his shares in the company and the company from disposing of the properties (the wife obtained a similar order in Jersey).  Bennett J then ordered the consolidation of both sets of proceedings.

In February 2006 an order for maintenance pending suit was made by Bennett J for the husband to pay the wife interim periodical payments of £48,000 per annum in addition to her costs of £13,500 and a further £12,000 towards her future costs.  The husband failed to comply with the order in its entirety.   At a subsequent hearing Bennett J ordered the husband to continue to pay the mortgage and service charge on the property occupied by the wife.  The husband also failed to comply with that order.

The trial lasted ten days in April 2008.  Judgment was handed down on 22 September 2008.

The husband’s approach
The husband refused to engage in the proceedings and declined to file a Form E.  His only participation at trial was as a witness called by the company and the children who, by contrast, disclosed 13 lever arch files of documents covering a period from 1985 to 2007.  Munby J said of the husband:

“The husband presented as respectable – even distinguished – but his account, insofar as he volunteered anything, had obviously been carefully prepared and was plainly an ‘edited’ version of the truth.  He gave away no more than he chose to and was neither frank nor honest”.

The judge found that the husband’s strategy was to string out the proceedings so as to exhaust the wife financially.  He accepted that the husband had shown his utter determination to defeat the wife’s claims.

The assets
The two properties held by the company were (i) 17 Kensington Heights which was valued at £975,000 with a mortgage of £290,000 (this was the property occupied by the wife) and (2) 57 Forest House which was valued at between £280,000 and £330,000 and was subject to a charge to enable the company to fund the litigation

Based on the wife’s evidence and the parties’ lifestyle, she believed that the husband’s wealth was in the region of US$500 million and could exceed US$800 million.  The wife invited Munby J to find that the husband’s wealth was in excess of £250 million.  Alternatively, if the Judge could not make that finding, he was invited to find as fact that the husband could satisfy the wife’s claim in full which was for a lump sum payment of £7,061,570 in addition to the transfer to her of the two UK properties, the arrears of maintenance (£156,000), the previous costs orders (£25,500) and costs (£100,000 owed before she obtained public funding).

The judge found that the picture of the husband’s wealth must be kept “within the bounds of reality”.   In the absence of disclosure he thought that there were two telling indicators of wealth:

(i) the matrimonial home in Saudi Arabia which although obviously large fell short of the enormous or the palatial;
(ii) the properties owned by the company which he noted were valued in the hundreds of thousands as opposed to in the millions.

However, for the same reasons as set out in Al-Khatib v Masry [2002] EWHC 108 (Fam) the judge found that the husband’s wealth would comfortable justify what W sought. In that case it was established that if a party to the proceedings (in this case the husband) refused to disclose the true extent of his wealth, the Court would draw the inference that the husband has sufficient assets to satisfy the wife's claim. There is a discussion of the authorities on this issue in the Al-Khatib case at paras 83 - 88.

The wife’s claims
At trial the wife put her claim to the properties owned by the company in four ways, namely:

i) Radfan held the properties on a constructive trust for the husband.
ii) The husband had purchased the shares held by the children and as a result, their shareholdings were subject to resulting trusts in favour of the husband.
iii) Radfan was the husband’s alter ego and the Court should pierce the veil of incorporation to make orders directly against the two remaining properties.
iv) Finally, and in the alternative, the properties should be regarded as having been settled on the husband and the Court should exercise its discretion to vary the settlements in the wife’s favour.

The wife’s primary case was that the husband and the company were one and the same, that he had ultimate control of the company and that the other shareholders – the children – were simply his nominees.  Essentially, the wife alleged that Radfan was a façade or alter ego of the husband and, on that basis, the Court should lift the corporate veil.

The wife’s case in respect of lifting the veil of incorporation
The wife relied on the following evidence:

i) The husband on a number of occasions during the marriage pointed out or referred to the properties as being ‘his’ or ’mine’.  He also told the wife that the company was his.
ii) The husband provided the entire share capital in 1988 when his children were all minors.  The wife asserted that there was no genuine intention by the husband to part with 70% of the value of the assets transferred into the company.
iii) The company was established for the purpose of protecting the husband from UK capital gains and inheritance tax and not to make immediate provision for the children.
iv) The only person to contribute or withdraw funds from the company was the husband.  Furthermore, when the company purchased properties, restrictions were registered with the Land Registry so that they could not be sold without the husband’s consent.  Most importantly, when properties were realised, the husband alone received the proceeds of sale.
v) All important decisions relating to the company were taken by the husband.
vi) The husband appeared to have regarded himself as the ultimate beneficial owner and referred to the company as a ‘vehicle’.  Indeed, the directors referred to him as ‘the company’s beneficial owner’ even though, on the face of it, his shareholding was only 30%.
vii) The timing of the attempt to sell one the properties and the instructions for the sale proceeds to be remitted outside the jurisdiction were consistent with a sense on the part of the husband that his personal property was being threatened by the wife’s application.

The wife’s Counsel submitted that the protestations of the husband and the company should be considered in the context of the husband’s conduct of the proceedings.  In such circumstances it would be manifestly appropriate for the corporate veil to be lifted.  Her Counsel further submitted that the Court should look through the corporate structure and treat the company’s resources as the husband’s absolutely as opposed to belonging to the husband and the children in accordance with their shareholdings.

Munby J’s conclusions
The judge emphasised that the relevant law was the same in the Family and Chancery Divisions:

‘The outcome of the Chancery proceedings cannot depend upon whether the case is heard, where it started, in the Chancery Division or, where it has been transferred, in the Family Division, any more than it can depend upon whether it is heard by a ‘Chancery judge’ or a ‘Family judge’.’

He went on to say that:

‘The blunt truth, at the end of the day, is that the wife’s case is founded on an implicit assumption as to the relevant legal principles, which assumption, common, I suspect, to much thinking in this Division, is simply not well founded.’

The judge said that the starting point when considering piercing the corporate veil is the elementary principle of company law associated with the House of Lords decision in Salomon v A Salomon and Company Limited [1897] AC 22.  The case established that a ‘one man company’ is a legal entity distinct from its owner and controller.  Munby J said that it was important to keep this in mind when considering the issues in this case.

The judgment includes a detailed exploration of the law the starting point of which is the statement of principle in Woolfson v Strathclyde Regional Council 1978 SC (HL) 90:

‘it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts.’

Munby J explained that there was no magic in the word façade which was used in the sense of ‘an outward appearance or front especially a deceptive one’.  He drew six conclusions from a thorough examination of the cases:

i) Ownership and control of a company are not of themselves sufficient to justify piercing the veil.
ii) Even where there is no unconnected third party involved, the corporate veil cannot be pierced merely in the interests of justice.
iii) The corporate veil can be pierced only if there is some ‘impropriety’.
iv) The impropriety must be linked to the use of the company structure to avoid or conceal liability.
v) Accordingly, if the Court is to pierce the veil it is necessary to show both control of the company by the wrongdoer and the (mis)use of the company as a devise or a façade to conceal the wrongdoing.
vi) It is possible for a company to be a façade even though it was not originally incorporated with any deceptive intent.
vii) Finally, the Court will pierce the veil only so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done.

Munby J concluded that the wife had failed to establish the necessary degree of control over the company without which the Court cannot pierce the veil of incorporation.  He considered that the children’s shareholdings were genuine.  He said that even if he was wrong about that, the wife had still faced what was in his judgment the insuperable obstacle that there was no relevant impropriety and Munby J could not identify the relevant wrongdoing on the part of the husband.  He concluded that all that the husband was doing was legitimately taking advantage of the existing corporate structure or put another way, he was able to take advantage of the principle in Salomon.

Finally, Munby J agreed with the reality of forensic practice in the Family Division as recognised by Bodey J in Mubarak v Mubarak [2001] 1 FLR 673 when he said:

‘In practice, especially in ‘big money’ cases, the husband (as I will assume) will often make a concession that company/trust assets can be treated as his, whereafter the case proceeds conveniently on that basis.  It is pragmatic, saves expense and usually works.  Problems such as have arisen in this case are rare and anyway can be avoided where there are other assets against which the lump sum order can be enforced’.

The outcome
Although the wife failed in her claims against the company and the children (she succeeded only in establishing that the company could not remove her from 17 Kensington Heights without giving her notice), the judge accepted that the wife was entitled in principle to have her present and future needs met, generously interpreted and assessed against the background of the husband’s true resources and the standard of living enjoyed during the marriage.  The judge was satisfied that the husband was worth ‘many millions – and significantly more millions than he has been willing to admit’. 

Summary
This case sets out in clear terms the ambit of the doctrine which permits the Court, in certain circumstances, to treat the assets of a company as belonging to a party to the marriage. It also demonstrates that, contrary to the belief of some, the Family Division will not treat this type of issue differently from the Chancery Division and will not ride rough-shod over the interests of genuine shareholders even in circumstances when the shareholders are family members and the acquisition of company assets is funded entirely by a party to ancillary relief proceedings. 


 


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