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Family Division 1 – Chancery Division 2: A consideration of Petrodel v Prest

Alison Burge, barrister, of Pump Court Chambers analyses the Court of Appeal's decision in the watershed case of Petrodel v Prest

Alison Burge, barrister, Pump Court Chambers

Alison Burge, barrister, Pump Court Chambers

It may be considered controversial among family lawyers but the Court of Appeal has finally ruled on what happens when the principles of fairness which flow though decisions in family finance conflict with the express and historic laws of corporations. Unsurprisingly, to the writer at least, particularly given the constitution of the Court dealing with the matter, the Chancery Division took the spoils in the recent decision of Petrodel Resources Ltd & Ors v Prest & Ors [2012] EWCA Civ 1395.

Moylan J dealt with the matter at first instance. The trial was lengthy, the papers voluminous. In relation to the husband's evidence he stated: 

"….I have sought to make sense of the husband's factual case. Ultimately I have decided that this has been a vain task because the husband has failed so comprehensively to comply with his obligation to provide full and frank disclosure and to give clear evidence that his case does not permit of such an exercise…..The result of the way in which the case has developed is that a great deal of energy has been expended by the husband on seeking to establish what he is not worth rather than the more conventional focus being on seeking to demonstrate what he is worth…..His evidence consisted significantly of obfuscation and dissembling."

We've all been there. We've all listened to witnesses bumbling their way through evidence about their finances that has no rational basis. We've all held our heads in our hands when that witness has been our client. What we have expected from the family courts for some time now though is that when evidence is described thusly, the other party is ultimately likely to succeed. Not any more.

The husband worked in international oil development and trading. He had done well. Several properties were owned in London and elsewhere by three main companies who were the appellants to the proceedings. At first instance it was found that the £4million matrimonial home ("FMH") was held by one of these companies on trust for the husband and that it therefore formed part of the matrimonial assets. The husband was not given permission to appeal this finding and the FMH did not therefore form part of the appeal. The key issue was who owned the other properties in the portfolio: the husband, or the companies? Why? Because section 24 (1) (a) of the Matrimonial Causes Act 1973 states that the court may make an order that a party to a marriage shall transfer such property as may be specified, being property to which that party is entitled, either in possession or reversion. We know this, you say. We do this every day, you say. Sometimes though, we take the wording of the statute, and with it Parliament's intentions, for granted. Here's the key: "property to which that party is entitled". The party has to be the beneficial owner of the property before it can be transferred. That is why we argue when properties are registered in the elderly in-laws' names but husband is the only one with an income and is paying all of the expenses, including the mortgage. If the husband has a beneficial interest in that property (think ToLATA) then that amounts to property, part or all of which depending on his share, which can be transferred by virtue of s. 24 (1) (a). If a wife owns shares in a family business, those shares can be transferred by virtue of s. 24 (1) (a). Where a husband holds a controlling stake in a large corporate structure though, what then? Well then we say: good for him. Hasn't he done well? The chances are his soon to be ex-wife will see nothing of it.

Having gone back to the statute to confirm what can, in principle, be transferred, we also need to go back to basics to determine whether property falls within that class of assets. The fact that the husband to all intents and purposes controls a group of incorporated companies does not mean that he is entitled to any property owned by any of the incorporated companies within that group.

The whole concept of a "limited" company is that the directors and owners have "limited" liability for the company's debts. If a limited company defaults on repayments of a loan it is the company that is sued, in its own right, not the directors or shareholders in their own names as individuals. The flip side of that coin is that the company's assets are owned by the company in its own right. The company is a separate legal entity, entirely distinct in law from its members. That is the reasoning behind the majority decision in Petrodel v Prest, a majority which comprised two former Chancery Division judges (Rimer and Patten LJJ) whilst the lone minority voice was that of one of the most experienced Family judges in the Court of Appeal, Thorpe LJ. The properties which Moylan J sought to have transferred by the husband to the wife were not the husband's to transfer. They belonged to the relevant companies and they did not form part of the matrimonial assets which could be distributed by the court.

The only way in which the court could consider that the husband was "entitled" to the properties was by looking beyond the corporate ownership of them and determining that, in reality, they belonged to the husband. For more than a century, this has been known as piercing the veil of incorporation. The veil of incorporation sits between the entity that is the company and the individuals who are its members. You can see through the company to its owners but you cannot actually reach them. The veil is in the way.

Unless it can be pierced. Then you can reach through and pass the company's assets to the members who thought they were protected by virtue of incorporation. The difficulty is that the Chancery Division has been telling us consistently since the nineteenth century that this is very difficult to do: Salomon v A Salomon & Co. Ltd. [1897] AC 22. So when can it be done? Ignoring the statutory examples which are extremely unlikely to be relevant to the family practitioner, the veil can only be pierced when there is some impropriety (the key word) linked to the use of the corporate structure to avoid or conceal liability. So, to take a couple of well known examples from company law, if Mr Horne were to set up a limited company to poach customers from his former employer, Gilford Motor Co Ltd, because if he'd poached them himself he would have breached a covenant not to solicit Gilford Motors' customers, he would be acting with impropriety in order to avoid liability. The veil can be pierced and indeed was: Gilford  Motor Co. v Horne [1933] Ch 935. Similarly if Mr Lipman had agreed to sell property to Mr Jones, but then transferred said property to a company which he controlled, we can again tick the impropriety and avoidance of liability boxes and the veil is pierced: Jones v Lipman [1962] 1 WLR 832.

So how might this apply in family finance cases? If property is transferred to a company by a party to the marriage so as to defeat the other party's claim the veil should be pierced. The company can have been in existence, quite legitimately for some time, before the relevant impropriety takes place. What matters is whether the company is being used as a façade, at the time of the relevant, improper transaction. In other words, is it a sham? What you need, following Petrodel is that there has been impropriety. For all of Moylan J's complaints about the husband's evidence, and for all that the  husband had repeatedly ignored costs orders and had failed to give full and frank disclosure, crucially Moylan J explicitly stated that he could find no impropriety in the husband's actions in relation to the company. As Rimer LJ specifically states in his conclusions, having determined there was no impropriety, Moylan J had no choice but to reject any claim that the husband was entitled to the properties. He could not pierce the veil of incorporation. The properties therefore did not fall within section 24 (1) (a) and could not be transferred to the wife.

The difficulty with this approach is that the whole concept of fairness goes out of the window, or to use Thorpe LJ's phrase, we now have an "open road and a fast car" available to the money-maker. It ignores the factual reality of many cases. It was clear from the evidence in this matter that the husband totally controlled the finances of the company and used those finances as he wished to pay for, amongst other things, school fees and holidays for the family. However, while we family lawyers strive for fairness, the commercial world fails to recognise that as a concept and without showing actual wrongdoing which is intended to defeat a spouse's claim, corporate assets will remain just that.

I suspect that a differently constituted Court of Appeal, one with a family rather than a chancery bias, might well have reached a different decision in this case and that I would now be writing an article confirming that where the interests of justice and fairness demand it the veil of incorporation could be pierced. I am not convinced however that I would think that was right. Should a company be stripped of its assets merely because it finds itself litigating against a spouse rather than a bank? I repeatedly tell clients that the court doesn't have the power to create assets from nothing. The fact that Mrs X's mother-in-law is a millionaire doesn't mean that Mr X is and that the court can take money from said mother-in-law and give it to Mrs X just because she might need it more and that would be fair. We cannot take money from third parties if neither spouse has a beneficial interest in it. A limited liability company is no different from any other third party. Finally, the Court of Appeal has confirmed this.

I appreciate that this may well be a controversial view amongst family practitioners. Indeed comment has been made by the wife's legal team in this matter suggesting that this is a victory for devious men who want to avoid making fair provision for their wives. Except, with respect, and in my opinion, it isn't. If a corporate vehicle is used to avoid making fair provision for a wife then surely that ticks the boxes of impropriety and avoidance of liability – and the corporate veil will be pierced. Otherwise, consider the penultimate paragraph of the very brief judgment given by Patten LJ who states:

"Married couples who choose to vest assets beneficially in a company for what the judge described as conventional reasons including wealth protection and the avoidance of tax cannot ignore the legal consequences of their actions in less happy times."

In other words: the bed was made, now lie in it.