Southampton 02380 482 482
Winchester 01962 679 777

22nd April 2015

To know a veil

22nd April 2015

To know a veil

Rachel Osgood

Posted: 22nd April 2015

T: 023 8048 2261

E: Email Me

Published in The Review – August/September 2013

THE SUPREME COURT DECISION IN PREST V PETRODEL RESOURCES

Family lawyers always get very excited about decisions handed down by the Supreme Court; after all, they don’t come very often. But although we have already seen the usual flurry of articles in response to the Supreme Court’s decision in Prest v Petrodel Resources , I have detected a certain degree of reservation – even on the part of some of the lawyers involved. I think this is a shame. This decision, in my own humble view, positively fizzes with possibilities. It bubbles over with erudition. There is also just a hint of cheekiness from those redoubtable old Law Lords that leaves me wanting more.

I think it’s probably right to say that we all know some of the background to this unedifying dispute, and for a brief re-cap, readers are referred to the article by Tim Amos QC, Oliver Wise and Amy Kisser (all of whom represented the companies) which appeared in the last edition of The Review . In the face of Mr Prest’s outrageous and persistent refusal to provide proper disclosure, Moylan J ordered a lump sum payment to Mrs Prest of £17.5 million, to be part-satisfied by the transfer to her of seven UK properties, all of which were apparently owned by the companies. Of course, even family lawyers know that company assets belong to the company, not the shareholder, so what on earth was Moylan J doing?

Although the decision in Prest v Prest was not reported, the judgment apparently ran to 230 paragraphs when three central issues were considered:

  • Was Mr Prest, through the operation of his companies, guilty of relevant impropriety, such that it would be possible and appropriate to pierce the corporate veil?
  • Did section 24(1)(a) Matrimonial Causes Act 1973 confer on the court the power to order a shareholder to transfer assets away from the company?
  • Were the companies nothing more than trustees in respect of the properties in question?

Notwithstanding that Mr Prest treated his companies like his personal piggy bank, and behaved as though the companies’ cash balances were his own, Moylan J held that there was no relevant impropriety such that would justify the piercing of the corporate veil.

Instead, Moylan J relied on section 24(1)(a), which enables the court to order a party to transfer property to which he is “entitled”, either in possession or reversion. He decided that because Mr Prest was the “effective” owner and controller of the companies’ assets, he was therefore “entitled” to them. In this, he relied on Mr Prest’s habit of treating the companies as piggy banks and, taking into account the absence of any third party interests and the “fact” that Mr Prest was able to procure the transfers, he interpreted that the “purpose and intention” of the section was to enable such orders to be made. After all, in this particular case, it was apparent that justice could not be done without them.

What proved to be arguably most contentious about Moylan J’s judgment was that, in interpreting section 24(1)(a) in this way, he apparently pierced the corporate veil. And this is where I think it gets exciting.

Outraged, the companies appealed. They relied on the doctrine of corporate personality, the fundamental consequence of which is that a company is a legal personality in its own right. Hence, its assets are its own, as are its debts. The Petrodel companies argued successfully that, given that they owned the properties in question, the judge had no power to order them to transfer the properties to the wife. The Court of Appeal said that the family judges’ long-standing tradition of ignoring that a company is a separate entity, “must cease”. There is not one law for family lawyers and another for everyone else.

It’s fair to say that, following the Court of Appeal decision in Tchenguiz & Others v Imerman , we family lawyers felt a bit battered and bruised. In that case, as we all know, the Court of Appeal rebuked us sharply for developing the practice of “self-help”, which the appeal judges said contravened the general law of confidentiality. We jumped up and down in fury at one of our favourite toys being taken away by those mean old Chancery judges. We waved our fists and called it a “cheat’s charter” as we stomped off to the naughty step to scribble our incessant articles and attend endless seminars.

So our frustration cannot be described as once again we were sent to our rooms for not sharing one of our other favourite toys. Thorpe LJ did his best, but he was pitted against two judges who would have none of it. And so were left without our lovely shiny veil-piercing gadget, and Mrs Prest was left without her £17.5 million.

Mrs Prest’s appeal was heard by an illustrious panel of seven of our most distinguished Law Lords. Of the seven Justices, five were commercial lawyers; two were family lawyers. Hence the stage was set for an almighty battle between Goliath of the Chancery Courts hefting its blunt club on the one hand, and David of the Family Division deftly wielding its slingshot on the other. Lady Hale and Lord Wilson were ready, pumped up on righteousness, but the Chancery Judges were coming for them. And they were angry.

The leading speech was delivered by Lord Sumption, an eminent Chancery lawyer. The majority of his speech deals with the whole concept of the “corporate veil”. He takes us through its history, from its birth in 1933 to its current state of wretched ill health. It’s fascinating reading, because he scoops up this venerable old concept, dressed in its tattered threads of respectability, thrusts it into the light, and exposes it as little more than a degenerate excuse for lazy thinkers to avoid applying the real law properly to the real facts. He breaks it down into two principles: the concealment principle and the evasion principle. The concealment principle is, he says “legally banal and does not involve piercing the corporate veil at all”. All that the court does is to look behind the corporate structure to discover the facts which it is concealing. This is what Moylan J did, quite legitimately, in finding that Mr Prest was the sole beneficial owner and controller of the companies in question. But, goes on Lord Sumption, the evasion principle is quite different. This is when the court disregards 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”.

Having conducted a thorough review of the jurisprudence, Lord Sumption concludes that:

  • Most of the statements which establish the doctrine of piercing the corporate veil are obiter;
  • Very few cases exist in which the doctrine has actually been engaged;
  • Of those cases, the decisions could and should have been made on other grounds;
  • Notwithstanding the above, there is a limited principle which applies when someone deliberately evades an existing legal obligation by interposing a company under his control.

Now I have a problem with that approach, and my problem is twofold:

  1. If Lord Sumption is right on the first 3 points, how does he then make the leap to the fourth point?
  2. In my view, Mr Prest did indeed have an existing legal obligation: to maintain his wife and children. He deliberately evaded that legal obligation by relying on a corporate structure which was nothing more than a piggy bank.

How is it that the corporate veil still does its job of concealing assets from the outside world when it has already been ripped to shreds from the inside by its high-living owner? Lord Sumption says that if this were not so, then the principle that company property is property to which its sole shareholder is “entitled, either in possession or reversion” would apply even in a case where the sole shareholder “scrupulously respects the separate personality of the company”. I’m not sure this bears scrutiny: the point is surely that if you don’t respect the law, you can’t expect the law to respect you when you later seek to rely on it in order to avoid a legal obligation. Isn’t equity the foundation upon which our legal system was built?

Lord Neuberger, in his speech, goes even further. He flirts openly with the possibility that the doctrine does not exist, bats his eyelids coquettishly at a whole host of academic articles which denounce the existence of the doctrine, and becomes almost dizzy at the prospect of doing away with the whole thing. However, he is teasing us. Recovering his composure, he concludes that “it would be wrong to discard a doctrine which, while it has been criticised by judges and academics, has been generally assumed to exist in all common law jurisdictions, and represents a potentially valuable judicial tool to undo wrongdoing in some cases, where no other principle is available”. I can’t help but disagree. First, the “assumption” that something exists does not mean that it actually exists (take Father Christmas). Second, if the doctrine does in fact exist, and exists to “undo wrongdoing”, then, for all the reasons discussed in the various judgments, it should have been used for that purpose in this very case.

Lord Sumption agreed with Moylan J’s finding that there was no “relevant impropriety” in this case and that therefore the corporate veil could not be pierced under the general principle. He went on to consider whether the principle has a wider application pursuant to section 24(1)(a) of the Act. He swiftly concluded that it does not. Whilst it is necessary, pursuant to section 25(2)(a), for the courts to take account of the husband’s ownership and control of the companies and his unrestricted access to the companies’ assets in assessing what his resources are, they are not entitled to order the companies’ assets to be transferred to the wife. For the record, I don’t think the family courts adopt a cavalier “stop at nothing” approach as suggested by the Chancery judges both in the Supreme Court and the Court of Appeal. Moylan J properly took into account the fact that Mr Prest had unrestricted access in practice to these assets and, as a matter of long-standing practice, treated those assets as his own. What would be the point of requiring the judge to take this into account if he could not then act on it?

Lord Sumption somewhat brushes this under the carpet. He says that “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”. Whilst he acknowledges that this is not always possible, particularly – as here – the shares are outside the jurisdiction in places which may not give effect to English court orders, he says that such cases “remain the exception”. He goes on to say that the limited provision of section 37 is as far as the legislature has been prepared to go in terms of preventing the frustration of financial claims. I doubt whether either of these comments would be of any comfort to the majority of wives in this position. We don’t, as a rule, seek the transfer of shares on behalf of wives, whether the shares are within, or without, the jurisdiction. There is far too much scope for abuse and uncertainty: the wife could easily end up with shares in a shell. As for section 37, I fail to see its significance in cases like this where there is no suggestion of the husband transferring assets away.

In the end, and with simple clarity, Lord Sumption finds – in relation to each of the seven properties – that they are all owned absolutely and beneficially by Mr Prest. What is not clear however is the extent to which he was entitled to make those findings. Moylan J arguably made no findings as to the beneficial ownership of the properties. Given his interpretation of section 24(1)(a), he felt that he did not need to do so. Lord Sumption took the view that, as he was wrong about section 24(1)(a), the question of beneficial ownership did now need to be decided. My question is: If it hadn’t been decided, how could it be appealed? According to Tim Amos et al, this is the “most remarkable” feature of the case.

So Mrs Prest got her properties and that, for her, was what all this was about. But what can we family practitioners take from it? Tim Amos suggests the case represents a “good result for law” and that it is unlikely that a wife will ever be able to obtain a property adjustment order piercing the corporate veil, however much the husband abuses the company’s resources. That may be right, but whilst the decision may be a good result for law it is arguably not a good result for the dependant spouse.

The somewhat muted response to the decision is I am sure attributable to the very unusual nature of this case. It is said that its relevance is limited, but it is not. There are many wives who are in a similar position to Mrs Prest, albeit not on the same scale. This decision does them a disservice, not only because of the closure of a long and distinguished line of cases in the Family Division, but also because of the manner in which the concept of piercing of the corporate veil was represented as fact but confined in effect to mythology.

I said at the start at the start of this article that I wanted more, and I do. I want more consideration of, and debate about, the fascinating illusion conjured up with such spellbinding judicial erudition that the possibility of piercing the corporate veil is not only real, it may be used, notwithstanding that it may never have been used before, notwithstanding that it was not used in this surely most deserving case, and notwithstanding the view that it can never be used in family cases. After all, aren’t we supposed to have the same law as everyone else?

Share This

Comment

Rachel Osgood

Posted: 22nd April 2015

T: 023 8048 2261

E: Email Me