THE SUPREME COURT DECISION IN PREST V PETRODEL RESOURCES

Mr and Mrs Prest, an international couple, both with dual Nigerian and British nationality, and homes in London, Monaco and Nevis, were married in 1993, but Mrs Prest petitioned for divorce in 2008.  Mr Prest was an oil trader, trading through a number of companies, both here and in other jurisdictions.  The corporate structure was obscure but in the face of his outrageous and persistent refusal to provide proper disclosure, the judge found that Mr Prest was the sole beneficial owner and controller of the companies, and that his net worth was £37.5 million.

The judge 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 apparently belonged to the companies.  Everyone knows that company assets belong to the company, not the shareholder, so how could the judge order the husband to transfer assets which did not belong to him?

There were three issues:

Notwithstanding that Mr Prest treated his companies like his personal piggy bank, and behaved as though the companies’ cash balances were his own, the judge held that there was no “relevant impropriety” and that he could not therefore pierce the corporate veil.

Instead, he relied on the Act, which enables the court to order a party to transfer property to which he is “entitled”.  He decided that because Mr Prest was the “effective” owner and controller of the companies’ assets, he was “entitled” to them and could therefore be ordered to transfer them.

Outraged, the companies appealed.  They relied on the doctrine of corporate personality, the fundamental consequence of which is that the company is a legal personality in its own right, distinct from that of its shareholder(s).  Hence, its assets are its own.  The Petrodel companies argued that, because 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 agreed.  It said that the family judges’ long-standing tradition of ignoring, where “fairness” required it, the fact that a company is a separate entity, distinct from its shareholders, “must cease”.  They reversed the judge’s decision, and Mrs Prest had no way to obtain any part of her award of £17.5 million.

Mrs Prest had to appeal, and her case was heard by an illustrious panel of seven of our most distinguished Law Lords, with judgment being delivered in June.  The leading speech was delivered by Lord Sumption, an eminent commercial lawyer.  The majority of his speech deals with the concept of “piercing the corporate veil”.

Having conducted a thorough review of the law, Lord Sumption concludes that although there is doubt as to whether the concept even exists there is a limited principle which applies when someone deliberately evades an existing legal obligation by using a company under his control to evade that obligation.

Lord Sumption agreed with the original judge’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 in family cases.  He swiftly concluded that it does not.  Good news for business-owning husbands, but what about the wives and children?

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 be 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”.

In the end, and with beautiful simplicity, Lord Sumption finds – in relation to each of the seven properties – that they are all owned absolutely and beneficially by Mr Prest.  As such, the court could order him to transfer the properties, because he was “entitled” to them.

So Mrs Prest got her properties and that, we must not forget, is what all this is about.  But what can we family practitioners and our business-owning clients take from it?  Well, thankfully, as all the commentators agree, the sort of extremities exposed by this case (the extent of the wealth and the lengths to which Mr Prest was prepared to go) are relatively rare.  But cases in which justice cannot adequately be done without recourse to company assets are not all that rare, and I do not believe that the transfer of shares to the wife would provide a satisfactory outcome in the majority of such cases.  I suspect that we may not have heard the last of this.  Ever-inventive lawyers will be advising their clients with regard to legitimate protection of business assets, whilst our equally inventive family judges, committed as they are to fairness and pragmatism, will not allow future Mr Prests to get away with it.