Are company assets off-limits in divorce cases?

Are the company assets of a wife or husband’s companies now available for distribution as a result of divorce? Natalie Jenner, Jersey Solicitor and partner at Parslows Jersey examines the Supreme Court ruling in Prest v Petrodel Resources Limited and others.

The case centres upon the high-profile divorce case of Michael and Yasmin Prest. The husband and wife were married in 1993 and have four teenage children together. The husband is a well-known and successful businessman in the field of international oil and founder of the company Petrodel Resources Limited. The couple shared a good standard of living prior to the divorce proceedings, which included having properties in England and abroad. A number of the properties and company assets were, however, held in the names of the husband’s companies.

In the lengthy divorce proceedings in the High Court, the dispute surrounded whether the properties owned by the Petrodel Group were effectively company assets of the husband. Mr Justice Moylan took the view that the husband was ‘in the same position as he would be in if he was the beneficiary of a bare trust or the companies were his nominees’. In reviewing the case law and relying upon the powers conferred by s.24(1)(a) Matrimonial Causes Act 1973 (which provides for the transfer or settlement of property by one spouse to another to which the spouse is ‘entitled either in possession or reversion’, the Judge considered that there was no legal impediment to the husband obtaining the transfer of the assets held by the companies into his name as they were his ‘alter-ego’. Having found that the husband was the sole beneficial owner and the controller of the companies, the husband was ordered to transfer 14 properties owned by the Petrodel Group to the wife. The Petrodel group subsequently appealed against the decision of the High Court.

Corporate Law principles state that a duly incorporated company is a legal entity wholly separate from those who incorporate it and, therefore, shareholders of a company have no interest in, or entitlement to, the company assets even where one shareholder is a 100% owner of the company. The Court of Appeal (by majority) upheld these principles, finding the High Court’s decision plainly wrong. Lord Justice Rimmer held that the husband’s control of the companies did not render him the beneficial owner of such company assets. The Court of Appeal went on to stress that the only factual circumstances in which it was legitimate for a court to ‘pierce the corporate veil’ were where special circumstances existed indicating that there was impropriety in the sense of a misuse of the company as a device or façade to conceal wrongdoing. The dissenting judge, however, felt that it was inappropriate for the court in family proceedings to be constrained by the strict line of authority in company law. He identified a separate line of authority in family proceedings which had allowed orders to be made where the husband (in most instances) could be deemed to be beneficially entitled to the company assets. The decision was quickly labelled the Cheat’s Charter and the Wife appealed this decision to the Supreme Court in March of this year. The judgment was released on 12 June 2013, the ripples of which will have a lasting impact on how family law interacts with commercial law on a practical basis.

The Judgment handed down by the Supreme Court on 12 June 2013 is significant, not only for those currently going through or contemplating divorce proceedings, but also to those with businesses whose company assets could be vulnerable to attack within divorce proceedings. The Supreme Court has made clear that assets which are held in the name of a company, but which in truth are owned beneficially by a spouse can be accessed by the family court – and has encouraged family judges to draw adverse inferences against spouses who fail to disclose relevant documents or provide pertinent information. Lord Sumption held that ‘family judges are entitled to draw on their experience and to take notice of inherent probabilities when deciding what an uncommunicative economically dominant spouse is likely to be concealing’. Where the matrimonial home is held in the name of a company, it can frequently be inferred that the property is held on trust for the spouse who owns and controls the company. The Supreme Court were satisfied that the husband had used his owns funds to purchase these properties, despite them being held in the name of the Petrodel Group. On this basis, the Supreme Court held that the properties were held on trust for the husband, who was beneficially entitled to them, thus falling within the scope of the court’s power to make transfer of property orders under Section 24(1)(a) of the Matrimonial Causes Act 1973.

The decision means that there will still be some cases in England where assets will be protected from divorce claims by being in corporate ownership, but equally others where that won’t deter the court from transferring properties. The implications of this judgment are, however, yet to be decided by our courts and the wording of our equivalent of section 24(1)(a) is slightly different.