CHRISTOPHER McCOURT COMMENTS ON PREST

THE SUPREME COURT: PETRODEL v  PREST

1.  The Supreme Court last week handed down its judgment in Petrodel v Prest, allowing Mrs Prest’s appeal and reinstating Moylan J’s order that the companies should transfer certain properties to her in satisfaction of her financial remedies claims against Mr Prest.

 2.  Does this decision mean that in practice where a party to financial remedy proceedings controls a company that the court may treat those assets as belonging to the party who controls the company. The answer to that in short is “no”.

 3.   Section 24(1)(a) of the Matrimonial Causes Act 1973 allows the court to order a party to financial remedy proceedings to transfer to the other party to the proceedings (or to a child of the family or a third party specified in the order) property to which the first named party is “entitled, either in possession or in reversion”.

 4.  The Court of Appeal [2012] EWCA Civ 139 allowing the companies’ appeal had observed that for some time it had been the practice of the Family Division to treat the assets of a company substantially owned by one of the parties as assets available for distribution under section 24 of the Matrimonial Causes Act 1973.

 5.  Rimer LJ held at Para 155 that:

  “..the separate corporate entity of a company is a fact of legal life that all courts are required to recognise and respect, whatever jurisdiction they are exercising. It is not open to a court, simply because it regards it as just and convenient, to disregard such separate identity and to appropriate the assets of a company …….a one man company does not metamorphose into the one man simply because the person with a wish to abstract its assets is his wife”.

 6.  In a short concurring judgment, Patten LJ said that the Family Division had developed “an approach to company owned assets in ancillary relief applications which amounts to a separate system of legal rules unaffected by the relevant principles of English property and company law” a practice, he concluded that “must now cease”.

7.  So, in allowing Mrs. Prest’s appeal, did the Supreme Court demur from the Court of Appeal’s admonition of the Family Division for its sometime liberal interpretation of Section 24(1)(a) of the MCA. It did not. The Supreme Court held that the statutory language was clear and that the court could only order the transfer of property to which the first named party is “entitled, either in possession or in reversion”. The “entitlement” is a legal right in respect of material property.

8. Sumption SCJ held [Para 37] that:

“Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different”

9. Sumption SCJ also held [Para 40] that:

“There is nothing in the Matrimonial Causes Act and nothing in its purpose or broader social context to indicate that the legislature intended to authorise the transfer by one party to the marriage to the other of property which was not his to transfer….”

The current position in respect of the equitable doctrine relating to the Piercing of the corporate veil

10. Over a century ago in Salomon v A. Salomon and Co Ltd [1897] the House of Lords held that a company was a separate legal entity distinct from its shareholders and that it had rights and liabilities which were distinct from those of its shareholders and that those principles applied as much to a company that was wholly owned and controlled by one man as to any other company.

11. “Piercing the corporate veil” in effect means disregarding the separate personality of the company and thus enabling, in a financial remedies context, the court to treat the company’s assets as if they were the controlling shareholder’s.  

12. In Prest Moylan J. declined to pierce the corporate veil under the general law without some relevant impropriety and declined to find that there had been any “relevant impropriety”. The Supreme Court held that he was correct to so find.

13. In considering whether to accede to Mrs Prest’s claims to pierce the corporate veil and so treat the companies’ assets as Mr Prest’s Moylan J. had regard to various authorities cited to him, including Ben Hashem v Al Shayif [2009] 1 FLR 115 where Munby J. conducted a review of both family and non family cases and formulated six principles which he considered could be derived from the authorities in respect of the piercing of the corporate veil:

(i)     ownership and control of a company were not enough to justify piercing the corporate veil;

(ii)    the court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought necessary in the interests of justice;

(iii)   the corporate veil can only be pierced if there is some impropriety;

(iv)   the impropriety in question must be “linked to the use of the company structure to avoid or conceal liability”;

(v)    to justify piercing the corporate veil, there must be “both control of the company by the wrongdoer and impropriety”, that is (mis)use of the company as a device or façade to conceal wrongdoing; and

(vi)   the company may be a façade even though it was not incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would however only pierce the corporate veil to the extent necessary in order to provide a remedy for the particular wrong.

14. In VTB Capital Plc v Nutritek International Corpn [2012] 2 Lloyds Rep 313, the Court of Appeal adopted Munby J’s statement of principle save that they held that (i) it was not necessary in order to pierce the corporate veil to show that there was no other remedy available; and (ii) that it was not enough to show some wrongdoing but that the relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts”.

15. Sumption SCJ. held [para 27] that it was well established by authority that the company’s corporate veil could be pierced “if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing”. He rightly goes on to state that “the difficulty is in identifying “a relevant wrongdoing”.

16. Sumption SCJ held [para 35] that there was:

“ a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality”.

17. Sumption SCJ referred to the fact that in Prest the legal interest in the companies had been vested in the companies long before the marriage broke up and that whatever the reasons for organising matters in the manner they were organised there was no evidence that this was done in order that Mr Prest may avoid any obligation relevant to Mrs Prest’s claims for financial remedies. Moylan. J in fact found that Mr Prest’s purpose was “wealth protection and the avoidance of tax”.

18. Therefore, the principle in Salomon remains good and, as held by Rimer LJ in the Court of Appeal that ”a one man company does not metamorphose into the one man simply because the person with a wish to abstract its assets is his wife”.

Beneficial interest/ Bare Trust

19. The Supreme Court allowed Mrs Prest’s appeal upon the basis that the properties in question, owned by corporate entities, were beneficially owned by Mr Prest, i.e. that irrespective of the fact that the properties were legally owned by various companies that they held them on trust for Mr Prest.

20. The Supreme Court held that whether assets vested in a company are beneficially owned by its controller is a highly fact specific issue and that it was not possible to give general guidance beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts.

21. In the present case Mrs Prest had expressly alleged, amongst other things, that Mr Prest used the corporate defendants to hold legal title to properties that belonged to him beneficially. In her section 25 statement Mrs Prest gave evidence of her belief that Mr Prest was the beneficial owner of the relevant properties, which Sumption SCJ noted was evidence that was “supported in some cases by admittedly inconclusive reasons for the belief”.

22. Mr Prest had failed to file any evidence upon the issue. Moylan J had referred to Mr Prest’s conduct in the proceedings has having been characterised by “persistent obstruction, obfuscation and deceit”. He was not a party to the appeal. The companies had been joined to the proceedings only because they were alleged to be trustees for Mr Prest of the shareholdings and the properties and because orders were being sought for their transfer to Mrs Prest. The companies themselves failed to file a defence or comply with orders for disclosure.

23.  The Supreme Court found that all seven properties, whilst legally owned by corporate entities, were in fact beneficially owned by Mr Prest and so comprised a part of Mr Prest’s asset base, constituting property which (in the words of the statute: Section 24(1)(a) MCA 1973) Mr Prest was “entitled (to) either in possession or reversion”.

 24.  The basis upon which the Supreme Court in each instance found that Mr Prest held the beneficial interest in each property is summarised below:

Property 1 – Mr Prest had purchased this property in 1991 pre PRL’s incorporation. He transferred it to PRL for the nominal consideration of £1 in 1995. The SC held that in the absence of explanation for the transfer of the property to PRL there was “nothing to rebut the ordinary presumption of equity that PRL was not intended to acquire a beneficial interest in the property and “there is therefore an ordinary resulting trust back to the husband”.

 Property 2 – This property was transferred to PRL by Mr Prest’s brother. Mr Prest’s brother had acquired title shortly before his transfer to PRL and at a time when (it was found) he could not have paid for it himself. Mrs Prest’s evidence was that Mr Prest had purchased this property. The SC held that in those circumstances “there is no evidence to rebut the ordinary inference that the husband was the beneficial owner of the property at the time of the transfer to PRL and that the company held it on a resulting trust for (the husband)”.

Property 3 – this property was actually transferred to PRL by Mrs Prest. The SC referred to the fact that “the husband must have provided the purchase money” and was the beneficial owner when the property was transferred by a third party to Mrs Prest. Sumption SCJ held that the property remained Mr Prest’s despite its transfer to Mrs Prest and post its transfer from Mrs Prest to the company and “there is therefore an ordinary resulting trust back to the husband”.

Property 4 – this property was acquired by the company from Mr Prest for substantial consideration. In this instance Sumption SCJ inferred that as PRL had at the material time not begun its operations that “the purchase monies must have come from the husband”.

Property 5 – the SC noted that virtually nothing was known about the terms of the acquisition of this property by PRL from Mrs Prest. Mr Prest had stated that the monies had come from PRL. The SC inferred that that the property was beneficially owned by Mr Prest because PRL was funded by Mr Prest.

Property 6 – the property was acquired for substantial consideration. Sumption SCJ held that the property was acquired with funds derived from the company at a time when it had not begun trading operations and therefore inferred that the funds were provided to the company by Mr Prest and therefore that there was an ordinary resulting trust back to Mr Prest.

Property 7 – the property was acquired for substantial consideration and at a time when the company was actively trading (and could therefore have funded the purchase itself). Sumption SCJ noted that (i) the ownership of the property had nothing to do with the oil trading business in which the company was engaged; and (ii) at this stage there was a consistent pattern by which Mr Prest “causes properties to be acquired with funds provided by himself by companies under his control, nominally funded by the companies.

25.  Thus, it must follow that in financial relief proceedings where a party (let us say the husband) controls a company, which company owns assets (no rationale for confining to “real property”), the following may be the subject of legitimate enquiry by the wife from the earliest juncture:

(a)       the source of the funds to purchase the asset/ property;

(b)       the consideration paid by the company for the asset/ property;

(c)       whether the company in question was actively trading at the time it acquired the asset/ property;

(d)       whether the asset/ property in question had any natural “nexus” with the company’s ordinary trading activities, etc

Christopher McCourt

17th June 2013