Family Law practitioners all over the UK will have been busy digesting todays landmark decision of the Supreme Court in the matter of Prest v Petrodel Resources Limited and considering whether to review the advice given to their divorce clients who own a company.
Until today’s decision, Family lawyers could be relatively confident in advising their company owning clients who were going through a divorce that, in the absence of any attempts of fraud or evasion or the company being formed as a “sham”, the court could not make an order against the company, in satisfaction of a spouses financial claims in a divorce. Not necessarily so any more….
Mr and Mrs Prest married in 1993 and Mrs Prest started divorce proceedings in 2008 which culminated in a financial order being made by the judge.
During the marriage the Husband established several companies, one of which was Petrodel Limited and these companies owned the family home and seven other properties. The Husband was the only shareholder.
It is fair to say that Mr Prest did not co-operate in the proceedings and failed to comply with orders made by the Judge to provide information about his companies and the purchase of the properties. Ultimately the Judge considered the evidence available to him and made a finding that the assets of the case were £37.5 million. The Judge made an order for Mrs Prest to have the family home transferred to her, free of mortgage along with a lump sum of £17.5 million. He went on to say that the 7 properties owned by the companies should be transferred to the Wife in partial settlement of the lump sum and that the companies should sign the transfer documents. He justified this by saying that the companies were “wholly owned and controlled by the Husband..”
The Companies, who had been joined in the proceedings, unsurprisingly appealed to the court of appeal basically saying that the family court didn’t have the jurisdiction to order a transfer of property owned by a company in settlement of its shareholders debt. The Court of Appeal agreed with them and reconfirmed the doctrine that the family courts could not “Pierce the Corporate Veil.”
The Wife appealed to the Supreme Court.
In a unanimous decision, the Supreme Court has found that the companies held the properties on trust for the Husband as he paid no rent to live in the family home and the funds to purchase the properties came directly from him (in relation to a couple of the properties they were sold to the companies by the Husband for £1) and relying on the law of trust, stated that the court was able to order the companies to transfer the properties to the Wife.
Interestingly, none of the courts made a finding that the Husband had created the companies as a “sham” in an attempt to defeat his wife’s financial claims. The companies were created during the marriage and it was deemed he had done so for the purposes of wealth protection and avoidance of tax.
There is no doubt that the question of whether the assets of a company are held on trust for a Spouse will be very fact specific but it will certainly leave a few business owners feeling vulnerable and family lawyers reviewing their advice.