Lifting the corporate veil in divorce proceedings

Rodney Hylton-Potts said

Divorce judges have been 
grappling for years with cases 
dealing with financial provision on divorce where family wealth derives from assets held by companies, or in some cases, where assets are difficult to ascertain or value.

The decision of the Court of Appeal in Petrodel Resources and Ors v Prest created what some journalists have hailed as 
a ‘cheats’ charter’.

The High Court judge ordered companies in which Mrs Prest had argued Mr Prest had, in reality a controlling interest, to transfer certain company assets to her.

The Court of Appeal allowed the appeal brought by the companies, finding that the Judge was wrong in concluding that the assets of those companies belonged beneficially to Mr Prest himself.

The Court stressed the need to recognise the distinct legal personalities of companies and their shareholders. In the absence of any impropriety, such as the company being a mere façade to 
shield wealth from the reach of the court, an order against company-owned property cannot be made.

Commercial lawyers will not find this decision controversial.  A company is a separate legal entity distinguishable from its individual members. As such, shareholders have no interest in, let alone entitlement to, the 
assets of a company in which they hold shares. However, in the divorce courts there is a long line of cases allowing the transfer of company assets to a spouse. The divorce court’s general approach has been that where family justice so requires they will act, provided that such an order will
not prejudicially affect any other person with a real interest in such company.

Abolishing differences

The Court of Appeal seeking to abolish any difference of approach between the family and commercial courts is not a surprise. However, for family lawyers, there are difficulties with this decision.

In the commercial sector, parties are bargaining at arm’s length to reach commercial deals. In contrast, in a family, there is no arm’s length dealing, and, if a spouse is able to hide assets behind a corporate structure, a just outcome in financial remedy proceedings may be impossible to obtain.

The 2012 case of Imerman highlighted the difficulties in exposing a spouse’s concealment of assets through investigation which might breach confidentiality. Any information gained through such investigation, or “self-help disclosure”, may be excluded from proceedings.

This, coupled with the Court of Appeal’s decision in Prest, may allow an unscrupulous spouse to conceal assets, without any means of redress for the injured spouse, who is prevented from obtaining or relying on evidence which may prove such concealment or to establish the impropriety required in order to allow a claim on company-owned assets.

Family court reach

Some have argued that the Court of Appeal’s decision in Prest could lead to a rise in company investment intended to put assets out of the reach of the family courts. However, what is clear from the Court of Appeal’s judgment is that the long-standing commercial law principles which will allow the court to pierce the corporate veil and treat company assets as those of the spouse-shareholder continue to apply, if impropriety can be shown

The difficulty will be in cases where assets have been transferred into corporate structures for legitimate purposes, but the ownership of those assets will inevitably lead to a perceived injustice, leaving one spouse much worse off than the other. One example where the court refused to pierce the corporate veil was the family case of Hashem v Shayif.  In that case the company was owned by the husband and the children, with the husband owning the largest share amounting to 30 per cent. The wife argued that the children had no input into the management of the company, which was completely controlled by the husband and served as his ‘alter ego’. While the court acknowledged that the husband was the controlling influence in the company, it had predominantly been set up as a tax saving measure. As this was a legitimate purpose, the court held that 
there was no impropriety linked to the use of the company as a sham.

Arbitrary value

These sorts of issues will only arise in cases where it is not possible, or suitable, for the court to order a transfer of shares in such companies. Where a share transfer is possible, a fair distribution of the value of family companies may be more readily achieved.

Even where ownership is accepted 
then there are considerable difficulties which may arise in valuing interested in a private limited company. The Court of Appeal explored this issue in Jones v Jones [2011], and found that the “latent value” in a private company should be taken into account when deciding the value of a non-matrimonial asset brought into the marriage by one spouse. However, there will inevitably be difficulties in actually quantifying such latent value, and such a decision will be arbitrary. This decision arguably paves the way for those with an interest in a company which pre-dates the marriage to seek to artificially inflate the value of the non-matrimonial property which will be excluded from sharing with their spouse.