Piercing the corporate veil in divorce proceedings

Rodney Hylton-Potts writes;

Historically, in order to achieve fairness between a divorcing husband and wife, the Family Division has been willing to look at the reality of a situation involving companies by piercing the corporate veil. In simple terms, if assets held within a company structure effectively belong to one spouse then orders can and will be made against those assets, especially if the company was used during the marriage to fund the marital lifestyle.

In contrast, the Chancery Division approach has long said that piercing the corporate veil is very difficult to do, and can only be done if there has been some element of dishonest or fraudulent use of the company to conceal the truth.

In Prest v Prest [2011], Moylan J pierced the corporate veil in order to be fair to Mrs. Prest in her financial proceedings after a 15 year marriage to Mr Prest. Mr Prest claimed that the assets of the company he founded did not belong to him but to a family trust and he owed many millions of pounds. Mrs. Prest argued that the company was 100 per cent owned and controlled by Mr Prest and the reality was that he was worth many tens, if not hundreds, of millions of pounds.

Moylan J concluded that he was worth at least £37.5m. An award of £17.5m was made to Mrs. Prest, to be partially funded by transferring various properties owned by the companies to her.

The veil was pierced by concluding that as Mr Prest was the only shareholder in various companies over which he had complete control, the assets in the name of the companies were assets to which Mr Prest was entitled within the meaning of the Matrimonial Causes Act 1973.

Following Moylan J’s judgment, three companies in Mr Prest’s control appealed thus paving the way for the Court of Appeal to deal with the two different approaches used by family judges and commercial judges.

The Court of Appeal allowed the appeal. They made it clear they did not approve of the Family Division’s willingness to pierce the corporate veil in the absence of dishonesty or fraud. It is clear the same rules must apply across the board.

This decision has been applauded by chancery practitioners who do not see why family cases should have been allowed to develop their own rules, but it is described as a ‘cheat’s charter’ by family practitioners.

As it stands, this judgment would seem to enable a spouse to defeat a financial claim on divorce against them simply by setting up a genuine company and then diverting their wealth into it. Prest seems to be authority that for family practitioners there is not a lot that can be done – the rules are the same as in the Chancery Division and piercing the veil is very difficult to do.

Will a pre-nuptial client be referred to the commercial team to set up a company? Perhaps. Arguably if a company is set up with the intention of defeating a financial claim on divorce then the corporate veil can be pierced as such a step would constitute a dishonest and fraudulent use of the company. However, it will take time and considerable expense to create a convincing argument to suggest such a step was taken to defeat a financial claim on divorce especially if a company is set up before the marriage or at the very least before the marriage runs into trouble.

Mrs Prest is appealing to the Supreme Court and the case will be heard in March 2013