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Prest case set to change landscape of divorce

The recent Supreme Court judgement in Prest v Petrodel Resources Ltd dealt with the issue of whether a shareholder could be ordered to transfer a company-owned property to his or her spouse on divorce.

The ruling in the case has important implications not just for lawyers but also for shareholders, lenders, insolvency practitioners, auditors and other professionals.

What are the main points from the case?

Key lessons to be learned from this case are as follows:

  • If the economically dominant spouse fails to provide full and frank disclosure on divorce then the court is likely to draw adverse inferences which favour the other spouse.
  • In most cases a matrimonial home which is owned by a company will be regarded as being beneficially owned by the spouse who owns and controls that company. As a result, the court will be able to make orders regarding the matrimonial home.
  • On divorce the court will examine closely a corporate structure and make orders based on the reality of the case even if this conflicts with the apparent corporate position. However, whether assets held by a company are actually owned by its controller is a highly fact-specific issue.
  • As company structures can be unravelled, the most effective way to protect wealth in the event of divorce is a pre- or post-nuptial agreement.
  • As company structures will not protect wealth in all cases, working with a range of advisors including family, private client and company lawyers to ensure the best possible planning is done is essential.
  • The corporate veil can be pierced only in very limited circumstances, namely when a person deliberately evades a legal obligation or liability by using a company under his or her control.
  • It may be necessary to examine corporate property portfolios to establish whether there may be competing claims to the properties from a spouse.
  • Lenders may need to consider whether it is it is safe to lend on the security of property held within a company but possibly subject to a resulting trust in favour of the company proprietor.

What happened?

The wife, Mrs Prest, was awarded £17.5 million by the High Court in October 2011 with her settlement being comprised of properties owned by her husband’s offshore companies. Her husband, Michael Prest, is a wealthy oil trader who the court deemed to be worth £37.5 million.

Throughout the expensive and lengthy court proceedings, Mr Prest refused to disclose details about his shareholdings in the offshore companies. The High Court judge, Mr Justice Moylan, described the husband as “an extremely evasive witness” who failed to “provide proper disclosure and honest evidence”.

Mr Justice Moylan found that Mr Prest was the effective owner and controller of the companies and was therefore entitled to the company-owned properties. As a result, the court was able to order that he transfer the properties to the wife to satisfy her £17.5 million award.

Mr Prest’s companies appealed, claiming that, as they owned the properties, not the husband, the court had no power to order a transfer to the wife. The Court of Appeal agreed and upheld the long-established legal principle that a shareholder has no interest in, nor entitlement to, a company’s assets, even if that person is a 100% shareholder in that company.

Mrs Prest then appealed to the Supreme Court, as without the properties there was no other way for her to receive her £17.5 million settlement.

The Supreme Court has now ruled in favour of the wife and allowed the transfer of the properties.

What was the thinking behind the ruling?

The court found that all the monies for the acquisition of the properties had come from Mr Prest, therefore, he was beneficially entitled to them under the presumption of a resulting trust. As he was entitled to the properties, he could be ordered to transfer them to the wife.

It should be stressed that Mr Prest was entitled to the properties, not by virtue of his status as a sole shareholder and controller of the company, but because the companies were holding the properties on trust for him.

The court emphasised that “whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue” and the case was very much decided on its own facts.

It was noted that all but one of the properties had been acquired at a time when the companies were not trading and consequently not in a position to provide capital of their own to acquire the properties. In addition, the companies were not property investment companies so the acquisitions fell outside the normal run of business.

What does this mean for company assets?

The court considered in the detail the legal concept of “piercing the corporate veil”. This occurs when the acts or property of a company are attributed to those who control it and the company’s separate legal personality to that of its shareholders is disregarded.

The corporate veil can be pierced only in very limited circumstances, namely when a person deliberately evades a legal obligation or liability by using a company under his control.

However, this principle did not apply to this case as the establishment of the companies by Mr Prest was for wealth protection and tax avoidance rather than evading any legal obligation to his wife.

What impact did the husband’s conduct have on the outcome?

The husband’s failure (and that of the companies) to engage and to provide proper disclosure cost him dearly as when evidence as to the acquisition of the properties was incomplete or absent, the court drew inferences that Mr Prest had provided the purchase monies.

It is common in matrimonial proceedings for the court to draw adverse inferences against a spouse who, like Mr Prest, breaches court orders and fails to provide full and frank disclosure.

Further information

For more details on how this landmark case could affect your operations, please contact one of our specialist divorce solicitors.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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