No more hiding behind corporate structures

23 June 2014

The Supreme Court decision in the case of Prest v Petrodel Resources and Others [2013] UKSC 34 is an interesting one. Not only did the court clarify the circumstances in which the corporate veil can be pierced in family cases, but through trust law sought to produce a fair decision.

The husband, who made his money in the oil industry, built up a property portfolio during the course of the marriage. These properties, including the matrimonial home, were owned by Petrodel Resources Ltd and Vermont Petroleum Ltd. These companies were in the sole ownership and control of the husband. During the divorce proceedings the husband claimed that the properties were company assets and independent from him in an attempt to protect his wealth.

At first instance Mr Justice Moylan held that the husband must transfer six properties and the interest in a seventh held by the companies to his wife, as in applications for financial relief ancillary to divorce the court has a wider discretion to pierce the corporate veil. This ruling was overturned by the Court of Appeal [2011] EWHC 2956 (Fam).

On appeal to the Supreme Court the original decision of Mr Justice Moylan was reinstated, but based on different legal principles. The Supreme Court found that the companies in the husband’s name were in reality engaged in the oil business. The husband funded the purchase of the properties from his own money, not company money. As a result the court found, based on the law of trusts, that the properties were in fact held by the companies on trust for the husband’s benefit. As a result, the court is entitled to make an order transferring them to the wife.

The Supreme Court clarified that the corporate veil may only be pierced where a person has deliberately evaded or frustrated an existing legal obligation or liability by interposing a company under his control. The Court held that although the husband had misapplied company assets for his own benefit, he had not concealed or evaded a legal obligation owed to his wife, nor was he evading the law relating to the distribution of assets following divorce. The corporate veil could therefore not be pierced in this case. However, for the reasons explained above it was not necessary for the court to pierce the corporate veil in order to achieve, what it considered to be, a fair outcome.

Following the decision in Prest v Petrodel wealthy individuals may find it more difficult to protect their wealth from divorce claimants by placing assets in a corporate structure. This will prove a blow for wealthy spouses; however has the benefit of protecting the claimant spouse from receiving disproportionally low settlements.  

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Note: This is not legal advice; it is intended to provide information of general interest about current legal issues.