The Supreme Court has unanimously allowed the appeal by Yasmin Prest and declared that property owned by the husband's companies are held on a resulting trust. The husband, Michael Prest, must transfer to his former wife, Yasmin Prest, properties held by companies owned and controlled by him, as part of a £17.5m divorce award.
The decision, handed down this morning (download judgment below), is of major importance not only for family law and divorcing couples, but also for company law.
Jeremy Posnansky QC, partner in Farrer & Co, the solicitors that acted for Yasmin Prest, said: "I'm delighted for Mrs Prest, whose calm determination to obtain a fair and just outcome has been vindicated by this decision. It puts reality and fairness back into this area of family law, while at the same time giving proper respect to company law." [Click here to read Jeremy Posnansky QC's analysis]
The appeal arises out of proceedings for financial remedies following a divorce between Michael and Yasmin Prest. The appeal concerned the position of a number of companies belonging to the Petrodel Group which were wholly owned and controlled by Michael Prest, the husband. One of the companies was the legal owner of five residential properties in the UK and another was the legal owner of two more. At issue was whether the court had power to order the transfer of these seven properties to the wife given that they legally belong not to the husband but to his companies.
Under Section 24(1)(a) of the Matrimonial Causes Act 1973, the court may order that "a party to the marriage shall transfer to the other party...such property as may be so specified, being property to which the first-mentioned party is entitled, either in possession or reversion." In the High Court, Moylan J concluded that there was no general principle that entitled him to reach the companies' assets by piercing the corporate veil. He nevertheless concluded that a wider jurisdiction to pierce the corporate veil was available under section 24 of the 1973 Act. In the Court of Appeal, three of the companies challenged the decision on the ground that there was no jurisdiction to order their property to be conveyed to the wife. The majority in the Court of Appeal agreed and criticised the practice of the Family Division of treating assets of companies substantially owed by one party to a marriage as available for distribution under section 24 of the 1973 Act.
There are three possible legal bases on which the assets of the companies might be available to satisfy the lump sum order against the husband: (1) that this is a case where, exceptionally, the Court may disregard the corporate veil in order to give effective relief; (2) that section 24 of the 1973 Act confers a distinct power to disregard the corporate veil in matrimonial cases; or (3) that the companies hold the properties on trust for the husband, not by virtue of his status as sole shareholder and controller of the company, but in the particular circumstances of the case .
The Court held that there is a principle of English law which enables a court in very limited circumstances to pierce the corporate veil. It applies when a person has an existing legal duty which someone deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.
However the Court found that in the present case because the husband's actions did not evade or frustrate any legal obligation to his wife, nor was he concealing or evading the law in relation to the distribution of assets of the marriage upon its dissolution.
Instead the Court held that the only basis on which the companies could be ordered to convey properties to the wife is that they belong beneficially to the husband, by virtue of the particular circumstances in which the properties came to be vested in them.
Alison Hawes, a specialist family lawyer at Irwin Mitchell which has offices across the country, said: "For more than 20 years family law judges have argued that where it appeared necessary they could tap into the resources of businesses in the interests of awarding a fair settlement. The law will no longer be drawn as widely as that, but today's ruling provides clarity on the circumstances in which the courts can lift the corporate veil.
"In the last few years, there have been a number of cases decided which appear to try and bring family courts more in line with civil and commercial courts - and this case was another example of this. The attempt has been partially successful; the family courts cannot operate on completely different principles from the rest of the legal system. However, the courts have the power to look closely at the nature of corporate holdings and my make orders based on the reality of the situation, even if that appears to conflict with the strict corporate position."
The full judgment is available to download here.