The corporate veil: Prest, but not pierced

The Supreme Court has recently given judgment in the case Prest (Appellant) v Petrodel Resources Limited and others (Respondents), following an appeal from the Court of Appeal.

In doing so, the Supreme Court has ordered divorced husband, Michael Prest, to 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 leading judgment was given by Lord Sumption.

Although the case revolved around a dispute concerning financial provision on divorce, the decision has potentially wider implications.

Issue

The Supreme Court had to consider whether it is open to the court, in ancillary relief proceedings, to treat the assets of a company, of which a spouse is the sole controller, as being assets to which that spouse is ‘entitled’ for the purposes of the Matrimonial Causes Act 1973.

In reaching its decision, the court had to consider the law surrounding the piercing of the corporate veil.

The Corporate Veil

This is the doctrine that a company is a separate and independent legal person, which is distinct in law from its members.  The concept is central to the existence of a corporate body.  The court may only "pierce the corporate veil" when it deems it appropriate and absolutely necessary to look behind the status of the company as a separate legal entity, distinct from its shareholders.  In so doing, the court will consider who are the individuals, as shareholders, directing and controlling the activities of the company.

The corporate veil may be pierced if there is some form of wrongdoing, which involves the fraudulent or dishonest use of the corporate personality, for the purpose of concealing the true position.

In the last year, the concept of the corporate veil (and the court's ability to pierce it) has been the subject of substantial judicial scrutiny and academic commentary.  This is largely as a result of the case of VTB Capital Plc. V Nutritek International Corp. & Ors [2013] UKSC 5.  In summary, VTB was the English claimant in an action to recover c.US$225 million loaned to "RAP", a Russian company, for the purpose of RAP's proposed acquisition of Nutritek.  RAP defaulted on the loan and VTB also learned that the security it had taken for the loan was of significantly lower value than it had been led to believe.  VTB's case was that, inter alia, the loan facility agreement should be enforced against individuals who were not party to it, which VTB argued could be achieved by piercing the corporate veil.

Following decisions at first instance and on appeal, the Supreme Court reached a unanimous decision that it would be contrary to prior authorities and principles to extend the circumstances in which the corporate veil can be pierced.

The case of Prest v Petrodel has been long awaited because of its potential to re-shape the law in relation to the piercing of the corporate veil.

Facts

Mr and Mrs Prest (who had dual British and Nigerian citizenship) had their matrimonial home in London but it was determined by the court that Mr Prest was based in Monaco.  Mr Prest was a wealthy businessman operating in the oil sector.

As is so often the case, the divorce proceedings were acrimonious and protracted.  At various stages, Mr Prest was reticent and resisted providing accurate information relating to his income and assets.  Indeed, the court found that Mr Prest took steps to conceal details of his wealth from the court and demonstrated flagrant disregard for court orders to provide corroborative information of his personal and commercial interests.

First Instance

The trial judge found that as the Petrodel companies were effectively owned and controlled by Mr Prest, he was their "alter ego", and so the properties which were legally vested in them were, in reality, assets available to Mr Prest.  Accordingly, the court found that those properties could be applied to satisfy Mrs Prest’s divorce settlement. The court assessed Mrs Prest's entitlement at £17.5 million. The court was plainly convinced that Mr Prest was likely to attempt to avoid making payment to Mrs Prest and ordered that seven UK properties nominally owned by the "Petrodel group" be transferred to Mrs Prest.

Court of Appeal

It came as little surprise that the Petrodel group companies challenged the first instance decision in the Court of Appeal.  Their main argument was that the family court could not simply depart from long established company law principles relating to the separate legal personality of companies.  The Court of Appeal considered the practice of family courts seeking to do precisely that under the Matrimonial Causes Act 1973 in cases where the company is wholly or largely owned by the spouse. The Court of Appeal rejected this approach in Prest.

Instead, overturning the High Court decision and following various authorities the Court of Appeal held that the corporate veil should only be pierced in very limited circumstances, that is:

1. where there is a deliberate abuse of a corporate entity (i.e. to hide behind the corporate veil) for improper purposes; and/or
2. the specific facts show that the assets are genuinely held on trust for a party to the proceedings.

The Supreme Court ruling

On 12 June 2013, seven members of the Supreme Court allowed Mrs Prest's appeal.  However, as in the case of VTB, the court could not be persuaded to pierce the corporate veil. Rather, Mrs Prest succeeded because of the specific facts of her case, and not because of any modification of the law in relation to the preservation of the corporate veil. The court found that the manner in which the seven properties had become vested in the Petrodel group companies meant that, in fact, the properties were held on trust for Mr Prest, such that he was their beneficial owner. The fact that Mr Prest had sought to conceal this fact in evidence, and that both he and the companies failed to cooperate with disclosure, permitted the court to infer that Mr Prest and the companies were attempting to hide the true beneficial ownership of the properties.

In reaching its conclusion, the Supreme Court confirmed that the Court of Appeal's analysis of the circumstances in which the corporate veil may be pierced was correct.  Divorce cases are not a special case in which the court may depart from the doctrine of the corporate veil.  However, in applying those exceptional circumstances, the Supreme Court held Mr Prest had not deliberately attempted to stymie Mrs Prest's claim.  In the light of this finding, Mr Prest had not used the corporate structures for wrongdoing.

Commentary

The judgment is important for businesses holding assets which could be vulnerable to pursuit by spouses in divorce proceedings. Plainly, the decision will also be of note to those engaged in advising high net-worth individuals in relation to their marital affairs.

In many respects, Prest has done nothing to re-shape the court's attitude towards piercing the corporate veil. The decision may well assuage the concerns of corporates, insofar as it adheres to long-held company and trusts law principles.  The case clarifies the fact that it is possible to lift the corporate veil, but only in a small category of cases where a company has been created or structured in some way to frustrate the law.

In cases where the ostensible title to company assets is established, the Supreme Court has demonstrated that an attempt to deceive the court could result in inferences being drawn which may precipitate the transfer of those assets, even where the corporate veil remains firmly in place.