'Cheat's charter' for divorcees "puts the genie back in the bottle"

 

An 'oil baron,' multi-million pound business and international judicial cooperation - these are just some of the features of a milestone case; Prest v Petrodel Resources Ltd [2013].

Mr Prest, the founder of an energy company, separated from his wife. On divorce, he claimed the assets of the company he operated belonged to a trust and that he was £48 million in debt.

Mrs Prest claimed the company assets were the sole property of her husband and that he was, in fact, valued up to hundreds of millions of pounds.

The Family Division of the High Court found that Mr Prest was worth £37.5 million and awarded Mrs Prest £17.5 million. In so doing, the court accused Mr Prest of a "flagrant breach" of his financial disclosure obligations.

Piercing the corporate veil: family law versus commercial law

On appeal, the court called into question the circumstances in which the family court can "pierce the corporate veil" and transfer assets held in a company to a spouse.

Under family law principles, the corporate veil can be pierced when a company is owned and operated by one spouse, there are no third-party interests, and the company is used to fund the family's lifestyle.

However, in commercial law, a company is separate from its shareholders. Therefore, even sole company ownership - as was alleged in this case - does not entitle piercing of the corporate veil in legal proceedings to retrieve company assets unless the company has been used for a dishonest purpose.

In the case at hand, the Court of Appeal ruled, in essence, that spouses cannot delve into corporate structures where they suspect their partners may have concealed assets unless the entity has been used fraudulently or dishonestly.

Ruling has "put the genie back in the bottle"

By applying company law to a family law case, opponents argue that the appeal court inadvertently highlighted a loophole that is bound to be exploited by opportunist spouses keen to conceal their assets from their partners.

Peter Burgess, a solicitor at Withers, commented: "The Court...has handed a victory to those who seek to obfuscate the true extent of their wealth on divorce." The Prest appeal has even drawn criticism from the bench. "In a dissenting judgment, Lord Justice Thorpe...observed that the court has given 'an open road and a fast car' to money-makers who are not prepared to act fairly," notes Burgess.

James Copson, a partner at Withers, summed up the consequences of the Court of Appeal’s decision: "This ruling put the genie back in the bottle. The court has effectively sanctioned...a cheat's charter."

Update – late 2013

But the story did not end there! Mrs Prest appealed the ruling to the Supreme Court, who handed down a judgement in June 2013. After conducting a thorough review of when the corporate veil may be pierced, the judges unanimously reinstated the original decision, though for slightly different reasons.

They determined that as a last resort the corporate veil may be pierced in matrimonial cases, but only where one party had improperly used the company to conceal their assets. The court also noted that the law in this field is confused, both in the UK and internationally.

As this case, proves, divorce law can be very complicated and incorporate many facets. You can learn more by visiting our page on the subject.

If you need legal advice on divorce proceedings we can put you in touch with an expert solicitor. Call us now on 0800 1777 162.

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