Prest v Petrodel Resources Limited 2013 UKSC 34 a victory for common sense - article by Elizabeth Darlington

In summary, the Supreme Court (comprising Lords Neuberger, Walker, Mance, Clarke, Wilson, Sumption and Lady Hale) has unanimously upheld the wife’s appeal and found that the Respondent group of companies held the assets on trust for the Husband. The assets therefore constitute property to which the husband is “entitled, either in possession or reversion” for the purposes of section 24(1)(a) MCA.

The leading opinion is given by Lord Sumption. His Lordship identifies 3 possible legal bases on which the assets of the Petrodel companies might be available to satisfy the lump sum order against H:

  1. On the basis that this is a case in which, exceptionally, the court is at liberty to disregard the corporate veil in order to give effective relief;
  2. Section 24 MCA might be regarded as conferring a distinct power to disregard the corporate veil in matrimonial cases;
  3. The companies might be regarded as holding the properties on trust for the husband in the particular circumstances of the case.

As to 1), piercing the corporate veil, Lord Sumption concludes that

there is a limited principle of English law which applies when a person is under an existing legal obligation or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality” (para 35).

This is endorsed by Lord Neuberger at para 81.

As to 2) their Lordships unanimously reject the argument that section 24 MCA might be regarded as conferring a distinct power to disregard the corporate veil. This will no doubt come as a great relief to those practising in chancery and commercial work.

As to 3), their Lordships found that on the facts of this case, the assets were held by the companies on trust for the husband. Lord Sumption states:

whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue.

However, the Court did not give any specific guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. Lord Sumption suggests, “however tentatively” that:

in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.

In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership.” (emphasis added)

The judgment strikes a very good balance between the often competing interests of the family and chancery/commercial courts: it upholds the principle of the corporate veil, recognising that there are only very narrow exceptions; it rejects entirely the idea that section 24 MCA might provide any power for piercing the corporate veil. The reliance upon the principles of trust law is welcome and recognises that across the two jurisdictions the fundamental legal principles are the same.

The judgment enables family judges to do what they do best – assessing the facts and coming to reasoned judgments based on that factual analysis – and is a victory, not only for rigorous legal analysis but also common sense.

©Elizabeth Darlington