Richer spouses will no longer be able to hide their wealth behind the corporate veil, says Caroline Holley of Farrer & Co, who acted for Yasmin Prest
On 12 June 2013, the Supreme Court ruled in favour of Yasmin Prest, the former wife of Nigerian oil trader Michael Prest, in a long awaited and landmark judgment. Mrs Prest’s appeal arose out of an earlier Court of Appeal judgment which overturned certain critical enforcement measures which formed part of the original financial order made upon the parties’ divorce – and which sent shockwaves through the family law world.
The Court of Appeal overturned orders for the transfer to Mrs Prest of several properties held by companies owned and controlled by Mr Prest and which were to be transferred in part-satisfaction of the divorce award made in her favour in the sum of £17.5 million. In doing so, the two out of the three Court of Appeal Judges with a company law background were dismissive of the way family courts have historically looked at the reality of the situation rather than being restrained by rigid company law principles and ordered that the grey areas where family and company law cross paths could continue no more. ‘That must now cease,’ said Lord Justice Patten.
However, the Supreme Court thought differently and, sitting with an unusually large bench of seven Justices, it found unanimously in Mrs Prest’s favour. The decision turned on a finding that the companies were not in fact beneficially entitled to the properties but that the true beneficial ownership lay with Mr Prest. He and the companies were therefore required to transfer them to his former wife in part-satisfaction of the lump sum award of £17.5m which was owed to her.
It had been widely forecast that the application of strict company law principles would ensure defeat for Mrs Prest in the Supreme Court and most commentators feared the creation of a ‘cheat’s charter’ allowing spouses to put assets beyond the reach of their husband or wife in the event of a divorce. The long standing conflict between company law principles and the approach taken by the family courts was ripe for review.
Although the Supreme Court did not rely upon the long established principle that it is permissible to pierce the corporate veil in certain rare circumstances, it took the opportunity to reinforce the existence of such a principle and set out parameters within which the veil of incorporation can exceptionally be vulnerable to attack.
It follows from the judgment that the circumstances in which a divorcing husband or wife will be able to access assets held by a company directly, as opposed to having recourse only to the transfer of shares held by their spouse, will remain strictly limited.
Piercing the veil
However, in circumstances where an individual seeks to evade a legal responsibility by interposing a company under his control, the veil of incorporation of the company may be pierced to prevent abuse of that corporate veil. The judgment therefore has implications far beyond the realms of family law; entrepreneurs and their lawyers will be reading it with interest.
Regardless of the clarification brought for lawyers and their clients, the more important and resounding message of the Supreme Court was that it will not allow divorcing parties to disregard orders of the court and will ensure compliance by whatever lawful means necessary. Those seeking to shield assets from the reaches of the English Court should take heed: the reputation of England and Wales as a jurisdiction which will do its utmost to protect divorcing spouses has once more been restored.
Caroline Holley is a senior associate at Farrer & Co and acted for Yasmin Prest