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5 February 2014
The Supreme Court ruling in Prest v Petrodel could help divorcing spouses to put assts out of the reach of the courts, says Sam Longworth
The decision of the Supreme Court in Petrodel v Prest sees an unexpected victory for Mrs Prest but, despite the result, there is much from which wealthy individuals (and their advisors) can take comfort.
This was an exceptional case, in which Mr Prest’s approach was to seek to establish what he was not worth rather than what he was worth. Moylan J (at first instance) found his evidence to consist “…significantly of obfuscation and dissembling.” Mr Prest’s evidence was largely rejected and criticised.
Primarily, the case in the Court of Appeal (CoA) and Supreme Court was not about how much Mrs Prest should receive following her divorce from Mr Prest, but how the award made by the court - £17.5m - should be paid. Where the bulk of assets were held by offshore companies and structures (an ever growing situation in high asset families), how far could the court go to facilitate the transfer of assets out of those structures and to Mrs Prest?
Here, the court initially determined that Mrs Prest’s award would be funded in part by the transfer to her of several properties owned by offshore companies. This was justified due to a finding that Mr Prest was ‘entitled’ to the properties. The CoA disagreed, restating the very established company law principles which make clear that a company has its own legal personality and that to ‘pierce the corporate veil’ requires ‘relevant impropriety’, which was not present in this case.
The companies owned the assets, whether or not Mr Prest ‘controlled’ the companies, and the court had no jurisdiction to transfer those properties to Mrs Prest in the context of her financial claims on the parties’ divorce. Mrs Prest appealed to the Supreme Court.
Whilst Mrs Prest won her appeal, she lost on almost every point and the Supreme Court went in an entirely different direction to achieve the outcome it considered fair. It was found that the companies held the relevant properties on trust for Mr Prest, who therefore owned them beneficially.
The Supreme Court has demonstrated a willingness to think outside of the box in looking at the reality of a situation in order to achieve a fair outcome on divorce, in a way that does not trample on important and very well established legal principles of company law.
On the one hand, the decision reiterates to wealthy spouses that seeking to shelter assets behind trust and corporate structures is not a bullet proof strategy on divorce. On the other, it shows that ‘divorce planning’ may enable assets to be effectively placed beyond the reach of the English divorce court. An increased use of corporate structures for this purpose as a result of this case would not be unforeseeable. That, together with the vastly increased popularity in recent years of pre-nuptial agreements may only serve to undermine further the institution of ‘till death do us part’ marriage.
For more on Prest v Petrodel