Divorce: following the money

Supreme Court ruling could see family courts allowed to pierce the corporate veil in divorce battles

Stephen Smith

As lawyers wait for the Supreme Court’s judgment in the case concerning the divorce of oil tycoon Michael Prest on the extent to which the corporate veil should be capable of being pierced by divorce proceedings, the question has to be asked whether any definitive judgment will do much to settle the clash between corporate and family lawyers.

There are those who believe issues should be resolved on strict legal principles and others who think the courts should interpret the law to give effect to the intention of the legislation, taking into account the way society changes.

Judgments of the appellate courts in the past decade or so have differed, with judges hailing from the commercial courts tending to resolve issues on strict legal principles and those with a background in the family courts seeking to achieve fairness in the distribution of the family wealth.

Over the years, the pendulum has swung from the wider approach adopted in the family courts to the stricter legal interpretation adopted in the Chancery courts.

In the recent case of AC v DC [2012] the court considered an application under s.37 of the Matrimonial Causes Act (s.37 allows the court to set aside transactions intended to prevent or reduce financial relief). The husband had transferred his substantial interest in his company to an offshore trust and the wife sought to set aside the transfer.

Concern was raised as to the capital gains tax implications if the shares were to be transferred back out of the trust. Unfortunately, s.37 was silent on the tax implications.

The court found that a judgment caught by s.37 operates to void the transaction from the beginning such that no capital gains tax should normally arise, and was prepared to interpret the purpose of s.37, commenting that “one is therefore required to undertake a task of statutory construction, having regard not just to the literal words but also the purpose of the legislation”.

By contrast, the Court of Appeal in Immerman [2010] sought to restrict the way ‘self-help’ disclosure was dealt with in matrimonial proceedings. In this case the wife and her family hacked into her husband’s computer and copied thousands of documents.

Until that point family practitioners followed the Hildebrand Rules whereby, if a party came into possession of documents belonging to the other, these could be referred to within the proceedings. Immerman stated the wife was not entitled to make use of the information contained therein.

In terms of companies, family courts have often been robust in looking at the true ownership of a company and being prepared to pierce the corporate veil to achieve fairness. Prest is considering the extent to which the family courts should be free to do this.

Whatever the outcome, will judges opposed to that decision be able to resist arguing their way out of that box? For those who say it was unfortunate that a broad principle was established through Immerman, look to the decision of Mostyn J in FZ v SZ when he said “no process could ever remove [the wife’s] knowledge of what she has found out”.