Go-ahead for ‘cheat’s charter’

CoA sells claimant spouses short by insisting company law principles apply to family cases


James Copson, partner, Withers

The split decision of the Court of Appeal (CoA) in Prest v Prest is disappointing for many wives who, on divorcing, confront a tangled web of companies used to shelter their husbands’ wealth. This ruling puts the genie back in the bottle. The court has effectively sanctioned the use of what could be perceived by the general public to be a cheat’s charter for other cases.

Michael Prest, founder of Nigerian energy company Petrodel Resources, separated from his wife of 15 years. During the divorce he claimed that Petrodel’s assets did not belong to him but to a family trust and that he was, in reality, in debt to the tune of £48m.

His wife claimed that Petrodel was 100 per cent owned and controlled by Mr Prest and that he was worth tens of millions of pounds. The High Court estimated that he was worth at least £37.5m and awarded Mrs Prest £17.5m.

The CoA ruling focuses on a particular aspect of the lower court’s decision – whether and in what circumstances family courts have the power to make orders transferring assets held in a company.

Companies are separate legal entities and shareholders are not entitled to the company’s assets. Where one spouse is the sole shareholder, family judges have traditionally ‘looked through’ structures to the underlying reality and made orders for the transfer of assets held by the company.

In the commercial context, that power has been available only where the company had been used for an improper purpose.

The first instance judge had made a series of orders on the basis that Mr Prest was “entitled” to properties held through a company and those were taken into account as his resources in calculating the award to Mrs Prest. But impropriety to ‘pierce the corporate veil’ was not present.

The CoA rejected the judge’s reasoning and found that the decision was wrong as a matter of company law. Merely having power as the sole shareholder did not translate into an entitlement that allowed the court to pierce the corporate veil.

Moreover, the test in the commercial context required impropriety and the rules should apply universally – even in family cases.

In a dissenting judgment the family judge on the panel, Lord Justice Thorpe, reasoned that if the commercial rules were applied to family cases it would make fairness difficult to achieve in many cases.

The test for impropriety is clearly set at a high standard. Even where the husband here was found to have failed to come up to proof, the trial judge could not make the necessary finding to pierce the veil.

By applying strict company law principles, even in instances where the husband has control of the company, the CoA has highlighted a loophole that is certain to be exploited by the unscrupulous.

Thorpe LJ observed that the court has given “an open road and a fast car” to money-makers who are not prepared to act fairly. The CoA has once again left claimant spouses exposed.

Withers solicitor Peter Burgess assisted with this article