Petrodel Resources & Ors v Prest & Ors Case Synopsis

Petrodel Resources Ltd & Ors v Prest & Ors [2012] EWCA Civ 1395 Case Synopsis

Introduction

For the past 30 years orders have been made against the assets of a company that are considered to be the alter ego of a spouse to satisfy a capital award made by the court in respect of the other spouse.¹In 2012 the Court of Appeals ruling in Petrodel Resources Ltd & Ors v Prest & Ors² set a new precedent stopping an ex-wife being able to investigate a company’s assets when she believes her husband has concealed assets within that company. The decision in Prest overhauled the court’s previous precedents regarding “piercing the corporate veil”, a decision to treat the rights of a corporation as the rights of its shareholders. The outcome of such a decision was a success for wealthy individuals looking to protect their assets upon divorce.

Prior to Prest, case law such as Salomon v A Salomon & Co Ltd³ and Macaura v Northern Assurance Co Ltd⁴ established that a company has a legal existence that is separate from its shareholders, even when an individual controls all of its shares. In the case of Macaura, Lord Buckmaster stated,

“No shareholder has any right to any item of property owned by the company for he has no legal or equitable interest therein…”

The facts of Petrodel Resources Ltd & Ors v Prest & Ors

Mr Prest (H) was an entrepreneur in the oil industry who was divorcing his wife. Mrs Prest (W) assessed his wealth in the region of between tens and hundreds of millions of pounds, which H denied. Due to H’s bad litigation conduct, lack of unclear disclosure and the unreliability of his evidence, there was difficulty in assessing his exact worth. Upon conclusion of the case Moylan J found H’s worth to be £37.5 million and awarded W a sum of £17.5 million.

Issues

Enforcement issues arose as the only assets that were within the jurisdiction were the properties in England and certain shares owned by H’s company. Moylan J ruled that these properties were all H’s assets and therefore were classed as his property. Following this ruling, W’s counsel sought to “pierce the corporate veil” of the companies, ignoring the distinction in law between his companies and H himself. However, with reference to guidance from the case of Hashem v Shayif,⁵ whose judgement was affirmed in VTB Capital Plc v Nutritek International Corporation,⁶ a finding of impropriety is necessary to pierce the corporate veil⁷. To seek an alternative route to this end, Moylan J relied upon the Matrimonial Causes Act 1973, S 24 (1) (a) to make a property order.⁸ He determined that H’s properties in England and his shares were “property” to which he was entitled “either in possession or reversion” within S24 (1) (a), despite these being in the companies name. Moylan J concluded that no relevant impropriety had been committed by H that would allow for the corporate veil to be pierced and concluded that H’s control and ownership of the company amounted to beneficial ownership of their assets.⁹ Moylan J made property adjustment orders transferring various properties owned by the subsidiary companies within Petrodel Group to W. Based upon this judgement, the subsidiary companies pursued an appeal.

Outcome

Upon appeal, Rimmer LJ rejected that when an individual has sole control of a company, the company’s assets can be treated as his own property for the purpose of a property adjustment order. He stated that Moylan J’s reasoning was that a one man company can never own assets beneficially but only ever as the nominee of it sole controller.¹⁰ This could not be the intention of the law due to the fact that assets would be unavailable, for example, to creditors upon liquidation of the company, as the assets would have never truly belonged to the company.

Rimmer LJ stated that the principle laid down in Saloman should still be applied:

“A one man company does not metamorphosis into the one man simply because the person with a wish to abstract its assets, is his wife”.

The law following Petrodel Resources Ltd & Ors v Prest & Ors

The law following Prest has come to a standstill with ‘exceptional cases’ warranting the approach of “piercing the veil”. The first of two recent cases that reflect this are Antonio Gramsci Shipping Corporation & Ors v Recoletos Ltd and Ors.¹¹ The question was whether the veil could be pierced to establish the consent of several individuals to a jurisdiction clause even though the company didn’t provide consent. Beatson LJ stated:

“Absent a principle, further development of the law will be difficult for the courts because development of common law and equity is incremental and often by analogical reasoning”.

The second case is Akzo Nobel N.V v Competition Commission¹² where the term ‘carrying on business’ under the criterion laid down in the Enterprise Act 2002, section 86(1) (c) required further interpretation in line with company law principles. A statement was made by the tribunal hearing the case which was in contrast to Lord Sumption’s assertion in the case of Prest that impropriety should be proven in order to justify piercing the corporate veil.¹³

The statement from the tribunal is as follows,

‘We note, however, that a majority of the Supreme Court, whilst endorsing Lord Sumption’s analysis, did not wholly exclude the possibility that exceptions may also be made in other unspecified but rare circumstances’.

This statement by the tribunal proves how the law following Prest has not been able to develop due to cases being catorgorised as having exceptional circumstances which prevent the law from developing in a consistent manner.

Conclusion

The ruling by the CA in Prest raised the threshold for the criteria required to “pierce the veil”. Whilst unfairness and injustice for the other spouse may flow from this strict application of company law, it does lay down clarity as when it is appropriate to pierce the veil. It is suggested by George that the ruling imposes difficulties as those looking to protect their assets from family court jurisdiction know that it is unlikely that the family court will be able to assess its legitimacy.¹⁴ As noted in the above cases however, the law requires further clarity and a new statutory remedy to ensure fairness in big money divorce cases.

Footnotes

¹Bedell Group accessed 4 July 2015

²(2012) EWCA Civ 1395

³(1897) AC 22

⁴(1925) AC 619,

⁵(2008) EWHC 2380 (Fam)

⁶(2012)WCA Civ 808, (2012])All ER (D) 147 (Jun)

⁷(2012) EWCA Civ 1395 para.37

⁸Ibid para 41

⁹Craig Rose, “Family: Hidden assets”? 162 NLJ 1487

¹⁰Ibid

¹¹(2013) EWCA Civ 730, (2013) 4 All E.R. 157 (CA)

¹²(2013) CAT 13

¹³Prest [N2] (27)

¹⁴Rob George, “The veil of incorporation and post-divorce financial remedies” L.Q.R. 2014, 130 (Jul), 373-377.