Articles | Does the owner of a company also own its assets?

Lindsay Allen considers the case of Petrodel and asks whether the courts are likely to treat the owner of a company as the owner of the assets owned by that company in divorce situations.

 

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Lindsay Allen

Lindsay Allen

The case of Petrodel Resources Ltd and others v Prest and others is due to be heard by seven justices of the Supreme Court on the 5th and 6th March 2013.  The important question of law to be determined by the highest court in England and Wales is whether or not the courts in matrimonial finance cases can make orders directly against assets held in the name of companies owned by one of the parties.  As the appeal will shortly be heard we thought that now would be a suitable time to revisit this important case and summarise the implications of the decision made by the Court of Appeal in October 2012 on the division of parties' assets on divorce.
 
In Petrodel the trial judge made a lump sum award to the wife of approximately £17.5m.  This amount represented just under half of the husband's total wealth of £37.5m.  The husband was in breach of several court orders and he had been described by the judge as a wholly unreliable witness.  The husband had also made attempts to manipulate the process and he had failed to pay costs orders that had been made against him.  Such behaviour is familiar to most divorce lawyers.
 
The difficulty was enforcement of the order.  The husband's wealth was in complex company structures.  There was very little in the husband's own name and many of the assets were out of the jurisdiction so orders made against these assets could not be enforced.  The properties in this jurisdiction were in the name of the husband's various companies.  The question was whether the judge could "pierce the corporate veil" and order that the properties owned by the companies  be transferred to the wife on the basis that they effectively belonged to the husband.
 
According to company law a company is viewed as having a separate legal personality from its owners and directors.  The shareholders have no rights in respect of the company's assets: it is the company that owns its own assets.  In strict company law in order to pierce the corporate veil there must first be impropriety.  The owner of the company must be misusing the company as a device or blockade in order to conceal their wrongdoing and thereby avoid or conceal their liability.  They must also have control of the company i.e. they must be the sole shareholder (or effectively be the sole shareholder).
 
The trial judge in Petrodel felt unable to make a finding of impropriety but decided that the properties owned by the companies could be construed as belonging to the husband and that he was therefore entitled to order that the properties were to be transferred to the wife under the Matrimonial Causes Act 1973.  This is a type of order known as a "property adjustment order".  The judge reasoned that such was the husband's control of the companies and the wealth in those companies that the companies could be said to be his "alter ego".
 
The Court of Appeal overturned this decision by a majority verdict.  Two out of the three judges decided the case in accordance with the ordinary company law principle that the shareholders of the company (including a shareholder with 100% control of the company) have no interest of any nature in the company's assets. Therefore in order to pierce the corporate veil and make orders against the assets owned by the company there must be 100% control by the party and impropriety.  Accordingly the property adjustment orders were overturned leaving the wife with no way of enforcing her lump sum award.
 
The dissenting judge felt that it was inappropriate for the court in family proceedings to be constrained by the strict line of authority in company law.  He identified a separate line of authority in family proceedings which had allowed orders to be made where the husband (in most instances) could be deemed to be beneficially entitled to the assets of the company.
 
Impropriety is a high bar and may be difficult to prove.  There has therefore been great concern among family law practitioners that this will prevent the courts from doing justice in cases where the majority or all of the assets are owned by the husband's companies, even in a situation where the company is completely owned and controlled by him.  In most instances the wives would be the ones to suffer.
 
The decision of the Supreme Court is now eagerly awaited as the outcome will have important implications for the future in the way in which courts decide on and enforce property adjustment and lump sums orders following divorce.