Judgement could have huge implications says family lawyer

11th June 2013

A family lawyer says that an eagerly awaited judgement in the case of Petrodel v Prest will be handed down by the Supreme Court on Wednesday 12 June 2013.

Higgs & Sons' Kelly Perks says that family and corporate lawyers alike are anxiously awaiting the judgement, which is likely to influence the outcome of applications to pierce the corporate veil for years to come. 

"The case is significant because the Supreme Court will determine the extent of the court's jurisdiction in ancillary relief proceedings to order assets held by a company to be transferred to the other spouse in satisfaction of a claim on divorce."

The Court of Appeal held by a majority decision that where a company structure is set up for conventional purposes of asset protection and tax avoidance and no impropriety is found, the court on a financial remedy claim cannot order a company to transfer any assets out of the balance sheet to the claimant even if the defendant is a shareholder with 100% control of the company.  As such, this could significantly hinder a spouse's financial settlement on divorce.

Kelly says: "The facts of this case are somewhat exceptional as the parties are extremely wealthy and it is therefore yet to be seen whether the outcome of the Supreme Court's decision will have a significant bearing on small to medium size companies."

In this case the parties had been married for 15 years and had four children.  The husband is the founder of Nigerian energy trading firm Petrodel Resources and is prominent in international oil development and trade.  The parties lived in a substantial London property.  There was a portfolio of other substantial properties in London and abroad, the majority of which were held in the name of the husband's three companies.  The husband's net worth was assessed by the court to be £37.5 million although the court acknowledged that this was a conservative estimate. 

Three of the seven companies owned by the husband were represented at the final hearing by their own leading counsel.  Mr Justice Moylan held that the assets held within the companies were effectively the husband's property and made provision awarding the wife £17.5 million.  As part of the settlement for the wife, the husband was ordered to transfer to her, London properties held by the companies along with three properties and shares in the company.

The decision was subject to appeal by the companies and the Court of Appeal, by a majority decision, allowed the appeal, determining that a company and the shareholders of a company have separate legal personalities and that the Court could not lift the corporate veil.  Therefore a company asset belongs to the company and the shareholders have no beneficial interest in them despite being a shareholder with 100% control.  Company assets cannot be used to meet the shareholder's individual debts just as the assets of the shareholders cannot be used to meet company debts.

Lord Justice Rimmer in the Court of Appeal decision held that the court should not ignore the separate identity of the company and its shareholders.  There are only limited circumstances when the corporate veil may be pierced, usually only when it can be demonstrated that there has been some impropriety on the part of the shareholders with regards to the use of the company.  The rationale is that if the controllers of the company have used the fact of its separate identify for improper purposes, it may be appropriate for the court to disregard its separate identity in order that its controller may not derive the advantage that they intended to achieve.

Kelly Says: "If the Supreme Court decides that the Family Court cannot challenge the beneficial ownership of corporate assets there are likely to be serious ramifications for family lawyers and how the courts structure financial settlements on divorce.  There will also be cause for corporate lawyers, accountants and tax advisors to consider family company structures in respect of wealth protection issues.

"If the Court of Appeal's decision is upheld, family lawyers will be seeking further guidance as to how impropriety is to be determined and proved as the current definition established by existing case law is extremely narrow. In the Petrodel case itself, despite the husband being found to have resorted to an array of strategies, it was still determined that there had been no impropriety as the primary reason for the company structure was for asset protection and tax avoidance rather than to impede the wife's claim."

Higgs & Sons works from two offices in the Black Country - Waterfront Business Park in Brierley Hill and Kingswinford. The firm employs more than 200 people, which includes over 100 specialist lawyers.

For specialist family law advice call Kelly on 0845 111 5050 or email kelly.perks@higgsandsons.co.uk


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