Prest v Petrodel: Spouses Cannot Hide Wealth in Companies to Avoid Losing it upon Divorce

On the 12 June 2013 the Supreme Court laid down a marker by unanimously allowing an appeal by Yasmin Prest and allowing her to get her hands on assets held by her ex-husband in numerous companies in his name. The thinking behind this decision appears to try and re-balance the power held by both parties upon a divorce. Whilst it is true that any person can put their wealth into companies to protect themselves, the Supreme Court felt that this gave too much power to the economically powerful.

The ruling, on first glance, would seem to allow the courts to pierce the corporate veil in these circumstances, a decision favoured by those who wish the courts to deliver justice, rather than enforce the law. It contradicts long-standing principles that a company is independent of its shareholders and that ownership of a company will not allow for assets to be obtained in legal proceedings, unless in cases of fraudulent or dishonest use of the company. Contrast this with family law principles whereby courts take a strict view on spouses who own and control companies, with no third party interests, especially where these companies have been used to help fund a wealthy family lifestyle.

The significant assets of Michael Prest’s in question were a number of properties which were owned by companies which in turn were owned by Mr Prest and he in fact had sole control over these companies. Section 24(1)(a) of the Matrimonial Causes Act 1973 states the court may order a party to the marriage to transfer to the other party “property to which the first-mentioned party is entitled, either in possession or in reversion”. Mr Prest argued that as he didn’t own the properties, the companies did, he was not entitled to them and so did not have to transfer them to his former wife under the Matrimonial Causes Act.

However, it was held that as Mr Prest had provided the original funding for the properties and not the companies, in applying general trust law principles, the properties were held on trust for Mr Prest by the companies. Therefore, he was entitled to them for the purposes of section 24(1)(a) and so they could then be transferred to Mrs Prest as part of the divorce settlement.

It should be noted that whilst the decision from the Supreme Court was the same as the original trial judge, the reasoning behind the decision was slightly different. The Supreme Court judges stated that they were not piercing the corporate veil here, but rather enforcing trust law principles. It will, therefore, remain difficult to prevent spouses hiding behind their companies where there is no impropriety or if the company is not merely a tool used to conceal the true facts. However, if it can be proved that the assets are being held on trust for the spouse attempting to conceal them, then this decision will greatly assist achieving a suitable level of fairness.

General and early reaction in the legal sector to this ruling appears to be positive. It sets down a marker for dishonest spouses who will no longer be able to hide away significant assets from their partner. Therefore, the decision is another step forward for the concept of fairness in divorce cases. It also gives us more clarity in the relationship between commercial law and family law. The courts seem to be reluctant to pierce the corporate veil and provide wives with assets simply because the husband has assets in a company and is the sole controller of that company. The decision to transfer assets will be more likely based on whether the wife can establish that the husband are entitled to the assets, which would then mean they are able to be used as part of the settlement.

This article was written by Ian Bradshaw, partner, Private Client, with assistance from Chris Smith.

If you have any queries or would like to discuss this further, please contact Ian Bradshaw, Head of Private Client on ibradshaw@gdlaw.co.uk or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.  This article if for general information and interest only and should not be relied upon as providing specific legal advice.