Caroline Holley, a senior associate at Farrer & Co, who acted for Yasmin Prest, addresses the ramifications of yesterday’s landmark Supreme Court ruling concerning the ability of divorcing spouses to “pierce the corporate veil” to get at assets held by companies.

Caroline Holley, a senior associate at Farrer & Co, who acted for Yasmin Prest, addresses the ramifications of yesterday’s landmark Supreme Court ruling concerning the ability of divorcing spouses to “pierce the corporate veil” to get at assets held by companies.

The Supreme Court yesterday handed down its widely anticipated judgment in the appeal of Yasmin Prest against an earlier decision of the Court of Appeal.  The Court of Appeal had previously overturned a crucial part of the financial order made upon Mrs Prest’s divorce from her former husband, oil trader Michael Prest, in so far as it provided for the transfer to Mrs Prest of several properties held by companies found by trial judge Mr Justice Moylan to be owned and controlled by Mr Prest. The quantum of the award, ÂŁ17.5 million ($27 million), was not interfered with by the Court of Appeal; the issue was how the award was to be enforced in the face of Mr Prest’s failure to comply with the order of the High Court.

The Supreme Court found unanimously in Mrs Prest’s favour, allowing her appeal with all seven Justices finding that the properties were held on trust by the companies for Mr Prest and that he and his companies must therefore transfer them to his former wife as originally ordered.

A clear message

Many commentators had feared that a finding against Mrs Prest would have created a “cheat’s charter” giving spouses the ability to put their assets beyond the reach of their divorcing husband or wife by placing them within a corporate structure. The case pitted the established company law principles, that a company is a separate legal entity with its own rights and responsibilities, against the more flexible approach adopted by the Family Division, in which Judges have looked through any façade to assess the reality of each situation and make such orders as are necessary to achieve the court's overriding objective: fairness. The Supreme Court has sent a clear message that it will not allow divorcing spouses to avoid their responsibilities or evade orders of the lower courts.

The leading judgment of the Supreme Court was given by Lord Sumption, allowing the appeal on the basis that the properties in dispute were held by companies on trust for the husband and dismissing it so far as it relied on the need for Mrs Prest to pierce the corporate veil and on the construction of s.24(1)(a) of the Matrimonial Causes Act 1973.

Notwithstanding that the Supreme Court did not decide the case by allowing Mrs Prest to “pierce the corporate veil” and access the disputed property via that route, they took the opportunity to set out clear and crucial guidance as to the circumstances when it will be possible to disregard the corporate veil. The judgment therefore has significance reaching well beyond the Family Division and company lawyers will read it with interest.

Many had expected that the Supreme Court would do away altogether with the potential to pierce the corporate veil. However, it was not prepared to go that far. Lord Sumption carried out a thorough analysis of the existing case law on the issue, concluding that “the consensus that there are circumstances in which the court may pierce the corporate veil are impressive” and that for his part he would not be “willing to explain the consensus out of existence”. He therefore considered the circumstances in which the court may pierce the veil and drew a distinction between what he referred to as the “concealment principle” and the “evasion principle”.  He explained the concealment principle as applying where the interposition of a company or companies are used to conceal the identity of the real actors and said that this will not deter the courts from identifying them. He did not define this as piercing the corporate veil, but merely looking behind it to discover the true facts which the corporate structure is concealing.

The evasion principle

The evasion principle, by contrast, applies in circumstances where there is "a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”. He concluded that “there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality”.

The judgment will not only bring clarity for those going through a divorce, but has also confirmed that, in any context, those subject to an existing legal obligation, liability or restriction, cannot seek to avoid that obligation, liability or restriction by interposing a company under his or her control.