Prest v Petrodel Resources Ltd: companies held properties on trust for husband

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Summary: Where a husband wholly owns and controls a company an order for the transfer of the company’s assets to the wife on divorce may be made where, on the particular facts of the case, the company holds those assets on trust for the husband.

Prest v Petrodel Resources Ltd concerned the financial settlement following the divorce of a Nigerian oil trader, Michael Prest, and his wife Yasmin.

Mr Prest wholly owned and controlled (directly or indirectly, through intermediate entities) a number of non-UK resident companies which, between them, owned seven residential properties in the UK. The question for the Supreme Court was whether it could order the properties to be transferred to the wife, as part of the financial settlement on divorce, given that they legally belonged to the companies not Mr Prest.

The Supreme Court held that:

  • on the particular facts of this case, the UK residential properties held by the offshore companies were held on bare trust for the husband. The properties were beneficially owned by the husband and so an order could be made for the transfer of the properties to the wife;
  • the provisions of the Matrimonial Causes Act did not entitle the court to ‘pierce the corporate veil’ and order a husband to transfer assets which he was not entitled to to his wife;
  • the court can only ‘pierce the corporate veil’ – that is disregard the separate legal personality of a company – if there is some impropriety. This will be the case where 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 which is under his control.

Following this decision, it is unlikely that a wife will be able to obtain an order for the transfer of property held by her husband’s company on the basis of piercing the corporate veil even where the husband treats the company assets as his own. She will need to be able to show that property held by a company is beneficially owned by her husband.

Beneficial ownership of properties

On the particular facts of this case, the Supreme Court found that the UK residential properties held by the offshore companies were held on bare trust for the husband. The properties were beneficially owned by the husband and so an order could be made for the transfer of the properties to the wife.

The Court made it clear that whether assets legally held by a company, are beneficially owned by the controller of the company, will depend on the specific facts of the case. However, in his judgement, Sumpton LJ suggested that, in the case of a matrimonial home held by a company, the facts may justify an inference that the property is held on trust for the spouse who owns and controls the company. He considered this may well be the case where the purchase and occupation of the matrimonial home is organised between the husband in his personal capacity, and the husband in his capacity as the sole agent of a company.

There are, of course, many legitimate wealth planning reasons why a husband and/or wife may choose to transfer assets to a company or other structure. If both parties to the marriage agree to that transfer a court will, in most cases, hold the husband and wife to the arrangement on a later divorce. Assets held in properly created, documented and run structures should be protected.

In this case the available evidence was ‘incomplete and in critical respects obscure’. The husband and the relevant companies persistently failed to co-operate with the proceedings or comply with orders to produce documents. The Supreme Court, therefore, had to consider ‘what presumptions may properly be made against the husband given that the defective character of the material is almost entirely due to his persistent obstruction and mendacity’. The Court inferred from the husband’s conduct that he was covering up evidence that would reveal that the properties were indeed held beneficially for him. This demonstrates the importance of full disclosure to avoid a court making adverse inferences.

Piercing the corporate veil

‘Piercing the corporate veil’ means disregarding the separate legal personality of a company and identifying  the company with those who own and control it, and so recognising a receipt of the company as that of the individual in control of it.

The Supreme Court held that the corporate veil may only be pierced where there is some impropriety. This will be the case where 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 which is under his control. The court can then pierce the corporate veil but only to the extent necessary to deprive the company or its controller of the advantage which would otherwise be obtained by the company’s separate legal personality.

Judges in the family division, dealing with claims for ancillary relief on divorce, have regularly made orders awarding assets, vested in a company of which one party to the marriage is the sole shareholder, to the other party to a marriage, on the basis that it is necessary in the interest of justice. The Supreme Court held that these are not cases which allow the court to pierce the corporate veil.

The husband may have misapplied the company’s assets for his own benefit but he was not concealing or evading any legal obligation owed to his wife, or the law relating to the distribution of assets on the break-up of a marriage. The legal interest in the properties was vested in the companies long before the marriage broke up and there was no evidence that the husband organised things in this way to avoid any obligation to his wife in ancillary relief proceedings.

Financial provision on divorce

When dealing with the division of a couple’s assets on divorce, a court may (under the Matrimonial Causes Act) order a husband to transfer to his wife property to which the husband is entitled (and vice versa). Judges in the Family Division, have been in the practice of treating the assets of companies owned and controlled by the husband (or wife as the case may be) as assets which they can order the husband to transfer to the wife under these rules.

The Supreme Court made it clear that the court could not order the husband to transfer assets which he was not entitled to to his wife. The company’s assets were not his to transfer, unless the company actually held the assets on trust for him as the beneficial owner of the assets.

If the assets did not beneficially belong to the husband, the court did not have the power ‘to authorise the appropriation of the company’s assets to satisfy a personal liability of its shareholder to his wife’ even where the husband had dealt with the company’s assets as if they were his own without any regard to whether or not he had a right to act in that way.

The fact that a husband may, as a result of his control and ownership of a company and the absence of any third party rights, be able to procure the transfer of property held by the company to him does not mean that the company’s assets are his. It is only where the assets actually belong beneficially to the husband that he will be entitled to them.

The assets of companies owned and controlled by the husband (or wife) may, however, still be taken into account in assessing what his (or her) financial resources are, and may affect the amount of any order made in favour of the other party to the marriage. If the court takes the view that a husband effectively has unrestricted access to the assets of a company within his ownership and control it will likely treat the company’s assets (as well as the shares of the company) as part of his financial resources.

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