The UK Supreme Court rules on whether properties held by companies controlled by the husband can be subject of an ancillary relief order (and provides important guidance on "piercing the corporate veil")

On Wednesday (12 June 2013) the UK Supreme Court handed down its much anticipated judgment in Prest v Petrodel Resources Limited and others [2013] UKSC 34, in which it held that seven properties purchased by the husband through off-shore companies should be made subject of an ancillary relief order and should be transferred to the wife.  Although made in the context of divorce proceedings, this judgment is of wider importance as it makes general findings on the circumstances in which a plaintiff may ignore the fact that a shareholder and a company are different entities and pursue both or either interchangeably (known as "piercing the corporate veil"). These findings will be of particular relevance in cases where complex offshore structures are used.  It is to be expected that Hong Kong and Singapore courts will follow the Supreme Court's decision on what is considered to be a difficult common law concept.

What is this case about?

This case relates to ancillary relief sought by the wife against her wealthy husband after their divorce.  The husband controlled a number of off-shore companies which in turn owned a number of residential properties in England.  The issue that arose was whether the court was able to order the transfer of those properties as part of an ancillary relief order in favour of the wife.  The Supreme Court points out in its judgment that this issue will normally arise where the shareholder (ie, the husband) and the company are both resident outside the jurisdiction, as otherwise the court is more likely to make an order for the transfer of the shares in the company (rather than the property held by the company).

The legal principles

The Supreme Court identified three possible legal grounds on which it was possible to order the transfer of the properties:

1. by treating the matter as one of the exceptional cases in which it was possible to "pierce the corporate veil" and ignore the fact that the properties were not being held by the husband but were being held by his companies as separate entities;
2. by finding that the ancillary relief legislation conferred a wider power to disregard the corporate veil in matrimonial cases; or
3. by finding that the properties were being held on a (resulting) trust for the husband.

The Supreme Court's findings

Although, in the end the Supreme Court found in favour of the wife, a number of the judges on the panel of seven judges made some strong findings that militate against "piercing of the corporate veil" whether in matrimonial matters or more generally.  Although some of the judges were less certain whether it was possible to distil piercing cases down to a narrow and definitive category, the tendency of the majority of judges is to restrict the application of the piercing principles.  In relation to each of the possible legal grounds the Supreme Court made the following findings:

1. Four of the seven judges agreed that generally, it should only be possible to "pierce the corporate veil" and ignore the fact that the shareholder and the company are separate entities 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 imposing a company under his control".  In such a case "the court may only pierce the corporate veil 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".  This was not the case in this matter as the properties had been purchased long before the marriage broke up and the reasons for purchasing them through the companies were "wealth protection and the avoidance of tax".
2. Section 24(1)(a) of the Matrimonial Causes Act 1973[1] which allows the court to make an order to transfer property to which the transferring party "is entitled, either in possession or reversion" does not provide family courts with a wider jurisdiction to pierce the corporate veil in matrimonial cases.  The same proprietary principles apply across all courts.
3. In light of the factual circumstances (eg, the properties had been purchased with the husband's funds or had been transferred to the companies for a nominal amount, the ownership of the properties had nothing to do with the companies' business and no rent was being paid to the companies) the properties were being held by the companies on trust for the husband who was the beneficial owner. Consequently, an order could be made under section 24(1)(a) compelling the companies to transfer the properties to the wife.

Take away points

• In a matrimonial context, the Supreme Court judgment (if followed in Hong Kong and Singapore) will mean that it is likely to be more difficult to show that property or other assets held by a company wholly owned by the husband should be made subject of an ancillary relief order, unless it can be shown on the facts that the assets are held on trust for the husband or that the husband interjected the companies predominantly to avoid his post-divorce obligations.
• Usually, a court may transfer the shares in the company (which in turn holds the assets).  However, this is likely to be less effective where the company is offshore and the offshore jurisdiction may not give effect to the transfer order.
• In a more general context, the "piercing of the corporate veil" doctrine is likely to find a more narrow application and a plaintiff will need to rely on other "more traditional" grounds such as agency and trusteeship in cases in which he wishes to bring a claim also against the shareholder (where the primary claim is against the company) or the company (where the primary claim is against the shareholder).

Please contact Gareth Thomas or Richard Norridge from our private wealth team if you wish to discuss.