Petrodel Resources Ltd v Prest; 2013 WL 2460304

This article was originally published in The Lawyer. Click here to view the article.

The doctrine of English law which enabled the courts in very limited circumstances to pierce the corporate veil, was only to be invoked where a person was under an existing legal obligation or liability or subject to an existing legal restriction which he deliberatley evaded or whose enforcement he deliberately frustrated by interposing a company under his control.

Appeal Allowed

The judgment is significant for family lawyers and corporate lawyers, because it clarifies the vexed question of piercing the corporate veil. Characterising “piercing the corporate veil” as “an expression rather indiscriminately used”, the court dealt with this doctrine “heavily burdened by authority, much of it characterised by incautious dicta and inadequate reasoning”.

In a precise and methodical analysis of the cases, Lord Sumption described the line, independent from the general law, the Family Division pursued, essentially for reasons of policy, of lifting the corporate veil when it was “just and necessary”.

Having found no justification for a “general legal principle for piercing the corporate veil, Lord Sumption stated: “Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different.”

The Supreme Court rejected the premise that the companies’ assets should be treated as part of the marital wealth. This would “cut across the statutory schemes of company and insolvency law”. Section 24 of the Matrimonial Causes Act does not permit assets of the company to be treated as if they were those of the spouse.

If the properties belonged beneficially to the husband, it would be property to which the husband is “entitled, either in possession or reversion” (s25 of the Matrimonial Causes Act).

On an analysis of the facts and circumstances, the companies’ properties were beneficially owned by and were held in trust for the husband.

The judgment gives much needed certainty. The Family Division does not have its own special and unique jurisdiction to disregard general principles of law, and treat assets of companies – even if 100 per cent of the shareholding in the companies is that of the spouse – as matrimonial property which can be transferred in satisfaction of an order. This does not mean that the assets of the company are to be ignored. This remains relevant as a resource available to the husband, for purposes of s25 of the Matrimonial Causes Act.

There is no general principle for piercing the corporate veil, and exceptional circumstances will be required before the separate legal personality of a company is disregarded.

If it can be found that the company held property for a spouse, as a mere nominee, and in trust for that spouse, the property of the corporate entity may be used to satisfy the spouse’s judgment debt in financial remedy proceedings.

Determining whether a company holds the property as mere nominee for a spouse is highly fact-specific, and will require a careful analysis.

We are also reminded that the Family Division is constrained, in making findings of fact, by the usual laws of evidence, and an adverse inference can be drawn from silence, only where that adverse inference is justified. This has to be seen in the context of the court’s inquisitorial role in the proceedings, and the court’s powers to compel disclosure from a recalcitrant spouse.

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