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Family Court does U-turn

View profile for Julie Bailey
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The recent court of appeal decision in Petrodel – v – Prest may have driven a coach and horses through what family lawyers have until now considered to be the position where a spouse owns or controls a company which they use as an alter ego.

In this case the husband was the effective owner of Petrodel Group. He controlled every business decision. The directors acted on his instructions. There was significant expenditure through the company for the benefit of the husband, his wife and their children. There were also investments made through the company which were not business opportunities but were “private commitments that the husband chose to make”. He was also found to be an unreliable witness and reluctant to disclose his financial circumstances.

At first instance the Judge summarised the principles that applied to the case in line with the existing authorities as follows:

  • Ownership and control are not in themselves sufficient to pierce the corporate veil
  • Even where there is no unconnected third party interest the veil could not be pierced only because it is necessary in the interests of justice
  • The veil can only be pierced if there is impropriety
  • The impropriety must be linked to the use of the company structure to avoid or conceal liability
  • In order to pierce the veil, both control by the wrong doer and impropriety must be demonstrated; and
  • The company may be a façade even though originally incorporated without a deceptive intent.

As a consequence of applying those principles the first instance Judge made an order that meant the husband had to transfer £17.5 million of assets to his wife from the company assets. The husband appealed. On appeal, by a majority judgement, the original ruling was overturned with the Court of Appeal concluding that:

 

The original decision had been based on reasoning that was inconsistent, contrary to principle and wrong and that a company could not be looked to in order to satisfy personal obligations of corporators any more than the latter’s personal assets could be looked to in order to satisfy the obligations of the company.

The wife is expected to appeal the decision to the Supreme Court because it runs contrary to the previous line of authorities. The dissenting Judge, Lord Justice Thorpe, said.

“If the Court now concludes that all these prior authorities were wrongly decided they present an open road and a fast car to the money maker who disapproves of the principles developed by the House of Lords “

It certainly means that cases which are yet to be decided where a company exists and is “run” by one of the spouses may not be so clear cut with District Judges in the lower family courts having to be subject to greater persuasion if they are to order that corporate assets should be called upon to meet personal liabilities in financial proceedings ancillary to divorce. This case will no doubt be cited as a reason for them not to do so unless and until it is overturned by the Supreme Court.

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