Authored By: Aafaq Ahmad
University of Bedfordshire
Case Citation and Basic Information
Case: Prest v Petrodel Resources Ltd and Others[1]
Citation: [2013] UKSC 34
Court: Supreme Court of the United Kingdom
Date of Judgment: 12 June 2013
Appeal from: Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395
Bench: Lord Neuberger (President), Lord Walker, Lady Hale, Lord Mance, Lord Clarke, Lord Wilson and Lord Sumption.
The case was heard on 5 and 6 March 2013 and the judgment was handed down unanimously by the Supreme Court on 12 June 2013. The issue of the appeal was the separation of corporate personality, the corporate veil and how company property is treated in matrimonial proceedings.
Prest is a landmark case, in the Supreme Court on the situations where the corporate veil may be lifted. It is so significant because it addressed the scope of this extraordinary doctrine when distinguishing between genuine veil piercing and the application of ordinary property and trust principles.
Introduction
Prest v Petrodel Resources Ltd is a leading Supreme Court case on piercing the corporate veil and separate legal personality. The case arose out of matrimonial financial actions in respect of properties owned by the companies managed by Michael Prest. The Supreme Court considered whether those assets could be realised to meet a financial order contrary to him. The judgement is important because it adopts a narrow strategy to piercing the corporate veil, while at the same time suggesting that ordinary rules of property law could offer a substitute basis for relief.
Factual Background
This case arose out of the divorce proceedings of Michael and Yasmin Prest. Michael Prest was the sole owner and controller of the companies making up the Petrodel Group. Seven residential units in England were legally owned by two of those companies. Yasmin Prest, following the collapse of the marriage, sought financial relief and an order that the properties be transferred to her. The problem was that in legal terms, the properties were owned by the companies and not by Michael himself.
In the first instance Moylan J held that the assets could be made accessible through the matrimonial jurisdiction of the court. The companies appealed, contending that because they were separate legal persons their assets could not be viewed as Michael’s property. The Court of Appeal was largely in agreement with this view. Yasmin Prest then appealed to the Supreme Court.
The Supreme Court thus had to decide whether or not the seven properties could properly be regarded as property to the extent that Michael Prest was entitled, notwithstanding that they were registered in the names of the companies.
Legal Issues
The Supreme Court was required to decide:
Could the corporate veil be pierced to ensure that the property of the Petrodel companies were regarded as being owned by Michael Prest personally?
The extent to which the Matrimonial Causes Act 1973 conferred the court authority to order the transfer of properties, which were legitimately owned by companies managed by Mr Prest[2].
Whether Mr Prest was the beneficial owner of the disputed properties, although the companies were the registered legal owners.
whether the properties could be made accessible to fulfil the matrimonial financial obligation by the application of conventional standards of property law, in particular the resulting trust.
The question, therefore, was whether the separate legal personality of the companies prevented their assets from being utilised to satisfy the monetary order made against Mr Prest.
Arguments
5.1 Appellant’s Arguments
Yasmin Prest said the properties in question had been registered in the names of companies in the Petrodel Group, but were really connected to her husband, who owns them. After the divorce she applied for financial relief and that the court should have had access to the assets in order to satisfy the financial order she had obtained against Mr Prest. The appellant was aggrieved by the narrow interpretation adopted by the Court of Appeal, which he also invoked the provisions of the Matrimonial Causes Act 1973, along with the concept of the corporate veil and beneficial ownership.
Much of her case was that if the court were to allow Mr Prest to argue that the separate corporate personality of companies wholly under his control meant that the court was unable to provide for his or his wife’s relief in this matrimonial proceedings then the court would be unable to achieve the purposes of the scheme. The Supreme Court therefore had to decide whether the companies’ separate legal entity would bar the transfer of the properties to the wife.
5.2 Respondents’ Arguments
The Petrodel companies claimed the properties were not Mr Prest’s personal property, but his company’s. They were based on the concept of separate corporate personality: a company is a legal entity separate from its shareholder or controller, even if the latter is the sole shareholder and controller. The company’s property therefore cannot be treated as Mr Prest’s property, said the respondents, and the court could not do so.
They also opposed the assertion of piercing the corporate veil simply because Mr Prest controlled the companies or that piercing the corporate veil would help the wife in seeking financial relief. The position taken by the respondents, therefore, meant that the Court had to uphold the distinction between a company’s assets and the personal assets of a shareholder, and to decide whether there was an existing legal principle which would justify reaching the disputed properties.
Court’s reasoning and analysis
The Supreme Court, in a unanimous ruling, did not accept that it was simply a question of ignoring the corporate veil because Mr Prest controlled the companies. In the leading judgment, Lord Sumption recognised that there are three potential bases for the properties being made available: piercing the corporate veil; a special power of matrimonial law, section 24(1)(a) of the Matrimonial Causes Act 1973; and the use of ordinary property law.
The Court first acknowledged a very narrow “evasion principle” applicable in piercing the corporate veil. Where a person is already under an existing legal obligation or restriction and knowingly places a company between himself and the obligation to avoid the obligation or to make it more difficult to meet. But the Court determined that this does not apply to Mr Prest as he had purchased the properties prior to matrimonial proceedings and there was no evidence the corporate structure was established to circumvent an existing commitment to his wife. The Court thus declined to pierce the veil because it did not consider that the control of the companies alone was sufficient to justify piercing the veil[3].
Secondly the Court disagreed that section 24(1)(a) of the Matrimonial Causes Act 1973 extended the power to disregard corporate personality in matrimonial proceedings. Only transfer of property to which the relevant spouse was legally entitled or beneficially entitled was provided for. The Court noted that common ideas of property law are still in effect in family matters[4].
Lastly, whether despite being registered in the names of the companies the properties were beneficially owned by Mr Prest. On the specific circumstances, the Court decided that the companies were holding the seven properties on trust for Mr Prest. This meant that the properties were treated as being property to which he was entitled under section 24(1)(a) and thus the order could be enforced without piercing the corporate veil.
Judgment and Ratio Decidendi
The Supreme Court upheld Yasmin Prest’s appeal and reinstated the financial order in respect of the 7 properties. But the Court stated that such an outcome was not based on ignoring the separate legal personality of the Petrodel companies. Rather, the properties were discovered to belong to the companies on resulting trust for Mr Prest; that is, for his benefit. They might then have been considered property which he had the right to claim for the matrimonial cause.
The Court also adopted a narrow doctrine for piercing the corporate veil. The principle of avoiding liability is the one that Lord Sumption would see as the basis for a genuine veil piercing: When an individual has an existing legal obligation or restriction and “interposes” a company that he controls to avoid or frustrate that obligation. The mere ownership or control of a company is not enough. On the facts of Prest, this principle was not applied as the parties were not interposed as a way to avoid a pre-existing legal obligation to Mrs Prest.
The ratio decidendi thus suggests that the corporate veil can only be lifted in exceptional circumstances, under the very limited “evasion” principle, which holds that a court cannot disregard a company’s separate personality, unless it feels that justice or fairness demands it. If there is an alternative principle of law (such as beneficial ownership or resulting trust) to which the relief can be granted, the court should do so and not pierce the corporate veil.
As such, Prest is a significant precedent with regard to the doctrine of separate personality and the recognition of a narrow exception to prevent ‘deliberate evasion of legal obligations’.
Critical Analysis
8.2 Activities and Character of the Decision Process
The corporate veil is pierced when there is a clear and narrowly drawn standards test, as in the case of Prest v Petrodel Resources Ltd. The Supreme Court did not approve of the concept of company personality being ignored just because it was controlled by an individual or because it would result in a more equitable result would be obtained. The judgment also highlights the underlying principle of the separate corporate personality which was laid down in Salomon v A Salomon & Co Ltd[5] but also accepts that the corporate structure cannot be employed as a ‘way to avoid an existing legal obligation’.
8.2 Implications and Impact
This ruling offers companies and shareholders greater certainty as judges will only be able to step in in exceptional circumstances. This is especially relevant for commercial activity as shareholders and director should know when the company’s separate identity is respected. Another problem with veil piercing as a general remedy is that it would allow courts to engage in veil piercing whenever they wanted the result to be the opposite of what the evasion principle requires, which is prevented by the Court’s distinction between evasion and the ordinary application of property law.
The judgment however could make it more difficult for claimants to get relief where a company is put to use in a manner that seems unfair but not in accordance with the strict rules of the evasion principle.
8.3 Critical Evaluation
The main virtue of the judgment is that it sought to provide legal clarity in an area where there was much uncertainty. The Lord Sumption’s separation of the evasion principle from the concealment principle offers a more structured approach to corporate veil cases.
However, there can be a criticism of the restrictive approach that may be able to be levelled that it might be taking formality over practical justice. The limited situations in which the veil can be lifted make it essential for claimants to have evidence of control or misuse of a company. Thus, the Court’s judgment has effectively safeguarded the concept of separate corporate personality, albeit there seems to be a narrow margin for judicial review in situations where corporate structures are misapplied and used for activities beyond the exception.
Conclusion
Prest v Petrodel Resources Ltd is a significant corporate law decision, as it upholds the corporate veil and sets limits on when it can be pierced. The Supreme Court’s logic further ensures clarity in corporate law and avoids situations where companies are intentionally created to avoid existing obligations. It is a decision that, therefore, strikes a balance between protecting against corporate misuse and maintaining corporate autonomy.
Bibliography
Table of Cases
Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415
Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)
Legislation
Matrimonial Causes Act 1973
[1] Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415.
[2] Matrimonial Causes Act 1973, s 24(1)(a).
[3] Prest v Petrodel Resources Ltd (n 1) [27]–[35].
[4] Prest v Petrodel Resources Ltd (n 1) [34]–[35].
[5] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
