Prest v Petrodel Resources Ltd and Others Citation: [2013] UKSC 34, [2013]2 AC 415

Full case name: Prest v Petrodel Resources Ltd and Others Citation: [2013] UKSC 34, [2013] 2 AC 415

Court: Supreme Court of the United Kingdom (UKSC)

Date of decision: 12 June 2013

Judges / tribunal panel: Lord Neuberger (President) Lord Walker Lady Hale Lord Mance Lord Clarke Lord Sumption Lord Wilson

II. INTRODUCTION

It is a curious jurisdiction at the intersection of company law and family law. The foundation stone of company law is, of course, the separate legal personality of companies under what is now Salomon v Salomon (1897) AC 22. But divorce involves equitable solutions, and at least some divorce jurisdictions would be inclined to employ equity in an attack on the share or asset. Now, in the present case, the Supreme Court has readdressed the balance by confining the ambit of the powers available at common law for “piercing the veil of corporate personality” to two classes of case and they defined one in this judgment.

III. THE FACTS

The factual circumstances giving rise to these proceedings related to a protracted dispute over ancillary relief following divorce. The wife had been awarded a lump sum order of $17.5M but the Husband lacked sufficient unencumbered funds to satisfy the Order. 

The parties’ dispute was in part concerned with ownership of the matrimonial home and 7 United Kingdom residential properties which, it was disclosed, were registered in the names of wholly owned off-shore companies of which the Husband was beneficially the director and shareholder. 

They were chiefly financed from the profits generated from the Husband’s oil trading business carried on through those companies. There was considerable evidence that the Husband and his associates had conducted the business as if it was owned entirely by the Husband. The judge said there was no ground to pierce the veil under general company law principles but nevertheless allowed an order for disclosure concerning the offshore companies pursuant to s24(1)(a) of the MCA 1973. 

This was on the footing that the companies had the benefit of the Husband’s beneficial control, and he made orders whereby two specific off-shore companies were to transfer legal title of the seven properties in question to the Wife. On appeal to the Court of Appeal the decision to allow such an order under S. 24(1)(a) MCA 1973 was overturned. The wife appealed. 

ISSUES

1. Whether S.24(1)(a) of the Matrimonial Causes Act 1973 permitted a family court to construe shares held by companies as belonging beneficially to the husband for the purpose of an ancillary relief dispute
2. Whether a resulting trust arose, whereby the six homes registered in the names of the Petrodel companies as a result of funds paid to acquire them were held for the husband’s benefit. 

ARGUMENTS

The wife’s argument was that where a person effectively owned and controlled all his companies, and dealt with their assets ‘as if they were his own’, a piercing of the veil could not only justify but require a piercing; and, further, in financial dispute, family court judge ought to apply s24(1)(a) MCA1973 more broadly in favour of the wife; as a fallback, the wife invited court to rule that the six homes, owned by corporations on whose behalf money was paid, ought to be construed as held for the wife. 

Petrodel and Mr Prest’s contention that the basic principle that the business be distinct from the property of its directors (Salomon v Salomon [1897] AC22) was not merely applicable when one sought a common law pierce of the corporate Veil but applied equally when an enquiry arose with in equity. The companies argued that a judgement piercing the veil on company law principles required actual fraud, or proof that an individual was actually fraudulently endeavouring to try to conceal their property interests and also a person or the corporation; was actually using to carry on its activities to evade. 

The Companies argued further that Mr Prest was not “beneficially entitled” to the seven United Kingdom’s residential Properties, and argued that it is the companies, Petrodel, and Vermont Decisions LTD who were entitled to six properties registered solely in their names.

THE REASONING

On their Appeal, all parties in the UKSC agreed with the judges that no veil pierce had taken place for reasons of common law, whether through the use of ordinary common law principles as agency or a trust, or whether for purposes of business or private purpose. On that particular, the Supreme Court agreed with Moylan J and disagreed with the Court of Appeal. The two basic forms of veil piercing used in family law was discussed as follows:   

Veil Concealment Principle: This is where the courts disregard the legal person of the Company for the purposes of establishing the effective or economic holder (of an economic rights). Here the shareholder can be seen, but in regard to which one would expect ordinary legal and trust law rules to yield an identical outcome in the court of common law. However, in practice, the court uses this principle of veil piercing but doesn’t pierce at all, because there’s not enough material to justify piercing the veil with more severe consequences. 

The Evasion Principle: This is used as a last resort when some person or organisation attempts to put an organisation through a gap in rules in order to defeat some legal rights; a remedy only usable if there was otherwise adequate recourse through agency law, a contract or the establishment of a trust but failing; only when failure occurs could such a procedure even be initiated, and then one to achieve last resort results. Therefore, The UKSC declared that a company may only be pierced for the avoidance of the consequences of obligations that exist or are sought to be imposed. In this specific case, since none of the companies incorporated ‘to avoid existing legal obligations’, none of them may be pierced. 

The Court then added that S24 MCA’s application to corporate entities is limited in that family court. Judges have no discretion to pierce corporate veils to facilitate spouse recovery of assets which they are unable to access via traditional property and trust rules; such assets need to be beneficially’ entitled to on conventional account of the relevant facts and applicable property rules, and, in case the parties acted with a lack of candour with disclosure, adverse inferences will be made which could result in an investigation of resultant (unregistered equitable ownership) trust. Since all six of the relevant UK Companies paid no money at all for the six property holdings, the Judge drew the inferences required by such’ conduct’ and concluded it held all six properties on the resulting trust for the benefit of Husband.

VII. DECISION AND RATIO DECIDENDI DECISION

The Supreme Court decided the appeal with the delivering of the order stating that the order by the Court of Appeal needed to be set aside. A judgment order was issued that the original order by the judge at the trial was to take effect, in order to make an order directing Petrodel Resources Ltd to handover the possession of the 7 UK residential properties to the wife with legal effect. 

Ratio Decidendi: 

• Limit of the Evasion Principle: It cannot be used to circumvent a pre-existing specific legal obligation or constraint. In other words, if an interposed company does so by colourable means, or by artificial design, it does not mean a family judge can pierce the veil and grab that asset; since veil piercing will only be allowed in circumstances where there has been deliberate evasion of a direct legal obligation. The veil cannot be used to evade something ‘that is to happen in the future’.

• A Last Resort: It is an exceptionally rare remedy which should only be used when it is a court of last resort, for example, if other means of dispute resolution like agency, contract or trusts are not appropriate. It can’t be substituted for other established means.

• MCA 1973 Constraints: Section24(1)(a) of the MCA 1973 provides for no room of discretion for the judge to take property belonging to the legal domain of a separate legal entity and attach it to the beneficial ownership of a spouse during a conventional property adjustment order in a divorce proceeding. To claim to be able to pierce the veil, one must demonstrate having a beneficial title under the conventional principles of law.

VIII. CRITICAL ANALYSIS 

8.1 Significance of the decision

This landmark decision in the UK can be credited with significantly reconfiguring the standards of veil piercing jurisdiction, by providing definite boundaries and two principles which are only ‘of last resort and were not intended to foster injustice by reason of an abuse of corporate independence’. In this judgment, the court held onto their precedent set by previous judgments that a company is the same as its member for liability purposes unless it’s an exception which would be, passing through the veil and this should never be a tool for family judges to loot and plunder a spouses assets from under their noses with use of the already established adverse inference rules under Section24(1)(a) of the MCA 1973

8.2 Implications: 

1. Commercial certainty: The judiciary’s decision will allow international firms confidence in business with the UK, because their separate financial legal status shall remain undeterred and uncompromised.
2. Family law: This judgment is very reassuring in that, it has given family courts the ability to use reverse inferences which come from resulting trusts in order to recover matrimonial assets that ‘are being concealed,’ thereby fulfilling their task of delivering ‘justice in a bid to attain outcomes determined by their judgments’ from ‘defiant spouses’. Future common law jurisdictions: This judgment had influenced other cases. For example, it led to some cases in Nigeria. 

8.3 Criticisms: 

1. Artificiality of the “concealment” & “evasion” argument: In distinguishing between ‘concealment’ and ‘evasion’, there appear to be similarities. They are practically the same in their application; to both arguments the court aims to unveil the truth behind a colourable transaction.
2. Evidential burden: The wife is saddled with most of the burden to establish adverse inferences. It’s to the point of being made to justify inferences on a scale with adverse inferences expected from a less resourceful spouse.
3. Commercial pragmatism: The court succeeded in safeguarding the financial rights of the wife, while upholding the core principles of company law. 

CONCLUSION

The case of Prest v Petrodel Resources Ltd, is undoubtedly one of the most logical and righteous judgments from the Supreme Court of UK as it simultaneously upholds the separate legal entity concept of a corporation whilst denouncing any corporate structure that stands to operate in a manner to avoid its responsibilities and hide behind its separate identity. The court has clearly drawn the lines on when veil piercing is appropriate, it has strongly established that family judges are not granted with the legal authority in a typical divorce to pass through the veil using section24(1)(a) MCA 1973 but are required to follow alternative equitable principles and principles such as adverse inference rules.

REFERENCE(S):

Cases:

• Caparo Industries plc v Dickman [1990] UKHL 2, [1990] 2 AC 605 
• Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 
• Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA) 
• Jones v Lipman [1962] 1 WLR 832 (Ch) Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 
• Salomon v A Salomon and Co Ltd [1897] AC 22 (HL) 

Legislation:

• Matrimonial Causes Act 1973, Section 24(1)(a)

Secondary Sources:

Books:

• Gallagher L, ‘Piercing the Corporate Veil in the Supreme Court: Prest v Petrodel Resources Ltd’ (2014) 77 (1) Modern Law Review 107 Tan C
• Veil piercing redefined: Prest v Petrodel Resources Ltd’ (2013) 25 (3) Singapore Academy of Law Journal 645