Petrodel v Prest: corporate law v family law in the Supreme Court

Divorce|Family Law|News|March 4th 2013

A landmark divorce battle that pits family law against corporate law goes to the Supreme Court tomorrow in the case of Prest v Petrodel.

Yasmin Prest is to appeal to the Supreme Court tomorrow over a ruling that her former husband Michael Prest need not transfer 14 properties to her as part of a divorce settlement. The properties in London and the Caribbean are owned by companies in the Petrodel Group, wholly owned and controlled by Michael Prest.

In an initial hearing at the High Court in October 2011 Mr Justice Moylan judged the properties to effectively be the assets of Mr Prest. He subsequently ordered him to transfer the properties to Mrs Prest as part of their divorce settlement. Mr Justice Moylan is a Judge of the Family Division of the High Court.

However, when a case reaches the Court of Appeal, the judges may not solely come from family law. And sure enough this case came up before two heavyweight non-family judges, sitting alongside the most senior family judge, Lord Justice Thorpe.

The judgement of Mr Justice Moylan was overturned by that Court of Appeal in October 2012. Lord Justices Patten and Rimer found in favour of Petrodel, and found that Mr Prest was not in a position to freely dispose of the company’s assets and ruled that the company was a separate legal entity. Both judges have a background in the Chancery Division of the High Court, dealing with commercial affairs.

One of the first things a student learns about in company law is the “veil of incorporation” that effectively separates the people who own and run the company from the company itself. Thus, if a company goes into liquidation, the assets of the company go with it, but the directors assets remain untouched, unless there has been misconduct or the directors have given personal guarantees.

This “veil of incorporation” which shields the company’s creditors from the directors applies in reverse too. So, as the creditors of the company cannot attack the directors, the company assets cannot be attacked by a director’s wife. Even if the director owns all the assets and in reality controls the company.

I have previously commented on the Prest v Petrodel case and the inherent conflict between family and corporate law in these proceedings:

“Prest v Petrodel has come before the Supreme Court because Court of Appeal judges have applied commercial principles to what is a family law case. The judges’ decision to reverse the previous High Court ruling, in which Mr Prest was ordered to give his former wife 14 properties belonging to his company Petrodel, demonstrates the extent to which commercial law does not sit comfortably with family law.

“The Supreme Court is faced with a conundrum: should company law or family law prevail in this case? Under corporate law, a company’s assets are not owned by its shareholders. There is a ‘veil of incorporation’, which separates shareholders from company assets. By contrast, family courts consider ownership within the definition under Section 24 (1)(a) of the Matrimonial Causes Act 1973, as ‘assets to which a spouse is entitled’, which includes the assets of a company he controls.”

I have also discussed the potential consequences of the Prest v Petrodel ruling:

“If the Supreme Court rejects the wife’s appeal and decides that Mr Prest does not have to give her the Petrodel properties, there could be significant financial implications for other divorcing couples. But if the Supreme Court allows her appeal, there are potential ramifications for companies. It’s tricky, but I note that the court comprises five commercial judges and two family judges. I am not confident that family law will win out, when put to the test like this against such a fundamental principle of corporate law, but we shall have to wait and see.”

So what will the Supreme Court do? Will it follow the High Court family law judgment or the judgment of the Court of Appeal which set it aside, holding the company’s assets are inviolable?

Or will the Supreme Court Judges look for a third way to resolve the conundrum?

I wonder whether there may perhaps be a potential solution. The Court of Appeal was not asked to deal with the issue of this particular director’s potential impropriety and control of the company in the case. If there has been any impropriety (which Mr Justice Moylan found there had not) but which may yet be open to the Supreme Court to further define, it may be the saving grace, and the outcome will still be entirely consistent with the principles of both commercial and family law. Let’s wait and see whether this aspect features and if so, whether it just might provide the answer.

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  1. Jeremy Newman says:

    One possible solution would be for the the ex to be awarded some of the shares in the companies, with a compulsion for a dividend in specie (being the relevant houses) being attached as the sole value of the shares. This should not then offend either the corporate veil or family law.

    Just a thought.

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