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03 September 2013

Can you keep company assets out of the divorce court?

In June, the judgment in the Supreme Court case Prest v Petrodel made headlines across the national press. Here, B P Collins’ family and commercial lawyers discuss its potentially wide-ranging implications for divorcing couples and family businesses

When Yasmin Prest divorced her ex-husband, millionaire businessman Michael Prest, she was awarded a £17.5 million settlement in the form of several multi-million pound properties.

Mr Prest, founder of Petrodel, a Nigerian oil firm, refused to transfer the properties, claiming that as they were held by his offshore companies and not by him, they could not be counted among his assets.

The couple had married in 1993 and lived mainly in London, although they also had properties in Nigeria and the Caribbean and enjoyed a luxury lifestyle. While Mr Prest claimed to be worth around minus £48 million, his estranged wife said his wealth ran into the “tens if not hundreds of millions”.

In October 2012, the Court of Appeal agreed with Mr Prest, saying the earlier High Court judge had had no jurisdiction to order the transfer of property, despite the fact that the companies were owned and controlled by him.

Mrs Prest took the case to the Supreme Court and, in what was widely hailed as a landmark judgment, seven judges allowed her appeal, reinstating the judge’s order in relation to the properties.

It found that the companies held the properties on trust for the husband and, as he was beneficially entitled to them, he could be ordered to make the transfer.

During the proceedings, Mr Prest was criticised for failing to be frank about the true extent of his wealth and, in his judgment, Lord Sumption, said his conduct had been “characterised by persistent obstruction, obfuscation and deceit”.

Lord Sumption warned that the courts could and would look behind complex corporate structures to expose those which are “simply a sham” to hide wealth.

What does it mean for me?

In its decision, the Supreme Court confirmed that the English family courts – like other courts – except in very extreme circumstances, cannot pierce the corporate veil, a legal concept which separates a company or corporation from its shareholders.

Sue Andrews, partner and leader of the family practice law group, says: “The ruling was claimed as a landmark case, however I disagree.  It did not create new law – the outcome in that case was fact specific.  Evidence had been filed by Mrs Prest to support her case that although Mr Prest had used his companies to hold the legal title of properties, the beneficial ownership belonged to him.

"Neither Mr Prest nor the companies, who had been joined to the proceedings, complied with orders for the production of documents to explain the source of the funds used in the property purchases and so the court decided that it was therefore fair to conclude that the lack of disclosure would reveal that the wife’s case was correct and agreed that on a reasonable balance of probabilities the companies held the properties for the husband and, as he was beneficially entitled to them, he could be ordered to transfer them to his wife.”

This case is another warning to spouses who fail to provide full and proper disclosure.  Where a spouse is uncommunicative the family judges are entitled to draw on their experience and take notice of inherent probabilities to determine what someone might be concealing.

The outcome also underlines the importance of getting the structure and processes right when it comes to family-owned businesses.

Simon Deans, partner in the corporate and commercial group, says: “This decision does not change company law, but it demonstrates the need, where assets are held within corporate structures, to properly document all transactions and for shareholders and directors to distinguish between themselves and their companies at every stage.

“The judgment emphasises the need where assets are transferred between individuals and corporate structures to not only take good advice, but also to ensure advisers are aware of the full context in which each transaction is occurring. It also sends a salutary message that failing to engage with any judicial process is unlikely to work favourably."

There are, says Simon, a number of steps which companies can take to limit their potential exposure if divorce could affect a sole or majority shareholder, now or in the future.

These include distinguishing between the individual’s roles as a director and a shareholder; ensuring there is real commercial value in every transaction involving the company, thus paying fair value for the acquisition of assets; and having proper paperwork such as minuting directors’ decisions, spelling out the tax advantages and the reasons behind commercial transactions.

In addition, where an individual who is already an executive shareholder is planning to marry, Sue advises considering a prenuptial agreement in order to record the understanding of both future spouses that any company assets are to be excluded from consideration in the event of a subsequent divorce.

“What this demonstrates is the importance of working with a legal team which has expertise in both family and company law,” added Simon. “Given our joint knowledge, we can help ensure the best possible outcome for anyone who is concerned that their company assets may be vulnerable in the event of a divorce or other relationship breakdown.”

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