Petrodel and others v Prest and others: "That must now cease"

Family lawyers and company lawyers alike will be anxious to see what the Supreme Court makes of Petrodel and others v Prest and others [2012] EWCA Civ 1395. The former may see the decision of the Court of Appeal as a gross and unwanted interference with well-established principle and authority. The latter may see it as an obvious correction of an obvious and thoroughly unwarranted legal aberration.

The case was one of the “big money” divorce proceedings that the press have often picked up on in recent years. At first instance, the judge ordered the husband to transfer £17.5m from company assets to the wife on the basis that he was unlikely to transfer assets from his personal resources (see [2011] EWHC 2956 (Fam)). To reach that decision he had to “pierce the corporate veil” and find that the assets of the company were effectively those of the husband. In determining whether it was appropriate to do so he followed a long line of family law cases centred on the concept of fairness and a consequent desire not to allow a spouse to hide assets in a corporate structure.

On appeal Thorpe LJ, a highly experienced family lawyer, upheld the judge’s decision. But he was outnumbered by the other two judges – Rimer and Patten LJJ – both of whom are veterans of the Chancery Division. In the starkest of contrasts they carefully trawled through the long list of authority relied upon by the judge below and endorsed by Thorpe LJ – and demolished the cases one by one.

Rimer LJ gave the main judgment. He said the family authorities were “internally inconsistent, contrary to principle and wrong”, and that the normal rules about company assets applied. The company could not use its assets to satisfy the personal debts of the shareholders any more than the shareholders’ personal assets could be sought by the company’s creditors – as , of course, all company lawyers have known since the seminal Salomon v A Salomon and Company Ltd [1897] AC 22.

Patten LJ said the same thing in a few short paragraphs given in emphatic agreement with and endorsement of Rimer LJ’s judgment:

What needs to be emphasised is that the provisions of s.24(1)(a) of the Matrimonial Causes Act 1973 do not give the court power to disapply the established principles of legal and beneficial ownership or of company law. On the contrary, those principles were plainly intended to define the limits of the court's jurisdiction under the statute and Moylan J was wrong to give the words "entitled, either in possession or reversion" any wider meaning. Married couples who choose to vest assets beneficially in a company for what the judge described as conventional reasons including wealth protection and the avoidance of tax cannot ignore the legal consequences of their actions in less happy times.

I wish particularly to support Rimer LJ's criticism of the dicta in Nicholas and his view that these cannot be relied upon as a correct statement of the law following the decision of this court in Adams v. Cape Industries plc. They have led judges of the Family Division to adopt and develop an approach to company owned assets in ancillary relief applications which amounts almost to a separate system of legal rules unaffected by the relevant principles of English property and company law. That must now cease.

It rather reminds one of the story of the provincial solicitors informing the London solicitors on the other side of a transaction in the early 1930s that the Law of Property Act didn’t apply in their part of the world.

It is not difficult to see the competing points of view. For family lawyers a fair outcome to matrimonial property disputes is the overriding consideration, and if one party is a sophisticated businessperson the use of a company structure may be an obvious way of hiding assets. Both the desire to protect the more vulnerable and the need for a fair outcome in all cases point to the need for flexibility for the court. In turn that means the court will need to be able to look at the substance of a corporate structure rather than its form. Geraldine Morris has a detailed analysis on Halsbury’s Law Exchange from the family lawyer’s point of view.

By contrast, commercial law requires certainty and the last thing that businesspeople are interested in is some sort of assurance that, if things go wrong, their money will be divvied out according to what a judge thinks fair after the time and delay of complex litigation. Instead parties to a commercial transaction will wish to set down in the clearest possible terms who owns what from the outset and who will be entitle to what should the venture fail. One only has to look at how the English Commercial Court became the most respected and sought-after judicial tribunal of its type in Europe after the war. It has usually applied the Salomon principle, looked to the parties’ intention when construing a contract, and followed the precedent system so that contractual wording in one case would be interpreted the same way in the next. As a result Continental courts, with their willingness to imply all manner of terms or overlook the express wording of contracts in pursuit of fairness, saw almost all international business head to London.

I have to say I instinctively side more with the company lawyers on this one, partly because as Patten LJ said one cannot have one set of law applying to one set of proceedings, but also because it does not necessary preclude an unfair outcome. For a start courts could order transfer of shares from one spouse to the other, which would not offend Salomon, although it might not be as tidy a solution by any means. But it is not a straightforward issue by any means.

No doubt the Supreme Court will have to deal with it sooner rather than later, and it will be interesting to speculate where their sympathies will lie. Somewhat atypically the present court contains two family lawyers, Lady Hale and Lord Wilson, but even if both are chosen to hear an appeal raising the point they are likely to be outnumbered by Chancery and Commercial judges, who still comprise the majority of the court as they usually have done. The new President of the Supreme Court, Lord Neuberger, is a former Chancery judge too of course …