Clash Between Company and Family Law to Be Resolved – Petrodel Resources Ltd
One of the great strengths of the common law system is its ability to grow through the dialectical process of judicial determination of conflicting positions. This feature is absent in dispute resolution mechanisms such as mediation.
A perfect illustration of the growth of the common law will be the determination by the UK Supreme Court of an appeal to be heard on 5 and 6 March 2013. The case involves a decision in which the English Court of Appeal sharply rejected the practice – adopted and developed in the Family Division over 25 years – of treating the assets of a company that is the alter ego of one spouse as available for the purposes of making a capital award to the other spouse on divorce.
The majority of the Court of Appeal held this practice amounts to a separate system of legal rules unaffected by the ordinary principles of property and company law. The court bluntly directed, “That must now cease.”
In the words of the dissenting appeal judge, if the court concludes that those Family Division cases were wrongly decided this presents “an open road and a fast car” to the money maker in big money matrimonial cases.
The case is Petrodel Resources Ltd & Ors v Prest & Ors [2012] EWCA Civ 1395. The husband and wife, both in their fifties, separated after 15 years of marriage. They had four teenage children at the time of separation. The husband’s background was in international oil exploration and trade. The husband’s holdings were through the Petrodel group of companies and were extremely complicated. The trial judge found the husband flouted his duty to give full disclosure of his finances deliberately, so that it was not possible to determine the value of Petrodel .
The shares in the company at the head of the Petrodel group – a Nevis corporation – were held on trust for the husband, among others. The husband did not own any shares in the subsidiary companies which owned properties.
The trial judge found the husband was able to change the Petrodel structure and distribute wealth to himself as he wished. However the trial judge specifically declined to find he could pierce the corporate veil: the husband’s ownership and control alone were not sufficient to justify this, and there had been no impropriety linked to the use of the company structure to conceal assets. Drawing an adverse inference, the trial judge concluded that the husband’s property available for distribution to the wife under the applicable statute was roughly $60 million. The trial judge made a capital award to the wife of approximately half of that amount. His order required the husband to cause the subsidiary companies to transfer assets to the wife to satisfy this award.
The subsidiaries appealed.
In reversing the trial decision the majority of the English Court of Appeal applied strict principles of company law . They returned to its basic principles holding that the assets of an incorporated company belong beneficially to the corporation, and not to its shareholders.
The majority thoroughly rejected the notion that family justice should be regarded as different from any other kind of justice. Relying on the House of Lords 1897 decision in Saloman the majority held:
It is not open to a court, simply because it regards it as just and convenient , to disregard such separate entity and to appropriate the assets of a company in satisfaction either of the monetary claims of it’s corporator’s creditors or of the monetary ancillary relief claims of its corporator’s spouse. …A one man company does not metamorphose into the one man simply because the person with a wish to abstract its assets is his wife.
Watch this space.
Shouldn’t the family court force a sale of the company and divy up the value of the shares between the spouses? It’s permitted in Canadian law and there’s a specific tax exemption for this type of roll-over in the Income Tax Act. One of my last files in active practice dealt with the issue.
Granted, my situation was fairly simple, but I would think that the principle would apply accross the board to all corporate holdings. Maybe U.K. law doesn’t properly address this situation as clearly, the capital gains tax hit could otherwise be prohibitive. But there’s no way in my view that the companies involved or subsidiaries should be selling assets and sending cash to a divorcing spouse. That makes no legal sense whatsoever.
This is an interesting case, but the slap at mediation was gratuitous. In this case the husband had done a lot (or his family before him and around him had done so) to conceal his assets. The court did not do better. It does not sound as if the spouses could have arrived at a mediated solution – but if they had, the wife might have got more money than the Court of Appeal has given her.
What taking the case to court instead of mediation has done is to provide the fast car and the open road to parties who for the past quarter century have been pressed to settle with all of their assets. I don’t see why that is a preferable method of resolving the disputes.
In the longer term, i.e. apart from the instant case, the best solution to the conflict between company law and family law is likely to lie in Parliament and not in the Supreme Court.