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Divorce and corporate assets

Matrimonial lawyer Zoe Bloom examines the implications for entrepreneurs and their advisers in Petrodel v Prest, the latest multi-million divorce case before the Supreme Court.

The Supreme Court decision in the divorce case ofPetrodel v Prestattracted enormous media interest, as the case had serious implications regarding the extent to which business assets could be protected ‘behind the corporate veil’ when agreeing the financial settlement in a divorce.

Shareholders, lenders, corporate lawyers and advisors, trustees, insolvency practitioners, auditors, wealth planners, independent financial advisors, accountants, tax lawyers and any individual who hold assets through corporate structures should take two minutes to consider the consequences of this case.

Mr Prest ran a complicated corporate structure which had a variety of underlying assets, including properties. As part of the original divorce settlement he had been ordered to hand over a number of properties, but he had argued that they were property belonging to the company and therefore not his to dispose of. The Court of Appeal agreed with him and Mrs Prest took the case to the Supreme Court.

The Supreme Court’s options seemed to be stark – either they would have to order that Mrs Prest take possession of corporate assets and in so doing pierce the corporate veil, whereby corporations have entirely separate legal entity to their shareholders, or they would have to order that she is not entitled to financial settlement from her 15 year marriage.

In the event, it took a measured approach without abandoning 150 years of corporate law. It seems probable that the seven judges (who provided a unanimous decision) started by agreeing that Mrs Prest needed to be provided for and worked backwards to determine how this could be achieved without upsetting the whole applecart.

In a valuable judgement, they achieved both goals ordering assets to be paid to Mrs Prest without piercing the corporate veil. However, a corporate entity, which can be shown to be holding assets on trust for a husband or wife, may be ordered to transfer those assets as a consequence of divorce proceedings. There is no easy test to determine when an asset is held on trust, so decisions will be based on the facts of each case.

In this case, it was found that the husband had unrestricted access to company assets and the companies were “effectively...the husband’s money box which he uses at will”. In addition, the assets had almost certainly been bought with the husband’s money – six of the seven properties were transferred to the companies before the companies had commenced trading.

A second important lesson is the importance of cooperating with the court in the disclosure of financial evidence.

Vital to this case there was a woeful lack of evidence from the husband, whose conduct was described by Lord Sumption as being ‘characterised by persistent obstruction, obfuscation and deceit and a contumelious refusal to comply with rules of court and specific orders’. When we had put away our dictionaries (‘contumelious’ meaning scornful or insolent), there was an almost comical account of a manoeuvre by the husband’s brother to obtain a Nigerian High Court order to prohibit the husband from engaging in the disclosure process.

The lack of cooperation by the husband undoubtedly cost him the properties (worth £17.5m). He refused to provide evidence or disclosure and without it, the Supreme Court was able to draw whatever conclusions it wished from whatever facts were available.

It is here that the warning arises. If decisions of this nature are to be decided on their facts, advisors must be absolutely diligent in ensuring that there are facts on which to rely and that those facts are backed up by evidence.

Planning is vital and care needs to be taken in preparing all documents relating to companies or trusts which hold assets with any chance of being ‘attacked’ in a divorce. This includes completion statements, trust deeds, letters of wishes, company documents, bank accounts, sources of credit and any other document or evidence which demonstrates that the property is not beneficially owned by anyone other than the company or trust. The clearer the picture presented to the court, the easier it will be for the court to find that the asset is held separately from the husband or wife who is a party to the divorce.

While considering what documentation can be provided to the court to assist them in their decision making process, we must also consider marital agreements. These may be pre- or post-marriage and should set out exactly what the couple’s intentions are in respect to any family assets.

Finally, this case has added to the growing history of case law which provide that economically dominant parties who lie, conceal and generally fail to be helpful during proceedings will be penalised. Most likely, that penalty will be in the form of a judge using their experience to decipher what the probable position is. Given what family judges are exposed to during their career, this is not a risk that any entrepreneur should be prepared to take.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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