Divorce: Protecting Assets in the Family Business

The recent landmark judgment by the Supreme Court in the case of Prest v Petrodel Resources Ltd & Others (2013) is expected to have an impact on any spouse pursuing a share of a family-owned business.

The Petrodel case involved a very wealthy international oil trader, Mr Prest. The assets involved 14 properties in various countries, held by a number of companies, including Petrodel Resources and Vermont. 

At the High Court hearing in 2011, Mr Justice Moylan ruled that the properties were effectively Mr Prest’s assets and ordered him to transfer the properties to his ex-wife as part of the settlement process. However, Mr Prest appealed and the Court of Appeal judges Lord Justices Patten and Rimer found in favour of his company Petrodel, saying that the High Court had been wrong to find that Mr Prest’s sole ownership of the property-owning companies made him entitled to freely dispose of their assets.

Mrs Prest appealed to the Supreme Court and the appeal was heard in June 2013. In the judgment of Lord Sumption, the Supreme Court held that the companies (PRL and Vermont) were the legal owners of the properties in question but that Mr Prest had remained the beneficial owner under a resulting trust. The Supreme Court reinstated the judgment of the High Court and ordered that the companies transfer the relevant properties to the wife.

Following Petrodel, a company might be ordered to satisfy a financial order on divorce against the husband or wife in the following circumstances:

1. Where the company might be regarded as holding the properties on trust for the husband or wife in the particular circumstances of the case (i.e. the party has a beneficial interest in the assets); and
2. Exceptionally and in very limited circumstances, the court is at liberty to disregard the corporate veil in order to give effective relief where a party has deliberately evaded an obligation or frustrated its enforcement.

The court will then use its powers under Section 24 of the Matrimonial Causes Act 1973 to order such transfers of property where necessary.

How to Protect Company Assets

The decision in Petrodel will have an impact on the assets of companies controlled by a party to divorce proceedings.

The Supreme Court was clear that the courts will not pierce the ‘corporate veil’ unless there are extraordinary and very limited circumstances. However, the ordinary principles and presumptions of equity will apply, especially relating to gifts and resulting trusts.

Whether assets legally owned by a company are beneficially owned by the company’s owner and controller will depend on the specific facts of a case. The court will look at the degree of control the party has over the assets and look to establish the true beneficial owner when considering whether they will form part of the matrimonial pot to be divided between the parties.

In Petrodel and in the subsequent case of M v M in August 2013, the purchase funds for the properties came from the husband’s personal finances and one of the properties held by the company was the matrimonial home. It may not be so easy to determine where purchase funds have come from in other cases and there may be genuine reasons for purchases, such as tax planning advice.

A party contemplating transferring or acquiring property in the name of a company should seek advice on the structure of the company and transaction, for example whether to fund by loan or capital subscription. If divorce proceedings are later issued, it is important to comply with full financial disclosure in order to ensure the court does not draw adverse inferences