THE CORPORATE ENTITY AND FAMILY FINANCES

 “Family Law” journal recently published an interesting analysis of the case of PREST V. PETRODEL

The issue that the Supreme Court had to wrestle with in this landmark decision was whether the corporate veil could be pierced in proceedings for financial remedies under the Matrimonial Causes Act 1973.

 An incorporated company is an independent legal entity.  It is therefore separate from those persons who have involvement with it.

As a separate entity the company of itself can hold property and engage in transactions as an individual. The real person who has involvement in a company and a legal entity itself of the company is a division that is protected by ‘the corporate veil’.

Wrongdoing or in propriety has previously been held to be a mechanism by which the corporate veil can be lifted.  In order to achieve this the wrongdoer must have both control of the company and be responsible for the impropriety.

Prest v. Petrodel investigated whether proceedings for financial orders following divorce fell within this general approach or not.

The Supreme Court answered this question in the negative.  The MCA allows the court to redistribute property to which a party is entitled.  The essence of the corporate structure is that an individual is not entitled to the assets within it as they are owned by the company.

This would not be the case if the company had been set up as a sham or the assets had been placed in it intentionally to avoid liability under the MCA.  In these circumstances the corporate veil could be lifted.

In the Prest case however the family simply arranged their finances in all or part using company structures.  The MCA in these circumstances does not offer any way to access those assets.

This is not an end in itself as such assets are not ignored by the family court.  When conducting its assessment of the total asset pot in order to determine orders under Section 25(2a) the court is required to have regard to the income, earning capacity, property and other financial resources of each party.  The family Judge will include assets held in companies in this assessment when identifying the overall wealth of the family before the court.

The Prest appeal will not impact upon the large majority of divorce cases as resolutions will be found such as transferring share holdings from one spouse to another.

It is true however that whilst a spouse can be shown to have deliberately used corporate structures to attempt to avoid liability to the other spouse under the MCA, no amount of this attempted evasion is within the power of the court.  In most cases however the court will not be in a position to make orders against companies which are controlled by the wealthiest spouse.

In summary the well advised duplicitous spouse will find Prest a useful decision to ensure that his or her assets are safety hidden within a corporate entity.

Bhatia Best Family Department.

21/08/2013