Prest v Petrodel

Resources Ltd & others [2013] UKSC 34

Prest v Petrodel has something for almost everyone: appalling behavior, a glimpse into the lives of the fabulously wealthy and a diverse range of legal issues appealing to corporate, insolvency, trusts and family lawyers alike.

Such has been the extent of the publicity surrounding this case that I will only briefly summarize the background facts in what is undoubtedly one of the more notable appeals to be heard before the Supreme Court of England & Wales this year.

Mr. and Mrs. Prest married in 1993, Mr. Prest a wealthy oil trader. Mrs. Prest petitioned for divorce in March 2008. Mr. Prest’s conduct of the proceedings that followed did not impress either Justice Moylan at first instance, or the Supreme Court. Lord Sumption in the Supreme Court judgment refers to a “long history of successive orders of the court which were either ignored or evaded.” 

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Despite Mr. Prest’s evasiveness, at the final hearing in November 2011, Justice Moylan did the best he could on the material available, assessing Mr. Prest’s net assets at £37.5 million. He ordered the transfer of the £4 million matrimonial home in London held by Petrodel Resources Ltd (PRL) to his wife, free from mortgage or other debts, as well as making a lump sum payment to her of £17.5 million, plus £24,000 a year and school fees for each of their four children. Mr. Prest was also ordered to pay his wife’s costs, including a payment of £600,000 on account. Three of Mr. Prest’s companies, PRL, Vermont Petroleum Ltd (VPL) and PRL Upstream Ltd (Upstream) were ordered to be jointly and severally liable with Mr. Prest for 10 percent of his wife’s costs, having been similarly evasive during the proceedings.

To go some way to satisfy the lump sum order, Justice Moylan ordered Mr. Prest to procure the transfer to his wife of seven U.K. properties owned by PRL or VPL, both companies wholly owned and controlled by him.

Described by Lord Sumption as “the distinctive feature of the judge’s approach” Justice Moylan found that he had no grounds to pierce what is known as the “corporate veil” of the companies to reach the assets which they held, because he was not at liberty to disregard the separate legal personality of a company without evidence that it was being used for an improper purpose.

He did however find that the matrimonial home was held by PRL on trust for the husband, thus allowing him to order PRL to transfer that property to Mrs. Prest. He did not make the same finding about the other properties, using instead what he regarded as his jurisdiction under s24 of the Matrimonial Causes Act 1973 to order their transfer.

The Court of Appeal allowed the appeal by PRL, VPL and Upstream against Justice Moylan’s order. Its decision was not unanimous. Lord Justice Thorpe, interestingly the only former judge of the Family Division on the tribunal, disagreed with both of his brother judges and defended Justice Moylan’s approach.

He found that: “Once the marriage broke down, the husband resorted to an array of strategies, of varying degrees of ingenuity and dishonesty, in order to deprive his wife of her accustomed affluence. Among them is his invocation of company law measures in an endeavor to achieve his irresponsible and selfish ends. If the law permits him so to do, it defeats the family division judge’s overriding duty to achieve a fair result.”

Lord Justice Rimer was equally vociferous in his opposing view, finding that “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,” in doing so describing Justice Moylan’s reasoning as “heretical.” Mrs. Prest was granted leave to appeal to the Supreme Court.

Mr. Prest, perhaps unsurprisingly, played no part in the appeal; only the three companies caught by Justice Moylan’s original order, PRL, VPL and Upstream did so. By the time of the Supreme Court hearing in March 2013, only the matrimonial home had been transferred to Mrs. Prest but in breach of the court’s order, was still subject to a pre-existing bank charge. Other than paying school fees for the children, the husband had not complied with any other part of judge Moylan’s order and as Lord Sumption concluded, had “shown no intention of doing so if he can possibly avoid it.”

As Mrs. Prest argued, unless the seven properties held by the various U.K. companies were transferred to her, the chances were that the lump sum order would remain wholly unsatisfied.

For the purposes of this article, we will confine our examination of the case to two of the main points at issue before the Supreme Court.

Can the matrimonial courts in England & Wales, when making a financial order on divorce, have direct recourse to the assets of companies by piercing the corporate veil?

If not, can a company be regarded as holding the assets as trustee for the husband and if so can the court direct provision out of them?

In an exhaustive analysis of the cases, Lord Sumption concluded in answer to the first question that there are in essence only two instances in which the corporate veil can be pierced – where there is deliberate concealment or evasion. He summarized his conclusion in this way:

“… where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control … The court may then pierce the corporate veil for the purpose … of depriving the company or its controller of the advantage they would otherwise have obtained by the company’s separate legal personality.”

This principle will only apply in a limited number of cases “where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company.”

In this case, PRL, VPL and Upstream had been incorporated and the properties acquired by them long before the marriage had broken down. There was therefore no evidence to support an allegation that Mr. Prest had interposed the companies in order to frustrate his obligations to his wife. Accordingly, Lord Sumption concluded that the court was not entitled to pierce the corporate veil and treat the properties as belonging to Mr. Prest.

The answer to the second question was, however, yes: The court upheld Mrs. Prest’s appeal that the properties were held on resulting trust for Mr. Prest by the companies and could be transferred to her in part-satisfaction of the lump sum order. This finding was based primarily on the court’s endorsement of the long-established principle that it is, in certain circumstances, entitled to draw adverse inferences from a party’s conduct in litigation.

Not only had Mr. Prest been roundly criticized for his evasive behavior and cavalier disregard for orders of the court by judges at each stage of the divorce proceedings, neither he nor any of the companies disclosed any material documentation relating to the purchase and ownership of the properties in question.

Lord Sumption summed up Mr. Prest’s conduct as “characterized by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders”, going on to find that “a good deal therefore depends upon what presumptions may properly be made against the husband given that the defective character of the material is almost entirely due to his persistent obstruction and mendacity.”

Lord Sumption warned against granting “a licence to engage in pure speculation” but did hold that “judges exercising family jurisdiction are entitled to draw on their experience and to take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing.”

The court undertook a thorough examination of such facts as were before them and concluded that the properties were held by the companies on resulting trust for Mr. Prest. In doing so, Lord Sumption warned that: “Whether assets legally vested in a company are beneficially owned by its controller is a highly fact specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts.”

This is an important point. Mr. Prest’s conduct was particularly egregious, leading perhaps inevitably to the conclusion that he, and the companies which he controlled, had something to hide, namely his beneficial ownership of the properties. Further, where one person is regarded as controlling a company and there is no obvious link between the asset held by it and the day to day business of the company, it will be all the more important to ensure that proper documentation is put in place to evidence the terms on which the property is transferred to and how it is to be held by, the company.

Directors of companies faced with similar enquiries will have to consider carefully with their advisers what position to take on disclosure of information and whether silence really is the best tactic to employ. 
 

 

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Morven McMillan

Morven is a partner based in Maples and Calder's Cayman Islands office, where she is head of the Cayman Islands Trusts group. Her expertise includes contentious and non-contentious international trusts and private client work.

 

Morven McMillan
Partner
Maples and Calder
Cayman Islands

T: +1 (345) 814 5356
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    morven.     mcmillan@maplesandcalder.com

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