Mr Toad, recently divorced, leaps into his luxury sports car, guns the engine and heads for the open road. The car and the open road were, according to a Court of Appeal judge, presented to Mr Toad by two other Court of Appeal judges as a result of the decision in the case of Prest, in which judgment was given on 26 October 2012. This article comes with a health warning, as the wife in the case has been given permission to appeal to the Supreme Court, so everything that follows may be rendered obsolete in the blink of an eye.
The courts’ powers to deal with finance and property on divorce are primarily contained in the Matrimonial Causes Act 1973. The power under intense scrutiny in the case of Prest was the power of the court to order one party to the marriage to transfer to the other party property to which the first party is entitled. So the court can only order a person to transfer a property if that person is “entitled” to the property in question.
Before the case of Prest, there was a clear path which had been followed by the Family courts when the property was owned not by the individual spouse but by a company. The approach adopted by the Family courts was broadly as follows:
- Had the property been placed in company ownership for wrongful reasons, eg to try to keep the property safe from a claim by the other party to the marriage?
- If the answer to the question in 1 above was “Yes”, then the courts would overturn the wrong-doing by what is known as “piercing the corporate veil”, which in effect gave the court freedom to ignore company law and to treat the property as being “up for grabs” in a divorce.
- If the answer to the question in 1 above was “No”, then the habit of the Family courts was to look at the reality of the ownership of the property by the company. The courts took the approach that if the company in question was in effect within the control and ownership of a party to the marriage, then the courts could make orders in effect ordering the company to transfer property to the other spouse. The courts were interpreting the word “entitled” very widely in order to reflect what they regarded as the reality of the situation. It is fair to say that this approach stretched to breaking point, and possibly beyond, an adherence to Company law. This was justified on the basis that a party should not be able to protect assets from a claim in divorce simply by virtue of the fact that the assets were owned by a company where, on the face of it and without getting bogged down in technical detail, the company and the party to the marriage were, in effect, one and the same.
In the Prest case, almost all of the properties were owned by the husband’s companies. The husband failed to engage properly in the legal process and was found to have been extremely obstructive so far as revealing required details of his circumstances was concerned. He was so disengaged from the process that he did not even pursue his own appeal to the Court of Appeal but left it to the companies to challenge the decision of the Family judge. The Family judge ordered the husband to achieve the transfer to the wife of properties which were actually owned by the companies as companies, and not by the husband as an individual.
When the case came to the Court of Appeal, it was heard by three judges, one of whom was a Family Division judge and the other two who were not. The path followed by the Family Division in a number of cases prior to Prest has been rendered inaccessible by the two-to-one majority decision.
So far as two judges were concerned, the position was clear and can be summarised below:
- The properties had not been put in the ownership of the companies for nefarious or dubious reasons, so there was no basis to pierce the corporate veil.
- Under Company law, properties owned by a company, unless clearly held on trust for another person or entity, were beneficially owned by the company and not by any one individual.
- It therefore inevitably followed from this reasoning that the court could not allow the original decision to stand as, under the Matrimonial Causes Act, the court could only order a transfer of property if the person required to do the transferring was entitled to the property in question.
Once two out of the three judges had decided that under Company law the husband was not entitled to the various properties, that was the end of the matter.
And so Mr Toad leaves the divorce court with all properties owned by companies in which he is the sole shareholder safe from Mrs Toad’s claims. He jumps into his fast car and races off down the open road. He has not a care in the world. There is not a cloud in his sky, although wait – what is that on the horizon? The Supreme Court lies ahead. Will that change anything? Only time will tell.
Marcus Price heads the Family and Divorce Law team at Colchester and Clacton Solicitors Thompson Smith and Puxon (TSP). Marcus can be contacted on 01206 217073 or by email on firstname.lastname@example.org