06th March 2013
Protecting a business in Divorce — will the divorce courts pierce the corporate veil?
For a business owner faced with divorce, sorting out a financial settlement with their spouse can be a particular challenge as it can ultimately threaten the future of their business.
Usually shares in the business would need to be valued and taken into account on divorce but a separated spouse of a business owner can be very mistrusting of their husband or wife over the value of their business and their access to the assets within the company.
There have been a number of divorce cases in recent years which have involved “piercing the corporate veil” ie looking behind the label of a company to find out who, in reality, is in control of its assets and whether the assets can be sold to realise cash for a divorce settlement or transferred to a spouse.
A recent case of Petrodel Resources Ltd .v. Prest has again highlighted these issues. The case was heard before a High Court Judge but his decision was appealed with the Court of Appeal allowing the appeal and overturning the High Court Judge’s original decision. The wife has again appealed and the case is shortly to be heard by the Supreme Court. The decision could have far reaching implications for company owners in the event of a divorce.
About the Case
The husband was the founder and ultimate owner of the Petrodel Group, an oil exploration and trading company. He did not provide proper disclosure of his shareholding during the proceedings so the District Judge could not therefore properly determine the value of the company. The Judge was entitled to draw adverse inferences against the husband because of his lack of disclosure and decided that the company was worth at least $60 million.
The company owned various properties but a court can only order the transfer of properties to a wife where the husband is beneficially entitled to the property. This means that even if the legal title to the property is not in the husband’s name, if it can be shown that he is entitled to it, the court can still order the property to be transferred.
The High Court Judge decided that the husband was entitled to the properties owned by the company and so ordered that some of them be transferred to the wife. The company appealed the decision and the Court of Appeal over turned the High Court Judge’s decision on the basis that a person is the sole owner and controller of a company, but it doesn’t mean in reality that they own the company’s assets. A company is a legal entity and the company owns the assets. The Court of Appeal said that to approach it in any other way undermines the fundamental basis of company law.
The Court of Appeal did say that there are a limited number of circumstances where a shareholder would be seen as the beneficial owner of the assets of the company. These are:
- Where the owner/controller of the company uses the separate identity of the company for improper purposes for example transferring properties into a company to try to put them beyond the claim of a spouse.
- Where the owner /controller of the company has transferred assets to the company on a bare trust or as a nominee for himself. This means that the asset is transferred in title only but the owner/controller of the company still retains full control over the asset.
In the past the family courts have decided that if a party to a marriage has treated company assets as their own, they can treat those assets as the party’s property for the purposes of the divorce settlement. The court would then make an order against the husband or wife company owner to pay an amount in the expectation that they have the financial means to meet the requirement.
The Supreme Court is due to hear the wife’s appeal in early March and this will determine whether the final approach will be to permit the transfer of company assets to the other party or not. We will report as soon as the judgement is delivered.