Can divorcing spouses protect assets by citing company law?

ANALYSIS:All eyes are on the outcome of an important British case which is set to test the law

Can the corporate veil be pierced in family law proceedings? In other words, can the courts ignore the principle that a company and its shareholder are separate legal persons, and make direct orders against company assets?

Lawyers in the UK are closely watching the Prest case, due to be heard by the Supreme Court in March. The landmark case centres around the question of whether companies belonging to spouses can be ordered to pay assets in a settlement.

In the UK, as a result of the 1984 case of Nicholas v Nicholas, it has long been held that the family courts can transfer assets to a spouse, providing such a move does not unreasonably affect anyone else’s interests.

In line with this, the High Court ruled that properties held by companies owned by oil tycoon and Petrodel Resources founder Michael Prest should be transferred to his estranged wife Yasmin in divorce proceedings.

That ruling was overturned by the Court of Appeal, on the basis that the assets belonged to the companies, which are separate legal entities to Mr Prest. In order for the corporate veil to be pierced there must be some skulduggery.

The Court of Appeal said: “The separate corporate entity of a company is a fact of legal life that all courts are required to recognise and respect whatever jurisdiction they are exercising.” Only in exceptional circumstances, where impropriety is proven, could the corporate veil be lifted.

Brian Hutchinson, a senior lecturer in law at UCD, said it is a fundamental principle of company law that company assets belong to the company, not to the shareholders.

“The basic rule is thought to be very important; without it, it is thought that investment and commerce would be damaged because the whole raison d’etre of establishing a company would be lost.”

Mr Hutchinson said lower courts have felt justified in ignoring the separateness of the company in circumstances where it was being used as a fraudulent means of hiding or concealing assets.

“Such cases are very rare, perhaps even arbitrary, and the Court of Appeal has been keen on more than one occasion recently to place order on the situation by stressing and upholding the general rule; the Prest case is just another example.”

Exceptional cases

The exceptional cases arise where the shares in the company are held by only one or two shareholders, and then usually only where the company has been set up or substantially operated to take a transfer of assets which would otherwise be due to the shareholders, according to Mr Hutchinson.

Family law solicitor Eugene Davy said decisions in English courts are very “influential” in Irish courts, and even though Ireland is a separate country, it often follows UK precedent.

However, he said family law was applied differently in both countries, with dependent spouses tending to do better in the UK when it comes to property distribution, while dependent spouses do better in Ireland in terms of maintenance.

Mr Davy, a partner with Hayes Solicitors, said the Irish courts can direct a husband or wife to transfer a company shareholding to their partner in a divorce case, but this is usually only done after careful consideration.

“If the husband was in business with his father and brothers, the court would most likely see it as impractical to transfer his shareholding to his spouse. Often a valuation of a company shareholding is given in court, and then the court will transfer other assets to the partner in recognition of the value of that shareholding,” he added.

Under Irish law, spouses must list all their assets including company shareholdings in divorce cases. All assets including the company shareholding can then be divided up.

In fact, the Irish courts have already visited the issue in the case of Bd v Jd. In that case, the court ruled the corporate veil could be pierced because there was no prejudice to any third party in doing so, and everyone was happy with making provision for the wife from the assets or earnings of the company.

However, in his Supreme Court judgment, Mr Justice Adrian Hardiman noted: “Lest the case be regarded as a precedent for proceeding in this way in other, quite different, circumstances, I would remark that the interests of the company itself and of other persons interested in it in any capacity might, in a proper case, require consideration.”

“It must not be forgotten that the company is, in law, a person distinct from its shareholders,” he added.

However, critics argue the Court of Appeal Prest judgment will enable wealthy spouses to protect their assets in divorce disputes.

In her appeal to the Supreme Court, Yasmin Prest will have the backing of a dissenting opinion from one of the Court of Appeal judges, who said Mr Prest’s invocation of company law to protect his assets should not have been allowed to “defeat the Family Division judges’ overriding duty to achieve fairness”.

Mark Pery-Knox-Gore a partner in the commercial department of Beauchamps solicitors, believes the Irish courts would most likely follow the UK Supreme Court if it holds that the corporate veil can’t be lifted in this case.

“Company law is always developing and keeping pace with the business world. That said we would probably follow the idea that there is just one law, and it cannot be overruled to suit the court’s perception of what is a fair result. The courts here have been reluctant to lift the corporate veil except in limited and well-defined circumstances.”