Corporate veil pierced in big money divorce

Posted: 14th June 2013

Supreme CourtIn a ruling of enormous significance to family and commercial practitioners, the Supreme Court has ruled in the context of a ‘big money’ divorce case that it is in certain very limited circumstances legitimate for family judges to 'pierce the corporate veil' in order to ascertain the true financial position of the parties.

The case concerned the position of a group of companies which was wholly owned and controlled by the husband and which owned a number of residential properties in the UK. The central issue was whether the court had power to order the transfer of those properties to the wife given that they legally belonged not to the husband but to his companies.

The court noted that, under section 24(1)(a) of the Matrimonial Causes Act 1973, the court may order that ‘a party to the marriage shall transfer to the other party…such property as may be so specified, being property to which the first-mentioned party is entitled, either in possession or reversion.’

At the first hearing, a judge of the Family Division had concluded that there was no general principle that entitled him to reach the companies’ assets by piercing the corporate veil. He nevertheless concluded that a wider jurisdiction to pierce the corporate veil was available under section 24.

That ruling was subsequently overturned by a majority at the Court of Appeal which ruled that the court had no jurisdiction to order the properties to be conveyed to the wife. In its decision, the court was critical of the practice of family judges of treating assets of companies substantially owed by one party to a marriage as available for distribution under section 24.

In unanimously allowing the wife’s appeal – albeit on grounds that had not previously been argued - the Supreme Court declared that the disputed properties vested in the companies were held on trust for the husband on the ground that, in the particular circumstances of the case, the properties were held by the husband’s companies on a resulting trust for him and accordingly fell within the ambit of section 24.

On a correct analysis of the authorities, the court held that that there was a principle of English law which enables a court in very limited circumstances to pierce the corporate veil. That principle applied when 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.

In such circumstances, piercing of the corporate veil was legitimate, but only for the purpose of depriving the company or its controller of the advantage which they would otherwise have obtained by virtue of the company’s separate legal personality. In most cases the facts necessary to establish such an advantage would disclose a legal relationship between the company and its controller giving rise to legal or equitable rights of the controller over the company’s property, thus making it unnecessary to pierce the veil.

In such cases, there was no public policy imperative justifying piercing the corporate veil. However, the court noted that the recognition of a small residual category 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 was consistent with authority and long-standing principles of legal policy.

That principle had no application in the present case because the husband’s actions did not evade or frustrate any legal obligation to his wife, nor was he concealing or evading the law in relation to the distribution of assets of the marriage upon its dissolution.

The court rejected arguments that a broader principle applies in matrimonial proceedings by virtue of section 24(1)(a). The section invoked concepts of the law of property with an established legal meaning which could not be suspended or taken to mean something different in matrimonial proceedings. Nothing in the statutory history or wording of the act suggested otherwise.

The first instance judge’s reasoning had cut across the statutory scheme of company and insolvency law which were essential for protecting those dealing with companies. It followed that the only basis on which the companies could be ordered to convey the properties to the wife was that they belonged beneficially to the husband, by virtue of the particular circumstances in which the properties came to be vested in them.

After examining the relevant findings about the acquisition of the seven disputed properties, the court found that the most plausible inference from the known facts was that each of the properties was held on resulting trust by the companies for the by the husband.