PREST V PETRODEL DIVORCE RULING - WHAT IT MEANS FOR BANKS AND BUSINESSES

15th July 2013

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Mr and Mrs Prest’s high profile divorce reached the highest court in the land last month, in the full glare of the media. Various companies owned and controlled by Mr Prest were ordered to transfer assets directly to Mrs Prest in satisfaction of his liability under the divorce settlement.

This ruling may have worried lenders and business people, but a look behind the headlines reveals the decision is not as alarming as it first appears. The Supreme Court firmly reasserted the general rule that a company’s assets are its own, and not available to be shared with a divorcing spouse, and reminded the divorce courts that they are not at liberty to disregard the principle of separate corporate personality, except in truly exceptional circumstances. Read on to find out more about the sort of exceptional circumstances where company assets may be affected.

Facts of the case 

Mr Prest, an extremely wealthy Nigerian businessman, on divorce was ordered to pay his wife £17.5m. However, Mr Prest claimed that his assets (the matrimonial home and a portfolio of other residential properties in London) were not his to give as they were owned by his various companies, and not by him directly. The Supreme Court had to decide whether the companies could be ordered to transfer the properties to Mrs Prest in satisfaction of Mr Prest’s obligation to make the payment. 

Why was Mrs Prest successful? 

The decision was unanimous. Although the various properties were owned by the companies, they were held on trust for Mr Prest, making him the beneficial owner. Accordingly the court could order the transfer of the properties to Mrs Prest in accordance with established divorce law. Since several of the properties are subject to charges in favour of banks, there may not be much left for Mrs Prest by the time the banks are repaid. 

In deciding that the properties were held on trust, the court was influenced by the fact that each property had: 

  • either been transferred by Mr Prest or at his direction to one of the companies for nominal consideration of £1; or 
  • been acquired directly by the company using funds provided by Mr Prest. 

Mr Prest and the companies refused to provide any evidence about ownership of the properties, so the court inferred that the evidence was withheld because it would have confirmed that Mr Prest was beneficial owner. It was even suggested that where the matrimonial home is owned by a company, it is quite likely that it is held in trust for the spouse who owns and controls the company. 

Although it made no difference to the outcome, the court decisively rejected an argument that, even if there hadn’t been a trust, it could “pierce the corporate veil” and treat assets in the ownership of the companies as belonging to Mr Prest. In fact, the court scrutinised the past caselaw in this area and decided that a court could pierce the corporate veil only if the person (X) who owns and controls a company uses it as a means by which to evade an existing liability or obligation of X. Although Mr Prest had behaved improperly in some ways, he did not transfer the properties into his companies for the purpose of defeating his wife’s claim on divorce. Therefore, there was no relevant wrongdoing to entitle the court to pierce the corporate veil. 

Implications 

This case is a reminder that circumstances can arise where a company owns only the bare legal title to its assets, with the beneficial interest in those assets held on trust for someone else. Banks and others who are considering taking security or entering into a significant transaction with a company should carry out enhanced due diligence if there is any indication that the company’s assets were acquired from a related party at less than full value, or acquired using funds belonging to a related party. In such circumstances those assets may be held on trust for the related party, and further investigation is advisable to establish where the beneficial interest lies. 

Although the facts of the Prest case were particularly unusual, generally banks and others doing business with companies can take comfort from it. The judgment respects the fundamental rule that a company is a separate legal entity to its shareholders, with separate assets and liabilities, and the assets of one cannot be treated as belonging to the other, except in very exceptional circumstances (such as where there is a trust). 

This sends a clear message that the normal rules about separate corporate personality apply even in divorce cases. The court cannot “pierce the corporate veil” merely to reach a fair result. While the value of assets of a company belonging to a spouse can be taken into account when deciding the amount of any financial award to the other spouse, in the absence of a trust entitling the spouse to beneficial ownership, the court cannot order the company to transfer assets owned by it as part of the divorce settlement. 

Assets acquired by a company in the normal way and with its own funds are very likely to be in the full legal and beneficial ownership of that company.  But if a bank is worried that it may have taken security over company assets which are held on trust for a third party, all is not necessarily lost. Several of the Prest properties were charged in favour of banks, and there are indications in the judgment that the banks’ interests will take priority. It is a difficult area of the law but generally, in such a situation, the bank will enjoy priority provided it did not have notice of the beneficial interest when the security was taken. .

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