The treatment of corporate structures on divorce

It is not uncommon for the Family Court to be asked to deal with the division of companies and other corporate structures, sometimes in cases where it is being suggested they have been specifically designed to obscure or protect wealth in the event of divorce.

The Family Court has therefore had to develop methods of ensuring fairness and justice, whilst respecting established principles of company law. Whilst the position in relation to operating businesses is usually relatively straightforward in that they are valued as such, assets held in corporate structures can sometimes be treated differently.

Are Companies treated as separate legal entities?

The general principle (established in Salomon v A Salomon & Co Ltd [1897] AC 22) is that a company is its own separate legal entity, and is distinct from the owners. The company’s assets belong to the company, not to the individuals who control it.

Historically, the Family Courts took a somewhat inconsistent approach to the application of this principle and the circumstances in which it might be appropriate to look past the basic ownership structure of the company to look at the reality of how the assets were held, and essentially treat the assets and liabilities of a company as those of its shareholder(s) (known as “piercing the corporate veil”). Courts were willing to intervene to prevent injustice, especially where no third-party interests were affected, however this produced some inconsistent case law.

Prest v Petrodel Resources Ltd [2013] UKSC 34

This case is the leading authority on piercing the corporate veil. The case concerned a divorce between a husband, who controlled a number of companies that held valuable properties, and a Wife, who sought to establish that these properties should be treated as belonging to the husband, making them capable of being subject to orders in the financial remedy proceedings.

Whilst the Supreme Court ultimately found in the wife’s favour and held that orders could be made against the properties owned by the husband’s companies, it did so in spite of its rejection of the argument that there could be any piercing of the corporate veil. It was emphasised that veil piercing was a limited and exceptional remedy, which would only be available under the ‘evasion principle’. Lord Sumption explained this at paragraph 35 of the judgement:

“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. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.”

Therefore, ownership and control only are insufficient for piercing the corporate veil, and there will need to be deliberate impropriety linked to the use of the corporate structure, which can be difficult to prove.

How else might the Family Courts treat assets held within corporate structures?

An inability to convince the court that the corporate veil should be pierced does not necessarily mean that a party’s corporate assets are safe from any court orders, and there are a number of ways these can be taken into account. Again, this generally applies to assets held in corporate structures, as opposed to operating businesses where there is no suggestion that they are anything other than that:

1. Resulting Trust – this was the reasoning used by the Supreme Court in Prest. They found that although the corporate veil could not be pierced in that case, the properties were held by the companies on resulting trust for the Husband, meaning he was “entitled” to them for the purposes of s.24 MCA 1973, as their beneficial owner, and the court could therefore make orders in relation to them.
   
   Generally, in order to establish the existence of a resulting trust, it is necessary to demonstrate that the transferor of property did not intend to make an outright gift, either by way of a presumed resulting trust where the transferor provides the purchase price for property held in another’s name with no evidence of a gift being present, or as an automatic resulting trust, where the settlor fails to dispose of the entire beneficial interest in the property, causing it to “result” back to the settlor.
   
   In Prest, the court found the properties to be held on resulting trust for a number of reasons:

• The “particular circumstances” under which the properties came to be vested in the company (ie a property investment company which appeared to have been initially set up in 1993 to hold the matrimonial home and five investment properties, and which did not conduct any other business until 2002);
• The fact the husband had deliberately concealed facts and failed to comply with disclosure orders, allowing the court to draw adverse inferences that proper disclosure would reveal the properties were beneficially owned by him;
• The subjective intention of the husband in transferring assets to the company. The court noted that evidence of a transferor’s intention or failure to rebut the presumption of a resulting trust could establish beneficial ownership. The presumption could be rebutted by evidence of an outright transfer, but in this case, no such evidence was provided;
• The source of the funds used to purchase the properties supported the inference that the husband was the beneficial owner.
  
  In practice, this is much more commonly argued than attempts to pierce the corporate veil, given the difficulty with doing so as set out in Prest, and because it allows the Court to make orders against the property without disregarding corporate personality. The Court will look at the reality of the situation rather than just the legal title, and the evidential focus will be on the source of funds, intention at the point of acquisition and how the property has been treated during the marriage.

2. Set Aside – section 37 of the MCA 1973 allows the court to set aside dispositions which appear to be intended to defeat financial claims. This can apply to the transfer of assets into corporate structures, if the required intention can be proven. See Akhmedova v Akhmedov [2018] EWFC 23 where the transfer of the Husband’s yacht to a Liechtenstein corporate entity was set aside, on the basis that the corporate entity that made this transfer was the “alter-ego” of the Husband. 

3. Add-Back – where assets have been improperly dissipated (ie into corporate structures to keep them out of a spouse’s or the court’s reach on divorce), the court can nominally add back the value of these assets into the pot and attribute this value to the spouse who has made the disposition. The court can also draw adverse inferences from non-disclosure, where corporate structures are unclear or when disclosure is refused (ie on the basis that the company is not party to the divorce proceedings).

4. Transactions at an undervalue – section 423 of the Insolvency Act 1986 may be relied upon where transactions have been entered into at an undervalue, with the purpose of putting them beyond the reach of a spouse within a financial remedy claim, and can make orders to remedy this (again, see Akhmedova).

Practical implications

There have been a number of reported cases dealing with this issue since Prest, which have confirmed that the current position is, as per Prest, that piercing the corporate veil in family law proceedings is more of a theoretical possibility than a viable argument in most cases. Whilst available to parties, it is very rare in practice that the court will order this, and in fact arguments framed as an attempt to “pierce the corporate veil” may in fact weaken credibility.

Instead, the court have relied on the other means of achieving fairness, which allows the courts to avoid ignoring the principle of corporate personality, but to also prevent injustice by parties being able to put assets beyond the reach of their spouse on divorce.