Is there a difference in how the courts approach piercing the corporate veil in matrimonial proceedings as compared with non-matrimonial proceedings?
Case law now establishes that the answer is definitively ‘no’.
Leading case of Prest v Petrodel
In Prest v Petrodel Resources Limited & Ors [2013] UKSC 34 the Supreme Court held that there was no separate family law jurisdiction to pierce the corporate veil under section 24(1)(a) of the Matrimonial Causes Act 1973.
Subsequent case law shows this principle is now well-understood in the family courts.
Since that judgment, 44 reported family law cases cite Prest v Petrodel. Only four of those contain any detail on piercing the corporate veil. All four affirm that the family courts have no special jurisdiction on this question.
But the test for piercing the corporate veil was not fully settled. There was some dispute amongst the justices as to the reach of the principle.
Despite this, whatever the test, it is the same in other proceedings as it is in matrimonial proceedings.
Background to Prest v Petrodel
This case arose out of proceedings for what was then ‘ancillary relief’ following a divorce. The husband owned and controlled several companies which in turn owned various residential properties. The question was whether it was possible to pierce the corporate veil so as to allow the judge to make orders directly against the underlying properties.
High Court judgment
In the High Court, Moylan J held that under the general principles of law he was not entitled to pierce the corporate veil, because the company was not being used for a wrongful purpose.
Nevertheless, the court did have a wider jurisdiction to do so under section 24 Matrimonial Causes Act 1973. This was particularly the case where the company was very much the corporate alter ego of one of the spouses and no third-party interests were engaged – and especially where the company was merely a holding company for real property.
Court of Appeal judgment
The Court of Appeal disagreed.
The court held it was impossible to pierce the corporate veil in these circumstances.
Supreme Court judgment
The Supreme Court approached the problem slightly differently by considering the following questions:
- Is there a general principle of law that would allow the court to pierce the corporate veil in this instance?
- Is there a wider jurisdiction afforded by section 24(1)(a) of the MCA 1973 that would allow the court to pierce the corporate veil?
- Could the companies be regarded as holding the properties on resulting trust for the husband in the circumstances of the case thus allowing direct orders to be made against the properties?
The court decided the appeal in the wife’s favour based on question (3). This was not a point that had been canvassed to any great extent in the courts below.
However, the court answered the other questions as follows.
The general principle
Lord Sumption gave the lead judgment. He articulated the scope of the principle as follows:
- There was a limited principle that allowed the court to pierce the corporate veil “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.” (Lord Sumption).
- It is an exception to the general rule that the court should respect the separate legal personality of a company. The essence of the exception is fraud.
- A distinction should be drawn between “concealment” cases and “evasion” cases.
Concealment involves corporate structures concealing the identity of the real actors. In this situation the court can look behind the corporate veil without piercing it.
Evasion involves situations where there is a legal right against the person in control of a company which exists independently of the company’s involvement, and the company is interposed so that the separate legal personality of the company will defeat the right. Only evasion cases actually involve piercing the veil.
The other justices broadly agreed with Lord Sumption’s formulation. However, there were some reservations about whether it was possible to classify all situations in which the court is entitled to pierce the corporate veil.
- Lord Neuberger agreed that the exception should be “clear and limited” and as such concurred with Lord Sumption’s formulation but added some observations of his own.
- Lords Clarke and Mance felt that it was dangerous to foreclose all possible future situations in which the exception may arise and therefore thought that the limits of the doctrine were unclear.
- Lord Walker thought the exception did not exist at all.
- Lady Hale and Lord Wilson expressed doubts as to whether it was possible to classify all cases as either “concealment” or “evasion” cases.
The court held that, on the facts, the husband did not frustrate or evade any legal obligation to his wife by the mere fact of putting real property in the name of a company and so the principle had no application.
Wider jurisdiction under section 24(1)(a):
The court unanimously held that there was no justification for a difference in approach to piercing the corporate veil in matrimonial proceedings by virtue of section 24(1)(a) of the 1973 Act.
“Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different”.
The court recognised that section 37 Matrimonial Causes Act 1973 could be used to set aside certain transactions, where for example a property in the name of one spouse was relatively recently transferred to a company.
However, it noted that this was a “limited provision” which was “very far from being a complete answer to the problem”.
What does subsequent case law show?
The proposition that Prest v Petrodel collapsed any distinction between matrimonial proceedings and non-matrimonial proceedings is supported by subsequent case law.
In AAZ v BBZ, C Ltd, P Ltd [2016] EWHC 3234 (Fam), a case which was “on all fours” with Prest, the court did not pierce the corporate veil but held that certain assets were held on trust for the wife.
The court in Estrada v Al- Juffali [2016] EWHC 213 (Fam) took a similar approach, as did Munby J in Z v Z (Legal Professional Privilege: Fraud Exception) [2018] EWCA Civ 307.
Akhmedova v Akhmedova [2019] EWHC 3140 (Fam) is perhaps the exception which nonetheless proves the rule. This concerned the enforcement of a matrimonial finance order against a husband who used every method available to avoid compliance. The court explicitly followed Prest v Petrodol but found it possible to pierce the corporate veil. The distinction was that the husband was found to have been evading his legal obligations under the order by placing companies in the way of enforcement of the specific judgment obtained by his wife. This was thus an “evasion” case.
Article by Jonathan Cowen and Christopher Stirling, barristers at Field Court Chambers.
With thanks to James Fowler, a pupil at Field Court Chambers, for his assistance in preparing this article.