The facts of the case are
summarised as follows:
The parties married in 1993
and had 4 children, all teenagers by the time of the hearing.
The Husband founded several
companies, collectively called the Petrodel Group and the parties lived a
lavish lifestyle. There were properties owned in London, Nigeria and the Caribbean
and the parties agreed outgoings of about £700-£800k per year.
The Former Matrimonial Home
in London (with a value of about £4m) and the properties elsewhere were all
held in the names of various companies forming the Petrodel Group and in essence
this caused the central issue in the case.
The family court heard
evidence from the parties and was tasked with trying to establish the extent of
the husband’s wealth. This was easier said than done as the husband had failed
to frankly disclose his assets and had throughout the proceedings been less
than honest and open. He had breached orders for maintenance that he was to pay
to his wife and his brother even issued injunctive proceedings in Nigeria to
prevent the release of papers or information relating to one of the companies
(although the husband did, when it suited him, disclose certain papers).
The Court ultimately
determined that a fair settlement to the wife would be a sum of £17.5m. It was
decided that although the former matrimonial home was owned in the name of one
of the companies, it was held on trust and, therefore, could be transferred to
the wife without difficulty.
The bigger issue for the
Court was to consider what orders it could make against the other property or
shares held in the names of the various companies.
This was important because
under the relevant legislation only property to which a party is “entitled” can
be ordered to be transferred to the other. This means that the party must be
legally or beneficially entitled to the property or it cannot be transferred.
So, a party who owns shares
can be ordered to transfer them, a party found to have a beneficial interest in
a property legally owned by someone else, perhaps because he has paid all of
the outgoings/expenses, can have the property transferred to his spouse.
In this case, the companies
were the legal owners of the property but did this mean that the husband was
not “entitled” to it?
The husband was the majority
shareholder in the companies and the Court found that the husband had
controlled the companies and assets for the benefit of the family and had been
able to use the companies to pay his own personal and legal expenses.
The Court was in no doubt
that the husband was the effective owner and controller of the companies and
that he had unrestricted access to the assets and could dispose of them as he
wished, without any need for a board to approve his actions.
The Court did accept that the
companies had been established legitimately for tax and wealth protection
purposes and that there had been no impropriety on the part of the husband in
running the companies.
The Court felt that the
property effectively belonged to the husband and that he was “entitled” to it
and that, therefore, it could be transferred to the wife.
The companies appealed the
decision, as did the husband. The husband was initially granted permission to
appeal subject to him paying to the wife the money owed under the maintenance
orders that he had breached. He did not do so and so his appeal was struck out
– the companies continued with their appeal.
The majority of the appeal
court disagreed with the family court decision, except the one family judge
sitting on appeal, LJ Thorpe who said that if the decision of the family court
was reversed in terms of the company held assets, it would put those beyond the
reach of the family court and fairness then could not be achieved.
On majority, the court
determined that the husband was not “entitled” to the property and that it was
wrong to consider that because he was the majority shareholder he could deal
with the property as if it were his own. They said that it was not enough to be
satisfied that it was “effectively his” – he had to be entitled to it.
Companies are separate legal
entities and assets held in company names belong to that company entity. The
normal starting point is that shareholders have no interest in the company’s
assets.
It is, of course, possible to
go behind the “corporate veil” but only where there has been impropriety i.e.
that the company structure has been improperly used to avoid or conceal
liability and that it should be disregarded to ensure that no benefit is gained
from its improper use.
But the husband’s lack of
co-operation in proceedings and his less than honest disclosure to the Courts
is not impropriety in terms of the company structure and so the Courts cannot
look behind it.
What followed from the appeal
court was a look at various case law and a telling off for the family courts
for using “family justice” rather as a catch all to get around having to apply
strict legal principles of the law in other areas.
The court could not,
therefore, order transfer of the properties owned by the companies and whilst
of course it remains open to the Court to order the husband to pay a lump sum,
such an order would have no teeth, as there was no realistic way of enforcing
it against the husband.
This judgement is likely to
have a significant impact on the ability of the family courts to achieve
fairness in cases where one party is involved in the running of a company or
companies which own certain assets.
It is more likely to come
into its own in the future, once parties have taken advice and recognise the
real opportunities that this case provides for assets being put beyond the
reach of the family courts on divorce.
It will mean that creative
thinking will be required when settlement terms are made, both in the
construction of the deal and the wording of any order. It may also have an
impact on the construction of pre-nuptial agreements and may see each
respective side seeking certain clauses that before now perhaps would have been
less important.
In my next post I’ll deal
with some of the brakes that might be applied to this fast car which, at
present, has an open road in front of it….
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