The Corporate Veil of Deceit?
By Louise Eady
Posted: 1st July 2013 08:50The fact that companies have a separate legal identity is long established. In their own right, companies can own properties, take out borrowings and enter into contracts. Lawyers are taught about the “corporate veil” from an early stage in our training. The corporate veil represents a long established principle that a company is independent from its shareholders and that ownership of a company will not allow “piercing” of the corporate veil in legal proceedings to get at assets owned by the company unless there has been fraudulent or dishonest use of the company.
For family lawyers the corporate veil can present as a difficult obstacle – for example where one party has sought to hide or protect assets by putting them into the ownership of a company.
A recent case in the Supreme Court has tackled this difficult issue which involves elements of both commercial and family law. Interestingly, the panel of judges who decided the case was made up of seven members of the judiciary – a blend of members of both the commercial court and the family court.
The case involved seven properties which were owned by a number of companies. The wife was asking for the properties to be transferred to her as part of the settlement and the husband’s argument was that a transfer was not possible as the properties were owned by the companies and not by him personally. The properties had been transferred to the companies for apparently legitimate corporate reasons (wealth protection and tax planning) long before the break down of the marriage so there was no suggestion that the husband had transferred the properties to the companies in order to defeat his wife’s financial claim against him. However, three of the properties had been transferred to the company for a nominal consideration and the source of the original purchase funds could be traced back to the husband. Two more of the properties had been sold to the company for a reasonable consideration but the company was not trading at the time and the court found that the funds paid by the companies for the properties actually came from the husband.
The court therefore identified a pattern whereby the husband would cause the companies to acquire properties with funds provided by him.
The Court of Appeal decided that the properties belonged to the companies alone and that the husband was therefore not entitled to them in the context of family law. The wife appealed against his decision, primarily arguing that the husband had complete control over the companies and that he was in a position to procure the transfer of the properties to her.
The challenge facing the Supreme Court was to balance the commercial principle of the corporate veil against the family courts approach to cases which seeks to achieve a fair outcome taking into account all relevant assets and the factors set out in section 25 of the Matrimonial Causes Act 1973.
The starting point in any case involving divorce finances is for each party to provide full and frank disclosure of their financial position. It is only once this has been done that solicitors or the court can then look to distribute those assets taking into account the factors set out in law.
The husband in this case had been particularly difficult and obstructive when it came to providing full disclosure of his financial affairs. The lower courts had added the companies as parties to the case and made orders against both the husband and the companies to provide certain documents. Those orders were not complied with and even at the time of the hearing before the Supreme Court, such was the non-compliance by the husband and the companies, the court was still unable to precisely ascertain the extent of the borrowings secured against the properties.
In a surprisingly unanimous decision, the Supreme Court applied trust law to reach its decision. The doctrine of resulting trust was applied. A resulting trust arises where the a person has made a direct financial contribution to the purchase of a property but (i) they are not the legal owner of the property and (ii) there are no circumstances to show that the contribution was intended to be a gift or a loan. A resulting trust" means that the legal owner (in this case the company) holds either all or part of the property on trust for the benefit the non-owning party (in this case the husband). The court therefore decided that the companies owned the properties on trust for the husband. The corporate veil was therefore not pierced by the application of these principles of trust law.
Despite the fact that the number of family law cases where these issues will arise will remain relatively small, the implications of this case are far reaching for shareholders, lenders, insolvency practitioners and auditors who will need to look rigorously at corporate property portfolios to establish if there are potential claims from a spouse. This is particularly relevant when consideration is given to lending money secured against a property or properties owned by a company which may be subject to a resulting trust in favour of the proprietor.
Louise Eady is a family law specialist. She has been practicing family law since 1994 and qualified as a solicitor since 1997. Louise has the Resolution specialist accreditation for cohabitation and divorce finances. The accreditation recognises specific expertise in these fields. Resolution is the largest organisation of family law solicitors in the country which advocates the resolution of family disputes in a non-confrontational way.
Louise joined Attwaters Jameson Hill in January 2013 and worked out of the Loughton office. She has a strong reputation for dealing with cases in an efficient yet sensible and pragmatic way.
Louise Eady can be contacted by phone on +44 (0) 20 8498 6580 or alternatively via email at Louise.Eady@attwaters.co.uk