Family home legally owned by company controlled by one of the spouses

Introduction

Section 6 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) empowers the court, in divorce proceedings, to require the transfer  of the property of one party (A) to the other (B). This order can only relate to property to which A ‘is entitled, either in possession or reversion’.

How does this operate with regard to property legally owned by a company controlled by A? Does section 6 empower the court to order the company to transfer the property to B? If so, on what basis?

This was the question considered by the UK Supreme Court in Prest v Petrodel Resources Ltd ([2013] UKSC 34).  It is of considerable practical importance to B, especially where much of A’s wealth is tied up in the company. It is true that the court could order A to transfer the shares in the company to B but, as Lord Sumption observed, ‘ this will not always be possible, particularly in cases like this one where the shareholder and the company are both resident abroad in places which may not give direct effect to the orders of the English court.’ ([40]).

Thus, the court has to confront the important legal question as to whether it is entitled to pierce the corporate veil and whether there is any special jurisdiction to pierce the corporate veil in matrimonial proceedings.

No special jurisdiction to pierce the corporate veil in matrimonial proceedings

The UK Supreme Court laid to rest the idea that England’s family law courts had any special power to pierce the corporate veil. The English equivalent to section 6 of the MPPO (which is in identical terms to the Hong Kong provision) was not open to this interpretation ([37] – [42] Lord Sumption).

If the courts have the power to order the transfer of the property to B it will either be because: (i) the company holds the property on trust for A so that the order can relate to A’s equitable interest; or (ii) the case is one where it is appropriate, applying general principles, to pierce the corporate veil.

Where the company is trustee for A

In Prest, there were several properties which A had either transferred to a company controlled by him for no consideration or where A had supplied the company with the funds to make the purchase and there was no evidence that this was by way of loan or in return for shares in the company. Thus, on general equitable principles, the company held the properties on trust for A. A could be, and was, ordered to exercise his control over the company to procure the transfer of the legal title to the properties to B.

In an important passage, Lord Sumption said:

‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership’ ([52] emphasis added).

Similarly, Lady Hale said that the power in section 6 MPPO  ‘is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case ([93] emphasis added).

Piercing the corporate veil

The Supreme Court rejected the idea that the English equivalent of section 6 of the MPPO created a right to pierce the corporate veil. The court could only pierce the corporate veil if there were some general principle that allowed it to do so. Lord Sumption thought that such a principle did exist:

‘I conclude that there is a limited principle of English law which applies 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 ([35]).

This principle did not come into play here. There was nothing on the facts of Prest that allowed the court to invoke this principle.

Michael Lower

 

Tags: ancillary relief, Michael Lower, piercing the corporate veil