Company Law

Prest v. Petrodel Resources Ltd.

[2013] UKSC 34

Citation: [2013] UKSC 34
Court: Supreme Court of the United Kingdom
Date: 12 June 2013
Bench: Lord Neuberger PSC; Lords Walker, Mance, Clarke, Wilson and Sumption; Lady Hale

Facts

Michael Prest controlled a group of companies, including Petrodel Resources Ltd.
Several valuable residential properties were legally registered in the names of companies within that group.
During divorce proceedings, the court ordered Mr Prest to make substantial financial provision for his wife.
He failed to provide full and reliable disclosure of his assets.
Mrs Prest argued that the company-owned properties should be transferred to her in satisfaction of the matrimonial award.
The trial judge treated the companies’ assets as effectively available to Mr Prest because he completely controlled the companies.
The companies argued that:
they were separate legal persons;
the properties belonged to them, not Mr Prest; and
controlling shareholding did not make their assets his property.
The Court of Appeal largely accepted the companies’ argument.
The matter reached the UK Supreme Court, which had to determine whether the properties could be reached without undermining the principle in Salomon.
Although the dispute arose from divorce proceedings, its company-law significance concerns:
ownership of corporate assets;
the circumstances permitting veil piercing; and
the distinction between legal and beneficial ownership.

Whether the companies’ properties could be treated as Mr Prest’s personal property merely because he owned and controlled the companies.
Whether the corporate veil should be pierced to enforce the matrimonial obligation.
Whether the companies held the properties beneficially for Mr Prest under ordinary property-law principles.

A company’s assets belong to the company, not to its shareholders.
Complete ownership and control do not, by themselves, justify disregarding separate personality.
Lord Sumption distinguished two principles:
Concealment principle: a company structure hides the true facts; the court identifies those facts without legally disregarding the company.
Evasion principle: a person already subject to an existing legal obligation deliberately interposes a controlled company to defeat or frustrate enforcement of that obligation.
True veil piercing is confined to the narrow evasion principle.
The doctrine applies only where ordinary legal principles cannot otherwise resolve the case.
Courts should first consider:
agency;
trust;
beneficial ownership;
sham transactions; and
other conventional legal doctrines.

The Supreme Court rejected the broad proposition that assets of a wholly controlled company are automatically available to satisfy the controller’s personal obligations.
Such a rule would destroy the distinction between:
ownership of shares; and
ownership of company property.
The properties had not been placed in the companies after the matrimonial obligation arose as a deliberate device to evade that existing obligation.
The narrow evasion principle therefore did not justify piercing the veil.
However, the court examined the evidence concerning how the properties had been acquired.
Mr Prest had provided the purchase money for several properties.
The companies failed to produce reliable records showing that the properties had been acquired beneficially for themselves.
Mr Prest’s refusal to make proper disclosure allowed adverse inferences to be drawn.
The court concluded that the companies held legal title, but Mr Prest was the beneficial owner.
This meant the properties were held on resulting trusts for him.
The court therefore did not treat the companies and Mr Prest as the same legal person.
Instead, it respected the companies’ legal ownership while recognising that, under trust principles, the beneficial interest belonged to him.
Since Mr Prest was beneficially entitled to the properties, they could be transferred under the applicable matrimonial statute.

The Supreme Court ordered the transfer of the properties to Mrs Prest.
However, the order was not based on general veil piercing or on Mr Prest’s control of the companies.
It was based on the finding that the companies held the properties on trust for him.
The judgment confined veil piercing to exceptional evasion cases involving an existing obligation deliberately defeated through a company.
Use this case for: control of a company does not make its assets the shareholder’s assets, and veil piercing is a narrow remedy of last resort.