Corporate Governance And Piercing The Corporate Veil – Supreme Court Rules To Extend Exceptions

Keywords: corporate governance, Petrodel, Prest, corporate veil

Introduction

The Supreme Court's decision in the case of Petrodel v Prest, handed down today, marks a crucial shift in the extent to which the courts will allow the "piercing of the corporate veil". Although the case revolved around a matrimonial dispute, it has profound implications for corporate governance.

The Facts

In October 2011, the High Court ruled that Mrs Prest ("W") was entitled to a divorce settlement of £17.5 million from Mr Prest ("H"), a wealthy oil trader. Since H failed to comply with court orders by failing to give full and frank disclosure of his finances during proceedings, his appeal was dismissed at a preliminary stage. The award therefore stood regardless of later court decisions concerning enforcement.

In terms of enforcement of the award, Moylan J ordered that properties in London and overseas, owned by Petrodel Resources and two other companies (collectively "X") were assets of H and formed part of the divorce settlement since they were beneficially owned by H as the sole shareholder. Whilst Moylan J found there had been no impropriety in relation to X, so as to permit the corporate veil to be pierced, he nevertheless held that H, exercising complete control over X both in terms of their operation and management, was 'entitled' to the relevant properties within the meaning of s24(1)(a) Matrimonial Causes Act 1973 ("MCA"), despite not personally owning the assets.

X appealed to the Court of Appeal, submitting that in order for company assets to become subject to s24(1)(a) MCA, the corporate veil would have to be pierced and this only occurred in exceptional circumstances, this not being one of them.

Court of Appeal's decision

In October 2012, the Court of Appeal allowed X's appeal (Thorpe LJ dissenting) and overturned the High Court's decision, holding that the High Court was wrong to conclude that H was the beneficial owner of X's assets because the shareholders of a company have no interest in or entitlement to the company's assets which instead belonged to the company. In Rimer LJ's view, it made no difference to a company's separate legal personality that a single individual controlled all of its shares, stating "a one-man company does not metamorphose into the one man simply because the person with a wish to abstract its assets is his wife".

W appealed to the Supreme Court. The key issue was whether corporate law principles should be sacrificed to...