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Divorce law blog

Why a change in the law affects divorcing business owners the most

05/11/2012   By: Nigel Shepherd

*This blog post has been updated on 19 November 2012 to clarify that the Court of Appeal did not reduce the wife's award by £9 million as has been misreported in the press. Her overall award remains £17.5 million as originally ordered by the High Court. See below for the updated story.*

You may have spotted headlines such as "Oil tycoon who used African law to fight £17 million divorce wins landmark case to slash payout to wife by £9 million" in the press last weekend. These all concerned a particularly high-profile decision in a Court of Appeal case called Petrodel Resources Limited v Prest. The case will have a real impact on business owners who are divorcing and will likely mean that wealth protection measures such as pre-nuptial agreements and family investment companies will become more important than ever.

The case concerned a very wealthy family. Their wealth came from the husband's companies, which were involved in oil exploration. The husband did his best to make the divorce proceedings as difficult as possible for his wife; for example, he continually failed to be honest with the court about his financial position. At the final hearing, it was decided that the husband was worth £37.5 million and that he should pay his wife £17.5 million. However, there was a real problem in how to get that money to the wife because of the way the husband had organised his financial affairs. The judge decided to use a long-standing practice in the family courts of treating the husband as the alter-ego of his companies (ie, they were one and the same); this meant that the court could transfer property owned by the companies directly to the wife in order to achieve a fair division of the family's assets.

The companies who had been told to transfer their property to the wife appealed the decision and won.ex The Court of Appeal said that the husband and the companies were entirely separate and the family courts could not treat them as the same. What property the companies owned in their own name was theirs and not the husband's. It had been wrong for the court to order that the properties owned by the company should be given to the wife.

The Court of Appeal said that the only thing the wife could do was to try and show that, amongst other things, the companies had been set up for an improper purpose; for example, they were fake companies set up to conceal the husband's assets. If she could do that, she might be able to keep the properties.

However, although she could show that the husband had acted badly towards her, the wife could not show that the companies had done anything wrong because they were genuine trading companies and had not been set up to conceal assets. Her settlement remained at £17.5 million (and was not reduced as misreported in the press) but the Court of Appeal said that the companies' properties (worth £9 million) could not be transferred directly to her to part-pay her settlement.

Although the wife has asked the court's permission to take her case to the Supreme Court, it is by no means certain that she will be allowed to do that or that the Supreme Court will come to a different decision.

For business owners, and particularly those business owners who are the 100 per cent shareholder in their company, the case is a very clear statement of the law - the family courts can no longer treat you and your company as one and the same. The assets your company holds in its own name belong to the company and the court cannot order that those assets are directly transferred to your ex. And, although, this can be overridden by showing that the company has been set up for an improper purpose, this will only likely happen in very exceptional cases.

Beware business owners: it is not all good news though! The Court of Appeal did not rule out an order being made against a business-owning spouse in the expectation that their company (or rather the company's assets) would provide the means to meet that order. Despite this, for genuine and properly run companies, the corporate structure may now become one of the most important wealth protection measures available. Over the next few years, we are likely to see more and more people take advantage of this.   

Protecting a business before a divorce requires careful advice. As a business owner, if you are seen to be moving assets or shareholdings simply to avoid future claims on divorce then this will damage your case considerably. Sensible and well-planned measures such as pre-nuptial agreements and corporate structures (including family investment companies) can prove to be very helpful indeed. See our section on protecting your business on divorce for more information.

Nigel Shepherd
Family Law Partner & Collaborative Lawyer
Manchester


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