Divorce How business arrangements are challenged by the Court
Sheridan Ball
Karen Myles
Alison Benson
Nasim SharfMarch 2014
WELCOME & OVERVIEW
Sheridan Ball
THE CORPORATE VIEW
Nasim Sharf
Company law in
divorce
Governance
Demergers
Corporate veil
Reorganisations
Own share purchase
Constitution
A company is a separate legal
entity, distinct from its directors and
shareholders
Cobblers!
Timber!
“No shareholder has any right to any item of
property owned by the company, for he has
no legal or equitable interest therein. He is
entitled to a share in the profits while the
company continues to carry on business and
share in the distribution of the surplus assets
when the company is wound up”
Lord Buckmaster in Macaura v Northern Assurance Co Ltd [1925] AC 619
Take a chill pill!
Abus De Droit(Abuse of Right)
Fraud = all bets are off
Mere Facade
Sham Management
Interests of Justice
Fiction
Myth
Strong Practical Reason
Just and Necessary
Alter Ego
Impropriety
Company = trustee of its shareholders
Company = agent of its shareholders
Lord Sumption’s Clarifications:
1. Concealment principle 2. Evasion
principle
Is there a special divorce rule allowing the
corporate veil to be pierced?
THE FAMILY APPROACH
Alison Benson
The Family approach including a
discussion on the case of Prest v
Petrodel Resources Ltd
Court Orders
Transfer of Shares
Lump Sum
Payment
Transfer of
Property
R v R
Husband was ordered to pay a lump
sum of £4m:
£1.25 million within 28 days
£1.25 million by 31 December 2013 (just over a year later) or upon sale of his shares, whichever was the sooner
£1.5 million on or before 31 December 2015 or upon sale of his shares, whichever was the sooner
Nicholas v Nicholas
Husbands control is so complete he is the Company’s alter ego
Assets belonging to the Company are treated as the Husbands property
Subject to a Property Adjustment Order
Prest v Petrodel Resources Ltd [2013]
The clash of the titans
Round 1: The High Court
Husband worth £37.5 million.
Wife awarded a
lump sum of £17.5
million.
Lump sum satisfied by a transfer of properties belonging to group of Companies including
Petrodel Resources Ltd
Round 2: The Court of Appeal
2 Chancery Division Judges Lord Justices’ Rimer
and Patten
1 Family Division Judge Lord Justice Thorpe
“Nicholas v. Nicholas has led Judges of the Family
Division to adopt and develop an approach to
company owned assets in Applications which
amount almost to a separate system of legal rules
unaffected by the relevant principles of English
property and company law. That must now cease”
Lord Justice Patten
“I emphasise that all Judges who have endeavoured to achieve fairness in big money cases at the first instance… have followed the
pathway marked in Nicholas v. Nicholas. If this Court now concludes that all these cases were
wrongly decided they present an open road and a fast car to the money maker who disapproves of principles developed by the House of Lords that govern exercise of the judicial discretion in big
money cases”. Lord Justice Thorpe
Round 3: The Supreme Court
• The Family Court cannot continue with their approach
• The principles of Corporate Law in relation to piercing
the corporate veil remain
but…• The Companies hold the various properties on trust for
Mr Prest
• He remains the beneficial owner
• The properties can be transferred to Mrs Prest
What happened next? M&M
• Largest ever divorce pay out in the Family Courts of £53
million.
• Properties in London were registered in the name of
Snowden Properties Limited
• The Husband is “a shady puppet master” in the
background.
• No legitimate tax mitigation scheme – “fantastic charade”
Practical Points
• More allegations properties vested in the Company are
beneficially owned
• More Companies party to matrimonial litigation
• Rigorous reviews of Corporate Property portfolios with
assessment of the matrimonial situation
• Proper paper trail and full disclosure
THE DISCLOSURE DISASTER
OF YOUNG V YOUNG
Karen Myles
The basics
Duty to make full and frank
disclosure
Prescribed documentation
Digging a little deeper
Questionnaires 1st hearing Proportionality
Additional disclosure issues
Single joint expert
Production appointments
Young and Young
“as complicated a financial remedies
case as has been dealt with before
these courts”
“about as bad an example of how not to
litigate as any I’ve ever encountered”
Young and Young
Mr and Mrs Young married for 17 years
6 years of litigation
20-day final hearing
Mr Young’s complete refusal to comply with his disclosure obligations
Drawing adverse inferences
Financial position
established at 2006
£45massets hidden
away by Mr Young
Mrs Young received
lump sum order £20m
Sharland and Sharland
Evidence misleading to the
court
Cheats charter?
ENFORCEMENT AND
ALTERNATIVES
Sheridan Ball
Enforcement Options
Charging Orders
Attachment of Earnings
Garnishee (Third Party
Debt Orders)
Statutory Demand
Judgment Summons
Committal for contempt of
Court
Contempt of Court
McNulty v. McNulty
• The Wife was granted an ex parte Freezing Order
endorsed with a Penal Notice relating to approximately
£70,000 inheritance monies received by the Husband
from his late mother’s estate which represented the only
significant asset in the case.
• The Husband removed all but £4,000 of the inheritance
from his bank account, and sent the Wife an email in
which he said he had no bank account, no address and
described himself as a “complete and utter bastard”.
McNulty v. McNulty
• By virtue of Orders for substituted service, Husband was
served via email to two addresses, at the Husband’s
former solicitors, the Husband’s former girlfriend by text
and by post to the Husband’s personal mailbox.
• Mr McNulty received a 4 month prison sentence with the
proviso that if he purged the contempt i.e. he repaid the
money then this may lead to a reduced sentence.
Thursfield v Thursfield
• The Husband breached a freezing order and failed to
attend two committal hearings
• Judge sentenced the Husband to 24 months
imprisonment
• The Husband appealed on the basis that the sentence
was manifestly excessive. Appeal dismissed
Constantinides v Constantinides
• Husband was committed to prison for 6 weeks for non-
payment of periodical payments - the arrears were
approximately £78,000 - the Husband had never made
any payments under the Order
• At first instance the Judge found there was evidence of
the Husband’s wilful refusal and culpable neglect and
that he was engaged in a long running and deliberate
attempt to frustrate the Order
Constantinides v Constantinides
• The Husband appealed. Appeal allowed and the
Committal Order discharged because the Appeal Judge
was not sure if the Husband had the means to pay
“It is one thing when the Court is deciding whether
or not to make a Maintenance Order, or the level of
that Maintenance Order, to take into account
current or likely earning capacity but it is a very
different matter to imprison a person for not
maximising his earning capacity”
Are there alternatives to
enforcement?
The Default Approach
• A Judge can anticipate enforcement and order assets to
be transferred in default of payment of a lump sum
• In Prest, Mr Justice Moylan looked to the properties in
default of payment of the lump sum
• In R v R Mrs Justice Macur assessed and utilised the
expert evidence presented to her - to justify the £4
million lump sum payment within a very tight timetable.
Supported by maintenance rather than transfer shares in
default of payment
An Alternative Approach
• Consider with Clients the overall impact of their actions
on their Business, their family and ultimately their life
• They cannot move forward. They may be on the run and
they will always be looking over their shoulder
• It will be hard if not impossible to operate and develop
their Business
• Who in their right mind in the cold light of day ever wants
to be the next Mr and Mrs Prest or Mr and Mrs Young?
Mediation and the Collaborative
process
• Enabling two people in the midst of divorce identify what
might be fair for everyone may actually be in those
Clients’ long term best interests
• Fairness is also at the heart of the judicial decision
making process but by the time the case reaches the
point that a Judge can make the decision, the damage
and entrenchment is often too deep
Prevention rather than cure
Law Commission Report on “Matrimonial
Property, Needs and Agreements”
• Recommendation that the meaning of “financial needs”
is clarified in Guidance to be published by the Family
Justice Council so that there is consistency of application
by all Courts
• Recommendation that further research carried out to
assess whether an aid to calculation of financial needs
could be devised and whether this would be useful
Prevention rather than cure
• Recognition that now not all cases go to Court and
therefore Guidance/Clarity on how to approach division
of assets and income may be helpful to couples who
choose to mediate, collaborate or sort things out
themselves
• The objective of achieving independence between
divorced couples is right
• Draft legislation prepared recommending enforceability
of Qualifying Nuptial Agreements precluding scrutiny by
the Court with the proviso that it will not be possible to
contract out of financial needs
Recommended requirements for
Qualifying Nuptial Agreements
• It is a Deed and includes a statement that the Parties
understand that they are signing a Qualifying Nuptial
Agreement that will partially remove the Court’s
discretion to make financial orders save if needs are not
met
• It is signed more than 28 days before the wedding
• Both Parties receive legal advice
• Financial/material information is disclosed
• There is no evidence of duress, undue influence or
misrepresentation
Family Arbitration - Privatisation of the
Court process• It is quick & private
• The Parties select their Arbitrator
• In conjunction with the Arbitrator, the Parties agree how their arbitration process will proceed
• The process - including disclosure - can be tailored to the issues in dispute
• Arbitration can be a paper exercise without the need for any face to face hearings
• The added expense of an arbitrator’s fees has to be weighed against convenience and privacy
• Only available for financial disputes
• S v S - February 2014 - the President of the Family Division approves the first Family Arbitration Award
Any Questions?