Thursday, 20 June 2013

Utopia Ltd - not so much G and S as UKSC

One of the least known of the Gilbert and Sullivan light operas is Utopia Ltd.  You can read a synopsis of the plot here - in fact to make sense of this post, you'll need to!

Utopia Ltd

So, it's all about avoiding legal consequences, you see.  The King of Utopia will be blown up by the constitutionally appointed Public Exploder if the constitutionally designated Tribunal, the Wise Men, instruct him to do so.  How does the King avoid this?  By incorporating himself as a Limited Liability Company, he has made himself immune to the existing powers of the law of his land.  The King can be blown up, but his acts are now no longer his but those of a limited stock company and that can merely be wound up, not blown up.  No more prospect of the law of his land delivering life changing ending consequences.

And so to family law, which is what this blog is about.  We've just had the Supreme Court adjudicate on Prest v. Petrodel.  You can find the judgment here:

Prest v. Petrodel

The facts are set out in paragraphs 11-15.  In essence, the Husband here was alleged to use a number of companies which he controlled as his private piggy bank.  When his marriage unravelled, his wife obtained an order for financial provision in English proceedings.  He failed to comply so she sought to enforce, at least in part, by forcing his companies to transfer to her title to seven valuable properties they owned in England and Wales.

Put it another way - the claim is that the Husband was using limited liability status to avoid having to comply with the orders of an English court.  Not so very different from the newly incorporated Utopians really.  The Matrimonial Causes Act 1973 enables the Court to make orders transferring money and property from one spouse to the other.  As no one marries a company, a sort of virtual personality, only a real person, this excludes the property and money of a company from the court's direct control.  At first instance, the High Court was having none of it.  Moylan J seems to have decided that because the Husband had the power to make the companies part with their assets to satisfy the Court's judgment, he could order him to do exactly that.

Not so, decided the Supreme Court.  The companies owned the assets and they were legal persons in their own right.  They were not parties to the marriage and so the Divorce court had very little power over them.  Right enough, if they had been set up as a device to frustrate the court and nothing more, the Court would not allow that to frustrate the Court's order, but Lord Sumption said,

"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."  (My emphasis.)

When the companies were formed, there was no existing financial order.  The Husband was not engaged in strategy to avoid complying with the court order at the time he formed the companies as they long pre-dated the marriage breakup.  They had been formed apparently to manage tax liabilities or something similar.

"Whatever the husband's reasons for organising things in that way, there is no evidence that he was seeking to avoid any obligation which is relevant in these proceedings."

So where did that leave the Wife?  Well on the face of things, the court could order the Husband simply to transfer the shares in the companies to her, or some of them at least.  This would be a property adjustment order under s.24 of the Matrimonial Causes Act 1973.  However, where companies are incorporated abroad, there is no guarantee that the foreign jurisdiction will enforce such an order against the Husband if he failed to comply.  In this case, it is very clear that compliance with court orders was not a major priority with this Husband!  He had conspicuously failed to comply with court orders to provide disclosure, as had the companies under his control.

However, the Court did find an alternative route to enforce its order.  As the companies acquired property, sold property and paid out money entirely at the Husband's behest, they were deemed to hold their assets on trust for the Husband.  A trustee holding property in England and Wales can be forced to comply with an order imposing an obligation on a beneficiary of the trust.  The companies owned seven properties in the UK, so they can be, and were made to transfer these to the Wife in part satisfaction of the £17.5m odd which she was entitled to under the order.

So what do we learn from this?

1.  You can get a court order against a company in divorce proceedings only where you can show that the only purpose for setting up the company and acquiring property through it was to defeat the court's jurisdiction.  Yes, I did mean to put two "onlys" in that sentence - they both count.
2.  You may still be able to lay your hands on the company's assets even where you can't satisfy 1 if you can show that it has acted effectively as a trustee for your ex, but complications will definitely arise where there are other share holders or creditors as their interests are separate from the ex and must be protected.
3.  Orders of English courts are commonly regarded as far more generous to the economically weaker party than orders from courts abroad, but there is the important matter of enforcement.  If the assets lie abroad, the other jurisdiction may not necessarily enforce the English order.  Half a loaf by consent may ultimately be better than no bread after a fight.
4.  Matrimonial litigation is no different from ordinary civil litigation in one key respect - the first and most essential question is, where's the money?  If you don't have a satisfactory answer to this question, there's no point in even starting court proceedings - they'll only make you poorer.

Blog Disclaimer: Nothing in www.austinkempfamilylaw.blogspot.com blog should be construed as legal advice. If you require legal advice upon any family law related matter then you should instruct a solicitor. Any links to other blogs or web sites are provided for convenience only and Austin Kemp Solicitors cannot accept any responsibility for the contents of such linked blogs/sites.

5 comments:

  1. Well thats progress I suppose, it is certainly high time some authorities in divorce matters are firmly established to discourage secretion of assets belonging in the marriage. Bravo to her.

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  2. Half a step forward, I'd say. It's quite fortunate that most wealthy spouses don't start planning for a divorce a couple of years before it happens. They could use some of these decisions to their advantage if they did.

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