Late last week the Court of Appeal delivered its judgment in Petrodel Resources Ltd & Ors v Prest & Ors. The case may have been of only passing interest to most lawyers, but for family law specialists it is an extremely troubling development.
The Petrodel case involved an appeal by three companies against financial orders that had been made against them in divorce proceedings litigated between their principal (perhaps only) shareholder and his wife.
The trial Judge had found that throughout the case the husband had been deliberately evasive, undertaking various manoeuvres and strategies to avoid providing full and frank disclosure of his finances in a barely disguised attempt to avoid the wife's claims. The Judge awarded the wife £17.5M of the husband's fortune, ordering that properties held by the companies should be transferred to her to meet the award.
The Court that heard the appeal was comprised of Lord Justice Thorpe, a very senior family Judge, sitting with two commercial Judges, Lords Justice Rimer and Patten. Although Lord Justice Thorpe found in favour of the wife, both commercial Judges found for the companies and the appeal was allowed. According to Lords Justice Rimer and Patten, it had not been open to the trial Judge to pierce the companies' veils of incorporation so as to identify the companies with the husband. Without such piercing and identification, there was no basis for an order directly in respect of shares and / or properties held by the companies, because those assets were companies' assets, not the husband's.
The implications of the decision could be far reaching. It seems that a determined spouse who wants to avoid his or her obligations on divorce needs only tie up all of his or her wealth in a bona fide limited company. As long as this is done prior to the marriage, or well before the first sniff of marital difficulty, he or she can evade having to comply with orders made by family Judges.
Recognising this, Lord Justice Thorpe said that the decision presented "an open road and a fast car" for the economically powerful who seek to avoid their spouse's claims on divorce. If the law permits this "it defeats the Family Division judge's overriding duty to achieve a fair result", he concluded.
Despite this the commercial judges were undeterred. Rubbing salt into the wound, Lord Justice Patten said he believed that: "...Judges of the Family Division [have adopted and developed] an approach to company owned assets in ancillary relief applications which amounts almost to a separate system of legal rules unaffected by the relevant principles of English property and company law. That must now cease."
Assuming Lord Justice Patten is right and family Judges had created one law for spouses and another for everyone else, the question taxing family lawyers is whether this actually matters.
The fact is that family Judges do not trample roughshod over genuine third party interests. They do however recognise, and are alive to, the reality of family life and the extent to which financially dominant spouses are frequently inclined to deploy all manner of strategies to avoid their partners' claims on divorce.
Indeed, there has been a long tradition, going back to Lord Denning, of senior Judges recognising that familial relationships are unique in law and that to do justice between husbands and wives, strict legal concepts applicable to arm's length relationships have to be stretched; sometimes beyond breaking point.
In one such instance Lord Denning, the celebrated law reformer, ruled in 1952 that a deserted wife occupying a marital home had a personal licence to stay there. The decision was derided by other Judges and later overturned by the House of Lords in a 1965 case. Two years later Parliament passed the Matrimonial Homes Act 1967 which effectively restored Lord Denning's decision by giving a statutory right to wives to occupy the family home.
In recent years, Parliament has been less responsive. It has been left to the Supreme Court to develop a body of Family law that reflects societal change and which requires Courts to adopt a fair approach to the resolution of matrimonial finance cases. I believe that the decision in Petrodel has the potential to subvert that approach.
I understand that Mrs Prest intends to appeal to the Supreme Court. Two of the Supreme Court Judges sat as Family Division Judges. It is to be hoped that they can build an effective road block.