In the recent English Supreme Court case of Petrodel Resources Ltd and others v Prest [2013] UKSC 34, the Husband was ordered to transfer to the Wife, as partial settlement of a lump sum payment upon their divorce, 7 properties beneficially owned by him but legally vested in companies owned and controlled by him. It is clear that under limited situations, the separate legal personality of companies can be overcome so that assets vested in those companies are available for distribution in matrimonial proceedings.

Background
Upon divorce, the Wife claimed from the Husband a lump sum payment of £30.4 million as ancillary relief on the basis that the Husband’s net assets exceeds “tens if not thousands of millions pounds”. However, the alleged assets of the Husband, in particular 7 properties in UK, were legally held by companies namely Petrodel Resources Ltd (“PRL”) and Vermont. The Wife argued that these 7 properties were all beneficially owned by the Husband; the Husband claimed that he was only a chief executive of PRL.

The Husband declined to reveal the ultimate shareholder and denied any personal interest in the shares of the companies. However, evidence showed that (i) the directors of the companies accepted instructions from the Husband; (ii) the Husband’s personal expenditure far exceeded his salary of the claimed position as PRL’s chief executive; and (iii) the Husband had unrestricted access to the companies’ assets and basically used PRL’s assets to fund his and his family’s expenditure. In such premises, the court was able to infer that PRL and Vermont were wholly owned and controlled by the Husband.

Jurisdiction of Family Court
Under the Matrimonial Causes Act 1973 (“1973 Act”), being the equivalent of the Matrimonial Proceedings and Property Ordinance in Hong Kong (Cap 192) (“MPPO”), the court has power to make an order that a party to the marriage shall transfer to the other party certain property in his/her possession or reversion. Further, under the 1973 Act, when making an order in relation to the settlement of property in a divorce or the financial provision to a party to a divorce, the court shall have regard to the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future.

The Supreme Court emphasized that courts exercising family jurisdiction do not occupy a “desert island” in which general legal concepts have a special meaning or a wider application. The court is entitled to take into account of the husband’s ownership and control of the companies and his unrestricted access to the companies’ assets in identifying his available resources; but it does not follow that the court would necessarily order the assets of the companies owned and controlled by the husband to be directly transferred to the wife in satisfaction of a lump sum order, in the absence of circumstances satisfying the principle for piercing the corporate veil.

Piercing the Corporate Veil
Owing to the doctrine of separate legal personality of companies (the “corporate veil”), legally speaking, the Husband as a shareholder of the companies did not have any right to such properties held under the name of the companies. Piercing of the corporate veils of PRL and Vermont can only be justified if their separate legal personalities are abused.

The Supreme Court summarized the law into two distinct principles: (1) “Concealment principle”, whereby the court only looks behind the corporate veil to discover the facts which the corporate structure is concealing; and (2) “Evasion principle”, where a person deliberately evades or frustrates the enforcement of his existing legal obligation or liability by interposing a company under his control, the court may pierce the corporate veil only for the purpose of depriving that person’s or the company’s advantage that they would otherwise have obtained by the company’s separate legal entity.

In the present case, the Supreme Court noted that the 7 properties were already vested in PRL or Vermont long before the marriage broke up. Strictly speaking, the Husband did not interpose these companies in order to evade existing legal obligation i.e. his liability owed to his wife after the divorce. Therefore, the “evasion principle” does not apply. Although the Husband gave false evidence concerning his interest in the companies, that simply means the court must look behind the corporate veil in order to discover the truth concealed under the “concealment principle”.

Beneficial Ownership of the Properties
Whether the 7 properties in question were beneficially owned by the Husband is highly fact-specific. Firstly, 3 of the properties under PRL were originally purchased by the Husband’s funds. Secondly, 2 other properties under PRL and 1 property under Vermont were purchased for substantial consideration by PRL when PRL had not begun commercial operation and generated its own funds. The court thus inferred that the funds must have come from the Husband. Accordingly, the court ruled that these 6 properties were all held on trust for the Husband by PRL or Vermont.

The last property concerned was purchased for substantial consideration by PRL in Vermont’s name, but the court found that such a residential property has nothing to do with the oil trading business of PRL. Furthermore, a consistent pattern could be discerned by which the Husband causes properties to be acquired by companies under his control with funds provided by himself. In the absence of explanation, the Supreme Court concluded that this property was beneficially owned by the Husband.

Conclusion
The Supreme Court declared that the 7 properties vested in PRL and Vermont were held on trust for the Husband and ordered that PRL and Vermont should transfer the 7 properties to the Wife in partial satisfaction of the Husband’s lump sum payment to the Wife.

In conclusion, even if a party to the marriage conceal his/her assets behind the corporate veil by interposing a company as legal holder of the properties, the court may still order the companies to transfer properties to the other party under the MPPO being the equivalent of the 1973 Act , either by piercing the corporate veil under the evasion principle, or by virtue of a legal relationship between the company and the husband/wife, such as trust or agency, as disclosed under the concealment principle.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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IMPORTANT: The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.