This Bullet Proof Corporate Veil

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This article by Olubukonla Olusada examines the rationale behind the UK High Court, Court of Appeal and Supreme Court judgements in the celebrated divorce case of the Nigerian couple, Yasmin and Michael Prest, while giving a mini bio of Lord Sumption, who delivered the lead judgement at the Supreme Court, claiming that the Supreme Court had found a ‘third way’ to make its decision, because of its need to seek justice and fairness for Mrs Prest

Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 is a leading UK company law decision of the UK Supreme Court concerning the nature of the doctrine of piercing the corporate veil. Since that year’s earlier decision in VTB Capital city Plc v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337, the legal fraternity had assumed the UK Supreme Court might use the opportunity in the Prest case, to give full clarity on the English company law position in relation to piercing of the corporate veil.

What was handed down proved anything but ordinary, and stopped short of jaw-dropping and drew gasps from lawyers, accountants, company directors, creditors and service providers all over the UK and the world.
Tuesday marks the fourth anniversary of the decision in Prest. Time has passed, and the consequences of the decision, are now better understood.

Madeleine Stowe, the U.K. Divorce Guru
Interviewed on Sky News the day of the decision, Madeleine Stowe, the go-to UK divorce guru, gave an uncharacteristically muted response that captured her relief, when she said the “the Supreme Court found a way to ensure that after a five year court battle, Mrs Prest gets paid” and concluded “Mrs Prest squeaked home”. Looking at that same Sky News bulletin, I can’t help thinking Mrs Prest didn’t look happy. Marshalled to address the assembled Press, her Counsel, made a brave attempt to talk up his position, yet he looked more relieved than anything. His bacon had been saved. Poor Mrs Prest, trussed up in white as her handlers prepared her to be fed to the press. Not a person of color by her side.

Why Mrs Prest looked Unhappy
As I read more about the case, I began to understand why ex-Mrs Prest looked unhappy that day, and I am left with no option but to feel very sorry for her. If ever there was a victim, she was one. I got the impression that Mrs Prest was a victim, perhaps, less of her own lack of judgement and more, a victim of the celebrity divorce lawyer determined to improve their star rating by taking down her ex-husband, seemingly at any cost.

In hindsight, the impression given is that she was poorly advised and misled in terms of ancillary relief expectation. Be it her lawyers or other advisers, someone convinced her that this was going to be a big money pay-out.

Whilst the mention of “Nigerian” and “Oil tycoon” may be an eye-grabbing cheap headline, a cool head would have seen from day- one that any ancillary relief payout, would have more to do with company law and property law, than anything else. Time spent focusing on that would have meant a shorter trial and definitely less money wasted.

Mrs Prest had contended that her then husband was worth hundreds of millions of pounds. If true, that alone would mean that Mr Prest was the richest black person in the UK. It was disclosed in the High Court, that her lawyers were paid approximately £1.3 million of which she had paid just under £900,000, very largely by way of a litigation loan. Yes, you read right, ‘litigation loan’. I extrapolated that Mrs Prest must have spent a further £ 700,000.00 going to the Court of Appeal and then to the Supreme Court. So some £2 Million would have been spent hunting so-called millions. A woman who according to court papers, had no money or family money, is then advised by her lawyer that she can qualify for a litigation loan to sue her husband, IF the loan application is endorsed by the very same lawyer who will be the ultimate beneficiary of the loan. Isn’t that some type of London is the divorce capital of the world, and there is a derivative industry that ensures the business of divorce doesn’t run out of steam

Mrs Prest won in the High Court and then sadly, lost everything at the Court of Appeal. Staring bankruptcy in the face and desperate, she thought there was no option but to go to the Supreme Court. Why her advisers or family didn’t tell her that it might be in her long-term interest to settle matters at this time, is not disclosed. Perhaps she was clinging to her High Court success and that had given her a false sense of expectation, not to mention, entitlement. Her world must then have fallen apart, when the Court of Appeal focusing on company and property law, shot down the High Court ruling that the London properties were property to which “Mr Prest was entitled”, was not justified. Salomon v Salomon an 1897 case ruled supreme, and this was a bullet proof corporate veil.

Moylan J’s (the judge in the High Court) fundamental error was to hold that the husband’s sole control of the companies as their 100% owner, enabled him to deal as he wished with the companies’ assets (the London properties), and that it followed that the husband was therefore, the beneficial owner of such assets and so ‘entitled’ to them within the meaning of s 24(1) (a) MCA 1973. To make an order under s 24(1) (a) the judge had to be satisfied that the properties were the husband’s beneficial property. A finding that they were ‘effectively’ his property was not good enough. Company law upheld, Salomon v Salomon upheld and Mrs Prest and her legal team left in a state of shock, not that far from being dead.

So set the scene for Mrs Prest’s appeal to the UK Supreme Court and what’s more? It was to be televised. I cannot imagine how I would have felt, opening up my private matter to the glare of TV cameras.

Lord Sumption and the Supreme Court
The Prest case was heard by a panel of seven. Joshua Rosenberg, writing for the Guardian reported:
“the main judgement was given by the most junior member of the seven-person court, Lord Sumption. As had been thought when he was appointed straight from the bar in 2011, he has proved to be the court’s workhorse, writing the detailed judgement and — we may assume — coming up with the device on which the ruling was based. The remaining six judges all agreed
Educated at Eton and Oxford, Jonathan Philip Chadwick Sumption, Lord Sumption, has been described as a uniquely British object, almost a metonym for the establishment and one of the guardians of a system that has provided the most stable democracy in the world, despite never being written into a constitution.

Sumption has also been described as the cleverest man in Britain.
In October 2012, as a QC, he argued his last and biggest case as a barrister. Roman Abramovich against fellow billionaire oligarch, Boris Berezovsky, proved to be a titanic struggle. Berezovsky had a doctorate in applied mathematics and considered himself whilst under cross-examination, Sumption’s intellectual sparring partner. Berezovsky lost the case and less than a year later, broken and out of money, he was found dead in the bathroom of his home near Ascot, Berkshire.

Sumption it is rumoured, was paid by Abramovich in excess of £5 Million in fees.

The Prest Judgement
To me, if ever there was anyone able to, find the ‘way’, referred to by Madeline Stowe, then Lord Sumption, was such a person. The Judge at first instance, had not found any relevant impropriety on the part of Mr Prest, nor did he find that Mr Prest was concealing or evading any legal obligation owed to his wife and therein lay the conundrum. In particular, it was relevant that the legal title to the properties was vested in the Companies before the marriage broke up, and in several cases, as far back as 1988 and 1991, and long before Mr Prest had even met his future wife. So it could not be said that Mr Prest was using the Companies to evade his obligation to pay the divorce settlement to his wife.

The Court of Appeal went further, exonerating Mr Prest by saying that the company structure was not being used to conceal or avoid liability. The Appeal Judges said the company structure was perfectly legal and was a way of seeking to provide a degree of protection for his family wealth, which may or may not be effective, depending on the nature of the rights retained by the husband. From Mr Prest’s perspective, the wealth and the corporate structure is, and remains his, but at the same time, he is able to take advantage of the tax and other benefits of holding it within a corporate structure. Finally and most telling, Lord Patten of the Court of Appeal said that several cases relied on by the Family Courts cannot be relied upon as a correct statement of the law, following the decision of this court in Adams v Cape Industries plc. “They have led judges of the Family Division, to adopt and develop 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.”

Lord Sumption best summed up the conundrum when he said “The problem in the present case is that the legal interest in the properties is vested in the companies, and not in the husband. They were vested in the companies long before the marriage broke up. 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. The judge found that Mr Prest’s purpose was “wealth protection and the avoidance of tax”.

Why then, did the Supreme Court feel the need to find a “way” to allow Mrs Prest to have seven UK properties? Why, if the Court of Appeal and Supreme Court confirmed that Petrodel’s corporate integrity had to be respected, did it feel the need to find a “way” to infer that the companies’ properties were held on resulting trust for Mr Prest, and further infer that he must have had provided the funds to purchase them?

Lady Hale best captured the sentiment of the Supreme Court panel when she said:
“I would dismiss this appeal on all but the issue of whether either party had a beneficial interest in the properties in question but allow it on that ground. I fervently hope that the wife will gain some benefit from the outcome of all this litigation, although in the light of the mortgages which apparently encumber the properties I am not optimistic that she will. “

Lord Sumption was careful to point out that this was an exceptional case, and the issue was highly fact-specific. With this caveat issued, he found a “way” for Mrs Prest which was pure genius in its ingenuity, yet I would say, sits uncomfortably given the facts of the case.
What is puzzling to me and I would suspect law-students reading the transcripts, is the High Court, the Court of Appeal and Supreme Court, All confirmed that:
• Mr Prest did nothing wrong in the legal way he set up his affairs.
• Mr Prest did nothing wrong, in trying to preserve his family wealth or taking advantage of the tax and other benefits of holding it within a corporate structure.
• Mr Prest is described as a hands on Father, who lavished his children and Mrs Prest with a fabulous lifestyle.
• Mr Prest gave full contributions during the marriage, and was more than likely to continue to make substantial contributions in respect of the children, for a further period of ten to twelve years.

Why?
What then prompted the Supreme Court decision? The answer is simple; a need to seek justice, in terms of that quality of being fair and reasonable. The Court of Appeal had been correct in its application of company and property law, but that would have left Mrs Prest, staring at a mountain of debt and impecuniosity. From a public policy point of view, would that be considered Justice? I suspect for Lord Sumption, as it probably was for Mr Justice Moylan, that would be an audacity too far and would offend a particular notion of fairness.

I also get the impression from the transcripts, that Mr Prest didn’t help himself. None of the Judges, bar one female Judge in the High Court, seemed to like him, and Counsel for Mrs Prest lost no opportunity to mention “Nigeria” and “Oil Baron”, as many times as possible. Nearly every Judge commented on Mr Prest’s intelligence, yet seemed to suggest that such intelligence was underpinned by an arrogance towards the proceedings. No doubt, this would have offended the sensibilities of any UK Judge.
Mr Prest should have been told by his advisers, that UK Family Courts are probably more used to seeing delinquent black fathers on social welfare, as opposed to a public school educated black man, who the Judges saw as having a sound command of company and property law. I read and was left with the impression that the Supreme Court found Mr Prest to be a rascal, who would bounce back, but should not be allowed to ‘get away with it’ and so, as Joshua Rozenberg said, The Supreme Court found the ‘third way”.

I hold the opinion that, Mrs Prest’s ancillary relief case would have gone no further than the High Court in any of India, Nigeria or other Common Law jurisdictions, where parties disagreeing on what the law means, look to past precedential decisions of relevant courts. In these jurisdictions, High Court Judges would have been more inclined to follow the UK Court of Appeal thinking and nothing more.

Assumptions and Inference
I also ask myself that, in the absence of the media and the final streaming on TV, would the Supreme Court have come to the same decision? Was this a judgement determined by assumption and inference? When you read the thread of transcripts from the High Court through to the Court of Appeal and finally at the Supreme Court, you get the real impression that it was a ruling, tailor-made for finding that necessary third way, yet less brilliant, in that it creates more problems than the solitary one it aimed to solve. It has therefore, planted the seeds from which further litigation could grow. I say that because:
• The Court inferred that the Companies held the UK properties on trust for Mr Prest. To reach this conclusion, Lord Sumption, had to also infer that the Companies did not pay for the properties. Yet a bank statement or solicitor’s conveyancing ledger, would show who paid for the properties, and so there would be no need to make an inference in the face of empirical facts. Further, UK Anti Money Laundering (AML) recommendations make it incumbent on UK solicitors, to hold comprehensive records of monies that come into their client’s account.
• The Court inferred that the Companies held the UK properties in trust for Mr Prest, because it inferred that the Companies could not have funded the purchase of the properties they owned, and that ownership of the property had nothing to do with the business of oil trading. Yet the court confirmed that BNP Paribas held the properties as collateral in support of oil trading activities.
• BNP Paribas, United Bank of Kuwait, Royal Bank of Scotland, Citibank had for over fifteen years lent the Companies large sums of money. These banks would have done their due-diligence, and satisfied themselves there were no 3rd party interests that might defeat their right of forfeiture or sale in the absence of non-payment. The Supreme Court retroactively rendered 15 years plus of mortgage and loan agreements between these banks and the Companies, null and void. They certainly would not have lent such sums to Mr Prest, if they thought he had for each of the 15 years, been holding them beneficially for his future and then present wife.
• Rather surprisingly, the judgement remained silent of the issue of the Company third party creditors, and the effect of the judgement on them.
Conclusion
What is clear is that the Prest v Petrodel Judgement, doesn’t close the matter for Mrs Prest. I genuinely feel for her, and I feel that the UK legal system has failed her and left her unnecessarily exposed. Other persons who may be affected by the decision, were not parties to the proceedings. These include banks and other persons who dealt with the companies, and for that matter, any other taxing authority. In any future litigation, they would have the opportunity, not only to put forward their own arguments (which may or may not have been put forward before by others), but also would have the opportunity to put forward whatever further or different evidence they thought appropriate. In addition, they would themselves be able to obtain and adduce evidence through the disclosure process in court proceedings.
The Supreme Court considered that it did not have a complete picture of the evidence of what had happened, and was therefore proceeding on the basis of certain limited primary facts, from which significant inferences were being drawn. It does not follow that, if a re- litigation of the same point took place, the evidential gaps would continue to exist. It might be that on a re-litigation, there would be more (or different) evidence, and the court might come to a different conclusion. It is instructive to consider the reasoning of the court leading to the conclusion that there was a resulting trust of the properties concerned.
In trying to find another way to give one particular wife what she is seeking, the Supreme Court has also left a lot of unanswered questions, which may cause problems in the future. At some point the courts will need to address the question.

Olubukonla Nuga Olusada, Legal Practitioner, Partner, Alpha Law Firm, Lagos