Divorce - How business arrangements are challenged by the Court (March 2014)

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?