Family: Your business
During the last decade or so there have been three court decisions which have impacted upon the business client, generally to their advantage.
Why is there an issue?
When the family court have to get involved following a permanent separation or divorce, they have found it difficult to grapple with the interaction between the business and personal assets owned by a couple. The court needs to decide the extent to which business assets are available for distribution and whether there should be a variation from the existing partnership or corporate arrangements.
What is the court's position?
In a landmark case called White v White (2001) the court decided that the starting point should be what the ownership of the partnership assets were and how much each person would have received had the partnership been dissolved. Matrimonial law should only be applied as a counter balance to achieve fairness. Prior to this, wives of wealthy men had to make do with their "reasonable means" which often bore little resemblance to the previous lifestyle of the family. In this case it was said that Mrs White should receive what was due to her under the farming partnership.
What other developments have there been?
In another landmark case in 2010, the family courts were criticised for maintaining, for almost 20 years, a practice in relation to disclosure in financial proceedings that was not compatible with the general law of confidentiality. Again, the court decided that the matrimonial law should not take precedence over other laws such as the Data Protection Act 1998 and the Computer Misuse Act 1990. Accordingly, the Court of Appeal granted an injunction to Mr Imerman (Imerman v Imerman 2010) requiring his wife's solicitors to deliver up seven lever arch files of documents without retaining copies and preventing his wife from relying on any of the information that had been inappropriately obtained about his business affairs. The husband had shared a work office and computer system with his wife's brother and, following the issue of proceedings, the wife's brother accessed and copied information and documents of the husband's from a server in the office and passed them to their solicitor. The court found obtaining another persons private documents or information breached confidentiality legislation. Query, whether the situation would be the same if the information was not obtained from the workplace, by a third party and early on in the proceedings?
Where are we now?
The recent decision of Petrodel v Prest (2012) has developed the law further. Prior to this case 100% control of a business entity tended to be equated with beneficial ownership and the assets available for distribution by the family courts. However, the Court of Appeal has since said that total control of a company is not in itself grounds for "piercing the corporate veil" and it was held that an application of "control" to decide a business structure would mean that third parties would be unlikely or unwilling to trade with one man companies, since such companies could never be more than mere nominees for the individual who controls them, whoever that might be.
It was pointed out that an unsatisfied creditor of the owner of a one man company cannot look to the assets of a company to meet his debts and, therefore, a one man company does not metamorphosize into the individual simply because the person with a wish to abstract its assets is his wife. The wife is entitled to look to the value of the owners' shares in the company as is any other unsatisfied creditor, but not the assets themselves.
So where does this leave us?
This case is yet to be appealed to the Supreme Court where we might get further guidance on these important matters but the current effect of the Prest decision is to encourage the protection of family wealth through corporate structures. Family investment companies are likely to increase in popularity as an alternative to trusts and other vehicles for the preservation of family wealth. The value of the shareholding can, of course, continue to be taken into account but the corporate structure is more likely to be preserved if a claim can be satisfied by the offsetting of other assets.