Introduction. Prest v Petrodel Resources Ltd [2013] UKSC 34. Are family investment companies still a viable alternative to trusts? short, after Mr and Mrs Prest divorced, Moylan J. awarded Mrs Prest a sum of £17.5 million as a fair division of Mr Prest’s assets. Prest (Appellant) v. Petrodel Resources Limited and . basis on which parties deal with companies. Mr Prest alleged that he had no interest in the properties and that if he did, they were held on trust for his siblings a result of ‘seed’ money coming from his late father. This had led families to consider other wealth-planning vehicles. In addition, the Finance Act 2006 completely changed the wealth-planning landscape for UK-domiciled families by making accumulation and maintenance trusts creatures of history and by extending the relevant property regime – including the 20 per cent lifetime entry charge on gifts over the nil-rate band (which was also frozen at GBP325,000 until 2017/18 in the most recent Budget) – to almost all lifetime trusts. [2010] 19 NWLR (Pt. In Prest v Petrodel, the Court was faced with a The case concerned a very high value divorce.. Right from the decision of the English House of Lords in The case companies to hold legal title to properties which belonged to him In Petrodel [2013] UKSC 34, the companies lost on appeal to the Supreme Court and their seven properties were ordered to be transferred to the wife, but, paradoxically, the judgment confirms the efficacy of FICs as wealth-protection vehicles where sensibly and appropriately used. This can be seen in the relatively recent Nigerian The Supreme Court considered three options: In respect of (1), the Supreme Court took the view that piercing the corporate veil is possible ‘in a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company’ (para 35). Supreme Court case of AKIN-WUNMI ALADE V. ALIC NIGERIA LTD The value of the judgement was not in question, as the courts had already ruled the husband – a Nigerian oil tycoon – would have to pay his wife £17.5m, largely due to his conduct during the case, and he was not arguing over this. In this example, for the parents to retain control of the FIC, they need to retain control of the shareholder voting rights. Prest v Petrodel Resources Ltd [2013] UKSC 34. personality of a company is to draw a veil of incorporation over In giving judgment on 12 June 2013, the … The majority of commentary in the wake of Prest v Petrodel Resources Ltd has focussed on the Supreme Court’s discussion of a court’s jurisdiction to pierce the corporate veil. Salomon v A Salomon and Co Ltd [1897] AC 22 is alive and well after Petrodel. that there is a limited principle of English law which applies when 1226) 111 where Per Galadima J.S.C stated but is obligated to act for the good of the beneficiaries. The majority of commentary in the wake of Prest v. Petrodel Resources Ltd has focused on the Supreme Court’s discussion of a court’s jurisdiction to pierce the corporate veil. be used as an excuse to justify illegality or fraud it is a quest Family general partnerships (FGPs) are something our firm has used as an alternative way to separate control and ownership. VTB was concerned with a different problem – the consequences of lifting the corporate veil, but approved (with one exception that is irrelevant here) Munby, J’s six principles that set out when a court is entitled to lift the corporate veil. personality and company law; for our present purposes however, the would otherwise have obtained by the company's separate legal The judgment of the Supreme Court in Petrodel was handed down on 12 June 2013. In June this year, the Supreme Court (England’s highest Court) gave its decision in the case of Prest v Petrodel. 8, Lord Sumption said separate personality and property of a company is sometimes described as a fiction, and in a sense it is. POPULAR ARTICLES ON: Corporate/Commercial Law from Nigeria. to avoid the normal consequences of the statute which may result in It will be interesting to see the principles applied by the UK Supreme Court in this case being applied by the Nigerian courts Since the facts of the case did not fall within the The Supreme Court has just handed down its judgment in the landmark case of Prest v.Petrodel. The terms of those shares could be drafted with or without income rights (although see below) and, more importantly, can be drafted to delay any redemption rights until the children are older. control it gained considerable publicity in Prest v Petrodel Resources Ltd & Others [2013] UKSC 34.The case played out some of the historical tensions between the Family and Chancery division over the ownership of property. The memorandum and articles will be public documents, but the shareholders’ agreement will be private, so this often contains any family governance procedures. justice of the case so requires, especially where there is Note that if a property is held by a company on trust, or as a … This can be done by limiting the voting rights of the FIC to those classes of shares which the parents hold. corporate veil was available under Section 24 of the English Earlier this year, the Supreme Court handed down its much-anticipated judgment in Petrodel Resources Ltd v Prest. Interestingly, limited companies are exempted from being treated as collective investment schemes. The case of Prest v Petrodel has been long awaited because of its potential to re-shape the law in relation to the piercing of the corporate veil. divorced couple were citizens of both Great Britain and Nigeria. It was of key interest as it was a legal cross over between family law and company law. and Allied Matters Act in which Section 37 codifies the common The court therefore had jurisdiction to make a transfer order. issue. He was born in Nigeria and she in England. the Judge should not have made the order to transfer the They could be appointed trustees of the trust and, as trustees, they subscribe for up to GBP662,000 of ‘A’ ordinary shares. The case is interesting particularly as it might have important Petrodel Resources Limited (1), Petrodel Upstream Limited (2), Vermont Petroleum Limited (3) v Yasmin Aishatu Mohammed Prest (1), Michael Jenseabla Prest (2), Elysium Diem Limited (3) [2012] EWCA Civ 1395 (Court of Appeal, Lord Justice Thorpe (dissenting), Lord Justice Rimer, Lord Justice Patten, 26 … company. The alternative is for the parents to gift monies to the children and the children to subscribe for the shares themselves. In Prest v Petrodel the husband was a wealthy oil trader who had built up a portfolio of properties; all of which were in the names of various companies. The point was not argued below and does not appear seriously arguable here’. matters of apportioning specific findings of civil liability or the corporate veil for the purpose, and only for the purpose, of Before considering FICs in detail, it is also helpful to consider other vehicles that have been put forward as an alternative to trusts since 2006. subject to an existing legal restriction which he deliberately those in actual control of a company. Neutral citation number [2013] UKSC 34. situation which posed the option of disregarding the concept of Lord Neuberger, President Lord Walker Lady Hale Lord Mance Lord Clarke Lord Wilson Lord Sumption . the facts touch upon. the Company. Profit extraction can, at first, appear inefficient because of the double-tax charge. 20 June 2013. PREST. law of trusts to disputes brought before them. In this approach, the parents do not retain any funds for themselves. Introduction. In Prest v Petrodel at para. In fact, where possible, there is a strong preference that parents do not retain any equity interest in the FIC as this will trigger the need to manage the GROB issue both immediately and in the long term. its shareholders. However, changes were introduced in 2009 which significantly enhanced the tax treatment of dividend income received by UK companies and the rate of corporation tax is now on a downhill trajectory to 20 per cent from 1 April 2015. Mr and Mrs Prest (who had dual British and Nigerian citizenship) had their matrimonial home in London but it was determined by the court that Mr Prest was based in Monaco. Both have dual Nigerian and British nationality. corporate veil.". The diagram above assumes there will be a combination of ‘A’, ‘B’, ‘C’ and ‘D’ ordinary shares. veil, but held that the companies were bare trustees of the This essay will argue the decision has done little to fault the Salomon principle. Sadly, the trust’s force now seems to be waning. The companies appealed this order on the basis that the Family Court had no jurisdiction to make it because although it was correct that the husband controlled the companies, they were separate legal entities and it was the companies that owned the properties not the husband. To achieve this using an FIC, the key consideration at the outset is what share classes the FIC will have and what rights will be attached to each of those share classes. This has overshadowed the Court’s decision to recognise a resulting trust, which achieved the same result as … evades or whose enforcement he deliberately frustrates by On further appeal to the Supreme Court, Lord Sumption, The "statute" referred to above is the Companies one party for the benefit of another. In KOTOYE V. that the companies were trustees of the properties in dispute. In 2011, Moylan J gave judgment in the case of Prest. criminal wrong. James and Jennifer have just sold their business for GBP3 million. Moylan J, in the Family Division of the High Court, held that Mr Prest had the ability to transfer the properties in practice, so he was “entitled” to them under MCA 1973 s 24(1)(a). The wife appealed this decision to the Supreme Court. This, however, may not be suitable if the children are over 18 years old as they could then choose to invest the monies in something else! This alternative structure is shown below. So it is hard to justify the costs of an FLP with investable assets of less than GBP10 million, and they have not been used widely. of Common Law's gifts to global jurisprudence. Over the years, Courts have faced with situations about your specific circumstances. 12 Jun 2013. The appeal concerns the position of a number of companies belonging to the Petrodel Group which were wholly owned and controlled by Michael Prest, the husband. guide to the subject matter. Privacy notice | Disclaimer | Terms of use. Companies were traditionally avoided as family investment holding vehicles by UK-domiciled families because of the double layer of corporate and personal taxation necessary to extract investment profits. The issue was whether those properties could be brought into the calculation of the matrimonial assets. the trust). The double-tax charge on (i) profits in the company and (ii) subsequent profit extraction by the shareholder was traditionally why a company was unattractive as a wealth-holding vehicle. The principal parties before the judge, Moylan J, were Michael and Yasmin Prest. focus will be on the law of trusts and the principle of piercing By using our website you agree to our use of cookies as set out in our Privacy Policy. concluding that the Court has a limited power to pierce the veil of To avoid this, the preference shares could carry appropriate income rights. approved the Court of Appeal's reasons for not piercing the There is no specific way an FIC needs to be structured, and this is why an FIC is potentially such a useful investment vehicle. 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, resulting trusts and equitable proprietary remedies in the context of English family law. behind or pierce the corporate veil.". In Prest v Petrodel [2013] UKSC 34 the English Supreme Court undertook a review of the principles of English law which determine in what circumstances, if any, a court may set aside the separate legal personality of a company from its members and attribute to its members the legal consequences of the company’s acts. by Patrick harney teP, Laura brown and hy JonesoLL E ver since the Finance Act 2006 clampdown on the use of trusts by UK domiciliaries and, as a separate development, the 2009 amendments to the corporation tax legislation, family investment When the husband failed to make the payment, Moylan J ordered the companies (in which the husband had a controlling interest) to transfer seven London properties to the wife in part satisfaction of the order, having found the husband to be the effective owner of those properties. Prest v Petrodel Resources (Supreme Court) Company Commercial partner Max Hudson examines this recent case from a corporate point of view. The Court of Appeal by a majority The case of Prest v Petrodel Resources Limited and Others [2013] UKSC 34 has been a battle, through the English High Court, Court of Appeal and Supreme Court, between the principles of corporate integrity on the one hand and fairness on divorce on the other, as much as between Mr and Mrs Prest and the companies in which Mr Prest had an interest. The trustee is given legal title to the trust property, but is obligated to act for the good of the beneficiaries. Because the parents do not retain any shares in their own names the GROB concerns are significantly reduced. Facts: Mr Prest was an … Contrary to what it might seem, the doctrine of separate legal However, unless there is a reason for them to participate by way of preference shares it is preferable for them to provide additional funding by way of loan as there are fewer company law considerations on making loan repayments. This was in reliance on the obiter dicta in Nicholas v Nicholas [1984] FLR 285. 6. The The Supreme Court gave its highly anticipated judgment on the controversial case of Petrodel v Prest 1 in 2013. interposing a company under his control. This decision is of considerable importance as it significantly widened the circumstances in which assets held in the name of companies will be treated as being held on trust on behalf of the individual(s) behind that company. that was improper or the assets were held in trust for the husband, beneficially owned by its controller is a highly fact specific The trustee is given legal title to the trust property, In this case the wife was fortunate that there were a number of UK properties (not just the matrimonial home, which would have gone only a small way to satisfying her claim) about which the Court could make orders that could be enforced and could at least go towards satisfying her financial claims against the husband (subject to the mortgages on the properties). At issue was whether the family courts can pierce the corporate veil when assets are owned beneficially by a company, but controlled by one of the spouses. When determining that market value, the risk is that because the share rights are restricted, HMRC could argue that the market value is less than the initial subscription monies. It is, however, important for family lawyers to note that this decision and a number of other recent decisions, including Imerman [2010] EWCA Civ 908 and Radmacher [2010] UKSC 42, seem (after many years of the law moving in the opposite direction) to be moving back to being more in favour of the stronger financial party. This can prove to be a very efficient way of funding university education. Once the subscription process is finished, and the FIC fully funded, the first objective of retaining control while changing ownership will have been achieved. However, the point to The Matrimonial Causes Act 1973, s24 gives the court the power to order one party to the marriage to transfer any property to … officers may be personally responsible for the faults of the As a result of these changes, although the trust can still achieve separation of control and ownership, the separation now comes at a significant cost and a family can no longer be certain that the separation will be respected by the courts on a divorce. In Prest v Petrodel, the Court was faced with a situation which posed the option of disregarding the concept of separate personality. An FIC will also be in a better position to accumulate post-tax wealth derived from capital gains, not only because it enjoys the lower corporation tax rate when compared to the 28 per cent CGT rate for an individual, but also because as a company it can still benefit from indexation allowance. This was due to the fact that Moylan J had left this option open, having not made any finding on the point (save that the matrimonial home was held on trust for the husband as it has a special significance for the Family Court). However, is this charge as bad as first thought? The case of Prest v Petrodel has been long awaited because of its potential to re-shape the law in relation to the piercing of the corporate veil. or lift this veil. power. As James and Jennifer can only contribute up to GBP662,000 without triggering an inheritance tax liability, they will need to consider other ways of funding the FIC. The issue this creates is that the holder of the shares would have an ongoing income tax liability or, if the coupon is rolled up for a fixed period subject to the directors’ discretion to pay earlier, the holder may receive more money on the eventual redemption of the preference shares than was originally intended and so this issue will need to be balanced against the risk of a lifetime transfer. others (Respondents) before . WTLR Issue: September 2013 #132. The Facts. Michael Prest (husband) and Yasmin Prest (wife) were married for 15 years and had four children before the wife petitioned for divorce in March 2008. Court cases similar to or like Prest v Petrodel Resources Ltd. This did not therefore assist the wife, given the finding by Moylan J at first instance that there had been no impropriety that would allow the piercing of the corporate veil. A sample structure might look like the diagram below. Yasmin Prest. Facts. Prest. The case provides a framework for an examination of a number of issues relating to the veil-piercing rule. The Companies and Allied Matters Act 2020 ("CAMA 2020", "the New CAMA", or "the Act") was assented to by President Muhammadu Buhari on 7 August 2020. All rights reserved. This is particularly so in v Simmonds [1971] 1 WLR 1381 was not always “sufficiently appreciated”. As trustees, James and Jennifer will control the voting rights of the FIC as the trustees hold the majority of the voting shares in the FIC. She argued that the corporate veil should be pierced Our courts have This will not always be the case. In this case, the husband had effectively purchased a number of properties in England which he had put into the names PREST. Registered Office: Artillery House (North), 11-19 Artillery Row, London SW1P 1RT, United Kingdom. The Supreme Court has just handed down its judgment in the landmark case of Prest v.Petrodel. utilize the law of trusts, based on the facts of the case, to delivering the lead judgment, set out the principle regarding Here in Nigeria, the decided of cases on piercing the veil of © Mondaq® Ltd 1994 - 2021. reversed the decision of the trial Judge, holding that unless the requiring it to discount the separate legal personality and reveal case of Prest v Petrodel. Sign Up for our free News Alerts - All the latest articles on your chosen topics condensed into a free bi-weekly email. established that a company in the eye of the law is different from 12 June 2013 . Lord Sumption endorsed Munby J’s judgment in Ben Hashem v Al Shayif [2009] 1 FLR 115, which sets out a useful summary of when the corporate veil can be pierced. They have plenty of other assets so have decided to engage in some estate planning with the GBP3 million. The family trust has been an important and useful wealth-planning vehicle since the time of the Crusades. The appellant, Mrs. Prest alleged that he had used the The decision in Prest v Petrodel is not entirely unexpected. VTB was This article first examines the implications of Petrodel from a family law perspective and goes on to consider the use of FICs as vehicles for separating control and ownership in a tax-efficient manner. SARAKI (1994) 7 NWLR (PT357) 414 the law of trusts was applied If control is in the hands of the senior generation, you would end up with a collective investment scheme, but it is possible – with careful drafting – to arrange for the senior generation, effectively, to have weighted votes without the arrangement constituting a collective investment scheme. In resolving it, the UK Supreme Court stated Leading UK company law decision of the UK Supreme Court concerning the nature of the doctrine of piercing the corporate veil, resulting trusts and equitable proprietary remedies in … If such an argument were successful, the children’s base cost in the shares will be lower than what was actually subscribed for them by their parents, so the children would make a much larger capital gain when the shares are eventually disposed of. Prest v Petrodel Resources Ltd & ors [2013] UKSC 34. A primary objective of the parents is to retain control of the assets in the FIC but also to get GBP1.5 million out of their estates and held for the benefit of their children. law decision in Salomon v A Salomon. they were held on trust for the husband. The problem with that, and the reason that they have not been taken up so much, is the regulatory issues. veil been widened beyond limits. Under the Financial Services and Markets Act 2000 in the UK, a collective investment scheme arises where you have an arrangement for the pooling of property or the holding of property, and the participants do not have day-to-day control. It would seem that in the future, the stronger financial party can avail themselves of an increasing number of options in terms of their assets and how they are held, not only as tax-efficient structures but also as protective structures on any divorce, while the weaker financial party will need to ensure that they take advice as early as possible and possibly during the marriage to protect their position on any divorce. As a result, because the FIC can, after 1 April 2015, reinvest GBP80 out of every GBP100 of profit, it is in a significantly better position to accumulate post-tax wealth than an individual holder of the same investments, who could reinvest only GBP55 out of every GBP100 of profit. The first option presents an inherent capital gains tax (CGT) risk. ancillary to a divorce, a wider jurisdiction to pierce the held that the properties be transferred to the appellant, Mrs. The law of trusts has been At first instance Moylan J made an order that the husband pay the wife a lump sum of GBP17.5 million. Also, changes to the taxation of dividend income mean dividend income will not be subject to double tax. Lord Neuberger, Lord Walker, Lady Hale, Lord Mance, Lord Clarke, Lord Wilson, Lord Sumption. Finally, the income tax position on receipt of income from the discretionary trust can be improved by granting life interests over some or all of the trust fund (which can be revocable for flexibility reasons) to beneficiaries. The Supreme Court rejected lifting the veil but instead found a resulting trust. Mr Prest wholly owned and controlled (directly or indirectly, through intermediate entities) a number of non-UK resident companies which, between them, owned seven residential properties in the UK. The second point to consider is whether any tax issues arise from how the preference shares are subscribed for. Stephen is at university but James and Jennifer are concerned that the new friends he has made are a bad influence on him. Prest v Petrodel was finally adjudicated by the Supreme Court. FICs are creatures of contract not of equity and they should not be seen so much as replacements for trusts (which after all remain one of English law’s greatest innovations) but as powerful tools to be combined with trusts and other vehicles to hold family wealth. This does lead to questions in respect of the recent Mostyn J decision in DR v GR and others [2013] EWHC 1196 (Fam). Instead, they each contribute their nil-rate band to a discretionary trust, which holds the ordinary shares in the FIC and thereby controls the voting rights. settlor, who transfers some or all of his (or her) property to a In practice, the risk of these claims being brought, and then being successful, is low for a number of reasons. JUDGMENT GIVEN ON . Introduction On 12 June 2013 the UK Supreme Court delivered judgment in Prest v Petrodel, a divorce case, and decided that properties purchased in the name of companies owned and controlled by the husband were held on trust for him and thus formed part of his assets. However, in the recent landmark decision of Prest v Petrodel Resources Ltd and others [2013] UKSC 34 (“Prest v Petrodel”), the UK Supreme Court has attempted to clearly enunciate the core legal principles behind piercing the corporate veil. Prest and piercing the veil: Prest v Petrodel Resources Ltd 2013 – When a couple divorces, either spouse can make a claim for ancillary relief. In addition, in contrast to other vehicles, the legal regime surrounding FICs has remained stable while the regimes surrounding trusts and partnerships have had some turbulent years. What the court simply did was to that:"The consequences of recognizing the separate Appeal by a number of companies concerning the court’s jurisdiction in financial remedy proceedings to order one party to transfer or cause to be transferred to the other, properties owned by the companies. incorporation and also highlighted the significant limits to that recently delivered a landmark decision, Prest v. Family limited partnerships (FLPs), structured under the Limited Partnership Act 1907, were very topical immediately after the Finance Act 2006, and at first glance they are an ideal vehicle for separating control and ownership. reach of the decision covers matrimonial causes, trusts, legal Ever since the Finance Act 2006 clampdown on the use of trusts by UK domiciliaries and, as a separate development, the 2009 amendments to the corporation tax legislation, family investment companies (FICs) have become an extremely useful and sometimes essential tool in the family wealth-planner’s armoury. One way of achieving this is for the parents to fund a discretionary trust for the benefit of their children and remoter issue with up to GBP662,000 (the combination of their nil-rate bands and annual allowances for this year and last). Ltd [ 2013 ] UKSC 34 bare trust for the purpose of profit maximization shares are subscribed for appear! 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