Financial Remedies: Nicholas v Nicholas no longer good law

Christopher Sharp QCThis is a guest blog post by Christopher Sharp QC, barrister and Head of Family Practice Group at St John's Chambers. Christopher is a leading silk on the Western Circuit, known well for his expertise in high value ancillary relief cases.

 

PETRODEL RESOURCES LTD; PETRODEL UPSREAM LTD; VERMONT PETROLEUM LTD – v -  YASMIN AISHATU MOHAMMED PREST; MICHAEL JENSEABLA PREST; ELYSIUM DIEM LTD  [2012] EWCA Civ 1395

 

In a very significant decision by a majority of the Court of Appeal dealing with the ability of the Court in financial remedy cases to make orders directly against the assets of a company that is the alter ego of one spouse to satisfy the entitlement of the other, Nicholas v Nicholas (1984) FLR 285 has not been followed and all the decisions following it have been held to be wrong. As a consequence, Munby J’s decision in Mubarak v Mubarak (No.1) [2001] 1 F.L.R. 673 has been overruled and W v H (Family Division: Without Notice Orders) [2001] 1 All E.R. 300 is overruled in part. To the extent that Mostyn J followed Nicholas in Kremen (formerly Agrest) v Agrest [2010] EWHC 3091 (Fam), [2011] 2 F.L.R. 490 and in Hope v Krejci [2012] EWHC 1780 (Fam) and treated company law principles as inapplicable in family cases, the court disagreed, so Kremen and Hope are doubted.

Accordingly a property adjustment order under s.24(1(a) of the MCA 1973 cannot be made against the property of a company unless there are legitimate grounds for piercing the company veil, including a finding to the necessary extent of impropriety (and not simply the obfuscating and dissembling conduct in which the husband had indulged in the instant case). The principles set out in Salomon v Salomon & Co Ltd [1897] A.C. 22 were stated to apply to all jurisdictions and the principles of legal personality had to be respected.

Thorpe LJ, in a vigorous dissenting judgment, pointed out that the principles in Nicholas had stood and been followed by the most specialist judges of the Division for three decades. It had been, he said, a relatively early pronouncement of the power necessary to enable the judge in financial provision cases to do justice. He went on:

“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 the principles developed by the House of Lords that now govern the exercise of the judicial discretion in big money cases.”

In a final passage in his judgment in response to Rimer LJ’s judgment (delivered for the majority) he concluded:

"64.       In this case the reality is plain. So long as the marriage lasted, the husband’s companies were milked to provide him and his family with an extravagant lifestyle. That was only possible because the companies were wholly owned and controlled by the husband and there were no third party interests. Of course in so operating them husband ignored all company law requirements and checks.

65.       Once the marriage broke down, the husband resorted to an array of strategies, of varying degrees of ingenuity and dishonesty, in order to deprive his wife of her accustomed affluence. Amongst them is his invocation of company law measures in an endeavour to achieve his irresponsible and selfish ends. If the law permits him so to do it defeats the Family Division judge’s overriding duty to achieve a fair result. However, the majority were very clear that the practice of the Family Division to ignore the basic tenets of company law, and the fact that companies are separate legal entities has to cease."

However, the majority were very clear that the practice of the Family Division to ignore the basic tenets of company law, and the fact that companies are separate legal entities has to cease.

Patten LJ agreeing with Rimer LJ said this:

"160.    What needs to be emphasised is that the provisions of s.24(1)(a) of the Matrimonial Causes Act 1973 do not give the court power to disapply the established principles of legal and beneficial ownership or of company law. On the contrary, those principles were plainly intended to define the limits of the court’s jurisdiction under the statute and Moylan J was wrong to give the words “entitled, either in possession or reversion” any wider meaning. Married couples who choose to vest assets beneficially in a company for what the judge described as conventional reasons including wealth protection and the avoidance of tax cannot ignore the legal consequences of their actions in less happy times.

161.    I wish particularly to support Rimer LJ’s criticism of the dicta in Nicholas and his view that these 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."

Rimer LJ himself, after a lengthy judgment that reviews both the conventional company law authorities and the manner in which the Family Division has found ways around the strict application of those principles, concluded in this way:

"Conclusion

154.    I have made clear my views on the ‘veil piercing’ issue, but shall summarise them. Salomon is House of Lords authority affirming the distinction between the separate legal personalities of a company and its corporators. It makes no difference to such distinction that the company has a single corporator with total control over its affairs. It is a feature of the principle that a company’s assets belong beneficially to the company and that its corporators have no interest in, or entitlement to, them. It is a further feature of it that such assets cannot be looked to in order to satisfy the personal obligations of the corporators, any more than the latters’ personal assets can be looked to in order to satisfy the obligations of the company. In special circumstances, in particular in the winding up of an insolvent company, there may be a statutory basis for requiring the corporators to contribute personally to the company’s assets, for example if they have misapplied its assets or engaged in wrongful or fraudulent trading (see sections 212 to 214 of the Insolvency Act 1986). Exceptions of that nature are, however, irrelevant for present purposes.

155.    Subject to exceptions such as those, and to cases in which it is legitimate to pierce the corporate veil, the separate corporate identity of a company is a fact of legal life that all courts are required to recognise and respect, whatever jurisdiction they are exercising. It is not open to a court, simply because it regards it as just and convenient, to disregard such separate identity and to appropriate the assets of a company in satisfaction either of the monetary claims of its corporator’s creditors or of the monetary ancillary relief claims of its corporator’s spouse. Salomon precludes any such approach; and the same was made clear by the House of Lords in Woolfson and by the Court of Appeal in Adams, Ord and VTB. The obiter dicta in Nicholas to different effect are inconsistent with Salomon, Woolfson, Adams, Ord and VTB and advance no reasoning why a different principle should apply in the family jurisdiction as compared with other jurisdictions. The Salomon principle must apply equally to  all jurisdictions. A one-man company does not metamorphose into the one-man simply because the person with a wish to abstract its assets is his wife.

156.    Woolfson, Adams, Ord, Ben Hashem and VTB show that there may be factual circumstances in which it will be legitimate for the court to pierce a company’s corporate veil and, to an appropriate extent, disregard the fact of its separate identity from that of its corporators. They all, however, affirm that that can only be done in limited circumstances, central to which is the demonstration of relevant impropriety in the corporators’ use of the company. The rationale for such an exceptional jurisdiction is that the controllers of the company have so used the fact of its separate identity for improper purposes that it may be appropriate for the court disregard its separate identity in order that its controllers may not derive the advantage from such abuse that they intended to achieve. It is perhaps a relative of the principle that a wrongdoer cannot ordinarily be allowed to profit from his own wrong. The jurisdiction, whilst of interest to legal theorists, is an exceptional one and there are few reported decisions where it has been applied (including, in particular, in family proceedings). Just as there is no rational ground for regarding the family courts as exempt from Salomon, so is there no rational ground for regarding them as exempt from the need to be satisfied as to the conditions affirmed in VTB before piercing of a corporate veil. The dicta in Nicholas cannot stand with the principles explained in Woolfson, Adams, Ord, Ben Hashem and VTB and they should no longer be regarded as of any authority. Insofar as Mostyn J has, in Kremen and Hope, treated those principles as inapplicable in family cases,  and instead supported the Nicholas dicta, I would respectfully disagree with him."

The consequences of this decision are plain. It will be much harder to enforce against the assets of a liable spouse who has tied up his assets (which may well include the matrimonial home) in a company, and against a determined opponent, the possibility of the court being able to do justice will be much impaired.

[Edited 31/10/12 Minor amendments made for clarification]

Rats! Why didn’t I think of that?

I'm miffed. There is a pioneering new online service out there called Intelligent Divorce and I think its probably a stroke of genius.

Intelligent Divorce is an online service for divorcing couples (or for one half of a divorcing couple) which enables them to access high quality advice from a specialist family barrister at a reasonable price, without paying solicitors rates for the grunt work of gathering information. It is the brainchild of one solicitor (Mahie Abey) and one barrister (James Roberts at 1 KBW) and although in some respects it is very much a new way of delivering legal services, beneath the facade it is structured the good old fashioned way using technology to streamline and route information via solicitor and then on to a barrister - this is not a direct access project. This leads to a streamlined front end experience but an exquisitely complex set of T&Cs.

The information on the site is well thought through and clearly explained for non-lawyers. There is a very useful Guide which is worth reading even if you don't ultimately use the service. The functionality on the site is excellent - I trialled account creation, inputting my information (don't tell my husband) and testing out how it worked - it was very intuitive and well designed. Stage by stage you input your personal and financial information and circumstances which is collated by Intelligent Divorce before being passed on to the lawyers for advice. You pay a fixed fee, which is clearly explained and in return you get an advice from counsel for what seems like a very competitive rate.

Users can choose whether to go solo, providing all the information themselves and obtaining an advice for their own purposes, or working in tandem with the other spouse to obtain an impartial advice that both can use to work out how to settle their arrangements. 

As all lawyers know it is a prerequisite of all legal sector software that it must be (barely) functional, utterly unintuitive and visually dated (grey clunky boxes). Congratulations to Intelligent Divorce for bucking this trend. It is beautifully straightforward and I could find no glitches (if I had found any I would have been compelled to point them out in the same way that one is compelled to point out spelling errors).

So, in summary:

For couples divorcing - Intelligent Divorce is well worth consideration. It is a non-confrontational way for both of you to get some good advice for a very reasonable price. I would be very happy to get advice from counsel at 1 KBW for about £800 all in. And if you use the couples service they will draft your consent order for you. If you are able to use an online divorce service to sort out your divorce itself you could potentially sort out the whole chabang for under £2000. £2000 is a lot of money when you have none, but believe me this is cheap. Of course, if you use ID and don't resolve things by agreement you may end up having to go through the court process anyway, but if you start the process well informed and with all your financial information to hand it would not be money wasted. (Cheeky plug - of course, if you do need to go to court you could always buy my book).

For lawyers - kick yourselves. Hard. Who needs ABS or direct access? This is just good lawyering, good client care and good business sense. Go and visit this website and ponder your own business development strategy. The future is upon us - there will be many many new business models, projects and innovations springing up all over the place and no doubt many will fail. My guess would be that this one will be successful - look carefully at this site and learn. It has been a thoroughly thought through project, and a vast amount of effort and planning has gone into it. Are you ready to compete?

 

Book Review: Financial Remedies Under The Family Procedure Rules 2010 & The @eGlance Guide

Zoe SaundersThis review is a guest post written by  Zoe Saunders, barrister at St John’s Chambers, Bristol. Zoe has particular expertise in cohabitation disputes, including applications for financial provision for children and trusts of land issues, and financial remedies on divorce. You can also find Zoe on twitter (@ZASaunders).

Financial Remedies Under the Family Procedure Rules 2010 by Singer, Mostyn, Marks & Smith 

Financial RemediesThis is a really useful book for anyone who does what we must now call 'financial remedies' formerly known as ancillary relief. The commentary on each chapter is likely to continue to be useful long after one has gained familiarity with the overall structure of the news rules and for those who are not yet familiar with the new FPR they are a really helpful guide to the most important changes.

The book is clearly laid out with commentary on the relevant sections of the rules preceding the rules themselves. It is a neat volume which is much more portable than the red book. It is clearly aimed at practitioners but does manage to balance adequate explanation without being excessively detailed.

Purchase of the book (£95 from Class Legal) also gives you access to the www.familyprocedure.com website which contains the full text and updates. One minor quibble is that it would be useful to see exactly what has been updated without re-reading the whole section, but other than that it is a useful resource and means that you can access the text without the physical book, which can be handy for when other members of chambers borrow it without asking! In my view although expensive I think this book is a worthwhile purchase.

@eGlance

We also got access to the @eGlance site for which you can get a discounted 12month subscription on purchase of the book (£30 off the usual £85 cost).

@eGlance suffers from two major flaws - the first of which is that it is not Apple compatible, which in the brave new world of ipads seems to me to be a really fundamental error and one which I think the authors / publishers really should get a grip on as soon as possible. The second flaw it that the user-interface looks like something which was designed 20 years ago and hasn't been touched since.

In my view these two errors run the risk of putting off potential users, which would be a real shame, because once you get past the initial impression and start to actually use the software it is really pretty impressive. It has pretty much everything you could really ask for in a programme designed to help with anything from big money downwards. You can print off information and calculations and I suspect that it could become a really invaluable tool, if you can repress the urge to snigger every time you load it!

Both the Financial Remedies book and the @eGlance software can be purchased through Class Legal.