Legal Update
Summer 2013

Article 1 - Lifting The Veil Of Incorporation - Derek Marshall

Important lessons for civil and family lawyers from the Supreme Court’s decision in Petrodel

The widely reported case of Prest v Petrodel Resources [2013] UKSC 34 contains important material which goes beyond the application of the law of family finances. At base, the Supreme Court had the difficult task of squaring the circle of reconciling over a hundred years of company law since Salomon v Salomon (which may be regarded as the cornerstone of British commerce) with the justice of Mrs Prest’s case and the Court’s reluctance to allow dishonest directors to use their companies to thumb their nose at matrimonial awards.

The question for the Supreme Court was:

Whether it is open to the court in ancillary relief proceedings to treat the assets of a company of which a spouse is the sole controller as being assets to which that spouse is ‘entitled’ for the purposes of s 24(1)(a) Matrimonial Causes Act 1973.

The Facts on appeal to the Supreme Court were as follows:

The appellant wife brought financial proceedings ancillary to her divorce from her husband Michael Prest. The husband was ordered to pay a lump sum of £17.5m to the wife, which he has (still) not paid. The respondents were all Isle of Man companies under the control of the husband. The wife obtained an order that real property held by the respondent companies should be transferred to her so as to reduce the lump sum order.

The respondents successfully appealed to the Court of Appeal against that order.

The husband was an extremely wealthy man due to his substantial ownership of a number of companies which themselves owned a very extensive property portfolio of luxury houses (including the matrimonial home) and other assets in various locations across the world.  The husband was running all family expenditure through these companies.

In 2011 the wife succeeded in convincing the Judge that in reality, the properties were owned, managed and effectively therefore the property of her husband. He was ordered to transfer over 17 million pounds worth of the property to her.

The problem for Mrs Prest was that having been awarded such a large sum of money, she was unable to enforce the order (apart from in respect of the family home which the trial judge found as a fact was being held on trust for the family) because all of the family wealth was tied up in offshore companies, including Petrodel Resources Limited. The Court never managed to get to the bottom of the beneficial ownership of the shares because the husband refused to cooperate with the Court, so the trial Judge had looked straight through the companies to the only director - Mr Prest - and assumed that he was actually the beneficial owner of the underlying assets of the company. Mr Justice Moylan thought that the provisions of the Matrimonial Causes Act gave him the power to do that.

The Court of Appeal disagreed, and in emphatic terms. Lord Justice Patten said I wish particularly to support Rimer LJ's criticism of the dicta in Nicholas v Nicholas [1984] FLR 285 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 [1990] Ch 433 . 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.

In the Court’s view, it was axiomatic that the assets of a company do not belong to their shareholders or directors. They belong to the company. The shareholders merely own the shares.

Mrs Prest’s victory in the Supreme court has been hailed in some sections of the press as restoring London to being the divorce capital of the world for wealthy wives, and a setback for business, but in reality it was nothing of the kind. Whilst Mrs Prest was successful in her appeal, almost everything said by the Court of Appeal remained untouched. All of her arguments in front of their lordships failed save one about the assets being held upon resulting trust, which had not been successfully pursued in the first place. In the leading judgment of Lord Sumption, a retrospective analysis of the facts was carried out, and the Court held that actually, when one looked at the source of the company’s assets (some of which had been acquired by the company from Mr Prest for £1), this was all very suspicious and since he (and the company) had deliberately refused to give any explanation about these dealings, the Court was entitled to assume that the assets were actually held upon trust for him personally.

Thus did the Supreme Court perform the tricky task of reconciling 100 years of company law since Salomon v Salomon with the obvious injustice of letting Mr Prest get away with his dishonest dealing.

The general law of lifting the veil of incorporation however took a battering. Lord Sumption made clear that the only basis of looking behind the corporate identity was that the basis of all legal reasoning is that people must deal honestly. Where there is fraud the Courts will not allow dishonest dealing to defeat the claim. Only fraud and agency and (in the almost unique factual circumstances of Petrodel assets impliedly held on trust by the company) could lead to a claim against the operator of a company personally, and the doctrine of lifting the veil will only be of any application

"where a person who is under an existing legal obligation deliberately evades responsibility by interposing a company under his control".

This is what happened in two of the previous leading cases, Gilford Motor Co v Horne1 and Jones v Lipman2. Mr Horne tried to get out of a restrictive covenant by forming a company to engage his services in competition with his previous business, and Mr Lipman sold his property to his own company to try to avoid the consequences of an agreed sale to the Claimant. The only other type of case is where the company can truly be said to be the agent of its directors, as in the (almost one-off) case of Wallersteiner v Moir3. Mr Wallersteiner’s companies were held by Lord Denning to be mere puppets for his personal activities and were set up to avoid personal liability. In each of these cases the company was in effect set up for a nefarious purpose.

Lord Neuberger in Petrodel went further. He said this

The history of the doctrine over 80 years of its putative life (taking Gilford Motor as the starting point) is, therefore, at least as I see it, a series of

decisions, each of which can be put into one of three categories, namely:

i. Decisions in which it was assumed that the doctrine existed, but it was rightly concluded that it did not apply on the facts;

ii. Decisions in which it was assumed that the doctrine existed, and it was wrongly concluded that it applied on the facts;

iii. Decisions in which it was assumed that the doctrine existed and it was applied to the facts, but where the result could have been arrived at on some other, conventional, legal basis, and therefore it was wrongly concluded that it applied (see para 62 above).

At one stage it looked as though he was going to re-write the law:

I was initially strongly attracted by the argument that we should decide that a supposed doctrine, which is controversial and uncertain, and which, on analysis, appears never to have been invoked successfully and appropriately in its 80 years of supposed existence, should be given its quietus. Such a decision would render the law much clearer than it is now, and in a number of cases it would reduce complications and costs: whenever the doctrine is really needed, it never seems to apply.

He drew back from this, and concluded (with Lady Hale and Lord Wilson) that

....it would be wrong to discard a doctrine which, while it has been criticised by judges and academics, has been generally assumed to exist in all common law jurisdictions, and represents a potentially valuable judicial tool to undo wrongdoing in some cases, where no other principle is available. Accordingly, provided that it is possible to discern or identify an approach to piercing the corporate veil, which accords with normal legal principles, reflects previous judicial reasoning (so far as it can be discerned and reconciled), and represents a practical solution (which hopefully will avoid the problems summarised in para 75 above), I believe that it would be right to adopt it as a definition of the doctrine.

Having read what Lord Sumption says in his judgment, especially in paras 17, 18, 27, 28, 34 and 35, I am persuaded by his formulation in para 35, namely that the doctrine should only be invoked where "a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control".

We may conclude therefore that as the law now stands, fraud unravels everything, and the corporate veil may be lifted in very limited circumstances, but only where a person who is under an existing legal obligation uses a company in dishonest circumstances to avoid his obligations such that the Court is entitled to conclude that the company is a sham and is no more than his creature or puppet and/or that the assets of that company truly belong to him and not the company. It remains to be seen whether any of the residual class of cases mentioned by several of the judges will lead to an extension of the very narrow doctrine now laid down by the Supreme Court.

Article 2 - Calling All Landlords With Long-Term Tenants - David Pugh

The Court of Appeal decision in the recent case of Superstrike Ltd v Rodrigues 1 (14 June 2013) (‘Superstrike’) will have a significant impact on many landlords with long-term tenants.

The salient facts of the case are that on the 12th January 2007 the tenant entered into a fixed term tenancy agreement for a year less one day. The deposit was not protected as the tenancy predated the implementation of the compulsory tenancy deposit legislation. On the expiry of the fixed term the tenant remained in occupation, bringing about a statutory periodic agreement. The deposit continued to be unprotected. On the 22nd June 2011 a section 21 (‘s21’) notice was served and proceedings subsequently issued. Proceedings were defended on the basis that the s21 notice was not valid since it was served during a period while the deposit was unprotected.

Uncontroversially the Court of Appeal ruled that the statutory periodic tenancy was a new tenancy under Section 5 of the Housing Act 1988 (on the facts of this case arising in January 2008). The tenant argued this had triggered the requirement for the Landlord to protect the deposit (and serve the prescribed information). The Landlord argued it did not trigger the requirement since no monies had been transferred.

The Court of Appeal found for the tenant holding that, although neither party were aware of the legal process taking place when the fixed term tenancy came to an end, the position should be treated in the same way as if they had had such a discussion. The Court’s rational being that the tenant should be treated as having paid the amount of the deposit to the landlord in respect of the new tenancy, by way of set-off against the landlord’s obligation to account to the tenant for the deposit in respect of the previous tenancy, given that the landlord did not seek payment out of the prior deposit for the consequences of any prior breach of the tenancy agreement.

Therefore tenancies created prior to the deposit protection legislation coming into force (6th April 2007), which reverted to statutory periodic tenancies after that date, require deposit protection on the expiry of the fixed term. Although not decided in Superstrike, best practice would also be to serve the prescribed information.

The important practical application of the judgment (and arguably draconian legislation at least from a landlord’s perspective) is that s21 notices will not be valid unless the deposit and prescribed information complies with section 213 of the Housing Act 2004 (as amended by the Localism Act 2011) (the ‘Act’), that being registration within 30 days of the tenancy starting or the deposit being taken whichever is earlier. Unwittingly many landlords now find themselves outside this 30-day period.

s215 2A of the Act provides two options to enable valid service of a s21 notice; either the deposit is handed back to the tenant in full or with agreed deductions; or an application made under section 214(1) has been determined by the court, withdrawn or settled by agreement between the parties.
It is important to note that return of the deposit will not necessarily avoid an application by the tenant under s214. There are two scenarios:

  1. If the deposit was registered late but was done so before the commencement of the Localism Act 2011 (6th April 2012), the old law will apply (there is nothing in the transitional provisions of the Localism Act 2011 to allow for retrospective application). The seminal case of Tiensia v Vision Enterprises Ltd (t/a Universal Estates) Honeysuckle Properties v Fletcher (‘Tiensia)2 provides that late, but nevertheless due compliance by a landlord with his dual obligations under s213 of the Act regarding tenancy deposit schemes give a complete defence to any claim by a tenant under s.214 of the Act (arguably draconian from a tenant’s perspective). The date of hearing of the tenant's s.214 application being the relevant date by which the landlord has to comply with the s.213
  2. If the deposit was registered late but was done so after the commencement of the Localism Act 2011 then the Landlord will be bound by the new law, and will be open to return of the deposit and a discretional penalty of between one and three times the deposit. Incorrect or incomplete registration of the deposit (or service of the prescribed information) prior to the commencement of the Localism Act will be seen as non-compliance and thus fall under this scenario.

The judgment of the Court of Appeal in Superstrike does not consider the scenario in point 2 above. It is unlikely however that a challenge to s214 of the Act will result in the pendulum swinging back as far in the landlord’s favour as provided by the decision in Tiensia. In the experience of the writer the rational of the decision in Superstrike affords the landlord at least good mitigation, and the chance of limiting the penalty for non-compliance.

Article 3 - Re J - The Relevance Of The Uncertain Perpetrator Finding In Care Proceedings. - Anthony Hand

Supreme Court decision in Re J (Children) UKSC 9

Author -Anthony Hand (1989 call), specialist family law barrister

On 20th February 2013, the Supreme Court tried to revisit once again the thorny issue of what does it actually mean if there is finding that parents are in a "pool of possible perpetrators" for non-accidental injury to a child, and what is the relevance of a past "pool finding" for future children of one of those parents if the couple had separated and now had new partners? This case is highly relevant for finding of fact hearings in care proceedings. This case is puzzling, difficult to understand, but also very important.

Summary

Lady Hale gave the lead judgment in the Supreme Court in the case of Re J in February 2013. She rightly said that it is a very serious matter for the state to take a child away from his or her family of birth. It is not enough for the state to intervene and remove a child just because it can find someone who can bring up the child better than the parents could. The state can only intervene if a child is at unacceptable risk of being harmed. Hence s.31(2) Child Act 1989 provides that the court must be satisfied (a) that the child is suffering or is likely to suffer significant harm and (b) that the harm or likelyhood of harm, is attributable to a lack of reasonable parental care.

The issue in this case is whether a court can be satisfied that a child is suffering or is likely to suffer significant harm in the future if another child has been harmed in the past and there is no more than a possibility that the parent who is now caring for this child was responsible for the harm to the other child? The case before the court concerned three children who are the children of Mr J and his former partner. They have always lived with Mr J and have come to no harm. The youngest child was always thought to be the child of Mr J and his new partner, who is now Mrs J, but turned out to be the child of Mrs J and her former partner. That child too has come to no harm. However, the Local Authority began care proceedings in respect of all of the children. They alleged that it was likely that all three children would suffer significant harm in the future because in 2004 another child of Mrs J and her former partner had died of non-accidental injuries (NAI). At that time a judge had not decided which of Mrs J and her former partner were responsible, but held that it was possible that either of them was the perpetrator - ie there had been a "finding" that Mrs J and her former partner were in the pool of potential or possible perpetrators. The Local Authority in this case relied solely on that finding as the basis for concluding that it was likely that Mrs J would harm these three children.

The trial judge dismissed the case on the basis that the likelihood of significant harm can only be proved on the basis of past facts that have been proven on the balance of probabilities. Ie the finding of earlier NAI regarding another child from another relationship, was in fact only a finding that Mrs J may have possibly inflicted past harm to another child since she was one of two adults in a pool of possible perpetrators. In turn the Court of Appeal dismissed the Local Authority’s appeal but gave permission to appeal to the Supreme Court.

The Supreme Court in February 2013 dismissed the Local Authority’s appeal. It was established by the House of Lords in 1996 (Re H and R (1996) 1 All ER) that a prediction of future harm can only be founded on proven facts. In Re H and R it was not enough to establish that a parent may sexually abuse a child in the future, on the basis that there was a possibility but no more that he had sexually abused another child in the past.

In Re J the Supreme Court confirmed that a real possibility that something had happened in the past is not enough (on its own) to predict that it will happen in the future. Only a finding that it has actually happened is sufficient.

The Supreme Court felt that cases in which this issue is raised in such a stark form are very rare. Usually there are many established facts from which there is the opportunity to prove the possibility of harm in the future, although such facts must always be set in the context of the present situation of the family. Actually, on the facts of Re J there were wider facts upon which the Local Authority might have relied to prove threshold but it chose not to do so, and in those circumstances it would have been unfair to the whole family to now allow proceedings to continue.

Comment and analysis

  1. Re J is not an easy case to master. Just working through the permutations, in care proceedings there are two children, A and B, and at a finding of fact hearing the Court determines that child A has suffered non-accidental injury and that both parents are in the pool of possible perpetrators, then threshold is established for child A (the injured child) and seemingly also for child B (the uninjured child). One child was injured by the parents, and that would probably also give rise to a finding that child B was at a likelihood of significant harm attributable to the care provided by the parents, who of course made up the pool of possible perpetrators for A’s injuries.
  2. However, if years down the line, following the original finding of fact hearing in relation to child A, mother and father have now separated and have new children, then the fact that a "pool finding" had previously been made against them cannot on its own be sufficient to establish threshold. From the judgments of Lord Hope and Lord Reed (and implicitly the judgment of Lady Hale), the previous pool finding is not ignored completely but will only be sufficient to warrant state intervention if there are other wider concerns that would give rise to a risk of significant harm when taken in totality. So if in the original care proceedings there were findings that the mother failed to protect the child, or that she failed to seek adequate medical attention for suspected injuries, then these wider findings could be added to a finding that the mother was in the pool of possible perpetrators for child A, and cumulatively could be used by a Local Authority to establish threshold in relation to a new child, even if the mother has a new partner. Equally, if there were no supplemental findings from the original care proceedings other than the pool finding, then arguably the pool finding remains relevant following separation in relation to a new child if there are concerns about the mother’s new relationship or life style, eg drugs, alcohol or DV.
  3. It is worth noting that Lords Wilson and Sumption disagreed with the notion that that one could find any relevance at all in a pool finding in regard to a new child after the adults who formed the original pool of possible perpetrators had separated. However, they were in the minority on this point.
  4. I think we are left, as ever, with a situation where each case must be determined on its own facts, but Re J is an important case that all care lawyers should be well aware of. There will be some cases where parents who were in a pool of possible perpetrators have moved on, and are with new partners, for whom the pool finding will no longer be relevant. On the other hand, Local Authorities will now doubtless be keen to explore past wider findings and establish current wider findings (drug, drink, DV, neglect), which when established can be used in conjunction with any historical pool finding in possibly establishing that threshold for a new child has been crossed.
  5. I cannot help but think, that whilst Re J was a valiant attempt to clarify past problems, in fact it will cause various trips to the Court of Appeal (if not the Supreme Court again) to clarify precisely what Re J means.

Article 4 - Professional Indemnity, Professionals Beware! - Carol Davies

From my experience, claims being pursued against professionals by unsatisfied clients who feel that the professional has not conducted their case with reasonable skill and care continue to increase and develop. I think that there is an element of society generally being more willing to complain and to seek legal assistance as to potentially wrong advice or services. The years of economic decline and austerity may be also making clients more intent in seeking recompense if they feel let down by professionals.

Traditional key areas of professional negligence cases include lawyers (particularly in relation to the fields of wills and probate and conveyancing), architects and surveyors. There is an increase in claims involving surveyors, accountants, tax and financial advisors and those involved in mis-selling. Claims are becoming more varied and so more complex and specialist.

Key law firms around the country have specific professional negligence departments with specialist lawyers and support staff. Such cases do require specialist knowledge and experience particularly in terms of the subject matters that may arise and also the tactics in dealing with such cases. There is a need for a thorough understanding of the law and the litigation procedures pursuant to the Civil Procedure Rules. Funding options needs to be varied and extensive for clients.

It is likely that the larger firms that specialise in professional indemnity claims will retain and handle most of the majority of the cases as opposed to the smaller firms. This is particularly so since the insurers for the professionals do use the larger law firms in the country.

It is likely that the market for PI related work will continue to develop in the future with an increase in the number of cases being pursued with an increased in the variety of complaints against professionals. There is, however, a strong emphasis in the field of civil litigation (as is in most areas of law) to avoid court proceedings and encourage parties to pursue alternative dispute resolution such as mediation. The aim is to prevent cases being pursued through the courts, saving money and in effect, resulting in matters being resolved by agreement of the parties much sooner.

Article 5 - Committal Hearings And The Court Of Protection: Line Up With The Rest Of Us! - Carol Davies

"It is a fundamental principle of the administration of justice in England and Wales that applications for committal for contempt should be heard and decided in public, that is, in open court" - Practice Guidance: Committal for Contempt of Court - 3 May 2013".

That statement will be instinctively recognised and understood by every lawyer in the jurisdiction of England & Wales. It is ingrained within us from our studies and training that any hearing in which a person’s liberty is at risk should be held in public. Criminal solicitors and barristers are very much accustomed to this deeply rooted principle and even those of us who practice primarily in family and civil law instinctively dust down our wigs and gowns when attending court for the committal of a spouse or ex-partner for a hearing to show cause as to why he should not be committed to prison for a breach of a non-molestation order. An open court with public access is an essential feature of our legal system when a person’s liberty is in question.

So why then, did the Court of Protection commit a person to prison for contempt of court in a private hearing with no public access?

The case of SCC v JM & Ors, 31 August 2012 & Ors is not far off being a year old. The application related to an elderly man suffering from Alzheimers ("P); he lacked capacity to make various decisions as to his care and residence. In 2011, a District Judge of the Court of Protection granted an injunction order preventing the respondents from encouraging P from leaving his residential care home and in particular, preventing one of P’s adult children ("R") from using or threatening violence against P or any employee of the local authority or the residential home and not to encourage or in any way suggest any other person to do so and not to intimidate, harass or pester P or the employees of the local authority and the home. However, R carried out various actions in respect of her father P and the staff of the local authority and the home that amounted to breaches of the injunction order and so was in contempt of court. It has to be said, the allegations suggested a lady who really knew no limits as to her inappropriate behaviour in dealing with her father’s ill-health and his circumstances: she brought P to court on the day the judgment on his welfare decisions was being given and later she left messages to the social worker calling her a "witch" and a "flipping cold bitch"! That was the just the tip of the iceberg.

Such was the behaviour of R, His Honour Judge Cardinal considered her actions amounted to numerous breaches; in fact this was the second time that breaches by R were found by the Court. Despite considering the guidance in the leading case of Hale v Tanner [2000] 1 W.L.R. 2377 (in which the Court of Appeal confirmed that the objective of contempt of court proceedings was to mark the court's disapproval of a breach and to secure compliance with the relevant order in the future) he felt that is only option was to commit R to prison. In reading the judgment, it is clear that the Judge felt that R was causing "considerable grief" to P and with the variety of inappropriate actions and behaviours by R against others, she complete disregarded the Court and its orders. He therefore felt imprisonment was necessary and he imprisoned R for a total period of 5 months. The Judge was very intent on protecting P but also protecting professional staff working with P from abuse.
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Lord Judge, the Lord Chief Justice and Sir James Munby, President of the Family Division and President of the Court of Protection issued a Practice Guidance on 3 May 2013 making it clear that applications for committal for contempt of Court be heard in open court applied as much in the Court of Protection (Court of Protection Rules 2007, rule 188(2)) as in other divisions of the High Court and the discretion to hear a committal application in private should be exercised only in exceptional cases when it is necessary in the interests of justice.

The Practice Guidance confirms that the fact that the committal application is being made in the Court of Protection does not of itself justify the application being heard in private. The Guidance even states that the fact that the committal hearing may involve the disclosure of material which should not to be published does not of itself justify hearing the application in private; such publication can be of course restrained by an appropriate order of the Court.

The Guidance goes on to provide the approach to be take by the Court in deciding when a case is to be heard in public and how it should deal with a case heard in private. The starting point is that the Court must list the committal application in public and if the court has to decide to exercise its discretion to deal with the matter in private, then that decision in itself must be determined with a judgment in public with reasons for taking the exceptional course.

If the Court decides that a committal application is an exceptional case and that it should be heard in private, it will then proceed to do so. If the Court makes findings of contempt of court, the Court must, without exception, state in public:

  • the name of the person found to be in contempt of court;
  • the general terms of the contempt of court for which committal is imposed;
  • the punishment being imposed.

Finally, in every case in which a committal order or a suspended committal order is made the judge should take appropriate steps to ensure that any judgment or statement complies with the procedure set out in the Practice Guidance. As soon as reasonably practicable, a transcript of the judgment should be prepared at public expense and every judgment as referred to is published on the BAILII website; and that upon payment of any appropriate charge, a copy of any such judgment is made available to any person who so requests.

The Guidance does not tell us anything new or significantly different. It is, however, useful to all practitioners and judges in the Court of Protection in dealing with committal hearings with the very basic requirements being clearly set out. In R’s case, the Court in its judgment did not address the question of a public hearing of the committal application at all; perhaps it was not raised as preliminary issue, allowing the Court to proceed as it did. It is a reminder that sometimes, in dealing with hearings, back to basics is required to ensure the administration of justice is properly and fairly delivered.

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