Corporate structure comes in play when love boat hits rocks
Stacey Devoy of Withers talks about asset protection against spousal claims on divorce
What assets are at risk in divorce? Do they include company assets?
Family law potentially takes account of all assets of the parties when considering financial provision on divorce. Both parties are obliged to disclose their wealth from all sources. It is common, particularly in Hong Kong, for private companies owned by the parties, or one of them, to fund the lifestyle of the family. In addition, corporate vehicles often hold matrimonial assets such as the family home or investments.
Company law and family law, traditionally, take different approaches to corporate-held assets. Company law regards assets held within a corporate structure not to be the property of the shareholders - the so-called "corporate veil". The commercial courts will only contemplate piercing the corporate veil in cases involving fraud, but the family courts have done it more regularly in the name of fairness to satisfy financial claims on divorce.
In the recent case of Petrodel Resources and others versus Prest and others, the two have come into conflict.
What changes has the English Court of Appeal made?
In Prest, the English Court of Appeal by a 2:1 majority placed a significant roadblock in the way of claimants in a divorce seeking to access corporate-held assets. Notably, the two judges from a commercial/corporate background clashed with the third judge, whose background was in the family courts.
The lower court took the traditional family law approach and ordered the husband to satisfy the wife's financial claim in part by transferring assets held by various firms in which he was the majority shareholder with complete control.
The companies appealed. On appeal, the two commercial judges criticised the family court's willingness to pierce the corporate veil in the absence of fraud. The family judge argued that to constrain the power of the family court to pierce the corporate veil in the name of fairness presented "an open road and a fast car" for the economically more powerful spouse.
The wife has now appealed to the Supreme Court, the final court of appeal in England.
What could this mean for families in Hong Kong?
This trend presents a good opportunity for families to apply forward planning to manage the fiscal risks and minimise the costs of relationship breakdown.
Pre-nuptial agreements are arguably likely to have more weight in future. Using a corporate structure or trust to hold family wealth may also assist to protect assets against the full force of claims upon divorce, so long as the structure is transparent, fair and clearly not solely designed to defeat a spousal claim.