The parties had disputed ancillary relief on their divorce. The three companies, each in the substantial ownership of the husband, challenged the orders made against them saying there was no jurisdiction to order their property to be conveyed to the wife in satisfaction of the husband’s judgment debt. The order had been made following the standard practice in the Family Division to treat the assets of companies substantially owned by one party to the marriage as available for distribution under section 24 of the Matrimonial Causes Act, provided that the remaining assets of the company are sufficient to satisfy its creditors.
Held: The appeals succeeded (Thorpe LJ dissenting). The practice developed by the Family Division was beyond the jurisdiction of the court unless (i) the corporate personality of the company was being abused for a purpose which was in some relevant respect improper, or (ii) on the particular facts of the case it could be shown that an asset legally owned by the company was held in trust for the husband. The judge having rejected both possibilities on the facts, he ought not therefore to have made the order.
The order had been made without jurisdiction because its effect was to equate control of a company with the beneficial ownership of its assets. Rimer LJ said that: ‘The flaw in the ‘power equals property’ approach is that it ignores the fundamental principle that the only entity with the power to deal with assets held by it is the company. Those who control its affairs – even if the control is in a single individual – act merely as the company’s agents. Their agency will include the authority to procure an exercise by the company of its dispositive powers in respect of its property, but those powers are still exclusively the company’s own: they are not the agents’ powers. When and if the agents act as such, and procure a corporate disposition, the property which immediately before the disposition belonged to the company will become the property of the disponee. Until then, it remains the property of the company and belongs beneficially to no-one else. The judge’s point that the agent is automatically the owner of all the company’s assets by the mere fact of his authority to procure the company to dispose of them to himself is astonishing and does not begin to pass muster. And why should it? The proposition was simply the fruit of a judicial attempt to shoehorn into section 24(1)(a) assets which manifestly do not fit there. The judge’s finding that the husband’s mastery of the companies meant that they and their assets were his, and that they were the equivalent of mere nominees or agents for him (see, for example, his paragraph 225), could have been lifted directly from the argument of counsel for the respondents that was rejected in Salomon (see [1897] AC 22, at 28, 29).
That is probably all that needs to be said about the judge’s ‘power equals property’ theory. I shall, however, add a little more. A further reason why the theory does not work is that the judge overlooked that even the one-man in such a company does not have unlimited power to procure the company to deal as he would wish with the company’s assets. He may in practice be able to do so, by procuring the payment of its money and the execution of corporate dispositions right, left and centre, all perhaps for nothing in return. But he will not be able to do so lawfully. Even he will be constrained by the capital maintenance provisions which limit such wholesale disposals. He cannot, for example, lawfully procure the making of distributions by the company save out of its distributable profits and, if he does, the distribution will be unlawful and void. I discussed such problems in Inn Spirit Ltd v. Burns and Another [2002] 2 BCLC 780, which concerned a one-man corporate group, in which the one-man purported to pay himself a dividend. The one-man is not in a position lawfully to distribute to himself the entirety of his company’s assets at any time. To revert to the judge’s paragraph 225, there is a ‘legal impediment’ to wholesale transfers by a company in favour of its one-man controller. Only when the one-man lawfully procures the exercise of the corporate power of disposition in his own favour is it possible to identify which property has ceased to belong to the company and has become his.’
Judges:
Thorpe, Rimer, Patten LJJ
Citations:
[2012] EWCA Civ 1395, [2013] 2 FLR 576, [2013] 2 WLR 557, [2013] 1 All ER 795, [2012] 3 FCR 588, [2013] 2 Costs LO 249, [2012] WLR(D) 296, [2013] Fam Law 150
Links:
Statutes:
Matrimonial Causes Act 1973 24
Jurisdiction:
England and Wales
Citing:
Cited – Salomon v A Salomon and Company Ltd HL 16-Nov-1896
A Company and its Directors are not same paersons
Mr Salomon had incorporated his long standing personal business of shoe manufacture into a limited company. He held nearly all the shares, and had received debentures on the transfer into the company of his former business. The business failed, and . .
Cited by:
Appeal from – Prest v Petrodel Resources Ltd and Others SC 12-Jun-2013
In the course of ancillary relief proceedings in a divorce, questions arose regarding company assets owned by the husband. The court was asked as to the power of the court to order the transfer of assets owned entirely in the company’s names. The . .
Lists of cited by and citing cases may be incomplete.
Family, Company
Updated: 06 November 2022; Ref: scu.465369