Divorce and the corporate veil

A company is a separate legal entity, it is not a party to a divorce and assets owned by the company are not part of the marital pot.

The court has power to order a transfer of shares from one party to the other as they are property belonging to the spouse. The value of the shares and therefore the value of the company along with income be it salary, dividends or loans is going to be relevant in a divorce.

But what of the assets of the company itself including property? Can a divorcing spouse put assets beyond the reach of his or her spouse behind what has become known as the corporate veil?

The court can make orders in relation to property to which the individual is entitled. Insofar as a company is the owner, the individual would not be entitled to the property and the asset would not be within the court's powers to distribute, transfer or sell.

There are very limited circumstances in which the court will 'pierce the corporate veil'. Where a company is being used to avoid legal obligations or restrictions or to frustrate enforcement of court orders, the court may ignore the separate legal status of a company.

This should only be to the extent necessary to prevent the individual using a company under his control from having 'the advantage they would otherwise have obtained by the company's separate legal personality' (Lord Sumption: Petrodel v Prest 2013)

It is not always necessary to truly pierce the corporate veil if the court is satisfied that in fact the individual is actually the beneficial owner of the asset in question. Evidence will be needed to show that whilst the company may be the legal owner, the person who is entitled to the asset is in fact the spouse and as such they are assets which can be the subject of distribution in the divorce.

The court will have to look at the intention of the party transferring assets to a company and the source of funds for the purchase. In the case of the family home owned by a company the court is more likely to infer that the property is actually held for the spouse who also owned and controlled the company

There is no requirement to establish that arrangements are a sham i.e. a deliberate act to distance the true owner from them. The arrangement may be genuine for reasons unassociated with the divorce itself.

In the case of Thakker v Thakker 2017 the court decided that shares held by the husband's mother and sister were held on trust for the husband and as he was therefore beneficially entitled to them and they were his assets as far as the divorce was concerned. If the party to a divorce is entitled to the asset the fact it is owned by the company may not put it out of bounds.

For help and legal advice on this area of the law, please contact our Family Law and Divorce team