The FIC structure allows family assets to be passed onto the next generation while retaining some element of protection over those assets. The FIC provides protection for parents and children.
• Protection for the parents who will provide the assets for the FIC structure.
• Protection for the children from a possible relationship breakdown.
FICs can registered as limited or unlimited companies, however they do not hold any special status under the Companies Act 2006 or receive any superior tax treatment. FICs can be incorporated in the UK or offshore if required.
Relationship Breakdown
If a child is married or in a civil partnership a possible concern for the parents transferring valuable assets into the FIC is a future relationship breakdown of one of their children and the assets of the FIC forming part of a divorce or dissolution.
The courts have established a company is legally separate from its shareholders2. In Petrodel Resources Ltd v Prest3 a review of the principles that a court may interfere with the legal concept of a company is separate from its members a doctrine referred to as ‘piercing the corporate veil4‘, to pierce the veil means disregarding the separate personality of a company.
Petrodel v Prest
In Petrodel Mr. and Mrs. Prest owned a substantial matrimonial home in the UK and a second home in the Caribbean, when assessing the assets of Mr. Prest for the purpose of a divorce, Mrs. Prest suggested a large proportion of her husband’s wealth was held by several companies that Mr. Prest owned and controlled.
Family Court Decision
Mrs Prest made an application to the family court for ancillary relief, where it was held by Moylan LJ5 that although there was no general principle by which the corporate veil could be pierced it was possible under the Matrimonial Causes Act 1973, s 24(1)(a).
Court of Appeal
The companies controlled by Mr. Prest appealed to the Court of Appeal, the three respondent companies challenged the orders made against them on the ground that there was no jurisdiction to order their property to be conveyed to the wife in satisfaction of the husband’s judgment debt. The majority in the Court of Appeal agreed and criticised the practice of the Family Division of treating assets of companies substantially owed by one party to a marriage as available for distribution under section 24 of the 1973 Act.
The Supreme Court
Mrs Prest appealed to the Supreme Court which held where an individual deliberately evades or deliberately frustrates enforcement by interfering with a company under his control6 the court may then pierce the corporate veil if the director (or controller) obtains an advantage on the basis of incorporation7 and using the company’s separate legal personality.
The Supreme Court found the most plausible inference from the known facts was that each of the properties was held on resulting trust by the companies for the husband and he had deliberately sought to conceal this fact in his evidence and failed to comply with court orders with particular regard to disclosing evidence.
Overview
In terms of divorce (and piercing the corporate veil) it could be assumed the courts would require clear evidence demonstrating the controller of the company had concealed or evaded a legal obligation to their spouse.
Main points: Petrodel v Prest
• In Petrodel the Supreme Court found the court was prevented from piercing the veil as the purpose of the corporate structure was ‘wealth protection and the avoidance of tax’.
• The matrimonial home itself was also owned by one of the companies, it was established in the Court of Appeal that this was held on trust for Mrs Prest and did not form part of the appeal to the Supreme Court.
• Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller’s nominee or trustee for that purpose.