Lehna Hewitt, Trainee Solicitor
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Gowers v Gowers [2011] EWHC 3485 (Fam) - http://www.bailii.org/ew/cases/EWHC/Fam/2011/3485.html
The background
These were ancillary relief proceedings where the parties had married in 1996 and separated in 2008. They had five children and all the wealth was generated during the marriage.
A company called City Docs Limited (CDL), whose business was to supply photocopying and document storage services to law firms and other businesses, was incorporated in 2000. The husband was the founder of and main driving force behind CDL. He was its chairman and an employee of the company, but he was not a shareholder. The husband was also the settler and a beneficiary of the United Kingdom Melvin Isaacs discretionary trust. The trust owned 100% of the shares in Peach Holdings Limited, and Peach owned 70% of the shares in CDL. In turn, CDL owned 100% of the shares in Trilantic International Limited (although due to the existence of various share options, CDL was treated by the court as owning 67% of the shares in Trilantic).
CDL was very successful and made large profits for several years. The husband drew considerable sums in the region of £370,000 from CDL in the form of loans. CDL's situation then became more precarious, and profit margins began to decrease. In 2010, CDL agreed to sell its shares in Trilantic for US$10million.
The major area of dispute in the ancillary relief proceedings was whether and to what extent the husband would personally benefit from the sale of Trilantic. This would determine if a lump sum payment to the wife was appropriate, given that there was no other substantial capital in the matrimonial pot.
The District Judge's decision
The District Judge found that although the husband was not a shareholder in CDL, he effectively "was CDL", and would be able to obtain some of the proceeds from Trilantic. She awarded the wife a lump sum, but because at this stage the sale of Trilantic had not completed, she deferred actual quantification of the lump sum until the amount received was known.
When the Trilantic sale completed, the wife's solicitors became increasingly anxious about the proceeds and applied for a without notice freezing injunction. This came before Mrs Justice Baron who expressed misgivings about the District Judge's decision but nevertheless joined the trust, Peach and CDL as parties to the proceedings and made a freezing injunction limited to one week in respect of £500,000 of the proceeds of sale of Trilantic. CDL paid £500,000 into court.
The District Judge's supplemental judgment
The District Judge resolved the case on paper and distributed a supplemental judgment. She ordered that the £500,000 be transferred to the wife within 28 days as part of an overall lump sum payment of £900,000.
The High Court
Once served with the supplemental judgment and order, CDL applied to the High Court to have the order set aside and the £500,000 paid out to itself and not the wife. Mr Justice Mostyn identified the following preliminary issues:
- That the court had no jurisdiction to make the order that the sum of £500,000 be paid out to the wife;
- If the court had such jurisdiction, the wife had no entitlement to a lump sum by virtue of the husband's supervening bankruptcy;
- Whether as a consequence of the above, the order should be set aside.
Counsel for the husband argued that the husband did not have any beneficial interest whatsoever in either CDL or Trilantic or any of the proceeds of sale of Trilantic, and the corporate veil ought to remain intact. The District Judge therefore did not have jurisdiction under the MCA 1973 to order the £500,000 payment.
Counsel for the wife argued that because the monies had been paid into court "to be distributed pursuant to any further order", CDL had conceded that the monies were held to be paid out in satisfaction of the judgment. Her second argument was that the corporate veil ought to be pierced and the court should look at the reality of what lies behind. The money in court was in reality the money of the husband as CDL was his "alter ego".
The High Court's Decision
Both arguments made by counsel for the wife failed. Firstly, the monies were paid into court in order to be kept secure from dissipation so that they were available to be paid out to the wife if, and only if, they properly could be. There was nothing to suggest that CDL was agreeing to put the company under any greater obligation than that imposed by the freezing injunction. Secondly, it was held that the corporate veil should not be pierced. The husband was not shareholder in CDL and there were significant third party interests at stake. None of the authorities where the court had looked behind the corporate veil were binding as there was no dishonesty or impropriety on the part of the husband.
The District Judge's order that the sum of £500,000 be paid out to the wife was found to be made without any power or jurisdiction and was set aside. The court ordered that the £500,000 be paid back to CDL forthwith.
Lehna Hewitt is a Trainee Solicitor in Anthony Gold's family & divorce law department. For further information email Lehna or call 020 7940 4000.
