Is my partner hiding ‘behind the corporate veil’?

Family Law matters often involve complex corporate structures, and it is not uncommon for one party to assert that the other is hiding assets ‘behind a corporate veil’.

In the matter of Atkins & Hunt and Ors [2020] FamCAFC 252 (9 October 2020), the Full Court of the Family Court of Australia considered the issue of when it is established that a company is a ‘mere puppet’ or ‘alter ego’ of a party, and when the court ought to treat a party and company as one and the same.

Atkins & Hunt and Ors

This matter was an appeal of final orders made on 18 December 2019 that divided the parties’ assets 80% / 20% in the husband’s favour.  In effect, this required the husband to pay the wife $964,693 and for the parties to otherwise retain the assets in their respective names, possession, or control.

The matter was first heard on 4 December 2014.  However, the wife successfully appealed those orders, and the matter was remitted for re-trial.

The husband operated a business X Pty Ltd.  Half of the class A shares in X Pty Ltd, which entitled the holder to have exclusive control over the company, were owned by the husband. The remainder of the class A shares were held by the company Y Pty Ltd.  The husband owned 99% of Y Pty Ltd.

Whilst the first appeal was pending, the husband disposed of the majority class A shares held by him and by Y Pty Ltd into X Pty Ltd, giving them to his children for modest financial consideration.

The wife alleged that the corporate structure of X Pty Ltd was the “alter-ego” of the husband, and that the disposing of the shares was done to defeat an anticipated property settlement. It was agreed at re-trial that the value of the husband’s share in the entity had the transfers not taken place would have been $5,993,000.

The wife also argued that “the husband’s control over [the entity] means that its full value should still be ascribed to him on the balance sheet” [paragraph 17]. The wife was unsuccessful in arguing this.  The court also held that, in recognising that X Pty Ltd as a separate legal entity mean that it could not be a “mere puppet” or “alter ego” of the husband.

Whilst it was ultimately held that the husband had transferred the shares in an attempt to defeat an anticipated claim by the wife, the wife was not successful in arguing that the entity was a “mere puppet” or “alter ego” of the husband.  Accordingly, she appealed.

Appeal 2.0

The first ground of the wife’s appeal was that the trial Judge erred in not finding that companies X Pty Ltd and Y Pty Ltd were the ‘alter ego’ of the husband.  The wife also asserted that the primary Judge erred in that he did not make an adverse inference from the husband’s (and other respondent’s) failure to lead certain evidence.

At paragraph 33 the Full Court stated “The wife… focussed on the capacity of the husband to control [X] Pty Ltd as demonstrating that the company and the controller should be treated as one and the same.” This argument was, however, rejected, with the court concluding that “something more than mere control is required.”

In considering the wife’s contention, the Full Court referred to the original trial judgment of Bryan CJ and Murphy J, stating that establishing an ‘alter ego’

does not devolve from the indicia of control by a shareholder; corporations where considerable control is vested in a particular shareholder do not per se forego their separate personality. Rather, the concept refers to the company having no existence and direction separate from that of the relevant shareholder” [paragraph 32]

At appeal, the onus was on the wife to prove that the company was a mere puppet (Ascot Investments Pty Ltd v Harper (1981) FLC ¶91-000(1981) 148 CLR 337). It was therefore incumbent upon the wife to call evidence in support of her claim that the directors did everything the husband told them to do. The wife contended that an adverse inference could be drawn of the husband’s failure to produce evidence to the contrary. This was rejected.

Why does this matter for me?

Separation is never easy, and in matters involving corporate structures, it is important you get advice early to ensure you have a full understanding of the assets for division.

The matter of Atkins & Hunt and Ords provides an important example of the difficulties and arguments that may arise in matters involving corporate entities (and in particular family members).

If you need advice regarding separation, are concerned your partner is hiding assets, or could like to discuss your options, please contact one of our team members on 03 9070 9839 or info@sagefamilylawyers.com.au

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