Tax, property developers and piercing the corporate veil

In the recent case of Rossendale Borough Council v Hurstwood Properties (A) Ltd [2019] EWCA Civ 364, the Court of Appeal decided on matters pertaining to the piercing of the corporate veil in connection with two schemes where the claimant local authorities sought to recover National Non-Domestic Rates (NNDR) from the defendant property developers.

The case has re-opened the discussion on the limited applicability of the doctrine of piercing the corporate veil in a new context (ie of tackling tax avoidance). This doctrine, however, is so closely connected with the doctrine of a company's separate legal personality – regarded as the foundation of English company and insolvency law – that the Court of Appeal judges were not prepared to rule in favour of the claimants.

Facts

The local authorities sought to recover NNDR related to unoccupied hereditaments from the defendants, who were either the freehold or leasehold proprietors of the properties and had granted leases to special purpose vehicle companies (SPVs).

The SPVs were then placed in voluntary liquidation to avoid paying NNDR, or were struck off the register of companies as dormant companies and thus dissolved. The claims for the recovery of NNDR made against the developers were on the basis that they held the ultimate freehold or leasehold titles.

NNDR is payable when, at the relevant time:

• the entire property is unoccupied
• the property is listed in a local non-domestic rating list in force for the year
• it falls within a class prescribed by the relevant regulations (here, the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008). Under Regulation 4(k), any property whose owner is a company "which is being wound up voluntarily" is excluded from that class
• the person paying the NNDR owns the property (ie is entitled to the exclusive entitlement to occupy the property).

The grant of the leases to the SPVs brought the properties within the ambit of the exclusion clause. The local authorities lost at first instance and appealed to the Court of Appeal on two grounds:

• whether the leases fell to be disregarded under the so-called Ramsay principles
• whether or not the doctrine of piercing the corporate veil applies to the SPVs, which would render the schemes ineffective and make the defendants liable for NNDR on the properties.

This article focuses on the second of these issues.

Decision

The local authorities argued that the corporate veil of the SPVs should be pierced as the companies had been interposed for the sole purpose of avoiding a charge, which was "an act of impropriety" designed to avoid a legal obligation. The results of piercing the veil would be that:

• the SPVs' separate legal personalities would be disregarded
• the leases would be treated as granted by the defendants to themselves (and therefore of no effect)
• the defendants were the owners of the properties and therefore liable to pay NNDR.

Richards LJ, who gave the leading judgment, referred extensively to Prest v Petrodel Resources Ltd [2013] UKSC 34. He noted that:

• the principle of piercing the corporate veil had only been successfully invoked in very rare cases
• most of these cases involved instances where corporate vehicles had been used as a "deception, to disguise the true involvement of the defendant", or where the relevant company was acting as the agent of the defendant
• in a minority of successful cases (perhaps only two), the so-called evasion principle applied, where, to quote Sumption LJJ: "there is a legal right against the person in control of [the company] which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate the enforcement".

Richards LJ concluded that of the above, only the evasion principle might be relevant. However, he also dismissed this on the basis that:

• The liability that arose on a daily-basis was that of the SPVs alone and not of the defendants. This would be different if the leases were found to be shams but this allegation had been struck out. In the present case, once a lease was granted to an SPV, the SPV alone came under a liability for NNDR for each day on which the lease subsisted.
• Extending the evasion principle would only be justifiable in "very rare and novel cases". The use of companies to avoid the incidence of tax or NNDR could hardly be described as either, since companies are often interposed to "mitigate or avoid one form or another of taxation". He considered that given the efforts to combat tax avoidance over the past years, it is odd that there were no previous attempts at piercing the corporate veil to defeat such schemes, if that was an appropriate legal route. He relied on the fact that the Supreme Court in Prest, when setting out the principle so neatly, would have mentioned that it could be applied in such schemes if that was the case.

Comment

Tax avoidance is certainly an issue which local authorities have been trying to tackle for many years.

However, the judge recognised that even if views may differ on whether the schemes were "socially reprehensible", the claimants sought to tackle them by coming up against a treasured principle of English law. The Court of Appeal stood by the "unyielding rock" on which company law is constructed – ie that "a legally incorporated company must be treated like any other independent person" (Salomon v Salomon & Co Ltd [1897] AC 22).

Rossendale Borough Council v Hurstwood Properties (A) Ltd [2019] EWCA Civ 364