Corporate Law Update

• The court refuses to “pierce the corporate veil” to impose an obligation that would not otherwise have existed
• Glass Lewis publishes an overview of sustainability reporting

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No piercing the corporate veil to impose an obligation that would not otherwise exist

The Supreme Court has held that a company’s “corporate veil” could not be pierced because doing so would create a liability that would not otherwise exist.

What happened?

Hurstwood Properties (A) Ltd v Rossendale Borough Council [2021] UKSC 16 concerned two groups of companies, each of which had been operating a scheme to avoid liability to pay business rates under the Local Government Finance Act 1988 (the 1988 Act). The proceedings were brought by two local authorities as a test case.

In brief, the 1988 Act imposes business rates on unoccupied property. However, there are a number of exceptions, including where the “owner” entitled to occupy the property for the purposes of the 1988 Act is subject to winding-up proceedings.

Both schemes involved the following steps.

• A third-party promoter would set up a special purpose vehicle (SPV) without any assets or actual or intended business.
• The member of the group of companies that owned the unoccupied property would grant a lease to the SPV.
• The SPV would then become the entity responsible for paying business rates under the 1988 Act.

The next steps in each scheme differed.

• One scheme involved placing the SPV into members’ voluntary liquidation almost immediately after the lease was granted so as to make use of the exception described above.
• The other involved dissolving the SPV after a period of inactivity so that the accrued liabilities for business rates passed from the SPV to the Crown as unowned property (“bona vacantia”).

Both schemes relied on the fact that, in law, a company is treated as a person in its own right, distinct from its shareholders and is capable of owning property in its own name and gaining rights and liabilities of its own. In particular, in the case of a limited liability company, a shareholder is not liable for the debts of the company beyond the amount they have invested when subscribing for shares.

However, in a limited number of cases, the courts can disregard the separate personality of the company (its so-called “corporate veil”) and “pierce” it, holding a company’s shareholders jointly responsible for the company’s own liabilities (Prest v Petrodel Resources Ltd [2013] UKSC 34). This includes where the company is used as a façade to allow the shareholder to avoid a legal liability (the so-called “evasion principle”).

Here, the local authorities claimed that, by using the SPVs to avoid liability for business rates which they would otherwise have been required to pay, the companies were abusing the SPVs’ limited liability under the evasion principle. They argued that the courts should therefore pierce the SPVs’ corporate veil and require the groups of companies themselves to pay the relevant business rates.

What did the court say?

The court disagreed.

It said that the leases that had been granted to the SPVs had been effective and, as a result, the SPVs had become liable to pay the business rates. The court was unable to conclude that the SPVs had been interposed to evade a legal obligation. The judges agreed with the court’s comments in Prest, namely that the corporate veil cannot be pierced merely to “impose upon the controller of a company a fresh liability incurred by the company as distinct from its controller”.

The court did note, however, that there had been an element of abuse, but that this concerned how the SPVs’ liability for the relevant business rates had been dealt with as part of the schemes. However, the law provided comprehensive remedies for that abuse which did not require piercing the corporate veil.

What does this mean for me?

The decision shows that the courts are reluctant to erode the principle of limited liability.

Interestingly, however, although the court was careful not to form a conclusive view, it did question whether there were coherent principles or rules of law for piercing the corporate veil, or whether there had simply been occasions where some other rule of law had been invoked that appeared to the look through the principle of limited liability.

However, despite this, the court was clear that the evasion principle is still good law. The courts will disregard the limited liability and separate legal personality of a company where a person deliberately interposes that company to avoid or frustrate an existing legal obligation, liability or restriction.

Also this week…

• Glass Lewis publishes overview of sustainability reporting. International proxy advisor Glass Lewis has published a report setting out an overview of international sustainability reporting recommendations and standards. The report covers standards published by the International Integrated Reporting Council, the Global Reporting Initiative, the Taskforce on Climate-related Financial Disclosures, the Sustainability Accounting Standards Board, the Climate Disclosures Standards Board and the Better Alignment Project. The report is available after providing contact details.