Generally, companies have their own legal personality. This means that shareholders are not responsible for the company’s debts. Piercing the corporate veil is when the rights, responsibilities or activities of a company are treated as the rights, responsibilities or activities of its shareholders.
Last month, the Supreme Court handed down its judgment in Hurstwood Properties (A) Ltd and others (Respondents) v Rossendale Borough Council and another (Appellants)  UKSC 16. The court considered the question of whether the local authority had reasonable grounds for claiming business rates tax from the Respondent companies.
The Respondent companies were the registered owners of various unoccupied commercial properties which were subject to non-domestic rates. They granted short leases of the unoccupied commercial properties to Special Purpose Vehicles (SPVs) which the Respondent companies set up. The Respondent companies granted the leases so as to make the SPVs the “owner” of the properties and therefore liable to the business rates tax. In order to avoid tax liability, the SPVs were then dissolved or put into liquidation.
The Appellants claimed that they were entitled to the unpaid business rates tax from the Respondents, either because:
- Ground 1: The lease to the SPV was ineffective to make the SPV the ‘owner’ of the unoccupied property, or
- Ground 2: The SPV should be ignored because their use to avoid tax liability is an abuse of the SPVs’ separate corporate personality that warrants “piercing the corporate veil”.
What Decision Did The Court Come To?
The Supreme Court ruled in favour of the Appellants and unanimously allowed the local authorities’ appeal. The Supreme Court set aside the Court of Appeal’s order to strike out the claim on ground 1 but upheld the Court of Appeal’s decision on ground 2. The Supreme Court held that the Court of Appeal was correct to decide that there was no principle which could justify piercing the corporate veil in this case.
Why Did the Supreme Court Come To This Decision?
The Supreme Court outlined the distinction between two different situations which may be said to involve “piercing the corporate veil”. One is where the separate legal personality of a company is disregarded in order to obtain a remedy against the owner/controller of the company in respect of a liability which would otherwise be that of the company alone. The other is where the personal liability of the owner/controller is being converted into a liability of the company.
The Supreme Court also added that they were not convinced that there was any real scope to hold a person who owns/controls a company liable for breach of an obligation which has only ever been undertaken by the company itself. The Supreme Court referred to Lord Sumption in Prest v Petrodel Resources Ltd  UKSC 34:
“It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place. It is not an abuse to rely on the fact (if it is a fact) that a liability is not the controller’s because it is the company’s. On the contrary, that is what incorporation is about.”
The Supreme Court held that, even if the Respondent companies tried to abuse the corporate veil to evade the law, the difficulty in this case was that the interposition of the SPV (and the grant of the lease) did not evade an existing legal obligation. This is because the business rates tax accrues day by day. Therefore, before granting the lease, the Respondent companies were liable for any accrued rates and once the lease was granted, only the SPC was liable (assuming that the SPV was the “owner”). Therefore, the Supreme Court decided not to pierce the corporate veil in this case.