Avoidance Schemes

March 8th, 2019 by James Goudie KC

In Rossendale BC v Hurstwood Properties and Wigan Council v Property Alliance Group (2019) EWCA Civ 364 actions by local authorities seeking to recover National Non-Domestic Rates from property developers in respect of unoccupied hereditaments were struck out where the developers had set up schemes to avoid the payments involving transferring leases of the properties to special purpose vehicle companies.  The Ramsey principle of purposive interpretation of the statutory scheme did not apply and there was no reason to pierce the corporate veil.

These appeals concerned two schemes. Both schemes involved the grant of leases of properties to SPVS without assets or liabilities which, as part of the scheme in question, were then placed in voluntary liquidation or were allowed to be struck off the register of companies as dormant companies and thus dissolved.The appeals arose in two cases brought by local authorities for the recovery of NNDR from the defendants in respect of the properties of which they, as the freehold or leasehold proprietors, had granted leases to SPVs. The defendants maintained that, by virtue of the leases, the SPVs were the “owners” of the properties for the purposes of liability to pay NNDR during the currency of the leases. The local authorities accepted that this was the case unless the leases or the SPVs could as a matter of law be disregarded.

The appeals raised two issues. First, was it arguable that the doctrine of piercing the corporate veil is applicable to the SPVs? Second, was it arguable that the leases fall to be disregarded by the application of the principles established by the decisions in W.T.Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (“Ramsay”) and later cases?

These proceedings were but two of some 55 similar proceedings pending in the Liverpool District Registry of the Chancery Division. The two present cases had in effect been chosen as test cases. The total amount of rates claimed in all these cases is some £10 million but it may well be that the amount of rates not paid as a result of schemes such as these is greater.

Lord Justice David Richards said:-

“43.    The question is … whether it is arguable that following a trial a court might develop the principle of piercing the corporate veil so as to apply to the present cases.

  1. The court will be cautious of shutting out a case on the basis that such a development is unsustainable. …
  2. …, in my judgment, this is a case where this court should grasp the nettle and decide whether the principle of piercing the corporate veil is capable of applying to the facts alleged by the claimants in these cases. …
  3. The citations from the judgments in Prest set out above make abundantly clear that, if there is to be any extension of the principle beyond the evasion principle, it will only be in very rare and novel cases. That was the view expressed by Lord Mance and Lord Clarke. Baroness Hale spoke of the principle as being one to prevent companies being used as engines of fraud and to prevent those who operate limited companies from taking unconscionable advantage of the people with whom they do business.
  4. In the subsequent decision of the Privy Council in Persad v Singh [2017] UKPC 32, [2017] BCC 779, Lord Neuberger, with whom Lords Kerr, Reed, Hughes and Hodge agreed, stated at [17] that piercing the corporate veil is “only justified in very rare circumstances” and that, as Lord Sumption explained in Prest, it can be justified only where the evasion principle applies. While I do not think that this can be taken as removing the possibility of some development to the extent envisaged by the other Justices in Prest, it serves to emphasise the difficulties facing any extension of the doctrine beyond the evasion principle.
  5. That the possibility of piercing the corporate veil should be highly circumscribed is not surprising. Registration of a company under the Companies Acts creates a separate legal person with all that follows, as the House of Lords affirmed in its seminal decision in Salomon v A Salomon & Co Ltd [1897] AC 22. The Acts contain no provision for disregarding that separate legal personality,… It is therefore remarkable that by the invocation of a common law power the courts can nonetheless disregard a registered company’s separate legal personality.
  6. The use of companies to avoid the incidence of tax or NDR can hardly be described as rare or novel. They are frequently inserted in tax avoidance schemes for no reason other than to mitigate or avoid the incidence of one form or another of taxation. Further, as the Judge said in his judgment at [3], it has been recognised for a considerable time that ratepayers or potential ratepayers can and do organise their affairs so as to avoid liability to pay rates.
  7. Given the efforts to combat tax avoidance over the last 40 years or so, it is surprising that attempts have not been previously been made to invoke the doctrine of piercing the corporate veil to defeat such schemes, if it was properly available for that purpose. If the members of the Supreme Court in Prest had thought that the establishment or use of companies for the purposes of tax avoidance, or NDR avoidance, was an appropriate ground for the application of the doctrine, I find it hard to imagine that they would not have said so. It is to be noted that Lord Sumption records at [36] the trial judge’s finding that the husband’s purpose in vesting properties in companies controlled by him was “wealth protection and tax avoidance”.
  8. Nor can it be said that the SPVs were used in the present cases as engines of fraud or to take an unconscionable advantage. Views may differ as to whether the purpose for which the SPVs were used was socially reprehensible but, assuming it was, there is no suggestion in Prest or in any of the other cases that such disapproval can found the application of the radical doctrine of disregarding the separate legal personality of a registered company.
  9. In my judgment, it is not open to the courts to pierce the corporate veil of the SPVs.
  10. … If the schemes are to be defeated, it would most obviously be achieved by disregarding not the separate personality of the SPVs but the leases granted to them. However, for the reasons given by Henderson LJ with which I agree, the principles to be derived from Ramsay and subsequent cases are not applicable on the facts of these cases.”

Henderson LJ said:

“57.    Everybody now agrees that the Ramsay principle, at its most basic level, is one of statutory construction. …”

“73.    … The legislation is … not amenable to a wider, purposive construction which could allow scope for the Ramsay principle to operate. …”

“78.    … As a matter of construction, the ownership condition is in my judgment concerned with the immediate entitlement to legal possession, and as a matter of law that condition was satisfied the moment that a valid lease was granted. …”

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