Hurstwood Properties (A) Ltd & Ors v Rossendale Borough Council & Anor [2021] UKSC 16 (14 May 2021)
Citation:Hurstwood Properties (A) Ltd & Ors v Rossendale Borough Council & Anor [2021] UKSC 16 (14 May 2021).
Subjects invoked: 41. 'Employment'.38. 'Discrimination'.
Rule of thumb:If one person is in complete financial control of another person, can they become vicariously liable for them? Yes, if person A is carrying on an enterprise which has no hope of commercial viability in its own right, then person B financing this can be vicariously liable, even if financier person B is not controlling what person A is doing.
Background facts:
This was a case in the subjects of partnership law, and tax law - it invoked the principle of vicarious liability in a fairly novel set of circumstances.
The facts of this case were that Hurstwood was a residential and commercial letting/renting company – they owned buildings and rented them out to people. They created a new subsidiary company, which they owned 100% of the shares in, and they divided up part of their business into this new subsidiary company – this new subsidiary company ran up part of Hurstwood’s business for them.
Many companies were operating a tax avoidance scheme to avoid paying higher rate Council Tax on properties. The law on the payment of Council Tax stated that if an organisation was insolvent then they paid Council tax at the reduced rate, which saved them a lot of money. Hurstwood were utilising tax this system to their significant financial advantage. They set up this new subsidiary company to run a part of their business and they funded this new subsidiary company. The new subsidiary company set up by Hurstwood delayed paying their Council Tax for as long as possible, however once it finally came time to pay the Council tax, Hurstwood then pulled the plug on funding of this new company, the new company filed for insolvency, and the Council tax bill to be paid then fell massively. Hurstwood then helped ensure that all the bills of this new subsidiary company they had set up, including the reduced Council Tax bill, were all paid – the new subsidiary company was then liquidated and lodged as finished at Companies House. Once the Council found out that Hurstwood were operating this system they sent them an increased Council Tax bill to Hurstwood. Hurstwood refused to pay this increased bill and the matter went to Court.
Hurstwood argued that section 45 of The 1988 Local Government Finance Act stated that if a person was the occupier of a property, and this person then went into liquidation, then this person did not have to pay the higher rate of Council tax on their property, instead paying the much cheaper lower rate. Hurstwood argued that this section applied. Hurstwood further argued that the new subsidiary company they set up was an independently operating company and that they did not interfere with day-to-day operations at all there – separate personality applied and they were a different legal person from their subsidiary company. Hurstwood also argued that just because financing someone else, as they were doing in this case, this was not sufficient to establish control of the other person – more than just financing was needed to establish sufficient control of someone else as a matter of law.
The Council argued that section 65 of the 1988 Act stated it was the person with effective control of the property who was due to pay the tax bill. The Council then argued that Hurstwood controlled their previous subsidiary company in the property because this company was completely dependent on Hurstwood for financing and to operate at all as an entity – the Council argued that even though they were not influencing day-to-day operations they were still the ones providing the all-important financing of it. The Council argued that as Hurstwood were giving their subsidiary company the life-blood it needed to survive so to speak they were therefore clearly in effective control of their subsidiary. The Council called this arrangement a ‘Special Purpose Vehicle’ (SPV), and they argued that the person who set this up retained control of it.
Judgment:
The Court upheld the arguments of the Council and accepted that the landlord Hurstwood was the controller and effective occupier of the property, and not the subsidiary tenant they set up in it, so Hurstwood owed the money for the Council tax debt. They held that even although there was no day-to-day influence over operations by Hurstwood in the subsidiary, normally crucial to deciding this type of question, the fact that the subsidiaries were so completely dependent on the holding company Hurstwood for money meant that the holding company Hurstwood was the effective occupier under s65. The fact that Hurstwood could control the exact moment when their subsidiary went into insolvency was crucial – effectively lived or died – meant that they were in control of this subsidiary company. The Court affirmed that if someone is financing another person completely, with no hope at all that this financing can ever allow this other person to become self-sustaining in the future to be able to pay them back, then they can become responsible for this other person’s actions despite not directly influencing their actions as such. Hurstwood as landlords/owners of their controlled subsidiaries were ordered to pay the higher rate of Council tax to Rossendale Borough Council. As a technical point of jurisprudence, the Court did hold that the ‘piercing the corporate veil’ principle did not apply in this case and the Court were keen to downplay the importance/viability of this as a principle of UK law; the principle that did apply was the partnership law principle of ‘control’ and ‘effective occupation’ of property – under this partnership law principle if someone is effectively controlling someone else then they become liable for their actions and this is the key partnership principle in matters like these.
Ratio-decidendi:
‘For these reasons, we would allow the appeal and set aside the order of the judge in so far as he struck out the claims that, on the proper interpretation of sections 45 and 65(1) the 1988 Act, the leases were ineffective to make the SPVs the owners of the relevant properties, with the result that the defendants remained liable for business rates. We would leave undisturbed the decision of the Court of Appeal in so far as it struck out the claims based on “piercing the corporate veil”’, Lord Briggs and Lord Leggatt writing jointly at 77
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.