© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
PIERCING THE CORPORATE VEIL
Concealment principle
- Concealment principle: looking behind the company to discover the facts it is concealing
"[65] In Prest Lord Sumption proposed that two distinct principles underlie the cases apparently concerned with piercing the corporate veil. The first, which he called the “concealment principle”, involves the interposition of a company or perhaps several companies to conceal the true nature of an arrangement. In these cases, the court is merely looking behind the company to discover the facts which the corporate structure is concealing and applying the ordinary legal or equitable principles to those facts. This concealment principle “is legally banal and does not involve piercing the corporate veil at all” (para 28)..." (Rossendale BC v. Hurstwood [2021] UKSC 16)
Evasion principle
- Person under existing obligation deliberately evades/frustrates by interposing company under his control
"[65]...The second principle, which Lord Sumption dubbed the “evasion principle”, was said to comprise “a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company” (para 35). This principle was said to apply:
“when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.” (Rossendale BC v. Hurstwood [2021] UKSC 16)
- Company formed by individual in order to carry on activity individual obliged not to carry on
"[69]...In Gilford Motor Co Ltd v Horne [1933] Ch 935 Mr Horne, after leaving his employment with the plaintiff, formed a new company to compete with his previous employer in breach of an agreement by him not to do so. The Court of Appeal held that the new company was a “mere channel” used by Mr Horne to avoid his contractual obligation and granted an injunction against both him and the company to prevent them from competing with the plaintiff.” (Rossendale BC v. Hurstwood [2021] UKSC 16)
- Asset transferred to company to avoid shareholder liability to sell it
"[69]...Jones v Lipman [1962] 1 WLR 832 was a case of a similar kind. The defendant, Mr Lipman, agreed to sell a property to Mr Jones. However, before completion he changed his mind and transferred the property to a company which he had formed for the sole purpose of seeking to defeat Mr Jones’ right to specific performance. The judge made an order for specific performance not only against Mr Lipman but also against his company. In the case of the company, on Lord Sumption’s analysis, this was justified by the evasion principle. In both cases there was a straightforward contractual liability on the owner of the company. The question was whether the company itself could be made liable.” (Rossendale BC v. Hurstwood [2021] UKSC 16)
- Query whether there is scope for principle to impose obligation on shareholder which has only ever been undertaken by company itself
"[72] Even if there is an “evasion principle” which may in “a small residual category of cases” (per Lord Sumption) justify holding a company liable for breach of an obligation owed by its controlling shareholder, we are not ourselves convinced that there is any real scope for applying such a principle in the opposite direction so as hold a person who owns or controls a company liable for breach of an obligation which has only ever been undertaken by the company itself. At para 34 of his judgment in Prest, Lord Sumption said :
“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.”
He went on to refer to VTB Capital plc v Nutritek International Corpn [2013] UKSC 5; [2013] 2 AC 337, where it was argued that the corporate veil should be pierced so as to make the controllers of a company jointly and severally liable on the company’s contract. Lord Sumption said that:
“the fundamental objection to the argument was that the principle was being invoked so as to create a new liability that would not otherwise exist. The objection to that argument is obvious in the case of a consensual liability under a contract, where the ostensible contracting parties never intended that any one else should be party to it. But the objection would have been just as strong if the liability in question had not been consensual.”
[73] That analysis, with which we respectfully agree, seems to us to leave very little room for reliance on the “evasion principle” to impose upon the controller of a company a fresh liability incurred by the company as distinct from its controller.” (Rossendale BC v. Hurstwood [2021] UKSC 16)
- No scope to use evasion principle to transfer liability for rates from company to controller
"[73] But whether that is so or not, we think it clear that there is no scope for such a principle to operate in the present case. Liability for rates accrues from day to day. If the leases were effective to transfer the ownership of the demised properties for the purpose of the 1988 Act from the defendants to the SPVs (which is the premise on which the attempt to “pierce the corporate veil” becomes relevant), then in each case, from the date of the lease, the only person liable for business rates incurred thereafter was the SPV. Furthermore the interposition of the SPV had no effect at all on the liability of the landlord for rates up to the date of grant of the lease. Applying Lord Sumption’s reasoning, it is not an abuse of the separate legal personality of the SPV to cause the liability for business rates to be incurred by the SPV by granting it a lease, nor to rely on the fact (if it is a fact) that the liability was not the defendant’s because it was the company’s. Nor can the evasion principle properly be invoked so as to create a liability on the part of the defendant that would not otherwise exist.
[74] At the heart of the evasion principle, as explained by Lord Sumption, is the necessary averment that the interposition of the company is, on the facts, an abuse of separate corporate personality. But if the rating legislation permits a landowner to transfer the on-going liability for rates by granting a lease of the property to a wholly owned subsidiary created for the purpose, on terms which make the subsidiary the owner of it, then it is not per se an abuse of corporate personality to do so. The abuse in the present case lies in the way in which the SPV’s liability for rates is then sought to be dealt with, by the abusive processes by which the SPV is either dissolved or put into liquidation. The law provides comprehensive remedies for abusive behaviour of that kind, which do not require the piercing of any corporate veil.” (Rossendale BC v. Hurstwood [2021] UKSC 16)