Limited companies are separate legal entities with a separate identity from their members and shareholders. In DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 2 EGLR 7, the Court of Appeal affirmed that in very limited circumstances the corporate veil can be pierced to enable the court to look at the reality of the situation.
In Aneesh Ltd v Hinchliffe and others [2023] UKUT 82 (LC); [2023] PLSCS 66, the question on appeal was whether the First-tier Tribunal was correct to distinguish DHN and refuse the appellant landlord’s request to pierce the corporate veil so as to treat its alleged subsidiary company as one economic entity for the purposes of determining whether compensation was payable under paragraph 5(2)(a) of schedule 6 to the Leasehold Reform, Housing and Urban Development Act 1993.
The statutory provisions
Pursuant to section 13 of the Act, qualifying tenants of flats can serve an initial notice on the freehold reversioner setting out their intention to exercise their right to enfranchise. The initial notice must include the price the tenants are proposing to pay to acquire the relevant freehold interest.
On receipt of the initial notice, the reversioner must serve a counter-notice under section 21, either admitting or denying the claim. If the claim is admitted and the reversioner disagrees with the price offered, it must make a counter-proposal.
Schedule 6 sets out the manner in which the purchase price payable for the freehold is determined. Pursuant to paragraph 5 of schedule 6, the freeholder is entitled to a reasonable amount of compensation for any loss or damage resulting from the enfranchisement. Under paragraph 5(2)(a) of schedule 6, this includes “any diminution in value of any interest of the freeholder in other property resulting from the acquisition of his interest in the specified premises”.
The issue
Odessa Court, London E7, was a purpose-built, two-storey building comprising six flats in two self-contained sections. The freehold of the part containing flats 1-2 was owned by Haveli Ltd. The freehold of the part containing flats 3-6 was owned by the appellant, Aneesh Ltd. Shares in Haveli and Aneesh were owned by the same individuals. Aneesh claimed that ownership of the two parts of the building had been split to spread risk and for tax planning purposes.
The respondents were jointly the nominee purchaser and the participating tenants who sought to acquire the freehold of 3-6. Following service of the initial notice, Aneesh served a counter-notice admitting the validity of the respondents’ claim, but counter-proposed a different price payable to acquire the freehold.
The only element of the price payable that was in dispute before the FTT was the amount Aneesh claimed it was entitled to receive as compensation for the loss of development value arising from the enfranchisement.
To pierce or not to pierce?
Relying on DHN, Aneesh argued that, for the purposes of paragraph 5(2)(a) of schedule 6, Haveli and Aneesh should be treated as a single economic entity owing to the identical controlling minds behind both companies. Aneesh claimed that if it was to sell the freehold of 3-6 on the open market, Haveli would also sell the freehold of 1-2. Alternatively, it would grant an airspace lease so the whole roof could be developed. Accordingly, it claimed the value of 1-2 was diminished by the enfranchisement because Haveli would be deprived of the opportunity to carry out a joint development of the whole roof.
The FTT refused to pierce the corporate veil and treat Haveli and Aneesh as a single economic entity. DHN was distinguished on the basis that it concerned a different statutory regime – namely, compensation for compulsory purchase. Further, in the present case, ownership of the two parts of the building had been split for the purposes of tax planning and to spread risk. This legitimate arrangement did not necessitate the corporate veil being pierced.
Aneesh appealed. It argued that compulsory purchase was analogous to leasehold enfranchisement. Both involved the acquisition of the freeholder’s land, whether the freeholder consented or not. Additionally, it argued that DHN was binding authority. The Court of Appeal had been willing to pierce the corporate veil in DHN because the three companies involved were “bound hand and foot” to DHN, their parent company. DHN was entitled to claim compensation even though it technically did not own the land, which was a similar scenario in the present case.
Not to pierce!
The UT determined that DHN constituted authority only for the proposition that “where one company in a group owns the land acquired and another company is in lawful occupation of the land for the purposes of the business of the group, the corporate veil may be pierced so as to give the second company an entitlement to compensation for disturbance”.
As the FTT correctly observed, the properties and operations of Aneesh and Haveli were deliberately separated to spread risk and for tax planning reasons. The UT found that this did not give rise to a need to pierce the corporate veil. Both companies were distinct entities and Aneesh had no proprietary interest in the land owned by Haveli.
Key point
- The court will only pierce the corporate veil in limited circumstances
Elizabeth Dwomoh is a barrister at Lamb Chambers
