Upper Tribunal (Administrative Appeals Chamber)

IN THE UPPER TRIBUNAL Case No. CH/1153/2009

ADMINISTRATIVE APPEALS CHAMBER

 

Before Judge Mark

 

Decision: The decision of the tribunal dated 27 February 2009 is set aside and the matter is remitted to be heard by a new tribunal in accordance with the directions given below.

 

 

REASONS FOR DECISION

 

19. This is an appeal from a decision of the Barrow Appeal Tribunal given on 27 February 2009 disallowing the claimant’s appeal and confirming the decision of the council in relation to housing benefit issued on 3 January 2008. That decision was that the claimant’s liability to pay rent in respect of the property she had occupied as her home since August 2003 was to a trust of which she was a named beneficiary, with the result that her claim to housing benefit had been terminated from 4 August 2003 as she was not entitled to housing benefit by reason of regulation 9(1)(e) of the Housing Benefit Regulations 2006.

 

20. The claimant’s parents appear to have set up a discretionary trust for their children and remoter issue around the time of their divorce in 1982. They were the trustees but retained no beneficial interest under the trust. According to a letter dated 20 November 2007 from the claimant’s solicitors (file, p.7), the original trust documents were lost some years ago. They had been held in safe custody by an accountant whose practice was closed when he became bankrupt. Despite instigating court proceedings, the claimant’s father had been unable to recover them. It would seem from p.359 that the accountant was also struck off as a chartered accountant.

 

21. A synopsis of the terms of the trust has been produced with that letter. The synopsis is dated December 1995, and is followed by a copy of a Deed of Appointment dated 4 April 1996 (pp.9-28). The Deed of Appointment, to which both the claimant’s parents are parties, recites that between August and October 1982 the claimant’s parents reached an agreement to create a settlement jointly for the benefit of their three children. They agreed to transfer to the claimant’s mother a property and its contents. It is said that at this time an oral trust was created, the settlors (i.e., the parents) determining that the trust property should be held on discretionary trusts for the benefit of their three children. There is said to have been a deed dated 29 March 1983 by which the father assigned his interest in the property to the mother.

 

22. That property was subsequently sold and the proceeds invested in another property, from which a business was carried on. The business was transferred in 1989 to a company (PI Ltd) the shares in which, or a majority of them, were held by the mother as trustee. Between 1992 and 1999, the claimant had been secretary of this company (see p.339). Between October 1982 and April 1996 there had been distributions in favour of the beneficiaries and the beneficiaries had also been allowed to occupy trust property. The father had become involved at some point in the administration of the trust, had acted as trustee with the mother, and in September 1992 had set out some of the provisions of the trust in a deed which was said to be supplemental to the Deed of Appointment.

 

23. The Deed of Appointment (“The Trust”), executed by both father and mother, appointed the trust property on the trusts set out in that deed. The trusts included a power to accumulate income for 21 years from 1 October 1982, and subject to that power gave power to the trustees to pay or apply the whole or any part of the income or capital of the trust to or for the benefit of all or any of the children or remoter issue (“the Appointed Class”) as they thought fit, with default trusts of income and capital in favour of the claimant and her sister.

 

24. It appears from a court order at p.337 that the mother was adjudged bankrupt on 3 November 1992.

 

25. No trust accounts are in evidence, but it appears that the Trust, and the trustees under the earlier trusts prior to the Deed of Appointment, acquired a number of companies, in addition to PI Ltd, and these companies owned or acquired properties. One of these companies, N Ltd,, was incorporated in 1996, and a company search dated 26 September 2003 (pp.32-36) indicates that the father became the sole director in March 1999 and that the secretary at that date was the accountant who subsequently became bankrupt. The search does not show identify any shareholder. An annual return at pp.347-352 dated 28 November 2005 shows that the father was still a director, and that there was one issued share, which had been held by the father but had been transferred on 30 September 2005 to himself and the mother as trustees for the Trust.

 

26. It is apparent from the copy Land Registry entries at p.29 that the property in respect of which the claimant had been claiming and receiving housing benefit since July 2003 had been purchased by N Ltd. for £120,000 on about 18 July 2003, and N Ltd was registered as proprietor on 1 September 2003. A charge was registered on the same date in favour of Capital Home Loans Ltd to secure monies that had been advanced by it. The property was next door to another property where the mother was tenant and the father was occupying a room as a lodger.

 

27. Somewhat curiously, the council’s agent, Liberata UK Ltd had written to the vendor of the property by letter dated 9 October 2003 (p.112-3) in terms which indicated that it knew that the property had been sold to N Ltd on 18 July 2003, asking for information. The reply at p.114 on the same day stated that N Ltd was located at the adjoining property and identified the father as the representative of N Ltd who had dealt with the matter and who had told him that his daughter was the planned occupant of the property. The council was therefore aware of the relationship between N Ltd and the claimant, although not, at least from this letter, of the Trust. I note that at p.165 the father does not deny this conversation but states that he would have obtained the information that his daughter was to be the tenant from the mother.

 

28. Further, there is a brief witness statement dated 30 September 2003 given by the claimant to the council at the time (p.116) that she had moved to the property on 5 August 2003 from her previous address, and that both of the properties were owned by B Ltd, for whom her mother acted as agent. She had needed a bigger property because she was in the process of fostering children. As far as she knew, B Ltd was based in Coventry and was owned by Mr. E. There is nothing to suggest that, at the time, the council took further the discrepancy between this statement and the clear evidence that the property was acquired by N Ltd.

 

29. I note for completeness the council’s submission at p.241 that previously the claimant had claimed housing benefit at three previous addresses, the first of which, which was rented by the claimant from June to November 1998, was owned by an unconnected landlord and the second of which had been stated to be owned by B Ltd. It was stated by the council that that property had been let to the claimant from November 1998 to October 2000, and that it now knew that B Ltd was the agent for N Ltd which had purchased that second property on 11 March 1998 (it appears from 259 that this was in fact the date of registration at the Land Registry). The third property, from which she moved in August 2003 had also been owned by N. Ltd, which had purchased it in May 2000 with major works needed (as indicated by the letter at p.277 and the Land Registry entries at p.278). The housing benefit claims at the latter two properties were also terminated, the claimant being notified by letters dated 9 January 2008 (pp.253, 271). I note that at p.427 the council states that there is no other appeal, but the council will agree to abide by the decision of the tribunal insofar as the tribunal determines whether the claimant’s liability is to a trust of which she is a named beneficiary, and that should the decision of the Tribunal turn on other matters, then the claimant has reserved her right to appeal at a later date. In both cases, as in the present case, overpayment decisions were issued on the following day (pp.255-258, 273 to 276 and 295-298).

 

30. The father has stated in a witness statement dated 22 September 2008 that the property was purchased as a long term investment with the aid of a mortgage and that rental income was needed to service these borrowings (p.165, para.6); that during this period N Ltd was acquiring properties for investment and that because he was ill, the entire portfolio was given over to another company, B Ltd to manage, with B Ltd being entirely responsible for the letting – B Ltd was stated to be a separate enterprise not related to the father (p.165, para.7); that he had been informed by the person who owned and ran B Ltd that the claimant was to be the tenant of this property (p.165, para.8). He also explained that there was a problem with B Ltd, and in 2004 a different company C Ltd took over the letting agency briefly, following which the father purchased an off the shelf company to manage it through an acquaintance who became company secretary. However, the acquaintance pulled out and the new company ceased trading in October 2005 and the father decided to wind up and sell the property interests of N Ltd (p.166, paras 9 and 10).

 

31. I note that there are company searches relating to both C Ltd and the company stated to have been purchased off the shelf. A search at pp.37-38 shows that C Ltd was incorporated on 6 August 2003 and the details of directors is consistent with the father playing no part in it. It was dissolved on 26 September 2006, having been dormant for some time before that. The off the shelf company appears from pp.40-41 to have been incorporated on 26 October 2004, the father was appointed director and his acquaintance secretary on 22 December 2004, the acquaintance resigned on 14 February 2005, no accounts were ever filed and the company was dissolved on 1 August 2006.

 

32. The documentation in the file relating to the letting to the claimant is, on its face not entirely consistent with the father’s account. The initial assured shorthold lease of the property to the claimant is by B Ltd (pp.195-199). It is followed by a letter to the claimant from C Ltd dated 20 September 2004 indicating that C Ltd were acquiring the property on 1 December 2004 and a further letter enclosing a new contract for her signature in which C Ltd is described as her landlord (pp.200-207). There is then a further letter dated 22 December 2004 from the new company stating that due to a technicality that company had taken over the lease from C Ltd (p.208), that letter being signed by the father’s acquaintance. Finally there is a letter signed by the mother on the new company’s notepaper stating that the new company was to cease trading on 31 October 2005 and that the properties [sic] would be taken over by N Ltd at 1 November 2005 and N Ltd would inform her of the new bank account details for the rent (p.211).

 

33. Further, the father had previously stated in a witness statement in relation to High Court proceedings between himself and the council over council tax in 2006 (pp.353-361) the properties were leased long term to B Ltd (p.357, para.18). No such lease has been produced and no explanation offered as to how it came to be assigned and then terminated.

 

34. These proceedings arose from his occupation of part of the adjoining property as the mother’s lodger. He describes the purchase of the original property in 1984 (an apparent inconsistency with the recitals in the Deed of Appointment where the property appears already to have been owned before then and where he is stated to have transferred his interest in it to the mother in March 1983). He goes on to explain that the properties were owned by PI Ltd and were sold over a period from the mid-1990’s to March 2000 and the proceeds were used to purchase buy-to-let properties in Cumbria. Eventually, he stated, 8 properties were bought, the 4^th being the property in which he was living and which had been bought in February 1998. He explained that N Ltd had been formed to deal with the purchase of these properties. He was acting as trustee and was the necessary director and shareholder. Again, there appear to be some inconsistencies as to dates when he became the director and shareholder.

 

35. The father stated that the funds were provided from the Trust as and when they became available, although he provides no explanation as to how the money reached the trust from PI Ltd. It is, of course possible that the technical details of any winding up of PI Ltd or any dividend distribution may have been lost with the other papers held by the accountant. Although the statement originally exhibited abbreviated financial statements of N Ltd for 1997-8, they do not appear to have been included in the tribunal’s bundle for the hearing on the present occasion. It would appear, however, that they were acquired with the help of loans from the Trust, although the witness statement then indicates, by reference to PI Ltd bank statement (also not in evidence) that the money came from PI Ltd.

 

36. I note that the father also confuses the Trust with N Ltd when he states that the property in which he was then living was initially bought by the Trust (p.361, para.20) and his instructions to B Ltd to find a tenant for the property following the death of his son in February 1998 would appear to be inconsistent, at least at that stage, with the existence of a long term lease of the property to B Ltd.

 

37. However, a further witness statement by the father dated 31 January 2008 (pp.368-374) in connection with a further dispute with the council, which had reached the Valuation Tribunal, states that the Trust had owned the same neighbouring property in which he was living through two private limited companies, each with only one issued share owned by the Trust through himself. It was stated first to have been registered to N Ltd until 18 October 2006, when it was transferred, on trust for the Trust, to the father himself, and then for a few months in 2007, it was owned, and held on trust by NE Ltd. The rental by the mother from 1998 was stated to be from a third party acting as agent for N Ltd. The mother, who sadly died in 2007, had been receiving housing and council tax benefits and had successfully appealed an attempt by the council to stop those benefits in 2003. Once again, the documentation referred to as supporting this evidence is missing from the file.

 

38. Finally, so far as the father’s evidence is concerned, by a direction dated 3 October 2008, the Appeal Tribunal in the present case directed him to provide further written information concerning the purchase by N Ltd of the property in respect of which the claimant was in receipt of housing benefit. The direction was that he was to state the purchase price and the amount of the mortgage, and was to state whether the difference between the price and the mortgage advance was paid out of the Trust. He was also directed to produce relevant bank statements to confirm the information he provided.

 

39. His response, dated 23 January 2009 (pp.438-444), was that the purchase price was £120,000, the mortgage advance was £80,000 and the remaining £40,000 was paid by N Ltd. The relevant bank statements had been with the documents in the possession of the accountant and, as already stated, he had been unable to recover those documents. He was trying to obtain a further copy of the bank statement from the bank but had been informed that it may take some weeks. He did, however, produce the relevant cash book entries from his computer which showed two payments of £37,000 and £5,000 from N Ltd to his solicitors to cover the balance of the purchase price and other purchase costs. The purchase price was confirmed by a copy of the transfer (p.441) and the price and other costs appear from the completion statement at p.442. A cash book page relating to N Ltd and entitled Abbey National Current Account (p.444) shows the two payments as made on 10 July, but the other entries have been blacked out so that it is not possible to see whether those funds had recently been paid into the account from the Trust or otherwise what their source was.

 

40. No copies of the relevant bank statements were produced at the tribunal hearing on 27 February 2009. I do not know whether they have since been obtained.

 

41. The claimant’s own evidence is contained in two brief witness statements and in the oral evidence she gave to the tribunal. In a witness statement dated 22 September 2008 (pp.161-3) she stated that she lived in the property with her children from 5 August 2003 until 14 April 2008. She had moved from her previous address because she wanted a larger house for her natural children and for her present and future fostered children. Her previous home had only 3 bedrooms. By 2003 she had two small children of her own and a fostered child of 16. She was hoping to foster a second child and wanted in due course separate bedrooms for her natural children.

 

42. She stated that the party she thought of as her landlord was the party to whom she paid rent. She did not know why this party kept changing. In February 2005, she had written to the council (p.103) that she confirmed that she was not related to and did not know the new landlord (the off the shelf company). She stated in her witness statement that she was not related to it and did not know it because it was a limited company and thought the question only applied where the landlord was an individual. In the absence of any indication to the council that the landlord was an individual, I find it difficult to see the basis for this belief, at least as regards the question whether she knew it. She was plainly aware of its identity and had been told to pay the rent initially to her mother, who would give her a receipt on the company’s behalf (p.208).

 

43. By letter dated 3 January 2008 (p.6), the council wrote to the claimant noting that her liability to pay rent was to the Trust, of which she was a named beneficiary. Therefore her claim had been terminated from 4 August 2003 in accordance with regulation 9(1)(e) of the Housing Benefit Regulations 2006. Her solicitors served a notice of appeal with regard to this letter, pointing out that the liability was to pay N Ltd. This appeal letter stated that the company had owned 8 properties and currently owned one other property. It required a minimum income of £720 per month to meet its liabilities in respect of its borrowings alone. The rent at that time payable by the claimant was £440 per month. There is no evidence as to the income from the other property.

 

44. The council refused the appeal by letter of 10 April 2008, on the basis that the liability to pay was to N Ltd which “is a company derived from the [Trust] of which you are a beneficiary.”

 

45. The claimant left the property in April 2008 and moved into a new property which she had purchased with the help of an interest free loan from the Trust.

 

46. The appeal proceeded to the tribunal and evidence was filed as I have indicated. Both parties were represented at the hearing, which took place over two days, on 3 October 2008 and 27 February 2009. The claimant was represented by counsel and solicitors. She attended in person and gave evidence at the first hearing. Her father did not attend.

 

47. The claimant’s oral evidence (p.227) was that she knew nothing of the purchase of the property. She did know about NE Ltd (see para.19 above re this company). She had been company secretary of this company, which had been set up by her father and owned a separate property, nothing to do with this one. She was no longer the company secretary and was not a director or secretary of any other company. She had signed and completed a proof of rent form for the off the shelf company to which I have referred. It also appears from the tribunals’ statement of reasons that she had told it that of her property acquisition with the help of the interest free loan which had no provision as to when it was to be repaid.

 

48. Most of the hearing was taken up with an analysis of the evidence and the legal consequences that flowed from it.

 

49. Before turning to the reasons for the decision and their adequacy, I note that while the relevant provisions are now contained in regulation 9 of the Housing Benefit Regulations 2006, the relevant regulation at the time when housing benefit was awarded in August 2003 was regulation 7 of the Housing Benefit Regulations 1987. Insofar as this decision, or any subsequent tribunal decision on this appeal, may impact on the other decisions in relation to a claim prior to 25 January 1999, it should be borne in mind that regulation 7 was radically revised with effect from that date. The old wording will need to be considered in respect of any period before that time, and the effect of any transitional provisions will need to be considered in respect of any such claim. The purported termination of the second claim with effect from 16 November 1998 by reference to regulation 9(1)(e) of the 2006 Regulations is plainly wrong in law, because neither it nor its identically worded predecessor, the amended regulation 7(1)(e) of the 1987 Regulations, as introduced in January 1999, applied to a claim made in November 1998.

 

The Statutory Provisions

 

50. Regulation 7(1) of the 1987 Regulations as amended provides as follows:

 

“(1) A person who is liable to make payments in respect of a dwelling shall be treated as if he were not so liable where –

 

(a)    the tenancy or other agreement pursuant to which he occupies the dwelling is not on a commercial basis;

(b)    his liability under the agreement is to a person who also resides in the dwelling and who is a close relative of his or of his partner;

(c)    his liability under the agreement is-

(i)              to his former partner and is in respect of a dwelling which he and his former partner occupied before they ceased to be partners, or

(ii)             to his partner’s former partner and is in respect of a dwelling which his partner and his partner’s former partner occupied before they ceased to be partners;

(d)    he is responsible, or his partner is responsible, for a child of the person to whom he is liable under the agreement;

(e)    subject to paragraph (1B), his liability under the agreement is to a company or a trustee of a trust of which-

(i)              he or his partner, or

(ii)             his or his partner’s close relative who resides with him, or

(iii)            his or his partner’s former partner

is, in the case of a company, a director or an employee, or, in the case of a trust, a trustee or a beneficiary;

(f)      his liability under the agreement is to is to a trustee of a trust of which his or his partners’ child is a beneficiary;

(g)    subject to paragraph (1B), before the liability was created, he was a non-dependant of someone who resided, and continues to reside, in the dwelling;

(h)    …..

(i)      …..

(j)      …..

(k)    …..

(l)      In a case to which the preceding sub-paragraphs do not apply, the appropriate authority is satisfied that the liability was created to take advantage of the housing benefit scheme established under part VII of the Contributions and Benefits Act.

 

(1A) …..

 

(1B) Sub-paragraphs (e) and (g) of paragraph (1) shall not apply in a case where the person satisfies the appropriate authority that the liability was not intended to be a means of taking advantage of the housing benefit scheme.”

 

51. Regulation 9(1) and (3) of the 2006 Regulations re-enact the above provisions in virtually identical terms.

 

The parties’ contentions

 

52. The council’s case was essentially that the claimant is a beneficiary under the Trust, and that either the interposition of N Ltd was to be disregarded by piercing the veil of incorporation so that regulation 7(1)(e) or (f) of the 1987 Regulations would apply, or that the liability to N Ltd was created to take advantage of the housing benefit scheme, so that regulation 7(1)(l) would apply. The equivalent provisions in the 2009 Regulations are regulation 9(1)(e), (f) and (l).

 

53. The claimant’s case was that regulation 7(1)(e) could not apply because (a) the claimant was not a beneficiary under the Trust and (b) in any event N Ltd was a different entity from the Trust. Regulation 7(1)(l) did not apply because the council had failed to show that the liability was created to take advantage of the housing benefit scheme.

 

The Tribunal’s findings

 

54. The tribunal concluded that it had not been referred to any case which would have enabled it to lift the corporate veil in the case of a stand alone company, as opposed to companies with a group. On that basis it rejected the council’s submission that regulation 9(1)(e) and (f) of the 2006 Regulations applied, since it found that the claimant’s liability was to a company. It concluded, however, that the claimant’s liability to pay had been created to take advantage of the housing benefit scheme, and on that basis upheld the decision of the council.

 

55. It found that N Ltd had purchased the property in 2003 to provide accommodation for the claimant. The purpose of that company was to act as a vehicle for the Trust. The purpose of the Trust was to provide support, including accommodation, for the children of the father and mother. It found that in the absence of availability of housing benefit for the claimant, the Trust would have utilised its resources in providing accommodation for the claimant and her children free of charge in pursuance of the good intentions of the Trust. It found support in reaching this finding in the fact that the Trust had been able to do this in 2008 after the claimant had left the property.

 

Errors of law

 

56. In my judgment the tribunal erred in law in its reasoning on all counts. So far as piercing the veil of incorporation was concerned, it was plainly dealing with an area of law with which it was not familiar and did not have the benefit of having the relevant authorities cited to it. The only cases relied on by the council were the Court of Appeal decisions in Revlon Inc v Cripps & Lee Ltd., [1980] FSR 85, and DHN Ltd v Tower Hamlets LBC, [1976] 1 WLR 852. Other cases, such as Gilford Motor Co. Ltd v Horne [1933] Ch.935 and Jones v Lipman, [1962] 1 WLR 832, show that the veil can be pierced in appropriate cases, where an individual uses a company to try to circumvent his obligations. The tribunal was wrong in law in holding otherwise. The circumstances in which the veil will be pierced are very limited, however, and I deal with this further below.

 

57. I am also unable to find any factual findings sufficient to support the proposition that in the absence of housing benefit the Trust would have utilised its resources in providing accommodation for the claimant and her children free of charge. The only fact relied on was that it had done so in 2008. But the evidence was that by that time N Ltd’s properties had been sold off or in the case of the property in question here there were at least unchallenged submissions that it was sold off in April 2008. There were plainly profits from the sales off and these may well have found their way to the sole shareholder as trustee of the Trust. There is no evidence as to the assets of the Trust that may have been made available to provide accommodation for the claimant and her children in 2003. The evidence before the tribunal was that the property was purchased with a large mortgage and that rental income was needed to service the mortgage and other liabilities of N Ltd.

 

58. There is also a considerable degree of confusion in the findings of the Tribunal in the following passage in its reasons:

 

“Mr Sharp submitted on behalf of the [council] …The purpose of the Trust was to provide for the [claimant] and her children and her sister [L] and her children. There was no need therefore for the purchase of 8 properties, No need to get mortgages that could not be paid for out of the income from the property. The Trust had purchased other properties without commercial mortgages and without claiming rent for the occupation of them. In this respect, Mr. Sharp referred to [the property purchased in 2008]. This had been owned by [the father] presumably as trustee for the Trust. On 30^th April this property was purchased by the [claimant]. The price stated to have been paid on that date was £170,000. On the same date however the [claimant] executed a legal charge to secure the sum of £180,000 in favour of the father “as trustee of [the Trust]”. Land Registry office copy entries of the [claimant’s] title are found at pages 456 and 457. There was no provision for payment of interest in the legal charge.

 

The [claimant’s] solicitor … informed the tribunal that she was unable to confirm whether or not any money changed hands in that transaction. The charge had been put in place so that the trustees could retain some control over the property. As the tribunal had heard that in other transactions involving the Trust no money had actually changed hands, and there was no evidence that that any money had changed hands in respect of the [claimant’s] purchase of [the property purchased in 2008] it found, on a balance of probabilities, that [that property] had been transferred to the [claimant] effectively as a gift and that the registered charge was some form of device the purpose of which was not intended to secure payment of any money stated to be secured thereby.”

 

59. At p.465 of the record of the proceedings it is noted that the charge by the claimant to her father to secure repayment of the £180,000 was produced to the tribunal. Despite this, it did not appear in the file and a direction was given which led to its production together with other documents relating to the 2008 purchase. I do not consider those other documents as they were not before the tribunal, except to the extent that it is apparent that the tribunal could have ordered their production in October 2008 had it considered them relevant, and that had it done so, it could have saved it from the factual error that it found that the property in 2008 was acquired otherwise than at arm’s length by the claimant.

 

60. I see no reason, however, not to look at the charge (pp.585-599), which is recorded as having been produced to the Tribunal. It is stated at p.585 to be between the claimant and her father as trustee of the Trust, yet it is executed at p.599 by the father and another person on behalf of N Ltd, a fact which may require some explanation at the new tribunal hearing. It did not, of course, require execution by the chargee to be effective. It is in a standard, if old fashioned, form and contains a covenant by the borrower (the claimant) to repay the loan on the Redemption Date, which is defined as 30 September 2008.

 

61. While evidence of the identity of the vendor was not provided to the tribunal (and had not been sought by the tribunal so far as I can see), so that there was no evidence that the 2008 property had been acquired by the claimant from an arm’s length vendor, neither was there any evidence that it had been acquired from either N Ltd or the Trust.

 

62. In my judgment there was no evidence on which the tribunal could properly have concluded that the 2008 property was a gift to the claimant, and as is pointed out in the council’s submissions on this appeal, that was not a contention which had been made by it. Indeed, the council concedes in those submissions that the claimant purchased the 2008 property in her own name from an unconnected third party. The tribunal appears to have had a misguided view of the acquisition of this property which does not seem ever to have been put to the parties for comment.

 

63. Further, I can see no basis for the finding that the loan of £180,000 was a sham. There is no suggestion that the claimant had any other funds to buy the 2008 property, and it was registered in her name. Even if it had been the property of N Ltd or the Trust, I can see no reason why it should not have been sold to her for £170,000 with the money being left outstanding on loan, and that is plainly the form that the transaction took. The Trust was not only for her and her children but for a wider range of beneficiaries and the father as trustee was entitled and bound to consider how he should benefit her, taking into account the potential interests of the other beneficiaries. An interest free secured loan was a proper way of doing this. There is no suggestion that the form of the transaction in any way took some unfair advantage of some third party, and I can see no basis whatsoever for the unfortunate imputations made in respect of it by the tribunal.

 

64. The tribunal was therefore in error of law in its reasons and I set aside its decision.

 

65. I do not consider that I can substitute my own decision for that of the tribunal as further evidence is required to deal with the matter on the basis set out below. I therefore remit the matter to a new tribunal.

 

Submissions by the Secretary of State

 

66. In addition to the submissions made on behalf of the claimant and the council, the Secretary of state, having been joined as a party to the appeal, made submissions which I take into account. He does not submit that the veil of incorporation should be pierced and submits that the case should be considered on the basis of regulation 9(1)(l) of the 2006 Regulations on the basis that the trust had sufficient funds to buy a property outright for the claimant, which it subsequently did, but chose not to do so at the time of the benefit claim, instead preferring to take out a mortgage on the property and charge rent. It is said that where a person could live in the home without payment of rent it would be an unreasonable use of taxpayers’ money to help with that rent.

 

67. The Secretary of State also accepts that it would be reasonable to accept a liability to a trust which has sought to look after the interests of its beneficiaries by acquiring a home for them, but only in a situation where the trust lacks the funds to buy the property outright. It would in those circumstances be reasonable to accept a liability for a rent that is set to recover the costs to the trust of buying that home, and in that situation it could be reasonable to apply regulation 9(3). However, where the trust does have funds to buy the home outright, as subsequently happened here, it is submitted that it would not be reasonable for the trust to take out a loan to purchase the property and then charge rent to the beneficiary instead of buying the property outright and avoiding those costs. It is asked rhetorically how that could be in the interests of the beneficiary. It is also pointed out that the interest of the taxpayers would not be served by paying the beneficiary’s rent in those circumstances as the benefit is intended to keep the bailiff from a claimant’s door and not to enrich her.

 

68. While I fully understand the merit in principle of the Secretary of State’s approach, I, and the new tribunal, must still approach the regulations as they stand, and must consider them as they apply to the facts of this case. The claimant had been receiving housing benefit in respect of a letting from an unrelated landlord before she moved into the first of the three properties owned by N Ltd. Had she continued to rent from unrelated landlords, she would unquestionably have continued to be entitled to housing benefit so long as she had no claim to the income of Trust and no discretion was exercised to pay anything to her which was sufficient to disentitle her to housing benefit (or to income support if the entitlement was related to her receipt of income support). This would seem to have been the case even if the trust fund was worth many millions of pounds.

 

69. Further, the trustees of a discretionary trust are bound to consider the interests not only of the claimant but also those of the other beneficiaries. Just because there is enough to buy her a home, it does not mean to say that the trustees ought to take that course. They have to exercise their discretion, and are perfectly entitled to conclude that it is better to pay income or capital to another beneficiary, or so far as it was within their powers to accumulate it, taking into account for this purpose that the claimant was entitled to housing benefit whereas another claimant was not and therefore was in greater need of help.

 

70. In addition, it is wholly unclear what assets the trustee in this case had available, whether as capital or income, at any time up to April 2008. No trust accounts have been sought or produced, and the only evidence is that the trustee held the only issued share in N Ltd, and on occasions the issued share capital of other companies. So far as N Ltd is concerned, it is unclear what, if any, income it had available for distribution after payment of mortgage interest and other outgoings, or whether any dividend was ever declared.

 

71. While I appreciate that much of the documentation may have been lost for the reasons given by the father, there were presumably accounts filed at Companies House, bank accounts, trust accounts kept by the father (of which one example has been exhibited heavily redacted) and other documentation and evidence to show how the business of both the trust and the company was conducted. Such evidence as there was, however, did not indicate whether the Trust was in a position to provide a free home for the claimant in 2003 or, if so, why the father exercised his discretion not to do so.

 

Directions to the new tribunal

 

72. The new tribunal is concerned with the application first of regulation 7(1) and (1B) of the 1987 Regulations to the lettings in 2003 to 2005, and to the application of regulation 9(1) and (3) of the 2006 Regulations from the date those regulations came into force. There is no material distinction in content between those regulations.

 

73. On the basis of the concession, rightly made in my view by the council, that the lettings were on a commercial basis, the new tribunal is concerned with the effect of the specific provisions relied on by the council.

 

74. The claim by the claimant that she was not at the relevant time a beneficiary under the trust is unfounded. She was amongst the class of discretionary beneficiaries and she had a residual entitlement to half the income of the trust. In ordinary language she is a beneficiary.

 

75. The claimant has relied on the decision of Judge Bano in appeal CH/4/2008, [2009] UKUT 7 (AAC) in support of a contention that as a discretionary beneficiary she did not fall within the expression “beneficiary” as used in regulation 9(1)(e) of the 2006 Regulations if no power of appointment had been exercised in her favour. In that case, Judge Bano stated at paragraph 13 that “I consider that for the purposes of regulation 9(1)(e) of the 2006 regulations a person is only a ‘beneficiary’ of a trust if under the terms of the trust the person can be permitted to occupy the dwelling which is the subject of the housing benefit claim.

 

76. I do not follow this argument. It can only arise if the veil of incorporation is pierced. If it is pierced on the grounds indicated below, then the property would be treated as the property of the trust, which would have the power to permit the claimant to occupy it. The claimant would therefore fall within the very limited definition of beneficiary propounded by Judge Bano. I therefore direct that, insofar as relevant, the new tribunal shall treat the claimant as a beneficiary under the Trust.

 

77. In any event, I am unclear why such a limitation should be necessary. As Judge Bano himself had pointed out earlier in his decision, a beneficiary can still obtain housing benefit if he can show under paragraph 9(3) that the liability was not intended to be a means of taking advantage of the housing benefit scheme. Indeed, it could give rise to serious abuse, if a trust precluded the occupation of the property by a beneficiary qua beneficiary, so as to preclude any appointment of the use of the property in his favour. This would be even more the case if other suitable properties owned by the trust could be so appointed. I cannot see that the position under sections 30 and 41(2) of the Landlord and Tenant Act 1954, on which Judge Bano relies, but where the context is totally different, can have any relevance to the position in relation to the housing benefit regulations.

 

78. There is nothing to stop a trust, suitably empowered by the trust deed, from owning shares in a company and using the company to acquire properties on mortgage. The company is a separate entity from the trustees, even if the trustees are the directors of the company. In this respect the position is the same as when an individual chooses to run his business through a company. Further, loose talk by such individuals describing the company property as his own does not mean that the company is to be treated as a sham.

 

79. The circumstances in which the corporate veil can be pierced are very limited. As stated in Trustor AB v Smallbone and others, [2001] EWHC 703 (Ch), in Woolfson v Strathclyde Regional Council, [1978] SLT 159 Lord Keith of Kinkel pointed out that it was appropriate to pierce the corporate veil "only where special circumstances exist indicating that [the company] is a mere façade concealing the true facts". This principle was applied by the Court of Appeal in Adams v Cape Industries plc, [1990] 1 Ch. 433, 542A-B. Adams v Cape Industries plc was followed by the Court of Appeal in Re: H and others, [1996] 2 BCLC 500 which was applied by Rimer J in Gencor ACP Ltd v Dalby, [2000] 2 BCLC 734. The decision in DHN Ltd v Tower Hamlets LBC, in which the three members of the Court of Appeal expressed their reasons for their decision in different terms, must be read subject to this limitation.

 

80. With regard to the council’s contention that it would be unjust to allow the company to be used as a means of avoiding the provisions of regulation 7, in giving the decision of the Court of Appeal in Adams v Cape Industries, Slade LJ stated at p.536:

 

"[Counsel for Adams] described the theme of all these cases as being that where legal technicalities would produce injustice in cases involving members of a group of companies, such technicalities should not be allowed to prevail. We do not think that the cases relied on go nearly so far as this. As [Counsel for Cape] submitted, save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities."

 

81. N Ltd was acquired by the father on behalf of the Trust long before 2003, and apparently two years before it began to let properties to the claimant. It appears to have owned 8 properties in all, of which only three were occupied by the claimant. There is at present no evidence that the Trust had any other assets in 2003, or that it could, or ought to have acquired the 2003 property in the name of the trustees rather than in the name of N Ltd or some other company the shares in which were then held by the trustees. Nor is there any evidence it was a function of the company’s existence or its acquisition of these properties to take advantage of the housing benefit scheme, as may have been the case, for example, if it had been incorporated specifically to acquire the 2003 property in place of the trustees.

 

82. The new tribunal will wish to bear in mind that the claimant had previously been in receipt of housing benefit at premises let at arm’s length, and on the face of it, in the absence of evidence to the contrary, it should ask why the father should not have left her to rent elsewhere where she could continue to obtain housing benefit while the assets of N Ltd continued to increase, probably in part for her ultimate benefit.

 

83. These are all matters that may properly be investigated by the new tribunal, which may wish to consider directing the production of further documentation relating to the assets and liabilities of the Trust and of N Ltd at that time. The new tribunal may also wish to consider directing production of trust accounts showing what assets and income the Trust had between 2003 and 2008 and also what income or capital was in fact distributed or, in respect of income, which the claimant was entitled to call to be distributed to her. The tribunal will wish to bear in mind that N Ltd appears to have had debts and interest liabilities for which it was liable and that if it gave away its property, or improperly permitted free use of it, and then became insolvent, that would give rise to claims against the director responsible, in this case the father, personally.

 

84. The tribunal should also seek evidence as to the other beneficiaries under the trust and the extent to which the trustees considered their needs in deciding how to deal with the trust fund.

 

85. If, and it appears to me on the present evidence to be a big if, the tribunal were to be satisfied that the veil of incorporation should be lifted in respect of N Ltd and its acquisition of the 2003 property, then the onus would be on the claimant to show that the liability was not created to take advantage of the housing benefit scheme. At present, I have some difficulty in seeing how she could show this, bearing in mind that in piercing the veil the tribunal will have found that the company was a mere façade concealing the true facts.

 

86. Similar considerations apply to the council’s case under regulation 7(f) of the 1987 Regulations. In the context of this regulation, I note that the curious position appears to be that if a wealthy father creates a formal trust for his children, which acquires a property, this regulation would apply, whereas if the same father, instead of creating the trust, acquired a property himself and let it on commercial terms to his daughter, she could claim housing benefit unless what is now regulation 9(1)(l) could be shown to apply.

 

87. With regard to regulation 7(1)(l), it is for the council to show that when the liability was created, it was created to take advantage of the housing benefit scheme. The tribunal must look at the time when each liability was created, which would appear to be the dates of the various tenancy agreements. As pointed out by Commissioner Jacobs, as he then was, in CH/39/2007, in considering the meaning of “taking advantage of the scheme”:

 

19. “It means something akin to abuse of the scheme of the scheme or taking improper advantage of it. Bad faith is not abuse, but it could be persuasive evidence of abuse. See the judgment of Kennedy LJ in Solihull Metropolitan Borough Council Housing Benefits Review Board v Simpson (1994) 27 HLR 41 at 49. Kennedy LJ also mentioned the dominant purpose of an arrangement, but concluded:

‘It may shift the evidential burden of proof, but it depends on the facts of the case whether or not it is conclusive.’

20. Care has to be taken with the use of dominant purpose even in this qualified way, especially when only the landlord’s motivation is relevant. Many landlords use the housing benefit scheme as a way of financing the purchase of property as an investment or of financing a business, but it is not the function of regulation 9(1)(l) to impede the proper operation of the private rented housing sector.

21. It was agreed that there may still be an abuse of the scheme even if the claimant would, under other arrangements, be entitled to benefit. R v Manchester City Council, ex parte Baragrove Properties Ltd (1991) 23 HLR 337 is authority for that proposition.

22. Mr Prescott QC referred me to the history of regulation 9 and particularly to the substantial amendments that were made in 1999. I have to interpret the regulation as it now stands and do so in the context of the housing benefit legislation as a whole. Part of that context, as I pointed out at the oral hearing, is the other control mechanisms that allow the local authority to control the amount payable by way of housing benefit. I draw three conclusions from that context.

23. First, there is no built in link between those mechanisms and regulation 9(1)(l). As a result, there is a possibility that an arrangement may fall outside the control mechanisms without being caught by regulation 9(1)(l).

24. Second, the cases in which those control mechanisms apply only operate if the cases are not excluded from the scheme by regulation 9. The terms of those mechanisms therefore reflect on the regulation by indicating the type of arrangement that is not caught by it. For example, the control on the rent under regulation 13 shows that a landlord does not take advantage of the scheme merely by setting a rent that is too high.

25. Third, it is relevant to take account of the effect of regulation 9(1)(l). If it applies, it excludes the claimant from the housing benefit scheme in respect of that particular liability for rent. The other control mechanisms operate to reduce the amount of housing benefit payable. That suggests that regulation 9 is concerned with circumstances in which it would be inappropriate to allow the claimant into the scheme at all. Although that does not give a precise indication of the sort of case that is caught by regulation 9(1)(l), it provides a touchstone for its application. It is relevant to consider whether the type of arrangement that has been made is one that calls for complete exclusion or is more appropriately controlled, if at all, by control over the amount of payment.

26. I accept, of course, that the control mechanisms are not an exclusive code for controlling the amount of housing benefit payable. An argument to that effect was put in R v Manchester City Council, ex parte Baragrove Properties Ltd (1991) 23 HLR 337 at 343, but rejected (page 345). In that case, landlords had targeted vulnerable claimants whose rent could not be effectively restricted under the usual control mechanisms. The premises were, as far as I can tell, ordinary accommodation and were not in any way adapted or appropriate for any particular needs the claimants might have. That is very different from the circumstances of the present case. The landlords there were in a way rigging the market by excluding all but a particular class of claimant from consideration. I do not read the case as deciding that a landlord necessarily takes advantage of the scheme by: (i) an individual decision to let to a particular claimant because that would produce the highest return; or (ii) setting up in business to provide appropriate accommodation or support to vulnerable claimants.

27. The cases I have cited were decided on the pre-1999 legislation, but no one argued that this affected their relevance to the present wording and I can see no material change to undermine their continuing authority.”

88. In reaching a conclusion as to whether any of the liabilities was created so as to take advantage of the housing benefit legislation in the sense indicated by Commissioner Jacobs, the tribunal will need to have regard to all the evidence, including such evidence as the knowledge of the trustees as to the provisions of regulation 7(1)(l), the reasons for the property being acquired in the name of N Ltd rather than the trustees, and what the trustees and the claimant would have done if the property had not been let to the claimant in this way. Some of the ambiguities, omissions and contradictions in the evidence to which I have referred earlier in this decision may be referred to and clarified by the new tribunal for this purpose, including an examination as to why other companies were interposed and described as the claimant’s landlord when in fact they were only agents.

 

89. It is apparent from the issues referred to above, and that it is the motives of N Ltd and the father that are primarily in issue, that it would be desirable for the father to attend the tribunal to give evidence.

 

 

 

(signed) Michael Mark

Judge of the Upper Tribunal

 

15 July 2010