Alan Adams v FS Capital Ltd

Hearing dates: 7 th, 8 th, 9 th, 10 th, 13 th, 14 th, 15 th and 16 th February 2023

Remote hand-down: This judgment was handed down remotely at 10.30am on Monday 3 ^rd July 2023 by circulation to the parties and their representatives by email and by release to the National Archives.

The structure of this judgment

The structure of this judgment is as follows:

Introduction

This is my reserved judgment following the trial of this action. The action is concerned with the disputed sale to the First Defendant of debt assets held in three Jersey trusts ( “the Trusts”). The Claimants, who number around 700 individuals, are some of the beneficiaries of the Trusts. The debt assets comprise the right to repayment of loans made to the beneficiaries by the settlors of the Trusts. The Claimants say that the sale of these debt assets ( “the Loan Assets”) was effected for an improper purpose and in breach of trust and was thereby void or voidable (in which case the sale should be set aside), with the consequence that the First Defendant now holds the Loan Assets on constructive trust, to be returned to a newly appointed trustee of the Trusts.

The Defendants deny these claims. They contend that the sale was a perfectly legitimate transaction, which took place for sound commercial reasons and cannot be impeached. If the sale was for an improper purpose and in breach of trust, the First Defendant says that it did not have the requisite notice of any of these matters, and is not bound by any rights of the Claimants, as beneficiaries of the Trusts. Even if the First Defendant is so bound, it says that the sale is only voidable, not void, and should not be set aside. The First Defendant also counterclaims against the Claimants for repayment of the loans made to the Claimants by the settlors of the Trusts.

At the trial of the action the bulk of the Claimants were represented by Hugh Miall and James Fennemore, counsel. The First Defendant was represented by James Morgan KC and Josh Lewison, counsel. The Second and Third Defendants were represented by Marcus Flavin, counsel. I am grateful to all counsel, and those instructing them for their work in preparing the trial documents and in presenting their respective cases at the trial.

I refer to the bulk of the Claimants because there are ten Claimants who are no longer represented by the solicitors acting for the remaining Claimants. The ten Claimants in question have taken no active part in the action on their own account, and did not appear at or participate in any way in the trial. In this judgment it is convenient to refer to the Claimants as a whole, but these references should be read subject to the point that the ten Claimants have not taken part in the trial, and were not represented by the Claimants' counsel. In practical terms the point is not significant, given that the position of these ten Claimants seems to me to be the same as the remainder of the Claimants, with the consequence that the decisions made in this judgment should apply equally, and do apply equally to all of the Claimants.

One further matter to record in this context is that in a small number of instances the relevant Claimant has died, so that the claim is brought by the personal representatives of the deceased Claimant or a person appointed to represent their estate pursuant to a representation order.

The conventions of this judgment

In this judgment references to the Loan Assets mean, as the context requires and unless otherwise indicated, the Loan Assets held in all three of the Trusts, or the Loan Assets held in a particular Trust. References to the Loan Assets also mean the Loan Assets as they stood from time to time. During the period of time with which this judgment is concerned, some of the beneficiaries of the Trusts secured the release of their loan obligations, thereby reducing the Loan Assets. Finally, references to the Loan Assets mean, as the case may have been and unless it is necessary to be specific, the title held to the relevant Loan Assets, whether legal or beneficial or both.

Italics have been added to quotations in this judgment. Definitions used in this judgment are as established in the course of the judgment. Where I refer to particular evidence of a particular witness on a matter of fact, I am accepting that evidence, unless otherwise stated.

The Trusts

Each of the Trusts formed part of an Employer-Financed Retirement Benefit Scheme ( “EFRBS”). EFRBSs are creations of the Income Tax (Earnings and Pensions) Act 2003, and are schemes for the provision of certain benefits to employees or former employees of employers which are not registered pension schemes. EFRBSs were used in some cases, including the present case, to facilitate loan schemes, whereby participants would receive remuneration from their employer by way of loans, which would not be subject to income tax. The employer would generally be an umbrella company which provided employment to a number of individuals. The umbrella company would then provide the services of those individuals to the third parties for whom the individuals were working, pursuant to contracts entered into between the umbrella company and the relevant third parties. Although my description uses the language of employment, those participating in such schemes included employees in the strict sense of the word, and contractors in the strict sense of the word.

Put more simply, the object of such schemes was tax avoidance, by treating income paid to employees or contractors as loans provided through the mechanism of the relevant loan scheme. Such loan schemes proliferated in the 2000s. This attracted the attention of HMRC ( “the Revenue”), and the Government introduced a series of measures to prevent loan schemes operating as an effective way to avoid income tax. These measures culminated in the announcement in the March 2016 budget, by the then Chancellor of the Exchequer (George Osborne), of a measure known as the Loan Charge ( “the Loan Charge”), which was introduced by the Finance (No. 2) Act 2017. The Loan Charge created a new, retrospective charge to income tax of 45% on all relevant loan payments made since 1999, to be payable in one tax year (2018–2019). The Loan Charge applied where loans were outstanding as at 5 ^th April 2019. As the relevant legislation was initially enacted, the Loan Charge applied to loans made on or after 6 ^th April 1999. Those facing the Loan Charge were given a choice of settling with the Revenue, paying off the loan balance, or paying the charge.

Not surprisingly, the Loan Charge was controversial, by reason of its effect on individuals who had signed up to loan schemes. The Government commissioned a review by Sir Amyas Morse in September 2019, which reported in December 2019 ( “the Morse Review”). As a result of the Morse Review, there was some mitigation of the Loan Charge. For present purposes however the relevant point is that the introduction of the Loan Charge rendered ineffective, or confirmed the ineffectiveness of the loan schemes, including the loan schemes with which the present case is concerned. This in turn left large numbers of individuals, (i) as participants in loan schemes which no longer achieved what they had been marketed as achieving, and (ii) facing substantial liabilities to the Revenue. These individuals included those beneficiaries who neither...