Ecology Support Services Ltd v Kevin Hellard and Another
| Jurisdiction | England & Wales |
| Judge | Mr Registrar Briggs |
| Judgment Date | 30 January 2017 |
| Neutral Citation | [2017] EWHC 160 (Ch) |
| Docket Number | Case No: CR-2016-003590 |
| Court | Chancery Division |
| Date | 30 January 2017 |
[2017] EWHC 160 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr. Registrar Briggs
Case No: CR-2016-003590
Mr. Jonathan Titmuss (instructed by Fletcher Day Limited) for the Applicant
Mr. Daniel Lewis (instructed by Rosenblatt Solicitors) for the Respondents
Hearing dates: 15 & 16 December 2016 & by further written submissions in January 2017
Judgment Approved
Introduction
Ecology Support Services Limited ("ESS") asks the Court to reverse a decision made by the joint liquidators of Saff One LLP (the "LLP"), rejecting its proof of debt pursuant to Rule 4.83 of the Insolvency Rules 1986 (the "Rules"). ESS also invites the Court to provide a direction that the joint liquidators call a meeting of creditors. The purpose of the meeting is to vote on replacing the existing liquidators. The appointed joint liquidators accept that if the appeal against their decision on the proof is successful, such a meeting should be convened. They argue the decision should not be disturbed as a result of any new information that has come to the attention of the court since rejection.
The dispute between ESS and the joint liquidators has been dealt with as an Insolvency Express Trial, operated by the Insolvency and Companies Court in Rolls Building, London. Disclosure has been limited but the parties have co-operated to the extent that there is little between them in respect of the factual background.
I heard oral evidence from Mr McGovern who is an agent for ESS. He is a chartered accountant, formerly with the banking corporate tax department of Ernst & Young in London. He left Ernst & Young to operate as an independent specialist in managing the implementation of tax mitigation structures for corporate groups. His evidence is that the joint liquidators failed to appreciate the tax mitigation structure involved in the present matter and so wrongly rejected the proof of debt submitted. Although I did not hear evidence from Mr Saffer (a member of the LLP, now in insolvent liquidation), I benefited by hearing oral evidence from one of the joint liquidators, Mr Hellard. In the course of his oral evidence he explained he had spent many years working on tax avoidance schemes where money is often designed to move "like a spinning top". He says that "spinning top" schemes are a sham creating an illusion of loss or investment where none exist. His vivid explanation of such schemes goes to the heart of the issue before the Court.
Background to the debt
The background I take from a combination of the written evidence provided by the parties, and the oral evidence given by Mr McGovern during the first day of the trial as he elaborated on some aspects of the transactional arrangements that gave rise to the impugned investment and resulting disputed debt obligation.
Ultra Green Group Limited ("Ultra Green") was incorporated on 24 January 2008 and entered into creditors' voluntary liquidation on 13 January 2011. It had one director, Mr Anthony Blakey. It is said to have traded in the production of "clean technology energy solutions".
At some point before 15 December 2009 Ultra Green sought to raise funds to invest in research and with the development of renewable energy. In particular, it set out to invest in forestry, bio-fuel, waste to energy technology, construction, tidal energy, and some other categories of research. This investment quest became known as the "Ultra Green Scheme" (the "Scheme") and was sold as an opportunity to tax payers to reduce taxation primarily imposed on income.
AIK Credit plc ("AIK") was incorporated on 23 December 1993 under the laws of the Republic of Mauritius. AIK's principal business is said to be leasing finance. AIK owned or was associated with a bank known as the Kensington Bank which was itself a limited company with a registered address in the Commonwealth of Dominica.
Mr Saffer is the majority shareholder of LSI Independent Utility Brokers Investments Limited ("Investments") which as at 2010 had a declared net wealth of £13 million. LSI Independent Utility Brokers Limited ("LSI") is a profitable operating company (wholly owned by Investments) which was projecting a taxable profit of £2million in the financial year 2009/2010. It acted as a utilities broker for individuals and corporate clients.
Mr Saffer is described by Mr McGovern as a serial tax avoider. Mr Hellard does not disagree. Mr McGovern and Mr Hellard agree that the LLP was incorporated for the sole purpose of tax mitigation, with the aim of avoiding payment of corporation tax on LSI's anticipated £2million profit by causing LSI to invest in the Ultra Green Scheme. LSI was one of two members in LLP. Mr Saffer is the other partner and he owns the entire share capital of LSI.
Synthesis Wealth Management LLP ("Synthesis") is a wealth management company incorporated on 19 February 2009. Synthesis was dissolved on 7 July 2015. It introduced LSI and Mr Saffer to Ultra Green in or around October 2009 and recommended investment in the Scheme.
Carbon Research and Development Limited ("CRD") was incorporated on 21 March 2005 under the laws of the Republic of Mauritius. CRD was central to the Ultra Green Scheme. Fideco Global Business Services Limited ("Fideco") was incorporated in the Republic of Mauritius and acts as a management services company for Mauritius-based entities. Fideco is the registered agent of CRD and ESS.
ESS holds a number of loan debts, and at some point toward the end of, or after, 2012 Mr McGovern was approached to give Fideco advice. It appears that Fideco was uncertain as to how to realise these debts. In October 2013 he visited Mauritius, and was subsequently appointed agent of ESS. Mr McGovern described the position he held as the British Isles agent. He was asked to conduct due diligence on the loan debts. The relationship developed and, for reasons Mr McGovern did not wholly explain, he acquired complete control of ESS on 26 February 2014. Mouette Holdings (PTC) SA, now owns the entire shareholding of ESS, and is its corporate director; however Mr McGovern explained in oral evidence that he remains the beneficial owner of ESS.
Moving away from structures and on to the impugned investment, Mr Saffer and/or LSI received advice that corporation tax could be avoided by investing debt and equity into research and development in green energy products. An attendance note from the tax advisor states that there had been "an extensive telecom with Laurence Saffer" and that "he is proceeding and appreciates the risks".
In order to invest in the Scheme two steps were needed (as far as Mr Saffer was concerned). First a separate entity needed to be incorporated: this led to the incorporation of the LLP. And secondly the LLP needed to obtain a term loan for £1.25m. The loan (debt) would be secured on the anticipated profits arising from any investments made in accordance with the Scheme. Mr Saffer provided a guarantee to LLP for the liabilities under the loan agreement between it and AIK. The liability (or otherwise) of Mr Saffer under that guarantee was not in issue between the parties in this application. As regards equity, LSI would pay £375,000 via LLP to its accountants which would in turn be held in escrow and subject to instructions from CRD (CRD was to become agent of LLP). The debt element would also be held by CRD in a nominated account and CRD would provide instructions once an investment opportunity arose. The intended result was LSI would obtain tax relief of £2.164M for the benefit of its corporation tax return, and not pay any corporation tax on its anticipated £2m profit. The benefit would arise by demonstrating a trading loss and by reason of a claim for research and development relief.
The Scheme documentation is dated 15 December 2009, but implementation did not take place until 26 January 2010. Mr Saffer signed a loan request. The loan agreement states that the LLP should provide to the lender a drawn-down notice within a specified period. On the same day Mr Saffer signed an agency agreement with CRD. The loan from AIK is expressed to be repayable but not before the seventh anniversary (unless an early repayment clause is triggered). The draw-down notice was also signed on 15 December 2009. The notice provided that the debt be credited to "a bank account as per the instruction to be given by [CRD]" on a date "as per the instructions given by [CRD]".
On 10 January 2010 CRD wrote to AIK referring to the loan facility stating:
"…..as part of the contract of agency between [CRD] and [LLP] we hereby request you to transfer the following amount which shall be attributable to [LLP] to our bank account held with Kensington Bank Limited….".
On 26 January 2010 AIK countersigned the loan agreement which is said to have constituted "a legally binding loan agreement" pursuant to clause 11 of the facility documentation. Schedule 1 of the facility documentation states that LLP "shall use the Loan solely to fund environmental research, environmental trading and the purchase of land exploitation rights.". By an assignment dated 26 January 2010 LLP assigned any future income from the investment to AIK to repay the loans.
Bank statements produced by Kensington Bank the day before trial show that a series of transactions ensued on the same day: a transfer of the loan from AIK to CRD; a transfer from CRD to Copex International Credit PCC ('CIC PCC'); another from CIC PCC to Copex International Credit Plc ("Copex Cyprus"); a subsequent transfer from Copex International...
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