Estera Trust (Jersey) Ltd (a company incorporated under the Laws of Jersey) v Jasminder Singh
| Jurisdiction | England & Wales |
| Judge | Mr Justice Fancourt |
| Judgment Date | 26 July 2019 |
| Neutral Citation | [2019] EWHC 2039 (Ch) |
| Court | Chancery Division |
| Docket Number | Petition No: CR-2015-009042 |
| Date | 26 July 2019 |
[2019] EWHC 2039 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LITS (ChD)
IN THE MATTER OF EDWARDIAN GROUP LIMITED
IN THE MATTER OF THE COMPANIES ACT 2006
Royal Courts of Justice
Strand, London, WC2A 2LL
THE HON. Mr Justice Fancourt
Petition No: CR-2015-009042
Mr Steven Gee Q.C., Mr Giles Goodfellow Q.C., Mr Oliver Conolly and Mr Alex Barden (instructed by Arnold & Porter Kaye Scholer LLP) for the Petitioners
Mr Ian Croxford Q.C., Mr Daniel Lightman Q.C. and Ms Emma Hargreaves (instructed by Orrick, Herrington & Sutcliffe LLP) for the First Respondent
Mr Andrew Green Q.C, Mr Kevin Prosser Q.C and Mr Fraser Campbell (instructed by Baker & McKenzie LLP) for the Fourth Respondent
Hearing dates: 16, 17, 18 July 2019
Judgment Approved by the court for handing down (subject to editorial corrections)
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On 5 July 2018, after the trial of liability issues (“trial 1”) in this heavy and vigorously contested minority shareholder action, I made an order in the following terms:
“… the First and Fourth Respondents, on a joint and several basis, do purchase the shares in the Company registered in the Petitioners' sole names … at the price and in a manner to be determined at Trial 2 …”
There followed a quantum trial (“trial 2”), which was also vigorously contested, at which the purchase price and the time for payment were determined. In my judgment upon trial 2 dated 8 April 2019, I ordered that an initial sum of £22,500,000 on account of the full price be paid no later than 28 days after judgment and that the balance be paid no later than 6 months after judgment. I left it to the parties to agree the wording of an order reflecting the terms of my judgment and ordered that all other consequential matters should be adjourned to be heard on a date to be fixed.
By the end of term, 17 April 2019, there remained one issue about the exact wording of the order, namely whether the shares purchased for £22,500,000 should be transferred “as jointly directed by the First and Fourth Respondents”, wording that was added to the Petitioners' draft order by the First and Fourth Respondents (“the Respondents”). In circumstances explained in more detail in a short, ex tempore judgment of 10 May 2019, which I do not need to repeat, I allowed a little time at the request of the parties for them to resolve a further (at that time unidentified) issue. The result was a letter dated 30 April 2019 from the Petitioners followed by their application dated 1 May 2019, asking me to order that the final order in trial 2 be not sealed until a further hearing had taken place.
The reason for the Petitioners' application was that they had very belatedly realised that a purchase by the Company (rather than by Jasminder Singh (“JS”) or any other person) of the Petitioners' shares would be treated as an income distribution by a UK-resident company under sections 368 and 383 of the Income Tax (Trading and Other Income) Act 2005 (“the 2005 Act”) and not (as might have been expected) as a capital transaction. If treated as a capital transaction, the gain arising to the First Petitioner (“Estera”), which holds the majority of the shares in question, would have been treated as a trust gain, liable to capital gains tax (at a rate of 20% currently) as and when distributed to on-shore beneficiaries. The appropriate rate of income tax for Estera would be the dividend trust rate, namely 38.1%, and would be payable immediately. The cap on tax for a non-UK resident holding the shares would not apply because the trust has UK-resident discretionary beneficiaries. The Petitioners want to seek to avoid being subject to any — or certainly the 38.1% — immediate tax liability.
A possible reaction to such concerns may be that those who use offshore trusts to hold their wealth may have to suffer the disadvantages that such structures can bring as well as benefiting from their advantages; but nevertheless the tax treatment is relatively anomalous and the concern of the Petitioners is understandable. On the facts of this case, the price being paid for the Petitioners' shares is self-evidently not in the nature of a disguised income distribution by the Company, so the expected tax treatment — though correct — can be seen as burdensome in so far as it exceeds a rate of 20%. If the shares had been bought by JS rather than by the Company the price would have been treated as a capital receipt giving rise to a trust gain. However, JS was in no financial position to buy all of Estera's shares and, for the reasons that I gave on 10 May 2019, the Company was entitled to do so and the Petitioners were not entitled to say that it should not do so.
The Petitioners told me on 10 May 2019 that they wished to have further time to explore with HMRC whether any relief against tax might be available under the relatively new Double Taxation Agreement between the UK and Jersey (“DTA”), and to investigate other potential measures that might properly (and without prejudicing the Respondents) mitigate the likely tax treatment of the price payable. At the hearing on 10 May, the Company pointed out that a perfectly legitimate measure to mitigate tax would be to bring the trust onshore, by appointing UK resident trustees, which would then entitle the Company to apply to HMRC for capital gains tax treatment of the payment by way of relief under sections 1033–1043 Corporation Tax Act 2010. The Petitioners, however, wished to seek to obtain DTA relief before the purchase of the shares, which if successful would result in no tax being payable immediately. The position on 10 May was that it was thought likely to take 30 days to obtain clearance from HMRC in that regard.
I therefore granted the Petitioners a stay on drawing up the final order until July 2019 to enable them to take the following steps:
(1) to seek to obtain DTA clearance from HMRC, in which event the sale of the shares could then proceed without further delay;
(2) to identify whether there was any other means of proper mitigation open to the Petitioners that would not potentially harm the interests of the Respondents, in which regard I indicated that I expected the Respondents to cooperate reasonably; and
(3) to progress if thought fit the “on-shoring” of the trusts.
I also ordered that no further interest would be payable on the purchase price, since the Company had been ready and willing to complete the purchase of all the shares on 3 May 2019.
Contrary to the Petitioners' expectations, it was later discovered that HMRC would not give advance clearance under the DTA but that an application for such relief could only be made after the date of the transaction. By way of contrast, an application for capital gains tax treatment of the price payable has to be made in advance of the transaction taking place. Such an application would be likely to be considered by HMRC within 30 days and, if approved, the transaction could then proceed and the change of trustees be effected. But no application has yet been made for that purpose, though the Respondents are content to assist the Petitioners to do so. They are currently seeking to agree the terms of a draft clearance request letter.
What can perfectly properly happen, therefore, is for an application to be made in respect of one of the four Herinder trusts for capital gains tax treatment of the price to be paid for its shares and if such treatment is granted the sale of those shares will proceed. The Petitioners will then apply for DTA relief in relation to the other three trusts, and if granted those three trusts will remain resident in Jersey. If not granted, the three trusts can also be brought onshore within the current tax year to mitigate tax liability to the rate of 20% on the gain rather than 38.1% on the whole price. All agree that this course is perfectly proper and no question of illegitimate tax avoidance arises.
However, the Petitioners wish to pursue a quite different structure in order to avoid any immediate tax liability being incurred. Their expert tax advice is that, even if DTA relief is not available, any immediate tax liability can be avoided if Estera incorporates a Jersey company and transfers the shares in the Company to that company (“Jersey NewCo”), so that Jersey NewCo and not Estera can then sell the shares to the Company and receive the price payable. To avoid a residual risk of JS being taxed as (arguably) an economic settlor of the Jersey trusts, the sale cannot take place until the tax year 2020/21, so what is intended is that after April 5, 2020 Jersey NewCo will be incorporated, Estera's shares in the Company will be transferred to it and then it will exercise a put option (or the Company will exercise a call option in relation to those shares) with completion taking place in June 2020. The Petitioners envisage that the transfer and put and call option structure will be created by order of the Court, but say that, alternatively, contracts to that effect can be made if the court so directs.
The order that the Petitioners seek is in the following terms:
“(a) [Estera] shall be permitted to transfer such shares to a new company to be incorporated under the laws of Jersey (“NewCo”) between 6 April 2020 and 3 May...
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