Gary James Keane v David Sargen
| Jurisdiction | England & Wales |
| Judge | Lord Justice Newey,Lady Justice Simler,Sir Geoffrey Vos |
| Judgment Date | 15 February 2023 |
| Neutral Citation | [2023] EWCA Civ 141 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2022-001405 |
and
[2023] EWCA Civ 141
Sir Geoffrey Vos, MASTER OF THE ROLLS
Lord Justice Newey
and
Lady Justice Simler
Case No: CA-2022-001405
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Insolvency and Companies Court Judge Jones (sitting as a Judge of the High Court)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lesley Anderson KC (instructed by Brabners LLP) for the Appellants
John McDonnell KC (instructed by Richard Slade and Company Limited) for the Respondent
Hearing dates: 25 & 26 January 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on 15 February 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
This is an appeal from a decision of Insolvency and Companies Court Judge Jones, sitting as a Judge of the High Court (“the Judge”). In a judgment dated 6 May 2022 (“the Judgment”), the Judge concluded that the claimant, Mr Gary Keane, had on 18 June 2012 become a partner in a partnership relating to the shares in the fifth defendant, Document Risk Solutions Limited (“DRSL”). The first to fifth defendants appeal against that decision.
Narrative
This section of this judgment seeks to provide a summary of events by reference to matters which are not (at any rate before us) in dispute.
The appeal concerns a business known as “DRS” which was started in 2009 to provide alternative legal services to financial institutions. The founders were the first and fourth defendants, Mr David Sargen and Mr Jonathan Martin, and Mr Sean MacGloin, who was the third defendant until his death in 2021. The second defendant, Mr Michael Beaton, joined the business in 2010. Mr Sargen, Mr Beaton and Mr Martin had met when working for Barclays Capital, and Mr Sargen and Mr Martin had also both worked for Derivatives Consulting Group (“DCG”). Mr MacGloin had been manager of the legal department of Mitsui's energy risk management arm before also working for DCG. All four were solicitors.
The business was initially carried on by DRSL. Following Mr Beaton's arrival, the directors of DRSL were Mr Sargen, Mr Beaton, Mr MacGloin and Mr Martin, and each of them held one of the company's four issued shares.
In early 2012, the possibility of Mr Keane joining DRS was discussed. Mr Keane was at the time global head of collateral operations projects with Bank of America Merrill Lynch and had previously gained experience with a number of other banks as well as DCG, where he had met Mr MacGloin and Mr Martin.
On 21 February 2012, Mr Sargen, who tended to handle DRSL's corporate and administrative matters, sent Mr Keane an email which, he said, was “to follow up on our discussion last week to confirm our proposal and reiterate our enthusiasm for getting you on-board”. Mr Sargen explained that he and Messrs Beaton, MacGloin and Martin were intending “to move to a model whereby the directors share equally in the profits of DRS” and, in that context, had suggested a package under which, among other things, Mr Keane would be granted “a 5% equity stake in the Company” on joining, rising by increments to equal parity with DRSL's existing directors after 18 months subject to Mr Keane meeting performance criteria. Mr Sargen referred to “very early discussions with others [i.e. persons other than Mr Keane, Mr Sargen, Mr Beaton, Mr MacGloin and Mr Martin] regarding a broader management role”, but said that “[t]he aim of creating a structure whereby you would achieve equal parity with the existing directors would remain however”.
Mr Sargen emailed Mr Keane again on 1 March 2012 with an updated proposal following discussions Mr Keane had had with Mr MacGloin. The email recorded that Messrs Sargen, Beaton, MacGloin and Martin were “happy to agree that, subject to the Performance Criteria being met, the increase in both profit share and equity increases at a higher level than previously, such that [Mr Keane] would achieve parity with the existing directors at the first anniversary of [his] joining”. On this basis, Mr Keane would have a 7.5% equity stake from the start. The email also contained suggested performance criteria.
A month or so later, the sixth defendant, Derivatives Risk Solutions LLP (“LLP”), was incorporated. Messrs Sargen, Beaton, MacGloin and Martin had instructed Kingston Smith LLP, the accountancy firm, to advise them on how their business could be restructured so as to reduce their tax burden. In a report of 20 February 2012, Kingston Smith proposed that DRSL's shareholders should become members of a “newly formed Document Risk Solutions LLP”. This, they said, would achieve tax savings through “profits being taxed at [the] more favourable Capital Gains Tax rate of 10% rather than at Income Tax rates of up to 50%” and, further, “a reduction in National Insurance Contributions and Corporation Tax”. The scheme involved Mr Sargen, Mr Beaton, Mr MacGloin, Mr Martin and DRSL all becoming members of the new LLP; DRSL's trade being hived down to the LLP at book value; the LLP recognising goodwill; and, after an interval of at least 12 months, Mr Sargen, Mr Beaton, Mr MacGloin and Mr Martin selling “a share of their LLP goodwill” to DRSL at market value. Kingston Smith explained:
“The sale will attract Capital Gains Tax with the probable benefit of Entrepreneur's Relief, though only where the Members are selling an interest in a qualifying business which they have held for 12 months ending with the date of sale ….”
The report also stated:
“The proceeds to each of David Sargen, Sean MacGloin, Jonathan Martin and Michael Beaton for the disposals of their interest in Document Risk Solutions LLP will be left on a loan account in [DRSL] to be drawn down. The draw down of this loan by the individual Members will be tax free, though an upfront Capital Gains Tax charge will be applied on the sale of the share in the business from the individual to the Corporate Member ….”
LLP was formed in pursuance of Kingston Smith's advice on 2 April 2012. Mr Sargen, Mr Beaton, Mr MacGloin and Mr Martin were named as the designated members and DRSL as a corporate member. On 4 April, Mr Sargen completed applications for LLP to be registered for VAT and also for LLP and DRSL to be treated as members of a group for VAT purposes. The form relating to group treatment included this:
“Please give full details of the individual, corporate body or partnership who controls the group …. If it is a partnership give the names of all the partners.”
By way of response, Mr Sargen, Mr Beaton, Mr MacGloin and Mr Martin were named. A further form bearing the same date, headed “Value Added Tax Partnership Details” and providing for completion by “[e]ach partner”, was signed by Mr Beaton, Mr MacGloin and Mr Martin as well as Mr Sargen. Mr Sargen forwarded the “(mostly) completed VAT forms” to Kingston Smith on 5 April.
In the morning of 27 April 2012, there was a meeting attended by Mr Keane, Mr Sargen, Mr Beaton, Mr MacGloin, Mr Martin and representatives of Kingston Smith. Mr Keane explained in cross-examination that he had no real recollection of the event, but Mr Martin described it as a meeting led by Kingston Smith to discuss the tax structure. Mr Martin also said that Kingston Smith had mentioned that Mr Keane might incur a tax liability if he took equity in DRSL and was a director or shareholder of the company.
At 12.35 pm on 27 April 2012, Mr Sargen sent Mr Chris Hughes and Mr Chris Barker of Kingston Smith an email whose subject was given as “New Member – Gary Keane”. Given the significance which the Judge attached to this, I think I should quote the email in full. It read:
“Hi both
Many thanks for your time earlier – good to see you (and meet Matthew) and glad we're making good progress.
Below is the general package we have agreed with Gary:
“(a) Financial –
• For the first six months, you would be entitled to the greater of (a) £50k (£25k per quarter in line with how we currently take some of our profit share) and (b) a 5% share in all DRS profits (excluding any profits attributable to projects which you have brought to DRS during that time “GK Projects”)). You would also be entitled to an equal profit share (i.e. 20% with 5 directors) in any profits attributable to GK Projects;
• At the initial six month point, we would all have the ability to decide to walk away if things are not working out as expected;
• After the initial six months, assuming you had met the Performance Criteria (see below) you would receive 12.5% share of DRS profits excluding those attributable to GK Projects and continue to receive an equal share in profits attributable to GK Projects; on the anniversary of you joining, subject to the Performance Criteria your share in DRS profits (excl GK Projects) would rise by 7.5% with the aim that you would have equal parity with the existing DRS directors after 12 months.
(b) Equity –
• Upon joining, we would grant a 5% equity stake in the Company to you, representing a 5% share in the value of DRS;
• After six months, assuming the Performance Criteria had been met, you would receive a further 7.5% equity stake (clearly if we all decided to walk away as above then equity would revert back to the existing shareholders), with this rising on the year anniversary of you joining by 7.5% (again subject to Performance Criteria) with the aim that you would have equal parity with the existing DRS directors after 12 months.
(c) Performance Criteria –
•...
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