HM Revenue and Customs v Holland; Re Paycheck Services 3 Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Elias,Lord Justice Ward |
| Judgment Date | 02 July 2009 |
| Neutral Citation | [2009] EWCA Civ 625 |
| Docket Number | Case No: A2/2008/1907 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 July 2009 |
[2009] EWCA Civ 625
Before :lord Justice Ward
Lord Justice Rimer
and
Lord Justice Elias
Case No: A2/2008/1907
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Mark Cawson QC sitting as a Deputy High Court Judge
Mr Peter Knox QC and Mr Aidan Casey (instructed by Neil Myerson) for the Appellant, Michael Holland
Mr Michael Green (instructed by the Solicitor of HM Revenue and Customs) for the First Respondent, The Commissioners for Her Majesty's Revenue and Customs
The Second Respondent, Linda Holland, did not appear and was not represented
Hearing dates: 10 and 11 February 2009
Lord Justice Rimer :
Introduction
This appeal by Mr Michael Holland is against an order dated 4 July 2008 made by Mr Mark Cawson QC sitting as a Deputy High Court Judge of the Chancery Division, his order following his 80-page judgment of 24 June 2008. The judgment followed a ten day trial of 42 originating applications issued by The Commissioners for Her Majesty's Revenue and Customs ('HMRC') on 27 July 2006 against Mr Holland and his wife Linda. The applications, made under section 212 of the Insolvency Act 1986, were brought on the basis of allegations that, as de facto directors of 42 insolvent companies, Mr and Mrs Holland had been guilty of misfeasance and breaches of duty in causing the payment between 24 April 2002 and 19 October 2004 of unlawful dividends totalling some £13m.
I record at the outset my tribute to the care and thoroughness of the judge's judgment (reported at [2008] 2 BCLC 613; [2009] Bus L.R. 1). Its outcome was that he dismissed the claims against Mrs Holland. As for Mr Holland, the judge focused on three different periods. First, in respect of the dividends paid during the period 24 April 2002 to 18 August 2004, the judge held that Mr Holland was at no stage liable, or if he was, that he ought to be relieved from liability pursuant to section 727 of the Companies Act 1985. Second, in respect of the dividends paid during the few days from 19 to 22 August 2004, the judge relieved Mr Holland from liability under section 727. Third, in respect of the dividends paid during the period 23 August to 19 October 2004, the judge declared that Mr Holland had been guilty of misfeasance and breach of duty in causing their payment. He ordered an assessment of the contributions to the companies' assets that Mr Holland must pay the liquidators, limiting them to 'the amount of Higher Rate Corporation Tax that the Composite Companies failed to provide for that accrued due in respect of trading in the period 23 August 2004 to 19 October 2004 together with interest thereon' at a rate to be determined. The amount of such tax was about £144,000. He ordered Mr Holland to pay half of HMRC's costs, not including those of their claim against Mrs Holland.
With the judge's permission, Mr Holland appeals on four grounds; and HMRC cross appeal on two. Mr Peter Knox QC appeared before us, as below, for Mr Holland. He led Mr Aidan Casey, who represented Mrs Holland at the trial. Mr Michael Green appeared before us, as below, for HMRC. Mrs Holland, formally a respondent to her husband's appeal, was not represented.
The litigation arose out of the setting up by Mr and Mrs Holland in 1999 of a complicated structure of companies whose business was the administering of the business and tax affairs of contractors working in various sectors, mainly IT. Each contractor was taken on as an employee of one of the companies and allotted a non-voting share. This enabled him to be rewarded on a weekly or monthly basis by way of both salary and dividends. The contractor's services were provided to clients through an agency which paid the relevant company. It was the essence of the basis on which the companies were established that each would be liable to pay corporation tax at only the small companies' rate, which was between 19% and 21% at the material time. As long as the companies were not regarded as 'associated' for the purposes of the relevant tax legislation, they could achieve this provided that each kept its annual profits below the £300,000 threshold, as it did. Otherwise each company would be liable to pay what the judge called higher rate corporation tax ('HRCT'), that is tax at the main corporation tax rate, which was between 30% and 33% at the material time. I will, like the judge, refer to tax at that rate as 'HRCT'.
The scheme was flawed, with the consequence that each company was liable to pay HRCT throughout its trading life. They had, however, made no provision for it; and each had, throughout such life, declared and paid dividends which should not have been paid because there were insufficient distributable reserves to permit them. All the companies stopped trading on 13 October 2004, they went into administration on 19 October 2004 and into creditors' voluntary liquidation in February 2005.
Mr Holland was not a de jure director of any of the companies: the sole director of each was a company of which he was a director. But the judge found that he was a de facto director of each company and so was answerable to HMRC's claim under section 212. Mr Holland challenges that finding as wrong. If he is right on that, that is the end of HMRC's case. If he is wrong, he argues further that he was anyway not, as the judge held, liable to reimburse the companies in respect of the dividends unlawfully paid during the period 23 August to 19 October 2004; alternatively, that the judge misdirected himself in refusing him relief under section 727 of the Companies Act 1985 against the claim in respect of the dividends so paid; and that the judge was also in error in the manner in which he determined the contribution to the companies' assets that Mr Holland should make, the assertion being that his order requiring a contribution of some £144,000 over-compensated the companies.
HMRC, by their cross-appeal, make common cause with Mr Holland that the judge misdirected himself as to the contribution that Mr Holland should make to the companies' assets, but say that his error led to an order that under-compensated the companies. They say he should have ordered Mr Holland to repay the full amount of the unlawful dividends paid during the period 23 August to 19 October 2004 (about £1.3m). They also say that the judge was wrong to let him off liability in respect of the four-day period from 19 to 22 August 2004 inclusive during which unlawful dividends of some £140,000 were paid.
The original structure: 1997 to 1999
From about June 1997 to 1999 Mr and Mrs Holland ran a company called Paycheck Services Limited ('Paycheck'). Paycheck's function, in return for a fee, was to administer the business and taxation affairs of contractors working in various sectors. Each contractor became an employee of Paycheck and was allotted a non-voting share entitling him to dividends as well as a salary. Most contractors did not pay higher rate income tax and the bulk of their income from Paycheck was by way of a dividend. By late 1998 it appeared that Paycheck's profits were likely to exceed the £300,000 threshold above which they were liable to be charged HRCT. Mr and Mrs Holland wanted to expand their business whilst avoiding liability to corporation tax at that rate. To that end, on the advice of solicitors (Mr Carl Newton of Neil Myerson), counsel (Mr Nigel Ginniff) and chartered accountants (Mr Matravers of Matravers & Co), they established a new company structure in 1999. It operated until 13 October 2004, with all the companies then going into administration on 19 October 2004. The structure was as follows. My description is gratefully derived directly from the judge's.
The new corporate structure: 1999 to 2004
Mr and Mrs Holland each held 50% of the issued shares in, and were directors of, a trading company they operated called Paycheck Services Limited (not the original Paycheck, a new company) ('Paycheck Services'). Paycheck Services held 100% of the issued shares and Mr and Mrs Holland were directors of Paycheck (Directors Services) Limited ('Paycheck Directors') and Paycheck (Secretarial Services) Limited ('Paycheck Secretarial').
Paycheck Directors and Paycheck Secretarial were incorporated to act respectively as the sole director and secretary of each of the 42 trading companies which the judge called, as will I, 'the composite companies'. They all had similar names distinguished only by a number: Paycheck Services 3 Limited, Paycheck Services 4 Limited and so on. Each company had one voting 'A' share and some 50 non-voting shares, each non-voting share being in a separate class (B1, B2, C1, C2 and so on). The 'A' share of each company was held by Paycheck Services Trustee Limited ('PST'), a company in which Mr and Mrs Holland each held 50% of the issued shares and of which they were directors. The non-voting shares of each company were held by some 50 employees of the company, each employee holding one each of the separate classes of shares. Under the terms of a trust deed, PST held the 'A' share of each company for the benefit of the shareholder/employees (i.e. holders of the non-voting shares) of that company.
Article 8(b) of the composite companies' Articles of Association provided:
'… non-voting shares shall carry the right to the receipt of such dividends payable on each such class of shares, in such amounts, at such frequency, at such times as,...
To continue reading
Request your trial
-
Madoff Securities International Ltd ((in Liquidation)) v Stephen Raven and Others
...liability for their breach did not fall for decision. Lord Hope in the Supreme Court at [45]-[47] and Rimer LJ in the Court of Appeal ( [2010] Bus LR 259) at [81]-[84] identified two conflicting lines of authority as to whether liability was strict or fault based. Lord Hope expressed a pref......
-
Media-Saturn Holding GmbH & Others v Toshiba Information Systems (U.K.) Ltd
...... (2) Toshiba Electronics Europe GmbH (3) Toshiba Europe GmbH (4) Panasonic Europe ... and to provide marketing and support services to subsidiaries. In the financial statements for ... done by the alleged de facto director: Revenue and Customs Commissioners v Holland [2010] ......
-
HM Revenue and Customs v Holland; Re Paycheck Services 3 Ltd
...before Lord Hope, Deputy President Lord Walker Lord Collins Lord Clarke Lord Saville THE SUPREME COURT Michaelmas Term On appeal from: 2009 EWCA Civ 625 Michael Green QC Adam Sher (Instructed by Her Majesty's Revenue and Customs) Respondent Peter Knox QC Aidan Casey Helen Pugh (Instructed b......
-
Smithton Ltd v Naggar
...... Paul Hunt (2) Alan Bedwell (3) Toshi Sahi (4) Penny Sahi ... of care to carry out the professional services referred to in the Certificates with reasonable ... The leading case is HMRC v Holland [2010] 1 WLR 2793 and it is not now necessary ......
-
Director of Corporate Director not a De Facto Director
...its directors so that there can be no doubt as to who is on its board. Holland v HM Revenue & Customs; Re Paycheck Services 3 Ltd [2010] B.C.C. 104 The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your spe......