Mason v Mills & Reeve (A Firm)
| Jurisdiction | England & Wales |
| Judge | THE HON MR JUSTICE ARNOLD,MR JUSTICE ARNOLD |
| Judgment Date | 01 March 2011 |
| Neutral Citation | [2011] EWHC 410 (Ch) |
| Docket Number | Case No: HC09C00727 |
| Court | Chancery Division |
| Date | 01 March 2011 |
[2011] EWHC 410 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before : The Hon Mr Justice Arnold
Case No: HC09C00727
Robin Mathew QC and Alexander Learmonth (instructed by Berry & Walton) for the Claimants
Mark Simpson QC and Marianne Butler (instructed by Mills & Reeve LLP) for the Defendant
Hearing dates: 2–4, 7–8, 10 February 2011
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
MR. JUSTICE ARNOLD :
Introduction
This is a claim for professional negligence by the executors of the late Christopher Swain and by his four daughters Claire Swain Mason ("Claire"), Abby Swain ("Abby"), Gemma Swain ("Gemma") and Christa Swain ("Christa") against the Defendant firm of solicitors ("Mills & Reeve"). The claim arises out of tax advice given by Mills & Reeve to Mr Swain and his daughters in connection with a Management Buy-Out ("the MBO") of their shares in Swains International plc ("the Company"), in particular in a letter dated 4 January 2007 ("the Letter of Advice"). The MBO, which was unusually complex for the level of consideration involved, was completed on 31 January 2007. Mr Swain had been suffering from ill health for some time before the MBO. On 17 February 2007 Mr Swain sadly and unexpectedly died immediately after an investigation carried out in preparation for a planned heart procedure.
The principal fiscal consequence of Mr Swain having died at that time, i.e. shortly after the MBO, was that the proceeds of the sale of his shares, held in his estate, were liable to inheritance tax ("IHT"). The amount charged was approximately £1 million. If, by contrast, he had died still owning his shares, they would not have been subject to IHT because they would have been covered by business property relief ("BPR"). Moreover, in that case there would have been a deemed disposal of the shares for capital gains tax ("CGT") purposes on his death so that, on a later disposal of the shares (if, for example, the MBO had been entered into and completed by his executors), the only chargeable gain would have been any further increase in the value between the date of his death and the date of the disposal, whereas on the actual disposal there was a charge to CGT, albeit moderated by taper relief for business property. The amount charged was approximately £200,000. These two adverse fiscal consequences have been referred to in this litigation as "the Tax Consequences" and I will adopt that terminology.
The essence of the Claimants' claim is that the tax advice given by Mills & Reeve was deficient and that, had the correct advice been given, Mr Swain would have deferred completion of the MBO until after the heart procedure with the result that the Tax Consequences would have been avoided. It is common ground that Mills & Reeve did not advise Mr Swain or his daughters as to the Tax Consequences or to defer completion of the MBO. The first main issue in the case is whether Mills & Reeve were under any duty to give such advice having regard to the scope of their retainer. The second main issue is whether, if Mills & Reeve were under such a duty, their failure to give the advice caused the Claimants to sustain the losses claimed.
It is important to note at the outset that this claim has had a unfortunate procedural history which was considered in detail both by the Court of Appeal in a judgment given on 20 January 2011 [2011] EWCA Civ 14 and in a ruling which I gave on the first day of the trial. The upshot is that, for the reasons I gave in that ruling, I ruled that the only case which it was open to the Claimants to advance having regard to their Particulars of Claim and the procedural history was one which was dependent on Mills & Reeve's knowledge of the heart procedure. As I will explain below, even that ruling did not put an end to the dispute between the parties on this question.
The witnesses
I heard evidence from the following witnesses for the Claimants: Claire, Abby, Gemma and Christa; Neil Kirby of Kirby & Haslam, Mr Swain's accountants, and one of the executors; Alan Comer, the leader of the management team that bought the Company; Gary Webb, a senior manager from National Westminster Bank plc ("NatWest") which was one of the two funders of the MBO (the other being RBS Invoice Financing Ltd, "RBS"); and Kim Cairns, Colin Crickmore and Thomas Ryan, friends of Mr Swain. Claire was the main witness of the four daughters, and her sisters largely agreed with her evidence.
I heard evidence from the following witnesses for Mills & Reeve: Craig Hodgson, Christopher Townsend and Isabel Pooley, all of Mills & Reeve. In addition Mills & Reeve adduced unchallenged evidence from a consultant cardiologist, Dr Simon Fynn.
The factual background
Mr Swain
Mr Swain was a successful businessman. He built up the Company from a small concern into a substantial enterprise. By 2006 he had withdrawn from full-time management of the Company, however, and was spending most of his life in Thailand. His third wife was Thai, and after separating from her, he entered into a relationship with another Thai woman. Nevertheless, he was domiciled in England and was also, for UK tax purposes, resident and ordinarily resident in the UK.
Mr Swain was 61 years old at the time of his death. He had had a history of ill health. He was overweight. He was diagnosed with Type 2 diabetes in 1995. He was prescribed insulin injections for this from 2001 onwards. From 2000 onwards he was prescribed Atorvastatin to treat hyperlipidaemia. Nevertheless, he had a mild heart attack in April 2001. In August 2001 he underwent coronary angioplasty and a coronary stent was fitted to one artery. This treatment appeared to be successful. At some point in June 2006, he was found to have an abnormal cardiac rhythm (atrial flutter), although without displaying any symptoms. On 22 July 2006 Mr Swain was admitted to the Bangkok Heart Hospital for a planned catheter ablation for the atrial flutter. An angiogram showed no re-stenosis of the artery. However, a pre-ablation transoesophageal echocardiogram ("TOE") revealed the presence of a left atrial thrombus (clot). As a result, the ablation was postponed and Mr Swain was prescribed anti-coagulation drugs, namely Orfarin (warfarin) and Anoxyparin (low molecular weight heparin). Mr Swain described himself as having "had a rough time swallowing the camera and was fairly distressed" during the TOE. It appears that Mr Swain attended the Bangkok Heart Hospital periodically after this for his blood to be tested. In addition, as discussed below, he attended regularly for supervised exercise.
The daughters
At the relevant times Claire and Abby were both directors and employees of the Company, Claire being Director of Human Resources. Gemma was (to use her own description) a housewife and mother. Christa worked as a teacher. As I will discuss, Claire and, to a lesser extent, Abby were involved in the negotiations which led to the MBO. Gemma and Christa were not, although they agreed to the sale.
The Family Trusts
In about 1992 three discretionary trusts for the benefit of Mr Swain's daughters and grandchildren ("the Family Trusts") were set up. Mr Kirby and David Berry of Berry & Walton were the trustees of each of these Trusts. Up until July 2001 each of the Trusts held a parcel of shares in the Company, but in July 2001 these shares were transferred to the daughters. Thereafter the Trusts' only assets were small amounts of money held in three bank accounts. Accordingly, in March 2005 Mr Kirby suggested winding up the Trusts. Although Mr Swain and Mr Berry agreed to this suggestion, it does not appear to have been actioned until after 11 January 2007.
The setting up of these Trusts appears to have constituted Mr Swain's only attempt at tax or estate planning prior to the MBO.
The Company
The Company's main business was as a photographic wholesaler. In addition, it had some subsidiaries in other fields. It had a turnover in the financial year ending 31 March 2006 of approaching £20 million and a profit before tax of approaching £700.000. It was founded by Mr Swain's father in 1953. Mr Swain first acquired shares in the Company in 1975. He acquired most of his shares when his father died in 1978. At the time of the MBO, Mr Swain owned just over 72.4 % of the shares. Each of his four daughters owned some 5.3 % of the shares in the Company. 4.8 % of the shares were held by the Swains International plc Employees' Discretionary Trust ("SWET"). The remaining 1.7 % were held by the three most senior members of the management team, namely Mr Comer, Ron Sealy and Danny Williams ("the MBO team").
Kirby & Haslam
At the time in question, Kirby & Haslam was a two-partner firm of chartered accountants, tax consultants and registered auditors based in King's Lynn, Norfolk. Mr Kirby was one of the partners. The firm employed Bryn Thomas, a former tax inspector.
Kirby & Haslam were responsible for preparing and filing the Company's corporation tax returns, the Family Trusts' tax returns and Mr Swain's personal tax returns. They also filed Claire's and Abby's tax returns and, in some years, Gemma's and Christa's tax returns.
There is a dispute as to the extent to which Kirby & Haslam provided tax advice to Mr Swain over and above preparing his tax returns, particularly in the three years prior to his death. Mr Kirkby accepted that...
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