Michaela Joy Hall (as Liquidator of Ethos Solutions Ltd) v Muhammad Nasim & 62 Others
| Jurisdiction | England & Wales |
| Judge | Barber |
| Judgment Date | 04 February 2021 |
| Neutral Citation | [2021] EWHC 142 (Ch) |
| Date | 04 February 2021 |
| Docket Number | CR-2018-010778 |
| Court | Chancery Division |
[2021] EWHC 142 (Ch)
ICC JUDGE Barber
CR-2018-010778
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF ETHOS SOLUTIONS LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
7 The Rolls Building
Fetter Lane
London
EC4A 1NL
Hugh Sims QC and Simon Passfield (instructed by Clarke Willmott LLP) for the Applicant
Setu Kamal for the Ethos Respondents
Hearing dates: 3–4 November 2020
Approved Judgment
This judgment was handed down remotely by circulation to the parties' representatives by email. It will also be released for publication on BAILII and other websites. The date and time for hand-down is deemed to be 10.30 a.m on 4 February 2021
ICC Judge Barber
On 13 December 2018, Ms Michaela Hall (‘the Liquidator’), the liquidator of Ethos Solutions Limited (‘the Company’) issued an application (‘the Main Application’) pursuant to s.423 of the Insolvency Act 1986 (‘ IA’) seeking to challenge payments in the total sum of approximately £9 million alleged to have been made by the Company to R1 to R62 via a business benefit trust (‘the Trust’) of which R63 (‘the Trustee’) was the trustee company.
The Liquidator's claim is set out in her Points of Claim dated 13 December 2018 (‘the POC’).
Forty-one of the Respondents (‘the Ethos Respondents’) have filed and served Points of Defence in materially identical terms (‘the Ethos Defences’), settled with the assistance of Mr Setu Kamal, a specialist tax barrister.
By Application Notice dated 27 November 2019 (since amended on 4 March 2020), the Ethos Respondents applied under CPR 3.4(2)(a) and CPR 3.4(2)(b) to strike out the Main Application and/or for summary judgment under CPR 24.2 (‘the Ethos Respondents’ Strike out Application’).
By Application Notice dated 18 February 2020, the Liquidator applied under CPR 3.4(2)(a) to strike out paragraphs 21, 25 and 46 to 49 of the Ethos Defences and/or for summary judgment under CPR 24.2 (‘the Liquidator's Strike Out Application’).
At the outset of the hearing before me, I directed that the Ethos Respondents' Application should be treated as a strikeout application only. I did so because the Ethos Respondents had not complied with CPR 24PD.2(3) and had not filed any evidence in support of their summary judgment application, notwithstanding prior warnings that they should do so.
This judgment sets out my conclusions on the Ethos Respondents' Strike out Application.
Background
The Company was incorporated on 24 September 2008 for the purpose of operating a scheme (‘the Scheme’) designed to enable individuals who provided professional services to end users on a consultancy basis to receive payment for those services via a trust (‘The Trust’) established on 27 February 2009.
At the time that it was incorporated, the tax treatment of such arrangements was governed by Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062.
On 9 December 2010, the Government announced that it was introducing legislation to change the tax treatment of such arrangements. In response to that announcement, the Company modified the Scheme for the year ended 31 December 2011. The modifications included the introduction to the Scheme of a business registered in Jersey known as Scope Self Employment Jersey (‘Scope’). The Ethos Respondents maintain (inter alia) that following the introduction of Scope, the Company ceased to be ‘employer’. The Liquidator maintains that the Company remained employer notwithstanding Scope's introduction.
The Liquidator alleges that between 4 March 2009 and 26 March 2012, the Company made payments to the Trust or to Scope in the total sum of £9,032,925.77. The Liquidator further alleges that those monies were subsequently transferred to sub-trusts for the benefit of R1-R62.
On 4 December 2012, HMRC issued determinations against the Company under Regulation 80 of the Income Tax (Pay As You Earn) Regulations for the tax years 2008/09 and 2009/10 in which it assessed that the Company was liable to pay income tax and NIC in the total sum of £2,328,057.72 in respect of payments made to the Trust. HMRC did not issue a Regulation 80 determination for the tax year 2010/11 or for the year ending 31 December 2011.
On 18 December 2012, the Company entered creditors' voluntary liquidation. Mr Ian Mark Defty was initially appointed as liquidator of the Company but was replaced by Ms Hall, the current liquidator, by order of the court dated 4 April 2014. According to the estimated statement of affairs dated 18 December 2012, the estimated deficiency as regards creditors stood at £2,487,949.25; creditors comprising (1) two ‘Trade and Expense’ creditors, totalling £4,242.66 (2) HMRC–Tax: £2,328,057.72 (3) HMRC-VAT: £191,195.13: Total £2,523,495.51. Consistently with the first Annual Progress Report dated 4 February 2014, the most recent Annual Progress Report dated 20 April 2020 continues to confirm claims from four creditors totalling £2,730,841.
In 2017, the Supreme Court in RFC 2012 plc (in liquidation) (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 (‘the Rangers case’) overruled Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062. As summarised by Lord Hodge JSC (giving the judgment of the court) at [58]:
(1) income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee;
(2) the governing primary legislation does not require the employee himself or herself to have received the remuneration for income tax to be chargeable;
(3) references in the PAYE Regulations to making a relevant payment to an employee or other payee fall to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee or as arranged by the employee.
It was following this ruling that the Main Application was issued. The Main Application is based solely upon s.423 of the Insolvency Act 1986.
Section 423 of the Insolvency Act 1986
So far as material, s.423 IA 1986 provides as follows:
‘423 Transactions defrauding creditors
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or
c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for –
(a) restoring the position to what it would have been if the transaction had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make….
(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as ‘the debtor.’
Section 424 sets out those who may make an application under s.423. In a case where the debtor is in liquidation, these include the liquidator.
Section 425(1) sets out a non-exhaustive list of orders which the court may make with respect to a transaction falling within s.423.
Section 425(2) and (3) continue:
(2) An order under section 423 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the debtor entered into the transaction; but such an order –
(a) shall not prejudice any interest in property which was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and
(b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.
(3) For the purposes of this section the relevant circumstances in relation to a transaction are the circumstances by virtue of which an order under section 423 may be made in respect of the transaction.'
Strike Out Applications: Legal Principles
CPR 3.4(2) (so far as material) provides that the court may strike out a statement of case if it appears to the court
‘(a) that the statement of case discloses no reasonable grounds for bringing or defending the claim;
(b) that the statement of case is an abuse of the court's process or is otherwise likely to obstruct the just disposal of the proceedings…’
The parties were largely agreed on the legal principles at play in determining a strike out application. In this regard I was referred to the summary of caselaw set out at 3.4 of Volume 1 of the 2020 White Book, as addressed below.
CPR 3.4(2)(a): No reasonable grounds
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