Mike Hilton and Others v D IV LLP and Others
| Jurisdiction | England & Wales |
| Judge | HH Judge Pelling |
| Judgment Date | 12 January 2015 |
| Neutral Citation | [2015] EWHC 2 (Ch) |
| Docket Number | Case No: HC 14 B 02271 |
| Court | Chancery Division |
| Date | 12 January 2015 |
[2015] EWHC 2 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Civil Justice Centre
1 Bridge Street West
Manchester M60 9DJ
His Honour Judge Pelling QC
SITTING AS A JUDGE OF THE HIGH COURT
Case No: HC 14 B 02271
(Representing himself and the other members of D IV LLP identified in Annex 1)
Mr Glen Davis QC and Mr Matthew Abraham (instructed by Grosvenor Law) for the Claimants
Mr Peter Knox QC (instructed by the Law Department) for the First to Fourth Defendants
Mr Andrew Ayres (instructed by Triton Global Limited t/a Robin Simon) for the Fifth Defendant
Hearing dates: 4–5 and 8 December 2014 (Rolls Building) and 12 January 2015 (Manchester CJC)
HH Judge Pelling QC:
Introduction
The Parties
The first to fourth defendants ("the defendants") are limited liability partnerships formed for the purpose of carrying on unregulated collective investment schemes that enabled high net worth individuals to invest in film and television productions. There were approximately 240 individual investors in the schemes operated by the defendants. They invested about £75 million. 103 of those investors are represented by the claimants.
The fifth defendant ("D5") is a solicitors' practice which currently holds a large quantity of documents that belong to the defendants. D5 came into possession of the documents some years ago when it was instructed to act on behalf of the defendants in a tax appeal that I describe in more detail below. It is no longer instructed by the defendants. I make clear at the outset and for the avoidance of all doubt that no allegations of wrong doing of any sort are made by any of the other parties in these proceedings against D5.
The defendants were established by three individuals being Mr Keith Haley, Mr Robert Bevan and Mr Charles Savill. Criminal proceedings have been commenced against these and other individuals arising out of the formation and/or operation of the schemes by the defendants. The trial is due to take place in the second half of this year. Many allegations of wrong doing are made by the claimants in these proceedings that may feature in the criminal proceedings. I make clear at the outset and for the avoidance of all doubt that it is not the function of these proceedings to determine those allegations. Where I recite the allegations made by the claimants hereunder, I do so only to the extent that it is necessary to make intelligible the claims made in these proceedings and my conclusions in relation to them. I emphasise that they are merely allegations in respect of which no determinations have been made. Whether and if so to what extent the allegations can be made good is exclusively a matter for other courts and tribunals on other occasions.
The Hearing
This is the hearing of a Part 8 Claim by which the claimants seek a declaration that they are entitled to inspect and copy the documents in D5's possession either as of right on a true construction of the deeds governing the affairs of the defendants or by operation of the Limited Liability Partnership Regulations 2001 ("the Regulations"). This is disputed by the defendants on the grounds that the relevant parts of the Regulations either do not apply or have been excluded by the deeds and, on a true construction of the deeds, the claimants are not entitled to either inspect or copy the relevant documents.
In the alternative, the claimants claim Norwich Pharmacal relief against D5. D5 is neutral though it has attended by counsel and made submissions as to the applicable principles. The defendants oppose that application as well (even though strictly, they are not parties to it) on the grounds that on proper analysis the requirements for such an application to succeed have not been made out.
Background
The Schemes operated by the defendants.
The schemes were devised by Messrs Hayley, Bevan and Savill in their capacity as the controllers of Little Wing Films Limited, and promoted by them in that capacity to Independent Financial Advisors who in turn promoted the schemes to their high net worth clients, primarily as a legitimate tax mitigation scheme though one that might result in profits from the business carried on in due course.
In order to be attractive as a tax saving scheme the schemes had to be structured so that tax savings exceeded the sums invested by the investor personally. Most schemes of this sort were structured in such a way that limited recourse or non-recourse loans were provided to investors that allowed them to make a geared investment with little or no risk. Lenders would be suggested by the promoters of such schemes. The schemes operated by the defendants adopted this model. The loans were typically structured so that lenders recovered the loan and interest out of profits made by the investment vehicle concerned to which the borrower concerned would otherwise be entitled.
Under the schemes operated by the defendants, for every £100,000 invested the investor was offered a limited recourse loan of £276,000 making a total investment of £376,000. The whole of that sum, together with the sums invested by the other investors in the scheme, was then expended in the first year of the scheme. £26,000 was notionally attributed to partnership costs leaving a loss of £350,000. That attracted tax relief of £140,000. That sum exceeds by £40,000 the sum actually invested (the remainder having been borrowed on limited recourse terms) which had the effect of reducing the tax payer's tax payable in respect of all other activities by that amount. The hope was that the investor would obtain a return on his investment from the commercial exploitation of the films in which the LLP concerned invested but on any view that was likely to occur only some years after the initial investment had been made and tax relief obtained.
The facts relevant to these proceedings
The schemes operated by the defendants were failures. HMRC decided that no allowances should be made available to investors following an investigation into the affairs of the defendants as a result of which it concluded that: (a) the partnerships concerned were not carrying on a trade; (b) the amounts spent by the partnership were not spent on allowable expenses; and (c) the real purpose and effect of the scheme was to carry out a tax avoidance scheme which sought to generate losses. HMRC based these conclusions in part on a finding that " the financial structure was circular and the mere circulation of money … does not create a trade or produce trading losses".
The defendants appealed the decision of HMRC ("the tax appeal"). Those proceedings are currently stayed pending determination of the criminal proceedings to which I referred earlier in these proceedings. Some years ago, the first claimant was given access to some of the documents currently held by D5, including those in respect of which these proceedings have been brought, at a time when they were held by another firm of solicitors retained by the defendant to act on their behalf in relation to the tax appeal. His case is that the documents revealed for the first time that, contrary to the understanding of investors, the money they invested was not predominantly used for investing in films but was recycled through a network of companies and used to finance the limited recourse loans made to investors which made the scheme effective as a tax mitigation scheme. He maintains that the documents also reveal that a significant amount of the money invested was diverted offshore to entities controlled ultimately by one or more of Messrs. Hayley, Bevan and Savill and that there was little or no legitimate commercial activity. This has led the claimants and those they represent to fear that the schemes were a vehicle for fraud and conclude that the information necessary to enable them to plead such an allegation is or is likely to be contained in the documents that they wish to inspect and copy. The documents that the claimants seek are all those documents set out in exhibit CS4 to Mr Savill's witness statement. They are referred to hereafter collectively as " the Documents".
The defendants do not object to the claimants inspecting and copying many of the documents held by D5. Those documents are however accounting materials that do not establish the points that concern the claimants. The Documents are described collectively in paragraph 36 of Mr Savill's statement as being:
i) Category I documents which are said to be draft documents, day to day correspondence, correspondence with HMRC in relation to civil tax enquiries, documents that relate to third parties rather than the defendants or to matters that pre-date the defendants' start of trading ("Category I documents");
ii) Category T documents that consist of documents prepared for the purposes of the tax appeal referred to earlier in this judgment or for the purpose of taking legal advice in respect of the structuring and operation of the defendants ("Category T documents"); and
iii) Category D documents being a large volume of documents on two CDs ("Category D documents").
The defendants rely on the fact that Commercial Court proceedings were started by a number of investors including some who are represented in these proceedings. Those proceedings consist of claims commenced on various dates between 14 January 2009 and 21 October 2010. The Commercial Court proceedings did not get further than the issue and service of a claim form and these proceedings too are stayed until after the criminal trial has been completed. The Commercial Court claims are formulated as claims for breach of contract,...
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Table of Cases
...All ER Rep 937, DC 82 Hill, Re; ex parte Holt & Co [1921] 2 KB 831, 90 LJKB 734, [1921] All ER Rep 650, KBD 149 Hilton v D IV LLP [2015] EWHC 2 (Ch), [2015] All ER (D) 53 (Jan) 110 Hirst v Etherington [1999] Lloyds Rep PN 938, (1999) 96(31) LSG 42, (1999) 149 NLJ 1110, CA 83 Hitchman v Crou......
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Financial Issues
...Blackett-Ord and Sarah Haren, Partnership Law (Bloomsbury Professional, 5th edn, 2015) at para 25.89. 15 Hilton and others v D IV LLP [2015] EWHC 2 (Ch), [2015] All ER (D) 53 (Jan). 16 CAS (Nominees) Limited v Nottingham Forest plc and others [2002] BCC 145. LLPs may therefore be able to ra......