Nicholas David Tlelfer v Costas Sakellarios
| Jurisdiction | England & Wales |
| Judge | Judge Mackie QC |
| Judgment Date | 19 June 2013 |
| Neutral Citation | [2013] EWHC 1556 (Comm) |
| Docket Number | Case No: 2011 FOLIO 1549 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 19 June 2013 |
[2013] EWHC 1556 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
His Honour Judge Mackie QC
Case No: 2011 FOLIO 1549
Laurent Sykes (instructed by Spring Law) for the Claimant
Alan Gourgey QC and Hui Ling McCarthy (instructed by Davenport Lyons) for the Defendant
Hearing dates: 15 to 17 April 2013
This is a claim for payment of about £930,000 under a Deed ("the Deed") which required the Defendant to make a series of payments to the Claimant. The liability is undisputed in principle but the Defendant claims that he should have deducted PAYE on past payments and also on those now overdue but not yet made. The dispute raises issues of tax law, the application of which depends on differences about the construction of the Deed and about the facts.
Under the Deed dated 4 January 2007 between the parties the Defendant, Mr Sakellarios, agreed to make payments totalling £2,820,000 to the Claimant, Mr Telfer, in accordance with the instalment plan contained in the Schedule. By 7 May 2010, he had paid a total of £1,940,301 but had fallen behind with the payment schedule. By a supplemental deed ("the Supplemental Deed") dated 7 May 2010, the Deed was varied to give more time for payment. Since 7 May 2010, Mr Sakellarios has made further payments totalling £155,000.
The Deed provides by clause 6.1 that all amounts due shall be paid in full without any deduction or withholding other than as required by law. The Defendant's case is that each of the payments made or required to be made under the Deed constitutes employment income under the Income Tax (Earnings and Pensions) Act 2003. He says that he was obliged by law to make a deduction from the payments. He claims the right to deduct tax from future payments and to be reimbursed for what he should have deducted in the past. The Claimant contends that the Defendant's claim is misconceived on numerous grounds.
Both parties have been at fault in not accounting for tax due on the Deed and the transactions which surround it. Both are subject to investigation by HMRC and I have indicated that the Court will not make a final order in this case unless and until it is clear that its terms will not prejudice the public's ability to recover tax that one or both parties should properly pay. There is some confusion about quite what has been disclosed to HMRC by each party and with what result as disclosure on this issue was limited and given very late.
At the trial I heard evidence from each party, there were no other witnesses. While there was fundamental disagreement about what was said and why things were done at various times many facts are agreed or not much in dispute.
Facts agreed or not much in dispute
The Defendant, Mr Sakellarios, is a director and the only shareholder of Pisani (Holdings) Limited ("Holdings") and its subsidiary, Pisani Plc ("Pisani"). Pisani carries on the business in the UK of the sale and supply of marble and granite. The Claimant, Mr Telfer, joined Pisani in 1986 and was until 23 March 2011 a director of Pisani and of Holdings. He was until 30 March 2011 an employee of Pisani. The factual disputes about the events leading to the Claimant's departure concern mainly the nature of the 20% interest which he came to have in Pisani and whether it was agreed between the parties that the Defendant would pay any tax the Claimant became liable for on payments he received under the Deed.
Holdings acquired Pisani in June 1996. The management team of Pisani at the time included the Claimant. There was discussion about the management team acquiring shares on the takeover but, in the event the Defendant, through Holdings, acquired all the shares in Pisani. Pisani prospered. Discussions subsequently took place between the Defendant on the one hand and the Claimant and other members of the management board on the other about the possibility of being awarded shares in Holdings to incentivise them and recognise their contribution to the business. These discussions led to letters in 2002 in which the Defendant confirmed that the Claimant had a "10% interest of my holding. Such interest will, at some time in the future, be formalised and incorporated in and be subject to the terms of a shareholders' agreement".
In March 2003, Pisani dismissed Mr Lamb, the then managing director, as an employee and director of Pisani. The Claimant and his colleagues Mr Kilpatrick and Mr Bruce were appointed directors of Pisani. The Defendant agreed at this point that each of them would have an interest in the company, "fully paid shares", with the Claimant having 10%. This agreement is recorded in Pisani's Board Minutes for 4 and 5 March 2003. The Minutes record that Pisani's accountants, Tenon, were " to advise on procedure for transfer". That transfer never happened for reasons that are in dispute. The Claimant says that at this time the Defendant agree that the 10% would be increased to 20% and that he began to receive notional dividends at the 20% level (on which he accepts that he paid no tax). The Defendant agrees that the percentage went up to 20% but only later in 2003.
A slide which the Claimant produced as part of his evidence, undated but prepared around that time refers under the heading "PHL Shares" to the Claimant's 10% being "3.3% under EMI Scheme. Balance offered under phantom scheme." This split is consistent with a letter of advice from Tenon dated 20 February 2004. The writer refers to his understanding that the Defendant had "an informal agreement with [his fellow directors] whereby, when the opportunity arose, you would arrange for the company to pay to them, or for their benefit, bonuses, pension contributions and other remuneration. The method of payment would be dependent upon the tax legislation and the valuable tax mitigation strategies at that time. This bonus payment would be in recognition of past services to the company."
The letter went on to advise that part of the reward to management could take the form of a share option scheme, an Enterprise Management Incentive Scheme. This Scheme was put in place shortly afterwards but, in order to deliver the tax benefits that such a scheme offered, the Claimant's option entitlement was limited to 3.3% of the shares in Holdings for which, if exercised, he would have to pay just over £97,000. The same letter recorded that the scheme would not give the Claimant and the other directors the full amount of their agreed proportion of the company's share capital. It recommended that the balance could be dealt with either by way of a "phantom share scheme", said to be in effect a bonus scheme, or use of an unapproved option scheme.
The Defendant says that the directors were not interested in taking shares in Holdings because of these potential tax consequences. The nature of the Claimant's "interest" in the shares of Holdings was subsequently defined in documents which the Defendant produced for signature by the Claimant, being his contract of employment and agreements of October and December 2005.
The Claimant says that he produced a formal contract of employment " to record the details of my arrangements with Costas more formally". There are two versions, one referring to the Claimant having a 10% interest (known at the trial as the public contract) and the other (known at the trial as the private contract) to him having a 20% interest. The Defendant accepts that he signed the public contract and that the relevant page of the private contract bears his signature.
Features of both contracts are as follows. The Claimant's 10% or 20% "interest" arises under his contract of employment and is stated to be part of his remuneration as a director of Pisani. The Defendant is not a party. The "interest" awarded was not shares in Holdings but a right to be paid 10%/20% of the Group profits per annum and 10%/20% of the full value of the Pisani Group of Companies. A mechanism was provided for the determination of the value. Pisani agreed that in the event of the Claimant leaving his employment or dying, he or his personal representatives would be paid the full value of these benefits by Pisani.
Another agreement drafted by or on the instructions of the Claimant is dated 1 October 2005 ("the October Agreement"). It is stated to be between Pisani and the Claimant, though the Defendant has been added in manuscript as party (but he undertakes no obligations under the agreement). The document records "the remuneration and reward scheme" between Pisani and the Claimant "Company" [defined as Holdings, Pisani and their subsidiaries] agrees that the Claimant "has a 16.67% beneficial interest in the value of the Company" and agrees to pay him 16.67% of any profits for distribution and 16.67% of the value of the Company to be agreed by an independent valuation. Clause 8 records that " The Company agrees that the 16.67% beneficial interest relates to total value or share of profits as opposed to any shares that might have been issued by the Company" (the 16.67% is 20% less the 3.3% attributable to the Enterprise Scheme). Errors in the October Agreement not material to the issues were corrected in what has become known as the December Agreement and this time the Defendant was not only included as a party to the agreement, but undertook payment obligations with the Company jointly. Clause 9 of this December agreement provided that "The Company and CJS agree that the 20% beneficial interests relate to total value and or share of profits of the Company as opposed to any shares that might have been issued by the Company".
The Deed arose against the backdrop of an indicative offer for Holdings made by third parties. The Claimant proposed that...
To continue reading
Request your trial