Pegasus Management Holdings SCA v Ernst & Young
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR. JUSTICE LEWISON,Mr Justice Mann,Mr. Justice Lewison |
| Judgment Date | 23 March 2012 |
| Neutral Citation | [2008] EWHC 2720 (Ch),[2012] EWHC 738 (Ch) |
| Docket Number | Case No: CH/2011/0698 & CH/2011/0672,Case No: HC05C03144 |
| Court | Chancery Division |
| Date | 23 March 2012 |
[2008] EWHC 2720 (Ch)
The Honourable Mr. Justice Lewison
Case No: HC05C03144
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Approved Judgment
Hearing dates: 28 th & 30 th October 2008
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 Lewison:
Introduction
On 10 November 2005 the two claimants, Mr Bradbury and Pegasus Management Holdings SA (“Pegasus”) issued a claim form against Ernst & Young (“E & Y”). The claim form claims damages for negligence in giving advice which led to Mr Bradbury subscribing for shares in Pegasus in April 1998. E & Y say that the claims are statute-barred and that, in any event, they owed no duty of care to Pegasus. These are the two questions I have to decide. It is conceded that any contractual claim is statute-barred; but the claimants argue that a claim in tort is still available. Whether this argument is correct depends on whether the claimants first suffered damage before 10 November 1999. It ought to be relatively straightforward to decide when a person has suffered damage. Unfortunately it is not.
The facts
Fortunately there is virtually no dispute about the facts; and I have borrowed extensively from Mr Salzedo's careful summary of them. Mr Bradbury says that he has been advised by E & Y on his personal tax matters since at least 1980. In paragraph 15 of his witness statement he says:
“I have been advised by E & Y on corporate tax matters since 1985, when I set up my first company in Newcastle.”
In about April 1997, Mr Bradbury sold an electronics manufacturing business that he had built up for a very large amount of money. The sale consideration was paid in loan notes. The payment of the consideration for the sale of the business by way of loan notes was a well known way of deferring liability for capital gains tax until disposal of the loan notes themselves. Thus any consideration that Mr Bradbury might receive on a disposal of the loan notes would be potentially taxable in Mr Bradbury's hands as a capital gain. The tax liability would also have been very large.
Understandably Mr Bradbury was keen to avoid or mitigate that liability. In 1997, the deferral of gains by use of loan notes could be extended beyond the disposal of the loan notes if the proceeds of such disposal were reinvested in a qualifying business in a way that satisfied the conditions of reinvestment relief. This relief was provided for under sections 164A to 164N of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”), supplemented by guidance given by the Inland Revenue. I shall look at this more closely in due course. By early 1998, there were discussions between Mr Bradbury, his lawyers (principally Mr Rhodes of Macfarlanes), his accountants (principally Mr Allan of E&Y) and the Inland Revenue about reinvestment options to take advantage of reinvestment relief. In particular, at a meeting with the Revenue in January 1998, Mr Bradbury said that he was considering reinvesting his gains in establishing clinics through which primary health care services would be supplied to the public.
In his paragraph 16 of his witness statement Mr Bradbury says:
“After the sale of my major company in 1997, Mr Allan became highly involved in all aspects of my tax affairs. He was of the view that it was impossible to distinguish me and my personal tax affairs from the companies that I was intending to set up and run. He wanted to ensure that I understood all the tax implications of everything that I was doing and not doing at that time. … [T]he practice between us was that E & Y would give comprehensive tax advice to me and my companies on all major business ventures, affairs and interests. From April 1997 Mr Allan would look to others about specific aspects of corporation tax but he insisted on being at the centre of things and involved with all tax related decisions.”
On 9 March 1998 Mr Allan produced a note on reinvestment relief which he gave to Mr Bradbury. The note suggested the setting up of a Luxembourg company which would trade in the UK and be resident in the UK for corporation tax purposes. It pointed out that the corporate structure could be a Luxembourg holding company and a Luxembourg trading subsidiary. The note continued:
“Assuming the more complex structure, money would be subscribed for shares in the holding company. It is recommended that the trading subsidiary is set up as quickly as possible. When the subsidiary requires funds to acquire a suitable trade, they could be borrowed from the holding company.
To be sure that reinvestment relief is given it would be advisable to transfer any trade and assets acquired by purchasing a company into the subsidiary. This is because s 164A TCGA 1992 allows reinvestment relief if a qualifying subsidiary is intending to “… Employ the money raised by the issue of the shares wholly for the purposes of a qualifying trade carried on by it.” (Emphasis added). There is a view that the qualifying subsidiary therefore has to exist before the acquisition of the trade and that the subsidiary must carry on the trade acquired. The Inland Revenue have stated that they do not see the perceived problem. In a letter to the Chartered Institute of Taxation, the Revenue stated:
“… It is not clear what prevents the holding company from lending money raised to its subsidiary which can then acquire the company in question. This would enable a group to retain a holding company and separate trading subsidiaries as required.””
The note concluded by saying that it was intended that a Luxembourg company would be established within the next few days and that the initial amount subscribed would be modest. At the end of the week beginning 9 March 1998 a second more substantial subscription would take place. The timetable was designed to fit in with the Budget, which was due on 17 March. On 17 March 1998, the Chancellor of the Exchequer announced in his annual Budget speech that reinvestment relief would in future be restricted to investments in companies which had gross assets of up to £10 million before investment or up to £11 million after investment. These changes were due to take effect at the beginning of the financial year in April 1998. Since Mr Bradbury's potential gain exceeded these limits many times over, this announcement had a potentially dramatic impact on his ability to use reinvestment relief to defer further any taxable gain which he realised upon disposal of his loan notes. However, there was a window of opportunity to arrange matters between the Budget announcement and the end of the financial year.
On 20 March 1998, Mr Bradbury met with Mr Rhodes and Mr Allan. After discussion, Mr Bradbury decided that he would establish a new Luxembourg company with a view to investing a substantial sum before 5 April 1998. The monies invested in the Luxembourg company would later be applied to some business which he would select by experimenting with smaller companies within the £10/11 million limits.
Pegasus was incorporated as a new Luxembourg company (originally under a different name) on 26 March 1998. Mr Bradbury subscribed $40,000 capital in return for shares. Mr Bradbury sold some of the loan notes for about $150 million (equivalent at the time to about £90 million) and used this money to subscribe for further shares in Pegasus. The subscription was agreed by the company in a board resolution of 31 March 1998, and the transaction was completed on 2 April 1998. Following Mr Bradbury's subscription, Pegasus' only asset was the cash that he had subscribed.
Ernst & Young Luxembourg SA (which is a separate entity from E & Y, and is not a defendant to these proceedings) was appointed statutory auditor of Pegasus at the initial shareholders' meeting on 26 March 1998. The initial directors of Pegasus were Mr Bradbury and two partners of Ernst & Young Luxembourg. The two Luxembourg accountants resigned on 23 November 1998, and were replaced by Mr Bradbury's wife and Mr Rhodes of Macfarlanes.
For Mr Bradbury to qualify for roll-over relief, Pegasus needed to invest the £90m in “qualifying trades” in the UK, making the first investment before 1 April 2000 and investing the full amount by 1 April 2002 (time limits which had been negotiated with the Inland Revenue). Mr Bradbury took extensive advice on his options following the establishment of Pegasus, including consultations with leading tax counsel.
At a meeting of Pegasus on 1 December 1998, attended by Mr Bradbury, Mrs Bradbury and Mr Rhodes, Mr Bradbury discussed the fact that he had carried out research through another company, Primary Care Advisory Ltd, the result of which showed that there were no suitable healthcare businesses available for sale, and that it would not be possible to spend more than £40 or £50 million on pilot schemes in the 2 years remaining for investment within the reinvestment relief rules. Mr Bradbury thought that Pegasus should consider other trading opportunities, if necessary outside the field of healthcare. In relation to “Taxation matters” the minutes of the meeting on 1 December 1998 record:
“It was agreed to confirm the appointment of Ernst & Young as tax accountants and auditors for the company. JGR [Mr Rhodes] to correspond with Jeremy Allan on the paperwork required for this.
Ernst...
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