Stephen John Hunt v Jagtar Singh
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 17 July 2023 |
| Neutral Citation | [2023] EWHC 1784 (Ch) |
| Court | Chancery Division |
| Year | 2023 |
| Docket Number | Case No: CH-2022-000104 |
[2023] EWHC 1784 (Ch)
Mr Justice Zacaroli
Case No: CH-2022-000104
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN ENGLAND AND WALES
CHANCERY APPEALS (ChD)
Rolls Building
Fetter Lane
London, EC4A 1NL
Ms Lexa Hilliard (instructed by Wedlake Bell LLP) for the Appellant
The Respondent was not present or represented
Hearing dates: 14 and 16 June 2023
This is an appeal against the order of ICC Judge Prentis dated 6 April 2022, dismissing the claim of the appellant, Stephen Hunt (“Mr Hunt”), the liquidator of Marylebone Warwick Balfour Management Limited (“the Company”) against the respondent, Mr Jagtar Singh (“Mr Singh”).
The principal question raised by the appeal is when, following the decision of the Supreme Court in BTI 2014 LLC v Sequana SA (“ Sequana”), does a director's duty to take into account the interests of creditors arise, in circumstances where the company is at the relevant time insolvent, but its insolvency is due to a tax liability which the directors (wrongly, as it later turned out) believed at the relevant time had been avoided by a valid tax avoidance scheme entered into by the company. I will refer to this duty as the “creditor duty”, recognising that it is nevertheless a duty owed to the company.
The background facts are set out at some length in the judge's judgment, but so far as relevant to the principal question on this appeal, they can be summarised as follows.
The Company was incorporated in 1994 to provide management services to Marylebone Warwick Balfour Group PLC (“PLC”) and other companies within the group of companies owned by PLC. In 2002, as a result of a downturn in the fortunes of the group, PLC announced that it would take on no new business, but would embark on a four-year realisation plan, targeting returns to shareholders of 200p per share. In the event, the realisation plan took much longer.
The Company provided the services of head office staff tasked with implementing the business plan. At about the same time, the Company was introduced to BDO Stoy Hayward (later BDO LLP) (“BDO”), who recommended a “conditional share scheme” designed to enable the head office staff to receive payments – structured as non-contractual gratuitous bonuses – without the Company incurring liabilities to HMRC by way of PAYE or NIC contributions.
The Company entered into such a scheme (the “Scheme”) in 2002 and operated it until 2010. It initially operated as follows:
(1) The Company set up an employee benefit trust (“EBT”) for the benefit of employees of the group;
(2) A shell BVI company, Moorston Holdings Limited (“Moorston”) was incorporated, with Mr Singh and another of the directors of the Company as directors;
(3) The Company made payments in excess of £3 million to the EBT trustee, and the directors of Moorston resolved to allot two ordinary shares of £1 to the EBT trustee;
(4) The EBT trustee subscribed for £3,143,169 1p preference shares in Moorston at a premium of 99p per share;
(5) The EBT trustee issued Moorston shares to the head office staff members, according to the Company's wishes to award them, as employees of the Company, non-contractual gratuitous bonuses;
(6) Moorston then declared and paid dividends on those shares to the head office staff members.
From 2003 onwards, the scheme was modified slightly, in that the Company subscribed for a 1p D redeemable share in Moorston at a substantial premium (constituting the amount the Company had resolved to pay out in gratuitous bouses), and the Company then resolved to award shares in Moorston to the head office staff, pursuant to “incentive arrangements” for senior executives and employees.
This process was then repeated at regular intervals over the following eight years, resulting in 34 subscriptions and declarations of dividends in favour of the directors of the Company (and certain other recipients) in a sum totalling over £54 million over the eight years during which the Scheme operated.
BDO continued to advise the Company that the Scheme was “robust” throughout the period relevant to this appeal, notwithstanding the actions of HMRC and the tribunal decisions to which I refer below.
The Scheme was notified to HMRC in May 2003. On 4 June 2004 HMRC notified an enquiry into the Company's return to 30 June 2002. On 20 July 2004, HMRC made further enquiries, and set out their position that if the payments under the Scheme were in reality earnings, then NIC and PAYE would be payable together with interest.
A number of similar schemes had been marketed and set up in the early 2000s. In December 2004, the Paymaster General announced in Parliament a crackdown on schemes avoiding PAYE and NIC, and stated that HMRC would be challenging such schemes in the courts where it was appropriate to do so.
In September 2005 HMRC offered a market-wide offer to participants in such schemes, including the Company. This was relayed to the Company in a letter from BDO dated 23 November 2005. The letter notified the Company that HMRC were minded to take a test case to the Special Commissioners for a formal ruling, but had decided to make an offer to all companies which, in essence, required the employing company to pay NIC contributions together with interest, with certain corporation tax relief being available. Attached to BDO's letter to the Company was a schedule which identified that the amount of NIC contributions for which the Company was liable (if HMRC's challenge to the Scheme succeeded) up to that point, together with interest, was in excess of £3.65 million.
The Company rejected that offer. In the early part of 2006 HMRC indicated that it would resolve the issue through litigation and indicated an intention to issue formal determinations (in respect of PAYE) and decisions (in respect of NIC) shortly. In fact, it was not until July 2008 that assessments were issued for the period 6 April 2002 to 5 April 2006, in the sum of £11,376,566 (for PAYE) and £4,776,592 (for NIC), each exclusive of interest. HMRC also commenced proceedings against the Company in relation to the NIC liability, in order to preserve its rights while it pursued litigation, including in respect of the issues that arose as between the Company and HMRC, against others, as I describe further below.
On 7 April 2008, HMRC wrote to the Company indicating that there were now a number of cases progressing towards litigation covering different variations of the generic arrangements of which the Scheme formed part. It had been hoped that at least one of those cases would be resolved in 2007, but that had not happened. HMRC again invited the Company to settle, this time by paying the full PAYE and NIC contributions plus interest for late payments. HMRC also offered the Company the opportunity to stop interest running by paying the amount that was due, but on the basis that it would be returned in the event that it turned out that the tax was not due.
On 7 May 2009, the tax chamber of the first-tier tribunal (“FTT”) released its decision in an appeal against HMRC's assessments in relation to a scheme for PA Holdings Ltd that was materially similar to the Scheme: [2009] UKFTT 95 (TC). It concluded that HMRC was entitled to payment of the NIC contributions, but not the PAYE claimed.
That decision was upheld on appeal to the Upper Tribunal, Tax and Chancery Chamber, in a decision released on 7 July 2010: [2010] UKUT 251 (TCC).
On a further appeal, the Court of Appeal, in a judgment handed down on 30 November 2011, dismissed the appeal of PA Holdings and allowed the appeal of HMRC: [2011] EWCA Civ 1414. The result was that the Scheme failed both in respect of the PAYE and NIC contributions.
As I have already noted, the Company continued to operate the Scheme until August 2010. In light of the decision of the Court of Appeal in the PA Holdings case, the Company's liability to HMRC in respect of PAYE and NIC contributions throughout the period that it operated the Scheme, including interest, was in excess of £36 million.
Leaving aside the tax liability, the Company's financial statements disclosed net assets or net liabilities, as at the year end (30 June) for each of the following years: 2002: +£45,000; 2003: -£5,945; 2004: -£2.5m; 2005: +£146,214; 2006: -£381,465; 2007: £+158,400; 2008: +£147,003; 2009: -£91,567; and 2011: +£192,478.
Once account is taken of the debt to HMRC, however, the Company was clearly substantially insolvent. The Company's liability for NIC and interest alone, by September 2005 (when HMRC made its market-wide offer of settlement), would have produced a net deficit (on the basis of the figures contained in the financial statements for 30 June 2005) of more than £3.5 million.
Following the Court of Appeal's judgment in PA Holdings, the Company was advised by Counsel that its position was not distinguishable, at least in respect of NIC, and that it “seems overwhelmingly likely that the Company's defence of HMRC's proceedings claiming NIC amounts will fail.” The Company was then placed into creditors' voluntary liquidation on 14 May 2013. The then liquidator's final report was filed on 3 March 2016, and the Company was dissolved on 3 June 2016. It was, however, restored into voluntary liquidation on 3 June 2017 and Mr Hunt was appointed liquidator. There are no material creditors in the liquidation apart from HMRC, whose proof was admitted in the sum of £38,701,750.
The claim was originally advanced against a number of former directors of the Company, but the Company settled with all but three of them prior to trial. The Liquidator advanced claims under s.423 of the Companies Act 1986, under s.317 of the Companies Act 1985 (later s.177 of the Companies Act 2006), and under s.212 for breach of...
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