Swain-Mason and Others v Mills & Reeve (A Firm)

Hearing dates: 23rd & 24th November 2010

Peter Smith J:

INTRODUCTION

This judgment arises out of my decision to grant the Claimants permission to Re-Amend the Particulars of Claim to add a differently pleaded case. This permission was granted on 24th November 2010 being the second day of the trial. As a result of that decision the trial was adjourned to recommence on the 17th January 2011.

The decision to grant permission to Re-Amend the Particulars of Claim arose out of the way in which the Claimants opened their case at the start of the trial on 23rd November 2010. During that opening it became clear to me (and Mr Simpson QC who appears for the Defendants) that the way in which the case was being opened by Mr Mathew QC for the Claimants was not in accordance with his pleaded case. He did not accept this and I ruled that the matters that he raised in his opening were not to be found in the Amended Particulars of Claim, the then pleading for the trial. Accordingly on the next day he produced a draft Re-Amended Particulars of Claim and sought permission to Re Amend the Particulars of Claim in that form. That was opposed by the Defendants but despite that opposition I granted permission on terms.

I intimated that I would give reasons for my decision later as the Defendants intimated through Mr Simpson QC that they might seek to appeal my decision. I refused permission to appeal.

BACKGROUND

In order to understand the Re-Amendment it is necessary to set out the nature of the case shortly. The Claimants are the executors and daughters respectively of Christopher J Swain (“Mr Swain”) who died on 17th February 2007 during a heart procedure in Thailand. A fortnight or so earlier the entire issued share capital of Swain's International Plc (“the Company”), his successful family business, had been sold in a Management Buy Out (“the MBO”) for a total consideration in cash and loan notes of approximately £3.5M.

The company carried on a substantial business as photographic wholesalers. Mr Swain beneficially owned 72.408% of the shares and his daughters owned 5.324% each with the remainder owned by an employees benefit trust (“the SWET”).

The material terms were set out in a revised Heads of Terms dated 23rd November 2006 which became the foundation of a lengthy and complex Share Purchase Agreement (“SPA”) completed on 31st January 2007 by Mr Swain, his daughters, the SWET and the MBO purchaser.

TAX LIABILITIES

Mr Swain's liability to Capital Gains Tax (“CGT”) as a result of his disposal of his shares was, on the Claimants' case, about £160,000 (his shareholding had the benefit of CGT “business asset taper” relief at 10%). The personal representatives discharged that. As a result of his death his estate was also liable for Inheritance Tax (“IHT”) on the full amount of the value of the consideration. The relevant amount of IHT was on the Claimants' case approximately £1M. In 2006/2007 the nil rate band was £285,000 and IHT was charged at 40% above that. Mr Swain's estate comprised other assets and had a net probate value of £3.5M.

THE DEFENDANTS

The Defendants are a well known national firm of solicitors. They were retained by Mr Swain and his daughters to act in relation to negotiations with the MBO team and the structure of the MBO itself. This involved some corporate tax work for which separate fees were paid. The Defendants by Craig Hodgson (“Mr Hodgson”), its partner having conduct of the MBO, invited Mr Swain to ask for personal tax advice (being described, the Claimants contend, by the Defendants as “personal tax advice”, “general tax advice”, “an overview of ……the tax position”) in addition to the separate advice on the sale of the shares for himself and his daughters.

THE SPA

The SPA is quite complicated. One matter however was that part of the purchase price (£1M) was deferred consideration in the form of loan notes to be redeemed over a period of up to 10 years from the date of completion.

The tax advice was provided principally by Isobel Pooley (“Ms Pooley”) a senior solicitor in the Defendants' tax department in a letter to Mr Swain dated 4th January 2007.

THE COMPLAINT

It is contended that at least from October 2006 the Defendants knew that Mr Swain's health was “weak” (being the expression given to it in paragraph 6 of the Claimants' skeleton argument). They knew that he had had a heart attack in the past, suffered from type 2 diabetes and was overweight. Mr Swain was described in internal notes of the Defendants as being ill. From at least 16th January 2007 Mr Hodgson knew that Mr Swain was about to undergo some form of heart procedure.

It is the Claimants' case as pleaded in the Amended Particulars of Claim that the Defendants failed to give any advice about the IHT consequences (either lifetime or death implications) in particular as to the difference his death would make after the MBO was completed and during the period that the deferred consideration was payable. It is complained that the advice failed to mention any IHT consequences at all immediately arising out of the transaction, not even as to the fact that the loan notes did not qualify for any business property relief (“BPR”).

The significance of it is that if the MBO had taken place after the death no IHT would have been payable because Mr Swain would have held property which would have been relieved 100% by the Business Property Relief. The company was an unquoted qualifying trading company and Mr Swain's shareholding was so qualified. In addition there would have been no Capital Gains Tax as there would have been a deemed disposition acquisition of the shares at the date of his death at market value so that any subsequent sale would only attract Capital Gains Tax on any increase in value over and above the market value of the shares at the time of his death.

Thus in broad terms the Claimants contend that the failure on the part of the Defendants to advise as to this possibility and address it by postponing the MBO until after the operation has cost the Claimants somewhere in the region of £1.3M. The claim therefore is a significant one.

CLAIM BEFORE RE-AMENDMENT

The essence of the claim was that given Mr Swain's imminent heart operation (as it is put) and given his health the Defendants ought to have advised Mr Swain to have postponed the MBO until after his operation. The Claimants have led evidence showing that apparently the deceased was concerned about the operation in conversations to his friends. They have also led evidence to show that the purchasers under the MBO (who were the working directors in the company) would have been willing to defer the sale.

The major difficulties about this approach seemed to me to be twofold. First it concentrated on the seriousness of the illness and the imminent operation.

In fact in my view the imminent operation was not a risky one. Whilst Mr Swain had had cardiac problems in 2001 thereafter this appeared to have been satisfactorily dealt with. However in 2006 he was noted to have an abnormal cardiac rhythm (atrial flutter). He was admitted to the Bangkok Heart Hospital on 22nd July 2006 to perform coronary angiography and a catheter ablation for the atrial flutter. The angiogram showed no re-narrowing of the arteries. However the catheter ablation did not take place because a pre-procedure transoesophageal echocardiogram (“TOE”) revealed the presence of a left atrial thrombus (clot). Therefore the ablation was postponed whilst Mr Swain's blood was thinned. That involved taking warfarin over a period of six months. It was therefore planned that after that period he would revisit the Bangkok Hospital Medical Centre (the February visit). There a further TOE would take place and if that showed that the clot had been satisfactorily dealt with the ablation would then take place.

The TOE was performed under sedation and it is not clear what happened after that. Mr Swain's blood pressure apparently collapsed during the TOE procedure and despite various attempts to address it he died on the operating table. The ablation had never taken place. There are no satisfactory notes of the procedure. There was no autopsy and Mr...