Timothy Colin Hamilton Ball (Liquidator of PV Solar Solutions Ltd) and Another v Paul James Hughes and Another

JurisdictionEngland & Wales
JudgeRegistrar Barber
Judgment Date13 December 2017
Neutral Citation[2017] EWHC 3228 (Ch)
Docket NumberCR-2016-001795
CourtChancery Division
Date13 December 2017
Between:
(1) Timothy Colin Hamilton Ball (Liquidator of PV Solar Solutions Ltd)
(2) PV Solar Solutions Ltd (in CVL)
Applicants
and
(1) Paul James Hughes
(2) Martyn Paul Ware
Respondents

[2017] EWHC 3228 (Ch)

Before:

Registrar Barber

CR-2016-001795

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST

IN THE MATTER OF PV SOLAR SOLUTIONS LTD (IN CVL)

AND IN THE MATTER OF THE INSOLVENCY ACT 1986

Royal Courts of Justice

7 The Rolls Building

Fetter Lane

London

EC4A 1NL

Joseph Curl (instructed by Darwin Gray LLP) for the Applicants

Christopher Brockman (instructed by TLT LLP) for the First Respondent

The Second Respondent did not attend and was not represented

Hearing dates: 18, 19 and 20 October 2017

Registrar Barber
1

This an application brought by Mr Timothy Ball as liquidator of PV Solar Solutions Ltd ('the Company') and the Company against its two directors, Mr Paul Hughes and Mr Martyn Ware.

2

The application is principally brought under Section 212 of the Insolvency Act 1986. It is alleged that, in causing the Company to enter into arrangements purporting to be a tax avoidance scheme in March 2012 and thereafter applying three unjustifiable credit entries against their directors' loan accounts with the Company in March, June and December 2012, in an overall sum totalling £750,800, at a time when creditors were being left unpaid, the Respondents acted in breach of their duties as directors of the Company and should be ordered to repay or restore that sum, together with compound interest, on a joint and several basis.

3

The application is alternatively brought on the bases either that (1) the Respondents should each be required to repay their loan accounts or that (2) the Respondents should each be required to repay the monetary equivalent of the three Credits pursuant to s241 IA 1986 on the grounds that such Credits comprised or formed part of transactions at an undervalue within the meaning of s.238 IA 1986.

Background

4

The Company was incorporated on 30 January 2006 but lay dormant for several years. It traded in the supply and installation of solar panels. Based in Cardiff, the Company operated nationally, but mainly in Wales and the south of England.

5

Mr Hughes was a director of the Company from incorporation onwards. Mr Ware was appointed as company secretary on 22 July 2011 and then as a director from 6 September 2011 onwards. Each director owned 50 of the 100 issued £1 ordinary shares.

6

Mr Hughes was the managing director, responsible for the day to day management of the Company. Mr Ware was the sales director, responsible for sales and marketing. The Company employed an internal accountant, Mr Glyn Thomas. He was a chartered accountant and ran a small inhouse accounting team comprising Ms Julie Llewellyn, a trainee accountant and Mr Neil Tritschler, who worked as bookkeeper and accounts assistant. Mr Glyn Thomas, Ms Llewellyn and Mr Tritschler did not attend trial or give evidence.

7

The Company had only two full years of trading, being the year ended 30 June 2011 and the year ended 30 June 2012. In both years, the Company benefited from a form of government support for solar installations known as the 'feed in tariff'. The feed in tariff was first introduced on 1 April 2010 pursuant to the Energy Act 2008. It was originally designed to produce a return on solar PV investment of around 5%. For the year 1 April 2010 to 31 March 2011, the starting FIT rate was set at 41.3 pence/kWh.

8

The Company benefited greatly from feed in tariffs, achieving a turnover of £2 million in its first full year of trading to 30 June 2011 (albeit a profit of only £27,730).

9

By the autumn of 2011, however, the tide was turning in the solar panel market. The FIT initiative had proved far more popular than anticipated. By August/September 2011, the government had announced that FIT rates for small-scale photovoltaic installations would be reduced from its then current rate, 43.3p/kWh, to 21p/kWh with effect from 12 December 2011. Further reductions, to cool the market, were to follow.

10

It would appear that the Respondents were well aware that these changes were imminent. In oral evidence Mr Hughes told me with some pride that he had his 'finger on the pulse' at this stage and 'knew what was going on.'

11

Following a successful challenge in the High Court, the reductions in feed in tariff were delayed, but only until 3 March 2012. On 3 March 2012, the FIT rate more than halved, dropping to 21p/kWh. It was due to drop again, to 16p/kWh, on 1 August 2012; and again to 15.44p/kWh on 1 November 2012.

12

In the meantime, still assisted by the relatively generous FITs of 43.3p/kWh available up to 3 March 2012, the Company achieved a turnover of £6.9 million in its second full year of trading, being the year ended 30 June 2012.

13

Neither director had a contract of employment with the Company. During the financial year ended 30 June 2011, Mr Hughes' service company, Hughes Consultancy Ltd (a company of which Mr Hughes was sole director and shareholder) was paid £126,569 and Mr Ware was paid £132,549. These sums were described in the Company's books and records as 'management fees'. In the year ended 30 June 2012, Mr Hughes and Mr Ware each (in Mr Hughes' case again via his service company) received a further £161,500 in 'management fees'. Whilst all falling within the year ended 30 June 2012 for accounting purposes, the entirety of the said sum of £161,500 was in each case paid by December 2011.

14

These 'management fees' are not impugned in the instant claim. Nonetheless, on behalf of the Applicants, Mr Curl invited the Court to note that 'Mr Hughes and Mr Ware had already had considerable sums out of the Company' before they embarked on the transactions which form the subject matter of this application.

15

The focus of challenge in this application was a series of credit entries totalling £750,800 applied against the Respondents' respective directors' loan accounts in 2012 in the sums and on the dates as follows:

(1) 19 April 2012 (backdated to 20 March 2012): £440,000 (comprising £220,000 each for the Respondents) ('Credit 1');

(2) 30 June 2012: £150,000 (comprising £75,000 each) ('Credit 2'); and

(3) 4 December 2012: £160,800 (comprising £62,400 for Mr Hughes and £98,400 for Mr Ware) ('Credit 3').

16

The backdrop to Credits 1, 2 and 3 was as follows.

17

In December 2011, having already paid themselves £161,500 each in management fees over the period 1 July 2011 to December 2011, and knowing that feed in tariffs were about to be halved, the Respondents decided to pay themselves a 'bonus' of a further £165,000 each as they 'could see large profits for [the] year' (Hughes (1) para 12). It was initially agreed with Mr Thomas that this bonus would be treated in the Company's records as a director's loan 'which would be converted to a dividend when finalising accounts later in the year' (Hughes(1) para 12). This £165,000 'bonus', in each case posted on 12 December 2011, took each director's loan account from a relatively modest £20,000 to £185,000. Thereafter, between 13 December 2011 and 20 March 2012, the Respondents each withdrew additional sums (for the most part £6,000 per week each) from the Company's cash resources. Over the period 13 December 2011 to 20 March 2012, these additional withdrawals totalled £65,900 in the case of Mr Hughes and £71,400 in the case of Mr Ware. Each withdrawal was posted to their directors' loan accounts.

18

In the meantime, in February 2012, the Company's in house accountant, Mr Thomas, attended a tax lecture on employer financed retirement benefit schemes ('EFRBS'). The lecture was given by a Mr Leighton Reed, a Chartered Accountant and Chartered Tax Adviser who worked as a tax director at Broomfield & Alexander Limited.

19

EFRBS schemes were once marketed as an effective form of tax avoidance. The attitude of HMRC to these schemes has, however, been clear for some time, as is apparent from briefing notes dating back to 2010. Parliament subsequently attempted to eradicate these and other disguised remuneration schemes with legislation, most significantly the Finance Act 2011 (' FA 2011'). Notwithstanding the enactment of FA 2011, however, a modified form of an EFRBS known as 'Lazarus' was still being marketed by a company called OneE Tax Limited ('One E') at the time of the seminar attended by Mr Thomas in February 2012.

20

Having made contact with Mr Leighton Reed at the seminar in February 2012, Mr Thomas introduced Mr Reed to the Respondents. Mr Reed thereafter introduced the Respondents to OneE to explore 'Lazarus'. The Respondents decided to put in place a Lazarus scheme and did so in March 2012.

21

As aptly summarised by Mr Curl of Counsel for the Applicants, the object of Lazarus 'was to enable directors to extract money from their companies and pay almost no tax on it, despite the terms of FA 2011.' For the purposes of this application, I am not invited to determine whether or not Lazarus was an effective tax saving scheme. Its main relevance, in the context of this application, is that it provided the underlying mechanics by which Credit 1 and Credit 3 (but not Credit 2) came to be effected.

22

The Applicants maintain that Credits 1, 2 and 3 cannot be justified, whether viewed through the prism of Lazarus or otherwise. They argue that by March 2012, when the Lazarus scheme was put in place and Credit 1 came to be effected, the Company was already experiencing cashflow difficulties and its solvency was, at the very least, sufficiently questionable for the interests of creditors to intrude into the proper consideration of the interests of the Company. The Respondents deny this.

23

The Applicants further maintain that by June 2012, when Credit 2 came to be effected, the Company's position had only...

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