Don’t distance yourself from your taxes because…
“Don’t distance yourself from your taxes because…” is a post about the case of Cham v Wilmot (7 May 2020) (“Cham”) and is a rather lugubrious tale that has just sprouted, concerning an application for summary judgment and strike out by the respondents. The respondents appear to have been tasked with dealing with an application from the Liquidators of Daystreet15 Limited (“the Company”).
If reported cases on summary judgment and strike out applications are your cup of tea, permit me to direct your attention to a similar sort of application that was the subject of an appeal recently in the matter of Nosnehpetsj Ltd v Watersheds Capital Partners Ltd & Anor  EWHC 739 (Ch) that I had to deal with as Liquidator.
The Liquidators in Cham could not be said to have held back pursuing the respondents in this matter; at least not from the vantage point of the spread of claims brought or the quantum in question.
A number of classic Liquidator relief declarations appear to have been sought in this litigation pot. The recipe that appears to have been swirling around incorporated breach of fiduciary duty, fraudulent trading, unjust enrichment, unlawful distribution and transactions defrauding creditors.
The application seeks relief by way of contribution to the insolvent entity’s assets in the amount fractionally less than the not insignificant sum of £4.5 million.
The Liquidators’ attentions appear to have been drawn to an assortment of tax avoidance schemes operated by the Company such as an EBT, EFRBs and Film Schemes.
HMRC started raising assessments from 2009 concerning the tax avoidance schemes.
The battleground was fought over by a couple of very experienced insolvency counsel.
The respondent’s application failed; it seems Mr Curl’s arguments prevailed.
In my judgment it is not necessary that the Points of Claim should allege that each scheme amounted to tax evasion. Had the fraudulent trading claim been simply based on entry into a tax avoidance scheme, without more, Mr Groves would undoubtedly be correct that the claim could not succeed. The complaint here, reading paragraph 102 in the context of the pleading as a whole, is not simply that that the tax schemes were entered into. It is that the First and Second Respondent caused the Company’s business to be carried on so that it entered into a series of tax schemes over an extended period in the knowledge that they might not be effective, and continued to do so, without making provision for the tax that might fall due, even after HMRC raised an assessment at a
relatively early stage, and culminating in the restructuring of the business to in such a way that HMRC would be entirely unable to recover any tax ultimately found to be due. Those are “the transactions” that together amount to “the attempt” to defraud and the intention to defraud HMRC by so doing is expressly pleaded. Mr Foster’s witness statement glosses that as tax evasion but it is not necessary to plead that as part of the cause of action. It is not necessary that each or any debt to a creditor has been incurred as a result of illegality, fraud or dishonesty in order to sustain a claim of fraudulent trading. What is necessary is that the company carries on its business to defraud creditors, however the debts to those creditors were incurred.
Mr Groves submits that, even if proven, the pleaded claim cannot amount to fraudulent trading. He submits that the business “carried on” by the Company was that of a recruitment agent. Its business was not the working of a fraud on HMRC. It is right that section 213 does not apply simply because a fraud has been carried out by a company, but it is not confined to companies that are established for some unstated fraudulent purpose in whole or in part. It is enough that the business of the company should be carried on so as to defraud creditors, whether or not those creditors have become creditors by reason of fraud or by reason of the company carrying on an entirely legitimate business. That seems to me to be clear from Templeman J’s observation in Gerald Cooper Chemicals that, in Oliver J’s example in Murray-Watson, the company did not carry on a business with intent to defraud creditors because it had done “nothing to make it impossible for the customer, once he had become a creditor, to recover the sum due to him as a creditor.” Here, if the Liquidators are correct, schemes were entered into by which monies were extracted from the Company and the business was artificially restructured so as to prevent recovery by HMRC and creditors more generally. In my judgment, that is capable of amounting to the “carrying on” of a business with intent to defraud creditors.
The fraudulent trading claim is adequately pleaded and has a real prospect of success in that it is more than merely arguable. It is not fanciful or lacking in reality and there is sufficient material on which a claim of fraud can be based. The restructuring so as to leave the Company without assets at a time when HMRC was raising assessments and pressing for payment is striking. On the face of it, the Company was at that stage insolvent as a result of HMRC assessments and yet the right to receive the consideration for the sale of the Company’s businesses was transferred to Holdings. The circumstances of the restructuring do seem to me to colour the carrying on of the Company’s business in relation to its tax affairs. I agree with Mr Curl that this does have to be considered as a whole. The Liquidators’ pleaded case, if proven, is more than capable of giving rise to an inference of intent to defraud on the part of First and Second Respondent in the conduct of the Company’s tax affairs. As noted in Three Rivers all that is required at this stage is a reasonable prima facie case. Such a case is disclosed, and its resolution will require consideration of the evidence. It will of course of be for the Liquidators to prove at trial that the business of the Company was carried on with intent to defraud HMRC and the period over which the business was carried on with any such intent. The submissions made by Mr Groves as to the disclosure of the schemes to HMRC, the taking of advice
before establishing them prior to HMRC raising a challenge, the widespread use of the schemes and the proper commercial reasons for the restructuring may be compelling answers to the claim but that is a question for evidence at trial. At this stage in the proceedings, those matters do not serve to show that the fraudulent trading claim does not have a real prospect of success.
Claims for breach of duty in respect of the Film Schemes are, on the face of it, statute barred. They were entered into in June 2009 and September 2010, more than six years before the commencement of the claim. There is no allegation that any financial benefit arising from the Film Schemes was received or retained by the First or Second Respondent so as to allow the Liquidators to rely upon section 21(1)(b) of the Limitation Act 1980. Mr Groves further submits that there are no grounds to claim concealment or fraud so as to extend the period pursuant to section 32 of the 1980 Act.
Mr Curl answers this, first, by saying that if the Liquidators succeed in showing fraud or dishonesty, then no limitation period will apply by reason of section 21(1)(a) of the 1980 Act. This argument depends on my judgment as to whether the claim for fraudulent trading is sustainable. I have already determined that the Liquidators’ have a real prospect of showing that these schemes are part of the carrying on of the business of the Company with intent to defraud creditors. If, however, I am wrong as to that Mr Curl submits that time did not begin to run until the Liquidators were appointed. He relies upon deliberate concealment pursuant to section 31 of the Limitation Act 1980 and the decision of Peter Smith J in Haysport Properties Limited v Joseph Ackerman  BCC 676.
There is no evidence as to the extent to which any breach of duty on the part of the First and Second Respondents, if there was such a breach, was disclosed to the Company. The question of whether there was a breach of duty that they were under a duty to disclose and, if so, whether disclosure was made, must be a matter for trial. Again, at this stage I am not satisfied that this claim can be said to be an abuse of process by virtue of being statute barred such that it should be struck out, nor that it does not have a real prospect of success.
Disclaimer: this post “Don’t distance yourself from your taxes because…” is not legal advice and no liability is accepted by the author or the author’s firm for any reliance upon the same. Independent professional advice ought to be sought on the facts of any case.