Enough To Evidence Insolvency?
‘Enough To Evidence Insolvency’ is a post that focuses its sights on the explanation as to insolvency in paragraph 94 in the case of Toone v Ross  EWHC 2855 (Ch) (“Toone v Ross”). It was in the eyes of the Court.
This was a case of a company, Implement Consulting Limited (“the Company”) which went into Liquidation and the Liquidator brought proceedings against Directors in respect of payments made into Employee Benefit Trust(s). The Court held that such payments amounted to distributions in respect of which the relevant statutory formalities had not been complied with and accordingly the Company was entitled to its statutory remedy.
In the matter of Chalcot Training Ltd v Ralph & Anor  EWHC 1054 (Ch) Mr Michael Green QC sitting as Deputy Judge of the Chancery Division had this to say about Toone v Ross:
I have found it a difficult case to follow and understand.
It is not pellucidly clear as to what question was considered but it does appear reasonable to suggest that it was not the matter of ‘insolvency’ by virtue of the following remark:
It is unclear from the judgment as to the actual nature of the payment that was made into the EBT
Paragraph 94 of Toone v Ross
Paragraph 94 of Toone v Ross was as follows:
“In my judgment the letter to the Company on 27 June 2011 was sufficient to put them on notice of a substantial debt owed to HMRC. It could be said that the precise sum was yet to be calculated. It could be said that HMRC reserved its position to raise further arguments and it was not sure of its own position. On the other hand, the PSL letters had warned that HMRC may make a challenge; that such a challenge may take years to work through the tribunal; accordingly a risk was always present; the risk was all the greater because a sum had been calculated by HMRC; HMRC had sent a written warning that “EBT arrangements can have a wide range of potential liabilities that include Income Tax, National Insurance, Corporation Tax, Capital Gains Tax (on beneficiaries) and Inheritance Tax charges”; and an offer of settlement was raised by HMRC. Further by this time the Company knew (according to Mr Bell) that it had lost “90-95% of its turnover since 2009”. Pulling these strings together the following represent material factors: (i) the interpretation of statute by the Supreme Court in 2017 is deemed to be the true interpretation; (ii) the statutes under consideration express the intention of Parliament; (iii) the courts must give effect to that intention from the date the legislation came into force; (iv) the Courts have no suspensive power; (v) the Respondents had caused the capital reserves to be swept from the balance sheet since 2009 notwithstanding the presence of a risk that sums would become due to HMRC as a direct result of the “aggressive tax” planning undertaken by the Company; (vi) no provision had been made for a risk that was apparent even if they believed it to be remote or unlikely; (vii) the Company’s turnover was not only falling at speed but significantly falling; (viii) the Respondents were warned that HMRC had opened an enquiry and a special investigator appointed; (ix) HMRC wrote on 15 June 2011 stating that it intended to raise assessments (which would give rise to a present obligation of a large sum); (x) HMRC wrote again five days later offering to settle before issuing assessments; and (xi) a debt figure was provided in the letter of 27 June 2011. These material factors lead me to conclude on the balance of probabilities, that as at that date, looking at the Company’s assets and making proper allowances for its prospective and contingent liabilities, the Company could not reasonably be expected to be able to meet HMRC liabilities. It was insolvent even if it continued to pay the debts of other creditors at the time.”
From the judgment we might decipher that the date 27 June 2011 was an important date. From the preceding paragraph (paragraph 93) we know the following about that date:
In closing submissions Mr Mohyuddin QC argued that the earliest date at which the insolvency test could be satisfied was 27 June 2011 when HMRC wrote stating “it is our view that you have accrued approximately £860,800 in outstanding liabilities”. Mr Curl argues that it is the latest date.
The Last Filed Accounts
The last filed accounts prior to 27 June 2011 were for the year ended 30 September 2010. They appear to show knowledge of the relevant Directors as to the Company’s financial position by 27 June 2011 because they were signed on 3 February 2011. The balance sheet was as follows:
On the face of it, the balance sheet looks healthy having positive reserves in the profit and loss account of £841,815.
The letter from HMRC dated 27 June 2011 referred to its view that the Company was liable to HRMC for the sum of £860,800.00 (“the HMRC Claim”).
The first set of filed accounts for the year ended 30 September 2011 showed the Company without apparent provision for the HMRC Claim with positive profit and loss reserves of £322,344:
The second set of accounts filed at Companies House for the same year (30 September 2011) show a somewhat rosier picture but still do not appear to take account of the HMRC Claim and show positive reserves of £678,653 for the profit and loss account:
Looking at insolvency in the context of paragraph 94 of Toone v Ross, there was a reference to the risk that it appeared that the Directors took if the tax planning failed.
There was also a reference to the tax planning being “aggressive”. That itself does not appear defined.
It might be said that neither would necessarily be evidence of insolvency.
The arguable issue appears to be whether or not the letter from HMRC on 27 June 2011 constituted evidence of an actual liability on the part of the Company to HMRC.
The argument perhaps presumably can be made that the HMRC Claim was disputed and as a result, without going through that contest, the question of solvency is suspended and in fact unknown. Absent clairvoyance it can perhaps be suggested that no-one knew how the EBT tax consequences would be determined.
Disclaimer: This post ‘Enough To Evidence Insolvency’ is not legal advice and is not to be relied upon as such. No liability is accepted by the author or Oliver Elliot Limited for any reliance upon the same. You should seek independent professional advice on the facts of your case.