Liquidator Tax Avoidance Claim Overview
A seemingly disappointing decision sprouted in the case of Hunt v Balfour-Lynn & Ors  EWHC 784 (Ch) when a Liquidator tax avoidance claim did not make it to the finishing line, at least not from the vantage point of Insolvency and Companies Court Judge Prentis (“the Judge”).
The Liquidator sought to address tax losses incurred by Marylebone Warwick Balfour Management Limited (“the Company”) in respect of the Respondent’s remuneration for their services to the Company by issuing claims against the Directors in respect of breach of duty and or Section 423 of the Insolvency Act 1986 as transactions defrauding creditors. The Company had entered Creditors Voluntary Liquidation in 2013.
Moving at what might appear to many, molasses-like speed, it took almost three years for the claims to manoeuvre through the Court system after being let loose in May 2019 by Mr Hunt and ending in a ten-day trial earlier this year. The transactions challenged go right back to 2002, involving sums north of £27 million of PAYE and National Insurance.
Mr Bednash having done around three years as Liquidator called it a day:
His final report confirms that HMRC had been desirous of funding a claim against the Company’s directors “but following extensive investigation and liaising with duly instructed solicitors, barristers and tax experts, I determined that no such claim could be brought”. While solicitors and barristers had been found on a CFA basis for a claim against BDO neither HMRC nor another funder could be found.
He left office but did return momentarily at the request of HMRC to enable Mr Hunt to restart matters after the restoration of the Company.
How Did The Embers Appear?
The Judge considering the limitation angle in this case decided to articulate matters by saying that the Liquidator:
… has been blowing the embers of a long-abandoned fire.
A conceivable issue for the Liquidator is however that it appears there is no limitation period in cases where a recipient personally benefits from a breach of trust. The recipient holds the trust property in effect for the beneficiaries of such a trust. Directors are somewhat akin to Trustees in their deployment of company property. Furthermore, a Liquidator has an obligation to recover the Company’s property.
The key complaint of the Liquidator was that the Directors (it was suggested) did not consider HMRC but were concerned for themselves by entering into a tax avoidance scheme. Furthermore, by continuing it they ended up leaving a company without the ability to satisfy the HMRC liability if it went wrong.
From 2004 the Directors knew that HMRC was investigating the Company’s tax avoidance affairs. Yet dividends under the tax avoidance scheme continued through to 2010.
There have been cases in recent times in which it has been held that the entering of a company into a tax avoidance scheme was itself a breach of duty. An example of such a case was highlighted in an earlier post Dividend Danger: Sweeping Up The Balance Sheet.
Competing Parties Key Positions
The parties’ positions were summarised as follows:
The Respondents deny any breaches. The keystone of their defence is that before entering the Scheme and at all times during it they relied, reasonably and responsibly, on the advice of BDO. Mr Lewis cites by analogy the dictum of Zacaroli J in Burnden Holdings (UK) Ltd v Fielding  EWHC 1566 (Ch),  Bus LR 2878 at :
“The question whether there are sufficient distributable profits may turn on fine questions of accounting judgment. Directors are not required to be accountants and the comments of Lord Davey and Lord Halsbury LC in Dovey’s Case  AC 477 as to directors being entitled to rely on the judgment of others whom they appoint to carry out specialist financial roles within the company are as pertinent today as when they were made in 1901“.
It appears that the Respondent Directors were reliant upon advice from BDO that had designed the scheme and was taking advice on it from tax Counsel.
Mr Hunt’s Reply is in high-keyed terms: any reliance on BDO’s advice “was not reasonable and was, in fact, reckless and irrational given the financial and reputational consequences for the Company in circumstances where HMRC had made it clear that it did not consider that the Scheme was legitimate and had commenced proceedings to challenge it“. More particularly, and as drawn out by Ms Hilliard in cross-examination:
31.1 It was not a firm of lawyers.
31.2 It was not asked to advise the directors on their duties, or as to any company or corporate matter.
31.3 It never advised in writing.
31.4 Insofar as counsel’s advice was taken, BDO took it and not the Company.
31.5 It never advised that the Scheme was without risk.
31.6 It “would or should have been obvious to the Respondents that BDO was not independent and had an obvious conflict of interest in advising the Company. BDO was the promoter of the Scheme and had a vested interest in the Company continuing to operate the Scheme”.
Matters Of Solvency
It appears that from 2003 onwards the Company would be insolvent if there was an HMRC debt:
So, leaving aside the potential liability to HMRC, the Company was wavering in and out of a solvent position on its accounts. The Respondents agree that they knew that if there was liability to HMRC, then it would be insolvent. The question then becomes whether they ought to have realised that the Company was probably likely to be or become insolvent.
The Purpose Of The Scheme And Role Of BDO
The purpose of the scheme was summarised as follows:
The Amended Particulars put the matter thus:
“In reality the Scheme was nothing more than an illegitimate attempt to avoid/ reduce payment of PAYE and NICs by seeking to disguise as dividends what was in reality remuneration, the payment of which included amounts representing PAYE and NICs that should/ would otherwise have been paid by the Company to HMRC. No commercial benefit accrued to the Company by setting up the Scheme or by subscribing for shares in Moorston. The sole purpose of the Scheme was to extract funds from the Company and channel them to the Respondents and the other participants in an illegitimate attempt to avoid/ reduce payment of PAYE and NICs“.
The Defence denies.
The Scheme “was undertaken as an incentivisation arrangement in the interests of the Company and its member. The more that could be distributed, the more incentivised the Respondents and the senior employees would be to stay with and promote the interests of the Company. If the Company could legitimately avoid incurring any PAYE and NIC, as the Company was advised by BDO and leading tax counsel that it could, the money available to be distributed would be that much greater and would provide more incentive for the Respondents and other senior executives.” It was implemented with “the full consent of its shareholders”.
“If there was any real risk that the Company might be liable for PAYE/ NIC the Company would reasonably have expected to have been advised by… BDO to reserve money or take indemnities from the recipients. No such advice was provided because BDO advisers considered that the Company had no such liability. The Respondents were entitled to rely on the professional advice that was being given by BDO”.
I consider that the Scheme was put in place, and subsequently operated, for genuine commercial reasons.
Reasons The Court Rejected The Key Liquidator Tax Avoidance Claim
The reasons the Court gave for rejecting the key breach of duty claim were as follows:
It is not controversial that the effect of the Scheme’s operation, known at the least to Mr Singh and Mr Bibring, was that all the Company’s profits were paid out, leaving nothing at any stage for HMRC, and such that if PAYE and NIC were payable the Company would have no funds of its own retained to do so.
It does not follow from that that, as Mr Hunt avers, the Scheme was always likely to cause loss to and be challenged by HMRC (or, more accurately, that the Respondents perceived or should have perceived that as the situation); nor that, as was put in cross-examination, the “purpose in making those payments and not holding anything back to meet a… possible liability to HMRC was to benefit yourself at the potential expense of HMRC?”. Those are views formed with hindsight.
As described, from the outset and throughout BDO was intimately connected with the Scheme: it fashioned it, and then oversaw it. As Mr Singh recalled “…we would have gone to BDO and discussed anything that had come from the Revenue, and we took their advice“; “Mr Magrin was always available and when anything, when any major turn in this scheme came about, there would have always been a discussion with Mr Magrin, always”; “if anything had been sent to me or the board of any consequence, of any materiality, we would have picked up the phone to Mr Magrin and we would have asked him, ‘What do you think, Edward? Is this correct? Should we be doing something or not be doing something?’ And he would give his advice”.
BDO was engaged on an ongoing basis to give advice, and was active under that engagement. It was a firm of the highest reputation, whose dealings with the Company were led by the impressive Mr Magrin. Of course, it was the Respondents who were making decisions on the part of the Company and not BDO; but in the making of those decisions there was nothing on this evidence which ought to have led them to be second-guessing the advice of BDO, experts in this field. Indeed, neither their own personal accountants nor the Company’s auditors were telling them anything different.
In accordance with its engagement, and demonstrative of the Respondents’ reliance, it was to BDO that they turned each time there was an issue: whether that was when HMRC initiated enquiries in 2004, or in January 2005 with the implementation of new legislation; or October and November that year with the HMRC offer; or in April 2006 with HMRC correspondence leading in 2008 to the rendering of the assessments and initiation of the claim; or in August 2006 following queries from BSG Valentine. Through those events BDO’s advice was the same, and definitive: the Scheme was robust. Moreover, HMRC was acting in the way which BDO was predicting.
Although differing in degree, BDO’s advice did not change in 2008, nor even in 2009 after the FTT had handed down its decision: it remained confident the Scheme was robust; no further action was needed by the Company. While consideration was to be given to the ongoing NIC liabilities and interest, the most needed in the Company’s accounts was a note (and again the auditors were not advising differently). Counsel was to be approached, and in September 2009 his view reported as being that the taxpayer in PA Holdings still had a “strong case” in respect of the NICs element which it had lost. Even near the end, it was to BDO to whom the Respondents turned for advice on liquidation.
The Respondents considered BDO’s particular and cumulative and consistent advice and took it at face value. They were entitled to do so. In proper discharge of their duties they had the wisdom to take this top-level advice throughout, and to use BDO to oversee the Scheme to the extent of drafting its ongoing necessary documentation. That the Court of Appeal later found that the equivalent to the Scheme protected neither against NICs nor against PAYE does not affect that reasonable reliance. Ms Hilliard confirmed that it was not Mr Hunt’s case that BDO sold a scheme which it knew was inoperable.
In the context of that advice, there was nothing wrong with the Respondents adopting a “sit and wait” policy, or trying to ensure that the Company’s issues were at the bottom of the HMRC pile. Neither was there a need to make provision for accruing liabilities of principal, interest or penalties; nor to cease the Scheme. Those were matter for commercial judgments, which were being exercised, informed by the advice which the Respondents had consistently sought and obtained. While the word “robust” was a BDO favourite, that does not undermine its being relied on: the review of relevant documents at trial has a more repetitious effect than would have been apparent at the time. Further, if the word were inapt in its conveying of a sizeable degree of strength and resilience to attack, there was a dictionary of alternatives carrying their different meanings.
For the same reasons, the 1 October 2008 extension of the duty to the consideration of long-term consequences makes no difference: that is what the Respondents were doing in taking the advice. The advice was specific to HMRC, and recognised it as an involuntary creditor. As to the complaint that maintaining a reputation for high standard of business conduct involved “ensuring that the Company performed its public duty to pay its fair and proper share of PAYE and NICs”, one answer is the same: commendably, it took advice as to that duty. Another answer is that this is an illegitimate equating. Another is that the court has no direct evidence as to the business morals which this would engage as between 2002 and 2010; and insofar as reliance is put on HMRC’s attitude expressed through its correspondence and actions, it may be noted that the Company and BDO apparently maintained a good relationship with the officers involved, and that the HMRC timescales for the litigation against the Company or its appeals to the FTT do not bespeak urgency or outrage.
I add that even were I wrong in my conclusion of the applicability of the Sequana test, it would make no difference because in operating the Scheme there was repeated assessment of HMRC’s status.
Neither can any breaches of disclosure obligations by the Company’s directors make a difference. While most of the Respondents were not aware of what precisely their fellows were receiving, they were all aware at all times of the existence of the Scheme and of their own and others’ remuneration through it and were content to continue with the Scheme over its many years in that state of knowledge.
The breach of duty claim fails.
Oliver Elliot Comments: Liquidator Tax Avoidance Claim
An issue, in this case, was the sheer scale of the potential HMRC liability and therefore the effect of the scheme’s continuation after HMRC has not only opened an enquiry but furthermore, after 2005 there were claims from HMRC yet the Respondent Directors continued with the tax scheme.
It is axiomatic that issues can arise that lead to uncertainty in a wide range of tax matters or indeed in respect of other points of contention when the outcome is unknown. However, does that mean a Director, instead of ringfencing funds to deal with such risks, can assume the rights to the same?
Notably, HMRC’s success at overturning tax avoidance schemes tends to show a real as opposed to remote risk.
Two notable highlights to pick out from this case:
✨ Highlight 1
BDO’s “conflict of interest” is illusory. It was being paid for advice it was giving … no evidence that the fees the Company was paying were of such order as to influence the advice.
🔔 Comment 1:
Important point but of course, a potential problem in generic terms could be whether a tax Promoter can be independent when giving advice on its own product and whether the quantum of the fee of such a Promoter can in any event cure a potential conflict.
✨ Highlight 2
Neither was there a need to make provision for accruing liabilities of principal, interest or penalties; nor to cease the Scheme. Those were matter for commercial judgments, which were being exercised, informed by the advice which the Respondents had consistently sought and obtained.
🔔 Comment 2:
Important point but of course, a potential problem in generic terms could be whether a company Director can freely deploy company money when there is inherent uncertainty about the status of a debt or claim which could realistically (as opposed to being a remote proposition) cause insolvency.
- 1 Liquidator Tax Avoidance Claim Overview
- 2 Competing Parties Key Positions
- 3 Matters Of Solvency
- 4 The Purpose Of The Scheme And Role Of BDO
- 5 Reasons The Court Rejected The Key Liquidator Tax Avoidance Claim
- 6 Oliver Elliot Comments: Liquidator Tax Avoidance Claim
- 7 What Next?
- 8 Recent Posts / View All Posts
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