In 2019 the liquidator of Marylebone Warwick Balfour Management Limited (“the Company”) commenced proceedings against seven former directors for their involvement in a tax avoidance scheme on behalf of the Company.
From 2002 to 2010, Marylebone Warwick Balfour Management Limited (“the Company”) utilised a tax scheme which was consistently advised by the promoters of this scheme, BDO, to be “robust”.
- The scheme resulted in the Company paying over £54m to its senior management team without also paying PAYE and NIC, had those sums been treated as remuneration.
- In September 2005, following enquiries, HMRC made a market-wide offer to participants in such schemes. This was relayed to the Company in November 2005 notifying the Company that HMRC were minded to progress a test case for a formal ruling, but had decided to make an offer, whilst also enclosing a calculation of the tax and interest due up to that point (£3.65m).
- The Company rejected the offer and disputed that any tax was due to HMRC. HMRC duly assessed the Company for PAYE and NIC, including interest and penalties in the sum of £36m. The Company could not pay and went into liquidation.
- The liquidator claimed that the tax scheme amounted to a breach of the directors’ fiduciary duties and/or that payments made under it were transactions defrauding creditors pursuant to section 423 Insolvency Act 1986.
In 2019 the liquidator of the Company commenced proceedings against seven former directors for their involvement in the tax avoidance scheme on behalf of the Company.
Stephen Hunt (Liquidator of Marylebone Warwick Balfour Management Ltd) v Richard Balfour-Lynn and others  EWHC 784 (Ch)
In the first instance the High Court, prior to the landmark decision in Sequana, found that the directors did not breach their fiduciary duties and that payments made pursuant to the tax scheme were not transactions defrauding creditors.
In reaching this decision the Court highlighted that:
- “Leaving aside the potential liability to HMRC, the Company was wavering in and out of a solvent position on its accounts”.
- The directors recognised that had the tax scheme failed, the Company would have been insolvent. “The question then becomes whether [the directors] ought to have realised that the Company was probably likely to be or become insolvent”.
- The Court found that the answer to this question was that the directors did not as:
- The tax scheme had been put in place for genuine commercial reasons.
- There was no evidence that BDO, who set up and advised on the scheme had done so in bad faith, or that the directors were acting in bad faith in relying on the advice.
- The directors genuinely believed that entering into the scheme was in the Company’s best interests (as would an objective director) relying on professional advice.
- The advisors were engaged on an ongoing basis to provide advice on the tax scheme, with their advice being that it was “robust”.
- The directors were entitled to take the advice at face value.
- The purpose of the scheme must be differentiated from the consequence of the scheme; the purpose of the scheme was not to put moneys out of reach of HMRC.
The liquidator appealed the decision. Prior to the appeal being heard, the liquidator settled with various directors, thereby pursuing the appeal against only one director, Mr Singh, who was subsequently unable to attend trial.
Stephen Hunt v Jagtar Singh  EWHC 1784 (Ch)
The principal question of the appeal was “when, following the decision in Sequana, does a director’s duty to take into account the interests of creditors arise, in circumstances where the company is at the relevant time insolvent, but its insolvency is due to a tax liability which the directors (wrongly, as it later turned out) believed at the relevant time had been avoided by a valid tax avoidance scheme entered into by the company”, referred to in this case as the Creditor Duty.
Sequana provided clarity with regards to when the creditor duty arises. However, as a developing area of the law, the court was faced with applying Sequana on these facts (Sequana made it clear that each case must be considered on its own facts).
The appeal had to consider the previous decision in light of the Sequana judgment. In doing so, they made an important distinction between the facts;
- “in Sequana, there was no doubt that at the time the relevant dividends were paid the company was solvent”.
- By contrast, in this case there was no doubt that the Company was substantially insolvent throughout the relevant period, with their financial position getting steadily and substantially worse as the amounts due to HMRC increased each year.
The court also made the point that it made no difference that the Company disputed that anything was due to HMRC; it was either insolvent or it was not as “a disputed liability is not a contingent liability”.
Sequana left unresolved the question as to whether, where the company is at the relevant time insolvent, that is sufficient to trigger the creditor duty irrespective of the director’s state of knowledge surrounding its insolvency. The court proceeded on the assumption that it is necessary to establish some form of knowledge of insolvency (whether actual or constructive) for the creditor duty to arise.
- The court considered the directors’ knowledge and, by HMRC raising enquiries regarding the tax scheme and making clear their intention to litigate, the directors would have been aware that there was a real prospect that the tax may have been due.
- The directors would also have recognised that the solvency of the Company was dependant on the Company successfully challenging that claim due to the size of the liability. Therefore, the directors ought to have had regard to the interests of creditors.
The court held that the Creditor Duty had been engaged at a time when it ought to have been clear to the directors that HMRC did not accept the tax scheme (at the latest September 2005), notwithstanding that they had obtained professional advice. The court did not go further to discuss whether the Creditor Duty had been breached, instead directing that this question would need to go back to the Insolvency and Companies Court.
This is undoubtedly one of many cases the courts will be faced with applying and / or distinguishing from Sequana, leading to uncertainty for litigants.
This judgment clarifies that courts are prepared to look at contingent liabilities differently to those which are disputed, but we would still expect competent directors to safeguard against all such liabilities falling due by ensuring that there are sufficient cash and assets at a company’s disposal to make a full repayment (including interest).
Directors should be regularly reminded of their duties, such as those under the Companies Act 2006 which include the duty to
- think independently;
- exercise reasonable care, skill and diligence and
- promote the success of the company.
Where these duties are at the forefront of a directors’ mind when making decisions, they are increasingly less likely to breach their other (less well known) duties such as those found in the Insolvency Act 1986.
We regularly see directors seeking to argue that they should not be disqualified for misconduct when enquiries are made by the Insolvency Service as they relied on professional advice. Prior to the appeal in this case, it may have been possible to argue that such reliance on poor advice would not constitute misconduct but the appeal confirms that this is increasingly less likely to succeed as a defence.
For good practice directors should hold board meetings to address a course of action (or inaction) likely to pose a threat to a company’s solvency. This should be followed up with detailed board minutes setting out the discussions had, reasoning for their decision, and whether they foresee insolvency. Whilst many directors will consider this a headache, it is a far smaller headache than being on the receiving end of a claim.
FWJ were very hands-on, getting involved from an early stage in seeking to avert an expensive set of litigation proceedings. I am more than happy to recommend their services, particularly when it comes to considering complicated issues or complex proceedings.A client who was facing a liquidator claim for the improper withdrawal of sums from a company. We had the claim dismissed