In the recent case of Re Marylebone Warwick Balfour Management Ltd [2022] EWHC 784 (Ch) the Court considered the conduct of the directors of Marylebone Warwick Balfour Management Ltd (the Company) as a result of their involvement in a tax avoidance scheme. The transactions challenged dated back to 2002 and claims were brought against all seven of the Company’s directors, although confidential terms were agreed in a Tomlin Order with four of the directors prior to the hearing. The decision highlights the importance for directors of obtaining professional advice at all relevant and key times; this was ultimately a crucial consideration in the Judge’s decision.
The directors of the Company avoided paying PAYE and NICs and instead diverted the funds to themselves by way of a tax avoidance scheme between 2002 and 2010. The Company and its directors took advice from its professional accountants on the use of the scheme throughout the period in question. The Company and its directors alleged that the use of the scheme was to “keep its experienced team together and to incentivise and motivate them appropriately”; as a result of the non-payment of PAYE and NICs the directors’ remuneration was greater.
Following the Company entering in to creditors’ voluntary liquidation in 2013, the liquidator made an application alleging that some of the directors had breached their fiduciary duties by entering into the tax avoidance scheme and / or that the payments made to the scheme were transactions defrauding creditors within the meaning of s.423 Insolvency Act 1986 (the IA 1986). The liquidator also alleged the directors had failed to disclose an interest in a proposed transaction, as required by s.177 Companies Act 2006 (the CA 2006).
The substantial complaint against the directors was that they failed in their duty to consider the Company’s interests by allowing the Company to enter into the tax avoidance scheme in which payments went to the directors without accounting to HMRC for the tax that the Company would otherwise have been liable to pay. It was argued that it was a breach of the directors’ duties. Further, the continuing of the scheme was a breach of the duty to act in good faith in what the directors believed to be in the best interests of the Company and (following the introduction of s.172 CA 2006) a breach of their duty to promote the success of the Company - as the scheme was for the benefit of the directors rather than the Company - and likely to be challenged by HMRC causing the Company significant loss.
There were times during the transactions in question when some of the directors were not formally appointed directors; the liquidator alleged that during these periods they were de facto and / or shadow directors. ICC Judge Prentis made the point that s.172 CA 2006 only applies to ‘directors’ of the company, however, s.250 CA 2006 provides that a director includes any person occupying that position by whatever name called. On that basis, shadow and de facto directors are also subject to s.172 claims.
The judge also noted that under s.172, where there is no evidence that the director actually considered matters, the test (which is usually subjective) becomes objective, "namely whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company".
The duty under s.172 CA 2006 is considered further in our article here.
The directors’ defence was simply that, prior to entering in to the tax avoidance scheme, they had sought and relied upon the advice of their professional accountancy advisors and auditors. Reference was made to the commentary in Dovey and The Metropolitan Bank (of England and Wales) Limited v Corey [1901] AC 477 in which it was commented that directors are entitled to rely on the judgment of others to carry out specialist financial roles.
In this case, at every key point, the directors had relied upon their financial advisors. The accountants had provided guidance when HMRC initially made enquiries following the introduction of the Finance Act 2005 which gave HMRC powers to investigate and recover sums diverted by way of tax avoidance schemes. They also assisted during settlement negotiations with HMRC, including advising the directors to hold off responding to HMRC’s queries to delay any potential court proceedings because they did not want to risk being used as the first test case against tax avoidance schemes following the implementation of the Finance Act 2005. The Company’s auditors also reviewed the position on an annual basis and agreed with the accountants’ approach. It was noted by ICC Judge Prentis that, in his view, at no time was there anything that may have prompted the directors to second guess the advice of their financial advisors.
The directors were also advised not to make provision for any potential HMRC accruing liabilities or penalties in relation to the tax avoidance scheme they had used.
ICC Judge Prentis noted that the directors were entitled to take their advisors’ advice at face value, “sitting and waiting” was a litigation tactic and the decision not to provide for any HMRC liabilities was a commercial judgment supported by advice. The breach of duty claim therefore failed.
Leave to appeal the decision has been granted and an appeal hearing date is awaited.
This case is a useful reminder that where directors take professional advice, in this case not only before utilising a tax avoidance scheme, but throughout their dealings with HMRC, it may be difficult for a liquidator to demonstrate that the directors did anything but carry out their role in accordance with their duties.
There are some simple steps that directors should take in order to ensure they have acted in accordance with their duties in these types of situations:
It is also a useful reminder that s.172 CA 2006 does not only apply to de jure directors but any person occupying that position whether named or otherwise.
For more information on this article, please contact Holly Ransley or another member of our Restructuring & Insolvency team.
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