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 Court addressed issues of limitation for breach of duty claims and considered the applicability of s.32(1)(b) and (2) Limitation Act 1980 (the LA 1980) where a right of action has been deliberately concealed from an applicant by a respondent.
The factual background is set out in our article here. In short, the liquidator of the Company brought claims for breach of duty and s.423 Insolvency Act 1986 (the IA 1986) against the Company’s former directors in respect of a tax avoidance scheme to avoid paying PAYE and NICs between 2002 and 2010. The Company and its directors took advice from professional financial advisors, including its accountants and auditors, at all material times.
The directors’ breaches of duty and the professional advice defence are considered in detail in our article here and the issue of when the duty to act in the best of interests of creditors arises is considered in our article here.
The transactions challenged by the liquidator dated between 2002 and 2010. The Company entered liquidation on 14 May 2013 with Mr Lane Bednash appointed as liquidator. He filed his final account in March 2016 and the Company was dissolved in June 2016. His final report confirmed that HMRC had been interested in funding a claim against the directors for their involvement in the tax avoidance schemes but that “following extensive investigation and liaising with duly instructed solicitors, barristers and tax experts, [he] determined that no such claim could be brought”. This was due to a lack of funders interested in funding the claims against the directors.
In June 2017 the Company was restored to voluntary liquidation upon the application of Mr Bednash, supported by HMRC (who was the sole material creditor in the liquidation), on the basis that Mr Stephen Hunt would be appointed as liquidator. Following Mr Hunt’s appointment as liquidator, an application was issued on 10 May 2019 against seven directors. Tomlin Orders were entered into with four of the directors and the hearing therefore proceeded against the three remaining directors only.
The directors argued that any relief in respect of the claims were barred by the LA 1980. The parties agreed that there was no limitation issue in relation to the s.423 IA 1986 claim as per Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542 or the application of s.21(1)(b) LA 1980 to the breach of duty claims. The parties recognised that there would be no limitation period applicable to a recipient of “trust” proceeds received and converted to his/her use; in this case the breaches of duty claims against each individual director for the receipts they each actually received under the tax avoidance scheme would not be time barred.
In terms of the claims against the directors on a joint and several liability basis for all payments made through the tax avoidance scheme, the liquidator relied on s.32 LA 1980 which provides that where any fact relevant to the claim has been deliberately concealed from the claimant by the defendant, the limitation period does not begin to run until the claimant discovers the concealment or with reasonable due diligence could have discovered it.
The Court considered the meaning of ‘deliberate’ and referred to the recent decision of the Court of Appeal in Potter v Canada Square Operations Ltd [2021] EWCA Civ 339, in which it was decided that the concept of concealing something required the existence of some obligation to disclose it. The Court of Appeal had also found for an individual to conceal something would require “subjective knowledge or actual awareness” but could also include wilful blindness or recklessness.
In this case, the liquidator argued that directors have a duty to disclose their own wrongdoing; the Court found that this obligation may arise on specific facts within the duty to act to act in the best interests of the company but did not appear to apply in this instance. The directors had not failed to disclose the existence of the tax avoidance scheme, or the overall sums being processed through the scheme. The Court found that the only potential concealment was the disclosure of the exact sums for each individual beneficiary under the scheme, but commented that there was no evidence that the directors would not have been forthcoming with that information had it been requested. The Court therefore found there was no failure to disclose or concealment for the purposes of the LA 1980 relevant to the claims for which joint and several liability was sought.
Notwithstanding the Court’s comments on limitation, the application was dismissed as the directors were not found to have breached their duties to the Company.
Leave to appeal the decision has been granted and an appeal hearing date is awaited.
Although the issue of limitation ultimately did not impact on the outcome of the liquidator’s application, it is a useful reminder of when limitation periods may be extended (or in some cases, not apply) to breach of duty claims. The principle that no limitation period will apply to recipients of trust proceeds will only apply to directors in respect of sums that they have personally received; it will not apply to all directors on a joint and several liability basis.
In order to avoid any issues of limitation arising, it is always best practice to issue claims promptly in order to avoid any criticism from the Courts.
For more information on this article, please contact Cathryn Butler or another member of our Restructuring & Insolvency team.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
