In the recent decision of Re Marylebone Warwick Balfour Management Ltd [2022] EWHC 784 (Ch), the Court considered the solvency of Marylebone Warwick Balfour Management Ltd (the Company) and whether the directors had a duty to consider the interests of creditors following assessments from HMRC in respect of unpaid PAYE and NICs having entered into a tax avoidance scheme.
The factual background is set out in detail in our article here. The Company entered into a tax avoidance scheme (the Scheme) in 2002 whereby the Respondents received dividends in addition to salary and as a result avoided paying significant amounts in national insurance contributions and PAYE to HMRC. By 2004, HMRC had commenced inquiries into the Scheme and had set out that they did not consider the Scheme to be legitimate tax avoidance, and informed the Company they were likely to take action to recover the PAYE and NICs.
HMRC issued protective proceedings against the Company but the matter was “adjourned generally pending the final determination of the [Company’s] liability”. The claim remained unresolved when the Company entered liquidation in 2013.
The liquidator issued proceedings against the directors of the Company asserting that they had breached their fiduciary duties to the Company and that the payments made under the Scheme were transactions defrauding creditors for the purpose of s.423 Insolvency Act 1986.
Between 2002 and 2010, c.£28 million had been paid to the directors under the Scheme which would otherwise have been paid to HMRC in respect of PAYE and NICs.
The Company had entered into the Scheme on advice from their professional accountants, and the directors had taken further advice at each point HMRC made inquiries into the Scheme, beginning in 2004. The Company’s accountants subsequently took advice from specialist tax Counsel, including at a conference which representatives from the Company attended. Following the Court of Appeal’s decision in PA Holdings Ltd [2011] EWCA Civ 1414, the accountants took further advice from different Counsel who informed the Company that he “believed the taxpayer still had a strong argument to run in that the dividends derived from the share itself rather than employment and therefore there should not be a charge to NIC”.
The accountants’ advice was repeatedly that they remained confident that the Scheme was robust and that no further action was required by the Company. They also explained that HMRC was acting in the way which they had predicted. When HMRC issued assessments against the Company, the accountants appealed these on the basis they were ‘wrong in law’.
The Court reviewed the Company’s accounts from 2002 to 2011 and noted that the Company was wavering in and out of a solvent position on its accounts, excluding the potential liability to HMRC. The Company’s 2008 accounts contained a note:
“HMRC has raised enquiries into certain arrangements which the company has implemented. The Directors have, however, been advised that no further taxation should arise as a result of the enquiries. The possible liability of [the Company] is estimated at £3.7m and was not provided for in the accounts as it is considered unlikely to arise.”
The Company’s auditors considered that the ultimate outcome of HMRC’s claims could not be determined at that time and therefore no provision for any potential liability had been included in the accounts.
The directors agreed that if they knew there was a liability due to HMRC the Company would have been insolvent.
The Court reached its decision before the Supreme Court handed down its judgment in BTI 2014 LLC v Sequana SA [2022] UKSC 25 at the beginning of October 2022.
Based on the Court of Appeal’s decision in Sequana, the ICC Judge noted that the duty to consider the interests of creditors is triggered when the directors know or should know that the company is likely to be insolvent, where ‘“likely” means probable. The question was whether they ought to have realised that the Company was probably likely to be or become insolvent.
The Companies Act 2006, which came into force on 1 October 2008, introduced the duty under s.172 to consider the interests of creditors which included a duty to consider long term consequences. The ICC Judge held that by consistently taking professional advice, the directors had considered the interests of creditors and had not therefore acted in breach of their statutory duties.
The accountants were continually reviewing the validity of the Scheme and assessing any liability to HMRC and the directors were entitled to rely on their professional advice that the Scheme was robust.
Both the accountants’ and auditor’s advice to the Company was that no further disclosures needed to be made or action required in respect of the potential liabilities to HMRC over and above the note on the accounts. The Court therefore held that where there was ongoing oversight by both the accountants and the auditor, the insolvency test was not met over the relevant period.
Leave to appeal the decision has been granted and an appeal hearing date is awaited.
This case emphasises the importance of taking professional advice, not just at the outset but throughout. By relying on the advice of their accountants, auditors and specialist Counsel provided over the course of several years, the directors had considered the interests of creditors and were advised no further steps were required in relation to HMRC’s claims.
The Court held that in the context of the advice the directors had received, there was nothing wrong with their approach to “sit and wait”. They did not need to make provision in the Company’s accounts for the potential liabilities to HMRC in respect of the PAYE, NICs, interest or penalties, nor to cease the Scheme.
For more information on this article, please contact Olivia Reader or another member of our Restructuring & Insolvency team.
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