Directors did not breach fiduciary duty in relation to insolvent company's participation in failed tax avoidance scheme

In Stephen John Hunt (Liquidator of Marylebone Warwick Balfour Management Ltd) v Richard Balfour-Lynn and others [2022] EWHC 784 (Ch), the High Court decided that the directors of a company which went into liquidation after participating in an ineffective tax avoidance scheme did not breach their fiduciary duties and payments made pursuant to the scheme were not transactions defrauding creditors.

Background

Marylebone Warwick Balfour Management Ltd (the Company) participated in a tax avoidance scheme (the Scheme) under which around £28 million of PAYE and NICs, which would have otherwise been due to HMRC in respect of remuneration paid by the Company for the services provided to it by Richard Balfour-Lynn and the other respondents in the claim (the Respondents), was avoided and paid to the Respondents who, at the material times, were directors of the Company or, according to HMRC, de facto directors of the Company.

The Company's liquidator, Stephen Hunt, issued an application in the High Court (the Application) contending that participation in the Scheme and/or its continuation was in breach of the Respondents’ fiduciary duties (the breach of duty claim) and/or that the relevant payments were transactions defrauding creditors within the meaning of section 423, Insolvency Act 1986 (the section 423 claim). Mr Hunt argued that the Respondents were jointly and severally liable for the £39 million debt admitted on HMRC’s proof in the liquidation. The trial proceeded only against three of the Respondents. The remaining Respondents had agreed a Tomlin Order with Mr Hunt and the claims against them were stayed.

High Court judgment

The Application was dismissed.

Mr Hunt argued that causing the Company to participate in the Scheme was a breach of the Respondents’ duty to act in the Company’s best interests, in particular, by committing it “to a scheme which was designed to be an aggressive form of tax avoidance and likely to be challenged by HMRC and likely to cause the Company loss”. Mr Hunt argued that the Respondents only considered and therefore preferred their own personal interests in receiving more funds through the Scheme than they would without it.

The Court decided that the breach of duty claim failed because the Scheme was put in place, and subsequently operated, for genuine commercial reasons. The Court also emphasised the Respondents' reliance on BDO, which was engaged to provide advice in relation to the Scheme, and noted that neither the Respondents' own personal accountants nor the Company's auditors contradicted the advice provided by BDO.

The section 423 claim also failed. The Court noted that, as JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176, makes clear, 'purpose', which is one of the pre-conditions to liability, is distinct from 'consequence'. It was a consequence of the Scheme that assets which would otherwise have been used for the payment of PAYE and NICs were put beyond the reach of HMRC. That was not its purpose. The Respondents’ evidence was that they had no interest in making, and would not have made, payments under the Scheme without the belief that it was likely to be legitimate. The purpose was to pay monies pursuant to a legitimate scheme, as to which BDO was consulted at all stages.

Comment

This judgment will provide some comfort to the directors of companies which have participated in tax avoidance arrangements and subsequently gone into liquidation. Where  directors sought and followed appropriate professional advice in relation to such arrangements, it will be difficult for liquidators to successfully argue that the directors concerned were in breach of their fiduciary duty by entering into such arrangements.

The judgment can be viewed here.