Estera [2019] EWHC 2039 (Ch)

WTLR Issue: Web Only

In the matter of: EDWARDIAN GROUP LIMITED

ESTERA TRUST (JERSEY) LIMITED

HERINDER SINGH

V

JASMINDER SINGH

VERITE TRUST COMPANY LIMITED

JEMMA TRUST COMPANY LIMITED

EDWARDIAN GROUP LIMITED

JASMINDER SINGH AND HERINDER SINGH

Analysis

The Petitioners brought an unfair prejudice petition against the First Respondent in respect of their management of the Fourth Respondent (the Company). Following a liability trial, the First Respondents and the Company were ordered to purchase the Petitioners’ shares in the Company at a price to be determined. A quantum trial followed in which the purchase price was determined and an initial sum to be paid on account of the full price within 28 days, with the balance to be paid within 6 months. The wording of the order was left to the parties.

A purchase from the First Petitioner (a trustee) by the Company would be treated as an income distribution under ss 368 and 383 Income Tax (Trading and Other Income) Act 2005 taxable at 38.1% rather than as a capital transaction taxable at 20% when distributed to UK-resident beneficiaries. If the First Respondent purchased the shares, the receipt would have been treated as a capital transaction, but he was not in a financial position to do so.

There were a number of ways of mitigating this tax including seeking relief from HMRC under the Double Tax Agreement between the UK and Jersey (DTA), and by ‘on-shoring’ the trust by appointing UK-resident trustees (enabling entitle the Company to apply for capital treatment under ss 1033-1043 Corporation Tax Act 2010.

The Petitioners, however, received advice that if DTA relief were refused, immediate tax liability could be avoided if the First Petitioner incorporated a Jersey NewCo and transferred the shares in the Company to it, so that the NewCo could sell the shares and receive the price. To avoid the risk of the First Respondent being taxed as settlor of the trusts, the sale would be delayed until after 5 April 2020. They therefore applied for an order that they be permitted to transfer their shares to a Jersey NewCo between 6 April 2020 and 3 May 2020, that the NewCo be entitled to exercise a put-option requiring the Company to purchase the shares, and that the Company be entitled to exercise a call-option requiring the NewCo to sell the shares.

The application was made both under the court’s broader discretion as to remedy, and as a form of relief for mistake.

The First Respondent and the Company resisted this order. They said there was a risk that the scheme would be regarded by HMRC as aggressive tax avoidance, and therefore undermining their relationship with HMRC. They also did not wish to have to wait until mid-2020 to acquire the shares. They also contested whether the scheme was effective and argued that the court lacked jurisdiction to make the proposed order because it was inconsistent with the order already made in the initial liability trial.

The Company sought to rely on an opinion leading tax counsel to explain their concerns. The Petitioners relied on an opinion from other leading tax counsel. Neither had permission to rely on expert evidence.

Held (dismissing the application):

Expert evidence on UK tax law

The Court does not receive expert evidence about domestic law. Contentions about this should be made by submissions (at [13]). It was also wrong to adduce it without permission and without complying with the proper form.

Efficacy of the scheme

The court could not and should not determine whether the scheme was effective. Any decision about the effect of such a scheme needs to be based on its true facts and in any event no decision made in on the application would bind HMRC (at [18], reference having been made to WT Ramsay Ltd v IRC [1982] AC 300, Furniss v Dawson [1984] AC 474, UBS AG v HMRC [2016] 1 WLR 1005, and MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311).

Jurisdiction

The court has jurisdiction to amend the terms of its decision before the order is drawn up and perfected, subject to the over-riding objective of dealing with cases fairly (at [20] applying Re L-B (Children) (Care Proceedings: Power to Revise Judgment) [2013] 1 WLR 634).

The proposed order was not inconsistent with the order from the liability trial, which required the shares to be sold in a manner to be determined at the quantum trial (at [22]).

Aggressive tax avoidance

(At [24]) the proposed scheme could reasonably be regarded by HMRC and others as aggressive tax avoidance. It was an artificial scheme devised at the last minute for the sole purpose of avoiding income tax. These are indicia which will cause HMRC to scrutinise it. The court should not without very good reason order reluctant parties to enter into such a scheme (at [26]).

Such an order could also assist the parties in persuading HMRC not to challenge the scheme, which is itself a reason not to make it (at [26]).

If HMRC did regard the scheme as aggressive tax avoidance, the Company and the First Respondent could be regarded as persons engaged in aggressive tax avoidance “creative” tax avoidance (at [27]). It was also relevant that the scheme might cause the First Respondent’s and the Company’s affairs to be scrutinised by HMRC (at [28]), though this is only one factor and must not be given disproportionate or overriding weight in exercising the discretion.

While harm to the Company and First Respondent might be ameliorated by their being able to say that they entered the scheme due to a court order, this itself raised question as to whether the court should order parties to enter into an aggressive scheme with a view to it thereby being treated more leniently by HMRC (at [29]). The answer is that it should not do so.

Had the parties agreed to implement the scheme, the court would have nothing to say about it (at [31] referring to Shah v Shah [2012] WTLR 165). But Shah did not contemplate parties being ordered to enter into a structure to avoid tax.

There are occasions where the Court will order a reluctant party to enter into a transaction to save tax for another party eg cases of a recalcitrant trustee, and where the public interest requires such an order (at [33] referring to Sherdley v Sherdley [1988] 1 AC 213). However this was a very different case – in Sherdley the court was only ordering what the Inland Revenue accepted to be a valid scheme which was commonly used by the family courts and it was doing so for the welfare of the children of the marriage. Sherdley is not authority for a broader proposition that in commercial cases the court will make an order the sole purpose of which is to avoid tax. There was no public interest in the order –the public interest was in the appropriate amount of tax being paid (at [35]).

The First Respondent could not afford to buy the shares. The fact that the Company would be the purchaser therefore caused a substantial benefit to the Petitioners as well as potential adverse tax consequences (at [37]). It was also relevant that any liability was not an unfair one (at [47]).

Mistake

Evidence of a mistake was limited, the court being asked to infer one (at [38]). Pitt v Holt [2013] 2 AC 108 distinguished because in that case it was obvious what steps would have been taken if the mistake had not been made (at [39]). Here it was not clear how the Petitioners could have improved their position at an earlier stage other than by seeking an order for payment by the First Respondent alone. Even after the liability trial, the First Petitioner could not have assigned the shares to a NewCo because of pre-emption provisions in its articles. They would therefore have had to have applied to court and the same issue would have arisen (at [40]). While the court can grant relief against a mistake, this is only to remove the effect of the mistake, not put the applicant into a better position than he would have been in but for the mistake (at [40]).

Other prejudice to the Respondents

Even if the Court should in principle be willing to make the order, it would not be appropriate in this case. The proposed order contained no mechanism to enforce any option against the (not-yet-extant) NewCo other than a liberty to apply and the court’s ability to enforce its orders against the parties. The consequence is that the court would have a continuing residual role. While this may in some cases be necessary, it is not desirable (at [43]). The Respondents were entitled to say there should be an end to the process (at [44]). The order would be an unjustified interference with the right of the Respondents to pay the price and get the Petitioners ‘out of their hair’ as soon as possible (at [45]). The governance of the Company was also likely to be adversely affected by the Petitioners continuing to hold shares (at [46]).

Mr Justice Fancourt: 1. On 5 July 2018, after the trial of liability issues (“trial 1”) in this heavy and vigorously contested minority shareholder action, I made an order in the following terms: “… the First and Fourth Respondents, on a joint and several basis, do purchase the shares in the Company registered in the …
This content is only available to members.

Counsel Details

Mr Steven Gee Q.C., Mr Giles Goodfellow Q.C., Mr Oliver Conolly and Mr Alex Barden (instructed by Arnold & Porter Kaye Scholer LLP) for the Petitioners
Mr Ian Croxford Q.C., Mr Daniel Lightman Q.C. and Ms Emma Hargreaves (instructed by Orrick, Herrington & Sutcliffe LLP) for the First Respondent
Mr Andrew Green Q.C, Mr Kevin Prosser Q.C and Mr Fraser Campbell (instructed by Baker & McKenzie LLP) for the Fourth Respondent

Legislation Referenced

  • Corporation Tax Act 2010, ss 1033-1043
  • Income Tax (Trading and Other Income) Act 2005, ss368, 383, and 385