Analysis
Christopher Swain (C) built up a very successful business and held 72% of the shares in a group of companies in which each of his four daughters also held 5.3% of the shares. He was advised by a small firm of chartered accountants who prepared tax returns for him, the company and the family trusts and at times for each of his daughters and by a small firm of solicitors who prepared his will, dated 17 January 2006. C decided to sell his company to the management and to use Mills & Reeve, a large full-service law firm (the firm) to advise him and his daughters on the MBO. In June 2006 he had a number of meetings with Mr Hodgson (H), a partner in the corporate finance team at the firm. On 30 June 2006 a client file was opened and an engagement letter sent which stated inter alia that the following legal work would be required in connection with the transaction:
- ‘1.1.3 Sale and purchase agreement
- Advising on and negotiating the agreement (to be drafted by Newco’s advisors)
- Advising on and negotiating a tax indemnity
- Preparing a disclosure letter to qualify the warranties in the sale and purchase agreement and complete disclosure bundles
- …
- 1.2 Assumptions
- In identifying the legal work to be undertaken as set out above we have assumed that:
- …
- 1.2.6 we will liaise with you and/or Claire on behalf of all shareholders
- ….
- 1.3 In identifying the legal work required we have not included:
- 1.3.1 individual tax advice for shareholders;
- …
- 1.4 If, however, personal tax advice is required then this is something which we will be delighted to provide and we will give you a separate costs indication for this advice’
C and his daughter Claire signed the engagement letter. At the time the firm understood C was 61 years old and had a history of heart problems. He lived most of the time in Thailand with his third wife and commuted on a regular basis to the UK. In October 2006 the firm undertook to obtain tax clearances for the MBO and a new file was set up for this by Ms Pooley, an assistant solicitor in the tax, benefits and charities team. She and the senior partner on the team did considerable work in respect of the tax clearances while preparing and amending a tax retainer draft which was sent to C on 5 December 2006. It dealt with the clearance letter that had been received from HMRC and the availability of roll over relief which had been discussed previously; summarised tax work done to date; and continued:
‘Looking ahead, there is a requirement for ongoing tax input in relation to the structure of the various elements of the consideration to ensure that the various conditions are met for roll over relief to be available in respect of those elements of the consideration which are to be satisfied by the issue of loan notes or shares. In addition, Craig has spoken to you previously regarding the general tax advice to be provided to you and your daughters in addition in relation to the tax liabilities arising in respect of the transaction structure. I estimate that the cost of providing this ongoing tax support and advising you and your daughters to be £3,000-£3,500 plus VAT.
By way of summary, we would be advising yourself and your daughters (the “Swain Shareholders”) with regard to the transaction structure but we would not be able to advise on how this transaction fits into each of your own financial and tax planning positions.’
C replied agreeing to the tax retainer email. After various delays the MBO was due to complete on 29 January 2007. On 16 January 2007 C sent a copy of some email correspondence to H which contained copies of earlier emails sent by C to other parties and not specifically copied to H. One of these was dated 13 January and headed ‘Heart operation’. It referred to a date for a heart procedure to take place in Thailand. There was no discussion between H and C in relation to this, and H knew that C was travelling to China for a few days and returning to the UK. C did this, then attended a lengthy meeting on 31 January, at which the MBO was finally completed, and flew back to Thailand the following day. Two weeks later C unexpectedly died during his surgery. As a result the proceeds of the sale of his shares, held in his estate, were liable to inheritance tax (IHT). The amount charged was approximately £1.3m. If he had died still owning his shares, they would not have been subject to IHT because they would have been covered by business property relief (BPR) and there would have been a deemed disposal of the shares for capital gains tax (CGT) purposes on his death so that, on a later disposal of the shares (if, for example, the MBO had been entered into and completed by his executors), the only chargeable gain would have been any further increase in the value between the date of his death and the date of the disposal, whereas on the actual disposal there was a charge to CGT of £20,000 after taper relief for business property. C’s daughters and the executors brought an action against the firm claiming that the tax advice given was deficient and that, had the correct advice been given, C would have deferred completion of the MBO until after the heart procedure with the result that the tax consequences would have been avoided. They alleged that the firm was under a duty to give such advice having regard to the scope of its retainer and that its failure to give the advice caused them to sustain the losses claimed. They also advanced an alternative case which started from the proposition that, at the very least, the firm should have made it clear to C and his daughters in the letter of advice what that advice did not cover.
Held (case dismissed [209])
Under the scope of their retainer, the firm did not come under a duty to advise C and his daughters as to the tax consequences if he were to die shortly after completing the MBO, or to consider delaying completion of the MBO until after the heart procedure. A solicitor’s duty to his client was primarily contractual and its scope depended on the express and implied terms of his retainer. Any duty of care implied had to be related to what he was instructed to do. The test was not what a particularly meticulous and conscientious practitioner might do but what the reasonably competent practitioner would do having regard to the standards normally adopted in the profession. It depended on the circumstances of the case including the nature of the client and the degree of expertise which the practitioner held himself out as possessing so that the standard of competence of a firm with a specialist tax department would be a high one and where the retainer involved different areas of specialisation an aspect of the duty of care involved coordination between specialists and someone with a sufficiently general legal experience would be required to have overall responsibility for reviewing the work as a whole [150]. It was the solicitor’s responsibility to ensure that it was clear what he was being asked to advise about and to clarify this if necessary [151].
There might be circumstances in which a solicitor’s duty extended to advising on matters that lay beyond the express instructions he had been given by his client so that if, in the course of doing that for which he was retained, he became aware of a risk or a potential risk to the client, it was his duty to inform the client. In doing that he would neither be going beyond the scope of his instructions nor doing ‘extra’ work for which he was not to be paid but simply reporting back to the client on issues of concern that he learnt of as a result of, and in the course of, carrying out his express instructions [154]. On the other hand, a solicitor was not under a duty to advise his client in respect of matters in relation to which he reasonably believed the client to be receiving advice from another advisor and if he wished to place limits on the scope of his duty of care he had to ensure that the client had clearly understood and consented to this [155, 156].
The tax retainer email said that the firm would provide ‘general tax advice… to you and your daughters… in relation to the tax liabilities arising in respect of the transaction structure’, and that it would advise C and his daughters ‘over the specific tax issues which arise in respect of the disposal of your shares and in particular’ various things. It was reasonable for C and his daughters to understand from this that the firm was advising them as to the tax consequences of the MBO, including but not limited to how to structure it most advantageously from a tax perspective. On the other hand, the tax retainer email also said that the firm ‘would not be able to advise on how this transaction fits into each of your own financial and tax planning positions’. Clearly, C had read this and understood that it meant that there was a limitation on the extent of the advice that the firm was providing, since in an email dated 7 December 2006, which was copied to his daughters, he said that the firm ‘have not dealt with personal specifics’. There was no reason to interpret the limitation as extending any further than the literal meaning of the words quoted. It extended to giving C and his daughters advice as to the tax consequences flowing from the MBO, but not to advising them on how the transaction fitted into their personal financial and tax planning positions [167].
With regard to any breach of duty by the firm the key question was whether the receipt by it on 16 January 2007 of the chain of emails including C’s email dated 13 January 2007 giving details of the heart procedure triggered any duty to give C and his daughters further advice and, if so, what advice? He had not asked for specific advice in the light of the heart procedure and given the manner in which the information about it was conveyed to the firm, and given that the information so conveyed did not suggest that the procedure was anything other than routine, receipt of the email could not trigger any duty on the part of firm to advise him and his daughters as to the tax consequences if he were to die during the procedure. Furthermore, even if the firm had come under a duty to so advise, it would not have come under a duty to advise them to defer the completion of the MBO until after the heart procedure. At most, the firm would have been under a duty to advise as to the available options. Deferring completion of the MBO was by no means the only option [183].
In respect of the alternative claim, the firm had received the information about heart procedure essentially by chance and the information received did not suggest that the procedure was other than a routine one. This did not give rise to any duty to advise C and his daughters as to the tax consequences, still less a duty to advise them to defer the MBO. The claimants had no coherent case on this point. The introduction of a reasonably competent private client tax team would have led to them
- (i) to advise that there could be potential tax consequences in the event of the client’s death after completion of the MBO, particularly bearing in mind that some of the consideration was deferred for up to ten years;
- (ii) to enquire what tax mitigation and/or estate planning the client had undertaken; and
- (iii) upon receiving the answer ‘essentially none’, offering to advise him as to his options.
Even if it was assumed that H was under a duty to forward the information about the heart procedure to the private client tax team it would not have affected the advice that they gave C. At most, it would have confirmed what they would already have appreciated simply from the terms of the deal, namely that C was at risk of dying prior to receipt of all the consideration due under the SPA. Furthermore, the options open to C would have included reinvesting the cash proceeds of the sale of his shares in shares traded on the Alternative Investment Market or unquoted shares in companies that qualified for Enterprise Investment Scheme (EIS) reliefs. Both of those types of shares qualified as business property for the purposes of BPR. Thus, if C had replaced his shares in the company with shares of those kinds, he could have rolled over that relief. Similarly, if the proceeds of sale had been reinvested in newly-issued EIS shares, he would also have been able to defer the chargeable gain he incurred on the sale for CGT purposes. In addition, there were options available for mitigating the IHT on the loan notes. Thus C could have avoided, or at least significantly reduced, the tax consequences without deferring the MBO. It was pure speculation as to what he would have chosen to do if presented with these options [200-204].
Obiter
The letter of advice ought to have included a much clearer statement as to the limits of the advice it contained, and in particular a statement that it did not include any advice as to the potential IHT consequences of the MBO nor comprehensive advice as to the potential CGT consequences. The firm were in breach of their duty in failing to include such a statement and if faced by such a warning it was more than likely C would have asked for further advice from them [197].
If causation became relevant on the basis of either claim of breach of duty there was ample evidence to support the conclusion that if C and his daughters had been advised to consider deferring completion of the MBO until after the heart procedure because of the risk of adverse tax consequences if he were to die during or as a result of the procedure, then they would have decided to delay the MBO [208].
Judgment MR JUSTICE ARNOLD: Introduction [1] This is a claim for professional negligence by the executors of the late Christopher Swain and by his four daughters Claire Swain Mason (Claire), Abby Swain (Abby), Gemma Swain (Gemma) and Christa Swain (Christa) against the defendant firm of solicitors (Mills & Reeve). The claim arises out of tax …Continue reading "Mason & ors v Mills & Reeve [2011] EWHC 410 (Ch)"