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Published June 10th 2022
Home > News & Insights > Article

Directors Duties and Transactions at an undervalue: Re Marylebone Warwick Balfour Management LTD

Author
Benn Richards
Benn Richards

Introduction

A claim was brought against the directors of Marylebone Warwick Balfour Management Ltd (the Company) in relation to their involvement in a tax avoidance scheme. The claim was initially brought by the liquidator against all seven directors, although four had settled the claims against them before trial.

Facts of the case

The Company utilised a scheme that paid employees and directors in a way that reduced the liability for PAYE income tax and National Insurance contributions (NICs) of both the Company and its employees. The Company used the scheme over an 8 year period from 2002 to 2010. The Company took advice from accountants as to the success of the scheme in mitigating tax liabilities, and their advice was consistently positive although success was not guaranteed.
The Company and its directors claimed the purpose of the scheme was to keep the management team together whilst winding the business down by creating a financial incentive; the directors’ net remuneration was greater as a result of the scheme. The liquidator argued that the true purpose of the scheme was to camouflage distributions to the directors. The liquidator brought the following claims:
1. Section 172 Companies Act 2006 – breach of director’s duties to promote the success of the Company (the Section 172 Claim);
2. Section 423 Insolvency Act 1986 – transaction at an undervalue; (the Section 423 Claim)
3. Section 177 Companies Act 2006 – failing to disclose an interest in a proposed transaction (the Section 177 Claim).
The claims were all dismissed by the Court. It was decided that the purpose of the scheme was in fact to keep the management team together, and that the professional advice received by the Company from the accountants could be relied upon as it was given in good faith. Therefore, the Section 172 Claim failed.
It was not disputed that the practical effect of the scheme meant all profits of the Company were paid out leaving nothing for HMRC as a creditor, but this was not found to be the purpose of the scheme, so the Section 423 Claim also failed. The Section 177 Claim was also unsuccessful because the failure to disclose an interest in the proposed transaction did not exacerbate the Section 172 Claim for breach of director’s duties.

Conclusion

This case is a reminder of the importance of “purpose” in claims under section 423. Section 423(3) states that the Court must be satisfied that the relevant transaction was entered into for the purpose of putting assets beyond the reach of a creditor or otherwise prejudicing their interests (the Prohibited Purpose).
There is authority from Hashmi [2002] EWCA Civ 981 that the Prohibited Purpose does not have to be the dominant purpose; and the Judge, in this case, clarified that the test is simply whether the purpose of the scheme satisfies the definition of Prohibited Purpose in the statute. This applies whether it is the sole purpose, or one of several purposes (either dominant or ancillary). However, if no Prohibited Purpose can be established, the section 423 claim will fail.
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Author
Benn Richards
Benn Richards

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