In Asertis Limited v Mr Dale Heathcote and Servico Contract Upholstery Limited [2022] EWHC 2498 the High Court found that a company director was not liable to repay contributions to an EBT after his company went into liquidation. They were properly authorised and justifiable as remuneration.
The case was brought by Asertis Limited on behalf of the liquidator as assignee for the company, against Mr Heathcote as the sole director of Servico Build Tec Limited (SBTL), and his personal company, Servico Contract Upholstery Limited (SCUL).
- SBTL made two contributions to an Employee Benefit Trust (EBT) in October 2014 and 2015 to allow Mr Heathcote to obtain rewards from SBTL without paying tax.
- In December 2018 following the loss of a big contract with Next plc and news of the 2019 Loan Charge, the company went into voluntary liquidation.
- In respect of the EBT the claimant contended that the rewards:
- were neither authorised nor justifiable as remuneration to Mr Heathcote for his services as director
- were made in breach of his duties to SBTL as its director
- represented transactions at an undervalue defrauding creditors under s.423 of the Insolvency Act 1986
- were made in breach of what is commonly referred to as the ‘insolvency or creditors' interests duty’.
and that Mr Heathcote should:
- repay the rewards to SBTL or pay damages or compensation in the amount of the rewards, plus interest or
- be ordered to restore the amount of SBTL’s tax liability arising out of the EBT Scheme, or
- pay damages or compensation in such amount.
- The claimant also claimed that a £65,000 payment to SCUL made in October 2018 in respect of an inter-company account was a preference payment under s239 of the Insolvency Act 1986 and should be repaid by SCUL and/or Mr Heathcote.
The High Court found that Mr Heathcote did not have any liability to the company in respect of the EBT rewards:
- The regards were authorised by SBTL by way of board minutes and justifiable as directors' remuneration so were not transactions at an undervalue.
- There was no evidence that Mr Heathcote had any idea of either the scale of the potential worst-case additional tax liability relative to the value of the rewards, or that he had participated in a very high-risk tax avoidance scheme.
- HMRC had not, at the time the rewards were provided, said or done anything to indicate that they intended to challenge the EBT Scheme, even though it had been registered with HMRC since November 2013 and its existence had been declared in SBTL's submitted tax computations.
- Absent a provision for the potential additional tax liabilities SBTL was solvent when the contributions were made to the EBT.
- Factoring in HMRC's willingness in the case of a viable trading business to agree a reasonable payment plan, it had not been clearly demonstrated that SBTL was insolvent on a balance sheet basis as at either October 2014 or October 2015. This was supported by the fact that the company continued to trade for three years before being put into liquidation.
The Court did find that the claimant was entitled to judgment for the sum of £65,000 against SCUL on the basis that it was the recipient of this sum, and against Mr Heathcote on the basis that it was a breach of his duties as director of SBTL to cause the company to make this payment to SCUL. The judge said it was plain and obvious that in making the payment it was SBTL’s intention to put SCUL into a better position than if it had waited for the Company to go into insolvency and prove that it was owed the money in liquidation.
A perhaps reassuring case for directors who have undertaken tax avoidance schemes and later had to put their company into liquidation, noting however that HMRC generally will not agree to the final liquidation of a company where they consider that there are outstanding tax liabilities relating to EBTs.
Useful guides on this topic
Insolvency FAQs for boards
What issues does the board need to consider when a company is about to go into insolvent liquidation? This guide considers some common questions that directors may have about insolvency situations.
Disguised remuneration loan charge
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?
Liquidation
How do you wind up (liquidate) a company? What types of liquidation are there? What are the formalities and the tax consequences of liquidation?
External link
Asertis Limited v Mr Dale Heathcote and Servico Contract Upholstery Limited [2022] EWHC 2498
