This case relates to alleged tax evasion and provides useful guidance on how to determine whether a breach of directors’ and professional trustees’ duties is deemed to be fraudulent.
Background:
The two claimant companies – CSI and BRP – brought claims against Mr. Brown who had been a director of the claimant companies prior to their liquidation. Additionally, he was a director of the second defendant, Equity Trust, which was the ultimate owner of the claimant companies. The claimants alleged that, in breach of his duties as a director, Mr. Brown, with a view to the evasion of corporation tax on capital gains by the claimant companies, agreed to the transfer of the properties owned by them to their parent companies at a substantial undervaluation.
CSI also alleged that Mr. Brown agreed improperly to the payment of charges by CSI to its parent company that were not justified. Regarding Equity Trust, the claimants asserted that Mr. Brown was acting in the course of his employment with Equity Trust when he took these actions, notwithstanding that he was also acting as a director of the claimant companies. The defendants took the position, however, that an employer cannot be vicariously liable for the act of its employee as a director of another company, even if it is part of the employee’s job to act as a director of other companies.
Decision:
The Court of Appeal (CoA) dismissed the appeal. The claimants tried to circumvent the fact that their claim was time-barred, as the alleged breach occurred between 2004 and 2006 but the claim was only issued in 2020. By pleading that there had been a fraudulent breach of directors’ duties and, reliant on Section 21 of the Limitation Act 1980, they tried to disapply the limitation period. However, the High Court Judge noted that there was no fraudulent breach of duty and, therefore, the extended limitation period did not apply.
The CoA noted that “I would not myself regard it as at all clear that a director who causes his company to transfer a property to its parent for a figure at the bottom end of the range of reasonable valuations in circumstances where the company is undoubtedly solvent and has ample distributable profits commits any breach of his duties to his company, let alone a dishonest one, even if he knows that it will be represented to HMRC that the price was market value when his own personal belief is that the property was worth more.”
The CoA agreed that there was no dishonesty, as it relied on the correct test to assess whether the breaches were fraudulent based on Armitage v Nurse [1998]. The CoA ruled that Armitage allows the Judge to take into account, as one factor, the inherent likelihood of Mr. Brown having acted dishonestly. The CoA did mention that the High Court judgement could have been clearer but did not find any error in its application of the law.
Implications:
This case is very specific as the argument was never that the defendant breached his duty to gain personally from the breach but rather that his motivation to act fraudulently was a desire to assist in an alleged tax evading process. In the absence of any evidence of a reason to act dishonestly, the courts will be unwilling to conclude such dishonesty occurred unless presented with strong evidence.
This case is a reminder of the high standard expected of professional trustees. It also confirms that dishonesty is still a key element to fraudulent breaches although it is not easy to demonstrate.