Insolvency Litigation Claims and Employee Benefit Trusts

Increase in Insolvency Litigation Claims by Company Liquidators Arising Out of Employee Benefit Trusts

HMRC are reported to have recently issued their first Winding-Up Petition, following an insolvency litigation claim based on an Accelerated Payment Notice (‘APN’) made against an Employee Benefit Trust (EBT). EBT tax avoidance schemes have been on HMRC’s radar for some time now. If UK or offshore trusts, such as EBTs, are created there will need to be a direct benefit to the Company with regards to its creation. Here at NDP, we are seeing a growing number of insolvency litigation claims that surround such trusts. These claims will often be of significant value, especially if the trusts were set up a number of years ago.

In light of The Supreme Court recently ruling in favour HMRC over Glasgow Rangers’s use of Employee Benefit Trusts (EBTs), this article looks at who brings such claims against directors, and why. It goes on to look at a recent case we have been involved in, which gives some pointers as to how directors facing insolvency litigation claims of this type can defend themselves.

What is an Accelerated Payment Notice?

An APN is a requirement, issued by HMRC, to pay an amount on account of tax or National Insurance Contributions. Such notices are made against Taxpayers in Avoidance schemes, under the Disclosure of Tax Avoidance Schemes (‘DOTAS’) rules.

What is an Employee Benefit Trust?

An EBT is a trust established either in the UK or offshore, holding either cash or other assets. EBT’s are set up by companies for the benefit of employees and act as an additional mechanism to securing and (at least, this was the intention) retaining quality staff.

Who Brings Such Insolvency Litigation Claims Against Directors?

Often, they are pursued by Liquidators of insolvent companies. We have in the recent past seen such claims pursued by Liquidators of failed companies under section 212 of the Insolvency Act 1986, as transactions that are alleged to constitute a Misfeasance and involving alleged breach of Directors’ duties owed to the company.

Such claims may also be pursued by the Liquidator (or others) under section 423 of the Insolvency Act 1986 as a transaction defrauding creditors, which requires two requirements to be met.

  1. The Claimant must show that a person (a company or an individual) has entered in a transaction at undervalue, whether that is by outright gift or a transaction in which the consideration received was significantly less than that given.
  2. Secondly, the Claimant must show that the transaction was entered into for the purpose of putting assets beyond the reach of creditors or future creditors or otherwise prejudices their interests.

These Claims Are Not Time Limited

From the Claimant’s point of view, a claim under section 423 is not time limited, unlike other claims (to include Preference claims and Transactions at an Undervalue claims) which are subject to time limits.

As with all such claims against Directors, the sooner advice is sought from us, the more we are likely to be able to do mitigate the claim.

Insolvency Litigation Claims

Our Experience of Insolvency Litigation Claims Involving Employee Benefit Trusts

We have recently represented a Director in a case where the Director was attacked in respect of an EBT. The Liquidator advanced the case that the director had breached the duty of care owed by him to his company, under section 212 of the Insolvency Act 1986, through the creation of an offshore EBT.

By way of reminder, section 212 allows a Director (or person who has been involved in the management of the company) to be pursued where the Director has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

It was argued in this case by the Liquidator that such a trust based scheme provided no benefit to the company, and constituted an unlawful return of Capital, resulting in the allegation that the sum transferred to the scheme were due and owing to the company creditors for the purpose of the liquidation.  That was denied by our Director client.

Prior to entering the scheme, our Director client had in fact obtained specialist advice from specialist Tax Counsel. The claim made against our Director client was defended on the basis that the funds were placed into the trust for the benefit of the company following the financial crisis of 2008.

The Director also relied upon (as he was perfectly entitled to do) the professional advice he had received in causing funds to be paid into the EBT.

As a general comment, such reliance on professional advice (as a Defence) can be fraught with difficulty.

For example:

  • Was the advice credible or reasonable?
  • Was the advice followed?
  • If not, why not?

The Outcome of This Employee Benefit Trust Case – a Successful Settlement

A deal was done with the Liquidator by the Director. Neither side could truly afford to lose at Trial and the merits of the case were so uncertain, that a compromise was perhaps the inevitable outcome.

So, the EBT preserved and retained some of its fund and the Liquidator received a payment to end the claim.

After prolonged discussion and a Mediation process, we successfully settled the matter outside of Court for the Director, for a sum that was substantially less than the amount claimed.

In obtaining an out of Court settlement we were able to dismiss the allegation that at the time of the creation of the trust it was illegal and provided no benefit to the company.

We were able to remind the Liquidator that hindsight has little or no relevance in the assessment of a Director’s conduct. Furthermore, in the context of a scheme sanctioned by legislation and entered into on the sort of specialist advice mentioned above, the Liquidator had a severe uphill task in challenging the actions of the Directors.

Please Contact Us if You Are Facing an Insolvency Litigation Claim

Here at Neil Davies & Partners our experienced Insolvency Solicitors are well used to dealing with such claims for both Liquidators and the Directors who finds himself under attack.

Our team of specialist insolvency solicitors has the in depth and extensive knowledge necessary to assist on such matters, including Insolvency litigation claims arising out of Employee Benefit Trusts.  If you are facing such a claim and require our help please do not hesitate to contact us for a FREE initial call on 0121 200 7040.

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