Toone v Ross

[2019] EWHC 2855 (Ch)

Summary

This decision of Chief Insolvency and Companies Court Judge Briggs deals with a challenge to the use of employee benefit trusts (EBTs) and an interest in possession fund (IIP). The company entered into two EBTs and one IIP. They were challenged by the company’s liquidators as being, in substance, distributions of capital which were made without the company having complied with the relevant formalities required by Part 23 of the Companies Act 2006. Allegations of breach of duty and that the transactions defrauded creditors were also made.

The court concluded that, looking through the eyes of the company, the payments made under the EBTs and the IIP were to be characterised as returns of capital to shareholders. The formalities not having been complied with, they were unlawful. The allegation of breach of duty also succeeded. The directors were required to account to the company for the sums paid away.

Comment

This is one of the first decisions directly concerning challenges by liquidators to the actions of directors (who are also shareholders) in causing their company to enter into EBTs and other arrangements perceived to have advantageous taxation consequences. It addressed how payments made in pursuance of such arrangements are properly to be characterised (although future cases will turn on their own facts). It involved consideration of the trigger for the creditors’ interests duty as explained in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112. This decision should be considered alongside that of Insolvency and Companies Court Judge Jones in Re Vining Sparks UK Limited; Allen v Bernard [2019] EWHC 2885 (Ch).

David Mohyuddin QC