Wednesday 31 July 2019

UK: England and Wales: relief for unfair prejudice, buy-out orders and tax avoidance

Last year, in Estera Trust (Jersey) Ltd v Singh [2018] EWHC 1715 (Ch), Mr Justice Fancourt ordered that two shareholders - the petitioners - should have their shares bought out by the company and another shareholder, following the finding that the company's affairs had been conducted in an unfairly prejudicial manner within section 994 of the Companies Act 2006.

At a subsequent trial, the purchase price and time for payment were fixed (see [2019] EWHC 873 (Ch)), only after which the petitioners appreciated the tax consequences of the proposed order: purchase by the company of their shares would be regarded as an income distribution and taxed more heavily than a capital transaction. With this knowledge, the petitioners made an application requesting that the final order not be sealed until a further hearing had taken place. They sought a change in the proposed order: they wanted a company structure to be created the aim of which was to minimise their tax liability.

Could, and if so should, the court order that the petitioners' shares be bought in the manner they now requested?  The answer was given several days ago in Estera Trust (Jersey) Ltd v Singh [2019] EWHC 2039 (Ch). Mr Justice Fancourt held that while he had the jurisdiction to make the order he would decline to do so. The proposed buy-out structure could, he stated, be reasonably regarded by HMRC and others as aggressive tax avoidance. The parties did not agree and, moreover, the order sought by the petitioners provided in his view "relief that is wholly out of the ordinary - if not unprecedented - for the Court to grant on a section 994 petition, despite the breadth of the jurisdiction to grant relief" (para. [32]). Fancourt J. further observed (paras. [33] and [41]):
[33] There are undoubtedly circumstances in which the Court will order a reluctant party to enter into a transaction for the purpose of saving tax for another party ... [41] In my judgment, in a purely commercial context such as this, there is no compelling reason why the Court should force reluctant parties to enter into a transaction solely for the purpose of saving tax for another party, even if there is no possible harm to them. There is no public policy interest in favour of making such an order. This is a case of an offshore trust, which will incur a tax liability on the receipt of an enormous sum of money, which it can very likely mitigate so that only the same tax has to be paid as would be paid by a private person resident in the UK. The public interest seems to me to be served by the payment of that tax, not by the avoidance of the substantial majority of the tax payable".

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