The directors of an insolvent company have successfully defended allegations that they were in breach of their fiduciary duties after setting up an Employee Benefit Trust (EBT). The EBT, which was set up on the advice of the company’s accountants, reduced the amount of income tax payments and national insurance contributions (NICs) due. The court ruled that the business, which went under owing HMRC millions, was entitled to rely on the expert advice they had received from their accountants when establishing the scheme.
EBTs were schemes put in place to remunerate employees via alternative means such as dividends rather than salaries, with a view to avoiding income tax and NICs. HMRC successfully challenged the legality of these schemes on the basis they were in effect disguised remuneration schemes and following the same, many businesses began settling their tax liabilities.
On the professional advice of their accountants, the directors of Marylebone Warwick Balfour Management Limited had set up an EBT to remunerate employees, and as a result initially avoided paying £28 million in PAYE and NICs. Following investigation, it became clear that the liabilities were due to HMRC but the company did not have the assets to pay. The company was liquidated and HMRC pursued the outstanding liabilities from the liquidator.
Mr Stephen Hunt (the liquidator) issued proceedings against the former directors, alleging that they were in breach of their fiduciary duties by participating in the scheme. He also argued that relevant payments under the scheme were transactions which sought to defraud creditors, contrary to S324 of the Insolvency Act 1986. Accordingly, he sought to recover in excess of £38 million from the directors.
The judge dismissed Mr Hunt’s allegations, finding that the scheme had been established by the directors with the genuine belief that it was legitimate and that the directors were entitled to rely on the advice of their accountants.
Matthew Golightly, Associate Director – Claims & Technical, Brunel Professions said: “The decision here will be looked at with much interest. Whilst it is favourable for directors of insolvent companies who participated in such schemes, the case is likely to refocus recovery claims on professional advisers. We may see an increase in the number of negligence claims against accountants who advised on Employee Benefit Trusts, which will be of concern to both accountants and their insurers.”