HM Revenue & Customs v Holland & Anor

Key points: The court considered claims brought by HMRC under section 212 of the Insolvency Act 1986 for misfeasance and breach of director’s duties by persons alleged to be de facto directors who caused a series of dividend payments by a group of composite companies. The principal legal issues were (1) whether the respondents were de facto directors, (2) whether dividends paid without provision for higher rate corporation tax (HRCT) were unlawful, and (3) whether relief should be granted under section 727 of the Companies Act 1985 or in the exercise of the court’s section 212 discretion.

The judge held that Mr Holland was a de facto director of the composite companies but Mrs Holland was not. The relevant statutory tests for association under ICTA 1988 (sections 13, 416 and 417(3)) meant the companies were liable for HRCT; reliance on Extra Statutory Concession C9 was misplaced in hindsight because of the settlor attribution point in section 417(3). The judge applied an objective test for whether provision for a liability was required in interim accounts (paragraph 89, Schedule 4 CA 1985): provision is required only where, on the facts as reasonably perceived at the time, the liability is "likely" to be incurred (taken as "more likely than not").

Applying those principles, the court concluded that Mr Holland acted honestly and reasonably prior to late August 2004 and was entitled to relief under section 727 in respect of that earlier period, but that he should be held liable for dividends paid from and after 23 August 2004 until administration on 19 October 2004. HMRC’s claim against Mrs Holland was dismissed.

Background and parties: HM Revenue & Customs (Applicant) issued 42 originating applications under section 212 Insolvency Act 1986 against Michael and Linda Holland (Respondents). HMRC alleged the Hollands were de facto directors of a number of "composite" service companies which paid regular dividends without making provision for HRCT; the composite companies later entered administration and liquidation and HMRC remained the sole significant creditor in respect of unpaid HRCT.

Nature of the application: HMRC sought orders under section 212 IA 1986 that the Hollands contribute to the assets of the composite companies for misfeasance and breach of duties as de facto directors, limited practically to the unpaid HRCT shortfall (c. £3.5m after realisations).

Issues framed by the court: (i) Were Mr and/or Mrs Holland de facto directors of the composite companies? (ii) If so, did they act in breach of duties by causing dividends to be paid without providing for HRCT and thereby misfeasance or breach of fiduciary duty occurred? (iii) If liable, should they be relieved under section 727 CA 1985 or by exercise of the court’s discretion under section 212 IA 1986?

Factual posture and evidence: The corporate structure involved trustee-held voting A shares (Paycheck Services Trustee) and many non‑voting employee/shareholders in each composite company. Advice was taken from solicitors, accountants and counsel; an early file note suggested HMRC at one stage indicated C9 applied, but later HMRC technical analysis and the statutory attribution under section 417(3) ICTA 1988 meant C9 could not protect the structure. The Hollands continued to cause dividends to be paid while appeals/enquiries and advice were pursued; leading counsel’s advice in August 2004 (and subsequent consultations) made it clear the position had become acute.

Court’s reasoning and conclusions: The court applied established tests for de facto directorship (occupation of position and exercise of director‑like functions). It found Mr Holland had assumed the status and functions of director for the composite companies; Mrs Holland had not exercised the requisite "real influence" and performed largely clerical/administrative and Paycheck Services functions. On lawfulness of dividends, the judge read Part VIII CA 1985 (sections 263, 270, 277 and Schedule 4) to require an interim accounts assessment based on facts as reasonably perceived when deciding whether to provide for a liability; the word "likely" in paragraph 89 Schedule 4 was taken to mean "more likely than not". If, on a reasonable objective view at the time, HRCT was more likely than not to fall due, provision should have been made before paying dividends.

The judge accepted that directors who cause unlawful distributions may be accountable but emphasised the availability of relief under section 727 CA 1985 for officers who acted honestly and reasonably and who ought fairly to be excused. Applying the facts, Mr Holland had acted honestly and reasonably until late August 2004 in reliance on professional advice and on HMRC’s earlier correspondence; relief under section 727 was appropriate for that earlier period. After receipt of leading counsel’s advice and related events in mid/late August 2004 the position changed: from 23 August 2004 onwards it was no longer reasonable to continue paying dividends without making provision. The court therefore ordered that Mr Holland should be liable only in respect of HRCT accruing between 23 August 2004 and the date of administration (19 October 2004). The claims against Mrs Holland were dismissed.

First-instance decision: The Court allowed HMRC’s applications in part. It held that Mr Holland was a de facto director and liable for causing unlawful dividends to be paid from and after 23 August 2004 until administration on 19 October 2004; the liability was limited in the exercise of the court’s section 212 discretion to the HRCT that accrued in that period. Mrs Holland was held not to have been a de facto director and the claims against her were dismissed. The judge reasoned that prior to late August 2004 Mr Holland had acted honestly and reasonably on professional advice and was entitled to relief under section 727 CA 1985, but after that date it was no longer reasonable to continue to cause dividends to be paid without provision for HRCT.