HM Revenue & Customs v Holland & Anor

For the purposes of unlawful dividends, the relevant question is whether the company’s accounts enabled a reasonable judgment, based on facts reasonably perceived or ascertainable at the time, about liabilities likely to be incurred. “Likely” means more likely than not. A director may be liable for an unlawful distribution without proof of loss where the director had trustee-like stewardship of the company’s assets. Relief under section 727 Companies Act 1985 requires honesty, objective reasonableness and fairness in all the circumstances. The discretion under section 212 Insolvency Act 1986 is narrower: it permits the court to limit the amount needed to remedy the deficiency caused by the delinquency, rather than provide a broad fairness-based exemption.

HM Revenue & Customs brought 42 applications under section 212 Insolvency Act 1986 against Michael and Linda Holland. It alleged that they were de facto directors of companies in the Paycheck composite-company structure and had caused dividends exceeding £13 million to be paid without provision for higher-rate corporation tax. The companies entered administration on 19 October 2004 and were subsequently wound up.

The issues were whether either respondent was a de facto director, whether the dividends were unlawful or involved breach of duty, and whether relief was available under section 727 Companies Act 1985 or the court’s discretion under section 212. The central dispute concerned the point at which the respondents ought reasonably to have provided for the corporation-tax liability.

1. De facto directors. The statutory question under section 251 Insolvency Act 1986 was factual: whether the individual occupied the position of director, whatever the description applied to him. The relevant matters were the functions performed, participation in directing the company’s affairs, equality with the appointed director, and real influence in corporate governance. Mr Holland was a de facto director. Mrs Holland was not. Her work was clerical and administrative, and she did not participate in executive decisions concerning dividends.
2. Corporate veil. The fact that Mr Holland acted, if at all, as director or agent of the corporate director did not prevent the finding. The issue was whether he occupied the position of director of the composite companies, not whether an agent was personally liable for a company’s contractual liabilities.
3. Dividends. Under Part VIII of the Companies Act 1985, provision for a liability had to be assessed by a reasonable and objective view of facts known or reasonably ascertainable when the dividend was authorised. A liability was “likely” within paragraph 89 of Schedule 4 if it was more likely than not to be incurred. Up to 18 August 2004, Mr Holland reasonably relied on professional advice and the uncertain position created by HMRC’s conduct. Dividends were therefore not unlawful, or he was entitled to relief.
4. Later conduct. After the consultation with leading counsel on 18 August 2004, Mr Holland could no longer reasonably believe that HMRC’s claim would ultimately fail. From 23 August 2004 he caused dividends to be paid without making provision for the outstanding and accruing higher-rate corporation tax. He had not obtained timely specialist insolvency advice or conducted a properly informed balancing exercise. Section 727 relief was unavailable for this period.
5. Remedy. The claims against Mrs Holland were dismissed. Mr Holland was prima facie liable for the dividends paid from 23 August 2004, but the section 212 discretion limited the award to the additional higher-rate corporation tax accruing between 23 August and 19 October 2004. The court did not accept that section 212 supplied a broad discretion to relieve liability on general fairness grounds.

First-instance decision. No prior appellate decision is stated in the judgment.