Re Implement Consulting Group Ltd (in liquidation)

The Court held that payments made by Implement Consulting Limited into two employment benefit trusts (EBT 09 and EBT 10) and into an interest‑in‑possession fund (IIP) were, in substance, distributions of the company’s capital to its shareholder‑employees rather than bona fide commercial transactions. Because the statutory requirements for distributions under Part 23 of the Companies Act 2006 were not complied with, those payments were unlawful distributions and void. The Court also found that the company was insolvent as from at least 27 June 2011 for balance‑sheet purposes and that certain payments (notably expenses paid to a shareholder/employee in March 2013) were made in breach of the directors’ duties when the interests of creditors had already intruded.

The decision applied established principles of substance over form: the court looked through trust labels and devices to the purpose and effect of the arrangements, relying on authorities concerned with characterisation of transactions. The statutory remedies under section 847 Companies Act 2006 and directors’ duties (including section 172) were available to the liquidators. The judge accepted the directors were honest but held they had failed to take adequate independent legal advice and had taken an unacceptable commercial risk, so the statutory remedies were engaged.

Background and parties: Implement Consulting Limited entered insolvent liquidation on 26 November 2016. The applicants were the joint liquidators and the company (in liquidation). The respondents were two former directors/shareholders, Mr W J G Ross and Mr W A Bell. The joint liquidators brought claims in respect of payments and transactions between 2009 and 2013 which had the effect of delivering company capital to the shareholder‑employees via profit‑extraction tax planning schemes (two EBTs and later an interest‑in‑possession fund).

Nature of the claim / relief sought: The liquidators sought to recover sums paid out of the company on the basis that the payments were unlawful distributions, in breach of fiduciary and statutory duties, and/or within the scope of Insolvency Act 1986 section 423. Remedies were sought under the Companies Act 2006 (including section 847) and for breaches of directors’ duties.

Issues framed by the Court:

• How to characterise payments to the EBTs and the IIP: distribution of capital or genuine commercial expenditure?
• Whether the payments complied with the statutory code for distributions (Companies Act 2006 Part 23) and, if not, whether recipients must account under section 847.
• Whether the directors breached duties (notably sections 171 and 172 CA 2006) by causing payments when creditor interests had arisen, and the appropriate timing of insolvency for those purposes (section 123 IA 1986).
• Whether other causes of action (including s.423 IA 1986) were engaged.

Court’s reasoning and findings:

• The Court examined contemporaneous documents (PSL correspondence, board minutes, accounts) and the pattern and proportions of payments. The EBT/IIP structures were used to transfer capital out of the company for the benefit of the shareholder‑employees in proportions matching their shareholdings.
• Applying the well‑established approach of looking to substance over form, the judge concluded the transfers were not reasonably incidental to the company’s business nor done for the company’s benefit but were returns of capital to shareholders. Accordingly they were distributions which required compliance with Part 23; that compliance did not occur and the distributions were unlawful and void.
• The company’s accounts had not made provision for foreseeable tax liabilities arising from the schemes. HMRC enquiries (including a letter of 27 June 2011 giving an estimated liability) put the directors on notice of a substantial HMRC claim. On the balance of probabilities the company was insolvent for balance‑sheet purposes by that date (section 123 IA 1986). From then on the directors ought to have had regard to creditors’ interests.
• Payments in June 2013 amounting to £70,000 to shareholders in proportion to shareholdings were conceded to be unlawful distributions and recoverable. Expenses paid to K. Flanagan in March 2013 (and payments to shareholders at a time when the company was insolvent) were made in breach of directors’ duties and the directors were liable to account.
• The court rejected the submission that the trusts could only be impugned by alleging a sham; it was permissible to look behind labels and examine purpose and effect.

Other findings: The judge found the directors to be honest but that they had not obtained independent legal advice and had relied on information provided by the scheme promoter and on their accountant; that choice to take the risk did not excuse non‑compliance with statutory requirements; and that the liquidators were entitled to statutory remedies. The judge reserved detailed orders and costs for further hearing.

First instance: The liquidators' claims succeeded. The court characterised the payments into EBT 09, EBT 10 and the IIP as distributions of capital to shareholder‑employees, unlawful under Part 23 Companies Act 2006 and void; payments of £70,000 in June 2013 were unlawful distributions recoverable under section 847; certain payments (notably expenses paid in March 2013) were made when the company was insolvent (insolvency established by 27 June 2011) and therefore constituted breaches of directors’ duties, for which the respondents must account. The judge directed that counsel address the terms of the consequential orders.