Re Chalcot Training Ltd

The court was asked to set aside transactions entered into under an "E Shares" tax-avoidance scheme on company-law grounds. The claimant company maintained the payments made under the scheme were in truth unlawful distributions to shareholders (not deductible remuneration) and alternatively that the arrangements involved unlawful discounts or commissions under the Companies Act 2006 (notably s.580 and ss.552–553). The judge applied the established approach of characterising transactions by substance not form, considered relevant authorities (including Progress Property, Re Halt Garage and Ridge Securities), and assessed contemporaneous documents and conduct of the directors and advisers.

The court found that the payments and credits effected under the E/F shares documentation were genuinely authorised rewards for services to the company (remuneration) and were properly recorded and treated as "employment expense" in the company accounts. Because the arrangements were correctly characterised as remuneration, they did not amount to unlawful distributions and did not fall foul of the statutory prohibitions on discounts or on commissions as advanced by the claimant. The company’s alternative restitution and mistake-based arguments also failed for reasons explained in the judgment.

This dispute concerned an owner-managed company (Chalcot Training Limited), its two controlling directors/shareholders (Ms Stoneman and Mr Ralph) and HMRC. The company had, over three years, entered into an "E Shares" (and later F Shares) scheme promoted by a third party (Blackstar) which: (i) caused very large payments and credits to be made in favour of the two director-shareholders; (ii) described those payments in scheme documentation and in the company accounts as employment-related remuneration; and (iii) sought to secure, for tax purposes, a corporation tax deduction while avoiding PAYE and NIC by coupling payments with contingent obligations to subscribe for shares.

Nature of the claim/application: the company (unusually, controlled by one of the defendants) sought declarations that the agreements implementing the 2011–2013 schemes and the purported issue of E/F shares were void, and rectification of the register of members to remove the E/F share entries. Relief was sought principally on the basis of common mistake; as alternatives the company argued the transactions were unlawful distributions under Part 23 of the Companies Act 2006 or breached provisions on discounts/commissions (s.580 and ss.552–553).

Issues framed by the court:

• whether the payments were properly characterised as directors'/employees' remuneration or were disguised distributions to shareholders (characterisation);
• whether the arrangements involved unlawful discounts (s.580) or unlawful commissions (ss.552–553) (discount & commission issues);
• whether sums paid were repayable to the company (repayment);
• whether the contracts and share allotments should be set aside for common mistake (mistake);
• whether the court should, in its discretion, grant declarations and rectification if the claimant established the above (discretion).

Reasoning and outcome (concise): the judge emphasised that characterisation is primarily a question of substance, not form, but that the parties' states of mind and contemporaneous documents may be "highly relevant" to that inquiry. The court gave limited weight to the heavily lawyered witness evidence of the controlling shareholder and preferred documentary evidence and the contemporaneous conduct of the company, its accountant and lawyers. The company accounts, board minutes, subscription agreements, directors' emolument certificates and the actions of professional advisers all treated the payments as employment-related remuneration; the payments were made in recognition of services and with an obligation to subscribe for shares as the tax mechanism. The judge concluded the directors' power to award remuneration had been genuinely exercised, the payments were remuneration (not disguised distributions), and the statutory provisions on discounts/commissions did not assist the claimant. The common mistake argument failed on the pleaded assumptions and on the allocation of risk and available alternative remedies. The court declined none of the relief on discretionary grounds because the substantive claim had failed.

Contextual note: the judgment observed the unusual procedural posture (the company, controlled by a claimant-defendant, seeking to unwind transactions it previously authorised) and the court cautioned about reliance on post-hoc witness recollections. The court applied established authorities on characterisation and the capital maintenance rule and noted the difference in approach when the company is solvent (margin of appreciation) versus insolvent (liquidator/creditor concerns).

The claims are dismissed. The court held that the payments and loan‑account credits effected under the E and F shares documentation were properly characterised as remuneration in recognition of services, being a genuine exercise of the directors’ power to award remuneration; they were therefore not unlawful distributions and did not fall within the statutory prohibitions on discounts or commissions as advanced by the claimant. The claimant’s alternative restitution, mistake and discretionary arguments likewise failed.