Hall (Liquidator of Ethos Solutions Ltd) v Nasim & Ors

A claim under Insolvency Act 1986, section 423, may be struck out where the pleaded case is internally inconsistent or cannot yield any meaningful relief. A claim based on no consideration was untenable because the pleading relied on the same payments being remuneration giving rise to PAYE and NIC liabilities.

A novel undervalue argument involving tax liabilities should generally be determined at trial unless plainly untenable. The claimant must, however, plead why one party’s tax liabilities should count while corresponding liabilities of other parties should not. A liquidator cannot pursue an unparticularised tax liability which HMRC has neither assessed, proved, nor indicated an intention to claim. Using section 423 to circumvent statutory tax processes may raise an abuse-of-process issue, but the issue was unsuitable for summary determination.

The liquidator of Ethos Solutions Ltd brought a claim under section 423 of the Insolvency Act 1986 against 63 respondents. The claim concerned approximately £9 million paid through a business benefit trust and, later, through Scope Self Employment Jersey.

The respondents applied to strike out the claim under CPR 3.4(2)(a) and (b). The court considered whether the pleaded case disclosed reasonable grounds, whether the alleged undervalue case was legally sustainable, whether a claim for unpaid PAYE and NIC for 2011 could be pursued without an HMRC assessment or proof, and whether section 423 was being used to bypass statutory tax appeal processes.

1. Strike-out principles. The court applied the rule that a statement of case may be struck out under CPR 3.4(2)(a) only where it discloses no reasonable grounds and the defect is plain and obvious. Strike-out under CPR 3.4(2)(b) is a remedy of last resort, and proportionality must be considered. Novel legal points should generally be decided on evidence at trial unless plainly untenable.
2. No-consideration case. Paragraph 23(a) of the Points of Claim was struck out. Read as a whole, the pleading alleged that the payments formed part of remuneration for services and therefore attracted PAYE and NIC. It was consequently inconsistent to allege that the Company received no consideration. The whole commercial arrangement, rather than an artificially isolated payment, had to be considered. The case was also self-defeating because, if the payments were not remuneration for services, the pleaded tax liability and the identified HMRC prejudice would fall away. The defect could not properly be cured by amendment.
3. Undervalue case. The alternative case in paragraph 23(b) was not struck out. The court had reservations about taking the Company’s PAYE and NIC liabilities into account without considering corresponding liabilities potentially falling on the employees or the Trust. Nevertheless, the issue was novel and not plainly untenable. The Liquidator was given an opportunity to amend and particularise the basis on which the Company’s liability should be taken into account while other liabilities should not.
4. 2011 liability. The claim based on unpaid PAYE and NIC for the year ending 31 December 2011 was struck out under CPR 3.4(2)(a) and (b). The pleading contained only a bare estimate. HMRC had not assessed the liability, lodged a proof, or intimated an intention to claim. The Liquidator could not properly second-guess what HMRC might later seek to prove, particularly where the 2011 arrangements raised separate questions about the Company’s status as employer and the possible liability of the individual respondents.
5. Tax appeal processes. The argument that section 423 was being used to circumvent statutory tax processes was sufficiently complex and significant to require full submissions and examination at trial. It was therefore not suitable for determination on strike-out.
6. Paragraph 25 was retained in narrowed form after deletion of the paragraph 23(a) case. The court ordered the striking out of paragraphs 20 and 23(a), consequential amendments, and an opportunity to seek permission to amend paragraph 23(b) and particularise paragraph 12.