Christopher Purkiss v Tim Kennedy & Ors

For Insolvency Act 1986 section 423, the value of a transaction is assessed from the debtor company’s perspective by comparing the incoming and outgoing consideration, both measured in money or money’s worth. Statutory PAYE and NIC liabilities may form part of the outgoing value even if the company mistakenly believed that no liability arose. However, a transaction entered into to prevent a tax liability arising does not, without more, have the prohibited purpose of prejudicing a claim which HMRC may make. The court must distinguish the consequence of a failed tax scheme from its purpose. Relief under section 423 requires evidence that impeding recovery, rather than merely obtaining tax effectiveness, was a purpose of the transaction.

The applicant, the liquidator of Ethos Solutions Limited, sought relief against 23 respondents under section 423 of the Insolvency Act 1986. The Company operated an employee-benefit-trust arrangement under which respondents’ services were supplied to end users, modest salaries were paid through payroll, and the balance was transferred to an offshore trust and later advanced as loans.

The claim proceeded on the basis that the composite arrangements were transactions at an undervalue because the Company incurred PAYE and NIC liabilities, and that they were entered into for a prohibited purpose. The central issues were whether section 423(1)(c) was satisfied and whether the Company intended either to prejudice HMRC’s claim or to put assets beyond HMRC’s reach.

1. Transaction at an undervalue. The Scheme was a composite transaction for section 423 purposes. The court compared the value obtained by the Company with the value of the consideration it provided, assessing both from the Company’s perspective. The Company received an administration fee averaging 13.4%, while undertaking statutory PAYE and NIC liabilities substantially exceeding that incoming value. Section 423(1)(c) was therefore satisfied.
2. The Company’s liability was assessed according to the law as declared by the courts. The later decision in Rangers showed that remuneration paid through a third party remained taxable. The earlier decisions in Dextra and Sempra did not prevent the liability being taken into account, because judicial decisions have retrospective effect under the declaratory theory.
3. Prohibited purpose. Section 423(3) requires the statutory question to be asked without adding a gloss. The Company’s purpose in seeking to prevent income tax and NIC liability from arising was not, by itself, a purpose of prejudicing a claim which HMRC was making or might make. It was directed to preventing the claim from arising.
4. The alternative case also failed. The fact that transferring funds to the Trust left the Company unable to meet the tax liabilities was a consequence of the Scheme’s failure, not proof that impeding HMRC’s recovery was an intended purpose. The evidence did not establish that the offshore trust, or the Company’s assumption of liability, was designed to put assets beyond HMRC’s reach.
5. The court did not need to decide the discretionary relief issues. The Application was dismissed.