Christopher Purkiss (as Liquidator of Ethos Solutions Limited) v Tim Kennedy & Ors

Key legal principle: Section 423 of the Insolvency Act 1986 requires a transaction at an undervalue and that the debtor entered into that transaction for the purpose of putting assets beyond the reach of a person making or who may make a claim, or otherwise prejudicing that person's interests in relation to such a claim. The purpose referred to in s.423(3) is the debtor's subjective purpose.

The court held that entering into a transaction in order to prevent a tax liability from arising does not, by itself, amount to a prohibited purpose under s.423(3). If the taxpayer succeeds in preventing the liability, there is no person who "is making or may make" a claim to be prejudiced. Conversely, an intention to make it more difficult for a creditor to recover a debt in the event that the scheme failed could, if proved as the debtor's subjective purpose, amount to a s.423(3) purpose.

The judge below was entitled to find that the company had entered into composite transactions at an undervalue but was not shown to have the requisite s.423(3) purpose either (a) to prevent HMRC from having a claim or (b) to impede HMRC's recovery in the event the scheme failed. The appeal was therefore dismissed.

Background and parties: Ethos Solutions Limited operated a scheme involving contracts of employment, an offshore trust (Ethos Solutions Ltd Business Bonus Trust) and loans to participants, intended to reduce income tax and national insurance liabilities of workers. HM Revenue and Customs assessed income tax and NIC liabilities and the company went into liquidation. The liquidator sought relief under section 423 of the Insolvency Act 1986 against a number of participants (respondents) to recover sums reflecting the tax and NIC which should have been deducted.

Nature of the claim: The liquidator sought orders under s.423 to restore the company's position by requiring respondents to repay sums corresponding to the tax and NIC that should have been deducted from monies paid to the trust between March 2009 and April 2010.

Procedural posture: This was an appeal from Mr Justice Rajah's decision in the Business and Property Courts (Insolvency and Companies List) ([2024] EWHC 1081 (Ch)). The Court of Appeal was asked to review the judge's conclusions on whether s.423 applied where transactions were entered into with a view to avoiding tax liabilities and whether, on the facts, the company had the requisite prohibited purpose.

Issues framed:

• Whether a transaction entered into with the purpose of preventing a tax liability from arising can amount to a prohibited purpose under s.423(3).
• Whether, alternatively, the company had the subjective purpose of placing assets beyond HMRC's reach or otherwise impeding HMRC's ability to recover tax if the scheme proved ineffective.
• Whether the trial judge's factual findings were susceptible to appellate review.

Reasoning and key findings: The court reiterated established principles: s.423 must be read in context, the prohibited purpose is the debtor's subjective purpose (citing El-Husseiny and Hill), and that a transaction can have multiple purposes (Ablyazov). The Court of Appeal accepted the trial judge's finding that the composite transactions were at an undervalue. On the primary argument, the court concluded that intending to prevent a tax liability from arising does not fit the wording of s.423(3) because if the liability is prevented there is no "person who is making, or may at some time make, a claim" whose interests are prejudiced. The court considered that Parliament was unlikely to have intended s.423 to reach ordinary tax mitigation. On the alternative argument, the judge's factual conclusion that there was insufficient evidence that the company had set up the scheme so as to impede HMRC's recovery was within the permissible range of judgment on appeal and not overturned.

Result: The appeal was dismissed; the judge below was entitled to his conclusions on both legal construction and fact.

Appeal dismissed. The Court of Appeal held that (1) preventing a tax liability from arising does not, by itself, constitute a prohibited purpose under section 423(3) of the Insolvency Act 1986 because if the liability is prevented there is no person "making or may make" a claim whose interests are prejudiced; and (2) the trial judge was entitled on the evidence to reject the alternative contention that the company had a subjective purpose of impeding HMRC's recovery if the scheme failed.

Appeal from Mr Justice Rajah in the High Court, Business and Property Courts (Insolvency and Companies List) (ChD) [2024] EWHC 1081 (Ch) to the Court of Appeal ([2025] EWCA Civ 268).