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

For Insolvency Act 1986 section 423(3), a transaction entered into to prevent a tax liability from arising is not, without more, a transaction entered into to prejudice a creditor in relation to a claim which it is making or may make. If the intended tax avoidance succeeds, no such claim arises. The statutory language does not permit the court to treat it as referring to a claim which the creditor might otherwise make.

Whether the avoidance is legitimate tax mitigation or unacceptable tax avoidance does not alter that conclusion. A finding that a scheme was structured to impede recovery if it failed requires an evidentially justified inference. An appellate court will not disturb the trial judge’s rejection of such an inference unless the conclusion was rationally insupportable or affected by an identifiable error.

The appellant liquidator sought relief under Insolvency Act 1986 section 423 against participants in a tax avoidance scheme operated by Ethos Solutions Ltd. The company paid most of the fees generated by participants’ services into an offshore trust, from which discretionary loans were made. It did not deduct income tax or national insurance contributions from those payments.

HMRC later assessed the company for tax and contributions. The company entered voluntary liquidation. The liquidator alleged that the composite transactions were at an undervalue and were entered into either to prevent HMRC’s tax claim or to make recovery harder if the scheme failed.

Rajah J dismissed the claims in [2024] EWHC 1081 (Ch). The appeal challenged his conclusions on the statutory purpose and on the evidential inference. The respondents also maintained, by respondent’s notice, that there was no transaction at an undervalue and that relief should be refused.

1. Appeal dismissed. The judge was right to reject the liquidator’s primary case. Section 423(3) addresses a 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 that claim. A purpose that a tax liability should never accrue is a purpose that HMRC should have no claim, not a purpose of prejudicing an existing or future claim.

2. The contrary construction would insert an unwarranted qualification into section 423(3)(b), so that it referred to a claim which HMRC might otherwise make. It would also extend the provision to ordinary tax mitigation. The distinction between legitimate mitigation and unacceptable avoidance concerns the means adopted, not the common purpose of preventing the tax liability. The policy that debts must be paid before gifts are made is not engaged where the objective is to prevent a debt from coming into existence.

3. The alternative case depended upon overturning a factual conclusion. The evidence showed some unsatisfactory responses to HMRC’s information requests, but did not compel an inference that the company had structured the scheme from the outset to impede HMRC if it failed. The absence of direct evidence, the small issued capital, the use of an offshore trust, awareness of a risk of challenge, and the later use of another offshore contractor did not make the judge’s conclusion rationally insupportable.

4. It was unnecessary to determine the respondent’s notice concerning undervalue or discretionary relief.

• Court of Appeal (Civil Division): Dismissed the liquidator’s appeal in [2025] EWCA Civ 268.

• High Court, Insolvency and Companies List (ChD): Rajah J dismissed the liquidator’s claims under Insolvency Act 1986 section 423: [2024] EWHC 1081 (Ch).