England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		24 May 2011

1. MR JUSTICE NORRIS: Atrium Training Services Ltd (" Atrium") was incorporated in August 2000. It was effectively run by a Mr McLean and a Mr McNally. It operated in the field of recruitment and as a temporary employment agency in the construction and other fields. As well as conducting that business, it also provided head office functions for a number of members of a group of associated companies. It may be inferred that in discharging that function Atrium received money from a number of sources within the group.
2. Within the group of companies was a company called Kimberley Scott Services Ltd ("Kimberley"). This was incorporated in July 2003. It provided payroll services, both to recruitment agencies generally (i.e. third parties) and also to Atrium. In relation to the provision of payroll services to Atrium it collected money from Atrium's customers (plus the VAT chargeable on the invoice); Kimberley then arranged to pay Atrium's workers in respect of whom the invoices had been delivered to customers. It operated what was supposed to be a tax efficient remuneration scheme under which the workers who were engaged received a payment which purportedly consisted of three elements. First, the worker was paid the national minimum wage (and that element of the remuneration bore relatively modest PAYE and NIC contributions). The second element of the remuneration was that the worker was reimbursed certain expenses which he or she had incurred. Then the third element was meant to be a dividend on shares which were issued to the worker in a limited company, affectively a "services company".
3. The intention was that the "services company" should have a number of workers connected with it (up to 26) , each of whom had a separate class of share issued to him or her ("A" shares, "B" shares, "C" shares etc) on which class of shares a dividend was paid relating to what that particular worker had earned. The payment of the "dividend" was not subject to either PAYE or NIC (but it would have been subject to corporation tax which should have been deducted by the services company before distributing the dividend to the worker). I say that the payment "purportedly" consisted of those elements because, in fact, it appears that the "services companies" were not incorporated as has been intended. So there were no shares allotted to any workers and no dividends could be declared or paid in respect of them. The consequence is that the payments which had been made to workers should have borne PAYE and NIC on all sums paid (except that part directly attributable to reimbursement of expenses).
4. After Kimberley had (a) collected the invoice due from the customer (plus VAT) and (b) paid the worker (having deducted the PAYE and NIC relating to the base element of the remuneration) it then paid the balance to Atrium. It appears, however, that Kimberley did not pay over to HMRC even the PAYE and NIC which it did deduct on behalf of Atrium's workers. It was subsequently estimated by Mr Harden, who acted as Atrium's finance director, that Kimberley had kept about £14.2 million deducted as PAYE from wages due to Atrium's workers. The same seems also to have been true in relation to PAYE collected from third parties. It appears, though the absence of books and records may make it difficult to tie down on this application, that some of the money collected as PAYE from third party workers (and not paid over to HMRC) was in fact used to pay Atrium's workers.
5. There came a time when Kimberley's business was transferred for a nil consideration to another company owned and operated by Kimberley's proprietors. This transferee company ("CW") appears to have received Kimberley's business on or shortly before 15 August 2005. Kimberley then ceased to trade on 19 August 2005. On the very day on which trade ceased the directors of Kimberley acknowledged that they had received advice from Mr Beattie, of MG Beattie & Co Ltd, in relation to what was then the insolvency of Kimberley. Kimberley's directors appointed Mr Beattie as the prospective liquidator of Kimberley.
6. In due course on 5 September 2005 Kimberley entered a creditors voluntary liquidation with Mr Beattie appointed as liquidator. According to the statement of affairs presented to Mr Beattie and accepted by him, there were only two creditors of Kimberley at that stage. The first was Atrium, which was said to have a claim against Kimberley for some £52,000; and the second, HMRC, which was said to be owed approximately £5,000 by Kimberley. But it now appears that there was a third creditor, namely Mr Beattie himself, in the sum of £5,000 in respect of the advice which he had given to Kimberley before the liquidation.
7. Atrium waived its claim. Mr Beattie in fact did not advance any claim, so that left only the claim of HMRC. Mr Beattie did not find any assets belonging to Kimberley, nor (notwithstanding the transfer to CW) did he identify any potential claims or assets and he, therefore, took the view that Kimberley should simply be dissolved: and so on 31 August 2006 it was dissolved. It is suggested that HMRC had, in fact, been advancing claims considerably in excess of the £5,000 shown in the statement of affairs, and also that there complicated claims arising out of the dealings between Kimberley and Atrium in relation to the collection of invoices and the payment of workers. But Mr Beattie, nonetheless, thought it right simply to dissolve the company.
8. In October 2008 that dissolution was declared void and the CVL recommenced with Mr Beattie as liquidator. In that restored liquidation, HMRC continued to pursue its claims, now including a claim for VAT collected by Kimberley on invoices rendered for Atrium's work but not accounted for to the Revenue. This VAT claim amounted to about £19.8 million.
9. Because of the claims that were constantly being advanced by HMRC, and because HMRC was indicating that if the tax liabilities could not be met by Kimberley then they would look to Atrium, Atrium went into administration on 29 March 2006. At the time when Atrium went into administration it had approximately £2.5 million in cash in its bank account, both collected from Kimberley and from others to whom it provided services and also relating to its own business recruitment and agency . Mr Smailes and Mr Ryman were appointed administrators of Atrium. Atrium exited the administration and entered into a creditors voluntary liquidation on 23 February 2007, and Mr Smailes and Mr Ryman were appointed joint liquidators of Atrium.
10. At this time, the nature of and responsibility for the tax liabilities arising from the Kimberley/Atrium operation were in a confused state. On 15 August 2008 HMRC wrote to Mr Smailes (as joint liquidator of Atrium) a letter which posed the question "Where the PAYE tax and NIC liability rests: Kimberley or Atrium?" The writer of the letter answered that question in the following way:

"At the moment this remains unclear. Understandably, HMRC would prefer to keep all avenues of recovery open, pending the conclusion of the matter. HMRC became concerned that Kimberley may owe PAYE and NIC because research confirmed that Kimberley enjoyed income of at least £15 million within the construction industry in an approximate three year period. In that period Kimberley never submitted corporation tax returns, PAYE tax and NIC returns, or the relevant subcontractor returns to HMRC. In October 2006 HMRC discovered that the PAYE tax and NIC debt may actually fall due from Atrium rather than Kimberley. At present HMRC does not know where the debt actually falls. Our investigations continue along with those of yourself as liquidator of Atrium. HMRC is aware that representatives of Atrium have made contradictory statements to you about this matter which the court will no doubt be made fully aware of by you."

11. It was in that context (that is to say, doubt about where the ultimate tax liability lay) that on 15 October 2009 Mr Beattie withdrew as liquidator of Kimberley and, on the vote of HMRC as a creditor then claiming some £19.8 million, Mr Smailes and Mr Ryman were appointed joint liquidators of Kimberley. That now meant that they were joint liquidators both of Atrium and of Kimberley.
12. Whilst liquidator of Atrium, Mr Smales had acknowledged in a witness statement made in August 2008 that:

"Although it would appear likely that the outstanding tax liability is owed by Atrium rather than Kimberley, there remains a possibility that some, if not all of the liabilities, may indeed be those of Kimberley rather than Atrium."

His appointment as joint liquidator of Kimberley meant that that now question fell to be examined.

13. Assuming HMRC's claims to be sound, the position appears to be this. Atrium faces a claim from HMRC for PAYE and NIC on all wages (base payment and "dividend") paid to Atrium's workers of about £27.2 million. Atrium has a claim against Kimberley for about £14.2 million in respect of PAYE that was collected but not handed on. Kimberley itself owes HMRC about £19.8 million in respect of VAT. Kimberley may have a claim against Atrium in respect of so much of the unaccounted for tax as was used to pay the wages of Atrium's staff. So there are a number of questions which need to be decided as between Atrium and Kimberley.
14. In relation to these questions, the evidence of Mr Smailes in cross-examination was that the claims were received and considered, and were then made the subject of an examination by a forensic accountant in order to see what the potential liabilities and outcomes might be. But that process has not concluded. One reason for that is that apart from the cash that was in Atrium's bank account and which funded the administration, there have been no realisations of any note. Kimberley remains without any assets, save perhaps for the claims that I have identified, but which Mr Beattie in his time did not pursue.
15. Because of these claims, Mr Beattie, in his capacity as a creditor (in the sum of £5,000 in respect of the invoice he delivered to Kimberley for pre-insolvency advice but for which he did not prove) now applies that Mr Smailes and Mr Ryman should be removed as liquidators of Kimberley and replaced by a Mr Rimes of CMB Partners. The application has the air of being a somewhat tentative one in the sense that Mr Rimes' consent to act in this capacity is not before the court; and there is nothing to indicate the terms upon which he would act and the fees that he would propose to charge. But the application is nonetheless pursued.
16. The relevant principles for considering an application of that nature seem to me to be these. First, the joint liquidators are of course office holders and are, as such, fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or contributories. Second, in discharging their duties in that regard, they must of course act in an impartial way. Third, the court has a power to remove them under section 108(2) of the Insolvency Act 1986 "on cause shown". The court may, therefore, make an order which compels Mr Smailes and Mr Ryman to leave office and compels HMRC to accept in their place a liquidator other than one approved of by HMRC. Fourth, that power is to be exercised by reference to the general principle stated by Bowen LJ in Re Adam Eyton Ltd (1887) 36 Ch D 299 at 306, that is to say:

"….the due course is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed."

In the instant case one may say the primary purpose of a liquidator being appointed (when the dissolution was set aside, the company restored and the CVL reinstated) was to investigate why it was that the company had gone in to liquidation without any assets; to identify the claims that truly existed at the date of liquidation; to recover such assets as exist and to distribute those assets.

17. Fifth, it is plainly desirable that a conflict of interest on the part of a liquidator should be avoided. By "conflict of interest" I mean primarily a conflict between his duties as liquidator and his interests in some other capacity. As Harman J pointed out in Re Corbenstoke Ltd [1990] BCLC 60 (reading from the head note):

"A liquidator, as a fiduciary, owed statutory duties to his creditors analogous to those of a trustee to beneficiaries and should not place himself in a position where his duty and his interest conflict without fullest disclosure of the conflict and the approval of his continuing to hold that position despite the conflict."

In the instant case there is of course no suggestion that Mr Smailes and Mr Ryman have concealed anything. But Harman J's observations went on to include consideration, not only of a conflict between duty and interest, but also of a conflict between two competing duties: and as liquidators of both Atrium and Kimberley this is something which (having regard to the claims between the two companies and their exposure to possibly alternative claims by HMRC) Mr Smailes and Mr Ryman potentially face.

18. Sixth, in that context, conflicts between competing duties are regularly encountered in the liquidations of associated companies where there are intercompany dealings which have to be unscrambled. Of itself the competition between those competing duties does not disqualify a liquidator from acting, or properly found any application for his removal. As Lord Hoffman observed in Parmalat Capital Finance Ltd [2009] 1BCLC 274 at 279 in paragraph 13:

"It is not unusual for the same liquidators to be appointed to related companies even though the dealings between them may throw up a conflict of interest. It avoids the expense of having different liquidators investigate the same transactions. The attitude of the court has been that any conflicts of interest can be dealt with by the court on the application of the liquidators when they arise."

19. In the instant case there was evident good sense in appointing the same liquidators to Atrium and Kimberley so that there could be a pooling of the resources to investigate both sides of the relevant transactions by reference to all the papers, such as they were. It may be anticipated that any conflict which arises when ultimate decisions have to be made can be addressed in the way indicated by Lord Hoffman, and more recently by Mr Justice Newey in Re York Gas [2010] EWHC 2275.
20. So much for the principles on which the application must be approached.
21. As has been pointed out, exercising the jurisdiction under section 108 involves something of a balancing exercise. I propose first to examine what claims arise in order to see what conflicts might be engendered. First, there are claims relating to the PAYE and NIC which is due to the Revenue from someone or another. It will have to be ascertained whether the people who actually did the work were employed persons or self-employed contractors. If they are employed persons it will have to be identified by whom they were employed, Atrium or Kimberley. It will then have to be identified in what capacity Kimberley acted when Kimberley actually paid those employees. Was it, as Mr Booth QC has suggested is a possibility, acting as agent for Atrium in the conduct of Atrium's business? It will then have to be ascertained for how much Kimberley must account in respect of what it actually deducted from the wages it paid. It must then be identified who must pay whatever PAYE and NIC falls to be paid as a result of the employment analysis which I have indicated. It will then have to be considered upon what basis, if at all, Atrium can recoup from Kimberley what Kimberley has wrongly kept; or Kimberley can recoup from Atrium what Kimberley is liable to pay. So much for PAYE and NIC.
22. There will then be questions relating to VAT. Is Kimberley liable for the VAT or is Kimberley, because it is simply Atrium's agent, either not liable for the VAT at all or able to claim a complete indemnity from Atrium?
23. Further, it is suggested that quite apart from these competing money claims, Kimberley may have a proprietary claim to the money in Atrium's bank account in relation to whatever money it actually paid over to Atrium. Much time was spent at this hearing trying to identify what that claim might be. Mr Beattie's evidence simply says at paragraph 14:

"There remained £2.5 million left in the bank account of Atrium and I understand from speaking to the directors that it was hoped that HMRC would be able to reach a decision as to whether the liability lay with Kimberley or Atrium and that this money could be used to defray this part of this tax liability."

Then later Mr Beattie asserts in paragraph 26:

"If the liability for PAYE and NIC does really lie with Kimberley then Atrium held this money on a proprietary basis for Kimberley since it was provided impressed with the purpose of it being passed to HMRC to pay the workers' tax liability."

On the evidence adduced a proprietary claim seems to me to be threadbare.

24. Apart from the proprietary claim there are undoubtedly complicated accounting questions arising between Kimberley and Atrium. So much for the claims.
25. I must now address the context in which this application is made and give consideration to Mr Beattie's case that the claims I have just identified give rise to conflicts which warrant the removal of the present liquidators of Kimberley.
26. The liquidators have just commenced proceedings against the directors of Atrium and Kimberley for fraudulent trading. The claim advanced in those proceedings is of the order of £50 million. This claim is Kimberley's only asset (apart from the claim, which I have described as "threadbare", to have beneficial ownership of part of the money that was in Atrium's bank account when Atrium entered administration). The litigation has only just begun. It is only possible because the joint liquidators are prepared to assume the personal risk of conducting that litigation against the directors without there being any assets in Kimberley against which they can seek reimbursement for any costs incurred or any costs awarded against them. They are prepared to do so because they have negotiated CFAs with a legal team, they have secured ATE insurance and HMRC is prepared to offer the joint liquidators an indemnity in relation to the proceedings.
27. If the joint liquidators are removed, none of these agreements will stand; all will have to be renegotiated by Mr Rimes or any other fresh liquidator, with a completely uncertain outcome to those negotiations. In the course of argument, and in the course of evidence, it has not been suggested that there is anyone who is better able to conduct the present litigation than the joint liquidators who, with the benefit of expert advice, have been considering the tax liabilities and the general organisation and structure of the companies since their appointment. In the course of the litigation which has been commenced the likelihood is that the court will have to address the question of what the liabilities of Atrium and Kimberley were in order to work out what contribution, if any, it would be just for the directors to make to the assets: so some of the difficult questions are likely to be ruled upon without the need to argue them out as between liquidators.
28. If one has to balance the theoretical conflict of interest between the claims which currently lie between the liquidators of Atrium and the liquidators of Kimberley (which will be capable of adjudication in the course of the present misfeasance proceedings, and are in any event subject to the right of the joint liquidators to apply to the court for directions for the approval of any compromise) against the real loss of advantage brought about by replacing the joint liquidators (prejudicing the conduct of the substantial claim which is Kimberley's only asset) the balance must come down in favour of leaving things as they are.
29. Mr Beattie's claim is as a creditor for £5,000. He says that his separate interest in the assets of Kimberley arising from that £5000 claim merits separate consideration by liquidators who are not involved with Atrium. He does so on the basis of perceived conflicts of interest which are themselves capable of management in accordance with the court's ordinary procedures. This consideration is of no weight when compared with the very significant and real disadvantage occasioned by disrupting the present litigation seeking to recover £50 million. Indeed, it has been something of a puzzle to me why Mr Beattie, for the sake of enhancing a dividend on a £5,000 claim, should launch an application such as this, which in monetary terms must cost him far more than any benefit he could conceivably obtain by a complete replacement of the joint liquidators team.
30. I accordingly dismiss the application.
COSTS JUDGMENT
31. MR JUSTICE NORRIS: Having made an order that the joint liquidators shall be entitled to recover their proper cost out of the liquidation estate, I must now consider the position between the parties.
32. I will order (and there had been no real opposition to this) that Mr Beattie shall pay the costs of the joint liquidators of and occasioned by his (unsuccessful) application for their removal. I will order that those costs shall, in default of agreement, be the subject of assessment and on the indemnity basis. I take the view that this case is out of the ordinary, a departure from the norm.
33. First, even allowing for the inclusion in the claim of both the calculation of interest and his claim to reimbursement of expenses, Mr Beattie's claim in the liquidation, when compared to that of the other creditors, is very small.
34. Second, the basis of his argument for the removal of the joint liquidators was that there were hypothetical conflicts of interest: conflicts of interest which in some cases (in particular relating to the proprietary claim) he had difficulty in identifying; conflicts of interest where it is plain that the court has said there is readily available machinery for resolution without removal of the present office-holders.
35. Third, this was, in my judgment, an extravagant claim. It was one that ought not to have been brought; and, even now, I find difficulty in seeing what real and substantial advantage it could ever have conferred on Mr Beattie, even if wholly successful.
36. I see no reason why the creditors (even if that means only HMRC as the other creditor) should bear any part of the costs incurred by the joint liquidators in resisting this claim. In the circumstances, because the case is out of the ordinary and was in my judgment extravagant, I consider the indemnity basis to be appropriate.