England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

		Civil Justice Centre 1 Bridge Street West Manchester M60 9 DJ
		06/09/2016

HH Judge Pelling QC:

Introduction

1. This was to have been the trial of all the various claims by the second to fourth claimants against the first to third defendants arising out of the purchase by the claimants of certain tax saving schemes on the advice of the first defendant, a limited company controlled by Mr Mark Coyle until his death and which carried on business as tax and accountancy advisors.
2. In broad summary, the claimants purchased tax saving schemes from scheme providers on the advice of the first defendant acting principally by Mr Coyle. In order to give effect to the schemes it was necessary for various structures to be created. The claimants maintain that these arrangements were void or voidable ab initio either by reason of the payment to and receipt by the first defendant of secret commissions and/or by reason of the undue influence of the first defendant acting by Mr Coyle and that in consequence they are entitled to rescind the arrangements by which effect was given to the schemes sold to them and/or the arrangements are liable to be set aside by reason of a common mistake ("the rescission claims"). The claimants maintain that if they succeed in obtaining rescission, or an order setting aside the arrangements for common mistake, they will be able to resist tax assessments raised against them by HMRC for unpaid tax, interest and penalties, which assessments have been raised on the basis that the schemes were not effective tax mitigation schemes.
3. Shortly before the commencement of the trial a settlement agreement was reached between the second to fourth claimants and the first to third defendants save and except in respect of the rescission claims. Following the settlement, the first to third defendants had no interest in the outcome of that issue and Ms Troy, and the solicitors who instructed her, withdrew following the conclusion of the settlement.
4. The second and fourth claimants (hereafter collectively "the claimants") remain acutely interested in the resolution of the rescission claims because of the impact success may have on their ability to resist HMRC's claims for at least interest and penalties. The fourth defendants are also acutely interested in that issue for similar reasons and strenuously resisted the claimant's case in relation to it. Their concern is not merely the position in relation to the claimants in these proceedings but that identified by Mr Bradley in paragraph 4 of his written opening submissions namely that success by the claimants may have wide ranging implications in other cases. In the result I heard argument in relation to that issue, from Mr ter Haar QC on behalf of the second and fourth claimants and Mr Bradley on behalf of the fourth defendants ("HMRC").
5. There was no factual dispute between the claimants and HMRC relevant to the rescission issue because HMRC were content to accept the factual assertions made by the claimants. In consequence, the trial proceeded without any live evidence on the basis of submissions of law made on the basis that the facts were as alleged by the claimants and on the assumption that the schemes sold to the claimants were technically sound. This position was without prejudice to any submissions of fact or law that HMRC may make in relation to any of the schemes entered into by the claimants to a Tax Tribunal concerning the technical effectiveness of the schemes.

Background

The Relevant Schemes and Claimants

6. The issues that I have to determine concern two types of scheme purchased by the claimants. The relevant scheme types are referred to in these proceedings as (a) the Employee Benefit Trust ("EBT") or Qubic schemes and (b) the Blackstar schemes. The rescission claims are by the second claimant ("BCR") in respect of the Blackstar schemes that it purchased and by the fourth claimant ("JLR") in respect of both the EBT and Blackstar schemes that it purchased. BCR invested £1.4 million in the Blackstar schemes that it purchased. JLR invested £330,000 in the Blackstar schemes that it purchased and a further £200,000 in the Qubic schemes that it purchased. I explain in more detail below how each of the schemes supposedly worked.

The Unlawful Secret Commissions Issue

7. This issue was determined in favour of the claimants by HH Judge Raynor QC sitting as a Judge of this Court in a judgment delivered on 23 March 2016, when hearing a summary judgment application in these proceedings.
8. In summary the first defendant (referred to in Judge Raynor's judgment as "MCA") had a contractual relationship with Added Value Solutions Limited ("AVN"), which in turn had contractual relationships with various scheme providers including Qubic Tax Limited ("Qubic") and Blackstar (Europe) Limited ("Blackstar"). As Judge Raynor explained in paragraphs 18 - 21 of his judgment:

"Under the contractual arrangement that MCA had with AVN, MCA became a tax member of AVN and as such obtained the various benefits and access to resources that are specified in paragraph 8 of the witness statement of Mr Flynn under the heading "Benefits of Membership". Those benefits included … the crucial benefit … specified in paragraph 8.10 of Mr Flynn's witness statement as

'Access to tax solutions provided by third parties (tax specialists) which have been subject to AVN due diligence procedures. Payaways were available for the accountant on the solutions … The solutions covered … more advanced planning solutions such as those provided in the present case by Blackstar'

19. AVN … received commission payments from tax specialists (such as Blackstar) when an accountant (such as MCA) introduced his client (such as BCR) to Blackstar in circumstances where the end client engaged the services of Blackstar. The level of commission payable was agreed between AVN and each tax specialist. What then happened was that the payments of commission referred to as "payaways" were paid by AVN to its tax member …

In short, by its contract with … MCA, AVN was obliged to pay a proportion of the commission that had been received by it from … Blackstar … on the conclusion of the agreement between …BCR … and the tax specialist. That proportion that was paid to … MCA was known as a "payaway".

21. The level of payaways was a matter for the negotiation of the intermediary with AVN. In the case of MCA, it was 60% of the commission which AVN had received."

As Judge Raynor said at paragraph 23 of his judgment:

"It is absolutely clear that MCA did not divulge to BCR the fact that it was receiving part of the commission that was paid by Blackstar to AVN at the conclusion of the agreement between BCR and Blackstar. Indeed, it is not clear to me that BCR had any knowledge of the existence or role of AVN. …"

As Judge Raynor had noted in paragraph 16 of his judgment, and as is common ground at this trial, the position was exactly the same in relation to payments made by AVN to the first defendant in respect of JLR.

9. Having noted the definition of a bribe set out by David Steel J in an earlier case as being "… a commission or other inducement which is given by a third party to an agent as such, and which is kept secret from the principal", he concluded in paragraph 31 of his judgment that the payaways received by MCA from AVN satisfied that definition and each "… was plainly an unlawful secret commission…" As he had said at paragraphs 28-29 of his judgment:

"28. … it is beyond question that Blackstar paid commission in order to induce AVN to procure introductions to end clients through intermediaries, who were known to be intermediaries. AVN then, by its contract with its intermediaries was obliged to pass on a proportion (60% in this case) to its member (namely MCA) and that was plainly a reward for the introduction and as an inducement to the intermediary to pass business through AVN. Blackstar knew that part of its commission would be paid to the intermediary.

29. … on proper analysis, AVN was making the payment to MCA, knowing that it was the agent of its principal as an inducement to obtain the placing of contracts by that principal with AVN's tax specialist. For its part Blackstar was making the payment via AVN, which it knew, and intended in my judgment, would be passed on in part to the agent so as to induce the agent – and by that I mean MCA – to obtain the business of its principal for it (namely Blackstar)."

The Schemes

10. The EBT Schemes

The EBT schemes in respect of which rescission is sought are those sold to JLR by Qubic. It is not in dispute that JLR was introduced to Qubic by the first defendant acting by Mr Coyle.

11. Once purchased, the EBT scheme structure required first that an EBT be established, the beneficiaries of which were the client company and its employees. The trusts relevant to the schemes sold to JLR were established by Deeds for a scheme for 2010 and 2011 each dated 22 November 2010. Nothing turns on the terms of the deeds other than to note that they appear to be in standard form and that the parties to each are (a) JLR and (b) Mr Coyle (who it will be recalled controlled the first defendant, who has since died and whose estate is the third defendant in these proceedings) and Ms Beverley Mills as joint First Trustees. The second defendant ("Mrs Coyle) replaced Ms Mills as joint trustee with Mr Coyle. It is not suggested in these proceedings that either Mrs Coyle or Ms Mills had knowledge of any of the facts and matters on which the claimants rely in support of the rescission claims. Mrs Coyle has not been sued in these proceedings in her capacity as a trustee.
12. The next stage was that the client company (here JLR) would make payments to the EBT. The best evidence that this is what JLR did is contained in the board minutes for 24 November 2010, which records the decision to pay £100,000 to the 2010 Trust and the minutes for the board meeting of 8 December 2010, which records that a decision had been made to pay £100,000 to the 2011 Trust. The next stage required that JLR relinquish its interest under the Trusts. Instructions to that effect were given by Mr Fielding on behalf of JLR by two emails to the first defendant of 8 December 2010, one in relation to the 2010 Trust and the other in relation to the 2011 Trust.
13. Mr Fielding was a shareholder and director of JLR. Once the company had surrendered its interest in the trust, the trustees would then lend money to those within the class of remaining beneficiaries. This is apparently what happened in relation to Mr Fielding because his bank statement shows the £100,000 being paid into his personal account on 24 December 2010 as to £10,000 subsequently corrected in the course of the clearing process to £100,000 by adding a credit of a further £90,000.
14. The ostensible tax benefit to be derived from this scheme was that (a) the client company was entitled to treat the payments made to the EBT as corporation tax deductible and (b) those that received a payment did so without becoming liable to tax or National Insurance because the payment was ostensibly a loan and thus was not taxable in their hands other than to the extent of the value attributable to the benefit of being able to borrow the sum received interest free. If the schemes were not effective then the client company would be liable to HMRC for the income tax and national insurance contributions that would otherwise have been collected under the PAYE scheme in the normal way, again together with penalties and interest. It is unclear to me whether on this hypothesis, the client company would also be liable to corporation tax on the amount paid to the trust. That is likely to depend on whether corporation tax would in any event have been payable had the sums been paid out as income to the recipients. That is likely to depend on whether the sums received by the recipients were in lieu of salary or directors' fees or dividends.
15. The Blackstar Schemes

These schemes were designed and supplied by Blackstar (Europe) Limited ("Blackstar"). The schemes were ones by which employees would agree to subscribe for shares in the client company at par and the client company would either lend or give to the employee the whole of the price for subscribing for the shares. The employee would be required to pay typically £0.01p for a share with a par value of £1.00 with the employee keeping the remaining £0.99p. The theory underlying this scheme is that the payment by the company would be corporation tax deductible and the employees (or the client company on their behalf) would avoid liability for income tax and National Insurance contributions.

16. There are obvious difficulties about such a scheme. Potentially at least it involves the provision of financial assistance by the client company for the purchase of shares in itself, which is prima facie unlawful – see s.678 of the Companies Act 2006. Allotting shares at less than the duly payable price is likely to be a breach of s.580 of the 2006 Act, which will expose the allottee to the sanction referred to in s.580(2). Neither of these points appear to have been considered by Blackstar, MCA, or AVN, and are not points that HMRC rely upon at any rate in these proceedings. If ineffective, the unpaid tax will have to be paid together with interest and penalties. Although this outcome may be corporation tax neutral in relation to payments otherwise payable to employees as salary and to directors as directors' fees (because salaries and fees paid in the normal course would be corporation tax deductible) it would not be in relation to payments to shareholders in lieu of dividends and in any event that is not the position in relation to the tax that would otherwise have been payable by the employees, directors or shareholders concerned in the ordinary course, or payable by the company on behalf employees under the PAYE scheme.
17. There are a number of documents that illustrate how these schemes operated in practice. It is not necessary for me to go through each in this judgment because the existence and purported effect of the schemes is not in dispute and because the effectiveness of the schemes is not in dispute in these proceedings. At the heart of the schemes lies an agreement between the client company on the one hand and the receiving individual concerned ("allottee") on the other. The agreement of 20 March 2012 between BCR and the sixth defendant ("Mr Donovan") is typical. It provides that in return for subscribing for Class F shares, the employer would make two payments to Mr Donovan – a payment of £3,000 and a payment of £297,000. The £3,000 was to be applied in making what is called the Allotment Payment with the balance being payable on payment being called for by notice or on the appointment of a liquidator or on the allottee ceasing to be employed by the company unless the shares have been transferred to a third party prior to the end of the employee's employment.

Parties to the Schemes

18. It will by now be appreciated that the documentation that carries into effect each of the schemes are agreements or arrangements made by and between parties other than the parties to any agreement between the scheme supplier and the client company or at any rate include parties other than the client company and do not in any case include the scheme supplier. The Blackstar scheme depended upon there being (a) an agreement between the client company and the allottee and (b) an application form for the allotment of shares from the allottee to the client company. The EBT Scheme depended upon the creation of a trust by deed to which the client company and trustees were parties followed by payments to the trustees by the client company, the disclaimer of interest by the client company and a distribution by the trustees to the receiving party concerned. No point has been taken concerning the role of Mr Coyle as a first trustee under the EBT schemes. In my judgment his role as such is immaterial for present purposes. Mr Coyle was a trustee in his personal capacity, not in his capacity as a director of or shareholder in the first defendant and in any event the first defendant has no interest in the trusts. Further he was in any event a joint trustee with first Ms Mills then Mrs Coyle, neither of whom are alleged to have had knowledge of the facts and matters which the claimants rely on in these proceedings.

The Effect of the Bribery Finding

19. The claimants submit, and it is common ground that where bribery is established (as it has been in this case) the principal may elect to rescind the transaction entered into with the briber – see Panama and South Pacific Telegraph Company v. India Rubber, Gutta Percha and Telegraph Works Company (1874-5) LR 10 Ch App 515 per James LJ at 525-6 and Logicrose Limited v. Southend United FC Limited [1988] 1 WLR 1256 per Millett J as he then was at 1260F, where he held that "… a principal who discovers that his agent has obtained or arranged to obtain a bribe or secret commission from the other party to the transaction is entitled … to elect to rescind the transaction…". The common feature of each of these formulations however, is that what was being rescinded was the transaction between the briber and the principal whose agent had been bribed in respect of which the bribe had been paid. Thus in this case it would have been open to the claimants to seek rescission of the agreement between each of them respectively and the scheme providers. It is this that leads Mr ter Haar to submit this is not enough and that if the claimants "… are to escape from the hard line taken by HMRC, it is necessary to rescind the transactions themselves". He adds, tellingly in my judgment, that "... researches have not revealed any case exactly on all fours with this". He suggests that this is because the proposition is an obvious one.
20. I am unable to accept the claimants' submissions on the issue I am now considering. In my judgment the reason why there is no authority that supports the proposition for which Mr ter Haar contends is because there is not in truth a principle to the effect for which he contends. It is a strict rule of law that where one principal to a transaction (in this case the scheme provider concerned) pays a bribe to the agent (in this case the first defendant) of the other principal to the transaction (in this case the claimant concerned) that is a fraud on the claimant concerned which (a) renders the first defendant liable to account to the claimant concerned for the amount of the bribe or pay damages at the claimant's option and (b) entitles the claimant concerned to rescind the contract with the scheme provider.
21. It was this rule that was being referred to in each of the authorities I have so far referred to and it was the same rule that was referred to by Eder J in Otkritie International Investment Management Limited and others v. Urumov and others [2014] EWHC 191 (Comm) at ¶71, where he sets out comprehensively the consequences of a bribe being established by reference to citation from earlier authority as being that the bribed agent and the briber were each jointly and severally liable to account for the bribe or, at the option of the principal, for damages and "… the principal is also able to rescind the contract with the payer of the bribe.". This is a rule of public policy applied strictly for the purposes of deterring bribery. It should not be and has not been extended further.
22. It was submitted by Mr ter Haar that this was an artificial analysis on the facts of this case because the allottees are before the court in relation to the Blackstar scheme claims and the innocent third parties are before the court in relation to the EBT claims. In my judgment this is not an answer since none of those parties are seeking rescission. Aside from that however, whether all parties now want rescission or not is beside the point. I accept as correct the principle set out in Snell's Equity 33^rd Ed., at ¶15-09. It is a statement of general principle supported by the authorities referred to in the footnotes. In the example provided, C is the first defendant, A is the claimant concerned and B is the third party or parties with whom the claimants concerned entered into contractual relations in order to carry the relevant scheme into effect. In those circumstances:

"Where … C wrongfully causes A to contract with B, the contract will only be set aside (a) if C was B's agent acting within the scope of B's actual or apparent authority or (b) if B actually knew of the factual circumstances that are treated by the court as vitiating A's consent …"

It is not alleged in relation to the parties I am currently concerned with that (a) is of any application and, in relation to the EBT scheme, that either Mrs Coyle or Ms Mills or any of the recipients of payment from the trust had the knowledge referred to in (b), or in relation to the Blackstar scheme that any of the parties to the contract between the client company and the allottee had the actual knowledge referred to in (b). Thus, while the parties to the arrangements may discharge them by agreement, they cannot be treated as being void or voidable ab initio. By a post judgment note, Mr ter Haar said that he had contended that Mr Coyle acted as agent for the various companies in presenting the scheme to those behind the companies. I agree that he made such a submission. He maintained that if the premise was correct then (a) within the quotation from Snell would apply. The point is not one that arises because, as Mr ter Haar said in paragraph 7 of his Note, none of the claimants I am concerned with is an allottee claiming rescission. In those circumstances it would be wrong of me to express any view concerning this submission.

23. The principle summarised in the quotation from Snell's Equity set out above that has been consistently applied wherever rescission by court order for whatever reason has been the issue. That this is so is apparent from the authorities that I refer to below in relation to undue influence. As long ago as 1853 it was the principle applied in relation to contracts induced by fraudulent misrepresentation – see Pulsford v. Richards (1853) 17 Beav. 87 where at 94-95 Sir John Romilly MR stated the principle as being:

"The ground on which this relief is asked for is that principle of equity which declares that the wilful misrepresentation of one contracting party which draws another into a contract, shall, at the option of the person deceived, enable him to avoid or enforce that contract. I think it convenient, in the present case, to state my view of this principle of equity, before applying it to the facts of this case …

The basis of this, as well as of most of the great principles on which the system of equity is founded, is the enforcement of a careful adherence to truth in all the dealings of mankind. The principle itself is universal in its application to these cases of contract. It affects not merely the parties to the agreement, but it affects also those who induce others to enter into it. …

The results, however, which flow from the application of this principle, differ materially in different cases. In the case where the false representation is made by one who is no party to the agreement, entered into on the faith of it, the contract cannot be avoided, and all that equity can do is to compel the person who made the representation to make good his assertion as far as this may be possible. In cases, however, where the false representation is made by a person who is party to the agreement, the power of equity is more extensive; there the contract itself may be set aside if the nature of the case and condition of the parties will admit of it, or the person who made the assertion may be compelled to make it good." [Emphasis supplied]

Bribery is, as Mr ter Haar accepted, a specialist variety of fraud. There is no reason why the long established principle referred to in Pulsford v. Richards (ante) should apply in relation to deceit but not in relation to a bribery case. It follows that if a principal (A) has been induced to enter into a contract with an innocent third party (B) as a result of the bribery of A's agent (C) by a stranger to the contract (D) then the remedy for any loss suffered by A lies in damages against C and D not in rescinding the contract between A and B.

24. Here, the claimants' remedy if there is one lies in damages against the first and third defendants. On the assumed facts of this case namely that the schemes are effective schemes, no damage has been suffered. Although the claimants could have claimed the commission received by the first defendant as money had and received – for which no causal link need be proved – they chose not to do so but instead pursued a claim for damages. Once that step was taken, the assumption that the schemes were effective is fatal to any claim in damages.

Undue Influence

25. It is argued on behalf of the claimants that in the circumstances of this case, the advice that was given to the claimants and which induced them to enter into the arrangements that they now allege were voidable ab initio was given by Mr Coyle; that the evidence establishes that the individuals who controlled the claimants trusted Mr Coyle, that there had been a long and close relationship between Mr Coyle and the claimants and the individuals who controlled them and that Mr Coyle owed them a duty not to put himself or the first defendant in a position of conflict with the interests of the claimants. In those circumstances, it was submitted that the relationship between Mr Coyle (or, perhaps, the first defendant acting by Mr Coyle since the contractual relationship was between the first defendant and the claimants) and the claimants or the individuals in control of the claimants was such that the former had a level of ascendency over the latter sufficient to engage the undue influence principle. It was submitted that Mr Coyle took unfair advantage of that ascendency by advising the claimants to acquire the schemes from the scheme providers because in giving that advice he was putting his own and/or the first defendant's interests (as a potential recipient of a payaway) before those of the claimants in relation to schemes that for a variety of reasons on proper analysis would not provide the benefits that Mr Coyle maintained would accrue. It is submitted in those circumstances that the relationship between Mr Coyle and the claimants and the individuals who controlled them was one where Mr Coyle owed to the claimants an obligation of candour and protection and that he had betrayed that trust by preferring his own interest over those of the claimants.
26. In this area of the law there are two types of relationship that can arise – one where undue influence will be presumed where the impugned transaction is one that calls for an explanation and those where actual undue influence is established. Mr ter Haar submits that the relationship between the first defendant and Mr Coyle on one side and the claimants and their respective connections on the other fell into the first category. This is disputed by HMRC. It is not necessary for me to resolve that issue because HMRC do not dispute the factual evidence relied on by the claimants and I accept that this evidence establishes that the individuals who controlled the claimants placed trust and confidence in Mr Coyle and thus the first defendant in relation to advice he gave them concerning tax mitigation. It has been established authoritatively that the first defendant accepted a secret commission and thus acted fraudulently as between it and the claimants and that in advising the claimants to acquire and operate these schemes he and it acted contrary to the claimant's interest for the purpose of obtaining at least the payaway attributable to the products they acquired from the scheme providers. What I am unable to accept is that on these facts the claimants are entitled to any remedy other than a claim in damages against the first defendant for breach of contract or negligence or breach of fiduciary duty or deceit. My reasons for reaching that conclusion are as follows.
27. The circumstances in which a transaction can be rescinded for undue influence was authoritatively considered in Royal Bank of Scotland Plc v. Etridge [2001] UKHL 44 [2002] 2 AC 773, an authority on which both parties relied. That case was concerned with whether a wife was able to impugn a guarantee and charge over a jointly owned matrimonial home in favour of a bank given to secure her husband's debts. In my judgment the key point that emerges from this authority for present purposes is that identified by Lord Nicholls at ¶40. Having identified the point that in the cases before the House, a transferor wife was seeking to avoid a transaction she had entered into with a bank on the ground that her apparent consent had been obtained by the undue influence of her husband, he then continued:

"The traditional view of equity in this tripartite situation seems to be that a person in the position of the wife will only be relieved of her bargain if the other party to the transaction (the bank in the present instance) was privy to the conduct which led to the wife's entry into the transaction. Knowledge is required. … the law imposes no obligation on one party to a transaction to check whether the other party's concurrence was obtained by undue influence. But O'Brien has introduced into the law the concept that in certain circumstances a party to a contract may lose the benefit of his contract entered into in good faith if he ought to have known that the other's concurrence had been procured by the misconduct of a third party."

The first part of this summary of the law reflects that which I have set out above in relation to the bribery allegation. Lord Scott expressed a similar view in ¶144:

"If contractual consent has been procured by undue influence or misrepresentation for which a party to the contract is responsible, the other party, the victim, is entitled, subject to the usual defences of change of position, affirmation, delay etc to avoid the contract. But the case is much more difficult if the undue influence has been exerted or the misrepresentation has been made not by the party with whom the victim has contracted, but by a third party. It is, in general, the objective manifestation of contractual consent that is critical. Deficiencies in the quality of consent to a contract by a contracting party, brought about by undue influence or misrepresentation by a third party, do not in general, allow the victim to avoid the contract. But if the other contracting party had actual knowledge of the undue influence or misrepresentation the victim would not, in my opinion, be held to the contract."

28. As Lord Nicholls went on to say at ¶43, the decision in O'Brien was directed to a special class of contracts namely suretyship transactions. He concluded at ¶87-88 that O'Brien was confined in its scope to suretyship cases other than sureties taking on such obligations on a commercial basis. This case is not concerned with such a transaction. Lord Nicholls also emphasised that such contracts were tripartite being a contract to which the debtor, creditor and surety are parties whereas again that is not this case. There was a contract between the first defendant and the claimants, there was a contract between the first defendant and AVN, and there were contracts between the claimants and scheme suppliers. Each contract was a separate arrangement and each had different parties. None are under challenge in these proceedings. The agreements and arrangements by which the schemes were carried into effect were separate from each of the agreements I have just referred to and again had different parties. It is only these latter agreements and arrangements that are under challenge in these proceedings.
29. This approach is a particular application of the general principle summarised in the paragraph from Snell's Equity quoted earlier. The circumstances of this case do not come within the scope of the principle there identified, which the statements of principle quoted above establish apply in relation to claims for rescission based on undue influence as they do to claims based on fraud or bribery. Although it is clear from the statements of principle referred to above that a different approach may be appropriate in relation to surety contracts and that might be capable of extension to other tripartite contracts, any such exception to the general rule is of no application on the facts of this case. As I have explained neither scheme is concerned with a tripartite contract in the sense that phrase is used in Royal Bank of Scotland Plc v. Etridge (ante) and in any event it was not suggested by Mr ter Haar that O'Brien had any application to the facts of this case or that it could permissibly be extended to cover such facts.

Common Mistake

30. It is common ground between the parties that the applicable test for the avoidance of a contract on the basis of an alleged common mistake is that set out by the Court of Appeal in Great Peace Shipping Limited v. Tsavliris Salvage (International) Limited [2002] EWCA Civ 1407; [2003] QB 679 at ¶76:

"If one applies the passage from the judgment of Lord Alverstone CJ in Hobson v Pattenden, which we quoted above to a case of common mistake, it suggests that the following elements must be present if common mistake is to avoid a contract. (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible. "

It was submitted on behalf of HMRC that the common mistake doctrine is juristically separate and different from rescission and they accept that if the claimants are able to establish the ingredients referred to above, then the claimants would be entitled to succeed.

31. It is necessary first to identify the common mistake that the claimants allege was made. The common mistake must obviously be one that is made by the parties to the agreement that the claimants seeks to set aside. It is unclear to me whether this ground is relied on in relation to the EBT schemes. It is difficult to see how it could be because common mistake is a basis for setting aside a contract and the EBT schemes are not carried into effect by agreement but by the creation of a trust followed by an ostensibly discretionary distribution by the trustees to members of the class of beneficiaries identified in the trust deed that remained after the client company had surrendered any interest it had as a beneficiary. In those circumstances, I consider that this ground is one that is relevant only to the Blackstar schemes, which are carried into effect by agreement as I explained earlier in this judgment. Even if this is wrong, I am satisfied that the doctrine is not one that is available to assist the claimants in the circumstances of this case. My reasons for reaching that conclusion are as follows.
32. I start by reminding myself that the parties to the Blackstar scheme agreements are (a) the client company, which is offering the new shares to the allottee and (b) the allottee. Thus the common assumption that must be established is one that is shared by both the client company and the allottee. In relation to JLR, the relevant parties are it and Mr Fielding. Mr Fielding was the shareholder in and director, but not an employee, of JLR. In relation to BCR, the relevant parties are it and the fifth and sixth defendants. The fifth defendant ("Mr McMahon") was the sole director of and a shareholder in BCR. The sixth defendant ("Mr Donovan") was a shareholder in BCR.
33. It was submitted that the first common assumption (which applied only to JLR and Mr Fielding) was that the scheme would result in a corporation tax saving when it is unlikely that such a saving would result because it was unlikely that JLR would make the profits necessary to trigger a liability to corporation tax given the close and parasitical relationship that existed between JLR and SS Logistics Limited and given the difficult financial situation that the latter was in. It is not necessary that I describe this in any detail. It is sufficient to say that SS Logistics Limited at the relevant time was loss making and the business of JLR was to a substantial extent dependent on the continued existence and success of SS Logistics Limited. If SS Logistics Limited was to fail, then that would have an obvious and substantial adverse effect on JLR's profitability. The second common assumption relied on in relation to JLR was that Mr Fielding was an employee whereas in fact he was not. In relation to BCR, this last point was repeated in relation to Mr Donovan.
34. There are a number of difficulties about the way in which this part of the case has been put by the claimants. First and most fundamentally, assuming what has been identified as being the common assumptions relied on otherwise satisfy all the requirements of the doctrine, the non-existence of the state of affairs that have been assumed must render performance of the contract impossible. The assumption that JLR had made or would continue to make profits that would otherwise trigger a liability to corporation tax notwithstanding the financial circumstances of SS Logistics Limited does not render the contract that JLR seeks to have set aside impossible to perform. It means only that the fiscal consequences of the arrangement would not be, or be as, beneficial as might otherwise have been the case. It is not suggested that JLR did not have the means of making the payments, which were in fact made.
35. The other assumed state of affairs concerns the status of the recipients of the payments. There are a number of difficulties about this. First, I do not see how it can even arguably be asserted that the parties to the contract between the client company and the allottee described earlier can be said to have assumed that the allottees were employees when they were not. Both parties, obviously, knew or would have known the true status of the allottees. Similar considerations would apply in relation to the parties to the EBT schemes.
36. Even if it was said that the common assumption was that implementation of the schemes would benefit the recipients whether or not they were employees that does not assist the claimants for the following reasons. First, if the scheme works from the recipients' point of view where the recipient is an employee then I do not see why, and Mr ter Haar did not explain why, it would not work for any other recipient who would be liable to pay tax on the sum received but for the use of the scheme as a method for affecting payment. On the face of it a director receiving director's fees or a shareholder receiving a dividend would be liable to pay tax on the sum received. If the scheme prevented the sum received from being income, then I do not see why that would not apply equally in relation to a director who would otherwise be entitled to receive fees or a shareholder who would otherwise be entitled to receive dividends.
37. Secondly, and perhaps more importantly, even if the scheme worked only in relation to employees otherwise entitled to a salary but not in relation to directors otherwise entitled to receive fees or shareholders otherwise entitled to receive dividends, that is not even arguably a state of affairs that renders performance of the contract impossible. On the hypothesis I am now considering, the assumption that the contract would benefit the recipients whether or not they were employees merely means that the contract will not be as fiscally beneficial to the recipients as they thought or (if the consequence is that they are exposed to penalties and interest charges that would otherwise have been avoided had the payment been taken initially as fees or dividend) will be fiscally disadvantageous.

Conclusion

38. For the reasons set out above the first and fourth claimants are not entitled to an order rescinding the agreements and arrangements by which the schemes they purchased from respectively Qubic and Blackstar on the advice of the first defendant were carried into effect or to an order setting aside those agreements and arrangements for common mistake.

Order

39. The parties have agreed the terms of an order that gives effect to this judgment, the substantive part of which dismisses the Rescission Claims referred to above. I make an Order in the terms agreed between the parties.