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Cite as: [2004] UKSC SPC422, [2004] UKSC SPC00422

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R & Anor v HM Inspector of Taxes [2004] UK SPC00422 (18 May 2004)

SPC00422

Capital gains tax – Residence of companies – Inter-group disposal – Whether both companies resident or both non-resident – Settlements – Gifts to company owned by non-resident trustees – Gains held over – Disposal by company incorporated overseas to subsidiary – Settlors assessed on gain – Whether no gain no loss on inter-group disposal – Central management and control – Anglo-Dutch DTR agreement Art 4(3) - _Place of effective management – TCGA 1992, ss 13, 14(2), 86, 171(1), Sch 5 para 1(3) – Appeals dismissed

THE SPECIAL COMMISSIONERS

Mr R Appellant

- and -

MRS L M HOLDEN

(HM INSPECTOR OF TAXES) Respondent

Mrs R Appellant

- and -

MRS L M HOLDEN

(HM INSPECTOR OF TAXES) Respondent

Special Commissioners: THEODORE WALLACE

DR NUALA BRICE

Sitting in private in London on 1-5 December 2003

John Tallon QC, instructed by a firm of chartered accountants, for the Appellants

Timothy Brennan QC, instructed by the Solicitor of Inland Revenue, for the Respondents

© CROWN COPYRIGHT 2004

ANONYMIZED DECISION

These appeals arise out of a sophisticated scheme devised on behalf of the Appellants to avoid capital gains tax on the disposal in July 1996 of shares originally held by the Appellants in a business built up by Mr R. The notice of appeal to the Inland Revenue was on 13 November 2001 against closure notices and assessments dated 17 October 2001 following notices of enquiry on 27 January 1999. Notice of hearing was served on the Special Commissioners by the Appellants on 30 May 2002.

The appeals concern the liability of the Appellants as settlors to capital gains tax under section 86 of the Taxation of Chargeable Gains Act 1992 in respect of gains treated as accruing to a number of non-resident settlements on the sale of shares which had been given by the Appellants to C Ltd, a company formed by the trustees of the settlements, and transferred by that company to E BV, the gains being attributed to the trustees under section 13.

The dispute concerns the applicability of section 171. Mr Tallon contended that both C Ltd ("C Ltd") and E BV ("E BV") were non-resident with the result that under section 171, which applied by reason of section 14, no gain accrued on the disposal. The primary dispute concerned the residence of E BV, which was incorporated in the Netherlands and was a wholly-owned subsidiary of C Ltd which was registered in the British Virgin Islands.

Mr Tallon's alternative contention was that if E BV was resident in the United Kingdom then C Ltd was also resident in the United Kingdom.

Mr Brennan contended that section 171 did not apply because on a proper analysis of the facts the central management and control of E BV was in the United Kingdom being exercised by Mr R or on his behalf and there was no evidence that C Ltd was resident in the United Kingdom.

The capital gains tax on the gifts by the Appellants had been held over. Mr R was assessed under section 86 to £11,149,600 tax on a gain of £27,874,000. Mrs R was assessed to £1,167,881 on a gain of £2,919,700. The appeal hearing was concerned with the issue of liability rather than quantum.

It was common ground that if section 171 did not apply the gain on the disposal of shares by C Ltd was assessable on the Appellants by reason of the combined effect of sections 13 and 86 and Schedule 5, paragraph 1(3) of the Taxation of Chargeable Gains Act 1992.

At the relevant time section 171(1) provided as follows:

"(1) … where a member of a group of companies disposes of an asset to another member of the group, both members shall … be treated … as if the asset … were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other …"

Under section 170(2)(a) it is provided that, except as otherwise provided, references to a company in section 171 apply only to companies resident in the United Kingdom. Section 14(2) provides,

"(2) Sections 171 … shall apply in relation to non-resident companies which are members of a non-resident group of companies, as they apply in relation to companies resident in the United Kingdom which are members of a group of companies."

The evidence

The following Statement of Agreed Facts was agreed prior to the hearing:

"1. [GC Ltd] was a trading company operating the [Group Ltd] chain of card shops. [Mr and Mrs R] held 380,920 and 40,000 ordinary shares respectively in the company. These shares formed approximately 96% of the ordinary share capital. Other shares were held by a number of employees and a personal acquaintance of [Mr R], [Mr B].

On 27 March 1995 [Mr and Mrs R] engaged [a firm of chartered accountants' Corporate Finance department] to locate a buyer for the company.

On 18 October 1995 [Mr and Mrs R] set up a number of settlements (the [Mr R] Family Settlements Nos 1-8 the [Mrs R] Settlements Nos 1-2 and the [Mr R] Discretionary Settlement). The amount settled on each trust was £1,000. Apart from the Discretionary Settlement, either [Mr or Mrs R] had a life interest in each settlement. The trustee of the 10 life interest settlements was [A Trustees (BVI) Limited] (which changed its name on 6 March 1996 to [Z Private Trust (BVI) Limited)] a wholly owned subsidiary of [Z], who were based in Geneva. [Z] was the trustee of the Discretionary Settlement.

On 13 October 1995 the trustees of the above settlements incorporated [C Ltd, a company registered in the British Virgin Islands. The share capital was split into A shares which were held by the interest in possession settlements and B shares which were held by the discretionary settlement. The B shares carried all the rights to the assets of [C Ltd] in the event of a winding up.

[GC Holdings Ltd] (formerly [V Limited]) was formed as an off the shelf company on 22 September 1995. The company had an authorised share capital of 100,000 £0.01 ordinary shares. [Mr R] acquired 200 £0.01 ordinary shares on 24 October 1995. A further 90,297 of these shares were allotted to [Mr R] and the remaining 9,503 shares allotted to [Mrs R] on 24 October 1995 for cash.

On 24 October 1995 [Mr and Mrs R] gifted 45,248 and 4,751 shares respectively in [Holdings] to C Ltd.

On 26 October 1995, [Mr & Mrs R gifted] 380,920 and 40,000 shares respectively in [GC Ltd] to [Holdings]. The chargeable gains arising on the transfers of the shares to [Holdings] were held over under s.165 TCGA 1992.

On 27 October 1995, [Mr & Mrs R] gifted 4,525 and 475 shares respectively in [Holdings] to [The R Children's Trust], a UK resident accumulation and maintenance trust established for the benefit of the children of [Mr R], being [SJR] (date of birth 17 April 1976) and [SRR] (date of birth 19 November 1978). The chargeable gain arising on the transfers into the trust were held over under s.165 TCGA 1992.

[C Ltd] purchased from [A BV], a subsidiary of the [Trust Company Bank NV], on 18 July 1996 all the shares in a dormant Dutch incorporated company [E Holding BV]. [Trust Company] was appointed as sole managing director of [E BV] and took an indemnity from [Z].

On 23 July 1996 C Ltd disposed of its shareholding in [Holdings] to [E BV] for £23.7 million plus, in the event of a sale within 3 years in excess of that amount, 95% of such excess. A group structure diagram as at August 1996 [was] attached.

On 21 October 1996 [E BV] sold its shares in [Holdings] to [Group Limited] for £30,799,384. The other shareholders (both in [Holdings] and the minority shareholders in [GC Ltd]) also sold their shares simultaneously.

The following statement (the correctness of which is disputed by the Inland Revenue) was made by way of additional disclosure in the capital gains tax section of the income tax returns of [Mr & Mrs R] for the year ended 5 April 1997.

'During the year [C Ltd], the BVI company owned by [The R family settlements 1-8] and [Mrs R Family Settlements 1&2] acquired a Dutch incorporated and resident company [ E BV] and sold its [Holdings] shares to [E BV] in exchange for debt. [E BV] subsequently disposed of the [Holdings] shares making a gain which, if it were to be calculated in accordance with UK CGT principles, would amount to around £30,800,000. The entire share capital of [Holdings] was purchased at this time by a third party.

I believe that the disposal of shares in [E BV] does not result in a charge to capital gains tax arising on me by virtue of s 13 TCGA 1992 and/or s 86 TCGA 1992 as [E BV's] gains are within the charge to Dutch tax (calculated by reference to their principles) and Article 13 of the Anglo/Dutch taxation treaty provides for gains from such property to be taxable in the state where the person making the disposal is resident.'"

The diagram referred to at paragraph 10 of the agreed Statement showed [C Ltd] as owning all the shares in [E BV] which in turn held 49.99 per cent of the shares in [Holdings]. [Mr R] held 40.724 per cent of the shares in [Holdings], [Mrs R] held 4.277 per cent and a trust for their children held 5 per cent. [Holdings] held 96.24 per cent of the shares in [GC Ltd] with [Mr B] holding 1.86 per cent and five other shareholders holding 0.38 per cent each. [GC Ltd] had five wholly-owned subsidiaries.

Oral evidence was given by four witnesses:

Witness 1, chartered accountant, who was at the time a partner in the firm of chartered accountants and head of the North West Corporate Finance team;

Witness 2, senior trust manager at Z (Suisse) SA;

Witness 3, solicitor, partner in the firm of solicitors; and

Witness 4, a partner of the firm of chartered accountants.

A statement by Nyree Victoria Lane, legal officer, employed in the office of the Solicitor of Inland Revenue, was agreed.

A statement by Mr W, of Dutch Trust Company, who was unfit to attend, was not agreed by the Respondent but was admitted in evidence under regulation 17(5) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994. This is subject to the weight to be given to it.

There was a substantial bundle of documents primarily produced by the Appellants but including material obtained by the Respondent from third parties under section 20 notices.

In addition to the Agreed Facts, we find the following primary facts.

The engagement letter of 27 March 1995 was signed by the two Appellants and followed a meeting between Witness 1, who was head of the North West Corporate Finance team of the firm of chartered accountants, and Mr R who was exploring the market with a view to sale. Profit after tax of GC Ltd was estimated at £7.31 million for 1994/95 and £10.72 million for 1995/96. Sale of all the shares including those held by staff was envisaged. Because the business had been built up by Mr R there was a very large contingent liability to capital gains tax on the Appellants' shares.

The possibility of the transfer of shares owned by the Appellants into trust prior to sale was envisaged in the engagement letter which included the following,

"To the extent that any of your shares are transferred into trust prior to the sale, it is agreed that they will be transferred subject to this letter of engagement."

Arrangements for tax planning were the subject of a separate letter of engagement from Witness 4 which was not exhibited.

Witness 1's letter included the following,

"We will manage negotiations and advise you on the relative merits of the final offers. During this latter phase, we will assist you in structuring the proposed transaction and in any further negotiations which may be required.

During the final phase of the transaction we will act as the co-ordinating point for you, the purchaser and their respective lawyers to ensure matters are brought to a swift conclusion. This phase of the assignment will include review of contractual documentation and final documentation of tax planning."

Fees were on a sliding scale, with 0.75 per cent up to £100 million as a success fee with a documentation fee and retainer of £75,000 to be deducted. Initially completion was planned for April 1996 in the new tax year.

While Witness 1's team was preparing material and researching potential purchasers, Witness 4 met Mr R on a number of occasions to discuss tax planning.

On 11 August 1995 following a meeting Witness 4 wrote a letter of eleven pages including schedules to Mr R confirming details of an off-shore structure under which the Appellants would give their shares in GC Ltd to a new UK resident company in which they would be the only shareholders and they would then give 49.9 per cent of the shares in that new company to a new non-resident company, the shares in which were to be held by the trustees of non-resident settlements established by the Appellants. The gain on the gift of the GC Ltd shares would be held-over and no immediate charge to tax would arise on the sale by the non-resident company of shares in the new UK company.

Witness 4's letter contained a number of other proposals in respect of the trusts and the shares in the new UK company to be retained.

The firm of chartered accountants' charges in respect of the off-shore structure were agreed at £10,000 once the structure was in place and a further £20,000 on sale of the business to an independent third party; legal fees would be extra but should not exceed £3,000 for the off-shore structure. Witness 4 suggested Z (Suisse) as trustees and as directors of the non-resident company and wrote that their fees were normally £2,500 to set up the structure and £2,500 annually.

These proposals were duly implemented : see paragraphs 3 to 7 of the Agreed Facts.

On 19 October 1995 Z Private Bank & Trust (BVI) Ltd, the sole subscriber to C Ltd, appointed X Nominees Ltd ("X Ltd"), a company incorporated in the British Virgin Islands, as sole director of C Ltd. X Ltd resolved that the shares in C Ltd be issued to the trustees of the eleven settlements. X Ltd resolved that Z (Suisse) S.A. be appointed to provide Corporate Management Services with fees commensurate with the work but not less than 5,000 Swiss francs per annum; Z Bank (Suisse) S.A. were appointed as bankers. A resolution took notice of the fact that X Ltd was "controlled by Z (Suisse) S.A. and/or Z Bank (Suisse) S.A. and/or Z Bank PLC and/or their subsidiaries or associated companies." It was resolved that the administrative office of C Ltd be x, x, Geneva. That was also the address of Z (Suisse).

On 24 October 1995 a series of events occurred. The Appellants sent share certificates in Holdings and transfers by way of gift to C Ltd at Tortola, British Virgin Islands. X Ltd, having tabled letters of gift, resolved to accept them. On the same day X Ltd sent the certificates and transfers back to the directors of Holdings, who were the Appellants, at the address in Rugby of the solicitors who had prepared the settlements. Again on the same day the Appellants as directors of Holdings resolved to approve the transfers and wrote to C Ltd at Tortola enclosing the new share certificates. The result was that C Ltd held 49,999 of the 100,000 shares in Holdings. It is not clear how all of this could have happened on the same day, however it was agreed (paragraph 6 of the Agreed Facts) that the gift of the shares was on 24 October.

Meanwhile Witness 1's team were seeking buyers for the business. Four indicative offers were received by Christmas 1995. One of these was from MV Ltd and NV (together referred to as "MNV") envisaging acquisition by a newly formed venture capital company; they wished to build on the strengths of the existing management and welcomed continued investment by Mr R. Their indicative offer of £90-100 million assumed an operating profit of £14.5 million in the year to June 1996. The ongoing commitment of key management was viewed as critical.

Although trading over Christmas 1995 was disappointing, MNV showed continuing interest. Mr R and his managers made a presentation on 19 January 1996. Following a further visit to GC Ltd a memorandum headed "Re Project Marvel" dated 12 March 1996 by MNV stated that Mr R was genuinely undecided about selling and had no firm personal plans. The memorandum stated, "The business has outgrown his management style but he is loath to let go. It probably requires a firm offer to flush him out." Later it stated, "The value of the business is unclear."

On 20 March 1996 MNV made an offer subject to contract to the firm of chartered accountants of £85 million, comprising £80 million plus £5 million corporation tax for the current year, on the basis of the selling shareholders re-investing in a 20 per cent share of the institutional investment in loan stock and equity; Mr R would be offered a consultancy agreement; key managers and directors would enter into service agreements. The offer was based on an operating profit of £13 million to June 1996 and was reduced to £75.2 million on 26 April following a reduced operating profit forecast of £11 million.

The offer was further modified on 15 May 1996 to £72 million on the basis of the existing shareholders reinvesting one third of the institutional investment and receiving 28.3 per cent of the equity in the new company which was to take over the business and £14.566 million in 15 per cent loan stock; the offer was for 100 per cent of the business.

By 16 April 1996 it was intended that a Dutch holding company should be inserted into the off-shore structure (see paragraph 32) and Dutch Trust Company had stated the terms on which it would act. Following a meeting with Mr S at the firm of chartered accountants' Corporate Finance division, Lovell White Durrant, the solicitors acting for the purchasers wrote to MV Ltd on 26 June 1996 stating among other matters, "We have de facto exclusivity even though they cannot confirm it in writing for tax reasons." The letter mentioned the tax structure and continued,

"The holding of the [R family] in [Holdings] is held, some direct and some through trusts. About 50% of the trusts onshore and 50% are offshore through the British Virgin Islands. Apparently the structure set up has now been snookered by the last Finance Act and they want to get over the point by interposing a Dutch holding company between the BVI Company and [Holdings]."

"They" in the context referred to the firm of chartered accountants.

On 5 July 1996 a letter setting out the terms of engagement for taxation services in relation to Project Marvel was sent by the firm of chartered accountants addressed to the shareholders of Holdings with spaces for Mr R and Z (Suisse) (see paragraph 24 above) to sign. Z (Suisse) was not in fact a shareholder but provided management services to C Ltd which was a shareholder. It is not clear whether it was in fact signed. It covered assistance during the sale of shares in Holdings encompassing "the identification and implementation of strategies, consistent with underlying commercial requirements, for the sale of the shares at an acceptable tax cost." It provided that only Mr R and Z (Suisse) would have authority to issue the firm of chartered accountants with instructions in relation to Project Marvel and that the firm of chartered accountants should report only to those persons. A fee of £180,000 excluding disbursements would be payable on completion in respect of the fees of the firm of chartered accountants in the UK for "time on the capital gains tax planning aspects … up to completion." The fee did not include 15,000 Dutch florins for the firm of chartered accountants colleagues in Holland. The letter stated,

"I also understand that [Dutch Trust Company] who will set up and run the Dutch company on [C Ltd's] behalf will charge D Fl 10,000 per annum."

On 11 July the firm of chartered accountants in The Hague sent an urgent telefax to Miss A at Z (Suisse) referring to a telephone conversation that morning. The writer said that the Birmingham office of the firm of chartered accountants had requested him or her

"to contact you directly in order to follow up on the purchase of [E BV] on behalf of his client [Mr R]."

A plan of action was enclosed of which that letter was step 5. The letter then covered the purchase price and local management; in relation to the total costs of the structure, the letter referred to a memorandum dated 16 April to the Birmingham office of the firm of chartered accountants (which although attached to the letter was not in the bundle for the hearing), giving the total purchase price as NLG 67,500. The memorandum stated that Dutch Trust Company would provide for management and bookkeeping services and would require an indemnity and a management agreement and a resolution in writing. Examples of those documents were attached. The letter continued,

"Usually, the parties to the indemnity agreement are the client, i.e. a private person, in this case the settlor of the trust, and [Dutch Trust Company]. However, for these particular cases, we could arrange with [Dutch Trust Company], that by way of exception the indemnity agreement being executed by the Trustees, (in)directly holding the shares in the BV …"

The letter then said under "Purchaser",

"I understand that the purchaser of [E BV] will be [C Ltd] established at the British Virgin Island, and that this company is administered by you."

A number of documents relating to C Ltd and the trust (in the singular) were then requested. The letter enclosed a draft power of attorney for execution of the stock purchase agreement on behalf of C Ltd to be executed by the duly authorised director together with a draft power of attorney for execution on behalf of C Ltd of the Notarial deed of transfer of the shares (also to be executed by the director) which had been prepared by the civil law notary.

On 15 July the same person at the firm of chartered accountants in The Hague wrote to Trust Company Bank NV with data required for drawing up the purchase agreement for E BV. The letter confirmed that the purchase price would be NLG 67,500 and stated that the individuals were the two Appellants whose passports and bank references would be sent to Mr W. The letter continued,

"Immediately after the transfer of the shares in [E BV] to [C Ltd], the latter company will transfer 49.9 per cent of the shares in the share capital of [Holdings] to [E BV]. As discussed, our aim is to have the structure in place by Friday July 19, 1996. If we are to achieve the aim, the deed of transfer of the shares in [E BV] should be executed by Thursday July 18, 1996, late afternoon and the transfer of [Holdings] shares to [E BV] should take place by Friday July 19, 1996 …

In connection with the transfer of the [Holdings] shares to [E BV], I have requested [Z Trust Suisse S.A] to contact [Mr W]."

A further letter from the firm of chartered accountants on that day to Z (Suisse) said that by 19 July not only the transfer of the shares in E BV to C Ltd "should be completed" but also the transfer of 49.9% of the shares in Holdings to E BV. Also on 15 July 1996 Lovell White Durrant prepared the first draft of the sale agreement for the shares in Holdings to the new company to be formed by MNV.

Also on 15 July X Ltd, the sole director of C Ltd, "noted that [the firm of chartered accountants] have recommended that [C Ltd] acquire a Dutch company known as [E BV] and resolved that [C Ltd] acquire the shares in [E BV] and grant a Power of Attorney to [Mr W] and [Mr V] both of [Dutch Trust Company] to execute the stock purchase agreement for the acquisition of [E BV]. There was no mention in this resolution of the transfer of the shares in [Holdings] to [E BV].

On 16 July Lovell White Durrant sent the first draft Sale and Purchase Agreement on behalf of MNV to the firm of solicitors, the solicitors acting for the shareholders in Holdings and GC Ltd. The identities of the vendors were not completed because they still required details from the firm of chartered accountants of the tax structure proposed. Also on that day Miss A at Z (Suisse) sent to Dutch Trust Company a series of documents relating to C Ltd and the settlements including Financial Statements at 5 April 1996.

On 17 July at an EGM of E BV at noon the proposal of the existing managing directors to resign on 18 July, immediately after the signing of the agreement in which A BV was to sell all the shares in E BV to C Ltd, was approved as was the appointment of Dutch Trust Company as managing director immediately after the signing of the agreement for sale. At 1700 hours at another EGM of E BV it was resolved to distribute a dividend of Dutch FL 1,109.16 as well as a dividend at the charge of the general reserve of Fl 83,243.15.

On 18 July Mr W executed the purchase agreement for the shares in E BV on behalf of C Ltd and the deed of transfer was notarised; that showed the principal place of business of C Ltd as Geneva. Earlier on that day Z (Suisse) had sent to Mr W a copy of the draft agreement approved by X Ltd on behalf of C Ltd. The shares had been acquired by A BV in March 1995, its registered office was in Amsterdam and the address of its principal place of business was the same as that of Dutch Trust Company. On the same day a management agreement was prepared between E BV and Dutch Trust Company providing that Dutch Trust Company would be responsible for the day-to-day management of E BV.

Also on that day the firm of solicitors wrote to the firm of chartered accountants referring to "those shares which are being sold by the Dutch BV and/or any Trustees" asking for a letter from the directors or the Trustees as appropriate formally instructing them to act on their behalf.

On 19 July at 1240 hours the firm of chartered accountants in Manchester faxed to Z (Suisse) a draft agreement for the sale of C Ltd's shares in Holdings to E BV for £23,700,000 together with a draft memorandum by E BV acknowledging a loan by C Ltd of that sum free of interest repayable on demand asking for any comments as soon as possible. The draft agreement provided that if E BV should transfer any shares within three years to a third party it should pay an additional consideration equal to 95 per cent of the excess over £23,700,000 less expenses.

On 23 July an agreement was signed in identical form to the draft sale agreement apart from the insertion of the registered number of E BV and its address and the name and address of Z (Suisse) S.A. for the purpose of notices to the vendor. It was executed by X Ltd on behalf of C Ltd and by Mr F and Mr H on behalf of E BV. A memorandum of loan in identical form to the draft in the sum of £23,700,000 was signed for Dutch Trust Company by Mr F and Mr H on behalf of E BV and for X Ltd by Miss A and another on behalf of C Ltd. The original was a faxed copy. From the Fax print-offs it appears that it passed successively from the firm of chartered accountants' Tax department to Z (Suisse) on 23 July at 1735 hours to Dutch Trust Company on 24 July at 1753 hours. Mr F and Mr H had been authorised to sign on behalf of E BV at a board meeting on 23 July. The statement of Mr W made after examining the files of Dutch Trust Company on E BV contains no reference to any material showing the basis of the price of £23.7 million or of any advice being received in respect of the transaction. Neither did Witness 2 give evidence of any such material in the files of Z (Suisse) or X Ltd. A letter from Z (Suisse) of 24 July to Dutch Trust Company marked "By Courier" referred to enclosing the agreement signed by C Ltd to be signed by E BV and returned. Another letter from Z (Suisse) on that day to the firm of chartered accountants stated that Miss A would discuss with Mr R on his return the cost of sending the certificate to Holland; presumably this was the Holdings certificate. A further letter by Dutch Trust Company to Z (Suisse) of 24 July stated that the duly signed agreement was forwarded therewith. On the same day Dutch Trust Company forwarded to Z (Suisse) a resolution, the management agreement and an indemnity agreement stating that all had been signed. On 25 July a resolution by Z (Suisse) for the trustees as ultimate beneficiary of E BV approved the management agreement between E BV and Dutch Trust Company; this provided for Dutch Trust Company to act as managing director and obliged it to "act in accordance with the resolutions of the Board of Directors of the Company and policy instructions issued by the Shareholders of the Company." No policy instructions were in fact issued.

On 5 August 1996 Mr M, of the firm of chartered accountants' Corporate Finance department, wrote to Dutch Trust Company enclosing a copy of the engagement letter signed by the Appellants in March 1995 (see paragraphs 15 to 18 above) asking Dutch Trust Company to "adopt the terms of the engagement letter in relation to the shares in [Holdings] under [E BV's] control". The letter stated that a number of parties had made offers for Holdings and that on receipt of the signed copy Dutch Trust Company would be informed of the progress of discussions. This was signed and returned on 13 August.

On 6 August the firm of chartered accountants sent to E BV at Dutch Trust Company an engagement letter for taxation services in not dissimilar terms to the engagement letter referred to at paragraph 31 above but adding Dutch Trust Company to those authorised to give instructions in relation to Project Marvel and providing for reporting to Dutch Trust Company. The letter included the following:

"Until advised otherwise in writing by yourselves, we shall work on the basis that only [Mr R], [Z (Suisse)] and [Dutch Trust Company] have authority to issue us with instructions in relation to Project Marvel."

Mr W was one of Dutch Trust Company signatories on behalf of E BV; this was dated 14 August.

Negotiations continued between the firm of chartered accountants' Corporate Finance department on behalf of the vendors and representatives of MNV. Witness 1 said at a meeting on 7 August that exclusivity would be granted upon confirmation of an offer acceptable to Mr R. In a letter dated 19 August the total offer was stated to be £73.2 million (including £3.2 million tax) on the basis of audited net assets at 30 June 1996 of £30.8 million. There is no record of any further communication with E BV or Dutch Trust Company until 30 September when Mr S informed Dutch Trust Company that an offer had been received which had been agreed in principle by all the Shareholders other than E BV. We return to this.

On 19 August Witness 1 wrote to MV Ltd confirming the firm of chartered accountants' understanding of the offer and stating that exclusivity would be granted until 13 September on receipt of a signed confirmation of the terms in the letter. Clearance applications under section 707 of the Income and Corporation Taxes Act 1988 and section 138 of the Taxation of Capital Gains Tax Act 1992 were submitted on behalf of the shareholders in Holdings and GC Ltd on 23 August enclosing the statutory accounts to 30 June 1995. The applications stated that C Ltd had disposed of its shareholding in Holdings to its 100 per cent subsidiary E BV at market value and included the purchase by Newco of E BV's shares in Holdings for cash. On 30 August Mr R signed an exclusivity agreement with MNV on behalf of himself and all other shareholders in Holdings and GC Ltd.

On 2 September 1996 NatWest Ventures wrote to Witness 1 expressing interest in GC Ltd and giving an indicative valuation in excess of £100 million. They prepared a presentation on 3 September but were informed that a preferred purchaser had an exclusivity agreement. This was confirmed by telephone on 16 September.

On 3 September the Inland Revenue gave clearance under section 138; section 707 clearance was given on 2 October.

On 10 September the firm of solicitors sent a draft form of agreement to the firm of chartered accountants and asked who would be executing the agreement for E BV and what arrangements were in place for corresponding with E BV.

There was a major meeting on 19 September to discuss issues prior to completion, attended by representatives of the purchasers, by Mr K of GC Ltd, by Witness 1 and Mr S from the firm of chartered accountants and by the firm of solicitors and Lovell White Durrant. Among matters considered was the position of E BV in respect of warranties. The firm of solicitors acknowledged that the consideration received by E BV would need to be ring fenced for a period to give security for warranty claims and that C Ltd would also need to be a party as E BV was obliged to distribute to C Ltd. It was agreed that on the question of security Mr R and E BV were to be considered together.

Mr S's letter to Dutch Trust Company of 30 September started by acknowledging the letter of 13 August mentioned at paragraph 41 above and stated that he was writing to explain progress. The letter stated that the shareholders of Holdings and GC Ltd had received an offer for their entire shareholdings and continued,

"This offer, which is outlined below, has now been in principle agreed by all the shareholders in [Holdings] and [GC Ltd] other than [E BV], and I would be grateful if you could also confirm your willingness to accept it on [E BV's] behalf."

The letter stated that the offer valued GC Ltd at £70 million and E BV's holding in Holdings at £30.8 million.

It stated that the detailed structuring was explained in a tax clearance application which was enclosed. Mr S's letter then referred to the proposal in the clearance application for Holdings to buy back the shares in the UK children's trust for £3 million and part of the Appellant's personal holdings for £16.3 million, which would result in the holding of E BV in Holdings increasing to 72.94 per cent for which E BV would receive a cash consideration subject to £5 million being deferred.

The letter then outlined warranty arrangements which were still under discussion. The proposals included an overall warranty of £50 million with joint and several liability between Mr R and E BV, a guarantee of E BV's liability by C Ltd and the shareholders of C Ltd, an agreement by E BV, C Ltd and the shareholders of C Ltd not to distribute part of the receipts (other than to each other) for a specified period and the deferral of £5 million of the consideration.

The letter then set out the completion procedures as follows,

"Completion procedures

Completion of the proposed acquisition by Newco [the new company to be formed by [MNV] to buy the business] is planned for 10 October 1996 in London. [E BV] will be required to be a party to the sale and purchase agreement (including the warranties) and hence, assuming you are happy to accept the offer, arrangements will need to be made for [E BV] to sign the appropriate documentation at completion (either in person or by fax).

[C Ltd] and its shareholders will also need to join with [E BV] in a separate agreement to provide for the warranty obligations and non-distribution of funds referred to above.

As a shareholder in [Holdings] [E BV] will also need to approve the buy back of shares in [Holdings].

The firm of solicitors, to the vendors will be co-ordinating the completion process and the contacts there are [Mr AH] [(0161 xxx xxxx)] and [Witness 3] [(tel: 0161 xxx xxxx)] [(fax no. 0161 xxx xxxx)].

They will wish to talk to you in advance of completion to ensure that the appropriate documentation is in place.

I would be grateful if you could respond to confirm who will co-ordinate completion from [Dutch Trust Company]. As you will appreciate we are working to a tight timescale and need therefore to ensure efficient communication. If you have any queries, please contact myself, [Mrs ED] or [Witness 1] [(at the firm of chartered accountants' Corporate Finance department on 0161 xxx xxxx)]."

Mr S closed by writing that he had copied the correspondence to Miss A of Z (Suisse) who had management authority for the trust shareholders in C Ltd and asked her to forward it to the appropriate party. A letter dated 30 September by Mr S of the firm of chartered accountants to Z (Suisse) enclosing a copy of his letter to Dutch Trust Company contained the following,

"This letter explains a proposed transaction involving the sale of [Holdings] and [GC Ltd] … There are certain agreements which it is likely that [C Ltd] and the trusts will be asked to be party to in relation to the proposed transaction. I would be grateful if you would confirm that you are comfortable with the type of arrangements proposed, further details of which will be supplied in due course."

Miss A was asked to copy the correspondence to whoever had authority to sign for C Ltd.

The response by telefax was on 7 October 1996. Mr D of Dutch Trust Company informed Mr S that he and Mr L, both account managers, were taking care of the day-to-day business of E and that Mr W, a trust officer in the legal department, would be handling any legal matters. The letter stated,

"… We hereby inform you that we prefer to complete any documentation by fax first instead of coming to London on the 10^th October 1996."

An action list by the firm of chartered accountants dated on the same day included under "Trusts",

"- initial discussion with [Miss A] MAS

- initial discussion with the [Trust Company] MAS

letter of [the firm of chartered accountants'

Corporate Finance department]

recommendations to [E BV] MAS

- fax draft sale and purchase together with list of

timings to be signed EOD

- [E BV]to recommend to [C Ltd]/trusts JR

- liaise for completion MS/EOD"

"JR" was Mrs J of the firm of chartered accountants at Manchester.

On 8 October Mr S of the firm of chartered accountants' Corporate Finance department sent a letter of fourteen paragraphs to Mr W, referring to a recent telephone conversation with Mr D, "to provide our views on the proposed transaction." The letter which was copied to Z (Suisse) outlined the negotiations and mentioned the approach from Nat West Ventures (see paragraph 45 above), stated that it was based on an unrealistic assumption as to debt financing and expressed the view that the offer was unlikely to remain at that level after due diligence. The firm of chartered accountants recommended that the offer by MNV of £30.8 million in cash for E BV's holding with a deferred element of £5 million should be accepted and asked for confirmation that Dutch Trust Company was happy to proceed. The letter stated that there would be a number of documents to be executed by E BV, C Ltd and Z (Suisse) and attached draft copies of the Share Purchase Agreement (draft number 3) and Guarantees. The letter said that the purchasers required opinions from lawyers in the Netherlands, British Virgin Islands and Switzerland as to the powers of the companies to enter into these agreements. The letter contained no enclosures. Although it stated that a revised forecast of profits of £11 million for the year to 30 June 1996 had been produced (see paragraph 29 above) there is nothing to show that this was provided to Dutch Trust Company. The clearance applications referred to at paragraph 50 above had been supplied to Dutch Trust Company on 30 September.

A memorandum of the firm of chartered accountants of 8 October to the firm of solicitors contained comments on the documentation. Under the guarantee it included the observation, "It is critical that [E BV] are seen to be acting independently and making their own decisions." In respect of clause 5.8 of the Sale and Purchase Agreement there was this comment, "There should be no indication that [Mr R] has any influence over [E BV] which is free to make its own decisions and commitments". Clause 5.8 of the draft read, "[Mr R] and [E BV] hereby jointly and severally agree and undertake to comply with the provisions of Schedule VIII through the term of the Warranties." Schedule VIII contained investment restrictions in the period to 30 September 1998.

Instructions from the firm of solicitors dated 8 October to lawyers in the British Virgin Islands to advise on the legalities of C Ltd entering into the various agreements and obligations stated,

"For tax reasons an offshore structure has been established so that the principal shareholder and vendor is a Dutch company, [E BV] which is administered by [Dutch Trust Company]."

The firm of solicitors instructed a firm of Dutch solicitors, to advise in relation to E BV; on 10 October they asked Dutch Trust Company to provide to them various documents including board minutes, resolutions and powers of attorney for this purpose.

On 11 October Mr D returned to the firm of solicitors by fax a shareholders' resolution of Holdings signed on behalf of E BV, which had been sent earlier on that day, approving the resolution for Holdings to purchase its own shares.

On 15 October the firm of solicitors sent to Z (Suisse) a copy of a draft resolution by C Ltd as shareholder of E BV approving the draft Sale Agreement. This resolution had been drafted by the firm of Dutch solicitors instructed by the firm of solicitors. The resolution, which was passed on 17 October in Geneva was signed by X Ltd on behalf of C Ltd as sole shareholders in E BV, recited that a copy of draft number 6 of the Sale Agreement had been produced and that C Ltd was of the opinion that the sale agreement was in the best interests of E BV and the group to which it belonged and approved the entering into the agreement for sale of the shares in Holdings by E BV.

Also on 17 October X Ltd as sole director of C Ltd resolved to support E BV in the disposal of its shares in Holdings by entering into a guarantee with the purchasers a draft of which was provided. Both of these resolutions were signed by Mr I and Miss A on behalf of X Ltd.

On the morning of 15 October Lovell White Durrant transmitted to Dutch Trust Company a copy of the latest draft of the sale agreement of 100 pages including the front sheet. Also on that day the firm of solicitors asked Dutch Trust Company for details of the bank account to which the consideration should be paid for completion on the Thursday (17 October).

On 16 October Dutch Trust Company faxed Mr S that they agreed the agreements as drawn up and upon execution would sign them on behalf of E BV.

On 17 October the firm of solicitors faxed Z (Suisse) that final form documents would be circulated on the following morning for execution at 1700 hours UK time, 1800 hours Dutch time and 1100 hours British Virgin Islands time. In the event completion was on Monday, 21 October.

On 18 October the final version of the agreement was faxed by Lovell White Durrant to the parties, among them Dutch Trust Company. On the same day the firm of Dutch solicitors provided an opinion to the purchasers that the agreements would constitute valid and legally binding obligations of E BV when duly executed by Dutch Trust Company.

On 21 October 1996 Dutch Trust Company faxed to Lovell White Durrant a number of documents signed by it as managing director of E BV. These included page 100 of the Sale Agreement, a stock transfer form for the Holdings shares and a certificate confirming that the facts at clause 3.2 in the guarantee by C Ltd were correct. It was agreed at paragraph 11 of the Agreed Facts that the shares were sold on 21 October by E BV.

The final Sale Agreement was 101 pages long. E BV received £30,799,384 in cash, of which £5,033,699 was deferred pending set-off of advance corporation tax on a dividend by GC Ltd and the purchase by Holdings of its own shares (see paragraph 50 above). Under clause 5.1 Mr R and E BV entered into a joint and several warranty and the other shareholders entered into several warranties; these were the type of warranties which are usual in such a sale agreement and related to Holdings and GC Ltd and their assets and liabilities and their transactions since the last balance sheet date, namely 30 June 1996; for periods up to 30 September 1998 E BV accepted investment restrictions (under Schedule VIII) in respect of amounts secured which commenced at £15 million. Under Schedule V the vendors warranted that the accounts annexed to a disclosure letter by the firm of solicitors gave a true and fair view of the state of affairs at the balance sheet date. The maximum aggregate liability of Mr R and E BV under warranty claims and a deed of tax covenant was £44 million, however E BV's liability was limited to the amount received by it. Clause 7 contained certain specific indemnities under which E BV was jointly and severally liable with Mr R. The range of investments permitted under Schedule VIII was in fact wide and including government stock and bank deposits in UK, Switzerland, the EU and USA, real property in the UK and (subject to a 50 per cent ceiling) shares and securities listed in the UK, USA and EU.

The guarantee by C Ltd referred to at paragraph 60 above was also executed on 21 October. The guarantee which was to Group Ltd, the purchaser of the shares, covered the failure by E BV to make any payment due under the Sale Agreement or the Deed of Tax Covenant. Clause 3.1 provided,

"The Guarantor warrants and undertakes that apart from its interest in [E BV], [E BV's] holding in [Holdings] and the transactions in relation to [Holdings] provided for … in the Sale Agreement …, it and [E BV] have no interest in other business, and they have no liabilities whatsoever (other than liabilities to each other … in relation to the formation of the Guarantor, the acquisition of [E BV], the acquisition of shares in [Holdings], the transactions contemplated in the Sale Agreement and for tax in respect of the proceeds of sale of shares in [Holdings] and professional and administration fees.)"

Under clause 3.2 C Ltd undertook to exercise its powers as shareholder in E BV as far as it could to ensure that E BV carried on no other business and incurred no liabilities apart from holding the assets payable on the sale and complying with its obligations under the Sale Agreement. Under clause 3.3 C Ltd undertook to incur no other liabilities without prior written consent.

Also on 21 October, Z (Suisse) wrote to Group Ltd to confirm that the statements in clause 3.1 of the guarantee were true. The letter stated that this was required as a pre-condition of Group Ltd entering into the Sale Agreement.

The witnesses

Witness 1 confirmed his written statement. He stated that he led the team at the firm of chartered accountants responsible for corporate finance advice, Mr S being his principal assistant on the transaction. Negotiations with MNV were conducted by the firm of chartered accountants, although consultation was mainly with management in dealing with due diligence issues. The firm of chartered accountants regarded themselves as acting in the interests of all shareholders including minority shareholders. MNV required exclusivity : E BV was not a party to this because they would have had to be briefed thus delaying the transaction. Mr R's position was clearly pivotal, since if he was prepared to sell it was likely that the others would follow his lead and if he was not so prepared the purchasers would not proceed. Witness 1 stated that Mr S kept him briefed as issues arose. When legal matters were fairly advanced Mr S wrote to Dutch Trust Company on 30 September 1996 to appraise them of the main terms of the offer (see paragraph 49 above). He said that the recommendation on 8 October (see paragraph 55) was relatively unusual since for risk management reasons the firm of chartered accountants preferred shareholders to make their own decision. He said that he was confident that the letter of 8 October was written at E BV's request.

Cross-examined, Witness 1 said that he remembered E BV asking Mr S for a recommendation. Mr S was now a partner of Ernst & Young. Witness 1 himself did not recall speaking directly to Dutch Trust Company. He said that tax was not one of his areas of expertise. Mr R thought in terms of sale of the whole business; there were shareholders outside the family but it was assumed that they would be prepared to sell. Witness 1 said that he himself was not involved in the change in share structure, but was kept informed. He was confident that E BV, which was professionally managed by Dutch Trust Company would be a rational shareholder. The off-shore structure was an additional complication which he would rather not have had but all shareholders had an identity of interest. Commercially he felt that if Mr R was satisfied the others would follow his lead. He said that the firm of chartered accountants did not report to E BV until a reasonably firm offer was likely. Until 13 August they had no contract with E BV. He did not see the letter to E BV about tax advice dated 6 August (see paragraph 42).

Witness 1 told Mr Brennan that he would prefer never to grant exclusivity. He did not think that Mr R consulted anyone else about exclusivity, but the purchasers regarded Mr R as pivotal. He said that he met NatWest and reported to Mr R but not to E BV. He said that many transactions fail on the day of completion. He said that the people MNV wanted to meet were the management; he was sure that Mr S would have kept E BV "up to speed". He said that the events were 6-7 years ago; he was no longer with the firm of chartered accountants but had reviewed the files. He said that it was not normal practice to file up-date telephone calls. It would be surprising if the letter of 30 September was sent "out of the blue". The managers were aware of the due diligence process over a period of months and their own contracts had to be discussed. There was much less to discuss with E BV. He assumed that E BV received legal advice from the firm of solicitors as to the warranties. E BV had received the engagement letter and knew what was going on. He said that he believed that Dutch Trust Company did make its own commercial decision.

In re-examination, Witness 1 said that the transfer of shares to C Ltd and then E BV did not change the corporate finance fundamentals. The transaction had been moving from day-to-day and Mr R and E BV did not require the minutiae. He said that he had no contact with Z (Suisse).

Witness 4, who was at the relevant time the senior tax partner for the firm of chartered accountants in Manchester and Liverpool, confirmed his written statement. He stated that having advised Mr R on techniques to reduce the capital gains tax liability of the Appellants on a sale the firm of chartered accountants were instructed to implement the offshore structure involving C Ltd. Following the Finance Act 1996 the firm of chartered accountants devised plans to reduce the tax on disposal of C Ltd's interest. This included the formation of a Dutch incorporated and resident subsidiary of C Ltd to which C Ltd would sell its shares in Holdings at market value. On a subsequent sale there would be a tax liability in the Netherlands on that company's gain. Under the double tax treaty there should be no liability to UK tax in respect of the sale. He stated that during May and June 1996 the firm of chartered accountants advised Z (Suisse) as agents to the trustees of the changes in the legislation and recommended that the trustees consider implementing the planning. He stated that on 23 July C Ltd sold its shares in Holdings to E BV, its 100 per cent subsidiary, at market value. He stated that throughout the period, as personal tax advisers to the Appellants, the firm of chartered accountants kept them informed of the actions of the trustees and the implications for their personal tax liabilities.

In cross-examination Witness 4 denied that it was decided that E BV would sell its shares before it existed; he said that the scheme was set up on the basis that if the sale happened it would be effective. In any situation where the executives were keen to sell, minority trustees were likely to sell. He said that the firm of chartered accountants spoke about the position to the trustees on a number of occasions; he thought that he told them that they would have to take their own decision. He said that some trustees take a commercial view. Asked whether he told Mr R that in practice it was certain that E BV would sell, he said that he did not recall telling him that.

Asked about the price at which C Ltd sold its shares in Holdings to E BV, he said that he thought that there was a price based on the likely sale price with an adjustment if the likely sale price was different. He did not recall any advice to the directors of E BV on the price paid by them to C Ltd. There was no formal valuation. After a break to look at the bundle, Witness 4 said that the draft sent on 19 July (see paragraph 39) included the figure of £23.7 million which the firm of chartered accountants suggested : the covering note read, "As discussed this is the draft …" He said that E BV presumably considered the price appropriate for a transfer by C Ltd to its 100 per cent subsidiary. The directors of E BV must have approved the agreement under guidance from its parent company and with the benefit of an indemnity. Asked whether a pro rata valuation was appropriate for a 49 per cent interest, Witness 4 said that he was not a valuation expert and that the price may not have been pro rata. Asked about the risk of the loan outstanding if the ultimate sale price was lower, he said that the loan was from E BV's parent and that although E BV did not have an indemnity the directors did.

Witness 4 said that the letter to E BV regarding taxation services (see paragraph 42) could have been better worded: it reflected tax advice on the transaction as a whole and E BV was a shareholder in Holdings. He denied merely treating E BV as a component in the scheme. He could not remember whether C Ltd had signed up to the engagement letter (see paragraph 31). He believed that the firm of chartered accountants' colleagues in the Netherlands provided separate tax advice which was not covered by the £96,360 charged by the firm of chartered accountants to E BV for tax services.

Re-examined, he said that following the gift of shares to C Ltd Mr R had no power to ensure that C Ltd and E BV would do as he wished. He had experienced clients who would not want to undertake that sort of tax planning. The documentation showed the material put in front of C Ltd. He would not have thought that E BV was at any commercial risk.

Witness 2, currently a Senior Trust Manager at Z (Suisse), confirmed a statement in which he said that he did not have first hand knowledge of the events, being the successor to Miss A and Mr I who were the trust officer and manager involved. He had reviewed the documents. It appeared from these that Z was recommended by the firm of chartered accountants to the Appellants as an appropriate offshore trustee. He stated that it also appeared to him that Z (Suisse) and A Trustees (BVI) Ltd acted appropriately and met their respective obligations as administrator and as trustee throughout the period in question. It was clear that Z (Suisse) was being advised by the firm of chartered accountants and followed that advice. Following the Finance Act 1996 the trust assets were restructured through the purchase of E BV to enable a tax efficient disposal of the shares in Holdings. He stated that he believed that the documents bear out a significant involvement at various levels in the trust structure. He stated that it was uncommon for a trustee resident in the British Virgin Islands not to appoint an agent in another jurisdiction to perform administrative duties. He said that Z (Suisse) preferred to avoid minority holdings because they could not exercise significant influence over the company and such holdings were illiquid and often non-income producing. The structure in this case was set up with a view to selling the minority holding. He said that there was no indication in the files of Mr R seeking to impose his views on Z (Suisse). He said that he had seen the recommendation by the firm of chartered accountants and had seen that Z (Suisse) as agent for the trustees had taken independent advice.

Cross-examined, Witness 2 said that he had studied the files in Geneva and had requested documents from Z in the Cayman Islands. Asked about the C Ltd resolution of 17 October (see paragraph 58) he said that he could not recall any evidence that it was sent to Holland. He said that draft number 6 of the sale agreement was in the files. He said that the drafts were reviewed by Mark Barmes of Lenz & Staehelin. He said that from the documents he had reviewed, due consideration was given on behalf of the trustees in relation to the sale of the Holdings shares; he had seen C Ltd's files but not those of E BV. He said that Miss A is in Jersey but is not now working for Z and that Mr I is in Geneva but not now with Z.

Witness 3, of the firm of solicitors, confirmed his statement. He acted in relation to the sale to Group Ltd along with Mr AH, who was in charge, and Mrs PO. They were instructed by the firm of chartered accountants' Corporate Finance department on behalf of all the shareholders. They advised the UK shareholders that they were acting for them as a group not individually. The firm of chartered accountants Corporate Finance liaised with the overseas shareholders; they were project managing the process and that involved liaising with E BV and Z (Suisse). Although the firm of solicitors had a number of meetings with Mr R and the management team to explain progress and obtain instructions where necessary, Mr R did not involve himself in the day-to-day progress. E BV did not attend meetings in the UK but he was told by the firm of chartered accountants that E BV and any directors and shareholders would as a matter of course obtain their own legal advice if they considered this prudent. He never advised any of the trusts on the transaction but did liaise with them. The firm of solicitors instructed a Dutch firm of solicitors to deliver a legal opinion as to the power of E BV to sign documents and that firm drafted resolutions. He had a number of conversations with Mr Barmes, of Lenz & Staehelin, who were advising the trustees and amendments suggested by them were made to the documents. He said that his firm received no instructions from Mr R regarding the sale by E BV.

Cross-examined, he said that the firm of solicitors started acting in July 1996, their first letter being on 18 July (see paragraph 38). He said that draft number 3 of the sale agreement was sent to E BV on 8 October and two days later another draft was sent. He himself sent draft number 6 on 18 October. He said that Mr R did not necessarily see drafts 5-7. He said that from the outset the purchasers wanted joint and several guarantees; it was not unusual for the two largest shareholders to give a joint and several warranty.

The statement of Mr W dated 20 October 2003 was admitted under regulation 17(5), see paragraph 12 above. At the time he was head of the legal department of Dutch Trust Company. Due to the passage of time he stated that he was unable specifically to remember the events but had examined the files. The first contact appeared to have been immediately before the fax of 15 July 1996 (see paragraph 33). Dutch Trust Company performed the day-to-day management of E BV through two persons, Mr D and Mr L who have left the company. The statement of Mr W makes no mention of any documents or contact between the acquisition by C Ltd of E BV's shares (see paragraph 37) and the purchase of the Holdings shares by E BV on 23 July (see paragraph 40). His statement makes no mention of any documents or contact between 13 and 14 August when Dutch Trust Company signed the engagement letters and Mr S's fax of 30 September (paragraphs 49 to 53). He stated that normal practice was for Dutch Trust Company legal counsel to review legal documentation and that no doubt he did so but due to the passage of time he had no recollection of so doing. Clearly there was no file note of any review. On the basis of Mr S's recommendation (paragraph 54) E BV, represented by Dutch Trust Company, sold its shares in Holdings. The file showed that on 17 October C Ltd issued a written resolution as sole shareholder in E BV approving entering into the sale agreement. E BV's part of the consideration was received in its Dutch bank account and transferred to C Ltd to repay the loan.

E BV's accounts and tax return

The accounts of E BV for 1996, which were not audited, no audit being required by reason of article 396 of the Dutch Civil Code, gave the principal activity as acting as a holding company. It stated that the company acquired the shares in Holdings for NLG 61,335,600 (£23.7 million) and sold them during the year for NLG 84,097,718 (equivalent to £30,799,384). The profit and loss account showed "Result on sale part of investment", NLG 2,716,011 and bank interest NLG 3,695; this presumably did not include the deferred consideration, since income was stated as recognised when received. Expenditure was NLG 1,784,156, which was effectively attributable to fees including NLG 1,095,395 corporate finance advice fees. The Director's management fees were NLG 3,666.67. Current assets totalled NLG 15,176,454, of which NLG 14,904,783 was the deferred consideration and NLG 270,834 cash at bank. Apart from NLG 837 interest receivable, there were no other assets. E BV's income tax return for 1996 showed a taxable profit of NLG 935,550 on which Dutch tax was NLG 329,442.

Articles of C Ltd

Article 86 of the Articles of C Ltd allowed a corporate director to appoint any person as its duly authorised representative to represent it at meetings or give written consents. Article 97 provided that if the company should have only one director the provisions for meetings of directors do not apply but such director has power to act in all matters as are not required to be exercised by the members and in lieu of a meeting shall sign a note.

Declaration by Dutch tax authorities

On 18 November 1999 the Inland Revenue requested information from the Dutch tax authorities under Article 25 of the Double Taxation Convention and the EC Mutual Assistance Directive 77/799 in connection with a civil investigation into the sale of the Holdings shares by E BV. On 23 May 2000 the Dutch authorities provided copies of the agreements for the purchase of the shares by E BV and the sale by E BV; that letter stated that Dutch Trust Company had acted as manager of E BV from the date of incorporation in 1995. On 19 February 2003 the Inspector of the Tax Administration in Amsterdam made a declaration that E BV "is a corporation according to Dutch legislation and is a resident of the Netherlands within the meaning of Article 4 of the Convention." On 8 March 2003, the Dutch authorities made a further response to the 1999 request for information which included the following,

"The further investigation convinced the Dutch tax department that the [Trust Company BV] executed the actual management of [E BV] as a result of which the fiscal residence of [E BV] is located in the Netherlands."