Holland (Respondent) v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) and another [2010] UKSC 51

The Times has now reported the UK Supreme Court's decision in Holland (Respondent) v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) and another [2010] UKSC 51. This is a fascinating case in which the Supreme Court (by a majority of 3 to 2) dismisses the appeal. Lords Hope, Collins and Saville gave the majority judgments. Lords Walker and Clarke gave dissenting judgments. I personally prefer the view of the minority. In an insolvency arena Lord Walker and Lord Clarke's pragmatic approach to the realities of the situation are more attractive. We will have to wait for Parliament to decide which set of Supreme Court justices has the better view! For those of you who do not subscribe to The Times here is the marvelous summary of the case from the UKSC pages:

"The primary question in this appeal is when a person should be considered to be a de facto director of a company so that he can be held responsible for the payment of unlawful dividends as if he had been formally appointed as a director.

When a company is wound up, section 212 of the Insolvency Act 1986, as amended, allows a creditor

to request a court to compel an “officer” of the company to pay sums in respect of misuse of a power

or breach of fiduciary duty. It was accepted that the definition of “officer” includes a director, whether

he is formally appointed or not.

Mr and Mrs Holland ran a business administering the business and tax affairs of contractors, especially

those working in the IT sector, who did not want to go to the trouble of setting up and running their

own companies. In February 1999 a complicated corporate structure was established to run the

business. Under the new structure, 42 trading companies were created, referred to in these proceedings

as the “composite companies”. Two further companies called Paycheck (Directors Services) Ltd and

Paycheck (Secretarial Services) Ltd were created to act respectively as the sole director and secretary of

each composite company. Mr and Mrs Holland were the directors of Paycheck Directors and Paycheck

Services and owned each company via another company.

The business model involved the composite companies contracting out the services of the contractors

to their clients. The contractors became both employees and (non-voting) shareholders of the

composite companies. The aim of the structure was to seek to ensure that the annual taxable profits of

each composite company did not exceed £300,000, in order to get the benefit of the small companies’

rate of corporation tax. From the income the composite companies received from the contractors’

clients, they paid a salary to each employee/shareholder and also declared dividends to each

shareholder/employee (after making provision for the payment of corporation tax at the small

companies’ rate). Dividends were paid regularly on the basis of timesheets submitted by shareholders/

employees for the work they performed as contractors. Paycheck Services used a software programme

which calculated the dividends due and generated a document purporting to be a minute of a directors’

meeting of the relevant composite company. The programme generated onto the minute a copy of Mr

Holland’s signature authorising the dividend, beneath which appeared the words “for and on behalf of

Paycheck (Director Services) Ltd.” Paycheck Services received a fee for its administrative services.

No allegation was made that this structure was a sham and there was never any pleading of dishonesty

against Mr or Mrs Holland. However, HMRC did challenge the structure. The structure failed because

Mr Holland was the settlor of the one voting share in each composite company, with the result that

the composite companies were treated as associated for tax purposes thus exceeding the £300,000

threshold. The resultant increased tax liability meant that the composite companies were insolvent, with HMRC being the only creditor. HMRC alleged that Mr and Mrs Holland were de facto directors of the insolvent companies and responsible under section 212 for causing the payment of dividends to

the companies’ shareholders (the contractors) when the companies had insufficient distributable

reserves. HMRC sought orders requiring Mr and Mrs Holland to pay amounts in excess of £13m to

compensate the insolvent companies.

The High Court dismissed the claims against Mrs Holland and that decision was not appealed.

However, the High Court held that Mr Holland was a de facto director of each composite company

and so in principle answerable to HMRC’s claims. The Court of Appeal unanimously allowed Mr

Holland’s appeal and held that he was not a de facto director of the composite companies.

JUDGMENT

Lord Hope considered that the question of whether Mr Holland was acting as a de facto director of

the composite companies must be approached on the basis that Paycheck Directors (the sole corporate

director of each of the composite companies) and Mr Holland were in law separate persons, each with

their own separate legal personality: [25]. The mere fact of acting as a director of a corporate director

will not be enough for an individual to become a de facto director of the subject company: [29]. One

must look at what a person actually did to see whether he assumed the responsibilities of the office of

director: [39]. Everything Mr Holland did was under the umbrella of being the director of a sole

corporate director: [40]. Until Parliament provides otherwise, if acts are entirely within the ambit of

the duties and responsibilities of a director of the corporate director, it is to that capacity that acts are attributed: [42].

Lord Collins agreed with Lord Hope. Lord Collins held that whether a person is a de facto director is

not simply a question of fact: the question was whether all of his acts can be attributed in law solely to

the activities of the corporate director: [95]. It did not follow from the fact that Mr Holland took all

the relevant decisions that he was a de facto director of the composite companies; if that were so, the

guiding mind of every sole corporate director would find themselves the de facto director of another

company: [96]. The basis of liability for a de facto director is an assumption of responsibility and being

part of the governing structure. Parliament has already intervened in the Companies Act 2006 to

ensure that there is a natural person to whom responsibility is attributed. The further extension of the

concept of de facto director contended for by HMRC is a matter for the legislature and not for the

Supreme Court: [96] Lord Saville agreed with Lord Hope and Lord Collins.

Lord Walker considered that if a person takes all the important decisions affecting a company and sees that they are carried out, then he is acting as a director of that company. Lord Walker considered that to attribute acts on the basis of capacity in a corporate structure was the most arid formalism: [115].

Lord Clarke agreed with Lord Walker and held that capacity should be irrelevant to the question of

whether an individual is a de facto director: [132]. Lord Clarke thought it artificial and wrong to hold

that Mr Holland was doing no more than merely discharging his duties as a de jure director of

Paycheck Directors: [142]."

Picture Credit: http://newsimg.bbc.co.uk/media/images/46477000/jpg/_46477057_-22.jpg