Category: Miscellaneous

In this article Richard Gray Barrister looks at the courts power to issue costs against a non-party; that is a party who is not directly involved in the litigation. Such orders may be considered against directors of an impecunious company formed only to protect the real litigators by the proposed use of the Company to litigate the claim.

The Statutory basis and the overall grounds for the award

Section 51 of the Senior Courts Act 1981, which is governed by CPR 46.2, gives the court power to award a non-party costs order. The award can be made in any court and the court is asked to exercise its jurisdiction to make it.

Generally, the only criterion for its application is whether, in all the circumstances, it is just to make the order. This is fact specific in each case.

Considerations for the Court to make the order

The court must consider whether the non-party is the (real) party interested in the outcome of the litigation, or

(i)         whether they have been responsible for bringing the proceedings; and

(ii)        that those proceedings were brought in bad faith; or

(iii)       there is some other conduct, which in all the circumstances, justifies the court in making the order.

It is not enough simply that the non-party is the sole director and controlling mind of a company. If, however, the interests of a company and its director were so close, it could be considered just to make the order against the director personally, the court will do so. Again, much is fact dependent and needs to be considered during the litigation.

If the non-party acted without impropriety or on legal advice, this does not prevent an order being made against them. However, a non-party costs order may be more likely to be made when the applicant can show improper conduct of litigation. See Turvill v Bird and others [2016] EWCA Civ 703

• It will be exceptional for an order for costs to be made against a non-party where the applicant has a cause of action against the non-party and could have joined them as a party to the original proceedings.

• There must be a costs order made against the primary party and there is no power to order the non-party to pay costs beyond those ordered to be paid by the claimant or defendant in the particular litigation.

Litigation Funders for Claimants

Generally, the jurisdiction will not be exercised against litigation funders meaning “those with no personal interest in the litigation, who do not stand to benefit from it and in no way seek to control its course.” (Hamilton v Al Fayed and others [2002] EWCA Civ 665)

Conversely however, there is authority to say that such orders can be issued against third-party funders who fund defences. See Merchantbridge & Co v Safron General Partner & another [2011] EWCH 1524.

Note however that if the funder effectively controls or participates in it, then they may be liable. See the case of  Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655

Causation

This is by no means settled law and the review of the authorities as to its necessity is beyond the scope of this article.

In Byrne v South Sefton Health Authority [2001] EWCA Civ 1904 the court said that it was necessary to determine whether the conduct complained of was really an effective cause of the costs incurred.

Generally, if there is no causation, whilst it may be possible to obtain the order, the granting of such orders will be rare.

An Application for Security for Costs – is it a prerequisite to the making of the order?

In any proposed litigation brought by a Company, a seasoned litigator would apply for security for their clients costs pursuant to CPR 25.

Those considerations will be the subject of a separate article given the litigation Our Clients are threatened with currently.  

Principles that the Court will consider in granting the order against a director

The court will consider the following non-exhaustive) principles:

(i)            Despite not being a party to the litigation, does the court consider that the non-party director properly be described as ‘the real party to the litigation’

(ii)        Where proceedings by an insolvent company are funded by a non-party solely or substantially for their own financial benefit, they should be liable for the costs, if the action brought or defended fails.

(iii)       To succeed impropriety need not be shown.

Section 51 orders may be made to avoid the injustice of an individual director hiding behind a Company and engaging in what they see as risk-free litigation for his own purposes (Re North West Holdings PLC and another [2001] EWCA Civ 67).

Such orders will not be made however where the Director is acting in proceedings to, for example protect shareholders. Of note here is that where a liquidator brings proceedings, the court will not usually make such an order.

In order to assess whether the director was the real party to the litigation, the question will be whether the individual director was seeking to benefit personally from the litigation.

It follows therefore, that before embarking upon funding of such litigation parties and their advisors are warned to consider whether in doing so, they are placing themselves at risk of being the recipient of such an order.

Conclusion

The courts power to award costs against non-parties is a significant incentive to dissuade others to encourage risky litigation. Where claims are made by Companies, litigators instructed to defend such claims should consider this power early in the proceedings and warn the other side in any pre-action correspondence.

If you require more information or are think of instructing a firm to act for you or your Company in litigation, then please email clerks@elysium-law.com or visit our website.

In this article Richard Gray Barrister gives an overview on the use of Employee Benefit Trusts and considers, even though the aggressive EBT schemes are a thing of the past, whether they are still being considered principally as a vehicle to avoid Inheritance Tax (IHT) and the potential pitfalls should that occur.

Having just finished a lengthy conference with a client, I was reminded of something a colleague of mine said, namely that; “Google is not kind to EBTs”.  If you were to Google the point, that appears to be correct and in this case the Client threw many questions at me surrounding the abusive arrangements for which they had previously been used. We now know all too well the effect of those arrangements and the misery they generated.

Aggressive schemes apart, there is very much a place for an EBT within the context of proper business planning and recently, Elysium Law has advised upon their use in the sale of a trading company where, prior to implementation, HMRC gave clearance.

Regrettably, there is still a temptation to use them purely as a vehicle for avoiding IHT and in this article I look at the consequences of the misuse of an EBT and simply ‘getting it wrong’.

Be warned of the use of an EBT in, for example, a small family company who just after incorporation of an investment portfolio now wants to avoid IHT by placing the shares into an EBT. It won’t work!

What is an EBT?

An EBT is a type of discretionary trust set up to fall within the definition of a trust for the benefit of employees within the provisions of Section 86 of the Inheritance Tax Act 1984 (IHTA 1984). This provides exemptions from inheritance tax (IHT) for certain transactions involving qualifying EBTs.

Special Treatment of Section 86 Trusts

The following should be noted in relation to a section 86 trust

It is not a relevant property trust;

A section 86 trust is not a relevant property trust.  Relevant property trusts are subject to the specific inheritance tax regime in Chapter III, Part III of the Inheritance Tax Act 1984. Therefore, a section 86 trust it is not subject to the IHT charges such as the exit charge and the ten-yearly charge.

Transfer of Value to an EBT

If a close company makes a transfer of value to an EBT, this will be a chargeable transfer, apportioned to the participators under section 94, IHTA 1984.

There are, however, four possible reliefs and exemptions that may be available:

• Dispositions not intended to confer a gratuitous benefit;

• Dispositions allowable for corporation tax.

• Disposition for the benefit of employees.

• Business property relief.

Section 13 of the Act deals with transfers of value into the Trust.

Consideration is then to be given to the effects of Section 239 of the Taxation of Chargeable Gains Act 1992., which gives the exemption of CGT for the ‘transfer in’ of the assets.

Inheritance tax

Section 28, IHTA 1984 provides that a transfer of value by an individual to an EBT will be an exempt transfer where the following condition is satisfied:

• The EBT is a section 86 trust with restricted beneficiaries.

However, the reliefs granted are subject to anti avoidance provisions without which it would be easy to use the EBT exemptions to transfer wealth from one generation of a family to another without adverse IHT and CGT consequences

Should an EBT be considered abusive by HMRC, then the trust will be treated as a Relevant Property Trust and a short contrast with that regime, as opposed to EBTs, must be considered.

Inheritance Tax considerations

Lifetime gifts into discretionary trusts are chargeable lifetime transfers (CLTs).  IHT will be charged at the lifetime rate of 20% on the amount above the settlor’s nil rate band. There is

10-year periodic charge

Discretionary trusts are ‘relevant property’ trusts because the trust assets are not included in the taxable estate of any of the beneficiaries, the trust itself will be assessed to IHT. That means that on each 10-year anniversary the trust is taxed on the value of the trust less the nil rate band available to the trust. The rate they pay on this excess is 6% (calculated as 30% of the lifetime rate, currently 20%).

Capital Gains Tax – Gifts into trust

Lifetime gifts of existing assets into trust, other than gifts of cash or the assignment of investment bonds, will be disposals for CGT.

During the life of the trust

If the trustees dispose of trust assets the gains are calculated in the same way as for an individual and taxed at the trust rates of CGT. The trust rates are 20% or 28% for residential property.

If the EBT is reclassified by HMRC as a Relevant Property Trust, then penalties and interest will apply and therefore extreme caution must be exercised when advising on the set up of the EBT

DoTAS and the final word

Again, a detailed consideration of these provisions is beyond the scope of this article, but advisors should consider whether placing shares in a small investment company with no employees will fall within the DoTAS legislation. In my view it does and the temptation to do this must be avoided

IHT hallmark a revision from the previous legislation

The IHT arrangement Regulations 2017 were made on 29 November 2017 and came into force on 1 April 2018, replacing the previous IHT hallmark.

Arrangements to which the IHT hallmark applies

The IHT hallmark applies to arrangements if it would be reasonable to expect an informed observer to conclude that both of the conditions below are met.

Condition 1

The main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain one or more of a list of specific advantages in relation to IHT (tax advantage).

The specific advantages are:

• The avoidance or reduction of a relevant property entry charge, the ten-year anniversary and exit charges.

(Regulation 4(2), IHT Arrangements Regulations 2017.)

Condition 2

The arrangements involve one or more contrived or abnormal steps without which a tax advantage could not be obtained.

(Regulation 4(3), IHT Arrangements Regulations 2017.)

EBTs if used properly have a significant place in Tax and Business planning. If you want further advice upon the use EBTs, EOTs and of an EBT upon the proposed sale of trading company, then contact us via email at clerks@elysium-law.com or call 0151 328 1968