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Earlier this year, in Saxon Woods Investments Ltd v Costa & Oths [2024] EWHC 387 (Ch), a minority shareholder (P) brought a Petition under section 994 of the Companies Act 2006 asking the High Court to decide on whether a company had breached terms in the Shareholders’ Agreement requiring the company and its shareholders to work together in good faith towards a sale of the company.

Background to the case

A Shareholders Agreement (“SHA”) was entered into between the Eighth Respondent, Spring Media Investments Limited (“the Company”) and its shareholders (including P and investment entities for the First Respondent) to the effect that:

• They would work together in good faith towards a sale of the Company (“Exit”) by 31^st December 2019.
• Good faith consideration would be given to any opportunities for a sale before that date.
• In the event that no Exit was achieved by 31^st December 2019, the Company’s Board should instruct an investment bank to “cause” an Exit.

All efforts to sell the company failed and the company remained unsold at the time of trial.

P argued that the Company, and in particular, the First Respondent, breached the SHA by not acting in good faith towards the Exit. When the 2019 deadline passed, they should have engaged an investment bank to cause the sale of the company.

The First Respondent, a director and indirect investor in the Company, argued that on true construction of the SHA, no breach occurred. He also stated that even if this was not the case, the Board did not consider that selling the company by the end of 2019 would maximise the value for shareholders and therefore, the decision did not constitute a breach.

This meant that P did not suffer any unfair prejudice under section 994(1) of the Companies Act 2006.

 Section 994(1) of the Act provides as follows:

“A member of a company may apply to the court by petition for an order under this Part on the ground-

(a)  that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b)  that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

The High Court’s Decision

The Court ruled that the First Respondent had breached the SHA concerning the Exit. Having examined the disputed clauses of the SHA, Mr Simon Gleeson (sitting as a Deputy High Court Judge) concluded that:

• The SHA imposed a timetable for selling the company.
• The directors would not have been in breach of their fiduciary duties if they had pursued a sale in 2019, as they were obligated to under the terms of the SHA.
• A director’s conclusion that it would be commercially reasonable to defer the sale beyond the end of 2019 was not be permitted by the terms of the SHA.

Mr Gleeson went on to say that Clause 6.2 of the SHA demands two things:

1. to work in good faith towards an Exit, and
2. to give good faith consideration to offers for an Exit received during the investment period.

The First Defendant argued that the Company was not ready for sale by 31^st December 2019 and it would have been sold for a low price if the sale was realised on that date. Mr Gleeson determined that this point was irrelevant. The issue was whether the Company and the directors, and in particular the First Defendant, did in fact work towards an Exit on that date, and give good faith consideration to any opportunities for Exit which arose at that time.

Mr Gleeson concluded that the directors did not give good faith consideration to all Exit offers. In particular, the First Defendant rigidly controlled access to the financial advisor overseeing the sale process. He would not let others communicate with the financial adviser and intentionally excluded one minority shareholder from the process by withholding information. The First Defendant also did not properly engage with a potential sale opportunity proposed by the minority shareholder.

The Court concluded that the First Defendant’s actions amounted to a breach of the SHA, and he did not act in good faith with regard to working towards an Exit at the time agreed upon and did not pursue other investment opportunities that were presented to him. Therefore, P had suffered unfair prejudice as it could not sell its shares as it intended under the SHA. The Court consequently ordered the shares to be purchased.

Comment

It is rare for these types of cases to reach court; typically, an early settlement is reached. It is essential to note the lesson from the case is that although directors must be commercially astute and put the interests of the company first, if a Shareholders’ Agreement exists, the obligations under it must be seriously considered. If tension develops between commercial reality and contractual obligations, directors should seek expert legal advice straight away.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 30^th October 2024. This article does not constitute legal advice. For further information, please contact our London office.

How To Remove Minority Shareholders

The Companies Act 2006 (CA 2006) contains provisions enabling or requiring a takeover offeror to acquire shares of the target company from shareholders who have not accepted the offer. These provisions are referred to as:

• Squeeze-outs – an offeror has the right to compulsorily purchase the shares of non-assenting shareholders.
• Sell-outs: the non-assenting shareholders’ rights to require the offeror to purchase their shares.

Why is it necessary to remove minority shareholders?

Dissenting minority shareholders can cause significant problems for an offeror because:

• Unless the offeror achieves a shareholding of 75% or more, it may not be able to pass a special resolution.
• A 75% or more holding is required to incorporate the target company into its UK tax grouping for certain tax and stamp duty reliefs.
• Merger relief will only apply if the offeror has a 90% shareholding.
• An offeror can only call a general meeting at short notice if it holds 90% of the shares in a private company or 95% if the target company is public.
• Any minority interest may need to be considered when structuring intra-group transactions following the offer.
• Disgruntled minority shareholders can disrupt company business and cause reputational damage.

Dissenting shareholders can also suffer disadvantages in takeover situations. If the target company does not keep its public listing, minority shareholders may discover no one wants to purchase their shares. If this happens, they can be left with only the negative protections against unfair prejudice under section 994 of the CA 2006 and minority shareholder rights at common law.

How do squeeze-outs and sell-outs work?

In a squeeze-out, section 979 of the CA 2006 allows the offeror in a takeover bid to buy the shares of minority shareholders if they have acquired:

(a) not less than 90% in value of the shares to which the offer relates, and

(b) in a case where the shares to which the offer relates are voting shares, not less than 90% of the voting rights carried by those shares.”

If these conditions are met, the offeror can force minority shareholders to transfer their securities at the price offered in the takeover bid.

It is crucial to note that section 979 only applies if there is a takeover offer. A takeover offer must:

• Include an offer for the entire share capital of the target company or, if the target’s share capital is divided into classes, all the shares of the particular class which is the subject of the offer.
• Aside from a few exceptions, offer the same terms to all shareholders (or shareholders of the relevant class).

The offeror must activate the compulsory squeeze-out procedure within three months of the last day on which the offer can be undertaken. The procedure is initiated by the offeror serving notice to those members who have not accepted the offer.

Can a minority shareholder challenge a squeeze-out?

Once notice under section 979 is served a minority shareholder has six weeks to apply to the Court for a declaration that either:

1. The offeror is not entitled to their shares, or
2. The different terms on which the shares can be purchased.

If the 90% threshold has been reached, it will be difficult for a minority shareholder to prevent compulsory acquisition of their shares. But if they can prove, on the balance of probabilities, that the offeror breached the principles set out in the City Code on Takeovers and Mergers (also known as The Takeover Code) or there are special or unusual circumstances that mean a decision should be made in their favour, the Court may allow the application.

What are sell-out rights?

Section 983 of the CA 2006 provides that if an offeror holds 90% or more of all the shares in the target company (or if the offer relates to a class of target company shares, 90% of all the shares in that class) and those shares carry not less than 90% of the voting rights in the target, then a minority shareholder may require the bidder to acquire its shares.

The offeror must give formal notice that they have the right to request their shares be purchased by the offeror within one month of the 90% threshold being reached. If the sell-out notice is given before the end of the period within which the takeover offer can be accepted, it must state that the sell-out offer is still open for acceptance.

A sell-out notice does not have to be given if the shareholder in question has already been provided with a squeeze-out notice.

Concluding comments

Squeeze-outs and sell-outs can present serious complications in takeover bids, and failing to give minority shareholders notice at the right time can be an offence. The best way to protect your interests is to work with an experienced Shareholders Disputes Solicitor who can guide you through this and other complex matters associated with takeover bids.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 21^st October 2024. This article does not constitute legal advice. For further information, please contact our London office.

MUR Shipping BV v RTI Ltd [2024] UKSC 18

The current geopolitical situation means companies are increasingly having to rely on force majeure clauses to cope with supply chain issues and sanctions. The UK Supreme Court recently delivered its anticipated decision in MUR Shipping BV v RTI Ltd, which clarified that unless the parties clearly agreed otherwise, a “reasonable endeavours” provision in a force majeure clause did not require a party to accept non-contractual performance.

Background to the decision

The case concerned a freight contract (the contract) between MUR Shipping BV and RTI Ltd. RTI agreed to ship, and MUR agreed to carry, consignments of bauxite from Guinea to Ukraine.

Under the contract, payments were to be made in USD. MUR Shipping BV invoked the force majeure clause when US sanctions hindered RTI from being able to pay in the agreed currency.

The criteria for a “force majeure event” included an event or state of affairs that could not be overcome by reasonable endeavours made by the party affected.

The force majeure notice was served on 10 April 2018. RTI rejected the notice and offered to pay MUR Shipping in Euros instead and to cover all the exchange costs. MUR Shipping rejected this offer and suspended performance.

RTI commenced arbitration in June 2018. The Tribunal found that the consequences of US banks’ risk-averse reaction to sanctions were unavoidable, and any USD payments made by RTI would have been, at the very least, delayed. However, the Tribunal concluded that accepting payments in Euros was a viable alternative and would have resulted in zero detriment to MUR Shipping. Therefore, the force majeure “failed because it could have been overcome by reasonable endeavours from the party affected,” and MUR Shipping therefore had to pay damages.

On appeal, the High Court rejected the Tribunal’s decision and held that “reasonable endeavours” could not include accepting payment in Euro rather than USD.

The Court of Appeal (by a majority) allowed RTI’s appeal and reversed the High Court’s decision. Lord Justice Males said the force majeure clause should be applied in a “common sense way” which achieved the purpose of the agreement and allowed the parties to undertake their contractual obligations.

The Supreme Court’s decision

The SC overturned the Court of Appeal’s ruling and allowed MUR’s appeal. It held the ‘reasonable endeavours’ clause included in the force majeure clause did not require a party to accept the contract to be performed in a way that was not stipulated in the agreement. An essential element of freedom of contract is the freedom not to contract. Therefore, it follows that parties have the freedom not to accept an offer of non-contractual performance.

MUR had stated clearly that it was to be paid in USD, and it did not have to accept the offer of being paid in Euros, regardless of whether acceptance made ‘commercial sense’.

Lord Justice Arnold provided the following reasoning:

“I agree that RTI’s offer would have solved that problem with no detriment to MUR. The fact remains, however, that what was offered by RTI was non-contractual performance. In my judgment an “event or state of affairs” is not “overcome” within the meaning of clause 36.3(d) by an offer of non-contractual performance, and in particular an offer of non-contractual performance by the counterparty to the Party affected. Suppose the contract required carriage to port A which was strike-bound and the party invoking clause 36 was presented with an offer by the other party to divert the vessel to port B which would not in fact be detrimental to the party invoking the clause (say because the goods being carried were required at place C equidistant between port A and port B)? Is the party invoking the clause required to accept that offer? In my view the answer is no, because the party invoking the clause is entitled to insist on contractual performance by the other party. If the parties to the contract of affreightment intended clause 36.3(d) to extend to a requirement to accept non-contractual performance, clear express words were required and there are none.”

Comment

You could be forgiven for wondering about the wisdom of the Supreme Court decision; however, when placed against the fundamental importance in English law of the principles of both certainty of contract and paying strict attention to the wording of an agreement to establish the parties’ intentions, it becomes clear that no other conclusion could have been reached.

Certainty of contract is one of the reasons English law is often preferred by those undertaking cross-border projects and/or agreements. Although accepting the offer to be paid in Euro would have made commercial sense and even perhaps facilitated a ‘fairer’ outcome, the Supreme Court reenforced the need for parties to provide clear wording when it comes to force majeure clauses, especially in terms of if and when non-contractual performance could suffice in cases where supply chains or sanctions make contractual performance impossible.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 14 September 2024. This article does not constitute legal advice. For further information, please contact our London office.

Introduction:

In an insolvency case involving both UK trustees and Russian Bank Creditors, the High Court issued guidance in regards to the potential breach of the 2019 Regulations surrounding sanctioned entities. The significant criminal and civil penalties potentially arising from this case make it a consequential and relevant case for UK arbitration and litigation lawyers to consider and understand. The final ruling deals with three key questions, as outlined in the court proceedings and expanded upon below.

Case Summary:

Anatoly Motylev, a Russian national residing in London as of 2015, faced cross-border insolvency proceedings between the United Kingdom and Russia that raised key legal issues for the UK trustees involved in the case. Under Section 44 of the Sanctions and Anti-Money Laundering Act 2018, statutory protection could be provided to those involved, on the condition that the decision to either exclude or include Russian Bank Creditors in Motylev’s UK insolvency proceedings were performed under “reasonable belief” that it was in compliance with the 2019 Russia (Sanctions) (EU Exit) Regulations. Therein lay the complication of confirming the necessary “reasonable belief” of whether the Russian Bank Creditors were subject to sanctions against Russia and thus excluded from proceedings, or otherwise. The decision to exclude them without having established this would expose the trustees to be held liable to the Russian Bank Creditors for civil damages. The reverse would expose them to facing significant criminal and civil liabilities under the current UK sanctions regime. So, the Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] claimants applied for a declaration essentially seeking guidance from the High Court and the judgment of Nicholas Thompsell, sitting as a Deputy High Court Judge, for directions under 303 (2) Insolvency Act 1986.

Background:

Relevant here is the case between Mints and Litasco coming prior, being the first of its kind to handle the adoption of ‘control’. As such, the Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] case attempts to resolve the opposing views raised by the former, specifically in its addressing of question one of three key questions of the case. These can be found in greater detail in the sections below.

Decision:

The court held that the trustees would not be in breach of UK Sanctions and thus not liable for allowing the sanctioned entities, Russian Bank Creditors, to take part in UK insolvency proceedings, prior to distribution. More specifically, the sanctioned entity was permitted voting rights in the creditors’ decision procedures and within the creditors’ committee. Read on to ‘What Does this Mean for Future Insolvency Cases?’, in which the reasoning behind this is considered.

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What is meant by ‘Control’ in regards to the law?

 

In what circumstances a person should be regarded as being owned or controlled directly or indirectly by a designated person?

This is a difficult question because Regulation 7(4) finds direct or indirect ownership or control where “it is reasonable … to expect that P (i.e. a designated person) [is] able … to achieve the result that the affairs of C (i.e. a Russian entity) are conducted in accordance with P’s wishes.”

Depending on the interpretation of Regulation 7(4), if the designated person is Vladimir Putin, this would imply that every single entity in Russia is controlled indirectly by him, as argued in Mints. In Litasco, the judges were reluctant to extend the interpretation “so far as to extend to companies of whose existence the putative controller was wholly ignorant and whose affairs were conducted on a routine basis without any thought of that controller.”

Reconciling Mints and Litasco, Deputy Judge Nicholas Thompsell [paragraph 76] breaks down ‘control’ into four types, with the fourth category being the core of the discussion:

1.  De jure control: this exists where there is an absolute legal right to exercise control embedded, for example in the constitution of a company or a body;
2. Actual present de facto control: this exists where the putative controller is manifestly “calling the shots” (to adopt the language used in Mints) with no legal right to do so;
3. Potential future de jure control: the creation of this category is, to DJ Thompsell, the main reason why the words “(if P chose to)” are included in Regulation 7(4). This would exist where, although the designated person enjoyed no current legal right of ownership or control, the designated person had the legal means to obtain ownership or control. The most obvious example of this, would be where the designated person had an option or a forward contract to acquire a majority shareholding in a company; and
4. Potential future de facto control. This would exist where although there was no evidence that the putative controller was currently exercising de facto control, there is some good reason to believe that the putative controller could, if he or she wished, exercise control in some manner. DJ Thompsell states: “For reasons I will expand on below, whilst this category must exist theoretically, I believe its existence in practice will be very rare.”

DJ Thompsell held that a strict interpretation of the fourth category would imply that every billionaire  could be “regarded as having control of every company that the billionaire could clearly afford to purchase” and every gun holder could be “regarded as having control of every organisation that he might be able to coerce by making use of that weapon.”

Based on this and the facts of the case, three questions need to be considered.

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3 Key Questions of the Case:

Question 1: Do designated persons have control of the Russian bank creditors?

Despite the significant influence they hold, the judge found no evidence of present or future de jure control by Governor Nabiullina or President Putin over the liquidators appointed by the DIA. Thus, neither had the right to direct how liquidators should perform their statutory duties. Furthermore, there is, at the time of writing, no current evidence of de facto control. There is no public evidence that either Governor Nabiullina or President Putin have interfered with any liquidation processes managed by the DIA. While future de facto control is theoretically possible, it would be difficult to obtain without the breach of constitutional norms, requiring cooperation from others, and incurring significant political and reputational costs. Thus, it is unlikely they could easily exert such control.

“Whilst Governor Nabiullina, and President Putin each have significant influence as to the supervision and senior management of the DIA, they do not, I consider, have any direct or indirect ability to control the individuals appointed as liquidators in the management of specific liquidations being conducted by the DIA. I do not consider it at all likely that those with a supervisory role within the organisation could as a matter of right direct how individual liquidators should discharge their statutory duties.”

[Paragraph 120 of the judgement]

“They might also be able to bring this about by appointing placemen (or placewomen) to the post of General Director and then to the Management Board, and thereby via those placees get to a position where they could ensure that the individual liquidators acted according to their orders. Any such arrangement would, however, likely require the cooperation of those persons and of the Duma and could be expected to involve the expenditure of political and/or reputational capital, as it would be obvious to the world that it was improper for them to interfere in a statutory process.”

[Paragraph 122 of the judgement]

 

Question 2: Is voting caught by sanctions?

The judge determined that exercising voting rights in bankruptcy is not “using” funds as defined by sanctions regulations. Voting does not alter the status of the debts themselves or constitute dealing with them as funds. The only exception would be if voting directly led to the distribution of funds to a sanctioned person. Additionally, voting rights are not considered “financial assets or benefits” under the regulations. Prohibiting sanctioned creditors from voting would disrupt the bankruptcy process, potentially leading to significant delays, legal complications, and contrary outcomes to the majority creditor’s interests.

“Turning to the second argument, voting rights under the bankruptcy machinery cannot themselves be regarded as “benefits” so as to fall within the definition of “funds”. Such voting rights have no value per se, and cannot be divorced from the statutory machinery of the bankruptcy process. Also, there is a strong argument that the phrase “ financial assets and benefits of every kind”, notwithstanding the words following “ (but not limited to)” needs to be read sui generis with the following list of assets set out in s.60(1) and voting rights are clearly not of the same nature to the type of financial rights set out there.”

[Paragraph 146 of the judgement]

“Where (as here) sanctioned creditors make up a majority of the creditor pool, there would be a serious risk of the bankruptcy developing contrary to the views of the majority creditor. In any case, there is a likelihood of unnecessary delay, uncertainty, court applications and licencing applications to OFSI.”

[Paragraph 151 of the judgement]

 

Question 3: Are the trustees in breach of regulation 18(a)?

The judge agreed that the Trustees are not violating Regulation 18A for three reasons.

First, their statutory duties as Trustees in Bankruptcy do not involve “financial services” as defined by the regulations. Second, they are not providing services aimed at “foreign exchange reserve and asset management.” Third, even if their services were considered “financial services,” they are not providing them to any prohibited persons under Regulation 18A. The Trustees’ actions are focused on managing the bankrupt estate under court supervision, not on serving specific creditors.

“First, they are undertaking the statutory functions of a Trustee in Bankruptcy and these statutory purposes do not include anything that falls within the definition of “financial services” within s.61 SAMLA. Whilst the words at the beginning of s.61(1) “ any service of a financial nature” are very wide, I consider it is clear that they should be read sui generis with the list of activities following (notwithstanding that these wide words are not limited to that list).”

[Paragraph 159 of the judgement]

“Thirdly, even if the Trustees could be said to be providing “ financial services” for the purpose of “ foreign exchange reserve and asset management”, they are not providing such services to any of the persons listed in Regulation 18(2) (even if you take the view (as I do not) that the Russian Bank Creditors are under the control of Central Bank). The Trustee’s services are provided in relation to the Bankrupt’s estate under the supervision of the court. Whilst the Trustees may have duties that can be enforced by creditors it would be wrong to think of them as providing services to particular creditors.”

[Paragraph 161 of the judgement]

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What does this mean for future insolvency cases?

DJ Thompsell concluded by issuing a declaration stating that the following did not constitute “funds” or “economic benefits”, for the purposes of the 2019 Regulations:

• the voting rights of creditors involved in a creditors’ decision procedure, under the bankruptcy provisions of the Insolvency Act 1986 and the Insolvency Rules 2016 (applicable to England and Wales)
• the rights of creditors to participate in and vote at creditors’ committees

Additionally, using such right or accepting the votes of the creditors would not be considered as dealing with “funds” or “economic benefits”, also for the purposes of the 2019 Regulations.

Nevertheless, the judge did also order the increased monitoring of the sanctioned entities, by the trustees, in order to ensure that there was no change in the position of said entities, at the very least prior to a distribution.

The new Chancellor of the Exchequer, Rachel Reeves, has promised the HMRC more resources to tackle tax evasion and fraud in an effort to plug some of the £22 million gap in public finances. The Treasury’s public spending audit document stated:

“The government is committed to tackling tax non-compliance, including from fraud and tax avoidance, to ensure everyone pays their fair share. The government will increase HMRC’s compliance staff, invest in HMRC’s resources and technology infrastructure, and make legislative changes to tackle tax non-compliance and raise revenue.”

Tax evasion and tax fraud encompass many activities including commonly known offences such as income tax fraud and VAT fraud. There are also more complex types of fraud such as missing trader fraud, also called ‘missing trader intra-community’ (MTIC) fraud, which involves exploiting VAT regulations governing cross-border transactions within the EU. This deceptive practice capitalises on the absence of VAT charges on such transactions. MTIC fraud also includes acquisition fraud, carousel fraud, and contra trading.

In this article, we explain everything you need to know about the offence of tax evasion and tax fraud. At the end, we have provided a helpful checklist that details what you should do if you are accused of one of these offences.

Related Article: Tax Evasion – Court Finds No Breach Of Directors Duties (Carey Street Investments Ltd (In Liquidation) v Brown [2024] EWCA Civ 571)

What is tax evasion?

When it comes to tax evasion, an offence is committed when a person engages in dishonest practices to reduce or avoid paying tax.. The Prosecution has to prove that you dishonestly evaded paying tax rather than just “avoided” doing so.

The Taxes Management Act 1970 (TMA 1970) provides for the offence of income tax evasion. Section 106A states that a person commits an offence if they are knowingly concerned about the fraudulent evasion of income tax by themselves or another person. The offence does not apply to things done or omitted before 1st January 2001.

Other ways a person can defraud HMRC, or the Department for Work and Pensions (DWP) include:

• Making a false statement (whether written or not) relating to income tax.
• Delivering (or causing to be delivered) a false document relating to income tax.
• Failing to account for VAT.
• Withholding PAYE and National Insurance.
• Failing to register for VAT.
• Failing to disclose income.

As well as statutory offences, there is a common law offence of cheating the public revenue.

Concerning the evasion of income tax, the Prosecution must prove that the Defendant was “knowingly concerned in the fraudulent evasion of income tax.” This is known as the mental element of the offence.

What is the difference between tax evasion and tax avoidance?

Tax evasion is the deliberate non-payment of tax, for example, not declaring taxable income and accepting cash-in-hand payments to reduce tax liability. On the other hand, tax avoidance, or “tax planning”, is the mitigation of tax liability through legal methods, for example, setting up trusts to protect assets or offshore companies.

Tax avoidance is legal, but evasion is not.

Can you be jailed for tax evasion in UK?

If you are convicted of tax evasion in the Magistrates’ Court, you could be sentenced to a maximum of six months in prison and/or an unlimited fine. Crown Court convictions may result in up to seven years in custody and/or an unlimited fine. Under the Sentencing Guidelines for fraud, bribery, and money laundering offences, aggravating, and mitigating factors can increase or decrease the final sentence.

Where the offence was committed before 12^th March 2015, the maximum fine is £5,000.

The maximum sentence is life imprisonment if you are convicted of cheating the public revenue. In reality, sentences are far shorter and are decided under the Sentencing Guidelines.

What powers do HMRC officers have when investigating a tax evasion matter?

HMRC officers have wide ranging powers derived from a number of statutes, including the Police and Criminal Evidence Act 1984 (PACE 1984), which provides HMRC investigating officers with the following powers:

• Ability to request the surrender of documents.
• Authorisation to enter, search, and seize evidence on premises occupied or controlled by you if you are arrested.
• Arrest and interview you.

HMRC officers also have powers, in certain circumstances, to conduct covert surveillance, access financial information, and freeze assets.

What is ‘dishonesty’ concerning tax evasion offences?

The majority of tax evasion offences require individuals to engage in fraudulent conduct, implying an act of dishonesty. This might involve using false invoices to decrease the taxable profits of a business or knowingly understating income in an annual return. The test for dishonesty is:

• What was the Defendant’s actual state of knowledge or belief as to the facts?
• Irrespective of the Defendant’s belief about the facts, was their conduct dishonest by the objective standards of ordinary decent people?

Dishonesty is a key element of tax evasion offences and must be proved if the Prosecution is to achieve a conviction.

Checklist – What steps should I take if I am accused of tax evasion or tax fraud?

Being investigated by the HMRC for tax evasion or tax fraud is a frightening experience. You may want to ignore the situation and hope it goes away, but trust us, it will not. HMRC has prosecution targets to meet and, especially given the Chancellor’s latest announcement (see above), there are concerns that the department will pursue a criminal case where in the past, a civil penalty would have been imposed.

Below are the following steps you should take to increase your chances of favourable outcome:

1. Do not discuss your case with HMRC, or anyone else, until you have consulted with your legal team.
2. Do not obstruct HMRC officers since in so doing you may be committing an offence.
3. Contact a specialist Tax Fraud Solicitor. They will quickly work to find out why HMRC suspects you of tax fraud or tax evasion. In addition, they will identify documents that are subject to legal privilege and provide an emergency response if your premises is subject to a dawn raid. An experienced Solicitor will advise you on matters of law, evidence and procedure. They will advise you on the legitimacy of any warrants executed, what you should do during an interview, and any preparation to be undertaken. Importantly, an experienced Solicitor will seek to ensure all of your rights and entitlements are protected.
4. Ensure your organisation has a policy detailing what to do in a dawn raid, individuals who are to be responsible during this time, and key professionals to be contacted immediately, including Solicitors and Accountants
5. Monitor any actions by HMRC, and make contemporaneous notes of key events, items seized, people spoken to, etc.
6. Request a copy of any search records from HMRC.
7. Ensure all documents are backed up since they may be crucial to your defence.

Concluding comments

Being investigated or prosecuted for tax fraud or tax evasion is incredibly serious and if convicted, you could go to prison. Our Business Fraud Solicitors have extensive experience in successfully defending complex tax fraud cases and will provide the advice and representation you need to manage an HMRC investigation or prosecution.

To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 12 August 2024. This article does not constitute legal advice. For further information, please contact our London office.

Background

The Defendants were two very successful Yorkshire based property developers, accused of a complex tax fraud, which concerned the transfer of shares holding valuable property (valued in excess of £11 million after construction) into various offshore entities, including Gibraltar and the BVI.

The allegations arose out of the infamous 2016 Panama Papers, which involved 11.5 million documents being leaked from the former Panamanian offshore law firm and corporate service provider Mossack Fonseca.

His Majesty’s Revenue and Customs (HMRC) then commenced action against our client, invoking the COP 9 procedure, following which criminal proceedings were initiated.

Tax Fraud Case Sentence

The Defendants expected to receive a prison sentence in excess of 6 years, but through settlement discussions with the Prosecution, we were able to secure a sentence which did not involve any prison time or further enforcement action through Proceeds of Crime Act proceedings.

Senior Partner of Eldwick Law, Mohammed Sarwar Khan, acted in this matter, together with Abbas Lakha KC of 9 Bedford Row (Chambers Of Steven Kay QC).

Mr Khan regularly acts for individuals and entities accused of fraud and serious crime. If you are facing any allegations of fraud, please contact our team at Eldwick: mail@eldwicklaw.com

If you are facing a claim for civil fraud, here is some good news. These types of claims are extremely hard to prove.

Commercial fraud is a complex area of law, and civil claims are often brought because the chances of a criminal prosecution are minimal. However, civil fraud claims must be taken seriously.

The Claimant’s legal advisors will have explored other, easier-to-plead claims such as breach of contract, negligence, or an action under the Misrepresentation Act 1967. They know that making allegations of fraud or dishonesty without strong evidence may result in the allegations being struck out and wasted costs orders being made against them. So, you can be assured the Claimant has done their homework and they believe their claim has merit.

What is commercial fraud?

Commercial fraud is not an action in itself. The term encompasses many causes of action, such as:

• Forgery
• False accounting
• False representation
• Cryptocurrency fraud
• Mortgage fraud
• Online fraud
• Insurance fraud
• Banking fraud

What does the Claimant have to prove to establish a civil fraud claim?

To prove fraud, the Claimant must show, on the balance of probabilities, that:

The Defendant made a false representation; and

• Knew the representation was false; or
• Had no belief in the truth of the representation; or
• Was reckless as to whether the representation was true or false; and

1. The Defendant intended for the Claimant to rely on the representation; and
2. The Claimant did rely on the representation; and
3. The Claimant suffered loss and/or damage as a consequence on that reliance.

Will a Freezing Order be applied if a claim for civil fraud is brought against me?

There is a high chance that the Claimant’s legal team will apply for a Freezing Order to prevent you from dissipating property or assets which may be subject to the claim.

Most Freezing Orders are made without notice (ex parte), so you will not know the injunction has been granted until you try to deal with your assets or withdraw funds from your bank account and find you cannot.

Should this happen, you must contact an experienced Civil Fraud Solicitor immediately.

What is an Anton Pillar order?

Freezing Orders are not the only intrusive injunction the Claimant may apply for. Searching Orders, also known as Anton Pillar Orders, are a form of civil search warrants. A Search Order allows the Claimant’s legal team to enter and search your premises and seize any relevant materials and documents. An Anton Piller Order’s purpose is to preserve evidence that may be in danger of destruction or concealment.

How is a civil fraud case defended?

After examining the Claimant’s disclosure documents and case particulars, your Civil Fraud Solicitor will advise you on the strength of the Claimant’s case.

Case law has shown that the Courts will strike out a civil fraud case where the allegations of fraud and dishonesty have not been sufficiently particularised. Your Solicitor will meticulously examine the facts, matters, and circumstances relied upon to show that you were dishonest (and not merely negligent).

If none of the facts “…tilts the balance and justifies an inference of dishonesty” (Three Rivers District Council [2001] UKHL 16, Lord Millett), your legal team will apply for the case to be stuck out.

If the case proceeds to trial, the Claimant must prove you actually knew, or were reckless as to knowing, that a false representation was made. This has been made easier due to our reliance on electronic communication. In the case of Digicel v Cable and Wireless [2008] EWHC Ch 2522, Morgan J stated:

“It is well known that people say things in e-mails which [they] would not dream of putting into a letter or a minute or a formal note. Further, in litigation involving allegations of conspiracy or similar allegations, it may only take one revealing statement in a document, perhaps in an e-mail, to show clearly what people really thought or what people were really intending to achieve, a matter that might not have been revealed in many tens of thousands of other documents in the trial bundle.”

If you know of any electronic communication that may indicate you were dishonest or reckless as to whether dishonesty occurred, you must inform your Civil Fraud Solicitor immediately so they can build a strategy to defend against such evidence.

Are cultural differences a defence in civil fraud claims?

Complex fraud claims often involve cross-border issues; therefore, cultural differences and misunderstandings can arise in the proceedings.

In Lakatamia v Su [2021] EWHC 1907 (Comm), the Court was asked to consider the cultural differences between Taiwan and the UK. Mr Justice Bryan concluded:

“Madam Su’s submission about not applying the standards of a substantial UK company to a Taiwanese company (whatever that in fact is intended to mean) also has to be approached with some caution. Any such cultural differences would not explain, still less justify, any conduct that would amount to tortious or civil wrongdoing, whether under English or Monaco law, or a lax or inappropriate approach to corporate structures and governance whatever the law applicable to those companies. Further, there is no evidence before me of any applicable law justifying what would otherwise be wrongdoing.”

 Article 17 of the Rome II Regulation may also apply to local standards of conduct. It states:

Rules of safety and conduct

In assessing the conduct of the person claimed to be liable, account shall be taken, as a matter of fact and in so far as is appropriate, of the rules of safety and conduct which were in force at the place and time of the event giving rise to the liability.

However, the Courts have made clear that cultural differences may not be used to justify wrongdoing under the applicable law, English or otherwise, nor can they excuse actions that, while lawful, are inconsistent with English public policy.

To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 16 July 2024. This article does not constitute legal advice. For further information, please get in touch with our London office.