Although the Court of Appeal judgment in Purkiss v Kennedy & Ors [2025] EWCA Civ 268 deals with the purpose requirement of s 423 Insolvency Act 1986, its importance rests equally on its reminder of the difficulties faced by a party whose appeal amounts in reality to an attack on the findings of fact of the judge who heard the case at first instance. In this case the first instance judge was Rajah J. In a judgment delivered on 8 May 2024 (Purkiss v Kennedy & Ors [2024] EWHC 1081 (Ch), covered in our Bulletin of May 13, 2024) he dismissed the liquidator’s claim.
The claim arose in the liquidation of Ethos Solutions Limited, a company formed to give effect to a tax avoidance scheme designed to enable self-employed individuals to reduce the income tax and national insurance contributions payable on their remuneration. Participating individuals would enter into contracts of employment with the company under which they were paid a modest salary. The company would enter into consultancy agreements with end users, participants’ personal service companies or employment agencies (who would themselves contract with the end users), pursuant to which the company supplied the individuals’ services in return for fees in excess of the salaries payable by the company itself. When the company received those fees, it would retain (and account to HMRC for) any VAT, retain an “administration fee,” pay what was due under the relevant contract of employment, and transfer the balance, without deducting income tax or national insurance, to a “bonus trust.” The trust received a fee of 2% on all payments made into it. It would pay the net sums it held into sub-trusts in the names of the participants and, on request, transfer the money to those participants in the form of discretionary loans.
Rajah J dismissed the liquidator’s claim under s 423, essentially on the basis that the company had operated the scheme for tax saving purposes which did not amount to a prohibited purpose under s 423. He held that the consequences, if the liquidator prevailed, would be that any steps taken with a view to minimising tax would be a prohibited purpose, which would be what he called “a remarkable outcome,” citing Lord Tomlin’s dictum in IRC v Duke of Westminster that “Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”
On appeal, the appellant liquidator contended, first, that Rajah J had been wrong to hold that preventing HMRC from making a claim against the company was not a prohibited purpose; and, secondly, that he ought to have concluded that the company had the purpose of making it more difficult for HMRC to recover tax in the event that the scheme which it was using was ineffective to avoid a liability arising.
The question on the first point was whether an intention to prevent a liability arising at all could amount to a purpose within the meaning of s 423(3), i.e. the purpose of putting assets beyond the reach of “a person who is making, or may at some time make, a claim against him” or of otherwise prejudicing the interests of “such a person in relation to [a] claim which he is making or may make.” Was that condition met if the aim was to stop a liability accruing? Newey LJ was not persuaded by the arguments advanced on behalf of the liquidator, which depended on a distinction being drawn between tax mitigation and tax avoidance:
“I have not…been persuaded that it is relevant to distinguish between [them] in the context of the Liquidator’s primary case. That case, if well-founded, would surely affect both. The purpose is the same in both cases: namely to prevent a liability to tax from arising. The difference between the two is not the purpose, but the means by which that purpose is put into effect. Were it correct that preventing a liability to a person arising could constitute ‘prejudicing the interests of a person [who is making, or may at some time make, a claim] in relation to the claim which he is making or may make’ (within the meaning of section 423(3)(b)), that could apply to ‘tax mitigation’ of a commonplace kind. Suppose, for example, that, someone paying higher rate tax made a gift to a child who was at university in part because the recipient, having no other income, would not be liable for tax on returns from the property. On the Liquidator’s primary case, the donor would have entered into the transaction ‘for the purpose…of prejudicing the interests of [HMRC as ‘a person who is making, or may at some time make, a claim against him’] in relation to the claim which he is making or may make’ since HMRC would have been denied tax which would otherwise have become due.”
That, in his view, could not be the case. It followed that entering into a transaction in order to ensure that a liability did not accrue did not involve a section 423(3) purpose.
The second point advanced as a basis for the liquidator’s appeal amounted to a challenge to factual conclusions of the judge below. Newey LJ reviewed the authorities on appeals against findings of fact. His starting point was Lord Reed’s statement in Henderson v Foxworth Investments Ltd:
“[I]n the absence of some other identifiable error, such as (without attempting an exhaustive account) a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence, an appellate court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified.”
Newey LJ moved from that to what he described as the “well-settled” propositions set out by Lewison LJ in Volpi v Volpi:
(1) An appeal court should not interfere with the trial judge’s conclusions on primary facts unless it was satisfied that he was plainly wrong.
(2) “Plainly” did not refer to the degree of confidence felt by the appeal court that it would not have reached the same conclusion as the trial judge. It did not matter that the appeal court considered that it would have reached a different conclusion. What mattered was whether the decision under appeal was one that no reasonable judge could have reached.
(3) An appeal court was bound, unless there was compelling reason to the contrary, to assume that the trial judge had taken the whole of the evidence into consideration. The mere fact that a judge did not mention a specific piece of evidence did not mean that he had overlooked it.
(4) The validity of the findings of fact made by a trial judge was not aptly tested by considering whether the judgment presented a balanced account of the evidence. The weight which the judge had given to it was pre-eminently a matter for him.
(5) An appeal court could therefore set aside a judgment on the basis that the judge had failed to give the evidence balanced consideration only if the judge’s conclusion was rationally insupportable.
(6) Reasons for judgment would always be capable of having been better expressed. An appeal court should not, therefore, subject a judgment to narrow textual analysis, nor should it pick over or construe it as though it was a piece of legislation or a contract.
Having considered Rajah J’s approach to the evidence before him, Newey LJ concluded:
“The upshot, in my view, is that there is no question of the Judge’s conclusions on the Liquidator’s…case having been ‘rationally insupportable.’ Nor do I consider that those conclusions are open to challenge on any other basis. It is quite possible that a different judge would have made different findings, but that does not matter.”
The appeal was accordingly dismissed.
Section 423 Insolvency Act has been the subject of a great deal of attention recently: at first instance in Taylor v Savik & Ryle and Wade & Anor v Singh & Ors; on appeal from the master in Malik v Messalti; and in the appellate courts, apart from this decision, the Supreme Court’s judgment in El-Husseini and another v Invest Bank PSC.