When Is a Director Not a Director?

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Holland (Respondent) v The Commissioners for Her Majesty's Revenue and Customs (Appellant) and another [2010] UKSC 51 (Lord Hope, Deputy President, Lords Walker, Collins, Clarke and Saville)

THE FACTS

This was a highly complex case in which section 212 Insolvency Act 1986 ("section 212") applications had been brought against Mr Michael Holland and his wife by Her Majesty's Revenue and Customs ("HMRC") on the basis that, as de facto directors of 42 insolvent companies, they had been guilty of misfeasance and breaches of duty in causing the payment of in excess of 13[pounds sterling] million of unlawful dividends between 2002 and 2004 when the companies had insufficient distributable reserves to pay their creditors. (1)

The 42 companies (the "composite companies") had been set up to administer the business and tax affairs of contractors who did not want to set up and run their own companies. Each composite company had a sole, corporate director, Paycheck (Directors Services) Limited ("Paycheck Directors"). Paycheck Directors was a wholly owned subsidiary of Paycheck Services Limited ("Paycheck Services") and was owned by Mr and Mrs Holland, each of whom held 50% of its shares. Mr and Mrs Holland were also both directors of Paycheck Directors.

Each of the composite companies had a voting share (held by another Paycheck company ultimately owned by Mr and Mrs Holland) and 50 non-voting shares which were held by the contractors who became employees of the composite companies. The services of the shareholder/employees were contracted out by the composite companies which, in return, received an income.

Each composite company paid (i) a fee to Paycheck Services for the provision of administrative services; (ii) a salary to each shareholder/employee; and (iii) after making provision for the payment of corporation tax at the small companies rate, a dividend to each shareholder employee.

Dividends were paid on a regular basis. A computer programme generated a document purporting to be a minute of a directors' meeting of the relevant composite company which recorded that "M Holland Paycheck (Directors Services) Ltd" had been present at the meeting and that the directors of the composite company had resolved to pay a dividend of a specified amount to a be distributed to a specified shareholder/employee.

The composite companies were part of a corporate structure which had been deliberately created to be tax efficient: provided that each company kept its profits below 300,000[pounds sterling] (which they all did) each company would, individually, pay the lower, small companies rate of corporation tax rather than higher rate corporation tax.

There was, however, a flaw in this structure which had not been spotted when it was established. As Mr Holland was in control of the companies (because he held one share in each of them and each share carried voting rights), they fell to be treated as associated" companies for the purposes of the Income and Corporation Taxes Act 1988. This meant that because the collective turnover of the composite companies exceeded 300,000,[pounds sterling] each composite company was liable to pay higher rate corporation tax. Dividends had been paid after provision had been made only for corporation tax at the lower rate. This meant that there was a substantial deficiency in each composite company's higher rate corporation tax liability. The composite companies went into administration in October 2004 and later into liquidation.

HMRC, which was the only creditor of each of the insolvent composite companies, sought orders requiring Mr and Mrs Holland to contribute over 3-5[pounds sterling] million to the assets of the insolvent composite companies by way of compensation in respect of their misfeasance and breach of duty.

At first instance, the claims against Mrs Holland were dismissed, but Mr Holland was found to be a de facto director of each of the composite companies and so was answerable to HMRC's claims under section 212. …