Edwards-Roberts v Price and another COURT OF APPEAL (CIVIL DIVISION) (Transcript: Smith Bernal) HEARING-DATES: 18 OCTOBER 1999 18 OCTOBER 1999 COUNSEL: R Walford for the Appellant; The Respondent did not appear and was not represented PANEL: PETER GIBSON, MANCE LJJ JUDGMENTBY-1: PETER GIBSON LJ JUDGMENT-1: PETER GIBSON LJ: On 19 April 1999 His Honour Judge Boggis QC, sitting as a judge of the High Court in the Birmingham District Registry, Mercantile Court of the Queen's Bench Division, dismissed the summons of the second defendants, Bentley Jennison, who are accountants, whereby those defendants sought to strike out the writ and statement of claim as against them. Bentley Jennison were refused permission to appeal by the judge. They sought such permission from this court. On 4 August my Lord, Lord Justice Mance, indicated that he was minded to refuse permission. Bentley Jennison, as is their right, now apply in open court for that leave. We have had the benefit of argument from Mr Walford in support of that application. The action is one brought by the claimant, Mr Edwards-Roberts, who is a property developer through the medium of a number of companies. Those companies included a company called Lansdowne Real Estate Limited ("Lansdowne") and Innercity Partnership Limited ("Innercity"). The claimant also owned, in his own right, property at Lichfield. He practised as an architect, and he was also a name at Lloyd's. Lansdowne was involved in unsuccessful property developments in Aston and Exeter. After the sale of the Aston property by Lansdowne, Lloyds Bank required the claimant to borrow a sum of £1m from it to be injected into Lansdowne to repay moneys owed by Lansdowne to Lloyds. The loan was secured on the Lichfield property. In June 1991 the claimant remortgaged and he obtained a £1.2m loan from the Bradford & Bingley Building Society. The Lloyds loan was repaid. The Bradford & Bingley loan was secured again on the Lichfield property. By June 1992 the Exeter development had run into the sands. Lansdowne sold its interest and ceased to trade in June 1992. It was struck off in November 1993. The claimant had claimed tax relief on the interest on the loan to Lansdowne under s 353 and s 360 (1) (b) of the Income and Corporation Taxes Act 1988. Negotiations with the Revenue about the deductibility of the interest payable by the claimant on the loans continued until April 1995 when it was agreed that tax relief was available to him until Lansdowne ceased trading in June 1992 but not thereafter. It is the non-availability of tax relief which appears to have triggered this action. The claimant brought proceedings against the first defendant, Mr Price, who was his accountant until February 1993, and against Bentley Jennison, who were retained from 1 February 1993 until 7 April 1995. The proceedings were commenced in 1997, the claimant suing both in negligence and in contract. Bentley Jennison applied to strike out the action as having no prospects of success. The application came before the judge but was adjourned to enable the claimant to amend his statement of claim. On the basis of the amended statement of claim the judge dismissed the application. The costs of the first day of the hearing were ordered to be costs in the cause. The costs of the second day he ordered to be paid by Bentley Jennison. By the amended statement of claim it is pleaded that Bentley Jennison were retained by the claimant to prepare his accounts, to audit the accounts and give taxation advice for Lansdowne and Innercity, to provide personal investment and financial advice including taxation and the preparation of personal tax returns for the period from 1 February 1993 until 7 April 1995. By para 9 (ii) it is pleaded that - "From the information that the Plaintiff has, it would appear that: .... (ii) [Bentley Jennison] became aware in 1993 or 1994 that tax relief on the loan from Bradford & Bingley Building Society would be disallowed from the date that [Lansdowne] ceased to trade. On the 3rd March 1995, [Bentley Jennison] advised the Plaintiff that he should seek to mitigate his position by re-organising his finances." By para 10 it is pleaded that that was not possible because Mr Price had advised the claimant and his wife to become names at Lloyd's. It continues: "At the time that the Plaintiff was advised by [Bentley Jennison] to re-organise his finances, namely March 1995 it was impossible for the Plaintiff to obtain any alternative source of finance as he and his Wife had unquantifiable losses in connection with the insurance underwriting syndicates." In para 11 it is pleaded that - "In the Summer of 1996, the Lloyds underwriting liabilities crystallised .... making it possible for the Plaintiff to re-organise his finances .... " and that he repaid the Bradford & Bingley loan in January 1997. The claimant pleads that the advice of Bentley Jennison and this failure to advise were negligent and/or in breach of contract. Particulars of the negligence and breach of contract are then given and they appear to relate mainly to Mr Price but they include the failure to advise properly, or at all, on any action that could be taken by the claimant to mitigate the claimant's loss. By para 13 A it is pleaded that Bentley Jennison - "(i) Should have reviewed the Plaintiff's financial affairs on a regular basis and advised the Plaintiff on relevant financial and taxation matters throughout the period of its retainer. (ii) Was retained by the Plaintiff to generally advise him on all his accounting, financial and taxation affairs as set out in paragraph 3A herein but failed either to inform the Plaintiff that the interest payment on his loan no longer qualified for tax relief or to properly and fully consider the options that were available to the Plaintiff to enable him to obtain tax relief in respect of the said interest payments .... " Then there are pleaded eight occasions when it was said that Bentley Jennison should have so informed the claimant or given him advice. Those occasions included - "(h) before the meeting with the Plaintiff in March 1995 or until before the end of their retainer." In sub-paragraph (iii) it is pleaded: "Failed to properly advise the Plaintiff as to how he could either best mitigate his loss in respect of tax relief on the Bradford & Bingley loan or arrange his affairs in a tax efficient method recommend to the Plaintiff that he consider: a) The Plaintiff's Company Innercity ... taking a Loan to purchase two-thirds or the whole of the Lichfield Development from the Plaintiff. The loan to Innercity ... would have been a qualifying loan for taxation purposes and/or an allowable business expense. The monies received by the Plaintiff from the sale of the Lichfield Development would then have been applied by the Plaintiff to discharge the Bradford & Bingley loan. b) The Plaintiff's wife, Sheila Roberts, purchasing part or the whole of the Lichfield Development in the same way. c) The possibility of selling the Lichfield Development to a discretionary trust, as the interest on the mortgage obtained by that trust to purchase a property would have been tax allowable." In para 14 it is claimed that - "By reason of the matters aforesaid, the Plaintiff has suffered loss and damage, as [he] has been denied the opportunity to re-arrange his affairs in a tax efficient way and depending upon when either [Mr Price] or [Bentley Jennison] had in fact properly advised him, he would have undertaken one of a number of options as set out in paragraph 13A(iii), that were available to him and thereby either made savings and/or avoided and/or reduced his tax liabilities." It is said that the plaintiff would have undertaken the option that was most advantageous at the time that he was informed by Bentley Jennison of the true nature of the options available. Then there are set out the details of the loss and damage. It is clear from the particulars given in relation to the claim against Mr Price that the claimant was saying that tax relief at 40 % was lost in respect of disallowed interest. A large number of alternative bases are then set out. They are nine in number and they are dependent upon the court's findings as to whether or when Mr Price was responsible for the claimant's loss and damages. It is unnecessary to go through those particulars in detail. They appear to be related to the claims which were made against Mr Price and, in particular, relate to loss of tax relief on the disallowed interest. For the claimant to succeed in his action he has to show that as a result of the claimed breach of duty owed in tort or in contract he suffered the claimed loss. It is to be noted that he said he could not re-organise his finances by obtaining finance at 3 March 1995 because of the unquantifiable Lloyd's losses of himself and his wife. It appears to be the claimant's case that had the advice been given at some earlier time by Bentley Jennison he could have made the necessary re-organisation in one of the ways indicated in para 13A (3). When asked for particulars of the date when the unquantifiable losses were suffered the claimant said that he could not give such date. When further particulars were asked as to the date on which the unquantifiable losses arose the claimant stated that, while he could not give an exact date, the relevant accounts closed in 1990 and the claimant became aware that there was a possibility of unquantifiable losses in or around 1992. Thus throughout the period of retainer the claimant knew of the possibility of unquantifiable losses. But he is asserting that by March 1995 that possibility had become the fact that there were unquantifiable losses even though they only crystallised in the summer of 1996. That leaves uncertain on what event and when, before March 1995, it is claimed that the possibility of unquantifiable losses, known before the period of retainer started, became the certainty of unquantifiable losses. The judge, when the point was taken before him, thought that the amendments to the statement of claim had cured any defects. It is, perhaps, unfortunate that the claimant did not, by a request for particulars, specifically request an answer to the question when advice should have been given in a way that it could have been acted upon. Nevertheless, it seems to me that there is a point here on which Bentley Jennisons are left in a state of uncertainty as to precisely what is the claimant's case. In my judgment, it is properly arguable that this is a point which the judge should have recognised needed to be dealt with and had not been dealt with, notwithstanding the opportunities afforded to the claimant to state his case clearly. It seems to me that the prospect of the claimant succeeding on this point cannot be said to be unrealistic. This is not the only ground on which Bentley Jennison attack the pleading. The second point taken is that the claimant has pleaded his loss in a way which indicates that there has been a confusion between the claimant himself and Innercity or his wife or the trust. In the pleading the claimant says that had Bentley Jennison advised the claimant to consider the possibility specified in para 13 A (iii) a), the loan to Innercity would have been a qualifying loan for taxation purposes and/or an allowable business expense. We have been told that Innercity is a company 100 % owned by the claimant even though that is not a matter pleaded by the claimant. The question is whether the failure suggested in the pleadings to obtain a tax deduction for Innercity, meant that the claimant has suffered a corresponding loss. I think it at least arguable that any failure to obtain that tax deduction for Innercity did not mean that there was a corresponding loss to the claimant. Even more clearly, as it seems to me, there are difficulties in the way of the claimant's suggestion that a sale to his wife of the Lichfield property could have led to the same tax advantage, and similarly in relation to the suggestion of a sale to a trust. So far as the wife is concerned, it is hard to see how in the light of the relevant taxation provisions (see s 355 (5) (a) of the Taxes Act) tax relief could be obtained on a loan for a purchase by a wife from the husband. There are also difficulties in the way of a trust obtaining tax relief if that trust was set up by the settlor or his wife (see s 355 (5) (c)). Further, it seems to me to be properly arguable that the failure to obtain tax relief for the wife or the trust does not mean that there was a loss for the claimant himself. I should add that I simply do not understand why there are references in the pleadings to the lost tax relief on the Bradford & Bingley loan. It seems to me plain that no tax relief in respect of that loan could be relevant once Lansdowne ceased to trade and was struck off. That loan was a complete loss and there could be no question of tax relief on it. The only way in which it could be put that the claimant has suffered some loss is in relation to a failure to re-organise his tax affairs. The last point on which Mr Walford criticises the judgment is what the judge said at the end of his judgment. The judge said that striking out was discretionary and he took the view that the application to strike out was a tactical ploy and that any discretion ought to be exercised against striking out. He thought it significant that the summons to strike out was issued on the day that the revised timetable for directions provided for the exchange of witness statements. He said that if Bentley Jennison seriously thought that there was no case to answer they would have issued their summons shortly after 9 October 1997 when the statement of claim was served, and should not have waited until December 1998. Mr Walford submits, in my view, with arguable justification, that there was insufficient material before the judge on the basis of which he could reasonably have drawn the inference that the application was a tactical ploy. In my judgment, Mr Walford has a realistic prospect of succeeding in his criticism of that final ground on which the judge decided to dismiss the summons. It follows that I, for my part, without wishing to give Bentley Jennison undue encouragement that they will be able to have the case against them struck out completely, would give permission to appeal. JUDGMENTBY-2: MANCE LJ JUDGMENT-2: MANCE LJ: I agree that permission should be given, and add only a few reasons of my own. On the impossibility issue, in favour of the claimant it can be said that there is no pleaded allegation of impossibility, except as at March 1995 (see amended statement of claim, para 10). As to the particulars of para 13.3 given on 12 August 1998, the date when unquantifiable losses "arose" or when the claimant became aware of the "possibility of unquantifiable losses" is not necessarily to be equated with the date on which it became impossible to rearrange the claimant's affairs. Paragraph 13 A (ii) of the statement of claim identifies the period of the defendants' alleged failure as extending throughout the retainer, that is February 1993 through to March 1995. Paragraph 14 avers quite specifically that the claimant would have taken one of the three suggested options during that period had he been advised of the tax problem and possible solutions. That is an averment, necessarily that it would have been possible for him to do this during this period. The real problem is the relationship between the explanation contained in the last words of para 10 and the particulars contained in answer 13.3 given on 12 August 1998. That relationship is not pleaded. It is not said when or why the awareness of the possibility of unquantifiable losses matured into actual impossibility of taking alternative steps. That is not explained in any affidavit or, so far as I can see, otherwise. I understand that the point was squarely raised before the judge. Under the new regime it seems to me at least arguable that the claimant should disclose his case in that regard. If there is anything in the claimant's case there must be some reason for saying why and when the impossibility of alternative steps materialised out of a mere possibility of unquantifiable losses. Turning to the second point, the corporate and individual personality point, the argument here is that the claimant would, by following any of the three schemes, have deprived himself of income but incurred capital gains tax liability. Neither of these two points was pleaded on behalf of the defendant until they were disclosed in the submissions which the defence put forward in July 1999. The first point - that the claimant would have deprived himself of income - was however before the judge and was described as the new point raised by counsel on 19 March 1999 and argued at the resumed hearing on 31 March 1999. The pleadings, arguments and experts' reports seem up to that point to have proceeded on the assumption that, for present purposes, the claimant's financial tax well-being could be equated with that of his corporate vehicle or, indeed, with that of his wife or any discretionary settlement. As regards the claimant's wife and discretionary settlement, that seems, on its face, unrealistic. As regards the corporate vehicle, that is Innercity Partnership Limited, this is said in para 13 A (iii) a) to be "the plaintiff's company". Again, it seems to me arguable that the claimant should be required to crystallise and explain his case, particularly as to how it is he says that benefits which the company would have obtained in terms of tax relief or avoidance of tax liability feed through to the claimant and give him a claim so far as he is deprived of them. As Mr Walford points out, it is by no means axiomatic that they would feed through to the bottom line of company's accounts or to the value of its shares. That is a whole area which, on the face of the material, is unexplained. As regards capital gains tax liability, it seems to me that there is a live issue on Deloitte Touche's reports whether any capital gains tax liability could have been eliminated by set off against other capital gains losses, particularly arising from the write off of the claimant's £1m loan to Lansdowne. The defendant's expert counters this by suggesting that the deductability of the capital gains tax losses on the Lansdowne loan was questionable, but the argument that this was so appears to have arisen more in relation to whether the defendant was negligent not to advise one of the schemes than in the context of whether the schemes would have led to avoidance of tax. Ultimately, capital gains tax relief was allowed on the Lansdowne loan. On the face of it, looking at all the material available, if the claimant can get over the other hurdles, including equating his loss with that of his company and causation, he does have a case on loss. Subsidiary points are raised whether the alternative schemes involving transfers to the claimant's wife or to a settlement would have been tax effective. Here, too, it seems to me that Mr Walford has an arguable case to pursue on appeal. The argument is that any transfer to the claimant's wife could never have given her a right to claim tax relief and a transfer to the settlement would not have done so because its main purpose would have been to avoid tax. If those issues were struck out it could lead to some restriction of the scope of the case. The judge's observation about a tactical ploy seems to me, in the light of what Mr Walford has said in his skeleton in outline, to be very questionable. I must confess that I do not regard the history of the proceedings to date as having been happy. Both sides' cases seem to have been developing throughout the successive applications and amendments. It does however seem to me that the claimant's case is not fully explained and, for those reasons and with some doubt, I think that permission should be given to appeal. DISPOSITION: Application allowed. SOLICITORS: Beachcroft Wansbroughs, Birmingham