The Courtroom of Attraction handed down judgment at the moment in David McClean & Ors v Andrew Thornhill KC [2023] EWCA Civ 466, unanimously dismissing the attraction. Herbert Smith Freehills Associate Will Glassey and Affiliate Henry Saunders acted for the profitable Defendant Andrew Thornhill KC.
BACKGROUND
The Claimants had been traders in three movie finance schemes which had been promoted by Scotts Atlantic Administration Restricted (“Scotts“) in 2002 – 2004. The schemes had been supposed to draw sideways loss aid, entitling traders to offset the schemes’ losses in opposition to their private earnings.
Every potential investor was required to warrant that they’d taken acceptable skilled recommendation and “solely relied on the recommendation of, or has solely consulted with, [their] personal skilled advisers with regard to the tax, authorized … and different financial issues” associated to the funding.
The schemes might solely be promoted to traders by IFAs, by means of the schemes’ data memoranda (the “IMs“). The IMs stated that Scotts’ “understanding” was that the schemes would entice aid however that potential traders ought to “seek the advice of their tax advisers.”
Earlier than issuing the IMs, Scotts obtained recommendation from Mr Thornhill KC on the tax penalties of the schemes. He suggested that the schemes met the necessities for sideways loss aid; i.e. that the proposed exercise would quantity to buying and selling commercially with a view to revenue. A few years later (2016), in a really totally different tax atmosphere, HMRC issued a closure discover in respect of the primary scheme, which concluded that the necessities weren’t met. Because of this, the Claimants settled their tax liabilities in respect of the three schemes with HMRC.
The Claimants alleged that Mr Thornhill KC, while being Scotts’ adviser, assumed an obligation of care to them: he endorsed the IMs; he consented to himself being recognized as tax adviser to Scotts; and he consented to his opinions being offered to potential traders (by way of their IFAs) upon request. They alleged that Mr Thornhill KC negligently suggested that aid would materialise and did not establish a major threat of the schemes being efficiently challenged. They stated that had Mr Thornhill suggested in a different way, they’d not have invested.
On 8 March 2022 Zacaroli J handed down judgment dismissing the declare, discovering that Mr Thornhill KC didn’t owe an obligation to the traders (versus his consumer, Scotts) and that his recommendation was not negligent in any occasion. Our abstract of that call may be discovered right here.
The Claimants who invested within the second and third schemes appealed to the Courtroom of Attraction.
DECISION
In judgment handed down on 28 April 2023, the Courtroom of Attraction dismissed the attraction. Simler LJ wrote the substantive judgment, with which the Chancellor and Carr LJ agreed.
Responsibility of Care
The Claimants argued that this was a prospectus-type dispute and that – in circumstances the place Mr Thornhill KC successfully fashioned a part of the gross sales staff with Scotts – the state of affairs was analogous to the statutory regime making use of to an issuer of prospectuses in shares and debentures; which, in broad phrases, requires the issuer to have affordable grounds for believing the content material of the prospectus to be true. The courtroom described this argument as “untenable“, in circumstances the place the schemes had been unregulated, and Parliament had expressly restricted the scope of the statutory prospectus regime. The IMs didn’t make factual representations as to the tax penalties, as a substitute containing what had been intentionally and thoroughly described solely as Scotts’ understanding and expectation as to the tax end result.
Opposite to the Appellants’ submission that Mr Thornhill KC had been appearing as a part of a gross sales staff moderately than as a barrister, the Courtroom of Attraction agreed with Zacaroli J that Mr Thornhill KC’s conduct “was clearly throughout the typical position of a barrister” and stated that:
“In these circumstances, absent good purpose on the contrary, the default expectation was that traders wouldn’t merely depend on what they had been instructed about Mr Thornhill’s recommendation, however would, with the assistance of their IFAs (and different tax advisers the place related), make their very own evaluation of the dangers of the transaction and an unbiased determination as as to whether to enter into it.”
The Courtroom thought-about whether or not Mr Thornhill KC assumed an obligation of care to the claimant traders, making use of the belief of duty take a look at set out in NRAM v Metal [2018] UKSC 13. The Courtroom concluded that it was “objectively unreasonable for traders to depend on Mr Thornhill’s recommendation with out making unbiased inquiry in relation to the chance of the [schemes] reaching the tax advantages; and Mr Thornhill couldn’t moderately have foreseen that they’d accomplish that.”
The Courtroom was influenced in reaching that conclusion by the truth that:
- The schemes had been unregulated and will solely be promoted by way of IFAs “who owed skilled obligations of their very own to every investor.” That was the context during which the Claimants would see the related IM.
- The IM “was the one means by means of which Mr Thornhill’s recommendation to Scotts may very well be obtained by third events” and it “expressly required these traders to take and depend on their very own tax recommendation referring to the Scheme.” While IFAs would possibly use Mr Thornhill KC’s recommendation as a place to begin, they had been required to analyse threat for his or her consumer and “not merely duplicate the recommendation given by Mr Thornhill.“
- While Scotts and the Claimants had a standard curiosity in tax aid materialising, they had been counterparties in a business transaction entered into at arm’s size. The precept of caveat emptor utilized and “it was presumptively inappropriate for traders to depend on something stated by Scotts’ adviser.” That they had not paid him, met with him or communicated with him.
The Courtroom rejected the appellants’ submission that it was crucial for Mr Thornhill KC to know that the traders had been taking recommendation from an “equal” adviser – i.e. a tax Silk; the Courtroom accepting, as had Zacaroli J, that the traders warranted that they’d taken their very own tax recommendation, and that it was completely acceptable for Mr Thornhill to know that that will be offered both by knowledgeable IFAs or different consultants to be recognized by the IFAs ought to they not have that experience themselves.
Breach
The method which Mr Thornhill KC had adopted in his recommendation – which adopted the method taken by the Home of Lords in Ensign Tankers [1992] 1 AC 655 – was described by the Courtroom as “affordable and never negligent”. The Courtroom held that Zacaroli J was entitled to conclude as he did {that a} moderately competent tax silk might have suggested that aid could be allowed.
The Claimants argued that Mr Thornhill KC’s unequivocal recommendation (i.e. that there was “little question“) that the schemes could be buying and selling was negligent. Simler LJ was not satisfied that Zacaroli J had squarely addressed this problem and concluded that “no moderately competent tax silk might have expressed such an unequivocal view”. This was of no sensible consequence, given the Courtroom’s conclusions on responsibility and causation.
Causation
The Claimants’ case on causation additionally failed. They argued that Mr Thornhill ought to have ensured that they got a warning that there was a “important threat” of a profitable problem to the Schemes by HMRC; and that had he completed so, they’d not have invested.
The Courtroom held that the prevailing tax legislation on the time required a far much less extreme warning, which, the Courtroom held (once more upholding Zacaroli J), the claimants would have ignored even when given: the Claimants didn’t come shut to creating out their case on causation, stated the Courtroom.
COMMENT
The case doesn’t make new legislation. Each Zacaroli J and the Courtroom of Attraction rejected novel arguments as to how an obligation might need arisen. However what we’re left with is a traditional software of the ideas set out in NRAM v Steel: to ensure that knowledgeable to imagine an obligation to a non-client recipient of recommendation, it should have been: (a) affordable for the recipient to depend on it; and (b) moderately foreseeable to the skilled that the recipient would accomplish that.
The choice does emphasise the fact-sensitive nature of that evaluation, which essentially requires a consideration of the connection between the events, the circumstances during which the recipient obtained the recommendation, the communications which surrounded the sharing of the recommendation, and whether or not it was affordable for the third celebration to depend on the recommendation with out unbiased enquiry.
Herbert Smith Freehills (Will Glassey and Henry Saunders) efficiently defended Mr Thornhill KC within the attraction, instructing Tom Adam KC and Max Schaefer of Brick Courtroom Chambers.
KEY CONTACTS
