Ecology Support Services Ltd v Hellard & Anor (As Joint Liquidators of Saff One LLP)

Factual and Procedural Background

The case concerns Ecology Support Services Limited ("ESS") appealing a decision by the joint liquidators of a limited liability partnership ("LLP") rejecting its proof of debt under Rule 4.83 of the Insolvency Rules 1986. ESS also requests a direction for the joint liquidators to convene a meeting of creditors to vote on replacing the liquidators. The dispute was heard as an Insolvency Express Trial in the Insolvency and Companies Court, London. The factual background is largely undisputed between the parties.

The LLP was incorporated as a tax mitigation vehicle to avoid corporation tax on anticipated profits of a company ("Company A"). The tax mitigation involved investing in a scheme known as the "Ultra Green Scheme," which was designed to generate tax relief through environmental research and development investments. The scheme involved a complex structure of entities including a creditor ("Company B"), a management company ("Company C"), and various offshore entities and bank accounts.

ESS holds loan debts related to this scheme and sought repayment of the loan from the LLP. The LLP entered insolvent liquidation and the joint liquidators rejected ESS's proof of debt, doubting the genuineness of the loan due to circular transactions and the absence of actual investment in research and development. ESS appealed this rejection and requested a meeting of creditors to consider replacing the liquidators.

Legal Issues Presented

1. Whether the loan transaction between Company B and the LLP constituted a genuine, provable debt under the Insolvency Rules 1986.
2. Whether the joint liquidators were correct to reject ESS's proof of debt on the basis that the loan was circular and no real investment was made.
3. Whether the alleged misapplication of trust property by Company C and the circular nature of the loan discharged the debt obligation or constituted a breach of fiduciary duty sufficient to reject the proof of debt.
4. Whether the court should direct the joint liquidators to admit the proof of debt and convene a meeting of creditors to consider replacing the liquidators.

Arguments of the Parties

Appellant's Arguments

• The LLP is liable to repay the loan made by Company B in accordance with its terms, giving rise to a provable debt.
• The admitted circularity of the loan does not negate the obligation to repay; the contractual terms establish a valid and enforceable loan.
• The documents supporting the loan are not sham documents, and the parties were free to enter into the transactions as structured.
• The tax mitigation scheme involved real financial risk and expenditure, distinguishing it from tax avoidance.

Respondent's Arguments

• ESS has not shown evidence that the loan facility was genuinely drawn down; the transaction was circular and lacked genuine underlying substance.
• The loan was never intended to rest with the LLP but was advanced straight to Company C, which held the funds on trust and breached fiduciary duties by making the money available as a loan to another entity.
• The circular transactions resulted in repayment of the loan, discharging the debt obligation.
• The circular nature and lack of real investment demonstrate the loan was a fiction and the proof of debt should be rejected.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by considering the definition of a provable debt under the Insolvency Rules 1986, noting that a debt includes all claims by creditors whether present or future, certain or contingent. It was agreed that if the loan transaction was genuine, it constituted a provable debt.

The court examined the contractual documentation, including the loan and agency agreements, and the nature of the transactions. Despite the circular movement of funds through various offshore entities and bank accounts on the same day, the court found that circularity alone does not negate the existence of a loan.

The court emphasized the importance of analyzing the whole transaction to determine whether the taxpayer faced real financial risk or incurred expenditure, distinguishing tax mitigation from tax avoidance. It found that the loan facility provided for interest, repayment terms, and events of default consistent with a commercial loan.

Regarding the argument of misapplication of trust property, the court found the evidence insufficient to establish breach of trust or that Company B's knowledge was such as to make retention of the loan proceeds unconscionable. The agency agreement was unclear, and no evidence showed that Company B or related entities had knowledge of any breach.

Consequently, the court concluded that the loan was a repayable debt owed by the LLP to Company B (and subsequently ESS) and that the joint liquidators erred in rejecting the proof of debt.

Holding and Implications

The court held that the proof of debt submitted by ESS should be accepted.

The court granted the application, directing the joint liquidators to admit the proof of debt and to convene a meeting of creditors for the purpose of considering the replacement of the joint liquidators. The decision directly affects the parties by reinstating ESS's claim and enabling creditor action but does not establish any new legal precedent beyond the application of existing principles to the facts.