BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £5, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] | ||
England and Wales High Court (Chancery Division) Decisions |
||
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Mason & Ors v Mills & Reeve (a firm) [2011] EWHC 410 (Ch) (01 March 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/410.html Cite as: [2011] STI 741, [2011] EWHC 410 (Ch), [2011] STC 1177 |
[New search] [Printable RTF version] [Help]
CHANCERY DIVISION
Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
(1) Claire Swain Mason David Jonathan Berry Neil Gordon Kirby |
First Claimants |
|
(2) Claire Swain Mason |
Second Claimant |
|
(3) Abby Swain |
Third Claimant |
|
(4) Gemma Swain |
Fourth Claimant |
|
(5) Christa Swain |
Fifth Claimant |
|
- and - |
||
Mills & Reeve (a firm) |
Defendant |
____________________
Mark Simpson QC and Marianne Butler (instructed by Mills & Reeve LLP) for the Defendant
Hearing dates: 2-4, 7-8, 10 February 2011
____________________
Crown Copyright ©
MR. JUSTICE ARNOLD :
Introduction
The witnesses
The factual background
Mr Swain
The daughters
The Family Trusts
The Company
Kirby & Haslam
Berry & Walton
The Will
Mills & Reeve
The engagement of Mills & Reeve to advise upon and negotiate the MBO
"Chris … generally makes 5 trips back to the UK per year of 10 days as a time but lives in Bangkok. He has been married and divorced three times.
… he doesn't know [Gemma's and Christa's] intentions but would be pretty sure that they would want to sell their shares. In any event, Chris confirmed that on his death the shares would transfer through to them tax-free.
… His personal tax advisor was Neil Kirby and his solicitor was Mr Barry [sic].
In connection with Chris' personal affairs, he has a pension fund that pays him £120,000 gross, he has a house in the UK which is worth £1-1.5 million, which is paid for, and he has an apartment in Bangkok which worth [sic] £200,000, which is again paid for. Accordingly he does not need the money but appreciates that now is a good time to sell to management …
... [CH said that] there may be a shortfall in the purchase price, in which case the price could be met by the big element of deferred consideration, which for tax planning reasons could be helpful if the deferred consideration was payable by way of loan note. Alternatively, the shareholders could roll-over some of their shares into Newco. …
… CH stated that in his view the transaction could be completed within 8 weeks and this is Chris' preference to complete as soon as possible so that there is no uncertainty amongst the management team and the employees and also any leaks to customers. … CH confirmed that he would issue an engagement letter."
"CH explaining that [the MBO team's] shareholders would need to form a new company which would then acquire the shares in Swains International Limited [sic] from the shareholder. From a tax perspective it may be appropriate for them to roll-over their shares in Swains International Limited into shares in Newco, but then they would be required to subscribe for some further shares and so put cash into the business. They would need to discuss with their bankers, Nat West, how much they would be prepared to fund the acquisition but they would need to expect to have to put in some money of their own, which is known as 'hurt money'….
CH stated that on a Management Buy Out we would typically expect not to give any due diligence enquiries or warranties of commercial nature because the business is well known to the management team. We would probably give a tax covenant to Newco, however as we would not expect Newco to inherit any liabilities in connection with tax…."
"…
When you have read this letter and its enclosures, please sign and return the letter to my office. Your signature will be on behalf of all of the Swain shareholders of the Company and so please ensure that they agree to the terms of this letter.
….
Terms relating to this matter
1 The scope of the work
1.1 I anticipate that the following legal work will be required in connection with the Transaction:
…
1.1.3 Sale and purchase agreement
- Advising on and negotiating the agreement (to be drafted by Newco's advisors)
- Advising on and negotiating a tax indemnity
- Preparing a disclosure letter to qualify the warranties in the sale and purchase agreement and complete disclosure bundles
…
1.2 Assumptions
In identifying the legal work to be undertaken as set out above we have assumed that:
…
1.2.6 we will liaise with you and/or Claire on behalf of all shareholders
….
1.3 In identifying the legal work required we have not included:
1.3.1 individual tax advice for shareholders;
…
1.4 If, however, personal tax advice is required then this is something which we will be delighted to provide and we will give you a separate costs indication for this advice.
2 People responsible for your work
I will be in charge of the day to day handling of the matter and will carry out the majority of the work involved. I am solicitor and partner in the firm's Corporate team specialising in work of this nature. ..
From time to time, specialist advice may be sought from other members of the firm. …
I will also be responsible for managing our overall working relationship. …
...
4 Estimates
4.1 I anticipate that if the matter proceeds then it should be concluded in 3 months.
On the basis of the anticipated timescale I would expect Mills & Reeve's fees to be between £50,000 and £65,000 plus VAT.
…
6 General Terms
6.1 Billing
You will be sent a bill on Completion and our fees will be deducted from the sale proceeds ….
6.2 Communications
We have agreed that we shall communicate by telephone and email to [email protected] and [email protected].
…"
"As you can see, I have offered the boys the chance to buy the business. It may well be you need to choose sides, in which case I would be very happy to retain you, although you may decide that your bread was better buttered by acting for the guys. As far as I'm concerned there should not be a conflict of interests, as you essentially produce facts, not opinion, but I leave it to you and your professional ethics."
"Although clause 6.1 is a standard procedure referring to costs being deducted from the proceeds of the sale, we reserve the right to change this through the negotiation with the MBO if we wish accepting, the tax implications, assuring you of our best interests in the payment of your fees."
Although the syntax of this paragraph is somewhat garbled, it seems clear that Claire understood that tax issues could arise during the negotiation of the MBO.
Negotiation of the MBO to the first Heads of Agreement
"CH also noted that she had only held the shares for less than two years and she was going to establish from her accountants how long she had held them. CH thought that there may be some advantages in her rolling over her shares into Newco to try and defer the gain but this is something she thought the purchasers may not want to entertain. Accordingly, we may well need to look at other ways to help with the tax and that may involve some loan notes but we would need to give this some further thought once the parties had had a further discussion on price."
"I would need to take some tax advice, how to make this tax efficient, but it might be that I do it as a gift – so that I am assured of your prayers for my good health for the next seven years!"
"The Buyer agrees to structure the Acquisition in any reasonable manner which accommodates the tax position and planning of the Sellers, providing that such structuring does not leave the Buyer in a worse financial position than other structuring options available to the Buyer."
The engagement of Mills & Reeve to prepare the tax clearance application and to give tax advice
"If there is some reason that I haven't thought of that means this is a bad idea, then Abby or Claire, who I have copied in will ask you to hold the idea until they can talk to me on Monday."
"Sellers
72.5% - Chris Swain – 60s, ill, lives in Thailand - not involved in business for 3 years
…
4.8% Swains Employee Trust (SWET) – t'ee[s] – CS's act Mr Kirby CS's day-to-day lawyer Mr Berry"
"Please can you also confirm that you are happy for my firm to submit the tax clearance application with the inland revenue as it needs to be filed with the revenue in the next few days so that we have the clearance back in time for 20 November. I think it would make sense for my firm to submit it as we are close to the detail and the cost will be in the region of £1500 to £2000.
Chris, you enquired about whether your daughters can receive cash rather than the loan notes and the issue is tax driven which we would be happy to answer and please confirm if you would like my firm to give the Swain Shareholders personal tax advice in connection with the proposed transaction. My tax colleague Isabel would be happy to give you a separate estimate for this advice and she could talk through what is required with you as the transaction is complex from a tax perspective. Isabel would go through the swains shareholder history with you and then based on the terms of the transaction would give you an indication now as to the likely tax treatment and rates of tax you would each have to pay. This is important as Abby and Claire will be taxed differently to your other daughters. Your accountant would then deal with the tax returns and any issues regarding valuations post completion."
"Regarding Tax Advice. Generally, Yes, please ask Isobel [sic] to act for me and the family. I normally use Kirby Haslam, and Bryn, a former Tax Inspector, looks after my affairs. Please liaise with him. Neil Kirby is the senior partner. I confirm that I am happy that your firm submits the Tax Clearance application."
"Chris and I have now had the chance to consider in detail the specific tax advice which will be needed and the other tax work needed in relation to the transaction.
Please find attached a draft e-mail to Chris Swains regarding the tax advice - you will see that given the amount of work involved and the complexities the estimate is substantial. This is in addition to the tax clearance application estimate which you already provided the client and the estimate for dealing with the SPA.
In relation to the SPA we see two areas in which the tax team will be involved: the tax covenant and the wider transaction. In relation to the tax covenant … the estimate is £1,000 to £1,250 plus VAT.
In addition, we have already taken quite a while to get to a starting position in terms of understanding the deal and identifying the minimum of issues which we cannot avoid addressing and have provided advice:
- that the special share has to be issued to all the sellers pro rata to their respective entitlements to permit a s.135 TCGA 1992 rollover;
- that it may be more desirable for the anti-embarrassment provisions in relation to the buildings in the form of an earnout/loan structure.
I expect as well that there may need to be tax input on the other parts of the SPA, e.g. vendor protection provisions and the completion accounts provisions.
The estimate for the additional work on the SPA to be £1000 to £1500 plus VAT."
"- concerned that quote is high and that the range of the quote is very wide
- risk losing work to accountants
- can the range be reduced – eg £7500 - £9500?"
The first tax clearance application
"I have other assets in the UK, which are possible [sic] worth more (together) than this business …
Generally as I get money outside of my needs, then I have passed it on to my four daughters who apply themselves to its fairly prudent disposal, and pray for my continued reasonable health – well for at least seven years."
He concluded by suggesting that Ms Pooley sit on the application for a few days as the MBO team might be looking at a fundamental shift.
"Long term intention – to move to Thailand. No intention to deprive UK authorities of tax due to them regarding UK income.
…
Nothing in the transaction has significantly to do with Thailand. The reason for the deferral is that the buyers can't get the money together.
CS saying he thought he would get retirement relief on the sale – he is retiring from the business and will only stay on with the business as a consultant as a non-executive chairman for £5k per annum and required to attend 4 meeting a year – very close to retirement. IP would consider further.
CS was happy for IP to discuss current/previous position with Bryn Thomas at Kirby & Haslam and get back to CS."
"She is advising specifically on the taxation situation that could arise out of the current activity so please afford her full co-operation."
"Retirement relief has been abolished for disposals in 2003/04 and subsequent years and will not be available on the disposal of your shares. Accordingly, in summary, when you sell your shares in the company, looking at two of the main components of the consideration, you will be treated as having disposed of the shares partly for cash and partly in exchange for loan notes. A capital gain will arise in relation to the disposal for cash, although taper relief should be available. However, the intention is that the capital gain on the disposal of the shares in exchange for loan notes will be 'rolled-over' into the loan notes so that a further capital gain will only be realised to the extent the loan notes are redeemed. A number of conditions must be satisfied for rollover relief to be available, one of which is the requirement that the disposal of shares partly in return for loan notes is for genuine commercial reasons and not for the avoidance of tax. As I explained previously, in light of recent case law it is important to address the issue of your residence in the tax clearance following recent case law. There is a good argument that clearance should be given because the purpose of the deferred consideration is to reflect the buyer's inability to raise sufficient finance and to reflect the difference in opinion in the value of the company and, as we discussed, has not been driven by considerations of your tax residence."
"Bryn has confirmed that your tax return for 2005/2006 tax year and previous were submitted on the basis that you are a UK tax resident and, whilst it is not possible to determine your tax residence status for the current tax year for certain at this stage, he thought it likely that you would be resident for the 2006/2007 tax year.
… In light of the reduction in the time you are spending in the UK on average each year, it is possible that you will cease to be resident in the UK tax purposes during the period in which the loan notes can be redeemed, or that you will be treated as resident in both countries (which is possible in certain circumstances) in which case the capital gains tax liability will need to be determined in accordance with the terms of the UK- Thailand double tax treaty."
"We are advised that Christopher Swain intends to continue to spend a significant amount of his time in Thailand with a view to gradually moving his interests to Thailand. It is likely that the average number of days which he has spent in the UK during [the] last two years and the forthcoming tax years may fall below an average of 91 days per year over a four year period. Christopher Swain has recently invested in a business in Thailand, as a result of which he may become eligible to seek residency in Thailand. Accordingly, it is possible that Christopher Swain will cease to be resident and ordinarily resident in the UK for UK tax purposes during the period in which the deferred consideration payments are payable, and possibly as early as the tax year 2007/8."
"He has a Thai wife of over ten years, who also has British citizenship.
However, his continuing weak health, following the heart attack in 2001, which was subsequent to his contracting Type 2 diabetes in the early nineties, and which which [sic] precipitated his early departure from the Swains International plc business means that he will not be returning to active work, although he does hope to be pro-active as a consultant to the business in Thailand. He is not salaried in Thailand, and does not expect to be."
"A few more bits of information in blue. ... The bits about my health are all true, and I attend the Bangkok Heart Hospital 2/3 times a week for exercise – as I'm only allowed to do it under medical supervision. It sounds worse than it is, perhaps. Nothing really hurts (except the exercise!) and as regards 'Wine Women and Song' I regret to say I have slowed up terribly."
"I disagree with this breakdown of the time spent so far. A fair bit of time has been spent on structuring advice: e.g. ensuring s. 135 TCGA cond'ns fulfilled; e.g. suggesting an earn out structure for the 'anti-embarrassment' as regards the building. This could only be done by first understanding the deal structure AND has substantial value to the client.
[The residency issue] was an issue which needed to be explored in greater detail than was anticipated when the estimate was given.
[The quote for the advice] is not high given the complexity of these issue[s]. If CS wants to go to a decent accountant to get comparable quality of advice, he is welcome to do so.
That said, maybe we should go for £7.5k -£10k. …"
The Kodak problem and the second Heads of Agreement
"Just want to ask the question – heaven forbid we inherit things in the next 10 years where do we stand."
The second tax clearance application
"Looking forward (and assuming that there is no further work in relation to tax clearance) there will be ongoing support in relation to ensuring the consideration is structured correctly and preparing a detailed letter of advice in relation to tax for the Swain shareholders. Given that a fair bit of the thought process has already happened I have reduced the 'going forward' quote but you may have a different view."
The Tax Retainer Email
"CH also was pleased to confirm that we had received tax clearance from the Inland Revenue and we had to revise our clearance letter and there would be some additional fees in connection with tax, together with fees for personal tax advice. Isabel Pooley would be writing to him separately to advise him of those likely fees."
"The time currently on the clock in relation to the two tax clearances and the general tax advice provided in relation to the structure of both the original and revised deals is £8,268.00 plus VAT. As there has been some duplication I propose to reduce this to, and submit an interim invoice for, £7,000 plus VAT (being £4,000 for the two tax clearances and £3,000 for the tax advice in relation to the structure of the transaction under both the original and revised heads of terms and the consideration of the issues surrounding your residency).
Looking ahead, there is a requirement for ongoing tax input in relation to the structure of the various elements of the consideration to ensure that the various conditions are met for roll over relief to be available in respect of those elements of the consideration which are to be satisfied by the issue of loan notes or shares. In addition, Craig has spoken to you previously regarding the general tax advice to be provided to you and your daughters in addition in relation to the tax liabilities arising in respect of the transaction structure. I estimate that the cost of providing this ongoing tax support and advising you and your daughters to be £3,000 - £3,500 plus VAT.
By way of summary, we would be advising yourself and your daughters (the 'Swain Shareholders') with regard to the transaction structure but we would not be able to advise on how this transaction fits into each of your own financial and tax planning positions.
We will need to consider and advise you and your daughters over the specific tax issues which arise in respect of the disposal of your shares and in particular:"
"Our final charges will, of course, depend on the degree to which you ask for additional detailed advice on specific issues after you have received our initial advice and will be based on the time spent in giving the advice. …
This estimate relates only to advice on the tax position of the Swain Shareholders and does not, therefore, include advising the management shareholders or the trustees on their tax liabilities. It assumes that there will not be particular issues in obtaining the information necessary to assist in providing the advice (for example, when the shares were required) and that your accountant will do with the preparation and submission of tax returns and any issues regarding valuations following completion."
"Alan and I both agreed that if we used professional advisors, outside of our existing company advisors then neither would have the potential advantage of that selection, and we would also be in a position to use firms that specialise in such work. The funding providers for the boys insisted on their using such a company anyway, so our thoughts became somewhat academic. The family decided to use Mills and Reeve, because Claire and I had met, and liked, one of the partners at a seminar run by them. The boys chose Taylor Vintners [sic] as their lawyers, and PKF as their accountants. .... Both as a family and as a company we have needed some tax advice and to get some clearances from the Inland Revenue. Mills and Reeve have taken care of that, too, although they have not dealt with personal specifics….
…
In conclusion gentlemen, can I thank–you, most sincerely for the way you have looked after the affairs of Swains International plc whilst it has been in my care. I will wish you to continue to look after my personal affairs as you already do, and I am sure that you will continue to get some business from my daughters. After next month I cannot say what Alan and the MBO team will want to do, but as they have sought to retain my services as Chairman - then there may well be no change. I cannot say, it is not my call."
"In terms of the shareholdings for Charles and I, then as I've said before, we can be too greedy with tax planning considerations. If we had done this years ago, rather than being busy scheming way to reduce the tax, then the tax would be on the tail end of taper relief by now. As it is you are now older, so premiums for your life insurance would have gone up while the tax went down. Sorry, it is one of those things I get hot and bothered about. People who devote too much of their creative time to working out how to avoid tax on the income they haven't made yet, usually don't make it! Generally difficult to say to you, because it probably easily looks like self interest and greed. I think you know it isn't greed - although I confess to self-interest. The UK tax regime in many ways is not too bad, so I don't mind paying. Inheritance tax is one that is a bastard, but shares in private companies get a discretion, so they don't attract death duties, I believe."
"Looks interesting although I'm not sure how you give tax advice, although I guess you do apologise for getting hot and bothered!! Also Gordon Brown is looking - if he hasn't sneaked it through already about inheritence [sic] tax on family shares."
"I have just been gratuitously informed by HSBC Private Bank in Jersey, who emphasize that they are not tax professionals, that as far as they are aware, unless there is a Treaty to the contrary, then if I spend 180 days or more a year in Thailand, then I am, de-facto, a Tax resident of Thailand.
Can you please advise as this may be interesting."
The Letter of Advice
"This letter sets out my advice on the tax treatment of the sale of shares in Swains International plc (which is to be converted into a private company, Swains International Limited) ('the Company') by yourself and your four daughters.
As we have discussed previously, this letter relates only to the tax position of the sale of the shares by you and your four daughters. Your accountant will be able to assist with the preparation and submission of tax returns, and related issues regarding valuations, the 'share identification rules', and the apportionment of the base cost of your shares, each of which fall outside the scope of our advice.
This letter considers:
- The extent to which, if at all, employment-related taxes could apply to any part of the consideration payable for your shares in the Company;
- The principles of capital gains tax (CGT) applicable to the different components of this consideration;
- The principles of computation to determine the amount of CGT payable;
- The availability of taper relief;
- The implications of your tax residence.
… "
"You should keep your residence status actively under review and take advice as to the possible CGT consequences of any proposed change in residence.
Whilst there is no statutory redefinition of residence or ordinary residence, HM Revenue and Customs has a published guidance setting out the rules it uses for determining when a person is resident or ordinarily resident in the UK and those rules are summarised briefly in Appendix 2. It will be to those tests that your contact at the HSBC Private Bank in Jersey was referring. However, whilst the guidance provides a starting point for determining whether a person is resident or ordinarily resident in the UK, these guidelines are not definitive as recent case law has emphasised. … "
Completion of the MBO deferred
The heart procedure and completion of the MBO
"Dear All,
I have finally been given a date for my Heart procedure, which is February 17th. Basically they do a pre-op. procedure to make sure the clots are gone, for which I would prefer to be put under, and then continue with the heart op. in the early evening – which can take about 4 hours. The bugbear is no long haul flights for four weeks after, which kills my attendace [sic] at Board Meetings of 'International' on Feb 22nd and Voice and Data on 26th. My apologies, but I really need to give the Heart treatment the priority.
The run in to the treatment starts on February 10th with a hospital visit in order that the week before is used to fine tune the body in readiness for the procedure. This particularly applies to my warfarin doseage, as I need to get weaned off that otherwise I leak too much when they operate!
Al, you were going to advise me if Jan 29th was looking good for a UK meeting when you know. I will need to leave UK on February 8th, latest, in order to be back in time for Heart procedures. Please advise ASAP, so that I can get a travel agent working upon my ticketing needs.
Once, again, apologies for the disruption to plans. It also wrecks a big trip I had planned for eight days away in Thailand on Water Projects, when I would have seen the installation of the Swains International site.
Regards,
Chris"
"I was sad to hear about Chris' sudden death just now. It is hard to believe that he is no longer here as he looked in good health at completion, and it was clear from that meeting what an engaging character he was."
Summary of the parties' cases
Issues regarding Mr Swain
Retainer
The law
"A solicitor's duty to his client is primarily contractual and its scope depends on the express and implied terms of his retainer"
"The extent of his duties depends upon the terms and limits of [the] retainer and any duty of care to be implied must be related to what he is instructed to do. Now no doubt the duties owed by a solicitor to his client are high, in the sense that he holds himself out as practising a highly skilled and exacting profession, but I think that the court must beware of imposing upon solicitors – or upon professional men in other spheres duties – which go beyond the scope of what they are requested or undertake to do. It may be that a particularly meticulous and conscientious practitioner would, in his client's general interests, take it upon himself to pursue a line of inquiry beyond the strict limits comprehended by his instructions. But that is not the test. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession, and cases such as Duchess of Argyll v Beuselinck [1972] 2 Lloyd's Rep 172, Griffiths v Evans [1953] 1424 and Hall v Meyrick [1957] 2 QB 455 demonstrate that the duty is directly related to the confines of the retainer."
"It is plain that when a solicitor is instructed by a client to act in a transaction, a duty of care arises. But it is also plain that the scope of that duty of care is variable. It will therefore depend, first and foremost, upon the content of the instructions given to the solicitor by the client. It will depend also on the particular circumstances of the case. It is a duty that it is not helpful to try to describe in the abstract. The scope of the duty may vary depending on the characteristics of the client, in so far as they are apparent to the solicitor. A youthful client, unversed in business affairs, might need explanation and advice from his solicitor before entering into a commercial transaction that it would be pointless, or even sometimes an impertinence, for the solicitor to offer to an obviously experienced businessman."
"… it is inherent that if the drafting of the two parts of a document is split between different departments, there is a potential for a mismatch between the two parts. To avoid this, it is essential for someone with a sufficiently general legal experience to have overall responsibility for reviewing the document as a whole with a view to seeing that it works and that it achieves the commercial bargain that it is intended to achieve."
"It must, surely, be up to the solicitor to take the appropriate steps to clarify precisely the extent of his retainer, and this, sadly, Mr Lightfoot failed to do when, in my judgment, the circumstances demanded that he should. This view is, if not analogous, at least consonant, so it seems to me, with that line of cases such as Crossley v. Crowther (1851) 9 Hare 384, and Re Payne (1912) 28 T.L.R. 201, to the effect that, where there is a dispute between solicitor and client as to the terms of any retainer, prima facie it is the client's version which should prevail. It seems to me that the underlying basis for this principle must be that it is the client who actually knows what he wants the solicitor to do, and so it is the solicitor's business to ascertain the client's wishes accurately, bearing in mind the possibility that the client, through ignorance of the correct terminology, may not have correctly expressed it"
"… if, in the course of taking instructions, a professional man like a land agent or a solicitor learns of facts which reveal to him as a professional man the existence of obvious risks, then he should do more than merely advise within the strict limits of his retainer. He should call attention to and advise upon the risks."
"The test to be derived from the authorities is whether, having regard to the terms of the retainer in all the circumstances which were know or should reasonably have been known by [the solicitor], [the solicitor] should reasonably have appreciated that [the client] needed his advice and guidance in respect of the tax liabilities which entry into the transaction would expose it."
"… A solicitor is not a general insurer against his client's legal problems. His duties are defined by the terms of the agreed retainer. This is the normal case although White v Jones [1995] 2 AC 207 suggests that obligations may occasionally arise outside the terms of the retainer or where there is no retainer at all. Ignoring such exceptions, the solicitor only has to expend time and effort in what he has been engaged to do and for which the client has agreed to pay. He is under no general obligation to expend time and effort on issues outside the retainer. However if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing 'extra' work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the analogy drawn by Mr Seitler. If a dentist is asked to treat a patient's tooth and, on looking into the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him. I do not need to consider what would be the consequences if the lawyer does more than asked for, for example reads documents which he was not asked to read, and discovers a risk to the client."
"A solicitor retained on a transaction may not be under a duty to advise on some legal aspect of the transaction, e.g. taxation, because it may be reasonably apparent to him that advice on that aspect is not need by the client and accordingly is not within his remit, but within the remit of someone else, e.g. a substantial client's expert tax department (see e.g. Virgin Management Ltd v De Morgan Group plc (24 January 1996, unreported) CA)."
"Any such agreement [to limit the solicitor's duties] must plainly, if it is to have any legal effect, be clear and unambiguous: the client must be fully informed as to the limited reliance he may place on his solicitor and the reason for it (i.e. the solicitor's lack of any basic knowledge or competence), that this limitation is not a normal term of a solicitor's engagement, and that this client may be better advised to go to another solicitor who is not so handicapped and can be retained with no such limitation on his duties. Common sense requires that all these matters should also be recorded in an attendance note of the meeting where they discussed and agreed, and should subsequently be recorded in a letter to the client. The letter is required, not merely to evidence what has been agreed, but to ensure that, after receipt of the letter, the client can consider (and discuss with others) the position and its implications away from, and free from any constraints imposed by, the presence of the solicitor. These are elementary precautions to ensure that the client gives a fully informed consent to a potentially disadvantageous arrangement where there is an obvious potential conflict between the interest of the solicitor (in retaining his client's work) and the client (in obtaining the best, or least competent, service and advice)."
The present case
Breach of duty
"Q. But you didn't ask Mills & Reeve to provide Inheritance Tax advice at any point?
A. We asked for personal tax advice and thought that we were given any necessary personal tax advice we needed.
Q. You thought Inheritance Tax was covered, did you?
A. I thought personal tax advice, whatever that came under, was covering us for the sale for those shares, yes.
Q. …. It's right to say though, isn't it, Mrs Swain Mason that in none of the documents that follow is Inheritance Tax even mentioned in respect of you asking for advice?
A. No, I didn't.
Q. You didn't ask?
A. (The witness shook her head)
Q. And neither did your father or your sisters?
A. I don't know, but I know that personal tax advice was asked for.
Q. I will come back to that in a moment.
A. So it's taken in the --
Q. It's also true --
A. It's taken in the broad --
Q. Sorry, I didn't mean to interrupt.
A. It's taken in the broad -- you are perhaps assuming or giving me too much credit for my knowledge, you know. When we were asking for personal tax advice that umbrella now, looking back, should have been Inheritance Tax, should have been Capital Gains, should have been, you know, that's what our belief was, that, you know, any tax linked to those shares we would be advised on.
Q. Even though the letter of advice of 4 January doesn't mention Inheritance Tax at all?
A. Assuming that we have had all the advice we need to have for the sale of those shares."
The Claimants' primary case
Is it open to the Claimants to advance their alternative case?
"In the further alternative, the Defendants at the very least ought in their letter of advice dated 4 January 2007 to have advised Mr Swain and the Daughters as follows: 'This letter does not include advice on the effects of the MBO for Inheritance Tax purposes, including the potential liability to Inheritance Tax on the consideration (in particular the loan notes) which you will receive for the shares. Whilst we advise on what we consider to be the relevant CGT consequences of the sale of the Shares and redemption of the loan notes, the advice about CGT is not comprehensive'. The Defendants did not so advise. Had they done so, Mr Swain and the Daughters would have sought such advice from the Defendants. The Defendants would then have either (a) advised Mr Swain and the Daughters in summary as to Tax Consequences, or (b) informed them that would not be able to provide sufficient advice on the other tax effects of the MBO in the time available prior to the scheduled completion of the MBO, and therefore suggested that completion of the MBO be delayed until such advice could be given."
"8. Paragraph 8.3A begins by making an allegation of an omission from the defendant's letter of advice dated 4 January 2007. That of course was before the date upon which the defendant became aware of the prospective heart operation or procedure that was to take place in Thailand in February. It might therefore be thought that that was an allegation of a breach of duty arising prior to, and therefore independent of, knowledge of the heart operation. However, paragraph 8.3A goes on to allege what the consequences would have been if the limitation which, it is suggested, should have been placed upon the advice had been placed upon it, namely that in those circumstances Mr Swain and his daughters would have sought further advice from the defendant. It is then alleged that, if such further advice had been sought, the defendant would have either advised Mr Swain and his daughters as to the Tax Consequences, or at any rate have informed them that they could not do so in time before the scheduled completion of the MBO.
…
45. Having considered the rival contentions, I have come to the conclusion that I accept the submissions made by Mr Simpson for the defendant. Taking them in turn, so far as the amended Particulars of Claim are concerned, it seems to me, coming to the case afresh, that the only suggestion of a case not tied to knowledge of the heart operation that can be found in the Amended Particulars of Claim is paragraph 8.3A. As I observed earlier, that paragraph does begin with a plea about an omission from the letter of advice dated 4 January 2007, prior to the date on which the defendant is alleged to have acquired the knowledge of the heart operation. That, as I have observed, might start one down the road of thinking that an allegation was being made of a breach of duty based only upon the defendant's state of knowledge at that point in time. That would encompass knowledge about Mr Swain's ill health, but not knowledge of the prospective heart operation or procedure. However, it seems to me, upon reflection, that there is force in the submission made by Mr Simpson that that matter does not end there, because the pleading goes on, in essence, to say that, if the warning as to the limitation on the advice which the claimants say should have been given had been given, then the consequence would have been that advice as to the Tax Consequences would have been given. Alternatively, there would have been advice to the effect that time was not available. As Mr Simpson put it to Peter Smith J and to me, there is therefore a degree of circularity in the pleading in the sense that it takes one back to the failure to provide advice as to the Tax Consequences, which really depends upon knowledge of the heart operation."
"... for the reasons I have given, I have come to the conclusion that it is not open to the claimants to advance any case that is not dependent upon knowledge of the heart operation or procedure."
"MR JUSTICE ARNOLD: Mrs Swain Mason, you were asked quite a lot of questions by Mr Simpson just before lunch about the advice that you asked for and didn't ask for. The point was put to you that you didn't specifically ask for Inheritance Tax advice, to which your response was, well, you asked for personal tax advice and thought you had received it. Just to try and put this into a little bit of context, could you go in bundle A3 to page 192. You recognise that as being the letter of advice of 4 January 2007?
A. Yes, my Lord.
MR JUSTICE ARNOLD: Now, let us imagine that on the first page that letter had contained a statement that said, 'This letter does not contain any advice about the Inheritance Tax consequences of this transaction', and it also contained a similar statement about the limitation on the Capital Gains Tax advice. Now imagine that that statement appeared in the letter and you had seen that statement when you received it, what would you and your sisters and father have done in those circumstances?
A. Dad, as the lead, would have certainly followed it up.
MR JUSTICE ARNOLD: But followed it up with whom and in what way?
A. I would have said he would have followed it up with Mills & Reeve, in the first instance."
The merits of the Claimants' alternative case
Causation
Conclusion