Brown v InnovatorOne PLC: a tale of solicitors and tax avoidance

Collyer Bristow may be breathing a sigh of relief after Mr. Justice Hamblen in Brown v Innovator One plc [2012] EWHC 1321 (Comm) rejected a series of claims against them but they also come in for criticism for the way they conducted themselves.

The case arose out of failed tax schemes in which the firm had acted for companies set up to run tax avoidance schemes but they had not acted for any of the claimants who were investors in the failed schemes. Those schemes had the endorsement of a QC who the court heard had provided advice on more than 100 occasions in about three years. The judge said the driving force behind the Schemes was a Mr Bjorn Stiedl, who acted as a shadow director, with his friend, Mr Carter, acting as Managing Director. In November 2004, whilst the schemes were under investigation, Stiedl was convicted at Southwark Crown Court of pension fraud, for which he was subsequently imprisoned.

The sheer length of the judgment (over 100,000 words) with dozens of lead claimants and a long list of defendants hints at the complexity of proceedings. The case only drew on a selection of the failed schemes as exemplars rather than try them all. The essential crux of the case was an allegation that the schemes were set up in the knowledge they would fail and that investors in the scheme (who hoped to ‘double their money’ in tax gains in excess of their actual investment) paid money in and were charged in that knowledge as a fraud on them.

Collyer Bristow and two (former) partners were amongst the defendants accused of conspiracy and fraudulent assistance. Both are extremely difficult to prove. One of those solicitors, Mr John Bailey, had become Chairman and non-executive director of the defendant firm which Stiedl and a friend (Mr Carter) set up to run the schemes.

The case has gained a good deal of attention for having the support of litigation funders. Whilst in one sense it is heartening to see the funders willing to take cases to trial; it must be extremely dispiriting to them to see the case lose on almost every point. From the perspective of view of the lawyers involved, there are a number of broader questions.

According to the judgment, Mr Stiedl was involved in instructing and liaising with Mr Bretten QC and in 2002 Mr Bailey referred to Collyer Bristow acting as a “conduit for the obtaining of instructions from [sic] Mr Bretten QC”. This is a rather unusual way of conducting business. Mr Bailey was working with Stiedl in this at a time when he may have become aware of allegations being made about Mr Stiedl. In particular, the judgment states that:

Between July and November 2002 there was correspondence between Innovator and CB and the Bank of Scotland (“BoS”) and its solicitors, Dundas & Wilson (“D&W”). In November 2002 BoS and its solicitors ceased discussions. By letter dated 25 November 2002, D&W stated “We write to advise that the Bank has in carrying out due diligence in respect of the proposed transactions become aware of information regarding Bjorn Stiedl. Our clients no longer wish to pursue this opportunity further and will enter into no further correspondence regarding it. We have also been instructed not to enter into any further correspondence on this matter”.

I have not been able to glean from the judgment what this information is. When one of Mr Bailey’s partners, Mr Marsh, found out about Mr Stiedl’s prosecution, he recommended that Mr Bailey was not a director of Innovator and that was acted on in March 2004. Mr Stiedl was convicted of conspiracy to defraud the Balfron pension fund at the Southwark Crown Court on 23 November 2004 and was later sentenced to four and a half years imprisonment.

In June 2003 the Inland Revenue also began investigating the Innovator schemes and in 25 March 2004 Baker Tilly resigned as auditors of all the schemes partnerships and as as accountancy representatives under the Inland Revenue’s enquiry. This may or may not have been about the same time as Mr Bailey resigned as Chairman of the relevant company. We do not hear whether they are linked but as the judge notes:

“Baker Tilly said that their reason for resignation was their stated discovery of information that Mr Stiedl might be exercising significant influence over the management of the Partnership and their understanding that he was under investigation by the Serious Fraud Office (“SFO”)”

One of the other allegations is that the Collyer Bristow partners remained silent whilst Mr Carter misled an Inland Revenue inspector (Mr Frost):

“Mr Carter’s statement to Mr Frost that Mr Stiedl was never more than a consultant in the November 2004 meeting with Mr Frost. This was untrue, as Mr Carter effectively acknowledged in evidence. Mr Bailey and Mr Roper were criticised for remaining silent when these statements were made but it is understandable that they would be reluctant to openly contradict their own client and it was Mr Bailey’s evidence that he did take the issue up with Mr Carter after the meeting.

It is not apparent that taking it up led to any reparative steps being taken, such that Mr Frost was no longer labouring under a misapprehension, though they may have been – we simply do not hear.

In almost all respects, the judgment was wholly in the defendants and Collyer Bristow’s favour. The judge held there was not a sham or a fraud in conception, nor was there a conspiracy. There had been no dishonest assistance by Collyer Bristow in relation to the claimants. Whilst a claim of negligence against Mr Bailey was rejected, the judge says this:

I reject the allegations of dishonesty and breach of duty made against Mr Bailey. Mr Bailey was a commercially minded lawyer who in the interests of his client may have been drawn into roles that with hindsight were unwise, such as acting as chairman of Innovator. He was also very busy and did not have all the time which ideally would have been available for some of the tasks he and his team took on. Difficulties may also arise where, as in this case, lines are sought to be drawn and responsibility disavowed for potentially important matters, such as FSMA. No doubt with hindsight there are some matters which Mr Bailey might have done differently but this is not indicative of dishonesty and Mr Bailey did nothing wrong knowingly.

Similarly, in relation to Collyer Bristow (CB) he says this:

I reject all allegations of dishonesty and breach of duty made against CB. No doubt with hindsight there are many things CB would have done differently. Allowing their name to be used in promotional material, their partner to act as chairman of the promoted company, and in particular their client account to be used for the deposit of subscription monies, have contributed to their entanglement in the allegations made in these proceedings. Apparent discrepancies in documentation in which CB was involved have fuelled the Claimants’ conspiracy theories. The CIS aspects of arrangements such as these are matters that it may be said CB should have considered for themselves. However, I am not concerned with any complaints that Innovator or the LLPs might have against CB. On the evidence at trial I have found that there is no substance in the very serious allegations which have been made against CB and that all claims against them should be dismissed.

Similarly, Claimant greed may have meant the judge had little sympathy for the claimants seeking to recoup their losses:

“Although the Claimants were understandably aggrieved to lose their cash contributions and receive back only limited tax relief, there are obvious risks in going into aggressive tax schemes which offer the prospect of almost immediately doubling your money.”

So, whilst a Bank ran a mile and accountants resigned, the solicitors carried on and the tax avoiders were hoist on their own petards. The judges comments may be read as very gently implying conduct problems but he declines to treat them as his concern (they were not I imagine argued in front of him; though as the solicitors are officers of the court the judge has an interest in seeing that these matters are investigated). With the SRA now taking a harder look at tax avoidance, for example on stamp duty, things may not remain so comfortable for solicitors similarly involved in the future.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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One Response to Brown v InnovatorOne PLC: a tale of solicitors and tax avoidance

  1. Pingback: Morning Round-Up: Monday 28 May |

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