Upper Tribunal Tax and Chancery Chamber

[2024] UKUT 00152 (TCC)

Fecha: 21-Feb-2024

The FTT’s findings of primary fact

The FTT’s findings of primary fact

15.

None of the findings of primary fact summarised in this section are challenged.

16.

LBIE went into administration on 15 September 2008. A secondary market emerged in claims where a creditor had a “proved claim” entitling them to some payment as part of the administration ([18] to [20]). That secondary market included an auction process established by LBIE’s administrators under which eligible creditors with claims having a value of less than £10 million could auction those claims to the highest bidder.

17.

Unusually for an administration, LBIE’s administrators were able to realise what the FTT termed the “Surplus” because LBIE’s assets exceeded its proved claims. The Insolvency (England and Wales) Rules 2016 entitled holders of proved claims to interest (“Post-Administration Interest”). That led to the question whether s. 874 of ITA 2007 applied so that the Post-Administration Interest was payable under deduction of UK income tax by LBIE at the rate of 20%. By December 2017, the state of the law was as set out in a judgment of the Court of Appeal to the effect that the Post-Administration Interest was yearly interest, overturning the decision of Hildyard J in the High Court. However, there was an appeal to the Supreme Court which gave its judgment in 2019, after the Assignment had taken place.

18.

BLM is a substantial investment company. Its investment manager was Davidson Kempner Capital Management, a New York based asset manager. As at the date of its 2017 financial statements, BLM held (directly or indirectly) about $6.9 billion of assets ([14] and [15]). It started acquiring proved claims in the LBIE administration in 2011 and came to own 443 such claims ([30] to [33]). BLM purchased some claims (including the SAAD Claim) after the vendors had received the principal amount. In such cases, BLM was purchasing the right to future payments which might arise such as the Post-Administration Interest.

19.

SICL, the former owner of the SAAD Claim, had received the principal amount of the SAAD Claim on 7 September 2016. In February 2018, SICL, which was then in liquidation, instructed a third-party broker (“Jefferies”) to market the SAAD Claim. BLM was the successful bidder.

20.

The commercial terms of the transaction were agreed on 8 February 2018. Those commercial terms were set out in a written contract dated 12 February 2018 (referred to in that contract as the “Trade Date”). Completion took place in two stages on 9 March 2018. At the first stage, the liquidators of SICL assigned the SAAD Claim to Jefferies for a consideration of £82,400,000. At the second stage, Jefferies assigned the SAAD Claim to BLM for a consideration of £83,550,000. Once SICL transferred the SAAD Claim to Jefferies, it was preordained that Jefferies would assign it to BLM ([165(7)].

21.

On 25 July 2018, the gross amount of the Post-Administration Interest payable in respect of the SAAD Claim was £90,736,521.36. LBIE’s administrators paid 80% of this sum to BLM (£72,589,217.09) in cash on that date. They withheld 20% of the Post-Administration Interest (£18,147,304.27) under s.874 of ITA 2007 and paid it over to HMRC in September 2018 ([6]).

22.

The economic effect of these transactions can be summarised as follows:

(1)

If SICL had retained the SAAD Claim, it would have received £72,589,217.09 on 25 July 2018 (which represented 80% of the Post-Administration Interest after UK withholding tax at the rate of 20%). The sum withheld by LBIE would have satisfied SICL’s liability to UK income tax. Accordingly, SICL’s post-tax receipt would have been £72,589,217.09.

(2)

By assigning the SAAD Claim, SICL obtained a consideration of £82,400,000 (90.81% of the Post-Administration Interest).

(3)

Jefferies made a profit of £1,150,000 on the transaction – 1.27% of the SAAD Claim interest.

(4)

BLM had paid £83,550,000 for the SAAD Claim (92.08% of the Post-Administration Interest). It received cash of £72,589,217.09 from LBIE’s liquidators. However, if BLM was entitled to the benefit of Article 12(1) of the UK-Ireland treaty, it would be able to obtain a repayment from HMRC of the sum withheld (£18,147,304.27) and, if it obtained that repayment, would have made a profit of 7.92% of the Post-Administration Interest (ignoring, for these purposes, the time cost associated with having to wait for the repayment).

23.

The Assignment also operated to insulate SICL from risks it would have suffered if it had continued to hold the SAAD Claim and transferred those risks to BLM. The risks in question were:

(1)

The “liquidation lacuna risk” – namely, the risk that the administration of LBIE would end with LBIE being placed into liquidation with the result that interest on the SAAD Claim would no longer be payable [164(1)(a)]. This risk was thought to be insignificant at the time (see for example [80(5)(a)]).

(2)

The “late termination risk” – namely, the risk that Post-Administration Interest was calculated, not from the date of commencement of LBIE’s administration, but rather from the later date on which SICL had terminated the contract that gave rise to the SAAD Claim. At the time of the Assignment, the law was as stated in a judgment of the Court of Appeal and was favourable to the holder of the SAAD Claim. However, there was a pending application for permission to appeal to the Supreme Court.

24.

The Assignment also meant that SICL no longer needed to consider the “withholding tax risk” – namely, the residual uncertainty as to whether Post-Administration Interest was subject to UK withholding tax at all (see paragraph 17 above). If the Supreme Court decided that the Post-Administration Interest was not subject to UK WHT, SICL might well consider that, with hindsight, it had sold the SAAD Claim too cheaply. However, it had no ongoing exposure to UK WHT on the Post-Administration Interest and, for its part, BLM thought that the incidence of UK WHT was not a risk at all since it expected to be able to reclaim any UK WHT by virtue of Article 12(1) of the treaty.