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Businesses beware of your attempts to avoid your tax liability - there may be consequences that you had not previously considered.

Businesses beware of your attempts to avoid your tax liability - there may be consequences that you had not previously considered.

Case: Xenakis & Corke v Birkett Long LLP 02/02/14

Mr Xenakis and Mr Corke, were the Claimants. They had opened a restaurant in Colchester Business Park and formed a company called Blue & Ginger.  They already had a restaurant in Colchester called the Barn Brasserie which operated through Mrs Xenakis’s family’s company called Pink & Lily.

 Birkett Long acted as Solicitors for the Claimants in relation to a new Lease for a term of 20 years whereby the Claimants were to be guarantors for the first 3 years.  The terms of that Lease provided that if Blue & Ginger became insolvent in that 3 year period, the Claimants would be liable to take a new Lease for the remainder of the term.  The Landlord wanted a 5 year guarantee - but the Claimants contracted on the basis that any guarantee was limited for 3 years, and also limited the rent payable during this period.

 The Defendants drafted the Lease on the basis that the guarantors would be released once 3 years had passed from the date of the Lease, rather than the commencement of the term of the Lease.  The term was to commence on 23 January 2006 and Blue & Ginger took occupation at that time.  It however took the landlord until 15 December 2006 (the date of the Lease) to sign the Lease and the Claimants’ liability as guarantors continued until 14 December 2009 rather than 22 January 2009.

The business was unsuccessful and the Claimants, on considering closing the business down in November 2008, became aware that if they did so before 14 December 2009 they would be required as guarantors to take out a new Lease.   The Claimants therefore had to keep the business going until the end of the year.

As a result of this the Claimants had to arrange funding of £240,000 to keep the business afloat a further 11 months in order to mitigate their losses.  They took financial advice, injected funds by way of director’s loan, drip-feeding payments to Blue & Ginger from time to time.  A small part of the loan was repaid to the Claimants by Pink & Lily.  The Court held that the Defendants had been negligent in allowing this situation to occur, that they should have advised the Claimants of the risk of starting the business before the Lease was completed and once there was a delay in completion should have negotiated that the three year period ran from the date the Claimants took up occupation ie. the term commencement date.

The Court accepted the Claimants would not have proceeded if they had been correctly advised.  However, as all the Claimants had actually done was to make loans to Pink & Lily, the Court held that they had not suffered any actual loss as these stood to be repaid.  It was Pink & Lily that would be out of pocket and the Claimants’ only loss was limited to the loss of use of their money as the loans were interest free.  What the Claimants should have done was to agree to reimburse Pink & Lily as they would then have suffered a loss.

The Court had great sympathy for the Claimants and considered the result morally unjust but pointed out that parties who take advantage of limited liability structures for tax reasons must bear the consequences of running their affairs in that way.