Neutral Citation No. [2012] NICA 30	Ref:     	COG8555	
			
Judgment: approved by the Court for handing down	Delivered:	07/09/12	
(subject to editorial corrections)*			

IN HER MAJESTY’S COURT OF APPEAL IN NORTHERN IRELAND
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ON APPEAL FROM THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND
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CHANCERY DIVISION 
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BETWEEN:

SEAN DEVINE

Plaintiff/Respondent;
-and-

DANIEL McATEER

Defendant/Appellant.
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Before: Higgins LJ, Girvan LJ and Coghlin LJ 
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COGHLIN LJ (delivering the judgment of the court)

[1]	This is an appeal brought by Mr McAteer (“the appellant”) from a judgment of Deeny J delivered on 2 December 2011.  In this court the appellant was represented by Mr B Kennedy QC and Mr Joseph Kennedy while Mr Humphreys QC and Mr Jonathan Dunlop appeared on behalf of Mr Devine (“the respondent”).  These proceedings have a complicated and fairly protracted history and, in the circumstances, the court is grateful to both sets of counsel for the benefit that it has derived from their carefully prepared oral and written submissions.  

Factual background

[2]	The following is the relevant factual background:

(i)	In February/March 1993 a company known as Roe Developments Limited (“the company”) was incorporated with Gavin Magill and the appellant as directors. The appellant remained a director until his resignation in November 2002.
 
(ii)	On 1 January 1995 the company made its first share issue of some 160,000 shares.  Further share issues took place on 31 March 1996, 30 September 1997 and 1 March 2000.  The Inland Revenue (“HMRC”) confirmed clearance within the rules of the Enterprise Investment Scheme (“EIS”) in respect of each issue of shares.

(iii)	On 1 March 2000 the respondent became a shareholder in Roe Developments Limited by acquiring 100,000 shares of £1 each. 

(iv)	Part VII Chapter III of the Income and Corporation Taxes Act 1988 (“the 1988 Act”) enables relief from income tax to be provided in respect of investment in corporate trades – the business expansion scheme.  Section 289 extends the appropriate relief to an individual who subscribes for eligible shares in a qualifying company which are issued for the purpose of raising money for a qualifying trade that is or is intended to be carried on by the company.  Section 293 of the 1988 Act deals with qualifying companies and provides that such a company must, throughout the relevant period, be an unquoted company, resident in the U.K. and one which exists wholly for the purpose of carrying on wholly or mainly one or more of the qualifying trades in the United Kingdom. Qualifying trades must comply with the requirements of section 297 and 297(2)(a) specifically excludes trades the substantial activities of which involve dealing in shares, commodities or land.  The basic purpose of the tax relief is to encourage the development of small businesses and local enterprise.  In order to qualify for relief the company has to employ the relevant funds for a qualifying purpose within twelve months, the qualifying period in the circumstances of this particular case being from 1 March 2000 to 28 February 2001.  

(v)	The appellant formally became Mr Devine’s accountant and tax agent in June 2000 and this relationship continued until May 2002 when the respondent retained the services of a new agent.

(vi)	 On 27 October 2000 the company submitted form EIS1 to HMRC claiming tax relief in respect of the fourth issue of shares which included those purchased by the respondent.  On 2 November 2000 HMRC issued form EIS2 confirming that tax relief had been authorised.  The respondent subsequently applied for and obtained tax relief of £20,000 upon the shares that he had purchased in the company.

(vii)	On 13 April 2002 the respondent sent a fax to the appellant indicating that he wished to encash all his “EIS investments”.  The appellant replied on 16 May 2002 pointing out that tax relief would be lost as a result of encashment within the relevant five year period. 

(viii)	In June 2002 the appellant notified the company of his intention to resign as a director as a result of a dispute between himself and the respondent regarding fees.  The appellant formally resigned in November 2002.

(ix)	The respondent sold his shares in the company on 17 November 2004 a date that was within the five year period required to protect any tax relief granted.

The history of relevant litigation

[3] (i)	In August 2006 the respondent issued proceedings, initially against both the appellant and Mr Magill, claiming damages by reason of the negligence, breach of contract and breach of fiduciary duty of the defendants in and about the management of the company as a company within the rules of the EIS.	  In the Statement of Claim as amended the respondent contended that he had lost tax relief of £20,000 with interest thereon of £7,336 which he had been required to repay to HMRC as a consequence of a breach of the EIS Regulations.  In addition to the claim made against both the appellant and Mr Magill as directors of the company both men were also sued as tax advisors to the respondent and, in the case of the appellant, as the respondent’s accountant.

(ii)	The proceedings initially came before Deeny J and, at that stage, both the appellant and Mr Magill were personal litigants.  Both defendants applied to the learned trial judge to dismiss the proceedings at the conclusion of the plaintiff’s evidence.  The learned trial judge acceded to that application on behalf of Mr Magill but permitted the action to continue against the appellant.  

(iii)	The proceedings before Deeny J continued against the appellant both in his capacity as the respondent’s accountant and as a director of the company.  In a written judgment delivered on 18 December 2008 Deeny J found against the appellant as a professional accountant and tax advisor both in tort and in contract on what he considered to be the primary issue, namely, that the plaintiff had lost tax relief in the sum of £20,000 as a result of the appellant’s failure to ensure that the relevant sums were employed in a way consistent with the statutory requirements or to take reasonable care to ensure that they were so employed within the relevant twelve month period.  Deeny J did not expressly rule on the extent of the appellant’s duty as a director of the company.  As a consequence of his findings the learned trial judge awarded the respondent damages of £22,850.

(iv)	The appellant appealed from the decision of Deeny J to this court. For the purpose of that appeal he was represented by Ronan Lavery QC.  At the outset of the appeal Mr Lavery indicated that the appellant wished to introduce in evidence material which he submitted had been or should have been before the trial judge prior to the delivery of his judgment but which had not been dealt with or mentioned in the course of that judgment.  In particular, the appellant sought to rely on the contents of a letter dated 10 June 2008 from Gregg Lewis an inspector of taxes based in the Small Company Enterprise Section of the Inland Revenue in Cardiff.  Deeny J had concluded the evidence in the main trial prior to the date of Mr Lewis’s letter but the appellant claimed that he had written to the Chancery Office on 17 June 2008, prior to delivery of judgment, forwarding copies of the letter and enclosures.  In such circumstances it became important to ascertain whether Deeny J had been made aware of the contents of the letter of 17 June 2008 and enclosures before he had delivered his written judgment on 18 December 2008.  This court formed the view that fairness both to the parties and to the trial judge required that the matter should be remitted to him to determine whether the correspondence had been received by the Chancery Office and, if so, to consider whether such a finding required any revision of his views. Accordingly, in a written ruling delivered on 23 June 2010 Girvan LJ directed that the proceedings should be remitted to Deeny J for the limited purpose of considering the issues relating to the letter of 17 June 2008 but not to involve the hearing of any further evidence.

(v)	The proceedings were remitted to Deeny J who delivered a written ruling on 2 December 2011.  After hearing detailed submission from Mr Ronan Lavery QC on behalf of the appellant and Mr David Dunlop on behalf of the respondent, Deeny J concluded, on the balance of probabilities, that the letter of 17 June 2008 had not been received at the Chancery Office and, consequently, had not been brought to his attention prior to the delivery of his judgment.  In deference to further submissions by Mr Lavery QC Deeny J permitted the appellant to introduce in evidence an expert report from Mr Tony Nicholl of Goldblatt McGuigan Accountants and, by way of response, a report from Sean Lavery of BDO Accountants was submitted on behalf of the respondent.  He also permitted the introduction of two documents from the appellant and a further letter dated 30 November 2011 from Mr Nicholl.  Having carefully considered all the material and the submissions of the parties Deeny J confirmed his earlier holding that the primary cause of the withdrawal of EIS tax relief had been the failure by the company to invest the relevant funds within twelve months.  He also held that the company could not have qualified for EIS relief in any event because, at all material times, it had maintained an excessive investment in and involvement in non-qualifying activities contrary to the provisions of Section 293(2) of the 1988 Act.  

(vi)	The appellant subsequently appealed.
 
Grounds of appeal

[4]	A composite Notice of Appeal dated 12 March 2012 was lodged relating to both the decisions of Deeny J on 18 December 2008 and 2 December 2011. In relation to the Order of 18 December 2008 the grounds of appeal were:

(i)	That the learned judge erred in law with regard to the duty of the care owed, the standard of care required and the remoteness of damage.
  
(ii)	That the learned trial judge had erred in his analysis of the facts.

(iii)	That the fact that the appellant had been compelled to act as a personal litigant as a consequence of the wrong revocation of his Legal Aid Certificate had resulted in a trial that was unfair and a breach of the appellant’s rights in accordance with Article 6 of the European Convention on Human Rights (“ECHR”).

In relation to the Order made on 2 December 2011

(i)	That the learned trial judge had erred in his analysis of the facts.  

(ii)	That certain of the findings made by the learned trial judge undermined the validity of his judgment on 18 December 2008.  

(iii)	That there had been a breach of the appellant’s rights under Article 6 of the ECHR as a consequence of judicial bias against the appellant.

(iv)	That the decision of the learned trial judge was unreasonable and irrational.

(v)	That the learned trial judge had failed to take into account the overriding objectives of the Rules of Supreme Court as contained in Rule 1A of the Rules of the Supreme Court (Northern Ireland) 1980 (“RSC”).

The submissions of counsel

[5]	Before this court Mr Kennedy concentrated his submissions upon the finding by Deeny J that EIS relief had been lost because the funds had not been “employed” within twelve months of receipt contrary to Section 289(1)(c) of the 1988 Act.  He drew the attention of the court to the decision of Sales J in the Upper Tribunal (Tax and Chancery Chamber) in the case of Richards and Another v Revenue and Custom Commissioners [2011] UKUT 440 (TCC).  In that case Sales J, delivering the judgment of the Upper Tribunal, expressed the following opinion with regard to the term “employed” in the 1988 Act at paragraph [28] and [29]:

“28.	The  word  ‘employed’  in  paragraph  1(2)(g)  of  Sch 5B  and  section 289(1)(c) of the Taxes Act is not defined in the legislation.  In my view, it is a word which requires the money in question actually to be used in some way for the purposes of carrying on the qualifying activity within the relevant one-year period.  Clearly, if the moneys are spent in carrying out the qualifying activity in that period, they will have been ‘employed’ for the purposes of that activity;  but,  as  the  Tribunal  correctly  recognised,  the  concept  of  being ‘employed’ for the purpose of an activity extends more widely than this.

29.	Moneys  will  also  be  ‘employed’  for  the  purposes  of  an  activity  if  the company has earmarked them in the relevant period for some specific purpose (which does not necessarily have to be a purpose calling for  expenditure in that period) and is keeping them in reserve for that purpose.  In such a case, the company may be found to have ‘employed’ the moneys for that purpose within the relevant period.  Whether moneys have been notionally set aside with sufficient precision for a specific purpose so that they can be said to have been ‘employed’ for the purpose of a qualifying activity at the time they are so notionally set aside will be a matter for assessment by a  tribunal on the particular facts of an individual case.”

Mr Kennedy submitted that, while in the instant case they had not been actually expended within the twelve months period, the relevant funds had clearly been “earmarked” for an appropriate purpose, namely the purchase of Hennessy’s Bar, and, had the Richardson decision been available for his consideration, Deeny J might well have come to a different conclusion.

[6]	Mr Kennedy also drew our attention to the expert report from Mr Sean Lavery of BDO Accountants which was introduced by the respondent in response to the report from Mr Nicholl of Goldblatt McGuigan Accountants during the hearing before Deeny J in 2011.  In particular, Mr Kennedy referred to the view expressed by Mr Lavery at paragraph 2.16 of his report when he said:

“2.16 	In addition, I would have significant concerns as to whether the company was a qualifying company throughout the relevant period, which for these purposes is from 1 March 2000 to 24 February 2003.”

According to Mr Kennedy this was essentially “speculation” which should not have been given any significant weight in the context of the opinion of HMRC that, at all material times, the company had been appropriately qualified.  Mr Kennedy referred to paragraph 60 of the appellant’s skeleton argument noting that: 
(i)	     the company had undergone a thorough tax investigation during the appellant’s period of office as a director 
(ii)	     that the EIS status of the company had remained unchanged 
(iii)	the respondent had been awarded £20,000 worth of tax relief which he had received
(iv)	 no tax relief had been withdrawn prior to the appellant ceasing to be a director of the company and terminating his role as the respondent’s accountant
(v)	      as early as May 2002 the respondent had been informed by the appellant that the tax relief would be lost if he sold his shares yet, despite this advice the respondent had done just that in November 2004 
(vi)	that the opinion of experts in HMRC in 2008 that tax relief would not have been withdrawn as a result of the “employment of funds” point had been drawn to Deeny J by the appellant in his written closing submissions. 

[7]	In support of his argument that the relevant funds had been effectively “earmarked” Mr Kennedy argued that it was clear from the correspondence that funds for the purchase of Hennessey’s Bar had been allocated by the company within the relevant time period and that the only reason why they had not been effectively applied for that purpose had been a dispute between three different firms of solicitors which would have been outside the control of the appellant.

[8]	On behalf of the respondent Mr Humphreys met the submission that the relevant funds had been effectively earmarked for the purchase of Hennessey’ Bar by providing the court with a penetrating and lucid analysis of the relevant documentation.  The company held a lease of Hennessey’s bar from James McVeigh dated 26 September 1997 with an option to purchase the premises at the sum of £510,000.  The premises were ultimately purchased by the company for the sum of £460,000 as one of the terms of a settlement of litigation between James McVeigh and the company dated 16 November 2000. A memorandum of sale of the premises to the company was completed signed by the purchaser on 12 April 2001 and the vendor on 18 May 2001.  The company signed an agreement to sell the property on to N.R.S. (Bars) Limited for £550,000 with a completion date fixed at 31 May 2001. James McVeigh subsequently conveyed the property to NRS (Bars) Limited.   Mr Humphreys submitted that these documents clearly indicated a “flip” transaction relating to the property as a consequence of which the company stood to make a profit and, presumably, sought to avoid the payment of Stamp Duty. The appropriate profit was recorded in the notes to the company’s Financial Statement for the year ended 30 June 2001 as “Profit on Disposal of Investments.” In the course of his oral reply Mr Kennedy argued that the delay caused by the dispute between solicitors had been beyond the appellant’s control although he also conceded that this “probably was” a flip transaction. In such circumstances, with regard to the employment of the funds invested by the respondent, Mr Humphreys submitted that it was clear that the company had never actually purchased Hennessey’s Bar or traded therein and the inter-company property transaction could never have been an activity or trade qualifying for EIS relief within the provisions of the 1988 Act.

Discussion

[9]	At all material times the appellant has accepted that he owed a duty of care to the respondent as his accountant and tax adviser and that he was sufficiently acquainted with the EIS regulations to enable him to properly discharge that duty – see paragraph [5] of Deeny J’s judgment of 18/12/08.  He was also at all material times a director of the company.    As his accountant and tax adviser the appellant was subject to a duty to take reasonable care to keep the respondent properly and adequately informed and to ensure that the monies invested by the respondent were expended by the company upon an activity that qualified for EIS relief.  Deeny J found that there had been a failure to invest the money within 12 months pursuant to Section 289(1)(c) of the 1988 Act as amended. While that finding constituted the primary ground for his decision, at paragraph [10] of his judgment delivered on 18 December 2008, after referring to the evidence of Mr Bell of KPMG, whom he considered to be ‘an impressive witness’, the learned trial judge also went on to observe that:

“There are limitations on the form that employment could take and I accept Mr Bell’s evidence that nothing which Roe Developments Limited did with the investment constituted employment which complied with the statutory provisions.  It might arguably have constituted a land dealing but that was a non-qualifying investment expressly excluded under Section 297(2)(a) of the 1988 Act.”

[10] Mr Kennedy urged us to remit this appeal once again to Deeny J so that he could have an opportunity to reconsider the evidence in the context of the Richards decision. However we have now had the benefit of the detailed and helpful oral and written submissions of counsel which have effectively covered both the factual and expert evidence engendered during the course of several hearings and, in the circumstances, we are satisfied that this court is able to reach a fully informed determination. 

[11]	The decision to withdraw the relevant tax relief from the respondent was taken following correspondence between Mr Magill, as a director of the company, and a Mr Malcolm McCausland of HMRC.  On 8 December 2004, in response to a letter from Mr McCausland, Mr Magill wrote as follows:

“As you are no doubt aware the company issued 260,000 at £1 each under the conditions of the Enterprise Investment Scheme on 1 March 2000 to fund the proposed acquisition of Hennessey’s Bar.  The acquisition however was not completed until April 2001 some 13 months after the issue of the shares.  As Hennessey’s Bar is the subject of High Court litigation we are anxious to know whether or not there will be a withdrawal of EIS relief with respect to these shares given the fact that the proceeds from the share issue was not used within the required 12 month period.”

By way of response Mr McCausland wrote on 14 December 2004:

“In most cases share capital raised by means of an Enterprise Investment Scheme must be used within 12 months after the date the shares were issued.  Exceptionally, where the qualifying business activity for which the money is raised consists of the company or a subsidiary preparing to carry on a qualifying trade, the deadline is extended to twelve months after the date on which the trading commences.

As the latter situation does not seem to pertain in relation to this issue, I regret that the relief will have to be withdrawn from the named participators.”

While we note that this correspondence was conducted without the approval of the appellant, at a time when he was no longer a director of the company, it is quite clear that the activity in respect of which tax relief had been sought and obtained was the purchase of Hennessey’s Bar and the issue was whether the funds had been employed within the permitted time scale.  Mr McCausland gave evidence during the substantial hearing before Deeny J in 2008 and it seems that, during that hearing, the appellant also focused upon Hennessey’s bar contending that the reason for delay beyond the twelve month period lay with the company’s solicitors.

[12]	In the course of his correspondence with Mr Lewis, after the hearing but prior to judgment being delivered by Deeny J, the appellant referred not only to the purchase of Hennessey’s Bar but also to the purchase of the Telstar Bar which he represented as having been acquired in February 2001.  It is clear that there was no reference to the purchase of the Telstar Bar as constituting the relevant qualifying activity when Mr Magill originally wrote to Mr McCausland in December 2004 nor did Mr Magill mention the Telstar in his correspondence with Mr McCausland seeking to review his decision in October 2007 and January 2008.  The initial email from the appellant to Mr Lewis of the 16 April 2008 referred to a ‘Background’ that was clearly limited to the Hennessey’s Bar transaction. Only in the appellant’s letter of 2 June 2008 to Mr Lewis did the first reference to the Telstar Bar appear.  The absence of any reference to the Telstar Bar from the original correspondence between Mr Magill and Mr McCausland was noted by Mr Sean Lavery in his report of 21 November 2011.  Mr Lavery expressed the view that the inclusion of the Telstar Bar purchase in the appellant’s letter of 2 June 2008 to Mr Lewis was the key reason why Mr Lewis formed a favourable opinion with regard to the retention of EIS relief.  However, at paragraph 2.9(3) of his report Mr Lavery also expressed significant concerns as to whether the purchase of the Telstar Bar could ever have satisfied the requirements of a qualifying trade since, in his view, it constituted an investment asset of the company as opposed to a trading asset.  

[13] As we have noted earlier in this judgment, Mr Brian Kennedy advanced his submissions with regard to funds being “earmarked” in accordance with the Richards decision solely in relation to the purchase of the Hennessey Bar.  That was entirely consistent with the skeleton argument lodged on behalf of the appellant which focused the issue in the following terms:

“9.	The central question addressed by the Court was whether or not monies had been employed within the requisite twelve months.  The trial judge concluded that because the actual completion of Hennessey’s had not taken place within the twelve months, then this was fatal to the tax relief, recent case law has clarified what is meant by ‘employed’ and it is clear that the funds had been employed within the required period.”

Again, at paragraphs 40 and 41:

“40.	In this case not only was the money spent but was clearly earmarked for Hennessey’s.  ….

41.	The funds were clearly ‘earmarked’ within the required twelve month period by Roe Developments Limited for the purchase of Hennessey’s Bar.  The exact amount, ie. £437,000, being the amount on the Court Order was forwarded to the company solicitors to complete the matter.  (Daniel McAteer is also of the view that the money was actually ‘spent’ within the twelve month period when the cheque was sent to the solicitors for the purchase of Hennessey’s.)”

[14]	The hearings to date have clearly proceeded on the basis that the relevant activity was the acquisition of Hennessey’s Bar. Having considered all the evidence and the submissions of the parties the conclusion that we have reached is that the transaction involving Hennessey’s Bar, at best, amounted to dealing in land and, as such, it constituted one of the activities specifically  excluded from relief by section 297(2)(a) of the 1988 Act. Such an activity could never have attracted EIS relief. In such circumstances the fact that the relevant funds were earmarked for that transaction within twelve months is irrelevant. That finding effectively determines this appeal in favour of the respondent.  However, a number of other issues were raised, although not ventilated in any detail, during the course of submissions.

Article 6 

[15]	While the appellant appeared as a personal litigant in the course of the hearings before Deeny J in 2008 he was represented by counsel and solicitors before this court and before Deeny J for the purpose of the remitted hearing in 2011.  He was also represented by junior and senior counsel and solicitors for the purposes of this appeal.  The appellant is a professional accountant with many years experience who has displayed a commendable degree of ability and industry in the course of conducting a significant number of complex pieces of litigation.  We have carefully reviewed earlier judgments in these proceedings together with the submissions advanced on behalf of the appellant and, having done so, we do not consider that there has been any breach of his right to a fair hearing in accordance with Article 6 of the ECHR in terms of equality of arms.

[16]	Mr Kennedy did not advance any specific oral submissions in support of the allegations of judicial bias or corruption of the legal process by the respondent’s legal advisers and accordingly, we reject any such allegations.  A trial judge is perfectly entitled and, indeed, in an appropriate case obliged, to express his view as to the credibility of witnesses and while Deeny J did refer in fairly strong terms to the failure by the appellant and his advisors to ensure that Mr Nicholl had been provided with a copy of Mr Bell’s report, in our view he was quite justified in so doing. The trial judge has delivered a number of judgments in litigation in which the appellant has been involved either as a party or a witness. Indeed, Mr Humphries pointed out that while the learned trial judge gave judgment against the appellant on the 18 September 2008, on the same date, in a separate case, he gave judgment in his favour. We should also record that, while the remittal of this appeal to Deeny J primarily related to the issue as to whether or not the 2008 correspondence had been received by the Chancery Office, the learned trial judge, in the interests of ensuring a fair hearing, permitted both parties to introduce additional expert evidence and comment thereon. We have considered all of the evidence and submissions but having done so, we are not persuaded that the appellant has established judicial bias in accordance with the principles set out in Porter v Magill [2001] 2001 UKHL 67 and subsequently developed in cases such as Helow v Secretary of State for the Home Department [2008] UKHL62.
 
Article 8

[17]    Although Mr Kennedy did refer to Article 8 of the ECHR, he did not develop any detailed submission in relation thereto and Article 8 did not feature in the Composite Notice of Appeal. In the circumstances we do not propose to make any observations with regard to that Article which does not appear to have any relevance for this appeal.
 
[18]	Accordingly, for the reasons given above, this appeal will be dismissed.