Nothing can be said to be certain, except death and taxes (and that dishonesty should not be alleged without proper grounds)

It is a long-standing principle that fraud or dishonesty should not be alleged without proper grounds. Particular care needs to be taken by claimants to carefully assess the words used which are alleged to amount to a misrepresentation, and to differentiate between statements of opinion and fact to ensure that the claim is properly thought out and pleaded. Failure to do so may have serious consequences for a claim, and result in liability for costs.

The recent case of Upham and others v HSBC UK Bank Plc [2024] EWHC 849 (Comm) (described as a case with “all the hallmarks of a Hollywood Blockbuster”) is an example of a case where the claimants failed to persuade the court that the defendants had acted dishonestly. The High Court ultimately dismissed all of the claims made by the claimants against HSBC.

Background

Eclipse Partnerships (Eclipse) was a film investment scheme devised in 2005, chiefly by Mr Neil Bowman, who was, at the time of the scheme’s inception, a director at HSBC Private Bank (UK) Limited. The Eclipse scheme was set up to enable individual UK taxpayers to defer their tax liabilities for several years, by investing in LLPs associated with the film industry. For investors to be entitled to tax deference it was essential that the LLP be engaged in trading. At the time the scheme was devised, there was a push by the government to encourage investment in the film industry by offering so called ‘tax breaks’ to investors by way of tax deferral schemes. There has been a long string of litigation, both in the civil courts and tax tribunals in relation to these schemes which have ultimately found that whilst the intention may have been in the spirit of the scheme, the implementation often made the schemes ineffective and HMRC have hit individuals with significant tax bills in relation to their participation.

Mr Bowman was a chartered accountant, known for his expertise in relation to personal tax relief and when he moved to HSBC, he was tasked with creating and originating tax-advantageous structures for high net-worth individuals and corporates. Mr Bowman also played a role in marketing the Eclipse scheme to various investors and Independent Financial Advisers, and even contributed to the scheme with his own personal capital. Eclipse was managed by Future Films.

Fast forward around four years and HMRC challenged the Eclipse scheme on the basis that the Eclipse LLPs were not trading and therefore the investors would not qualify for tax deference. The implication was that Eclipse failed to achieve its intended purposes which would allow the investors to defer their tax liabilities and therefore the investors were hit with significant personal tax bills. In 2016, the Supreme Court handed down a ruling that the Eclipse scheme amounted to tax avoidance and the investors were required to pay their tax liabilities together with interest for late payment. As the initial liability was due in or around the time of the first investment and some taxpayers paid the tax in or around 2016, the interest that accrued in these cases was significant, and in some cases, the interest payments were larger than the underlying tax.

The investors sought to recover their alleged losses from the bank and therefore issued a claim against HSBC. The core claim by the claimants was that they had invested based on representations that the scheme's structure had been approved by a tax KC (a senior barrister). However, their claim was that the structure implemented by Eclipse was materially different from the one approved by the KC, rendering the representations false. They further alleged that these false representations were made dishonestly and/or deceitfully, and that the bank (through its employee Mr Neil Bowman) was aware of and actively involved in this deceit.

The Judgment

In Mr Justice Bright’s Judgment, he dismissed all of the claims against the bank on the following reasons:

The Claimants failed to analyse properly the legal significance of the statements made to them before they invested in Eclipse.

The claimants relied on Information Memoranda that were prepared to provide information about Eclipse to potential investors which said that the structure had been based on tax advice obtained by English solicitors and from the tax KC and that the promoter (Future Films) and Mr Bowman therefore expected the investment to work in the manner outlined in the legal advice.

The court found that whilst these representations appeared to be matters of fact, they were in reality representations of opinion. The court concluded that both Future Films and Mr Bowman (by an extension of HSBC) represented an opinion that the structure on which the tax KC had advised was the same as the actual structure adopted by the Eclipse scheme and also impliedly represented that they had reasonable grounds for holding this opinion.

The representations made did not constitute misrepresentations

The court held that Future Films and Mr Bowman had reasonable grounds for believing that the Eclipse scheme, as implemented, was consistent with the basis on which the tax KC had advised. Accordingly, the court held that the representations were not false.

Neither Future Films or Mr Bowman were dishonest

The court stated that “in its simplest form, deceit involves a false representation, which the representor actually knew was false at the relevant time. Deceit is not confined to cases involving actual knowledge, however. It also includes the situations where representor has shut his eyes to the facts, or has purposely abstained from inquiring into them, or has no belief in the truth of the representation, or is reckless or careless as to its truth. Deceit is concerned with fraud; to prevent a false statement from being fraudulent, there must be an honest belief in its truth”

The claimants alleged that Future Films and Mr Bowman shut their eyes to the truth - meaning either that they had blind-eye knowledge, or were reckless (and, therefore, dishonest) as to whether the structure as implemented was consistent with the basis on which the tax KC had advised. The court disagreed and found that neither Future Films nor Mr Bowman was dishonest or shut their eyes to the truth.

Their claims were time-barred

The claims were all tortious such that the limitation period was 6 years pursuant to section 2 of the Limitation Act 1980. The Claimants relied on section 32(1) and (2) of Limitation Act 1980, which they said postponed the date when time began to run for the purposes of section 2. However, the court disagreed with the claimants and found the claim to be time-barred.

Despite Mr Justice Bright dismissing all of the Claimants’ claims, he did have great sympathy for the claimants and said “Their losses are significant, their suffering has been real… and they have every right to feel aggrieved. When all is said and done, they were badly let down” but regardless of this he said “this is not enough for them to have a good claim against HSBC”.

Mr Justice Bright also had great sympathy for Mr Bowman who he believed should not have had to deal with these proceedings.

Conclusion

The decision in this case reiterates the importance that fraud and dishonesty are serious allegations that require fully particularised (i.e. detailed) pleadings and convincing evidence. Mr Justice Bright clarified that this is to protect the reputations of prospective defendants and so that prospective claimants are not given false hope. The case also demonstrates that alleging dishonesty without proper grounds, will result in a less favourable outcome for any potential victims. 

Further information

If you have any questions or concerns about the topics raised in this blog, please contact Jemma Brimblecombe or Leyla Maestri. 

About the authors 

Jemma is widely recognised for her skills and experience in commercial litigation. She acts for both claimants and defendants in a wide range of sectors, including financial services, legal services, accountancy, and construction. 

Leyla is an Associate in the Dispute Resolution team at Kingsley Napley. Leyla has experience acting on a broad range of disputes, including complex cross-border litigation, civil fraud matters, contract disputes, contentious trust and probate claims and arbitration proceedings.