The Court of Appeal has held that a £15 million claim against Ernst & Young is time-barred. This was because the claim was brought more than 6 years after the Claimant first suffered "damage".
The case has particular application where an accountant advises a client to enter into a particular scheme or transaction that is then alleged to have been flawed. The case highlights that time for limitation purposes will almost always run from when the client, on the back of its accountant's advice, first enters into the allegedly flawed scheme or transaction, which may be well before an easily quantifiable financial loss arises.
Background
The Claimant had sold his business and made a sizeable gain. Ernst & Young advised the Claimant how to avoid or defer Capital Gains Tax by reinvesting the sale proceeds and claiming roll-over relief. Accordingly:
- the Claimant reinvested the money from his original business sale into the Claimant company, Pegasus;
- Pegasus then acquired companies that carried on businesses that qualified for roll-over relief and hived those businesses up into itself;
- some of those businesses were then sold at a loss.
The scheme worked, in the sense that the Claimant was able to roll-over his original capital gain. Unfortunately, however, when the Claimant came to sell the businesses at stage 3, he found that he had to pay CGT even though he sold the businesses at a loss. The liability could have been avoided if the scheme had been structured differently; in particular if Pegasus had been set up from the start with subsidiaries to purchase the qualifying businesses.
The question facing the Court of Appeal was: when did the Claimant first suffer "damage", being the date when time will run in a professional negligence claim? If damage accrued at stage 1, when the Claimant first reinvested his money, the claim would be out of time. The Claimant argued this couldn't be the case; he only became liable to pay tax at stage 3. Further, up until the point when Pegasus acquired the companies at stage 2, the Claimant could also have avoided the tax liability by purchasing the assets of the businesses rather than acquiring the companies themselves. In that sense, any loss before stage 2 was only possible, future loss. Accordingly, he could not be said to have suffered damage at stage 1.
The decision
The Court disagreed with the Claimant. It held that from the moment he entered into the first transaction, when he reinvested his money into Pegasus, he was in a less advantageous position than he ought to have been in. Pegasus ought to have been set up with subsidiaries to purchase the qualifying businesses but it was not. The Court accepted that it was possible that the tax liability could still have been avoided at this stage. However, although the Claimant was not "inevitably doomed to suffer the [tax liability]..he was...tied into a commercially disadvantageous straightjacket". In other words, the Claimant did not receive what he ought to have received and this was sufficient damage for the 6-year limitation period to begin to run.
Comment
In cases of professional negligence the person relying on the professional's advice will very often then enter into a transaction of some kind that turns out to be flawed. This case emphasises that entering into such a flawed transaction will usually amount to "damage" from the Claimant's perspective so that time will run from this date. In this case the Court stressed that this will be so even if the Claimant is not financially worse off at this point in time. The decision is yet another example of the Courts' recent trend in finding that limitation starts to run when advice is acted upon rather than any later point when apparent financial loss is suffered. Especially given the huge financial losses generated by the recession, this is a decision that should be welcomed by professionals and their insurers.
Further reading: Pegasus Management Holdings SCA and Ivan Harold Bradbury v Ernst & Young (a firm) and Another [2010] EWCA Civ 181
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 19/03/2010.
