31 January 2020

Development Securities: what directors of Jersey companies should continue to do

Don’t worry, this isn’t another briefing that anxiously sets out new standards of corporate governance required as a consequence of the recent Development Securities judgments. On the contrary, our view is that those English judgments tell us little about corporate governance of Jersey companies that was not already known, and in fact support our long-held view that what some may see as corporate governance ‘best practice’ should instead be considered as the ‘only practice’.

Key points

The key points that come out of the Development Securities judgments in a corporate governance context are as follows:

  • A court may examine pre-incorporation planning in determining whether a company’s board was operating on an ongoing basis or to undertake another’s plan: future board members should be sufficiently involved.
  • The court may review board minutes and handwritten notes of board minutes: avoid conflicting records and prepare long form draft minutes in advance.
  • The court may be critical of material matters discussed in board meetings not being recorded in board minutes, and of directors not being sent relevant emails or spending sufficient time considering matters: again, prepare long form draft minutes in advance and, where meetings must be held at short notice, company advisers can attend the meeting to brief directors.
  • It could be argued before the court that directors with numerous directorships were not abreast of and focused on relevant transactions.
  • Shareholder resolutions authorising directors’ actions may be the subject of lengthy arguments and comprehensive analysis: they can be authorisations but not instructions.
  • Provided a Jersey company’s directors exercise proper judgment, its central management and control does not vest in its sole parent even where it carries out the purpose for which it was set up in accordance with the intentions, desires and even instructions of the parent.
  • Directors of a Jersey company that is a wholly-owned special purpose vehicle and which is to enter into a transaction that does not prejudice its creditors act in the best interests of the company where they act in the best interests of the company’s sole shareholder.

Further details follow.

What are the Development Securities judgments?

The Development Securities judgments are three judgments of the UK Tax Tribunal, a first instance judgment and two appeals, which looked at whether three Jersey companies (the “Jcos”) were tax resident in the UK at the time they entered into certain transactions. It is the two appeal judgments that are of most interest in a corporate governance context, being:

  • Development Securities v HMRC [2017] UKFTT 0565 (TC) (the “First Appeal”), rejecting the taxpayer’s appeal to the First Tier Tribunal against a decision of HMRC in respect of various CGT capital loss relief provisions; and
  • Development Securities v HMRC [2019] UKUT 169 (TCC) (the “Second Appeal”), a further appeal, to the Upper Tribunal, which overturned that earlier decision but did not undermine the importance of the corporate governance points raised in the First Appeal.

Summary of background facts

A summary of background facts is as follows:

  • The three Jcos were incorporated as part of a scheme to crystallise latent capital losses in UK real estate. Each had a board consisting of two Jersey professional directors and one client UK director. Board meetings were held in Jersey. The Jcos were intended to be Jersey tax resident at the relevant time (and on the Second Appeal this was found to be the case).
  • Under the scheme, the Jcos acquired assets at an undervalue under call option agreements while Jersey tax resident and then became UK tax resident before disposing of the assets. This would mean that for UK tax purposes the Jcos would suffer a loss as between the acquisition price (base cost plus indexation) and the sale price (market value).
  • The directors were not comfortable that entry into the transactions forming part of the scheme was in the best interests of the Jcos. As a consequence, the shareholders of each Jco passed resolutions (together the “Shareholder Resolutions”) confirming that entry into the call option agreements was in the best interests of the relevant Jco and authorising the directors to enter into, execute and deliver those agreements, under a specific provision of the Companies (Jersey) Law 1991 (“CJL”). That provision provides for a ‘whitewash’ process by which no act or omission of a director is treated as a breach of statutory duty, including the duty to act “…with a view to the best interests of the company”, if all the members of the company authorise or ratify the act or omission and after the act or omission the company will be cash-flow solvent.
  • One of the professional directors estimated that he was a director of at least 40 to 50 client companies of various types and would attend about 25 to 30 board meetings each month.


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