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R Dennis v HMRC

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In R Dennis v HMRC [2018] UKFTT 735 (14 December 2018), the FTT found that a rebalancing payment made pursuant to a shareholders’ agreement was not made under a guarantee and therefore did not give rise to an allowable loss (TCGA 1992 s 253).

Mr Dennis had entered into a joint venture with TAG Group Holdings SA (TAG) to develop and manufacture high quality electronic audio and audio-visual equipment. The joint venture vehicle was a UK company. Mr Dennis and TAG made their respective series of investments in the company by way of loans and subscriptions for ordinary shares and preference shares. After a few years, due to lower than expected demand and difficult market conditions, the company was wound up. Mr Dennis subsequently made a ‘rebalancing payment’ to TAG pursuant to the shareholders’ agreement (clause 10.3), as TAG had not received ‘satisfaction in full’.

The issue was whether the rebalancing payment was made under a ‘guarantee of a loan’ and therefore gave rise to an allowable loss for Mr Dennis. The FTT observed that there is an important distinction between contracts of guarantee and contracts of indemnity and quoted the Law of Guarantees: ‘It follows from the secondary nature of the [guarantee] obligation that the guarantor is generally only liable to the same extent that the principal is liable to the creditor, and that there is no liability on the part of the guarantor if the underlying obligation is void or unenforceable, or if that obligation ceases to exist. This is known as the “principle of co-extensiveness”.’

The FTT noted that clause 10.3 could only apply after the company had started the winding-up process and all distributions had been made so that there was no further recourse against the company. The rights of TAG against Mr Dennis were therefore sequential and not co-extensive and clause 10.3 did not create a guarantee.

Read the decision.

Why it matters: This case is a useful reference when deciding whether a guarantee has been created. It also confirms that in circumstances where a guarantee is a guarantee of all the company’s obligations, and some of those obligations arise in respect of loans, the guarantee is a guarantee of a loan for the purpose of TCGA 1992 s 253. There was however no guarantee in this case.

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