Save content
Have you found this content useful? Use the button above to save it to your profile.
Eclipse AccountingWEB The total Eclipse of the film industry
iStock_eclipse_JamesBrey

Eclipse investors fail to recover losses from HSBC

by

Investors in the Eclipse film partnership faced disappointment as their attempt to sue HSBC for alleged misrepresentation of the failed scheme was unsuccessful.

28th May 2024
Save content
Have you found this content useful? Use the button above to save it to your profile.

Many of us have followed the case of the Eclipse film partnerships, from the tax tribunals through to the Court of Appeal judgement which finally confirmed that they were not effective as tax deferral schemes. Eclipse has once again cropped up before the courts – this time in the High Court’s commercial division rather than, as before, in the taxation courts.

The case, Christopher Bernard Upham & Others v HSBC UK Bank plc [2024] EWHC 849 (Comm), concerns a number of investors in the Eclipse scheme suing HSBC as promoter of the scheme.

What was Eclipse?

Investors would join an LLP, borrowing around 97% of their capital contribution; the LLP would then be involved in the marketing of a Disney movie (the “studio film”) over a period of up to 21 years. This was brokered by an intermediary (Future Films, a firm with considerable film financing expertise and a presence in Hollywood) and operated through an agreement with “a marketing services provider (MSP), which was a special purpose company owned and controlled by Disney, and incorporated in England and Wales.

There was “an essentially circular movement of funds, all of which took place at the very outset of each Eclipse transaction”. Members’ capital contributions were used to pre-pay the interest on their loans; each year a member would receive an annual distribution which sufficed to service the loans and at the end of the licence period would receive a balloon payment enabling them to settle any outstanding loan balance.

There was the (arguably remote) possibility of additional “contingent receipts” should the films perform exceptionally well, but these formed no part in measuring the success or otherwise of the scheme.

Why did Eclipse fail?

The idea was that it would defer taxation: LLP members would have a substantial loss – and tax relief against general income – in year one, followed by minuscule profits in the intervening years and a large profit at the end.

Success in this, however, proved entirely dependent on one factor: whether the Eclipse LLPs were trading with a view to a profit.

Between 2009 and 2015 that question was considered by the courts, and at each stage the decision was that the LLPs were not trading. When, in April 2016, leave to appeal to the Supreme Court was refused, this became final.

Members who had claimed loss relief were assessed to recover the tax due, and late payment interest was charged.

Why sue now?

Mr Justice Bright summarised the complaint as follows:

  1. Members invested in reliance on representations that the structure of the scheme had been approved by a tax QC;
  2. Those representations were false, in that the structure of the scheme as implemented was materially different from the structure that was the basis of the QC’s advice;
  3. These false representations were made dishonestly and/or deceitfully; and
  4. HSBC knew, intended and was actively involved in all this.

Tax QC’s approval

The information memorandum for the scheme included counsel’s opinion from Mr Jonathan Peacock QC. This opinion included several requirements which would, in his view, need to be met for the LLPs to be seen as trading:

  • In the years following year one, an LLP should make at least a small profit – even though, due to their borrowings, the individual members may not.
  • Each LLP should devise and implement a marketing and release plan; this would involve making key decisions, documented in a detailed marketing strategy. To the extent that such activities were carried out by the MSP, it should clearly be acting as agents for the LLPs.
  • It was vital to institute and retain proper documentary evidence, to ensure that the MSP would be able to demonstrate that it actually undertook the role assigned to it.
  • To substantiate the evidence of trading “it is important that each [LLP] monitors the income flow from the licensing and exploitation of the Studio Film and actively considers the suitability of other acquisitions”.

From the chronology, it was clear that counsel’s opinion was rolled out to prospective investors and their independent financial advisors (IFA) before it was clearly established that the success criteria he had specified had been met. Ultimately, they were not.

Materially different?

The MSP did not devise or implement a marketing plan and did not make key decisions. All such decisions were taken by Disney, and all the MSP did was monitor and report back to the LLPs. Detailed records were not made or preserved by or for the LLPs.

This was because Disney “was adamantly opposed to” any agency agreement and removed any notion of agency from the final agreement between the LLPs and the MSP. 

The judge assumed “that Disney took this course because, if the MSP had been a true agent of the LLP and owed it fiduciary duties, it … would have favoured the interests of the LLP and would have exerted itself on the LLP’s behalf.” Instead, the MSP as a wholly owned Disney entity staffed by Disney/Buena Vista employees acted in Disney’s interest.

The role of the LLPs was essentially passive, and not trading.

Dishonesty or deceit?

The judge, on reviewing the vast store of evidence, concluded that HSBC had attempted to bring about a situation which would fulfil counsel’s requirements. They were primarily reliant in this endeavour upon Future Films.

It is arguable that, as matters proceeded, individuals at Future Films became aware that counsel’s criteria would never be adequately fulfilled. However, “there is no indication that [such a realisation] was ever brought to the attention of … anyone … at HSBC”. Not to mention the fact that the claimants were suing HSBC, not Future Films.

The judge was clear that counsel’s opinion, as presented to potential investors and IFAs, was precisely that: a statement of opinion, and not one of fact. HSBC “had reasonable grounds for the matters of expectation and opinion to which the representations related, and they were not dishonest.”

The judge’s conclusions

The claims of all the claimants failed, essentially for the following reasons:

  • They “failed to analyse properly the legal significance of the statements made to them before they invested in Eclipse.”
  • The statements relating to counsel’s opinion did not constitute misrepresentations. HSBC “had reasonable grounds for believing that the scheme as implemented was consistent with the basis on which Mr Peacock QC had advised.”
  • Neither Future Films nor HSBC was dishonest.

Last words

As ever, a blithe reliance on counsel’s opinion in a tax scheme has failed to help unsuccessful investors seeking redress for their losses.

Mr Peacock QC set out matters which would need to be ensured for the scheme to succeed; no one ultimately relying on his opinion appears to have tried to find out whether his requirements were met.

It would have been better if everyone concerned had waited until those criteria had been fulfilled before marketing or adopting the scheme. To proceed upon an “if” might well be seen as imprudent.

Tags:

Replies (12)

Please login or register to join the discussion.

avatar
By Paul Crowley
28th May 2024 16:51

The type that gets involved with this type of tax scam always look to blame someone else.
They and their advisors deserve no sympathy from the the honest tax payer.

Thanks (14)
By ireallyshouldknowthisbut
28th May 2024 18:55

1. Members invested in reliance on representations that the structure of the scheme had been approved by a tax QC;
2. Those representations were false, in that the structure of the scheme as implemented was materially different from the structure that was the basis of the QC’s advice;

Every single dodgy scheme I have seen does this. Attach a QC report which in itself is probably very thin indeed on the basis that those in the legal game will claim almost anything can be argued, to a situation removed from it.

Thanks (6)
avatar
By FactChecker
28th May 2024 22:18

We all laugh up our sleeves at the stupidity of avaricious fools being parted from their money - as per:
"Mr Peacock QC set out matters which would need to be ensured for the scheme to succeed; (but) no one ultimately relying on his opinion appears to have tried to find out whether his requirements were met"

But that same 'I've paid for top advice so I must be in the clear' attitude is what you'll encounter amongst most HNW individuals talking about their appointed Accountant (or Auditor or Financial adviser or ...).

So who is more 'at fault' ... the gullible (who want to believe that they've purchased indemnity) or the professionals (who all too rarely disabuse their clients of that notion)?

Thanks (8)
By jon_griffey
29th May 2024 08:36

An obvious way to deal with the tax scheme industry would be to make everyone in the chain jointly and severally liable for the tax lost. That would soon put a stop to it.

Thanks (6)
Replying to jon_griffey:
avatar
By Justin Bryant
29th May 2024 09:29

Eh? There was no tax lost here.

Thanks (0)
Replying to Justin Bryant:
By Ruddles
29th May 2024 22:24

You’ve missed the point.

Thanks (0)
Donald MacKenzie
By Donald MacKenzie
29th May 2024 08:50

The QC appears only to have set out what would need to be done to be "seen" as trading. This entity was a facade to be "seen" as trading, but in reality entirely intended to save tax with no real commercial activity.

HMRC are right to go aftert outfits that only can be "seen" as trading but with no actual trade. Unless there is real trade, (commercial actions such looking for new ideas or markets, keeping records, some degree of risk etc) all these tax based schemes should be closed down.

Thanks (5)
avatar
By petestar1969
29th May 2024 09:42

So, the rich fools failed to defer (not avoid or save) tax using this blag and have now failed in an, no doubt, expensive attempt to sue HSBC. Excuse me while I LOL!!!

Thanks (3)
Replying to petestar1969:
paddle steamer
By DJKL
29th May 2024 10:03

The catch here is it is very hard to be rooting for a bank as the "good guy":-

one ,because they are a bank (say no more),
two, because they were flogging the product so are hardly innocents.

Thanks (1)
Replying to DJKL:
avatar
By petestar1969
29th May 2024 12:44

Well, that's true. Still funny, though.

Thanks (0)
avatar
By SuperAccountingSteve
29th May 2024 16:05

Seems like it was a Mickey Mouse implementation of the scheme.

Thanks (3)
By tonyaustin
30th May 2024 17:33

No surprise there. A good many schemes work in theory but fail on implementation, which is usually impossible in practice for commercial reasons but that's not realised until it's too late

Thanks (0)