Removal Application Fails But Conflict Liquidator Being Parachuted In For HMRC Tax Appeal

Change of Liquidator by the court does not require evidence of misconduct but that it is deemed desirable for the Liquidator to be removed.

The matter of Microcredit Ltd v Rosler [2021] EWHC 1627 (Ch) is an interesting case involving an application to remove a Liquidator that came before Deputy ICC Judge Baister. It did not result in a change of Liquidator.

It is not a particularly lengthy judgment that is probably worth swallowing whole. The case touched on a number of connected issues:

• The suggested desire of the Liquidator to earn fees and the fee approval
• Adjudication of creditor claims
• HMRC discovery assessments
• HMRC tax appeal
• Change of Liquidator

Application For A Change Of Liquidator

The application for a change of Liquidator was brought by a creditor of Microcredit Limited (“the Company”) in Compulsory Liquidation which was a payday lender.

The key issue in this application was summarised in the judgment as follows:

The principal bone of contention between the parties is that the applicant believes that there is good reason to appeal HMRC’s assessments, on the basis of which they are creditors in the liquidation, while the liquidator believes there is not. Malta complains that the liquidator has set his face against the possibility of an appeal because it suits his purposes to leave the HMRC debts unchallenged: he can prosecute the claim against the Malta parties without hindrance and generate fees for his own benefit. That, Malta says, warrants removing him from office. The applicant, on the other hand, has a real interest in seeing off HMRC as a creditor. It does not put the matter as bluntly as I shall, but if HMRC go away Malta will be the only significant remaining creditor and will be able to say to the liquidator that there is little or no purpose in his pursuing the claim against the Malta parties (said to be worth £13m) when Malta can pay off the few remaining creditors and, I imagine, withdraw its own claims; even if I am wrong in my presumptions, at the very least the quantum of the substantive claim would be affected since it would be odd if the liquidator on behalf of the Company could legitimately recover from the Malta parties more than was necessary to pay the creditors (other than HMRC if there is a successful appeal) and the proper costs and expenses of the liquidation.

The HMRC Discovery Assessments

The HMRC discovery assessments arose after HMRC had withdrawn their claim in the Liquidation and paid money over to the Company, notwithstanding being responsible for the winding up petition that led to the Company being placed into Liquidation.

The circumstances in which the discovery assessments came about appears to have caught the attention of ICC Judge Baister who noted that they arose after the Liquidator, Mr Rosler, had initially pursued a claim against HMRC in respect of Terminal Loss Relief (“TLR”).

The Liquidator says that he became aware that the TLR was rooted on a flaky premise and as a result, Corporation Tax appeared to him to be due. It seems that the Liquidator contacted HMRC and ICC Judge Baister expressed some reservations about the:

enthusiasm with which the liquidator appears to have encouraged the claims of iTax and HMRC

However, the judge did not suggest that meant that a change of Liquidator was warranted.

It could conceivably be inferred that the judge’s suggested enthusiasm perhaps might be seen from the following extract in the judgment:

On 9 March 2020 the liquidator contacted Mr Stuart Mee of HMRC. Mr Mee’s attendance note records that the liquidator wanted “HMRC to review the terminal loss claim to see if it can be reinstated,” because “If this can be done then it will give him a reason to go back to Court and HMRC may well end up with some money.” Time, it seems, was of the essence because the liquidation had been open for five years (which I take to mean the liquidator had in mind a possible six year limitation period). I was taken in detail to the ensuing correspondence from 24 March 2020 which culminated in HMRC’s doing just what they were invited to do, in spite of initial reservations on the part of Mr Mee and an unidentified internal HMRC accountant about going along with the suggestion. On 19 August 2020 Mr Mee capitulated in the face of the liquidator’s persistence (or he saw the light, depending on your point of view):

“At some point in time I have to draw a conclusion based on the balance of probabilities, and I believe now is that time. As a result, it is my view that corporation tax assessments on all the company’s profits need to be put in place,”

which is exactly what happened. I pause here to remind myself that a large part of Mr Foster’s submissions went to the inadequacy of the basis of the discovery leading to the raising of the assessments or part of them.

Appointment Of Conflict Liquidator Preferred To Change Of Liquidator

The Court decided that the current Liquidator could not dispassionately consider the HMRC Tax appeal against the discovery assessments but acknowledged that a considerable amount of work had been done and which might be duplicated if a complete change of Liquidator were to result, in respect of claims that had been issued by the Liquidator which were summarised as follows:

the liquidator has issued an application against Malta, Mr Valdmann and his brother challenging a number of transactions entered into by the Company by which it transferred its right to receive income from its loan book to Kapama and the benefit of realisations arising under that agreement to Malta for £50,000, seeking, variously, repayment of an overdrawn loan account, alleging breach of trust and knowing receipt, and relief under ss 239 and 423 Insolvency Act 1986.

As a result the Court came up it seems with a compromise as follows:

If it would not be right “to remove him altogether,” I do, however, think that someone other than the present liquidator needs to form a dispassionate but definitive view of the prospects of a late appeal against HMRC’s assessments and (for the reason advanced by Mr Foster) prosecute such an appeal if that person forms the view that the prospects of success warrant doing so. The present liquidator cannot consider the possibility of an appeal dispassionately in circumstances in which he made the TLR claim and then took steps to reverse it; and for the reasons advanced by Mr Foster he could not make out a case for an extension of time. The appointment of a “conflict liquidator” for those limited purposes will not eat into any remaining assets, given that Mr Valdmann has said through Mr Comiskey that he will meet the costs (which in my view must include providing an adequate indemnity for any adverse costs if an appeal proceeds). There appears to be precedent for my suggested course: see Clements v Udal [2002] 2 BCLC 606 and Re Comet Group Ltd [2018] EWHC 1378 (Ch), to which I refer for the mechanics of an appointment and not because I suggest that the reasons for my decision reflect those in either of those cases. It may be that the appointment of a conflict liquidator should be not only for the limited purposes I have described but also for a limited time.

Observation: Change of Liquidator

This case raises an interesting point as to how far is to be considered too far to merit a change of Liquidator, particularly when an officeholder is engaged in handling an area in which he or she might conceivably have competing duties. However, it can lead to a catch 22 position.

HMRC raises discovery assessments, not the Liquidator.

The Court expressed reservations about the Liquidator’s enthusiasm to encourage claims from HMRC and another creditor. There was no determination of the HMRC discovery assessments. The duty of a Liquidator is to be vigorous, efficient and unbaised.

Taxpayer Duty To HMRC For The Liquidator

A Liquidator has a duty to come clean to HMRC as he or she steps into the shoes of the taxpayer. See the case of Nicholson v Morris (H.M. Inspector of Taxes)(1) (1973-1978) 51 TC 95:

“It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, ‘Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.’ That is not a duty on the Revenue. If it were, it would be a very onerous, very costly and very expensive operation, the costs of which would of course fall entirely on the taxpayers as a body. It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean, and if he gives no evidence whatsoever he cannot be surprised if he is finally lumbered with more than he has in fact received. It is his own fault that he is so lumbered.”

Misfeasance By The Liquidator

The line can be difficult because of what can happen if a Liquidator does not go far enough. An example of that might be seen in the case of Top Brands Ltd & Ors v Sharma & Ors [2014] EWHC 2753 (Ch) in which there was a change of Liquidator. It was a case in which a Liquidator was sued for misfeasance or breach of duty and came in for criticism:

GS’s evidence is that she did write to HMRC to ask whether HMRC was a creditor for VAT and was told that there was no liability. What GS plainly did not do was inform HMRC of the substantial trading apparent from the documents provided to her. By 30.8.11 MML should have prepared a VAT return for the quarter to 31.7.11; Mr Tariq did not provide such a return and GS did not ask for it nor, so it would seem, did she turn her mind to what it should or might contain.

…

In my view, there is simply no evidence that GS engaged in the liquidation of MML with the enquiring mind reasonably to be expected of an ordinary, skilled insolvency practitioner. Mr Morgan’s characterisation of GS’s conduct as ‘slipshod’ and ‘slapdash’ is entirely fair.

…

On my findings, the Sum, which should have been available for distribution to creditors, was paid out in two tranches by GS to third parties in circumstances where, (1) inadequate steps were taken by GS to ascertain MML’s state of affairs at liquidation, (2) inadequate, if any, consideration was given by GS to the material available as to MML’s trading, assets and liabilities, (3) no attempt was made by GS to obtain important missing information, (4) inadequate instructions were given by GS to the solicitor, KT, who advised that repayment could be made, (5) inadequate thought was given by GS to new circumstances and evidence as they presented themselves to GS, (6) inadequate enquiries were made by GS as to the payees of the Sum before payment, and (7) GS failed to notice, before making payments out, that the indemnity in fact obtained was not in the required form

Had GS acted with the care and diligence to be expected of an ordinary, skilled insolvency practitioner (1) the Sum would have been retained within her Barclays account for the benefit of MML; (2) before reaching any conclusions, GS would have reconstituted MML’s trading records by, at the very least, obtaining and analysing a complete set of bank statements (not an onerous task given the relatively short period of trading); (3) supporting documentation would have been obtained from creditors (As) and customers (SERT) presenting themselves to GS and collated and considered; and (4) any competent insolvency practitioner would then have realised that (a) VAT had not been accounted for, (b) As had a recent but active history of trading with MML as suppliers, and (c) SERT had an active history of trading with MML and was its most significant customer. This would have prompted further investigations, very different instructions to KT, and, very possibly, an application to the court for directions. What would not have happened was the loss of the Sum before the true position as to MML’s trading, assets and liabilities had been enquired into by the liquidator, let alone established.

Inviting Creditors To Prove

In the case of Pulsford v Devenish [1902 P. 2037] – [1903] 2 Ch. 625 the following was held to be a duty in relation to creditors and the invitation to prove:

The defendant took no steps whatever to ascertain the claims of any creditors against the old company except by inserting advertisements in six London newspapers. He knew of the existence of this claim by the plaintiffs for the payments under the licence; but he says he did not know, and I accept his statement, of the existence of the claim for the lamps. If, however, he had performed that which I consider to be the duty of a liquidator, namely, not merely to advertise for creditors, but to write to the creditors of whose existence he knows, and who do not send in claims, and ask them if they have any claim, he would undoubtedly have received a claim, not merely for the instalments payable under the licence, but also for the purchase-money of the lamps.The advertisement itself is of a most unusual nature, the earliest appearing in a paper of April 20, 1901. It requires all the creditors to send in their claims by May 25, 1901, giving them very little more than a month, on peril of being excluded altogether. Now the defendant has told me that he did not pay one single creditor, that he took no steps whatever to see to the payment of any creditors of any sort, but left everything to the new company, and trusted entirely to their covenant of indemnity, and proceeded to call the final meeting of the old company, which would involve dissolution at the end of three months, without inquiring whether the new company had paid all the debts or not. He received, moreover, the consideration from the new company as liquidator for distribution among the shareholders of the old company, and he did so distribute it, and as a shareholder himself he received 2943 shares, which were nominally at par at the time, although not saleable to any extent. A more gross dereliction of duty by a liquidator I have seldom heard of.

Asset Creating Liquidator Deserves A Pat On The Back

In the case of Walker Morris v Khalastchi [2001] 1 BCLC there was a reference to the ‘asset creating’ Liquidator deserving a ‘pat on the back’ when it was proposed that disclosures be made to HMRC to investigate its claim in the insolvency:

(1) The starting point is that the files are the property of the Company, and the Liquidator is entitled to possession of them. The applicants have no right whatsoever to withhold them.

(2) A liquidator’s duty is to investigate the affairs of the Company, and there is an obvious and urgent need for him to investigate the capital gains tax situation. The applicants’ conduct has already resulted in delay of nearly a year. Mr Khalastchi’s initial request should have been answered much more quickly, and the documents should have been handed over to him so that he could get on which his investigations, with a request for an undertaking that he should disclose nothing to the Inland Revenue pending the decision of the Court on this application; if such a request had been refused, an application for an interim direction could have been made.

(3) It is for a liquidator to decide whether to make a voluntary disclosure of the Company’s documents, whether privileged or not, to third parties. If he needs guidance as to where his duty lies, he can apply to the Court for directions. Otherwise, there is no reason for the Court to interfere unless there is reason to fear that he proposes to act in a manner which is not in the Company’s interests or is otherwise improper.

(4) I can see no way, and Mr Moss has been unable to suggest any way, in which the Company’s interests could be harmed by the disclosure of documents in these files, whether subject to legal professional privilege or not, or of information derived from these documents. That is because the Company has no assets and the addition of another claim by the Inland Revenue, however large, therefore cannot damage its position or that of its existing creditors.

(5) However paradoxical this may seem, it may be for the benefit of the Company and its creditors that the Inland Revenue’s claim if valid should be assisted, so that it is worth its while to finance proceedings to recover the dividend and thereby produce a fund which is sufficient to enable the creditors (including the applicants) to recover all or part of their debts. In that situation, Mr Khalastchi might well consider it to be in the interests of the Company and the creditors to disclose documents including privileged documents to the Inland Revenue. Mr Moss criticises this as “attempted asset creation”, but it seems to me that Mr Moverley Smith’s response, that an asset-creating liquidator deserves a pat on the back, is correct.

(6) It is also possible that he may consider that he has a legal duty to disclose some of the documents (although probably not privileged documents) or that, if he does not, the Inland Revenue will be able to exercise its powers to obtain them so that to withhold them would cause needless trouble and expense.

(7) It being thus clear that there are circumstances in which Mr Khalastchi could properly disclose documents to the Inland Revenue, his refusal to give an undertaking not to do so without an order of the Court is in my view entirely reasonable. There is no reason whatsoever to disbelieve his statement that he will review them “with the utmost propriety” before deciding whom to consult and what action to take. There is no reason to apprehend impropriety; Mr Khalastchi is entitled to decide for himself whether he needs to ask the Court for directions.

The above addresses most of the matters put forward in argument, but I should deal specifically with three submissions.

First, it was submitted that Mr Khalastchi owes a duty to the Court and to the other creditors to act “fairly” and that this involves an obligation to resist disclosure to the Inland Revenue, which might prejudice the creditors’ position. I do not accept this submission. Mr Khalastchi’s duty is to act in the interests of the creditors (including the Inland Revenue) and of course with propriety. As I have sought to show earlier, disclosure could not prejudice or disadvantage creditors and might benefit them. Mr Khalastchi has no duty to act fairly to the applicants’ clients, who have no interest in the liquidation and may be debtors of the Company.

Secondly, it was submitted that the undertaking sought from Mr Khalastchi involved no disadvantage, that the refusal to give it conveyed an impression that he was not holding an even balance between the Revenue and the other creditors and that the safeguard of an application to the Court was therefore needed. It rarely advances a claimant’s case to show that an undertaking unreasonably demanded, as in my view this one was, involved no disadvantage; in any event, this did involve a disadvantage, namely the cost and loss of time involved in applying to the Court. It is for Mr Khalastchi to decide if he needs the guidance of the Court and there was no justification in seeking to impose such a safeguard on him. In any event, there is no balance to be held as between the Inland Revenue and the other creditors as creditors; their interests as creditors are the same.

Thirdly it was submitted that there was a danger that by collusively admitting the Inland Revenue’s claim when it ought not to be admitted, Mr Khalastchi may manufacture a claim against the applicants’ clients. I can see no such danger. The applicants’ clients would not be bound by an admission by Mr Khalastchi. They would only be liable if proceedings brought against them were successful; they would have every opportunity in any such proceedings to contend that his Inland Revenue’s claim was invalid and should not have been admitted. In any event there is again no justification for assuming that there is any risk of Mr Khalastchi admitting the Inland Revenue’s claim collusively or otherwise improperly.

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