The Extent Of The Creditor Duty – Liquidator’s Appeal Remitted To Be Reconsidered

Overview Of The Extent Of The Creditor Duty

The extent of the Creditor Duty was considered in a case where a Liquidator’s appeal was remitted to be reconsidered. That was the judgment of Mr Justice Zacaroli on 17 July 2023 in the matter Hunt v Singh [2023] EWHC 1784 (Ch). 

The Liquidator, Mr Hunt, appealed the decision in the case of Hunt v Balfour-Lynn & Ors [2022] EWHC 784 (Ch) which was considered in the earlier post Blowing The Embers Of A Long-Abandoned Fire – Liquidator Tax Avoidance Claim.

Appeal Based On The Extent Of The Creditor Duty

The appeal has its roots in the Creditor Duty following the Supreme Court Sequana decision.

That decision suggests that once a company is or is likely to become insolvent ie. it is probable, then the Creditor Duty is triggered.

The Creditor Duty means that in accordance with a Director’s Duties, a financially distressed company requires a Director to act with regard to the interests of creditors. 

The Liquidator appealed in respect of breach of duty in the period September 2005 to 2010. 

Shortly after Mr Hunt was granted permission to appeal the respondent went into Bankruptcy on his own petition.

Grounds Of Appeal

Getting down to brass tacks the grounds of appeal concentrated on the position that the judge of first instance was wrong to say the Creditor Duty had not arisen. Furthermore, if that ground of appeal succeeded then the appellant said the judge was wrong to conclude it would have made no difference.

The matter of the timing of insolvency was a relevant matter of consideration.

The Court said in this case there was no doubt that by September 2005 the Company was insolvent, owing in excess of £3.65 million for NIC and being without assets:

In contrast, in this case there is now no doubt that the Company was in fact insolvent (indeed substantially insolvent) throughout the relevant period. Having regard to the liabilities for NIC alone, it is established that by September 2005 (the start of the relevant period) the Company owed in excess of £3.65 million but had either no or negligible net assets from which it could pay that sum. Thereafter, the position got steadily and substantially worse as the amounts due to HMRC increased each year, but no assets were retained to cover the liability.

The Court said the Company’s dispute of the amount of the HMRC debt does NOT alter the insolvency position:

“A disputed liability is not a contingent liability. At the time (i.e. throughout the relevant period) there either was an actual liability to HMRC or there was not: see, for example, Integral Memory PLC v Haines Watts [2012] EWHC 342 (Ch), per Richard Sheldon QC, sitting as a deputy High Court Judge, at §32. In fact, as is now know, there was an actual liability.”

However, in this judgment knowledge (actual or constructive) of insolvency was considered relevant and the judge notably said:

In my judgment, assuming some element of knowledge is required, where a company is faced with a claim to a current liability of such a size that its solvency is dependent on successfully challenging that claim, then the creditor duty arises if the directors know or ought to know that there is at least a real prospect of the challenge failing.

…

Knowledge of a real risk that the company’s challenge to the claim may fail, therefore, equates to knowledge that it is the creditors that are potentially currently being affected by the directors’ actions and decisions.

Content Of The Creditor Duty

In this case, the Court said a Creditor Duty that has been triggered is the starting point of a breach of duty claim ie. it does not necessarily mean such a breach has arisen.

The content of the Creditor Duty was summed up as follows:

The extent to which directors should act with a view to protecting creditors’ interests is likely to vary significantly, for example, depending on what it is the directors are considering doing. For example, there is a world of difference between, on the one hand, (1) directors proposing to continue trading, notwithstanding the risks of making further losses and, on the other hand, (2) directors proposing to declare dividends of all available assets leaving nothing to pay the disputed liability in the event that it is a good one.

…

In my judgment, therefore, the judge – in deciding that the creditor duty was not engaged, essentially because the directors acted reasonably in taking and acting upon advice as to the merits of HMRC’s claim and as to what provision, if any, should be made in the Company’s accounts – applied the wrong test for determining whether the creditor duty arose. Had he applied the right test, then I consider that he should have held that the creditor duty had arisen at the latest in September 2005, and continued thereafter throughout the relevant period.

The second limb of Mr Hunt’s appeal relates to the judge’s conclusion that, had the creditor duty arisen, it would have made no difference. I can deal with this shortly. The judge, of course, did not have the benefit of the deliberations of the Supreme Court in Sequana on the content of the creditor duty. Albeit obiter, I consider that the nuanced approach there suggested ought to be followed. That requires consideration of a range of factors. In this case, the economic effect of the directors continuing the Scheme was materially the same as if salaries had been paid which gave rise to an arguable tax liability, but all remaining assets were routinely distributed by way of dividend to the shareholders, leaving nothing to pay that liability in the event that it was later established to exist. It is not sufficient, in my judgment, to conclude that there was no breach of duty on the basis simply that “there was repeated assessment of HMRC’s status”, which is the only reason given by the judge. The issue needs therefore to be reassessed in accordance with the Sequana test.

…

I will, therefore, remit the case to be reconsidered.

Depending on what happens in any reconsideration of this case the extent of the Creditor Duty may develop.

It appears reassuring the judge in this case noted the potentially concerning issue of Directors who might hoover up all of a company’s assets by way of dividends leaving nothing for creditors, whose claims although disputed are known about.

Disclaimer: The Extent Of The Creditor Duty – Liquidator’s Appeal Remitted To Be Reconsidered

This page is not legal advice and should not be relied upon as such. This article The Extent Of The Creditor Duty – Liquidator’s Appeal Remitted To Be Reconsidered is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Recent Posts / View All Posts

Write Off The Loan, Write In The Taxman 

Elliot Green | Director Transactions, HMRC, Liquidation | No Comments

There are occasions when tax law achieves something seemingly rather remarkable: it manages to be perfectly logical and yet may arguably produce some inconsistency at the same time. The recent…

Insolvency Practitioner Fees: When Nobody Can Mark the Homework The Judge Will

Elliot Green | Liquidation | No Comments

The recent Float Capital Ltd, In the Matter Of EWHC 1891 (Ch) judgment is not simply another decision about insolvency practitioners' remuneration. It is a reminder that where the normal commercial…

Liquidator’s Assignment Challenged On The Basis Of Validity Of Appointment

Elliot Green | Liquidation | No Comments

The case of Henderson & Jones Ltd v Chambers & Anor (Re Priors Group Ltd) EWHC 1152 (Ch) involved dismissal of a summary judgment application issued by the applicant who…

Liquidator’s Claim Defeated By Disclosure Difficulty

Elliot Green | Liquidation | No Comments

Disclosure is an important part of litigation. At its core, it serves to function as a means of furthering attempts at a fair trial. The consequences of inadequate disclosure can…