The long awaiting decision handed down by the Supreme Court in BTI 2014 LLC v Sequana SA analysed to what extent (if any) a duty to creditors is owed and, if such a duty arises, when does it arise.
Although the Supreme Court decided that directors do have a duty to take into account the interests of creditors, the scope of when that duty arises is still very much up for debate and discussion. The Supreme Court took a view that the duty to creditors will be engaged when a company is insolvent and the more insolvent the company is, the more weight should be given to the interests of its creditors. The Sequana decision also provided that the scope and extent of the duty will be something for submission on a case-by-case basis.
In one of the first cases to consider the issues raised in Sequana, Mr Justice Zacoroli has handed down his decision in Hunt v Singh (17 July 2023) [2023] EWHC 1784 (Ch), where he allowed the appeal of Stephen Hunt, the liquidator of Balfour-Lynn and others – Re Marylebone Warwick Balfour Management Limited (in liquidation) (“Marylebone Warwick”), to overturn the lower court’s decision where the liquidator’s claims against Mr Singh (the respondent director) were dismissed.
The case concerns the Marylebone Warwick’s use of a tax avoidance scheme, aimed at remunerating directors whilst avoiding paying PAYE and National Insurance Contributions. Without going into significant detail on the court’s approach to the use of tax avoidance schemes, the Supreme Court held in the Rangers decision that the use of such schemes, aimed at remunerating employees (often called Employment Benefit Trusts) but avoiding paying PAYE or NIC, is not lawful and therefore the intended purpose of the tax avoidance scheme has not been achieved, as the tax should be paid.
Following the Rangers decision, there have been a number of cases commenced by liquidators of companies where tax avoidance schemes have been used, with the liquidator seeking to recover from the directors the tax monies that should have been retained by the company and paid to HMRC and also (in most cases) a claim that the directors causing the company to enter into the tax avoidance scheme is a breach of duty. Marylebone Warwick is a similar case.
The liquidator’s claim, on first instance, failed as the court found the company’s duty to creditors was not engaged (at the time the schemes were entered into) and the directors acted reasonably by taking advice on the company’s use of the schemes and how they should be provided for in the company’s accounts.
Despite the advice the company was receiving, HMRC notified the company (at the material times) that if the payments under the schemes were earnings, then NIC and PAYE would be payable (which the Rangers decision subsequently clarified).
The liquidator appealed as against Mr Singh on the issue of Mr Singh’s breach of the creditor duty.
As noted in Sequana a duty to consider the interests of the creditors will arise “when the directors know or should know that the company is or is likely to become insolvent … In this context ‘likely’ means probable.”
Given the company’s continued use of the schemes, over a number of years, which created a significant (contingent but arguable) liability to HMRC, when at the same time the company did not have the means to meet that liability if and when it became due, the creditor duty had arisen and therefore the liquidator’s appeal was allowed.
The court has therefore allowed the appeal and has ordered that the case be remitted for certain aspects of it to be reconsidered, including the full effect of Sequana.
Given Mr Singh is bankrupt, it remains to be seen whether the case will be fully and properly reconsidered. However, the court analysis on the application of contingent liabilities at material times (and thus the need to properly and accurately consider a company’s balance sheet) is a welcomed clarification following Sequana.
