Creditor’s duty
In the recent case of Hunt v Singh, the court considered the question as to when a director’s duty to take into account the interests of creditors arises as the Supreme Court has done in the case of BTI 2014 LLC v Sequana SA. However, in the case of Hunt v Singh, the court not only considered the decision in Sequana but distinguished it.
It is important to remember that the so-called “creditor duty” is a duty that a director owes to the company to consider the interests of creditors (as opposed to just the interests of the company’s shareholders) and the question that the court considered in Hunt v Singh was when that duty arose.
Once the creditor duty arises, it is important to remember that the director does not necessarily have to treat the creditors interests as paramount, as it depends on the particular circumstances and whether the company is sufficiently weak financially so as to make the economic interest in the company shift to the creditors.
Facts of the case
In Hunt v Singh, the company in question, Marylebone Warwick Balfour Management Limited entered into a conditional share scheme in 2002. The scheme was recommended by the company’s tax advisers to enable senior staff to receive payments, structured as non-contractual gratuitous bonuses, without becoming liable to pay PAYE and NIC to HMRC.
HMRC investigated these schemes and by 2004 confirmed that they believed such schemes were in reality earnings attracting PAYE and NIC and by 2005 HMRC made a market-wide offer to participants of these type of schemes to settle the matter, which the company rejected.
The company continued to operate the scheme and by 2010 had paid over £54 million to senior managers and directors.
After litigation commenced by HMRC challenging these schemes and an appeal in 2010 that ruled PAYE and NIC were due on payments made under the schemes, the company stopped operating the scheme and went into liquidation after a financial downturn in 2013, with HMRC claiming £38 million from the company.
The decision
The liquidator brought claims against the former directors for breach of the creditor duty.
In June 2023 the High Court considered and distinguished the Sequana case as the company’s liability to HMRC was an actual liability whereas in the Sequana case the company faced a contingent liability.
The company’s liability to HMRC was not a contingent liability because a disputed liability was not a contingent liability but an actual liability.
The question that the High Court had to decide was therefore whether insolvency alone was sufficient to trigger the creditor’s duty or was it necessary for the directors to also have knowledge of the company’s insolvency.
Since this question was not answered in the Sequana case and the point not argued in this case, the court held that if the directors knew, or ought to have known, that there was a real prospect of the dispute failing, the creditor duty would arise. On the facts the judge held that the creditor duty would have arisen in 2005 when HMRC made the market-wide offer to settle the issue, and continued until the company went into liquidation.
Key takeaways
The key message for directors is that once they become aware of a claim or other liability (including any tax mitigation scheme) that would result in the insolvency of the company if not successfully challenged or defended, the directors must assess the claim or liability and keep it under review. If there is a real risk of the challenge or defence failing, the directors are likely to come under a duty to consider the creditors interests when making decisions.
Faced with such a claim or liability that could drive the company into insolvency, the directors should take professional advice early on and impartially evaluate the risk.
For good practice directors should hold board meetings to discuss and address a claim or liability likely to present a threat to the company’s solvency and to keep detailed board minutes of each such meeting.
If you need any advice on these type of insolvency issues, please do not hesitate to contact us.
