English court considers directors' "creditor duty" in context of failed tax avoidance scheme

In Hunt v Singh, the Court referred to the Supreme Court's landmark decision in BTI v Sequana (see our alert) in deciding when the directors' duty to creditors arose. 

Background

Marylebone Warwick Balfour Management Limited (the Company), entered a tax avoidance scheme between 2002 and 2010 which the directors, on professional advice, believed to be valid. 

In 2005, HMRC made an offer to settle the Company's liability of £3.65 million which it rejected. In 2012, the Court of Appeal held that HMRC was entitled to payments that had been avoided under a similar scheme. The Company's liability to HMRC now exceeded £36 million and it was placed into liquidation.

The liquidator of the Company brought claims against several former directors for breach of the creditor duty, the claim against Mr Singh proceeded to a hearing. 

Decision

• The court noted that in Sequana, at the time the relevant dividends were paid, the company was solvent, in contrast here the Company was substantially insolvent during the relevant period.
• Where a company is faced with a liability of such a size that its solvency is dependent on successfully challenging a claim, the creditor duty arises if directors know or ought to know that there is at least a real prospect of the challenge failing.
• By 2005, there was a "real risk" that the Company, whose assets were negligible, was insolvent and the directors ought to have been considering the interests of creditors.

What does this mean for directors?  

Directors should not ignore the interests of creditors because a liability may be successfully challenged. If such a liability would leave a company insolvent, then directors should consider the creditors, make reasoned decisions on the prospect of success of a challenge and seek professional advice.

Find out more 

Our Restructuring & insolvency team acted for parties in early stages of these proceedings and is therefore very familiar with the law in this area. To discuss the issues raised in this case in more detail, please contact a member of our team.

Hunt v Singh [2023] EWHC 1784 (Ch)

Also featuring in this month's update:

• Favourable changes on the horizon for debtors in the Czech Republic
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• English Court of Appeal finds bankruptcy trustees are not required to act in the interests of creditors at all costs 
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• Requirement to substantiate German debtor's illiquidity remains high 
  Dr Rembert Graf Kerssenbrock reviews a recent decision of the District Court of Hamburg on the requirements to substantiate a “third-party application” for the insolvency of the debtor on grounds of illiquidity.

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