Duty to creditors considered

When those liabilities were factored in, the company had been operating at a net deficit since September 2005. The company was placed into insolvent liquidation. At the point of liquidation, the company’s liability for PAYE, NIC and interest exceeded £36million.

The liquidator brought various claims against the directors, including breach of duty claims for allowing payments to be made at a point where the company was insolvent. At first instance the judge held that it had not been established that the director knew or ought to have realised that the company was probably likely to be or become insolvent. The liquidator appealed in respect of the claim for breach of duty to creditors.

At appeal, Zacaroli J made an important distinction between this case and BTI 2014 LLC v Sequana SA [2022] UKSC 25. In Sequana, the company was solvent at the time the relevant dividends were paid, and the court had to consider whether the directors ought to have realised that the company was likely to become insolvent. In the present case, there was no doubt that the company was insolvent when the payments in question were made. The fact that the liability to HMRC was disputed (ultimately unsuccessfully) by the company did not make it a contingent liability. The liability existed throughout the period.

In allowing the appeal, Zacaroli J held that the first instance judge had applied the wrong test for determining whether the duty to creditors arose. The duty was triggered if the directors knew or ought to have known that there was at least a real prospect of the company’s challenge to HMRC’s claim failing. Had he applied that test, he ought to have held that the duty to creditors had arisen by at least September 2005. The question of whether the duty had been breached was referred back to the Insolvency and Companies Court for consideration.

Hunt v Singh [2023] EWHC 1784 (Ch)