In May 2019 the liquidator of Marylebone Warwick Balfour Management Limited (“MWBM”) commenced proceedings against seven former directors in relation to their operation of a complex tax avoidance scheme. MWBM had paid over £54 m to its senior management via the scheme in circumstances in which PAYE and NIC would have been payable had those sums been treated as remuneration. Shortly after HMRC became aware of the scheme, enquiries were raised and HMRC ultimately assessed MWBM for PAYE and NIC, including interest and penalties, in excess of £36 m. That sum went unpaid and MWBM entered liquidation.
The liquidator claimed that the use of the scheme amounted to a breach of the respondents’ fiduciary duties and/or that payments made under it were transactions defrauding creditors within the meaning of s 423 Insolvency Act 1986. In a decision handed down in April 2022 (Hunt v Balfour-Lynn & Ors [2022] EWHC 784 (Ch)) ICC Judge Prentis dismissed the claim in its entirety. With respect to the breach of duty claim, he held that the scheme had been entered into for genuine commercial reasons. He also took into account the fact that the respondents had relied on professional advice, provided in large part by BDO, who were both the promoters of the scheme and MWBM’s accountants. At all material times BDO had referred to the scheme as “robust”. With respect to the s 423 claim, the ICC Judge held that “purpose” had to be distinguished from “consequence”. The fact that moneys were put beyond the reach of HMRC was a consequence of the scheme but not its purpose.
Prior to trial the liquidator had settled with several of the respondents. A further respondent settled after permission to appeal was granted. The liquidator continued the appeal against one respondent only, Jagtar Singh.
Zacaroli J (whose decision is reported as Hunt v Singh [2023] EWHC 1784 (Ch)) framed the issue before him in the following terms:
“The principal question raised by the appeal is when, following the decision of the Supreme Court in BTI 2014 LLC v Sequana SA, does a director’s duty to take into account the interests of creditors arise, in circumstances where the company is at the relevant time insolvent, but its insolvency is due to a tax liability which the directors (wrongly, as it later turned out) believed at the relevant time had been avoided by a valid tax avoidance scheme entered into by the company.”
Of some importance to Zacaroli’s J’s reasons for allowing the appeal was that ICC Judge Prentis had proceeded on the basis of the test set out by the Court of Appeal in Sequana by David Richards LJ, as he then was. As Zacaroli J said, “The Court of Appeal’s decision on that issue must now be read in light of the decision of the Supreme Court in the same case.” It is unsurprising, therefore, that much of his judgment on the appeal takes the form of a forensic examination of the Supreme Court’s approach to the creditor duty issue and the extent to which it applied in the case before him. He concluded that the focus of the Supreme Court had been on the time before the company in that case was actually insolvent when the creditor duty arose.
“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.”
This, in his view, was crucial: the fact that MWBM disputed that anything was due to HMRC did not change the fact that it was objectively insolvent at the relevant time:
“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 […] In fact, as is now known, there was an actual liability.”
The Supreme Court’s decision in Sequana left unresolved the question whether, in a case where a company was at the relevant time actually insolvent, that was sufficient to trigger the creditor duty irrespective of the directors’ state of knowledge of insolvency. Zacaroli J decided, in the light of that, to assume that it was necessary to establish some form of knowledge of insolvency (actual or constructive) on the part of the directors for the creditor duty to arise, even where the company was at the relevant time actually insolvent.
He went on to find that that had been the case on the facts before him:
“[A]ssuming 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.”
He found that to be so in spite of the fact that, as he put it, the language of “real risk” of insolvency had been rejected by the Supreme Court in Sequana in the different context of that case.
That necessarily undermined the weight the judge below had given to the professional advice relied on by the respondents in defending the liquidator’s claim:
“In my judgment…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.”
Zacaroli J’s thoughtful approach to an understanding of the creditor duty following Sequana, and the distinctions drawn between the facts of that case and the case before him, may be the subject of further analysis and debate. However, it is undoubtedly an important and very welcome development.