Factual and Procedural Background
Plaintiff Company A applied for an inquiry as to damages on an undertaking given by Defendant HMRC upon the appointment of a provisional liquidator in February 2009. The undertaking required HMRC to abide by any order for damages if the appointment was found to have caused loss unjustly. HMRC opposed the application.
HMRC had presented a petition to wind up Company A based on assessments for excise duty totaling approximately £5.97 million, alleging large-scale fraudulent evasion of excise duty. On the same day, HMRC applied without notice for the appointment of a provisional liquidator, supported by extensive affidavit evidence alleging fraudulent conduct by Company A and its directors.
The provisional liquidator was appointed by the court, and immediately applied for a worldwide freezing order against Company A's directors in aid of misfeasance proceedings. HMRC indemnified Company A against liability under the undertaking in damages and adverse costs orders. The provisional liquidator closed down Company A’s business shortly after appointment, as foreseen by the judge.
The winding-up petition was not opposed and a winding-up order was made, with the provisional liquidator becoming liquidator. The liquidator pursued misfeasance proceedings against the directors, which were dismissed after a 13-day trial, with the judge finding no evasion of duty in relation to the assessed consignments. HMRC did not withdraw the assessments at that time.
Following the dismissal, Company A’s directors were permitted to appeal the assessments before the First-tier Tribunal, and HMRC eventually withdrew the assessments and were ordered to pay costs and an interim payment. The directors sought to replace the liquidator, which was eventually agreed in 2012. The new liquidator purported to assign Company A’s rights under the undertaking to the directors, which HMRC challenged, leading to mediation that was unsuccessful.
The present application for inquiry as to damages was issued in November 2013. The inquiry was previously directed by the court following the misfeasance proceedings, with HMRC conducting the defence under their indemnity. The Court of Appeal later increased the damages awarded to the directors and modified cost orders.
Company A’s directors established a new company to carry on the same business at the same premises, with HMRC granting the necessary licenses after vetting their fitness and propriety.
Legal Issues Presented
- Whether the court should make an order for an inquiry as to damages on the undertaking given by HMRC on the appointment of the provisional liquidator, having regard to the failure of misfeasance claims and withdrawal of assessments.
- Whether the undertaking in damages given on appointment of the provisional liquidator ceases to have effect upon the making of a winding-up order.
- Whether delay, prejudice, or public interest factors justify refusing an inquiry as to damages.
- Upon what factual basis should any loss be assessed in the inquiry, in particular whether to proceed on the footing that Company A would have been wound up on the return date of the petition.
Arguments of the Parties
Appellant's Arguments (Company A)
- HMRC gave an undertaking in damages which should be enforced as the appointment of the provisional liquidator was wrongly made, shown by the dismissal of misfeasance proceedings and withdrawal of the assessments.
- The court must use hindsight in deciding whether the order was wrongly made, not the circumstances known at the time.
- There are no special circumstances to displace enforcement of the undertaking.
- The appointment of the provisional liquidator did not cease the undertaking upon the winding-up order; the court retains discretion to enforce it.
- Delay in making the application for inquiry is not unreasonable given the circumstances, including the replacement of the liquidator and mediation attempts.
- There is no significant prejudice to HMRC arising from delay or passage of time.
- The inquiry should proceed on the basis that Company A would not have been wound up absent the appointment of the provisional liquidator.
Respondent's Arguments (HMRC)
- The appointment of the provisional liquidator was an interim measure that ended upon the winding-up order, so the undertaking in damages ceased to have effect.
- The winding-up order was not opposed and not appealed, indicating no basis for damages.
- Delay in seeking inquiry was excessive and should bar enforcement.
- HMRC is not bound by findings in misfeasance proceedings to which it was not a party and may contest the validity of the assessments and allegations.
- HMRC relies on the statutory appeals process as the proper forum to challenge assessments and contends it is not an abuse of process to defend the appeals despite misfeasance findings.
- There is a public interest in HMRC not being required to give undertakings in damages when acting in a public capacity, citing recent Supreme Court authority.
- Any inquiry must proceed on the hypothesis that the provisional liquidator was never appointed, but not that the winding-up order would have failed or that the assessments would have been overturned.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| HMRC v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116 |
Importance of undertaking in damages on appointment of provisional liquidator; interim remedy causing potential terminal damage; court must consider prejudice and compensation. |
The court relied on this authority to affirm the significance of an undertaking in damages and the need for cautious appointment of provisional liquidators. |
| Yukong Ltd v Rendsburg Investments Corporation [2001] 2 Lloyd's LR 113 |
Distinction between interim injunctions and freezing (Mareva) injunctions regarding inquiry into damages. |
The court considered analogies with freezing orders, concluding that appointment of provisional liquidator is sui generis but closer to freezing orders than ordinary interim injunctions. |
| Cheltenham & Gloucester Building Society v Ricketts [1993] 1 WLR 1545 |
General principles on enforcement of undertakings in damages: discretion, timing, and the nature of the undertaking. |
The court applied these principles to confirm that the undertaking is given to the court, enforcement is discretionary, and the question of wrongful grant is judged with hindsight. |
| SmithKline Beecham plc v Apotex Europe Ltd [2005] EWHC 1655 |
Clarification of "wrongly granted" injunctions and the purpose of cross-undertakings in damages. |
The court rejected the argument that an inquiry can only follow a failed final injunction, emphasizing the broader discretion and purpose of undertakings. |
| Barratt Manchester Ltd v Bolton Metropolitan BC [1998] 1 WLR 1003 |
Delay in seeking enforcement of undertakings in damages and its impact on the court’s discretion. |
The court held that delay is a relevant factor but not an absolute bar; enforcement depends on reasonable promptness and circumstances. |
| Financial Services Authority v Sinaloa Gold plc [2013] UKSC 11 |
Distinction between public law enforcement actions and private litigation regarding requirement for undertakings in damages. |
The court considered HMRC’s position relative to public authorities, concluding that the decision does not justify departing from the established practice of requiring undertakings from HMRC in provisional liquidator appointments. |
| Re Parkwell Investments Ltd [2014] EWHC 3381 (Ch) |
Recent judicial consideration of undertakings in damages in HMRC winding-up petitions post-Sinaloa Gold. |
The court reaffirmed the practice of requiring undertakings from HMRC in creditor petitions, distinguishing HMRC’s role from pure public law enforcement bodies. |
| Johnson Control Systems Ltd v Techni-Track Europa [2003] EWCA Civ 1126 |
Use of hindsight in assessing damages for breach of contract. |
The court applied the principle that hindsight is appropriate in assessing loss when considering the inquiry as to damages. |
| Golden Strait Corp v Nippon [2007] UKHL 12 |
Retrospective assessment of damages in contract law. |
Referenced to support the use of hindsight in damage assessment. |
| F. Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 |
Distinction between private litigation and public law enforcement actions. |
Used to analyze the nature of HMRC’s role and the appropriateness of undertakings in damages. |
Court's Reasoning and Analysis
The court began by outlining the nature and purpose of undertakings in damages given on the appointment of provisional liquidators, emphasizing that such undertakings provide a mechanism for compensating companies if the court later finds the order was wrongly made. The court rejected the proposition that the undertaking automatically ceases upon the making of a winding-up order, holding instead that the court retains a broad discretion to enforce it if justice requires.
The court applied the principle of hindsight, assessing whether the appointment was justified in light of subsequent events, including the dismissal of misfeasance proceedings and the withdrawal of assessments by HMRC. It found the foundation for the appointment was undermined by these developments, making the appointment wrongly made.
The court rejected HMRC’s arguments that the undertaking should not be enforced due to the winding-up order, delay, or public interest considerations. It found the absence of opposition to the winding-up petition was understandable given the freezing orders, loss of control, and financial constraints faced by the directors. Delay was not unreasonable, considering the complexities of the liquidation and the change of liquidators.
The court considered HMRC’s assertion that it was not bound by the findings of the misfeasance proceedings, noting the statutory appeal process for assessments and concluding that HMRC could not maintain the assessments after withdrawing them in appeal. The court held that HMRC’s withdrawal of assessments effectively negated their standing as creditors and the basis for the petition and appointment.
The court also addressed the relevance of public interest and recent Supreme Court authority, concluding that HMRC’s role as a creditor seeking to recover tax is distinct from pure public law enforcement and that the established practice of requiring undertakings remains appropriate.
Regarding the factual basis for the inquiry, the court held that the inquiry should proceed on the basis that the provisional liquidator was never appointed and that Company A would not have been wound up on HMRC’s petition. It rejected HMRC’s submission that the inquiry must assume the winding-up order stands regardless.
Holding and Implications
The court ORDERED an inquiry as to damages suffered by Company A as a result of the appointment of the provisional liquidator on 4 February 2009.
The inquiry is to proceed on the basis that Company A would not have been wound up on HMRC’s petition presented on that date.
The decision enforces the undertaking in damages given by HMRC, affirming that such undertakings do not automatically terminate upon a winding-up order and that the court retains discretion to order inquiries where appointments are retrospectively found to be unjustified.
No new precedent was established beyond clarifying the application of existing principles to undertakings given on provisional liquidator appointments and the interaction with winding-up orders and public authority roles.