Hunt v Singh

Factual and Procedural Background

This appeal arises from an order by ICC Judge Prentis dismissing the claim of the Appellant, the liquidator of Company A, against the Respondent, a former director of Company A. The central issue concerns the timing of the directors' duty to consider creditors' interests ("creditor duty") following the Supreme Court decision in BTI 2014 LLC v Sequana SA ("Sequana").

Company A was incorporated in 1994 to provide management services within a group of companies. In 2002, facing a downturn, the group initiated a long-term realisation plan. Company A implemented a tax avoidance scheme ("the Scheme") recommended by advisors, designed to pay bonuses to employees without incurring PAYE or NIC liabilities. The Scheme involved complex arrangements including an employee benefit trust and a shell company (Moorston Holdings Limited) to distribute dividends as non-contractual bonuses.

The Scheme operated from 2002 until 2010, with over £54 million paid out. Despite ongoing HMRC enquiries and warnings, Company A continued the Scheme based on advice from its auditors and advisors that the Scheme was "robust". In 2005, HMRC made a market-wide settlement offer, which Company A rejected. Subsequent litigation confirmed that the Scheme failed, resulting in substantial tax liabilities exceeding £36 million, rendering Company A insolvent during the relevant period.

Following these developments, Company A entered voluntary liquidation in 2013. The liquidator brought claims against several former directors, including the Respondent, alleging breach of fiduciary duty, specifically breach of the creditor duty. The trial judge dismissed all claims. The liquidator appeals only against the Respondent and only in relation to the claim to recover sums received due to breach of the creditor duty for the period September 2005 to 2010.

The Respondent was a director from incorporation until September 2005 but was found to be a de facto director thereafter. The Respondent did not participate in the appeal due to bankruptcy and personal circumstances.

Legal Issues Presented

1. When does the directors' creditor duty arise in circumstances where a company is insolvent due to a disputed tax liability, which the directors believed had been avoided by a tax avoidance scheme?
2. Whether the trial judge erred in concluding that the creditor duty had not arisen during the relevant period.
3. Whether, if the creditor duty had arisen, the Respondent breached that duty by continuing the Scheme.
4. Whether the trial judge erred in concluding that, even if the creditor duty had arisen, it would have made no difference to the outcome.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by outlining the factual background, particularly the operation of the Scheme and the financial state of Company A. It noted that the Company was substantially insolvent throughout the relevant period once the tax liabilities were accounted for.

The judge at first instance applied the Court of Appeal's Sequana test, requiring directors to know or ought to know that insolvency was probable for the creditor duty to arise. The judge found that due to reliance on ongoing advice from advisors who consistently maintained the Scheme was "robust," the directors did not meet this knowledge threshold, and thus the creditor duty was not engaged.

The appellate court considered the Supreme Court's later decision in Sequana, which clarified that the creditor duty arises when a company is insolvent or bordering on insolvency, or when an insolvent liquidation is probable. The Court emphasized that insolvency here was not speculative but actual, and that the directors' knowledge of the disputed liability did not negate the fact of insolvency.

The Court rejected the trial judge's application of the test, holding that the creditor duty should be considered engaged where directors know or ought to know there is a real prospect that a challenge to a liability will fail, especially when the company's solvency depends on that challenge succeeding.

The Court acknowledged the nuanced nature of the creditor duty's content, which requires balancing creditors' and shareholders' interests rather than always prioritizing creditors. It noted that the duty's breach depends on factors such as the likelihood of insolvency, the directors' knowledge, and the nature of their decisions.

Finally, the Court found the trial judge erred in concluding that the creditor duty would have made no difference, indicating that this issue requires reconsideration under the correct legal test.

Due to the Respondent's bankruptcy and absence, and the potential need for further factual findings, the Court declined to determine breach of duty on appeal and remitted the case for reconsideration, including whether it should be transferred to a High Court Judge.

Holding and Implications

The Court held that the trial judge applied an incorrect test for determining when the creditor duty arises. Applying the correct test, the creditor duty arose at the latest by September 2005 and continued throughout the relevant period.

The appeal is allowed in part, with the matter remitted for reconsideration of whether the Respondent breached the creditor duty and related issues, including possible defences.

The direct effect is that the trial judge's dismissal of the claim on the basis that the creditor duty had not arisen is set aside. No new precedent is established, but the decision clarifies the application of the creditor duty in cases of disputed but actual insolvency and directs careful fact-specific analysis in future cases.