Stephen John Hunt v Jagtar Singh

This appeal concerned when a director's duty to have regard to the interests of creditors (the "creditor duty") arises where the company is in fact insolvent but the directors mistakenly believed a tax liability had been avoided by a tax avoidance scheme. The court held that, applying the guidance in Sequana, where a company's solvency depends on successfully challenging a large current claim, the creditor duty is triggered if the directors know or ought to know there is at least a real prospect that the challenge will fail. The judge below had applied the Court of Appeal's Sequana test and concluded the duty did not arise because the directors reasonably relied on BDO's advice; the appeal court found that was the wrong test and that, on the correct test, the creditor duty had arisen by September 2005. The court did not finally determine breach or remedies but remitted the matter for further consideration in accordance with the correct legal test.

Background and parties:

• The appellant, Mr Stephen Hunt, is the liquidator of Marylebone Warwick Balfour Management Limited (the "Company"). The respondent, Mr Jagtar Singh, was a director (and later found to be a de facto director) and recipient of payments under a conditional share/employee benefit trust scheme advised by BDO.

Nature of the claim and relief sought:

• The liquidator sued former directors including Mr Singh under s.423 Companies Act 1986, s.317 Companies Act 1985 (later s.177 Companies Act 2006) and s.212 for breach of fiduciary duty, seeking equitable compensation and disgorgement of amounts received as a result of breach, on the basis that directors failed to consider creditors' interests when the company was insolvent due to HMRC PAYE/NIC claims.

Procedural posture:

• The claim was dismissed by ICC Judge Prentis on 6 April 2022. Permission to appeal was granted and the appeal was heard before Mr Justice Zacaroli on 14 and 16 June 2023, with judgment delivered on 17 July 2023.

Issues framed:

• Primary: When does the creditor duty arise following the Supreme Court's decision in BTI 2014 LLC v Sequana SA, in a case where the company was in fact insolvent because of a disputed tax liability which directors believed had been avoided?
• Subsidiary: If the duty arose, whether applying it would have made a difference to the outcome (i.e. whether there was a breach and recoverable benefit).

Court's reasoning:

• The court reviewed Sequana and concluded that, where a company's solvency depends on successfully challenging a significant current claim, the creditor duty is engaged if directors know or ought to know there is at least a real prospect of the challenge failing. This approach recognises the binary nature of disputed primary liabilities and that, if the company was in fact insolvent, creditors' economic interests had already shifted.
• The judge below had applied a different (Court of Appeal) formulation and had placed weight on the directors' reasonable reliance on BDO's advice. The appeal court held that reliance on advice and reasonableness are relevant to the content of the duty and to whether it was breached, but do not determine the threshold question of when the duty arises.
• The court concluded the correct test meant the creditor duty had arisen by September 2005 and continued through the relevant period, but declined to decide on breach or defences (including s.1157 CA 2006), and remitted the case for reconsideration and directions in light of the correct legal test.

Appeal allowed in part and remitted. The court held that the judge below applied the wrong test from Sequana when determining whether the creditor duty had arisen. Applying the correct approach — that where a company's solvency depends on successfully challenging a current claim the creditor duty is engaged if directors know or ought to know there is at least a real prospect of the challenge failing — the duty arose by September 2005 and persisted thereafter. The court did not determine breach or remedies and remitted the matter for further consideration.

The claim was dismissed by ICC Judge Prentis on 6 April 2022. Permission to appeal was granted (permission noted in the judgment as given on 18 July 2022). The appeal was heard before Mr Justice Zacaroli on 14 and 16 June 2023 and judgment delivered on 17 July 2023 ([2023] EWHC 1784 (Ch)).