Stephen John Hunt v Jagtar Singh

Where a company is actually insolvent because its solvency depends on successfully resisting a current liability, the creditor duty arises if the directors know or ought to know that there is at least a real prospect that the challenge will fail.

The trigger for the duty is distinct from its content. It does not automatically make creditors’ interests paramount or establish a breach. The court must assess the proposed conduct, the strength of the company’s resistance to the liability, the prospects of avoiding insolvency, and who has the greatest economic stake in the outcome.

Stephen Hunt, the liquidator of Marylebone Warwick Balfour Management Limited, appealed against the dismissal by ICC Judge Prentis on 6 April 2022 of a claim against Jagtar Singh, a former and de facto director.

The claim concerned payments made through an employee benefit scheme which HMRC later established gave rise to substantial PAYE and NIC liabilities. The appeal was limited to recovery of sums received by Mr Singh for alleged breach of the creditor duty between September 2005 and 2010. The central issue was when that duty arose while the company disputed the underlying tax liability.

1. Appeal allowed in part and matter remitted. The judge applied the wrong test in deciding that the creditor duty had not arisen. The question was not whether the directors knew or ought to have known that insolvency was probable, but whether, assuming some actual or constructive knowledge was required, they knew or ought to have known that there was at least a real prospect that the company’s challenge to a current liability would fail.
2. The company was in fact substantially insolvent throughout the relevant period. A disputed liability was not a contingent liability: there either was an actual liability or there was not. The company’s solvency depended on successfully resisting HMRC’s claim, and the directors’ appreciation of the risk was therefore relevant to the creditor duty.
3. The duty’s engagement was only the starting point. It did not make creditors’ interests automatically paramount, nor did it establish breach merely because creditors were harmed. Its content required a fact-sensitive assessment, including the strength of the company’s resistance to the claim, the prospects of escaping insolvency, who had the greatest economic stake, and the nature of the proposed conduct.
4. Continuing a business despite risks of further loss could require a different assessment from distributing all available assets while retaining nothing to meet the disputed liability. The judge’s conclusion that repeated assessment of HMRC’s position made no difference was insufficient under the approach indicated in [2022] UKSC 25, which the judgment treated as requiring a nuanced assessment.
5. The case was remitted for reconsideration of breach and any defence under Companies Act 2006, section 1157. The question whether the matter should be transferred for trial before a High Court Judge was left for the judge dealing with the further directions.

• Chancery Appeals: The appeal from the order of ICC Judge Prentis dated 6 April 2022 was allowed on the issue of when the creditor duty arose. The matter was remitted for further directions and reconsideration.