HSJ Consultancy Limited (in liquidation), Re

Directors who cause a company to enter into a high-risk tax scheme must consider the company’s ability to meet any resulting tax liability and, where engaged, creditors’ interests. The creditor duty requires more than a merely real risk of insolvency. A director’s duty is ordinarily assessed subjectively, but an objective standard applies where the director failed to consider relevant interests or unjustifiably overlooked a material creditor interest. Tax assessments create statutory debts unless set aside through the designated tax appeal process. Ratification and statutory relief cannot protect directors who prioritise personal extraction, fail to obtain appropriate advice and leave creditors exposed.

The joint liquidators of HSJ Consultancy Ltd applied under Insolvency Act 1986, section 212, against its former directors. They alleged that the directors caused HSJ to pay £450,000 into employee benefit and employer-financed retirement benefit schemes, receiving most of the money through purported loans, while failing to consider insolvency, creditors’ interests, the risk that the schemes would fail, or provision for tax liabilities.

The directors denied breach, relied on limitation, disputed the tax assessments, invoked shareholder ratification under In Re Duomatic, and sought relief under Companies Act 2006, section 1157. The central issues were whether the payments rendered HSJ insolvent, whether the creditor duty was engaged and breached, whether the claim was time-barred, and the appropriate compensation.

1. Liability and outcome. The claim succeeded for £436,500 plus interest. The counterclaim based on the company’s articles was dismissed.
2. Creditor duty. Applying BTI 2014 LLC v Sequana SA, the creditor duty did not arise merely from a real and not remote risk of insolvency. It required imminent insolvency or a probability of insolvent liquidation or administration. Consistently with Hunt v Singh, some actual or constructive knowledge of insolvency was required where the company was actually insolvent. HSJ was insolvent on both the balance-sheet and cash-flow tests in Insolvency Act 1986, section 123, and the directors knew at least of a real risk that the schemes had rendered it insolvent.
3. Assessment of breach. The duty to promote the company’s interests, including creditors’ interests where applicable, is ordinarily subjective. If the director did not consider the relevant question, or unjustifiably ignored a material creditor interest, the court applies an objective standard. The directors failed to consider how tax would be paid if the schemes failed, obtain independent advice, or maintain a responsible reserve. The withdrawal of company funds for personal benefit was outside the range of decisions reasonably open to directors facing the obvious risks.
4. Tax liabilities. Tax liabilities arose by operation of statute and were not contingent upon later assessments or tribunal decisions. Existing assessments created debts which could be challenged only through the statutory tax machinery. The court therefore declined to adjourn or substantially reduce compensation by reference to unresolved tax appeals.
5. Limitation, ratification and relief. The payments were company property received by, and converted to the directors’ use. Section 21 of the Limitation Act 1980 therefore removed the ordinary six-year limitation period. Ratification could not validate the conduct where the company was insolvent, and there was no evidence that shareholders had applied their minds to ratification. The directors had acted honestly, but not reasonably, and it would not be fair to excuse them under section 1157.
6. Quantum. The appropriate equitable compensation was the £450,000 paid into the schemes, less £13,500 paid to other employees and not claimed. The assessments exceeded that sum.