How and to what extent can undertakings given on the appointment of a provisional liquidator be enforced by the company in liquidation? Matthew Weaver of St Philips Chambers comments on the first reported decision on these issues.
Abbey Forwarding Ltd (In liquidation) v Revenue and Customs Commissioners  EWHC 225 (Ch),  All ER (D) 91 (Feb)
The applicant company was investigated by the respondent Revenue and Customs Commissioners (HMRC). HMRC gave an undertaking to abide by freezing orders. The applicant brought proceedings, seeking an inquiry as to damages to be carried out on the undertaking. The Companies Court held that, on the evidence, none of the reasons adduced by HMRC would make it inappropriate for the inquiry for damages to occur.
What was the background to the case?
The company in question was wound up by the court on 18 March 2009 pursuant to a petition presented by HMRC on 4 February 2009. The petition was based upon assessments of excise duty raised by HMRC but not, at the date of the petition, served on the company so as to create, by statute, a debt (subject to appeal by the company). On the same day as the petition was presented, HMRC applied, without notice, for the appointment of a provisional liquidator. The application was based principally on the alleged fraudulent behaviour of the company which, it was said, gave rise to the assessments of unpaid excise duty. The court appointed the provisional liquidator on 4 February 2009.
Immediately following the appointment of the provisional liquidator, a worldwide freezing order against three of the company’s four directors was sought and obtained in aid of misfeasance proceedings which the provisional liquidator undertook to issue against those directors on the grounds of their part in the company’s alleged fraudulent activities.
HMRC gave an undertaking in damages on the appointment of the provisional liquidator and provided the company, under the control of the provisional liquidator, with an indemnity for the undertaking in damages the company was required to give upon the making of the freezing order and for any adverse costs order which might be made against the company within the misfeasance proceedings.
As Blackburne J had anticipated when appointing the provisional liquidator, the company’s business was closed down shortly after the appointment. At the return date of the petition, it was unopposed and the provisional liquidator was appointed as liquidator on 18 March 2009.
Misfeasance proceedings were issued and were founded exclusively on the same case as HMRC had advanced for the appointment of a provisional liquidator and, indeed, relied exclusively on evidence from HMRC. These proceedings were dismissed by Lewison J after a 13-day trial in July 2010, principally because the Judge concluded there had been no evasion of excise duty by the company, finding that all 301 of the consignments of alcohol from the company and challenged by HMRC had, in fact, arrived at their destination in France and that there was no evidence that the company was aware of any fraudulent activities of any of its business partners. The liquidator did not seek to appeal this decision.
Despite the judgment of Lewison J, HMRC refused to withdraw the assessments upon which the petition had been based and the liquidator declined to appeal them. The directors of the company obtained permission to bring the appeals against the assessments on behalf of the company and appeals were lodged in January 2011, with the hearings listed for 9 August 2011. HMRC initially opposed the appeals but, on 4 August 2011, withdrew its opposition and consented to the appeals and were ordered to pay £215,000 adverse costs.
In August 2012, after pressure from the company’s shareholders, the liquidator agreed to be removed and was replaced. The new liquidator issued an application in November 2013 for an inquiry as to damages on the undertakings given by HMRC on the appointment of the provisional liquidator.
What were the issues that the Judge had to decide in this application?
After much discussion between the court and the parties, David Richards J ordered the following issues to be determined on the application:
- should the court make an order for an inquiry as to damages, having regard to:
- the failure of the misfeasance claim
- the withdrawal of the assessments by HMRC
- the delay on the part of the company in applying for such an order
- the fact that a winding up order was made on 18 March 2009, and
- the absence of any application to set aside the appointment of a provisional liquidator or any opposition to the petition on 18 March 2009
- if an inquiry is ordered, on what factual basis is the loss to the company to be assessed? In particular, is it to be assessed on the basis that the company would have been wound up (as it was) on 18 March in any event?
What were the main legal arguments put forward?
The company’s position was straightforward. It submitted that without the undertaking by HMRC, the provisional liquidator would not have been appointed. It was now clear that the appointment was wrong on the grounds that the assessments raised had been withdrawn and the allegations of fraud advanced had been subsequently dismissed. The court is to use hindsight and consider whether the order was wrongly made, given the subsequent events, and is not limited to considering whether Blackburne J was wrong to make the order on the evidence and submissions available to him at the time. In addition, there was no need to apportion fault on the part of HMRC. The undertaking ought to be enforced in the absence of special circumstances and no such circumstances existed in this case.
HMRC resisted the inquiry on the basis that a winding up order had in fact been made after the appointment of the provisional liquidator, which was not opposed or appealed. The appointment of a provisional liquidator was an interim measure and the undertaking given came to an end when the winding up order was made just as an undertaking in damages on the grant of an interim injunction comes to an end when a final inunction is made at trial.
HMRC also relied on:
- the delay in making the application for an inquiry
- prejudice suffered by HMRC in withdrawing the assessments on the understanding that an inquiry as to damages could not be ordered
- prejudice suffered by HMRC because many of its employees with first-hand knowledge of the matter had left its employment
- prejudice to HMRC because the liquidation and passage of time will mean that much of the relevant evidence regarding the company’s trading will have been lost or ‘degraded’
In addition, HMRC argued that the current practice of the courts (albeit a practice not in place in 2009) is not to require undertakings in damages from HMRC in such cases and, as such, an inquiry as to damages would be contrary to public interest.
What did the Judge decide, and why?
David Richards J ordered an inquiry as to damages and ordered it on the basis that the company would not have been wound up on 18 March 2009. In doing so, he made the following findings:
- the parties had agreed that, as general principles:
- undertakings are given as the price for an interim order of any sort
- the undertaking is intended to provide a means of compensating the respondent if it subsequently appears that the order was wrongly made
- whether an order was wrongly made is to be judged retrospectively (ie not solely in light of the circumstances known at the time), and
- once it is established that an order was wrongly made, absent special circumstances, the court will ordinarily order an inquiry as to damages
- whether a final injunction or order is made following an interim injunction, while the usual test, is not the only basis for determining whether an interim injunction was wrongly made. Dismissal of a winding up petition, while normally a basis for ordering an inquiry in respect of a provisional liquidator’s appointment, is not a pre-condition to such an inquiry. Appointments of provisional liquidators cannot helpfully be compared to other forms of interim injunction or remedy and the court is entitled to exercise a broad discretion when determining whether to order an inquiry
- an undertaking given on the appointment of a provisional liquidator does not automatically terminate on the making of a winding up order so as to deprive the court of jurisdiction to enforce the undertaking
- the fact that a winding up order has been made and the fact that there was no opposition to the making of the order will be highly relevant factors in all cases but not determinative ones
- the key feature of the current case was that the petition was presented and the application for the appointment of the provisional liquidator was made on the basis that HMRC were creditors in the sum of a little under £6m on the basis of assessments raised on 2 February 2009. When the company eventually appealed these assessments, HMRC agreed to withdraw them, thereby abandoning its only standing claimed for presentation of the petition. HMRC could not continue to claim that the company was liable for excise duty as sought by HMRC and to do so would be an abuse of process in the circumstances
- the allegations of fraud against the company’s directors did not need to be looked into on the basis that the assessments were not properly raised and, as such, the company did not owe the excise duty claimed within those assessments
- in respect of the company’s failure, or that of its shareholders, to apply to set aside the appointment of the provisional liquidator or to oppose the winding up petition, it was unrealistic to expect the provisional liquidator herself to do so. Further, while it will plainly be relevant whether a company or its directors took such steps or simply sat back and failed to adduce evidence which would have resulted in the petition being dismissed, each case will depend on its own facts. In this case, the directors and shareholders of the company
- were taken by surprise by the provisional liquidation and the petition
- were faced with voluminous evidence in support of the petition and the application to appoint the provisional liquidator
- were excluded from the company’s premises and access to its books and records
- were prevented from using the company’s funds to finance opposition of the petition, and
- were severely restricted by the freezing order in the use of their own resources to do so
In addition, one of the directors suffered serious ill-health as a result of the provisional liquidation and freezing order. The judge described the suggestion that the directors ought to have defended the petition as having ‘more than an element of unreality’
- while applications for inquiries on undertakings must be made promptly, the authorities did not impose promptness as a mandatory condition. The approach to delay is to consider all the circumstances of the case and determine whether the delay is such to make it inappropriate to order an inquiry. Until the appointment of the new liquidator, it was not for HMRC to claim that some form of delay by the company had caused it to delay in withdrawing its own assessments. The original liquidator did not have the funds to challenge HMRC’s assessments or to make an application to enforce the undertaking and was, in any event, unlikely to bring proceedings against HMRC who was, at the time, supporting her appointment as liquidator in the face of challenge from the company’s shareholders. The new liquidator had large amounts of documentation to consider and from the date of his appointment onwards, there was no unreasonable delay such as to render an inquiry inappropriate
- it was for HMRC to identify and demonstrate any prejudice. The fact that HMRC withdrew its assessments on the mistaken belief that the undertaking was no longer in force was not the fault of the company and, as such, provided no defence to the application
- the evidence that former employees of HMRC could give was not relevant to the application for an order for an inquiry. The assessments, to which the employees could give evidence, were withdrawn and no more needed to be said about them
- while the liquidation of the company and the passage of time will have degraded the evidence as to trading, it could not be said that an inquiry could not be undertaken with the available evidence
- the judge was not satisfied that a practice existed that no longer required HMRC to give undertakings on the appointment of provisional liquidators and concluded that the public interest in enforcing undertakings given freely to the court, particularly by a public authority, was the overriding public interest here
- as to the factual basis of an inquiry, the Judge concluded that as the basis for the petition itself, namely the assessments, had fallen away, he was satisfied that, but for the provisional liquidator’s appointment, the company and its directors would have been able to successfully defeat the petition and avoid liquidation by demonstrating the necessary genuine dispute on substantial grounds. As such, the appropriate measure of loss under the undertaking was the value of the company’s business on or immediately before 4 February 2009
To what extent is the judgment helpful in clarifying the law in this area?
This is the first reported decision in respect of undertakings given on the appointment of a provisional liquidator and how and to what extent they can be enforced by the company in question.
It helpfully sets out:
- the court’s jurisdiction for ordering an inquiry
- the impact of the company’s subsequent liquidation on such an application
- the effect of delay in bringing the application, and
- dismisses the idea that HMRC are exempt from providing such undertakings
What practical lessons can those advising take away from the case (in particular in terms of those acting for creditors other than HMRC)?
The same principles that apply to HMRC will apply to any creditor seeking to appoint a provisional liquidator. An undertaking will be required by the court and is a condition of any appointment of a provisional liquidator. It is intended to provide protection to the company should it later be discovered that the appointment was inappropriate (whether that is because the locus of the creditor is undermined or because the risk to the company or its assets turns out not to be sufficient). As such, the court will treat the undertaking as enforceable unless special circumstances exist.
If the company would have been wound up in any event notwithstanding any problems in the application for the provisional liquidator, the losses claimed under an undertaking may be limited but if the basis for the petition is also undermined, the losses claimed could be significant. Creditors and their advisors must give this serious thought before embarking on such applications.
What was the Judge’s approach to the suggestion that it was not usual practice for HMRC to give undertakings in light of the Supreme Court’s decision in Sinaloa?
The Judge dismissed the view that a practice had grown up not requiring HMRC to give undertakings in applications to appoint provisional liquidators. While it was correct to say that the case of Financial Services Authority v Sinaloa Gold plc (Barclays Bank plc intervening)  UKSC 11,  2 All ER 339 involved the Supreme Court confirming the Court of Appeal’s view that the Financial Services Authority (now the Financial Conduct Authority and Prudential Regulation Authority), as a public authority fulfilling its public law function and duty, was not required to give an undertaking in damages for the grant of a freezing injunction, it could not be said that this covered the situation of HMRC seeking the appointment of a provisional liquidator.
Sinaloa did not consider such a circumstance and, as far as the Judge was concerned, the position of HMRC as a creditor of a company choosing to present a winding up petition and choosing to seek the appointment of a provisional liquidator was not that of a public authority acting pursuant to its public law function and duty.
HMRC has other options available to enforce payment of a debt owed by a company but chooses to present a petition. The Court of Appeal decision in Revenue and Customs Comrs v Rochdale Drinks Distributors Ltd  EWCA Civ 1116,  STC 186 spelt out clearly that the practice of the courts is to require HMRC to provide an undertaking when seeking the appointment of a provisional liquidator and nothing in the Sinaloa case alters or cast doubt on such a practice.
Interviewed by Nicola Laver.
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First published on LexisPSL Restructuring and Insolvency