HMRC Petition Injunction Granted In Spite of £1.5m Tax Debt

In a notable High Court judgment in the case of A Company v His Majesty’s Revenue and Customs [2024] EWHC 1611 (Ch), His Honour Judge Hodge KC granted an injunction to restrain HMRC from presenting a winding-up petition against a company with a £1.5 million tax debt. Despite the debt being undisputed, the court exercised its broad discretion under Insolvency Rule 7.24, citing the misuse of the petition as a debt collection tool rather than a collective remedy for creditors. The decision emphasised the need to balance the interests of creditors and the potential detriment of a forced liquidation, allowing the company time to complete a business sale that would enable full debt repayment. This case underscores the flexible and nuanced application of judicial discretion in insolvency proceedings, prioritising justice and the collective benefit of creditors.

A Company v HMRC – Injunction to Restrain HMRC

The case involves an application by a company to restrain His Majesty’s Revenue and Customs (HMRC) from presenting a winding-up petition against it. The application, dated 24 April 2024, was made under Rule 7.24 of the Insolvency Rules 2016 and includes a request for costs on the punitive indemnity basis. The company’s claim hinged on the assertion that it expects to settle its tax debt of over £1.5 million through an imminent business sale.

The Company did not dispute the debt but argued that compulsory liquidation would be detrimental to the interests of its creditors as a whole. The Company’s Counsel, submitted that the Company was in advanced negotiations to sell its business to an entity named Compass. The proceeds from this sale, along with a potential loan from HSBC, would enable the company to settle its debts in full. It was contended that HMRC’s petition was being used improperly as a debt collection tool rather than for its legitimate purpose as a class remedy.

Immediate liquidation not optimal remedy

The court’s decision in this case underscores the nuanced application of judicial discretion within the framework of the Insolvency Act 1986 and the Insolvency Rules 2016, particularly Rule 7.24. The judgment reflects a careful balancing act between the strict enforcement of insolvency laws and the equitable consideration of broader stakeholder interests. The Court’s willingness to grant an injunction against HMRC’s winding-up petition, despite the company’s significant tax liabilities, highlights an important precedent in insolvency jurisprudence. This decision illustrates the court’s recognition that immediate liquidation is not always the optimal solution, especially when a company shows a genuine potential to address its financial distress through viable business transactions, such as the proposed sale to Compass.

By considering the impact on employees and apprentices, the court demonstrated an awareness of the broader socio-economic repercussions of insolvency proceedings. Moreover, the judgment emphasised that HMRC’s role as an involuntary creditor, while significant, does not automatically outweigh the potential benefits of allowing the company to pursue its rescue strategy. The case also reinforces the court’s commitment to preventing the misuse of winding-up petitions as mere debt collection tools, ensuring that such actions are reserved for genuine insolvency situations that warrant such drastic measures. This critical analysis reveals that the court’s decision serves not only to protect the immediate interests of creditors but also to foster a legal environment where distressed companies are given a fair opportunity to recover, thus promoting a more stable and equitable economic landscape.

UK Insolvency Law

Under UK insolvency law, particularly Insolvency Rule 7.24, the court has the discretion to restrain the presentation of a winding-up petition if it deems such action to be in the best interest of the creditors collectively. This discretion is broad and can be exercised in various circumstances to prevent the misuse of insolvency proceedings.

Court’s Judicial Rationale

• Discretion and Creditor Interests

The Court acknowledged its broad discretion to restrain the presentation of a winding-up petition. It emphasised that such discretion should be used judiciously to protect the interests of all creditors and prevent the oppressive or unfair use of insolvency procedures. In this case, the court found that the Company’s efforts to negotiate a sale of its business, which could potentially satisfy the debt to HMRC and other creditors, warranted a stay on the winding-up petition.

• Evaluation of Evidence

The Court considered the evidence presented, including the third witness statement admitted to provide a comprehensive view of the current status of negotiations with Compass. The Company’s draft accounts indicated creditors in excess of £5 million, but these debts were deemed manageable, and other creditors were not pressing for payment. The proposed sale to Compass, if successful, would generate sufficient funds to repay HMRC and potentially other creditors. Despite the arguments highlighting the uncertainty and lack of concrete evidence regarding the sale, the court decided that the company’s efforts merited a final opportunity to conclude the transaction.

Download HMRC Injunction Judgment:

Precedents and Comparative Cases

The court referred to the decision in Travelodge Hotels Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch), where the court granted an injunction to restrain a winding-up petition due to the financial impact of the COVID-19 pandemic and pending legislative changes. This case underscored the court’s willingness to grant temporary relief to companies in genuine financial distress, provided that there is a credible path to financial recovery.

Judicial Discretion in Bankruptcy and Insolvency Proceedings

Cash flow Insolvency

The court acknowledged the company’s cash flow insolvency but noted that balance sheet insolvency was not a necessary determination in this case. The critical factor was the company’s inability to meet its tax obligations as they fell due, rendering it cash flow insolvent.

Involuntary Creditor

HMRC, as an involuntary creditor, held a unique position. PAYE and VAT collected by the company were meant to be remitted to HMRC, making the company’s use of these funds for working capital particularly egregious. The court highlighted this misuse as detrimental to HMRC.

Efforts to Regularise Debt

Despite the company’s financial struggles, the court recognised HMRC’s patience and support in providing multiple opportunities for the company to pay its debt. The company had entered into two Time to Pay Agreements and considered a moratorium, but ultimately, these efforts were unsuccessful. HMRC also allowed time for the company to negotiate a sale of its shares or business, further indicating their cooperative stance.

Impact on Employees and Apprentices

One of the significant arguments presented was the potential impact of a winding-up petition on the company’s 130 employees and ten apprentices. The court considered the severe consequences of redundancies and the disruption of apprenticeships. Although HMRC was aware of these repercussions, the court had to balance these considerations against the company’s persistent failure to meet its tax obligations.

The Rescue Strategy

The company’s ongoing negotiations for a sale, particularly with Compass, were central to its argument against the winding-up petition. The court scrutinised the progress of these negotiations and the feasibility of the proposed transactions. Despite the lack of a binding offer from Compass, the court noted that the company was making payments and striving to resolve its financial difficulties.

Abuse of Process

The court considered whether HMRC’s actions constituted an abuse of process. Drawing parallels with previous cases such as Travelodge and Re Maud, the court examined whether the petition was serving the interests of the creditors as a whole. It was argued that a winding-up petition at this stage would prematurely end negotiations and likely result in a lower return for creditors than a consensual sale.

Weighing the Balance of Convenience and Prejudice

Balance of Convenience

The court found that the balance of convenience strongly favored the injunction. Granting time for the company to sell its business and settle its debts was deemed more beneficial than proceeding with a winding-up petition. Additionally, the absence of significant prejudice to HMRC, alongside the potential harm to the creditors if the petition moved forward, justified the court’s decision.

1. Convenience: The court considered the likelihood of the company successfully completing its business sale and using the proceeds to repay the debt.
2. Prejudice: The court weighed the potential harm to the company and its creditors if the winding-up petition proceeded against any prejudice to HMRC from a delay in presenting the petition.

Court’s Ruling Implementation

• Granting the Injunction: The court granted a time-limited injunction, restraining HMRC from presenting the winding-up petition for 14 days. This provided the company with the necessary time to finalise its business sale and pay off the debt.

• Conditional Relief: The injunction was conditional upon the company meeting its future tax obligations on time, ensuring continued compliance and accountability.

Awareness of Socio-Economic Repercussions of Insolvency Proceedings

• Impact on Employment: The court considered the potential redundancies of 130 employees, recognising the significant economic and social consequences of job loss, including increased unemployment rates and financial instability for affected families.

• Effect on Apprenticeships: The disruption of ten apprenticeships was noted, emphasising the importance of maintaining opportunities for skills development and workforce training, which are crucial for long-term economic growth and individual career prospects.

• Economic Instability: The court acknowledged that the liquidation of a company can lead to broader economic instability, affecting not just the direct stakeholders but also the local community and supply chains dependent on the company’s operations.

• Social Justice: By preventing immediate liquidation, the court demonstrated a commitment to social justice, ensuring that vulnerable groups, such as employees and apprentices, are protected and given a fair chance to benefit from any potential financial recovery of the company.

• Holistic Approach: The decision reflects a holistic approach to insolvency, where financial metrics are balanced with human and societal dimensions, ensuring that judicial decisions contribute to a stable and equitable economic environment.

• Judicial Role in Economic Resilience: The court’s awareness of socio-economic repercussions underscores the judiciary’s role in fostering economic resilience, particularly during times of financial distress, by allowing distressed companies a fair opportunity to recover and continue contributing to the economy.

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We are experts in dealing with matters surrounding winding-up petitions, offering extensive expertise in defending against such petitions, managing applications for winding-up orders, and liaising with the Official Receiver. Whilst we are based in London we provide national coverage across all Courts in England & Wales.