At What Point Might A Director’s Duty To Creditors Arise?

The Bahamas remains popular for companies given its tax-friendly rules for businesses, as well as for individuals. Even so, the rules are tightening; and companies based in The Bahamas would do well to be aware of their duty to creditors – which will soon include the Department for Inland Revenue.

The award-winning commercial lawyers at ParrisWhittaker are available to advise on directors’ duties, including the extent of the duty towards creditors.

Businesses in the jurisdiction are reminded that a new business levy will apply from 1 January 2024  to revenues generated by an International Business Company (IBC) carrying on a business in or from within the Bahamas.

The creditor duty

Company directors owe several duties in the running of their business including a potential duty towards its creditors (such as Department for Inland Revenue), in certain circumstances, under the Bahamas Company’s Act. A helpful ruling from the UK’s High Court demonstrates when such a duty may arise and what this means in practice.

Directors will welcome the ruling, which has important persuasive authority on the courts here in The Bahamas.

What’s the background?

A UK management Company provided services to a PLC which started to wind down its business with the Company’s continued assistance. This included, from 2002 until 2008, operating a tax avoidance scheme which involved paying management and directors in dividend payouts without incurring income tax and what’s known as National Insurance Contributions (NIC).

HM Revenue & Customs (HMRC) – the UK’s tax authority – had been notified of the scheme. The scheme was also consistently considered robust by the company’s tax advisers. Over the eight years it was operated, the company had avoided around £36 million.

However, by the end of 2004 the UK government had turned its attention to tax avoidance schemes and declared a crackdown, and said HMRC was prepared to challenge such schemes. HMRC then offered to come to arrangements with companies operating such schemes (the Company refused to accept the offer put to it).

HMRC started proceedings against the Company; meanwhile the company liquidator brought a claim against its directors for breach of creditor duty. The financial records revealed that given the debt owed to HMRC, the company was substantially insolvent at the relevant time. Furthermore, the directors accepted that had they known there was a liability to HMRC, the company would have been insolvent.

Was there a creditor duty owed?

The issue was two-pronged: whether the creditor duty had arisen (and at what point); and if so, had the creditors’ interests been harmed. The court ruled that the creditor duty had arisen at the latest in September 2005 (ie when HMRC made its market-wide offer) and the duty continued until the Company entered liquidation – and then throughout the relevant period.

Once the creditor duty arose, the question was then whether the interests of creditors had been damaged.  That depended on the facts of the specific case. Here, the judge did not consider it appropriate to decide whether the director had breached the creditor duty (it is a decision for the court at a later date).

What does this mean?

It’s clear that tax avoidance schemes need to be treated with caution, given that the circumstances could trigger a directors’ duty towards its creditors. Any company considering operating such a scheme – or similar arrangement – should, at the very least, take specialist advice first and regularly review both their financial situation and their statutory duties.

For expert advice, contact the commercial team at ParrisWhittaker here info@parriswhittaker.com

1 Hunt v Sing [2023] EWHC 1784