Hoping to Pay All Your Creditors in One Day is Not a Defence

Howes Percival LLP

3rd May 2019

Mark Baldwin of our Insolvency Service team considers the recent decision in Secretary of State for Business Energy and Industrial Strategy v Raymond St John Murphy [2019] EWHC 459 (Ch).

St John Law Limited (“St John”) had traded as a solicitor’s practice under the sole directorship of Mr Murphy between May 2012 and October 2014, when it was placed into administration. Mr Murphy was a solicitor

The Secretary of State made two allegations against Mr Murphy: –

  • He had caused St John to fail to comply with its obligations to file and pay its taxes when due throughout the life of the company resulting in a debt to HMRC of £582,329 at the date of Administration; and
  • he had caused St John to make payments to him totalling £24,400 and other payments in excess of those agreed in a validation order to the detriment of creditors.

Mr Murphy defended the proceedings on three grounds: –

  • He was owed a substantial sum from HM Treasury in respect of a costs order made in his favour in 2011 in criminal proceedings brought against him, which would have satisfied the Crown liabilities in due course.
  • The company’s income from work in progress and conditional fee cases would have been sufficient to pay HMRC in due course and that the company was therefore not insolvent.
  • The payments to him complained of represented his modest remuneration and the payments in excess of the validation order were proper payments of the firm.

Mr Murphy also sought to argue that he could not have a fair trial because St John’s cloud based case management system was no longer available. However, an earlier application on that ground, had been unsuccessful and the trial judge, ICC Judge Mullen, agreed with that conclusion.

He considered that the first two defence matters raised by Mr Murphy were at best mitigation to an allegation of trading to the detriment of the Crown as it was evident that there was a policy of discrimination against the Crown. Of the £625,802 plus interest due by St John to HMRC it had paid £50,189.

However Mr Murphy had provided no evidence that the cost order monies, which were due to him personally, would ever have been enough to pay HMRC and had further misrepresented to HMRC that St John was able to set off the costs order.

The judge also concluded that Mr Murphy’s assertions as to the recoverability of £2m in work in progress and conditional fees were without foundation. It was not open to Mr Murphy to suggest that St John was solvent, when he had stated in the application for administration that it was cash flow insolvent, as it clearly was.

As regards the validation order, whilst the judge found that certain of the payments not specified in the order were in the course of St John’s business, Mr Murphy was not entitled to a salary and that it was irresponsible and to the detriment of creditors to make such payments.

Mr Murphy was disqualified for a period of 8 years. The judge took a dim view of the personal benefit Mr Murphy received from payments made to him when HMRC was not being paid and was mindful of the fact that Mr Murphy had previously been disqualified for a period of 3 years for failing to pay taxes due.

This case illustrates that the court will not generally consider it a defence to trading to detriment of the Crown allegations that a director traded on in the hope that one day the company would be able to pay off all the company’s debts.

Please contact mark.baldwin@howespercival.com for more information on this subject, or to ask a question.

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