The liability lasso – Round up, wind up, pay up…

A recent High Court judgment in James Kay & Ors v Vision Payroll Ltd & Ors [2025] delivers a crucial warning to directors, particularly those operating within the temporary labour market.  This case involved SJ Pay Limited, an umbrella company whose business model centred around employing temporary workers and supplying them to various agencies in the healthcare sector.  While their contracts with the agencies represented that PAYE deductions were being operated, the Company actively treated the workers as self-employed for the majority of the income paid to them, avoiding the necessary statutory deductions.  

The claim was brought to the High Court by the Joint Liquidators (JLs) of SJ Pay Limited (the Company) against its directors, Shams Urrehman (de jure director), his brother, Shahid Urrehman (de facto director), and another connected umbrella company, Vision Payroll Limited (Vision).  The Company entered creditors’ voluntary liquidation, but Vision, was later subject to a winding-up order petitioned by HMRC.  The core allegation was that the brothers breached their fiduciary duties by diverting a substantial part of the Company’s business and its income, totalling over £12.2 million, to Vision between January 2021 and May 2023.

​The defendants relied on an ‘Agreement’ to justify the transfer, but the court found that the arrangement was not commercially sensible, was not in the Company’s best interests, and was entered into to put assets beyond the reach of creditors, particularly HMRC.  The diversion exposed the Company to significant liabilities (such as unpaid PAYE, NIC, and VAT) without the corresponding revenue to meet those obligations.  The judge found the brothers were in breach of their statutory duty to promote the success of the Company.  Furthermore, the evidence of the directors was found to be unreliable and untruthful, especially regarding the ‘Agreement’ and Shahid’s late concession of his de facto director status.  The JLs were granted a claim for equitable compensation to recover the net amount of the diverted payments for the benefit of the Company’s creditors.

While the core of the judgment focuses on the actions of the JLs of the Company against its directors and the connected company, Vision, importantly, the judgment confirms that HMRC initiated the compulsory liquidation of Vision.  

When would HMRC initiate a winding-up petition?

For completeness, HMRC typically uses a winding-up petition as its final and most severe debt recovery measure, aiming to collect unpaid tax and maintain the integrity of the tax system. 

Some of the reasons that HMRC may do this include:

• The company owes tax (e.g., Corporation Tax, VAT, NICs or PAYE), that it has failed to pay after repeated demands.
• The company is unable to pay its debts as they fall due, which is often evidenced by its inability to pay its taxes.  A statutory demand that goes unpaid for 31 days is generally treated by the court as proof of insolvency.
• The company failed to adhere to a previously negotiated ‘Time to pay’ (TTP) arrangement.  Once a taxpayer has defaulted on a TTP, HMRC often accelerates a winding-up petition.
• HMRC uses winding-up petitions to target businesses suspected of corporate abuse, such as ‘phoenixism’ (the closing of an indebted company and restarting the same business under a new, clean company name) or those deliberately avoiding tax obligations.
• Informally, the process is used to remove non-viable businesses from the economy, protecting public funds and ensuring a level playing field for compliant businesses.

Why was a winding-up order used in this case?

​The context of HMRC initiating winding-up proceedings, as seen with Vision in this case, often signifies significant public interest and unpaid tax liabilities, which become a priority for JLs. 

In this case:

• The diversion of income from the Company to Vision left the Company with tax liabilities but lacked the corresponding revenue to pay.
• If Vision was used to continue a business that had accrued tax debt in a previous entity (i.e., the Company), or if Vision itself subsequently failed to remit the large amounts of PAYE/NIC it was responsible for, HMRC may view it as a deliberate failure to meet statutory obligations.
• As a major creditor, HMRC would have initiated the winding-up petition against Vision only after other recover methods such as TTP or Statutory Demands failed to resolve the substantial debt.

Upon appointment, the JLs of an insolvent company are obligated to investigate the company’s affairs and the conduct of its directors, with the primary goal of collecting and realising assets for the benefit of all creditors, with HMRC often being the largest. 

JLs have powers to:

• Pursue claims against former directors under the Insolvency Act 1986 and the Companies Act 2006.  As demonstrated in this case, a critical avenue is seeking a remedy for breach of fiduciary duty, particularly where directors have engaged in transactions at an undervalue or for the purpose of defrauding creditors.  In situations like this, the JLs successfully claimed equitable compensation to restore the company’s estate for the benefit of the creditor body.  This is vital when unpaid PAYE and NIC are involved, as HMRC’s substantial proof of debt can only be partially met if assets are recovered from third parties or failing directors.
• Possess investigatory powers under the Insolvency Act 1986 to interview current and former directors and staff to ascertain the full extent of misconduct.  In complex cases involving connected companies, like SJ Pay and Vision, JLs may need to navigate potential conflicts of interest.  Here, the liquidators appointed to both companies ensured a proper process by arranging for conflict liquidators for Vision in the context of the litigation, showcasing the need for robust impartiality when exercising their powers to restore assets to the creditors.  This ensures that the recovery actions are valid and ultimately serve the interests of the creditors, including HMRC.

Will there be a stronger crackdown on ‘Phoenixism’ following the Budget?

Yes!  The Budget confirmed that the government will fund the recruitment of 50 additional Insolvency Staff within a new “Abusive Phoenixism Taskforce” to disqualify more rogue directors who abuse insolvency processes to evade tax and write off their debts.  We understand that the law will also be amended to extend circumstances under which directors who break the law can be disqualified.

Disclaimer: Chartergate Legal Services Ltd has drafted this update to provide you with a general overview of the relevant law and developments at the date of sending only. This update is provided as a general overview and should be taken as such. It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.