Directors who were economical with the truth in dealings with HM Revenue & Customs (HMRC) have been disqualified from acting as directors on grounds their conduct meant they were unfit to be directors.
The directors failed to make PAYE and NI contributions but told HMRC that they were in financial difficulties, and that the board were not taking salaries. They had also kept from HMRC the fact the company had won a new contract.
First, the court said that it was irrelevant that the creditor was HMRC – the same rules applied to all creditors. It also said that the factors in this case creating a danger of disqualification included:
The directors had taken unfair advantage of HMRC’s forbearance in chasing the sums due.
They had a policy of not paying HMRC (whether conscious or not).
They were still benefiting personally while not paying creditors.
During their attempts to agree a deferral of payments, they had not told HMRC the full story.
It ruled that the last factor was particularly damaging to the directors. It also dismissed the defences they put forward, including that:
They intended to pay PAYE and NI eventually.
They were acting in good faith, only paying other creditors to keep the business going.
They had only withheld payment for a short time.
HMRC had not enforced its right to payment.
The Court dismissed all of the excuses. It ruled that, overall, HMRC were not given sufficient accurate information to decide whether they should insist on payment of PAYE and NI or agree to defer it. There was also a policy, conscious or not, of paying other creditors before HMRC. Altogether, this was unfair, and amounted to misconduct that made the directors involved in it unfit, so they should be disqualified.
Directors of companies in financial difficulties and proposing to pay one creditor, but try to defer payment to another, should:
Take specialist professional advice on their position; and
Particularly, ensure they give sufficient, accurate information to all creditors or risk disqualification.
Case ref: Janus Technologies Ltd
Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.