There are many grounds which the Secretary of State (acting through the Insolvency Service) can rely on when seeking an order for the disqualification of a director, following the insolvent failure of their company.
The most common grounds cited by the Insolvency Service will be
- the failure to equally treat HMRC when compared to other creditors (in terms of making regular repayments, even if only partial); or
- trading to the detriment of HMRC, where the company’s life is extended by using the tax sums collected during the ongoing trading period.
The allegation is usually worded on the basis that the company has traded to the detriment of HMRC and has, in doing so, preferred other creditors of the company to HMRC. However, this definition can change and may include a simple allegation of non-payment of HMRC or it may refer to some action with the post script “…to the detriment of Her Majesty’s Revenue & Customs”.
Why is HMRC always a creditor?
Most companies in the UK trade in the provision of goods or services, and their creditors will usually be directly connected to that business process, with regular billing and payment intervals.
As has been publicised often in the media, small creditors themselves often face difficulties trading if they are not paid quickly and this chain of risk through the chain of small SME businesses supplying other small (or maybe slightly larger) SME businesses often leads to a need for rapid payment by all debtors throughout the chain, to keep all of the connected businesses afloat.
- however, unlike most of these creditors, HMRC becomes a creditor only when the above transactions have completed – often sometime after other similar unsecured creditors have been paid;
- in these circumstances, particularly where there are solvency issues (for example a large debtor further up the chain not paying) then tax liabilities may not be paid as rapidly – especially as the liability is not recognised until much later and the pressure to pay is not initially as intensive (and more so because their role is not essential to the business itself).
When is non-payment of HMRC misconduct?
Virtually every company placed into insolvency in the UK has liabilities due to HMRC.
As described above, this is a natural consequence of a company facing trading difficulties and it is only where such liabilities have been exacerbated – sometimes over a substantial period of time or with demonstrable negligent – that the Secretary of State will consider that the director(s) have acted to allow such prejudicial treatment / misconduct.
- such behaviour does not need to be deliberate or open, it can be a result of negligence where, for example, the company was struggling to survive and maintaining payments to those creditors who would support its survival;
- indeed, for co-directors, passive misconduct occurs where they failed to prevent such treatment of HMRC as an unsecured creditor.
For example a restaurant which needs regular supplies of fresh food may prioritise payment to its fresh food suppliers rather than the landlord or, more commonly, HMRC. In this example the company should not have continued to trade as it was clearly unable to trade profitably and by artificially extending the trading life of the company, the directors effectively engineered this extension by increasing the debts due to the less prioritised creditors.
Defending such misconduct
For a director to be found to be unfit and meriting disqualification, as a result of non-payment of HMRC, the court will have to be persuaded that the company followed a policy, deliberate or not, of paying other creditors in preference to HMRC or in some other way prejudicing the needs of HMRC (for example by prioritising a director’s interests).
- the defence of such accusations are varied and subjective, often depending on accounting principles (as well as legal arguments) and at Francis Wilks & Jones we have considerable experience of exploring such forgotten points;
- the analysis by the Insolvency Service is often partisan and not completely neutral, applying payments to different chronological periods when compared to the relevant periods when such tax liabilities were allegedly not accounted for, or by ignoring basic accounting principles when setting out what should have been done in a given scenario;
- one common error we see is when director’s loans are considered to be assets removed from a company, when in reality they are repayable and remain an asset of the company whilst the director remains solvent, although the abuse of a director’s loan account can in itself comprise misconduct.
At Francis Wilks & Jones we have considerable experience of director disqualification matters, dealing with representations on the above and many other issues that you may not have previously considered, as well as setting out such cases in litigation proceedings post issue of a disqualification claim against you. Please call any member of our director disqualification team today.