Directors' Duties - What Constitutes Misconduct Part 5
This is Part 5 of a series of booklets considering the general question of Directors’ duties and responsibilities and in particular, what conduct can ultimately constitute a finding of “unfitness” and possible disqualification as acting as a director.
It deals with the issues of Non-payment of Crown Debts (i.e. HMRC) or other non-pressing creditors.
Unfitness is governed by section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”).
This series of booklets is intended to guide you through the general standard of behaviour expected by the Courts on either: (i) an objective basis – i.e. the standard expected of directors generally; and (ii) a subjective basis – i.e. the higher standard expected of directors having regard to their qualifications, skills and experience.
Although cases are always judged on their own individual facts, certain common threads can be determined from the various decisions made by the Courts when determining unfitness pursuant to Section 6 of the CDDA 1986.
1. Non-payment of Crown debts – General principles when considering director responsibilities
Non-payment of a Crown debt does not automatically result in a finding of unfitness leading to disqualification. It is a common misconception that it does.
Rather, the courts must look at each case on its own individual facts in order to determine the significance of the non-payment of a Crown debt.
In general the Court will consider the differing treatment of the Crown to other creditors, whether the company had sufficient funds to pay the Crown and whether it was in fact using the sums due to the Crown to otherwise fund the other parts of the company’s on-going business.
The same principles apply as regards other creditors, and is particularly relevant to banks or members of the public, where the priority to pay these specific categories of creditor appears to have been considered less important than other interests (either which the business relies on – i.e. trade creditors – or personal interests e.g. directors loans).
For the remainder of this article we will focus on the non-payment of Crown debts (which is perhaps the creditor most commonly singled out for preferential non-payment) but the principles are identical for any other category of creditor which is differently to other categories of creditor as described above.
2. How are allegations against directors normally worded in director disqualification claims?
Ordinarily, when dealing with a claim involving non-payment of a Crown debt, the director will be accused of funding the continued trading of the company by withholding taxes due to HMRC (ie VAT, PAYE and NIC). That is, trading to the specific detriment of the Crown.
Often the allegations relate to a director using monies meant for the Crown to fund the company’s continued trading at a time when the company was insolvent. Alternatively, the director is shown as adopting a policy of deliberately not paying sums owed to the Crown and therefore unfairly discriminating against the Crown in favour of other creditors of the company.
However, the Secretary of State can sometimes make mistakes when drafting the wording of claims against directors.
Allegations of trading to the detriment of a particular creditor need to be carefully framed. For example, if it is shown that the director actually caused the company to trade to the detriment of not just one but a number of creditors, then this can defeat a claim of trading to the detriment of a specific creditor. This is even though trading to the detriment of a number of creditors may in itself be the basis for other claims constituting unfitness, disqualification claims have been struck out for being incorrectly phrased or focused.
3. What about Non-payment of creditors other than the Crown? Is this taken in to account when considering my responsibilities as a director?
As stated above, allegations of prejudicial treatment against certain categories of creditor can be just as severe as any claim of trading to the detriment of HMRC/the Crown.
The reality is however that it is normally the Crown who doesn’t get paid. When faced with an option of paying either the trade creditors or the Crown at times when the company is in financial difficulty, many directors choose not to pay the Crown in the hope that they can keep the business going and ultimately repay the outstanding Crown arrears. They often want to pay suppliers of the company as a means of keeping it going.
The reason for the emphasis, in common law and in statute, on the reasons for such sanction for non-payment of the Crown is by reason of its very nature as an involuntary creditor. The Crown does not supply anything vital to your business (although there is an argument that the provision of public services is a necessary commodity) and the withdrawal of its services will do little to affect a company’s business.
However, for public policy purposes taxes must be collected and thus any failure to treat the Crown in an identical way to all other creditors will be subject to a severe sanction.
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4. Does it matter if a creditor isn’t chasing for payment of a debt?
5. What happens if the bank overdraft is paid off instead of a creditor? Is this an abrogation of my director responsibilities?
6. What if a director takes advantage of a non-pressing creditor’s forbearance? Is this a ground for director disqualification?
7. Can the court infer a policy of deliberate non-payment of creditors?
8. What is the position if a director transfers assets and liabilities to another company?
9. What if the level of debts remained generally constant in the company?
10. What if a director has a policy of only paying pressing creditors? Can that person be banned as acting as a director?
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