Company director banned for deliberate non-payment to HMRC loses appeal against disqualification

Patrick Bradley was a director of Barhaul (2003) Limited, which went into liquidation owing more than £270,000 to HMRC before the assets were transferred to another company of which he was a director and used to pay the company’s trade creditors, but no payments were made to the taxman.

By a majority of two-to-one, judges in the Inner House of the Court of Session upheld a sheriff’s decision that the appellant’s “deliberate policy” of non-payment to HMRC while paying other creditors made him “unfit” to be concerned in the management of a company.

Lady Smith, Lord Malcolm and Lord McGhie heard that the company ceased trading on 30 June 2010 and HMRC commenced proceedings for its liquidation on the grounds of insolvency.

The company’s balance sheet at the time showed that it owed £109,881 to trade creditors and £134,468.86 to HMRC in relation to PAYE and NIC, as well as £147,567 to HMRC in relation to VAT.

On the same date the business, assets and employees of the company, including book debts of £378,986, were transferred to another company of which the appellant was a director Barhaul Aberfeldy Limited (BAL).

The book debts were collected by BAL and used to pay the company’s trade creditors, but no payments were made by the company in relation to the sums owed to HMRC and at the end of the liquidation there were insufficient funds to pay a dividend to any creditor.

Thereafter the Secretary of State of Business, Innovation and Skills presented a summary application at Perth Sheriff Court in terms of the Company Directors Disqualification Act 1986, seeking a disqualification under section 6(1).

The unfit conduct relied on was that the appellant had failed in his director’s duties when, through the transaction with BAL, he caused book debts to be realised and paid to trade creditors, all to the detriment of HMRC, to which he chose to make no payment at all.

The court found that more than £160,000 was realised from the company’s debtors and used to discharge the debts due to trade creditors, but nothing was paid to HMRC because, although the appellant accepted that there was a debt due by the company to HMRC – a debt which had been outstanding for a significant period – he considered that the total amounts sought were “excessive”.

Between 30 June 2010 and 28 February 2011 when an interim liquidator was appointed, he tried, without success, to reach a compromise agreement with HMRC.

He made offers of payment by instalments – an initial instalment of £20,000 then £10,000 every fortnight – on the condition that HMRC would agree to enter into negotiations with him, but those offers were rejected.

The sheriff rejected that defence as “irrelevant” to the issue of whether or not a disqualification order was justified and having concluded that the appellant was unfit to be concerned in the management of a company she ordered that he be disqualified from being a company director for three years.

But the appellant challenged that decision on the basis that the sheriff had erred in making her assessment of whether or not he was unfit to be a director, arguing that the findings in fact did not support that conclusion.

However, Lady Smith – with whom Lord McGhie agreed – ruled that the sheriff was “entitled” to find that the appellant was unfit to manage a company.

In a written opinion, Lady Smith said: “I consider that the sheriff was entitled to conclude that the appellant had operated a policy of not paying HMRC whilst paying other creditors, choosing thus to favour trade creditors, to the detriment of HMRC. Put shortly, he applied a policy of discrimination amongst the creditors.

“Further, he did so at a time when he knew that HMRC’s consistent position was that they would not negotiate a settlement with him, no formal challenge to their claims had been raised and the company’s cash resources were finite with no prospect of any further earnings.”

She added: “I cannot conclude that there is any basis on which the court could interfere with that conclusion and, I would, accordingly, refuse the appeal.”

Dissenting, Lord Malcolm held that the sheriff “erred in law” in her decision “that the defender’s position that the sums sought by HMRC were excessive is irrelevant to the determination in the present proceedings”.

His written opinion stated: “When regard is had to the narrowly focussed basis for alleged unfitness, and once the full circumstances are taken into account, I am unable to identify any lack of commercial probity or marked incompetence such as would make the defender unfit to manage a company.

“In so far as there was a ‘policy’, it included payments to HMRC, but for the reasons set out earlier, none were made. What happened thereafter was a reaction to the stance taken by HMRC. I would uphold the appeal and quash the disqualification order.”