Trading to the Detriment of HMRC – Director Disqualification
A recap of the principles applicable to allegations by the Secretary of State of trading to the detriment of HMRC – The Secretary of State for Business Energy and Industrial Strategy v Raymond St John Murphy  EWHC 459 (Ch)
In The Secretary of State for Business Energy and Industrial Strategy v Raymond St John Murphy  EWHC 459 (Ch) the principles applicable to allegations of trading to the detriment of HMRC (the most common ground for disqualification proceedings) were reaffirmed. This is an important decision for company directors as it was established that a director cannot avoid disqualification on the basis that he hopes the company would be in a position to pay tax at a later date.
An application for a disqualification order pursuant to section 6 of the Company Directors Disqualification Act 1986 was brought against Mr Murphy. Mr Murphy was formerly the sole director of St John Law Limited (“the Company”), which entered into liquidation.
One of the principal allegations brought by the Secretary of State was that Mr Murphy had caused the Company to fail to comply with its obligations to file and pay taxes when due. As a result, he had caused or permitted the Company to trade to the detriment of HMRC.
Mr Murphy sought to defend this aspect of the claim on two principal grounds:
- Mr Murphy claimed that he was owed a substantial amount from HM Treasury in respect of a costs order made in his favour in 2011 in criminal proceedings brought against him. This would have been sufficient to satisfy all liabilities due to HMRC at a later date, and;
- The Company was due to receive sufficient income shortly in order to repay HMRC liabilities in full. The Company was therefore not insolvent.
It has long been established that non payment of crown debts, cannot, in itself, justify a finding of unfitness (see Re Sevenoaks Stationers (Retail) Ltd 1991 Ch 164, 183 per Dillon LJ). Instead, a policy of discrimination must be established.
1) The starting point is to establish a discriminatory practice of paying other creditors with the result that the company is trading at the expense of the creditor who is discriminated against. This may constitute unfit conduct.
2) The evidence required to establish a policy of discrimination can be direct but can also be inferred from conduct – for example, the fact of withholding payment for a significant period in contrast to the payment of others. Such practice is normally found in cases where the company is insolvent, cannot pay all its creditors when the debts falls due and the director decides to pay those creditors who press and not those who forbear (whether intentionally or because of administrative problems in pressing for prompt payment of companies in financial difficulty).
3) If a deliberate policy of non-payment of Crown debts is established, the court asks whether the defendant has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies taking into account any extenuating (not the higher test of exceptional) circumstances. However, the guidance of the court is that a deliberate policy of non-payment over a lengthy period is likely to be misconduct justifying such a finding.
4) If the Defendant has fallen below the required standards of probity and competence, it is the duty of the court to make a disqualification order. Other matters, such as subsequent conduct and the current position are for mitigation and/or an application for permission to act.
5) A finding of a deliberate policy of discrimination does not require a conscious decision to that effect by the directors of a company. Accordingly, the decision can be subconscious and the reasons for it may be unconscious.
The allegation that Mr Murphy had caused the Company to trade to the detriment of HMRC was made out. Substantial payments were being made to other creditors (including Mr Murphy) at a time when HMRC were not being paid. This policy continued for a significant period of time. Accordingly, a policy of discrimination was made out and Mr Murphy was disqualified for a period of 8 years.
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