Director Personal Payments Breach Of Duty On Notice Of HMRC Claim

This guide considers Director personal payments breach of duty when on notice of HMRC claim.

In this article you’ll learn about:

  • When personal payments could amount to a breach of a Director’s duty.
  • Consideration of making personal payments when on notice of a claim from HMRC.
  • Key principles for Directors to consider when making personal payments.

Let’s get cracking.

Director Personal Payments Breach Of Duty When On Notice Of HMRC Claim

When Are Personal Payments A Breach Of Duty?

Director personal payments breach of duty arises when you prejudice the position of creditors or you are simply not entitled to the money received.

If a Director receives money they are not entitled to receive then if the company is solvent it can only be retained if they get approval from the shareholders.

If a company is insolvent then there will be a greatly increased risk that creditors could be prejudiced and as a result, approval to retain such monies cannot be ratified by shareholders. In theory, it could be approved by creditors but it is very unlikely to happen.

There is a conflict of interest if a Director makes payments to themselves or their associates such as family members who benefit but company creditors then lose out.

The problem arises when Directors are themselves, creditors because they are just as entitled to company monies in respect of their debts as indeed are the other unsecured creditors. What a Director is not entitled to do, however, is to take unfair advantage of their control over the company to put themselves into a better position than they would otherwise have been put into. In such an instance a Preference could arise which is defined in Section 239 of the Insolvency Act 1986.

Personal Payments When On Notice Of HMRC Claim

It is not uncommon for companies to end up in a dispute with HMRC about tax liabilities.

Tax disputes with HMRC can often take a considerable period of time. Sometimes such disputes can take years.

A company cannot necessarily halt its dealings until a dispute with HMRC is resolved. However, this will depend on the facts of a case.

For example, if a company has more or less ceased trading then before a Director hoovers up the last remaining company crumbs left in its bank account it should await the outcome of the HMRC dispute.

If however, a company is trading then matters can be more complicated. Liability to pay Director wages may well be justified but making payment of dividends (for example only) could be a whole different ball game and will often be impermissible. This is because contingent liabilities (or in the case of HMRC Assessments and or Determinations – absolute liabilities) need to be taken into account when paying dividends.

Director Personal Payments Principles

The Director personal payments principles was looked into in the case of Manolete Partners Plc v Dalal & Ors [2022] EWHC 1597 (Ch).

In that case sales were thought by HMRC to have been understated and an HMRC Tax COP9 investigation resulted.

HMRC suggested that the company (Bolton Poultry Products Limited – “the Company”) had made more money than declared in its accounts and it was claimed by Manolete Partners Plc that such funds had been misappropriated.

The Company was in the business of slaughtering chickens, and selling wholesale halal chicken meat. It wound up in Voluntary Liquidation (Creditors).

A key issue in the judgment was whilst on notice of an HMRC claim should payments have been made by the Director for the benefit of relatives.

Promote The Success Of The Company

It is a duty of a Director to promote the success of the company in light of Section 172 of the Companies Act 2006.

However, there is still a duty to take into account the interests of creditors when a company is insolvent.

Acting In The Interests Of Creditors

A Director must act in the interests of creditors when a company is on balance insolvent following the rule in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112[2019] BCC 631:

… in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 (Kinsela) at 730:

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

The Point Of Insolvency When HMRC Raised Assessments

Although the point of insolvency can be tricky to identify, HMRC is in a notable position of being able to raise for example discovery assessments which can mean the taxpayer might be liable for substantial additional tax.

“In my view, where a person is claiming that a company owes them more money than the company can afford to pay, and the company is unlikely to be able to defend the claim, the company should be treated as being more likely than not to be insolvent for the purposes of imposing on the directors duties to consider the interests of the creditors.”

In assessing what is in the interests of creditors if a Director fails to consider the interests of creditors then the transactions in question are viewed on whether an intelligent and honest person would have considered them to be in the best interests of the company and as such in Manolete the Court said:

In my judgment, an intelligent and honest person in Ebrahim’s position could not have reasonably believed that causing the Company to pay £250,000 to him in repayment of money it owed him was for the benefit of the creditors as a whole. The creditors were essentially him and HMRC. The payment was for his own benefit, because it enabled him to make a generous gift to his son and daughter-in-law which would enable them to buy a house. But his duty was to consider the creditors as a class, not just himself: see GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] BCLC 369 at [168]. The payment was not for the benefit of the creditors as a class. Accordingly, I consider that Ebrahim did act in breach of his duty to the creditors when he caused the payment to be made.

Oliver Elliot Observation

When a company is insolvent or could be insolvent because of HMRC Tax Assessments and or Determinations then Directors need to carefully think before assuming they will be relieved from the obligation of paying back monies they hoovered up from the company whilst the dispute was developing.

The assertion that an HMRC Tax Assessment or Determination is disputed is unlikely to be good enough to justify a Director emptying a company bank account in their favour.

There is no loss to the company if such funds are kept in the company bank account and the Director refrains from letting their fingers swarm all over the same.

If the Directors are right they can access the funds when the dispute is resolved. If the Directors are wrong they can use the same to pay the fair share to HMRC and avoid the prospect of a Liquidator attempting to claw such funds back from them later on and all the litigation expenses that feature as well. It is a win win approach.

What Next?

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Disclaimer: Director Personal Payments Breach Of Duty On Notice Of HMRC Claim

This page Director Personal Payments Breach Of Duty On Notice Of HMRC Claim is not legal advice and should not be relied upon as such. This article Director Personal Payments Breach Of Duty On Notice Of HMRC Claim is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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