In the decision in The Secretary of State for Business Innovation and Skills v Khan the High Court has considered the principles surrounding trading to the detriment of HMRC in directors disqualification proceedings. Mark Baldwin considers the judgment.
Mr Khan was the sole director of Prime Focus Broadcast Limited (“the Company”). On 28 February 2013, the Company acquired parts of the assets and business of another company that was in administration and commenced trading. The Company was placed into administration on 17 October 2013 shortly after HMRC had presented a winding-up petition.
Whilst the Company paid its VAT liabilities it failed to make any payments in respect of its PAYE/NIC liabilities. As at the date of administration HMRC was owed £998,178 and the other unsecured creditors were the bank (£1,063) and an inter-company debt (£639,494) which was disputed by the administrators.
The Secretary of State brought directors disqualification proceedings against Mr Khan alleging that he had “caused or allowed the Company to trade throughout to the detriment of (HMRC) by the non-payment of PAYE and NIC which totalled £998,178 at the date of administration.”
Initially, Mr Khan filed evidence denying that he had any responsibility for the matters alleged. Days before trial he filed further evidence admitting that he was responsible for the non-payment of HMRC, but stating that he had given full consideration to the Company’s solvency and had not paid HMRC because there were three possible solutions to the Company’s cash flow difficulties being a) sub-letting part of the Company’s premises; b) a sale of the business and c) when the sale fell through, a letter of comfort provided by the Company’s ultimate parent company that it would provide the funds to pay HMRC.
Mr Registrar Jones considered the principles laid down in the decisions of Re Structural Concrete Ltd [2001] BCC 578 and Cathie v Secretary of State for Business Innovation and Skills (No2) [2012] BCC 813, and concluded that he had to find whether there had been a policy of discrimination against a class of creditor, and if he did, he had to consider whether the conduct of Mr Khan took him below the standards of probity and competence appropriate for persons fit to be directors of companies taking into account any extenuating circumstances.
The Registrar had no hesitation in finding a discriminatory policy of not paying HMRC. Notwithstanding the arguments advanced by Mr Khan, the Registrar found that he had not given proper consideration to the interests of all creditors when deciding to continue to trade. He also found that whilst he had spoken to HMRC about deferring payment, Mr Khan had failed to make full disclosure of the Company’s position and possible solutions, which a reasonable director would have done. Further Mr Khan could not reasonably have relied on the matters that he put forward as founding a belief that HMRC would be paid in the future.
The Registrar considered that the appropriate starting point for disqualification was 7 years, but Mr Khan’s conduct was mitigated by the pressures brought to bear upon him by the directors of the holding company and ultimate parent company and the letter of comfort. The period of disqualification was therefore set at 5 years.
Whilst this decision is an affirmation of well-known principles, it is interesting to note that the modest period of misconduct of seven months (effectively March to September 2013) merited a disqualification period of 7 years absent mitigation.
