Factual and Procedural Background
The Secretary of State brought a claim seeking a disqualification order against the Defendant for his conduct as the sole director of Company A (Combat Construction Limited). The claim arose from the Defendant causing Company A to trade to the detriment of HMRC by failing to account for and pay Construction Industry Scheme ("CIS") tax and Value Added Tax ("VAT") liabilities over specified periods between November 2017 and April 2019. Despite these tax liabilities, payments to other creditors and the director were maintained, resulting in liabilities of at least £226,002 at liquidation.
The Defendant challenged the claim on grounds that the stated case did not establish an arguable claim for disqualification and that the case had strayed beyond the permitted ambit under relevant civil litigation and Company Directors Disqualification Act 1986 ("CDDA") case law. The court was required to consider the statutory framework, the scope of the grounds, the evidence supporting the claim, and whether the Defendant’s conduct amounted to unfitness to be a director.
Legal Issues Presented
- Whether the Defendant's conduct as director of Company A constituted unfit conduct under section 6 of the CDDA by causing the company to trade to the detriment of HMRC through a discriminatory practice of paying other creditors while failing to pay HMRC’s tax liabilities.
- Whether the claim as presented, including its particulars and evidential basis, established an arguable case within the ambit permitted by the Disqualification Rules and relevant case law.
- Whether the Defendant had knowledge or ought to have had knowledge of the CIS tax liabilities prior to the formal tax determination and if such knowledge impacted the claim’s scope.
- Whether the VAT-related allegations could support a claim of unfitness given the evidential deficiencies regarding the Defendant’s knowledge and conduct.
- Whether the Defendant’s evidential defence, particularly relating to the alleged possession of Gross Payment Status ("GPS") evidence and inability to access the CIS portal, was credible and sufficient to rebut the claim.
Arguments of the Parties
Defendant's Arguments
- The stated grounds and particulars did not establish an arguable claim for disqualification and exceeded the permissible ambit of the claim.
- The Defendant believed the main subcontractor had GPS, so deductions were not required, and the company was unable to verify this online due to lack of access codes from HMRC.
- The Defendant contended that the VAT claim was unsupported by evidence of knowledge or unfit conduct and thus should not succeed.
- The Defendant relied on a defence that he acted reasonably based on representations by the subcontractor and administrative difficulties accessing the CIS portal.
- Submissions were made that the claim lacked necessary investigation and testing, particularly due to absence of evidence from HMRC and other witnesses.
Secretary of State's Arguments
- The Defendant caused Company A to trade to the detriment of HMRC by applying a discriminatory practice of paying other creditors while withholding HMRC tax payments, particularly CIS tax liabilities.
- The failure to pay HMRC despite payments to others and the director supported an inference of a deliberate policy of discrimination.
- The VAT claim lacked sufficient evidential foundation and therefore could not sustain a claim of unfit conduct.
- The Defendant’s defence regarding GPS status and access codes was not credible, unsupported by documentary evidence, and contradicted by possession of relevant letters and failure to appeal tax determinations.
- The evidential burden shifted to the Defendant to rebut the claim once the prima facie case of discriminatory conduct was established.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Rex Williams Leisure Plc [1994] Ch 350 |
Requirement for clear identification of grounds in disqualification proceedings |
Used to emphasize the necessity of setting out the substance of the case clearly in the affidavit supporting the application. |
| Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164 |
Discriminatory practice of paying some creditors while withholding payment from others, particularly the Crown, can amount to unfit conduct |
Applied to explain the concept of trading at the expense of a creditor due to discriminatory payment practices. |
| Re Structural Concrete Ltd [2001] BCC 578 |
Establishing unfitness through discriminatory payment policies |
Referenced to summarise the law on how failure to pay a particular creditor, including HMRC, is not unfit conduct unless discriminatory practice is established. |
| Cathie v Secretary of State for Business, Innovation and Skills (No2) [2012] EWCA Civ 739; [2012] BCC 813 |
Approval of principles regarding discriminatory payment practices and standards of probity and competence |
Confirmed the approach to assessing unfitness and the evidential standards required. |
| Secretary of State for Business Innovation and Skills v Khan [2017] EWHC 288 (Ch) |
Clarification of evidential requirements and standards for disqualification claims |
Followed in assessing the burden of proof and the need to establish discriminatory practices. |
| Re Kazitula Ltd [2022] EWHC 2588 (Ch); [2023] BCC 377 |
Tax assessments establish statutory debt but do not bind findings on director conduct |
Applied to distinguish the evidential value of tax assessments from evidence of unfit conduct by the director. |
| Wisniewski v Central Manchester Health Authority [1998] EWCA Civ 598; [1998] PIQR 324 |
Conditions for drawing adverse inferences from absence or silence of witnesses |
Considered in relation to absence of HMRC evidence and failure of Defendant to call other witnesses. |
Court's Reasoning and Analysis
The court began by defining the ambit of the claim, focusing on whether the Defendant caused Company A to trade to the detriment of HMRC through a discriminatory practice of paying other creditors while withholding payments to HMRC for CIS and VAT liabilities.
Applying section 6 of the CDDA and Schedule 1 factors, the court noted that failure to pay a creditor alone is not unfit conduct; rather, a discriminatory policy resulting in trading at the expense of that creditor is required. The court emphasized that such a policy can be inferred from conduct, including payment patterns.
Regarding the CIS claim, the court found sufficient evidence to establish an arguable case: the company paid out more than it received, paid other creditors and wages, but paid only a nominal sum to HMRC, resulting in a significant unpaid CIS liability. The Defendant’s admission under oath that deducted CIS funds were used to pay other subcontractors supported the inference of discriminatory conduct.
The Defendant’s defence—that he reasonably believed the main subcontractor had GPS and that the company lacked access to the CIS portal due to HMRC’s failure to provide an access code—was examined critically. The court found that the company had received a letter containing the access code, undermining this defence. The Defendant’s failure to produce the purported GPS letter from the subcontractor and the absence of appeals against tax determinations further weakened his position.
Concerning the VAT claim, the court found the evidential basis insufficient to establish unfitness. The Defendant’s knowledge and conduct regarding input tax claims and VAT liabilities were inadequately addressed in the grounds and evidence, leading to the conclusion that the VAT claim could not succeed.
The court considered the absence of HMRC evidence and the failure of the Defendant to call other witnesses, applying the principles from Wisniewski. However, no adverse inference was drawn due to the presence of credible explanations and the evidential context.
Overall, the court found that the Defendant’s conduct fell below the standards of probity and competence expected of a director, given the deliberate policy of non-payment of CIS liabilities over a lengthy period despite payments to other creditors.
Holding and Implications
The court held that the Defendant was a director of an insolvent company and that his conduct in failing to account for and pay CIS tax liabilities while paying other creditors constituted unfit conduct under the CDDA.
DISQUALIFICATION ORDER FOR FOUR YEARS was made against the Defendant, reflecting the seriousness of the misconduct, the amount involved, and the statutory purposes of protection and deterrence.
The VAT-related allegations were dismissed for lack of evidential foundation. The decision does not establish new legal precedent but applies existing principles to the facts, emphasizing the importance of demonstrating a discriminatory policy and knowledge in claims under the CDDA.