Directors: A failure to pay tax can lead to personal liability on insolvency

Following the decision of the High Court in the case of E D Games Limited [2009], a director of a company which is in financial difficulties, who is responsible for the company’s failure to pay tax, could potentially face personal liability as a result of that failure.

The case concerned a claim by the liquidators under section 212 of the Insolvency Act 1986.  Such section allows a liquidator or a creditor of an insolvent company to litigate claims of the insolvent company against its directors personally for breaches of fiduciary duty or other duties to the company.

In this particular case, the liquidators alleged that the director had caused the company not to pay VAT in the months before it went into liquidation.  The liquidator further claimed that by acting in this way, the director was in breach of his fiduciary duties and that loss was caused to the company as a result.

The High Court held that in principle the liquidators' claim disclosed a basis upon which the director's breach of duty may have caused loss to the company.  The High Court considered that the monies that should have been used to pay the tax were instead used to allow the company to continue to trade for longer than it would otherwise have been able.  By enabling the company to trade for longer, the company's net deficit on its balance sheet had increased which could in principle represent a loss to the company which the liquidator could then recover from the director personally under section 212 of the Insolvency Act 1986.

For more information please contact Jennifer Bell on 01254 828300 / 07921 390020 or email jennifer@backhouses.co.uk