A disqualified accountant banned for deliberate non-payment to HMRC loses appeal

An accountant has failed in an appeal against a three year disqualification. The director was banned from being a company director after he paid trade creditors but not HM Revenue and Customs (HMRC) when his business went into liquidation.

Patrick Bradley was a director of Barhaul (2003) Limited, which went into liquidation owing more than £270,000 to HMRC before the assets were transferred to another company of which he was a director. He then used the assets to pay the company’s trade creditors, but no payments were made to the HMRC.

Judges in the Inner House of the Court of Session upheld a sheriff’s decision that the appellant’s “deliberate policy” of non-payment to HMRC while paying other creditors made him “unfit” to be concerned in the management of a company.

The Secretary of State of Business, Innovation and Skills presented a summary application at Perth Sheriff Court in terms of the Company Directors Disqualification Act 1986, seeking a disqualification under section 6(1).

The unfit conduct relied on was that the appellant had failed in his director’s duties when, through the transaction with BAL, he caused book debts to be realised and paid to trade creditors, all to the detriment of HMRC, to which he chose to make no payment at all.

It was heard that the company ceased trading on 30th June 2010 and HMRC commenced proceedings for its liquidation on the grounds of insolvency.

The company’s balance sheet at the time showed that it owed £109,881 to trade creditors and £134,468.86 to HMRC in relation to PAYE and NIC, as well as £147,567 to HMRC in relation to VAT.

Also on the 30th of June, the business, assets and employees of the company, including book debts of £378,986, were transferred to another company of which the appellant was a director Barhaul Aberfeldy Limited (BAL).

The book debts were collected by BAL and used to pay the company’s trade creditors, but no payments were made by the company in relation to the sums owed to HMRC and at the end of the liquidation there were insufficient funds to pay a dividend to any creditor.

The court heard although the appellant accepted that there was a debt due by the company to HMRC – a debt which had been outstanding for a significant period – he considered that the total amounts sought were “excessive”.

He had tried to negotiate with the HMRC when an interim liquidator was appointed, with offers of instalments but those offers were rejected. He made offers of payment by an initial instalment of £20,000 then £10,000 every fortnight – on the condition that HMRC would agree to enter into negotiations to reduce the amount with him, but HMRC declined the offers.

Despite these attempts to negotiate with the HMRC and make some form of payment, the sheriff rejected it as defence saying it was “irrelevant” to the issue of whether or not a disqualification order was justified and having concluded that the appellant was unfit to be concerned in the management of a company she ordered that he be disqualified from being a company director for three years.

But the appellant challenged that decision on the basis that the sheriff had erred in making her assessment of whether or not he was unfit to be a director, arguing that the findings in fact did not support that conclusion.

Opinions from the Inner House of the Court of Session

Lady Smith – with whom Lord McGhie agreed (of the Inner House of the Court of Session) – ruled that the sheriff was “entitled” to find that the appellant was unfit to manage a company.

Lady Smith said: “I consider that the sheriff was entitled to conclude that the appellant had operated a policy of not paying HMRC whilst paying other creditors, choosing thus to favour trade creditors, to the detriment of HMRC. Put shortly, he applied a policy of discrimination amongst the creditors.

“Further, he did so at a time when he knew that HMRC’s consistent position was that they would not negotiate a settlement with him, no formal challenge to their claims had been raised and the company’s cash resources were finite with no prospect of any further earnings.”

She added: “I cannot conclude that there is any basis on which the court could interfere with that conclusion and, I would, accordingly, refuse the appeal.”

Dissenting, Lord Malcolm held that the sheriff “erred in law” in her decision “that the defender’s position that the sums sought by HMRC were excessive is irrelevant to the determination in the present proceedings”.

His written opinion stated: “When regard is had to the narrowly focused basis for alleged unfitness, and once the full circumstances are taken into account, I am unable to identify any lack of commercial probity or marked incompetence such as would make the defender unfit to manage a company.

“In so far as there was a ‘policy’, it included payments to HMRC, but for the reasons set out earlier, none were made. What happened thereafter was a reaction to the stance taken by HMRC. I would uphold the appeal and quash the disqualification order.”