Directors’ personal liability for tax breaches

Under s212 of the Insolvency Act 1986, Liquidators have the power to pursue compensation from directors who breach their fiduciary duties to the Company.

In the recent case of E D Games Limited [2009] EWHC 223 (Ch), the liquidators brought such a claim against the director. It resulted from his failure to submit VAT returns or pay VAT or any tax for a period of 22 months before the company went into liquidation. The liquidators claimed that the funds that should have been paid to HMRC in respect of VAT were used to fund the continued trading of the company beyond the point it would have otherwise ceased to trade. The continued trading generated a further loss to the company.

The director tried to claim that any losses were not the company’s but the creditors’ and he could not be held personally liable. The High Court held, however, that the liquidators’ claim did support a basis from which, at least in principle, it could be shown that the director’s breach of duty caused loss to the company and was, therefore, recoverable under s212.

The scope of this case is not limited to HMRC and the principle could apply to any creditor. It further supports the necessity of directors seeking advice as soon as possible from a licensed insolvency practitioner if they believe their company is in financial difficulty, in order to limit the risk of personal liability.