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Official Receiver v Thomas David Barnes & Ors (2000)

Summary

The adoption by the respondent company directors of a policy of deliberate non-payment of income tax, so that the company could continue to pay its trade creditors, was misconduct that constituted unfitness for the purposes of s.6 Company Directors Disqualification Act 1986.

Facts

Appeal by the Official Receiver from the decision of District Judge Wilby, who had dismissed his application under s.6 Company Directors Disqualification Act 1986 for disqualification orders against the respondents by reason of their conduct in relation to the affairs of Structural Concrete Ltd ('the company'). The company was wound up on the petition of the Inland Revenue ('the Revenue'), which was owed in excess of £467,000. The company carried on business in the building construction industry. Of the seven contracts that the company undertook during its trading life of just over two years, difficulties in obtaining payment were experienced in relation to five. The sums outstanding were substantial. Given the pressure that these difficulties placed upon the company's cash flow, a deliberate policy was adopted of not paying to the Revenue amounts due in respect of the company's subcontract tax liability. Evidence was given by the directors to the effect that it was not their intention that the Revenue should never be paid, but that the company, in an attempt to ensure that it survived for long enough to recover the sums that were due to it, was obliged, in accordance with a policy carried through by the first defendant ('B'), but acquiesced in by all the other respondents, to pay its trade creditors in priority to the Revenue. Thus, while the company's liability to the Revenue steadily rose, the amount due from it to trade creditors remained relatively low, and amounted to just over £22,000 as at the date of liquidation. The district judge held that the policy was not "a cynical decision to use Crown monies as working capital", but was "an informed commercial decision borne out of necessity to enable the company to continue trading". On that basis she held that the policy did not constitute misconduct amounting to unfitness.

Held

(1) The money that the company had failed to pay over to the Revenue was clearly being used as working capital. It was clear, and must have been at the time, that operating such a policy was at the risk of the Revenue, among others, and indicated that the company was insolvent. Those being the facts, it would require exceptional circumstances to justify a finding that such a policy did not amount to misconduct justifying a finding of unfitness. The district judge's view that the policy was a "commercial one" could not be supported, since it sent out entirely the wrong message. (2) The appropriate disqualification periods clearly fell within the lowest band. Since B had greater responsibility for the day-to-day implementation of the policy than the other respondents, it was appropriate that he should be disqualified for a period of four years and the others for two years.

Appeal allowed. Order accordingly.

Chancery Division
Blackburne J
Judgment date
21 June 2000
References

LTL 29/6/2000