Raithatha v Baig & Ors

The liquidator sued 14 former directors for breach of the statutory duty of care, skill and diligence under section 174 of the Companies Act 2006 for failing to ensure the company was registered for VAT and for failing to collect VAT from customers. The court found that the company should have been VAT-registered from 2005, that the directors failed to exercise reasonable care by relying on assumptions and the accountants' silence instead of making relevant enquiries, and that this failure caused loss by preventing the collection of VAT which the company later had to meet out of its own funds. The court fixed the period for which loss was attributable to the directors' breach from April 2010 to the presentation of the winding up petition and refused relief under section 1157 of the Companies Act 2006.

Background and parties:

The claim was brought by the liquidator of Halal Monitoring Committee Limited against 14 former directors. The company provided halal-monitoring services and was intended to operate on a not-for-profit basis. It failed to register for VAT until 2011, HMRC levied a prime assessment and later presented a winding-up petition. The liquidator sought to recover loss from the directors arising from the failure to register and to collect VAT.

Nature of the claim:

• The claimant sought compensation for breach of the statutory duty in section 174 Companies Act 2006 (duty to exercise reasonable care, skill and diligence) and relied on the company having suffered loss because VAT was not charged to customers and was ultimately assessed on the company.
• The directors pleaded reliance on the company accountants and, alternatively, that any liability was time-barred; the directors also sought relief under section 1157 Companies Act 2006 if liability were established.

Issues framed by the court:

• Whether the company’s supplies were subject to VAT and whether the company should have been registered from 2005;
• Whether the directors breached their duty under section 174 by failing to ensure registration and collection of VAT;
• Whether causation and loss were established (ie whether failure to collect VAT caused a loss to the company); and
• Whether the court should grant relief from liability under section 1157 Companies Act 2006.

Court’s reasoning and conclusions:

• The court accepted HMRC’s view that the company made standard-rated supplies and should have been VAT registered from 2005, but focused on whether the directors’ conduct after appointment caused loss.
• The directors had assumed the accountants had dealt with VAT, did not ask the accountants whether VAT registration was required and assumed an exemption; that reliance on accountants’ silence was objectively unreasonable and amounted to a breach of the statutory duty under section 174.
• On causation, the court distinguished a mere unpaid tax liability from loss resulting from failure to collect VAT: where supplies are taxable and VAT is not collected the company will have to meet the liability out of its own funds, reducing working capital and causing loss. The court therefore found causation for the period in which the directors ought to have invoiced VAT.
• The court exercised an evidential assessment of timing and fixed the start of the compensable loss at April 2010 (a reasonable interval after the January 2010 meeting when the board should have investigated VAT) to the presentation of the winding up petition; earlier periods were not attributed to the new board.
• The directors’ application for relief under section 1157 failed because their failure to make relevant enquiries and to obtain professional advice when appropriate was objectively unreasonable.

Disposition: The liquidator’s claim succeeded against the directors for the loss attributable to their breach; relief under section 1157 was refused.

The claim succeeded. The court held that the company should have been VAT-registered from 2005 but that the directors breached their duty under section 174 Companies Act 2006 by failing to make reasonable enquiries (including of the accountants) and by relying on assumptions; that breach caused loss through failure to collect VAT from customers; the court attributed compensable loss from April 2010 to presentation of the winding-up petition and refused relief under section 1157 Companies Act 2006.