Raithatha v Baig & Ors

A company director must acquire and maintain sufficient knowledge of the company’s business to discharge the statutory duty of reasonable care, skill and diligence. Directors cannot simply rely on an accountant’s silence or claim inexperience where an obvious compliance issue requires investigation. The duty is fact-sensitive, but it does not require directors to possess specialist professional knowledge. They must ask appropriate questions, supervise delegated functions and obtain advice where necessary. A failure to register for VAT may not itself cause loss. However, where taxable supplies were made, failing to collect VAT can cause loss because the company must meet the VAT liability from its own assets. Relief under section 1157 of the Companies Act 2006 requires objective reasonableness. Honest reliance on professional advice cannot justify relief where no relevant advice was obtained.

Halal Monitoring Committee Limited entered insolvent liquidation after HMRC raised a substantial VAT assessment. The liquidator claimed that the company’s directors breached their duty of care, skill and diligence by failing to ensure VAT registration and by failing to charge and collect VAT on taxable supplies.

The directors admitted the failures but relied on their inexperience, their accountants’ involvement and the absence of advice that VAT registration was required. They also argued that the failures had not caused loss and sought relief under section 1157 of the Companies Act 2006.

The central issues were whether the directors breached section 174, whether the breach caused loss, and whether relief should be granted.

1. The claim succeeded in part. The Company should have been registered for VAT from 2005, but the directors’ liability was assessed from April 2010, after the newly constituted board had a reasonable period to investigate the Company’s financial position.

2. Section 174 of the Companies Act 2006 places the established duty of reasonable care, skill and diligence on directors. Directors must acquire and maintain sufficient knowledge and understanding of the company’s business. Delegation does not remove the duty to supervise. The standard applies to inexperienced and non-executive directors as well as others.

3. The directors were not required to possess an accountant’s specialist knowledge. They were required to ask whether the Company had a VAT exemption and to obtain advice rather than assume that the position had been dealt with. Reliance on the accountants’ silence therefore demonstrated a lack of reasonable care, skill and diligence.

4. The case did not involve the court substituting its commercial judgment for that of management. The directors had acted on an unverified assumption and had taken no proper steps to validate it.

5. A failure to register for VAT may not independently cause damage. Where taxable supplies are made, however, failure to collect VAT causes loss because the company must discharge the VAT liability from its own assets rather than from sums collected from customers. The causal loss ran from April 2010 to presentation of the winding-up petition.

6. The directors were not entitled to relief under section 1157. The test was objective. They had not obtained professional advice on VAT before HMRC raised the issue, so they could not rely on professional advice as the basis for claiming that their conduct was reasonable. Their honesty, charitable purpose, inexperience and reliance on accountants did not make the failure objectively reasonable.

Order accordingly.

The judgment describes the Company’s winding-up order as having been made on 30 April 2012 following an HMRC petition. The liquidator subsequently brought the present first-instance claim against the directors. No earlier judicial decision in the same claim is stated.