The Secretary of State for Business, Energy and Industrial Strategy v Shafique Uddin (aka Sofiq Uddin)

For the purposes of director disqualification, a director may have caused a company’s misconduct either by positively bringing it about or by knowingly failing to prevent it. To have allowed misconduct requires culpable inaction, including failure to exercise reasonable care, skill and diligence.

A director cannot discharge statutory responsibilities simply by outsourcing them to an accountant. Reasonable reliance on professional advice may be relevant, but it does not excuse approval of returns containing glaring inaccuracies. Filing materially inaccurate tax returns over a prolonged period is conduct capable of demonstrating unfitness under the Company Directors Disqualification Act 1986.

The Secretary of State sought a disqualification order against Shafique Uddin, the sole director of Kazitula Limited, under section 6 of the Company Directors Disqualification Act 1986.

Kazitula operated a restaurant and entered creditors’ voluntary liquidation in April 2017. HMRC alleged that the company had substantially suppressed non-card sales in its VAT and corporation tax returns. HMRC raised assessments using its best judgment after the company failed to provide requested records.

Mr Uddin denied wrongdoing. He relied principally on alleged reliance upon the company’s accountant and on a spreadsheet intended to show that the under-declaration was materially less than HMRC alleged. He also argued that the disqualification claim should await the outcome of related First-tier Tribunal proceedings.

The issues were whether the company’s sales had been understated, whether Mr Uddin had caused or allowed the inaccurate returns, whether that conduct made him unfit, and what period of disqualification was appropriate.

1. Disqualification. The claim succeeded. The court was satisfied that Kazitula had understated its sales between 2010 and 2017 and that Mr Uddin had caused the filing of inaccurate VAT returns. An eight-year disqualification order was imposed.
2. Meaning of “caused or allowed”. “Caused” includes deliberately bringing about the relevant conduct and, in an appropriate case, knowingly failing to prevent it. “Allowed” requires culpable inaction. It may be established by failure to acquaint oneself properly with the company’s affairs, contrary to the duty of reasonable care, skill and diligence under section 174 of the Companies Act 2006. The allegation is not to be read as a criminal indictment; the essential question is whether the defendant fairly understands the substance of the case.
3. Directorial responsibility. A director cannot simply outsource his responsibilities. Reasonable reliance on professional advice may negate unfitness or mitigate the case, but only where the reliance was reasonable. The accountant’s alleged role did not relieve Mr Uddin of responsibility for checking returns which showed substantial discrepancies.
4. Evidence. The HMRC material was admissible at least as hearsay and was not binding on the court. The court had to reach its own conclusion on the balance of probabilities. The absence of evidence from the accountant and from the person who prepared the spreadsheet supported adverse inferences under Wisniewski v Central Manchester Health Authority.
5. Findings. The spreadsheet itself showed materially higher sales than the VAT returns and understated cash banked and cash wages where comparison was possible. The HMRC visits showed non-card sales consistently exceeding 40%, while the returns suggested only 14.6%. The court found that the discrepancy could not have escaped the attention of the sole director.
6. Unfitness and period. Deliberately filing materially inaccurate returns over nearly seven years, causing the company’s insolvency and apparently conferring personal gain, demonstrated unfitness. Applying the three-bracket approach in In re Sevenoaks Stationers (Retail) Ltd, the conduct fell towards the top of the middle bracket. Eight years was appropriate, allowing for the uncertainty as to the precise level of understatement and Mr Uddin’s remaining working life.