The Secretary of State for Business and Trade v Daniel Singh Sekhon

Failure to pay HMRC is not, by itself, unfit conduct. The relevant question is whether the director adopted or was responsible for a discriminatory practice of paying other creditors while withholding payment from HMRC, so that the company traded at HMRC’s expense. The practice may be proved by direct evidence or inferred from the payment pattern and surrounding circumstances. A deliberate policy of non-payment over a lengthy period will ordinarily justify a finding of unfitness, subject to any extenuating circumstances. Tax assessments establish the company’s statutory liability but do not, without more, establish the director’s culpable conduct. The court must determine the claim within the pleaded ground and supporting evidence.

The Secretary of State sought a disqualification order against the defendant, the sole director of Combat Construction Limited, under section 6 of the Company Directors Disqualification Act 1986. The claim alleged that the company traded to HMRC’s detriment by failing to pay construction industry scheme tax and VAT while paying other creditors and the director.

The defendant challenged the adequacy and scope of the grounds. He also relied on a defence that he believed the principal subcontractor held gross payment status and that the company had been unable to access the CIS portal. The central issues were whether the CIS allegation established an arguable and proved discriminatory practice, whether the VAT allegation was properly pleaded and supported, and whether the conduct made the defendant unfit.

1. Scope of the claim. The CIS ground was sufficiently pleaded. Its substance was that CIS liabilities accrued during the relevant period, HMRC was not paid, other creditors were paid, and that discriminatory practice was attributable to the defendant as sole director. The claim did not depend on the date of the Regulation 13 determination or on a separately pleaded allegation of knowledge of the subcontractor’s status.
2. VAT allegation. The VAT ground failed at the pleading and evidential stage. Rejection of input VAT did not itself establish that the defendant knew, or ought to have known, during the relevant period that the deductions were impermissible. The claim needed to identify the rejected expenditure, the available evidence, and the defendant’s actual or constructive state of mind.
3. CIS evidence. The company traded while withholding approximately £70,000 of CIS tax, paid almost all other expenditure, and HMRC was the only creditor at liquidation. The defendant’s sworn admission that deductions had been retained and used to pay other subcontractors supported an inference of discriminatory practice. His evidence that he lacked access to the CIS portal and had relied on evidence of gross payment status was rejected. The evidential burden therefore remained unmet.
4. Unfitness and order. Applying section 6 and Schedule 1 of the Company Directors Disqualification Act 1986, the court found that the defendant’s conduct fell below the standards of probity and competence appropriate for a fit director. No extenuating circumstances altered that conclusion. The statutory duty to disqualify was engaged, and a four-year disqualification order was made. The court rejected the proposed amendment based on a specific 8 March 2018 knowledge date and was satisfied that the trial remained fair.