The Secretary of State for Business And Trade v Zafar Ali Khan

Under section 6 of the Company Directors Disqualification Act 1986, the court must disqualify a director where an insolvent company’s conduct makes that director unfit to be concerned in company management. A Kittel finding and a finding of unfitness are distinct: the court must separately assess the director’s personal knowledge and involvement and the standards expected of a director. The Kittel inquiry asks whether there was a tax loss, fraudulent evasion, a connection between the transactions and that evasion, and actual or imputed knowledge of that connection. Actual knowledge and imputed knowledge are materially different states of mind. Deliberate and substantial fraud ordinarily engages the top Sevenoaks bracket absent very special circumstances.

The Secretary of State sought the disqualification of Zafar Ali Khan, the sole director of Anderson Security & Trading Ltd, under section 6 of the Company Directors Disqualification Act 1986. The company entered creditors’ voluntary liquidation with substantial HMRC liabilities after HMRC refused input-tax deduction on invoices attributed to four security-service sub-contractors.

The Secretary of State relied on two alternative bases: that the sub-contractors had made no taxable supplies, and that the transactions were connected with fraudulent evasion of VAT and Mr Khan knew or should have known of that connection. A PAYE/NIC allegation was withdrawn. The central issues were whether the Kittel questions were established, whether the court could determine them without a prior FTT decision, whether the conduct made Mr Khan unfit, and the appropriate period of disqualification.

1. Jurisdiction and statutory test. The court could determine the Kittel issues without awaiting a decision of the FTT. It was conducting a different inquiry, between different parties, into unfitness under the Company Directors Disqualification Act 1986 [13]. Under section 6, insolvency and unfitness having been established, a disqualification order was mandatory [21]-[25].
2. Kittel inquiry. The relevant questions were whether there was a tax loss; whether it resulted from fraudulent evasion; whether the transactions were connected with that evasion; and whether the director knew or should have known of the connection. A fifth question then arose under the Act: whether the director’s conduct was unfit [36]. Kittel liability did not itself establish unfitness. The court had to consider the director’s personal knowledge, involvement and effect on fitness [35].
3. Application. The first three Kittel questions were established for each of the four relevant sub-contracting arrangements. Mr Khan had failed to undertake ordinary commercial inquiries, ignored incompatible business descriptions and other warning signs, made substantial round-sum payments unrelated to invoices, often in cash, and operated without timesheets or reliable records. He therefore ought to have known, and indeed must have known, that the transactions were connected with fraudulent evasion of VAT [71], [78], [85], [101], [141]-[143]. The court also found that no taxable supplies had been made [143].
4. Sanction. Actual knowledge involved dishonesty, whereas imputed knowledge was broadly equivalent to negligence. The distinction affected the appropriate period of disqualification [37]-[38]. The conduct amounted to deliberate and substantial fraud. Although the withdrawn PAYE/NIC allegations and the age and scale of the VAT loss moderated the suggested period, 12 years was appropriate. The court ordered Mr Khan’s disqualification for 12 years [144]-[145].