Many companies admirably soldier on through cash flow difficulties, but it is the mark of a competent director to know when to pull the plug. A businessman who left that decision far too late was banned for four years from being a director or otherwise being concerned in the management of a limited company.

The businessman was sole director and shareholder of a company that had been trading for little more than two years when it was compulsorily wound up at the behest of HM Revenue and Customs (HMRC). The company’s liquidator had received substantial claims from unsecured creditors, including HMRC which asserted that it was owed over £270,000.

The company had filed only one set of accounts during its life and HMRC claimed that, of almost £2.3 million paid from its bank account, PAYE, National Insurance Contributions and VAT represented only £15,148. In those circumstances, the Official Receiver launched proceedings against the businessman under the Company Directors Disqualification Act 1986.

The businessman, who suffered a substantial financial loss personally as a result of the company’s collapse, argued that its debts had been overstated and that it in fact owed nothing to HMRC. There was no allegation that he had acted dishonestly, nor that he had allowed the company to trade whilst insolvent, to the detriment of creditors. He was not accused of any other misconduct or regulatory breach and the case against him was founded solely upon an allegation of incompetence.

Ruling on the matter, the High Court acknowledged that it is perfectly possible for companies to go bust without anyone being at fault. Limiting corporate liability acts as an important encouragement to entrepreneurial risk-taking but, on the other hand, directors owe heavy legal responsibilities which are, or should be, well known. In particular, it was not right for companies to trade whilst discriminating between creditors as to which of them will be paid.

The company failed to meet its obligations to HMRC as it lurched from one unpaid debt to another. It only paid HMRC as and when it was pressed to do so, and rarely even then. It was not adequately capitalised and had no robust systems in place to ensure that it met its tax liabilities. The businessman at all times had the choice to cease trading but had delayed that decision until it was far too late.

Imposing the four-year ban, the Court was satisfied that he had displayed serious incompetence in his management of the company so that it ended up trading to the detriment of HMRC, which had proved to be its largest creditor. His failings went beyond commercial misjudgment and his conduct fell significantly below that required to protect the company’s creditors and the general public.