Directors should provide for contingent liabilities

The directors of Avacade Ltd (Company) are to be disqualified as the court found that their conduct fell below the standard of probity and competence appropriate for the directors of the Company when they failed to provide for a contingent liability to HMRC.

The Company carried on the business of an investment broker. The Company entered into two separate tax planning schemes, both of which HMRC found to be ineffective, and which gave rise to significant liabilities to HMRC.

When the Company entered insolvent liquidation on 6 November 2015, it had an estimated deficiency of nearly £4 million, which increased to over £12 million once HMRC’s contingent claims were accounted for.

In the 16 months prior to liquidation, the directors caused the Company to enter into a number of transactions which saw its assets diminished, and debts to the directors satisfied. The court found that the directors caused the Company to enter into transactions, including the repayment of loans to the directors of £640,000, without proper regard for the interests of the creditors as a whole. Further, they caused the Company to dispose of assets and business goodwill without benefit to the creditors as a whole.

Having consideration for the directors’ duty to have regard for the Company’s creditors and their duties to act in good faith and exercise reasonable skill and judgment, it was clear that the directors had failed to consider HMRC a contingent creditor.

Whilst the directors argued that they had sought professional advice on the transactions in question, the court was not satisfied that they had asked for specific advice on the risks of proceeding with the transactions in question. The risks and improper nature of the transactions would have been apparent, even in the absence of specific advice.

Avacade Ltd, Re, [2021] EWHC 1501 (Ch)

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