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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Raithatha v Baig & Ors  EWHC 2059 (Ch) (25 July 2017)
Cite as:  EWHC 2059 (Ch)
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Fetter Lane, London, EC4A 1NL
B e f o r e :
| SITUL DEVJI RAITHATHA
(As Liquidator of Halal Monitoring Committee Limited)
|- and -
|MIRA NAZEER AHMED BAIG & ORS
LOUIS DOYLE (instructed by NEIL DAVIES & PARTNERS) for the RESPONDENTS
Hearing dates: 18 July-20 July 2017
Crown Copyright ©
Chief Registrar Briggs:
"By the time my fellow co-defendants and I became involved in the Company, Watergate Accountants have already prepared Year End accounts for the previous 3 accounting periods, and therefore the taxable status of the Company was well resolved and I have no reason to believe otherwise. It would appear to me inconceivable that Company accountants, retained year after year by the Company, in the full knowledge of its business activity would prepare accounts in this way where they had formed the view that it ought properly to have been registered for VAT."
"This is a polite request for your VAT registration number-I have carried out checks on our database and cannot locate your registration number. If you are not VAT registered, can you confirm this and provide me with a summary of your business turnover on a weekly/monthly basis. If you have already applied to be VAT registered then please accept my apologies for not being aware, in such a case I would be obliged if you could forward me a copy of your application and any contact with HM Revenue & Customs."
"….VAT was not, several years ago, discussed as it was generally assumed that the business was that of providing a religious and food-based service. The company registered as a charity to provide transparency amongst the religious community. The previous accountants (Watergates) never raised the subject of VAT registration.."
The claim and defence- a brief summary
"This is a summons under s212 of the Insolvency Act 1986 by a liquidator against a former officer of the company. This is a summary procedure which used to be called the misfeasance summons but has been extended to include breaches of any duty including the duty of care. The liquidator alleges that the respondent Mr D' Jan was negligent in completing and signing a proposal form for fire insurance with Guardian Royal Exchange Assurance plc. As a result, the insurers repudiated liabilities for fire at the company's premises in Cornwall which had destroyed stock said to be worth some £174,000. The company is insolvent, having a deficiency as regards unsecured creditors of £500,000. The liquidator therefore brings these proceedings for the benefit of the unsecured creditors."
"As a general rule the remedy for breach of a director's duty of care is compensation for the harm caused to the company by the director's negligence".
"[Their Lordships] accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management's decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law; nor will courts assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at."
"I accept Mr Banner's submission that a failure to pay tax does not of itself result in the loss of a sum equivalent to the unpaid tax, any more than the acceptance of a loan can be described as a loss causing damage (see Galoo Limited v Bright Graeme Murray  1 WLR 1360 at 1369D). Moreover, I accept that the liquidator may have considerable difficulties in establishing the necessary causal link between failure to pay the VAT monies and losses equivalent to or greater than those sums. This is particularly so since it appears from the evidence filed on behalf of the Liquidator that the cause of the problem may have been the fact that the Company was obliged to pay VAT on imported goods before it had sold them, so it is possible that the trading on and sale of the goods may, at least to some extent, have improved the Company's position. That all remains to be seen. It is, however, as Mr Davenport submits, a matter which requires factual investigation."
Conclusion- VAT liability- breach of duty
Q. You saw that VAT had not been paid previously and assumed the Company did not have to pay [VAT] going forward?
A. I didn't rely on BH's advice, but what I did rely on, was the accountant. The accountant's presence at the meetings we had. He said nothing of VAT.
Q. You didn't go to the accountants and ask the question, should we be registered?
A. I didn't ask the question after we took over. The accountant [at the meeting] didn't say about VAT but did discuss PAYE, NIC. I said we had been through tumultuous period and what we want to do is make this work. I don't want in two years time to finds skeletons coming out of the cupboard. The accountant was there [at the meeting] and what I intended was anything to do with the accountant should be dealt with by him.
Q. What you wanted was exemption from VAT?
A. Something we assumed, we did have the exemption.
Q. But with the benefit of hindsight, you should have asked that question, about VAT?
A. There were lots of factors but possibly I should have asked that question.
Q. If you had been told to register for VAT you would have?
"Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors. Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions."
Conclusion causation and loss
"As a matter of fact, I do not accept that accepting loans involving an obligation simpliciter to repay them can be described as damage. At the moment of accepting the loan, the company which accepts the loan has available that amount of money and the obligation to repay that amount of money, and I simply fail to see how that can amount to damage. If there is damage, it must consist of parting with those moneys in certain circumstances."
"…..I do not understand how the acceptance of a loan can, of itself, be described as a loss causing damage. If anything it is of benefit to the borrower. Of course, a loss may result from the use to which the loan monies are put, but no such resultant loss is pleaded …"
Assessment of quantum
"Although my contention is that the Respondents should have ensured the Company was registered for VAT from the date they took appointment as directors………..at the very latest they were made aware of their obligation for the Company to register for VAT by January 2011."
Relief and section 1157 of the Companies Act 2006
"The sale of goods and services is trading income and taxable for Value Added Tax (VAT) purposes. The trustees were of the opinion that the income was not subject to VAT and so did not register despite having breached the compulsory registration threshold."
"In my judgment a director of a company dealing with a matter of this kind who does not seek any legal advice at all but elects to deal with the matter himself without a proper exploration of the considerations which contribute, or ought to contribute, to a decision as to what should be done on the company's behalf, cannot be said to act reasonably. In my judgment Mr. Elvins did not act reasonably in this respect. He failed to take those steps which, as a director of the company, he should have taken before making the bargain which he made with Mr. Hanly…… The question which I have to ask myself is whether, in acting in the way in which he did, Mr. Elvins acted reasonably. I do not think that he was acting in the way in which a man of affairs dealing with his own affairs with reasonable care and circumspection could reasonably be expected to act in such a case, for I think that any such imaginary character would take pains to find out all the relevant circumstances, many of which in this case depended upon some knowledge of the law, and ought to have encouraged Mr. Elvins to seek the assistance of a legal adviser."
54.1. The Directors were seeking to run a company for the benefit of a community;
54.2. They were men of faith and not experienced businessmen;
54.3. Accountants had been engaged but had never mentioned VAT to them until 2011; and
54.4. They had managed to raise money from the community to clear the debts accrued by the Company under the previous management.