Previously, Inland Revenue has not been aggressive in pursuing company directors for unpaid tax debts in insolvent companies. Insolvent companies are companies with debt but not enough assets with which to repay that debt.
As companies have limited liability, this, generally, prevents Inland Revenue from demanding payment of the unpaid tax debt from the shareholders. However, Inland Revenue is now being more proactive in pursuing the directors of insolvent companies for the unpaid tax debt.
Inland Revenue has done this by forcing the companies into liquidation. Whilst in liquidation, the Companies Act 1993 allows the liquidator to seek to recover funds from directors for negligence, misappropriation of property or alleged breaches of their duties that gave rise to the company’s liquidation. This can allow the courts to demand payment from the directors to recover the unpaid tax debt of the company.
It is important to note that a director includes a deemed director, so any person who manages the company or makes important decisions on behalf of the company may be liable for the company’s unpaid tax. For example, in C of IR v Jackson Property Group Ltd a de facto director was held responsible for the mismanagement of the company’s affairs and therefore the potential losses caused to creditors. The court ruled that the company’s deemed directors have the same duties, and therefore face the same consequences, as directors.
Inland Revenue are directing liquidators to bring actions against directors of failed companies that have tax shortfalls, claiming those individuals breached their duties. Liquidators then ask the court to require directors to pay compensation in order to pay creditors, including the Inland Revenue.
This extends the Commissioner of Inland Revenue’s reach from the company to also include directors of the company.
This reinforces why a person acting in the capacity of a director should understand their duties, including ensuring the company does not trade whilst insolvent.
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