England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		25/07/2017

Chief Registrar Briggs:

Introduction

1. Halal Monitoring Committee Limited (the "Company") was incorporated in 2004 and entered insolvent liquidation by order of the court on 30 April 2012. The Company failed to register for VAT until 2011. A prime assessment was served on the Company which it could not pay. At the time of winding up the Company had 14 directors comprising members of the Muslim community (the "Directors"). Mr Raithatha was subsequently appointed liquidator (the "Liquidator"). The claim made by the Liquidator directly relates to the failure to pay the VAT assessment. He claims that in failing to ensure the Company registered for VAT until 2011 and by failing to charge or recover the VAT for services provided the Directors breached their fiduciary duties to the Company or failed to exercise reasonable care and skill as required by the Companies Act 2006.

Background

2. The Company was incorporated as a community project ensuring that the meat and poultry consumed by the Muslim community was Halal, that is the meat and poultry had to adhere to Islamic law, as proscribed by the Koran. It would do this by monitoring both source and sale. An employee (in the early days it would have been a volunteer) would attend an abattoir to observe the process and ensure adherence. When satisfied, the carcass would be endorsed with the Company's seal of approval.
3. The Company was intended to be run on a not for profit basis when it was founded by Mr Mohammed Benkhelifa (BH), the Company's first director. By 2008 the Company had accumulated debts it could not pay. There was a concern in the community as to why the debts accrued. It may have been that BH was not a commercial man and was managing the Company on the basis that profits were not particularly relevant. This led to a change in management and the raising of funds from the community to clear outstanding debts. Four new directors were appointed in November 2008 including Mr Dudhwala (DH).
4. The Company employed a local firm of accountants, Watergates, to assist with the preparation of tax returns. I have seen no letters of instruction. These accountants prepared accounts for the year ending 2005, 2006, 2008, 2009, and 2010. DH said in oral evidence, that soon after his appointment he had a conversation with Watergates and asked them whether the Company was compliant with all financial requirements. He said "I wanted to know if there were any skeletons in the cupboard". The conversation took place in the context of the Company having experienced financial difficulties and members of the community having to contribute funds to pay debts. In his written evidence, DH says:

"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."

5. I comment that there is no evidence that Watergates had formed such a view or been asked whether or not supplies should have been subject to VAT. However, DH explains that Watergates were "heavily involved" in the Company's operations. He does not suggest, neither does Mr Doyle acting on behalf of the Directors, that Watergates acted as de facto directors. The accounts for the year ending 2005 and 2006 do not disclose the Company's turnover. The sums reported in the abbreviated accounts are not substantial. The accounts for 2007 are not in evidence. The year ended 2009 accounts disclose that the Company had a turnover of just over £1,000,000 for the year ended 2008 although this included donations and fund raising income. Similarly, the turnover figure of £759,000 for the year ended 2009 includes fund raising, income and donations. In the year ended 2010 the donations rose to over £100,000. It is entirely possible if not probable, that these sums did not attract VAT. The assessment does not disclose this detail. It appears that HMRC made its calculations, which I shall turn to next, by reference to the turnover disclosed in the Corporation Tax Returns submitted by Watergates, and deducted 10% being an estimate for input tax.
6. Ten more directors were appointed in May 2009 when the Company became a registered charity. In January 2010, the directors of the Company and a representative from Watergates convened a meeting at which, says DH, "a wide ranging list of Company compliance matters were addressed, including the rate at which the Company, by this stage a registered charity, could apply for a discounted rate of VAT on inputs from British Gas." The subject of VAT was raised but not in the context of the Company's liability to pay VAT on services rendered. The representative from Watergates informed the meeting that the Company would be audited as it had adopted a "charity model". DH finds it odd if not striking that Watergates did not advise the directors about the VAT issue. This is particularly so as he says the accountancy firm "were aware of the turnover of the Company". Watergates "never advised my co-defendants or me that it was appropriate to register for VAT".
7. In late January 2011 HMRC wrote to the company:

"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."

8. DH explained, following receipt of the letter, that he had taken immediate steps to obtain advice. He sent an e-mail addressed to "Brother Liban" of tax consultants CTM Limited on 6 February setting out the Company's background and attaching the January letter. In his e-mail communication he said that the Company had "never charged VAT or paid VAT. I don't think [the Company] has ever been advised to be VAT registered or pay VAT." He continued: "obviously you are the expert, but having worried about this and read about VAT since receiving this letter...... My own tuppence of thought is the following: the supply by a charity of welfare services and the supply of goods and services in connection with spiritual welfare services is exempted from VAT under group 7 of schedule 9…. Your support and advice will be greatly appreciated."
9. On 7 February CTM Limited responded "I believe that HMRC's interpretation of the law (VAT Act 1994), which is found in the various public notices, will render you liable for VAT for the previous 4 years……. To me, the services you provide should morally be VAT exempt and it appears unfair. However, we often advise companies not to appeal HMRC decisions simply because they are unfair; the law is the only thing which matters; not fairness." CTM Limited suggested that "Human Rights or Fundamental Freedoms" could be deployed but this would very likely end in a court case. The e-mail advice ended "In summary, the VAT Act will cause you problems but often such cases can be won on community law and other case law. You will need skilled advice from counsel with community law experience…".
10. DH and Liban Ahmed met with HMRC on 6 May 2011. There is a record of the meeting. DH informed HMRC that the business of the Company was to raise awareness in the community and ensure meat and poultry eaten by the Muslim community was genuine Halal. The management of the Company comprises Muslim "volunteers [who] are assembled as representatives around the country." The note of the meeting records DH stating:

"….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.."

11. In the course of the meeting held on 6 May 2011 DH accepted that the Company was providing a service, being paid for that service and received a monthly payment from butchers who displayed the Company's logo which represented to the Islamic community, viable Halal products. The meeting ended by Mr Day of HMRC stating that he would seek expert advice and provide a written decision within two weeks. He would include any advice about penalties in the letter. The note of the meeting records Mr Day informing those present "…. after listening to the description of the business, he believed that [the Company] should be VAT registered as it makes standard rated supplies."
12. On 16 May 2011 Mr Day wrote to the Company. He had consulted and looked at the European VAT Directive 2006/112 art as well as the Group 7 categories of business. He reasoned "the service you provide in the abattoirs by your employees is carried out in return for payment from your customers; the amount you receive is dependent on the volume of animals being slaughtered and the subsequent time spent in the abattoirs/processing plants by your staff. The monthly fees paid by butchers, shops etc is paid for in return for their right to display the HMC logo in their premises. In return for these outlets being permitted to display your logo, they must accept the random visits from your staff to inspect the meat on sale…..my advice, therefore, is that you apply for VAT registration as soon as possible…..Once you receive your VAT number you should raise VAT only invoices to your customers covering the period from the registration date to the invoices date…..Should your HM Revenue & Customs not receive an application by [the Company] to be registered within 28 days from the letter's date, I shall arrange the compulsory VAT registration…". In my judgment the letter is clear. The services and supplies were in the view of HMRC subject to VAT and the Company had a choice to register voluntarily or be registered.
13. The Company did register voluntarily and completed the registration form by stating that the turnover had exceeded the registration threshold in January 2005. No further action was taken by the Company to resist or challenge registration or liability. On 7 November 2011 HMRC issued a "Prime Assessment" based upon "but extrapolated where necessary, turnover figures declared on your Corporation Tax returns…". The assessment provided that the sum of £637,893 was payable for the period 1 May 2005 to 31 October 2011. It is common ground that the Company did not issue any VAT only invoices and did not seek to collect-in any VAT on supplies previously made.
14. On 7 February 2012 the Company resolved, at an extraordinary general meeting, to "put HMC into liquidation". The resolution was not actively pursued. The reasons for that is not clear, however HMRC petitioned for winding up which was not opposed by the Company and an order was made on 30 April 2012. On 31 July 2013 HMRC submitted a proof of debt for £685,146. It appears that HMRC used its discretion not to add penalties or interest. The reason for that decision is unknown.

The claim and defence- a brief summary

15. The claim against the directors of the Company is simply put. An assessment was raised by HMRC. There is a statutory mechanism to challenge the assessment. No challenge was made and it is now out of time. A petition was presented based upon the assessment. No injunction restraining advertisement was issued. The debt set out in the petition was not paid. A winding up order was subsequently made and the winding up order has not been rescinded. HMRC have now submitted a proof of debt. It follows that the Company suffered a loss as result of the failure to register for VAT in 2005 and collect in that VAT. The Directors acted in breach of duty of care, skill and diligence owed to the Company. The claim of breach of fiduciary duty was not pursued at trial.
16. The Directors pleaded case included a defence that the claim brought by the Liquidator is statute-barred. Mr Doyle did not seek to pursue the limitation issue at trial. The Directors admit that there was a failure to register the Company for VAT until September 2011, failure to charge VAT to the Company's customers for services rendered and a failure to recover VAT from those customers. The defence takes issue with the claim that the Directors breached their duty to exercise reasonable care, skill and diligence. First it is argued that the cause of action is not complete because any such breach was not causative of any loss flowing to the Company. Secondly the Directors were non-specialist volunteers, and were entitled to rely on independent specialist advice. Mr Doyle argues that the facts do not bear out a finding of blind reliance. The Directors were entitled to believe that the accountants would advise if there was any positive action required, including registering for VAT.
17. If the Directors fail on the loss issue it is claimed that they acted honestly and reasonably in all the circumstances and should be relieved of liability in full or part under section 1157 of the Companies Act 2006.

Legal considerations

18. Section 174 of the Companies Act 2006 provides that a director of a company must exercise reasonable care, skill and diligence with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director, and the general knowledge, skill and experience of that director. The parties agree that section 174 places on a statutory footing the established common law duty which can be traced back to at least the 19th Century: see the cases referred to in Re City Equitable Fire Insurance Co Limited [1925] Ch 407. In Re D'Jan of London Limited [1994] 1 BCLC 561 Hoffman LJ (sitting at first instance) succinctly explained the case:

"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."

19. The Judge thought that the duty of care and skill was accurately stated in s214(4) of the Insolvency Act 1986 and explained the test was both objective and subjective. The decision was later endorsed by the Law Commission.
20. Mr Doyle places emphasis on the factually sensitive nature of the inquiry. He relies on Brumder v. Motornet Service & Repairs Ltd [2013] 1 WLR 2783 which concerned a claim by an employee against a company for damages for personal injury. The issue concerned the amount of contributory negligence. It is not an obviously relevant case but Beatson LJ considered a submission that contributory negligence may not apply in the same way to a corporate defendant as it would to an individual defendant: there is a need for an assumption of personal responsibility by a director. Having considered the statutory test under section 174 of the Companies Act 2006 he said:

"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".

21. He explained that on the particular facts of the case the company's duty was absolute "whereas the director's duty is to exercise reasonable care, skill and diligence, the damages payable by the director to the company will be the sum which the injured director/claimant would in principle be able to recover from the company". Focussing on a breach of section 174 he said "whether the director will be in breach of his duty under section 174 of the 2006 Act is an intensely fact specific question to which it is not necessary to give an answer in this case.".
22. For the proposition that the court will not second guess a commercial decision, Mr Doyle took me to Roberts v. Frohlich [2011] 2 BCLC 625 and Howard Smith Ltd v. Ampol Petroleum Ltd [1974] AC 821 where Lord Wilberforce said (at 832):

"[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."

23. The contention that directors may be deemed to have acted reasonably by relying on the advice of accountants is supported by Pro4Sport Limited (in Liquidation) v Adams [2016] 1 BCLC 257 where the issue concerned the sale of a business on the eve of insolvency. The contract for sale included a term for deferred consideration. The Judge thought it an important factor weighing in favour of the respondent director that he had taken independent advice as to the sale, obtained a valuation and had followed the advice received.
24. On the issue of loss, reliance is placed on Re E D Games Ltd (in liquidation), French v. Chipolletta [2009] EWHC 223 (Ch), where Mr Jonathan Gaunt QC, sitting as a Deputy Judge of this Court, determined an appeal dismissing an application to strike out a number of paragraphs of a claim for breach of duty or fiduciary duty pleaded under section 212 of the Insolvency Act 1986. An issue in the case centred on non-payment of VAT. The case against the director was that he deliberately caused the company not to complete and return VAT returns for nearly two years. No loss had been specifically pleaded, or at least it was argued that it was inadequately pleaded by reference to "a greater deficiency" arising as a result of non-payment. The Judge found that loss would have to be pleaded as it was a "necessary ingredient of a cause of action for breach of fiduciary duty or negligence under section 212" but the pleading was sufficient to permit the respondent to know the case against him. It is worth repeating the Deputy Judge's analysis of the loss argument:

"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 [1994] 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."

25. In my judgment the Court was not, in this paragraph, saying anything unorthodox.

Conclusion- VAT liability- breach of duty

26. In his written evidence DH says that it "has been explained to me there is an arguable case that the type of activity undertaken by the Company ought properly to be exempt from VAT…" Insofar as the issue persisted to the end of trial I find that the Company was liable to be registered for VAT during its trading life. The officers of HMRC were not in much doubt after the 6 May 2011 meeting. A note of the meeting reads: "Mr Day stated that after listening to the description of the business, he believed that [the Company] should be VAT registered as it makes standard rated supplies." It is true that Mr Day mentioned expert advice, but I do not read the note as a sign that Mr Day was in anyway unsure. He perhaps foresaw what would happen to the Company in the event of retrospective registration and was taking a belt and braces approach. Although the correspondence from the Company's tax advisers (CTM) is evidence that they thought there may be merit in instructing a legal team to pursue the matter, no such action was taken. The CTM e-mail to its client is not conclusive of a genuine doubt as to whether the supplies made by the Company attracted VAT. It is, in my judgment, too late to now challenge the registration requirements. A winding up order has been made.
27. I proceed on the basis that the Company should have been registered for VAT from 2005. The question then arises as to whether (as pleaded) the Directors acted in breach of section 174 of the Companies Act by failing to exercise reasonable care, skill and diligence by permitting or allowing the Company to continue to trade without registering for VAT and collect in VAT from the time they took office.
28. Except for Simmons v HMRC [2011] UKFTT 192 which concerned the extent of the duty of an accountant to inform a business that it should register for VAT, counsel could find no authority dealing with a similar matter: failure to register and collect in VAT by a community based organisation later incorporated; its corporate governance governed by men of faith, not business or law.
29. A key part of the defence is reliance on the role played by Watergates. At paragraphs 2.3 and 2.5 of the amended defence it is said that the Directors took their appointments due to the "concerns as to the competence of the Company's previous directors and what was ultimately the willingness of those previous directors to resign from office…" Soon after their appointment Watergates presented the accounts for the year ending March 2009 to the newly appointed board of directors and "there was no suggestion at that meeting or at any other time by Watergate….., that the Company was liable to be registered for VAT".
30. In his written evidence DH explains that prior to the appointment of the new board of directors the Company was not registered for VAT and "neither I nor any of the other directors, were aware (or indeed now accept) that the Company ought to have been registered for VAT…"
31. During cross-examination DH was asked about the time he first became a director and the first board meeting:

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?

A. Yes"

32. I have no hesitation in concluding that the evidence given by DH was honest and straightforward. The clear impression I was given is that DH was prepared to tell the truth no matter what the consequence. He understood that by admitting he did not ask the accountants about VAT, and admitting that it would have been better if he had asked, his defence to the claim would not be advanced. During cross-examination he proved himself capable, understood and answered in a clear manner technical questions concerning taxation. DH gave evidence on behalf of all 14 Directors. The issue of honesty or reliability in respect of all Directors could not be tested by the Liquidator, but the Liquidator was prepared accept that the evidence of DH represented all Directors.
33. There are some fundamental standards by which a director of a company should be judged. This is evident from Secretary of State for Trade and Industry v Baker [1999] 1 B.C.L.C 433 where Parker J explained:

"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."

34. Similar observations were made by Lord Woolf MR in Re Westmid Packing Services Limited [1998] 2 BCLC 646. It can be observed from the decision of Mr Justice Parker that part of the modern landscape of corporate responsibility is to place on directors the obligation to ensure adequate monitoring and supervision of delegates. In some circumstances a director is required to adopt a positive role in supervision or will otherwise be deemed to have allowed the company to trade in such a way that is detrimental to stakeholders: see Anton Taylor v Secretary of State [2016] 2 B.C.L.C. 3. The requirement extends to non-executive directors: Lexi Holdings Plc (In Administration) v Luqman [2009] BCC 716 where there was a failure through inactivity and failure to question the executive directors.
35. In my judgment the duty of the Directors to acquire and maintain sufficient knowledge and understanding of the Company's business to enable them to discharge their duties as director, is inescapable. It may seem harsh on the facts of this case that an incoming, inexperienced director should acquire the necessary knowledge and understanding of the Company's operations, and ensure that it is compliant with issues as wide ranging as trading standards, health and safety and taxation. The standards required of a director to discharge the duties are higher perhaps than at any time in the past. It is not sufficient to simply delegate tasks in a small/medium sized enterprise. Neither is it sufficient to claim inexperience or lack of knowledge. The combined oral and written evidence given by DH demonstrates that the Directors (i) took appointments as a direct result of the financial mismanagement of the previous directors; (ii) had assumed that all matters concerning taxation were or had been dealt with by the previous management, and there was nothing to do in respect of accounts or taxation other than leave the situation as it existed at the time; (iii) did not ask the accountants whether VAT was payable on supplies; (iv) had assumed the accountants would advise the board of directors on any issue relating to financial management including taxation; but also (v) assumed the Company had an exemption from VAT.
36. The Directors were not required to obtain the specialist knowledge of an accountant but needed, in my judgment to ask if the Company had an exemption for VAT rather than assume the situation. Reliance on the accountant's silence demonstrates, objectively, a lack of care, skill and diligence.
37. This is not a case where the Court is seeking to substitute its opinion for that of the management, or is questioning the correctness of the management's decision. The Directors worked on an assumption and did not take any or any proper steps to discharge their duty of care and skill. Neither is this a case similar to Pro4Sport Limited (in Liquidation) v Adams where the director sought and relied on specialist advice. The Directors obtained no advice but made an incorrect assumption and took no steps to validate the assumption.

Conclusion causation and loss

38. If a company has a liability to pay VAT it is obliged to meet that liability. When a company pays the sums due to meet the liability no debt can arise. The non-payment arose from the obligation to pay the tax. No loss is created by not paying the tax; the liability remains as a result of the non-payment. The reference to Galoo Limited v Bright Graeme Murray in ED Games was a reference to jurisprudence on causation. In that case the claim was for professional negligence against auditors as the audited accounts contained inaccuracies. The question was whether negligence had caused or allowed the audited companies to incur losses and whether the auditors knew that reliance was being placed on the accounts. The Deputy Judge in Galoo Limited considered (on a strike-out) the claim for damages for loss as a result of accepting loans. He said:

"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."

39. From this distance in time, it is perhaps easy to comment that it is hard to fault the logic of the Deputy Judge's reasoning. That is made all the easier because the Court of Appeal agreed with the reasoning. Glidewell LJ said (page 1369):

"…..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 …"

40. In Galoo there was an obligation to repay the loan, but there was an equal benefit; receipt of the loan. In my judgment neither ED Games nor Galoo assist an understanding of whether a loss arises when a company incurs a liability to pay tax, fails to pay the tax liability and has committed a concomitant failure to collect in the tax. The failure to collect in VAT where a company is accountable to pay VAT will cause a loss.
41. The legislation does not provide that VAT is not payable in circumstances where a company has not collected in the money. If there is no collection of VAT from its customers the company will necessarily have to meet the assessment (or demand based on its own returns) from its own capital. Such a company will suffer a reduction in available working capital. If a company does not have sufficient working capital it will be unable to meet a later demand or assessment.
42. A failure to register for VAT when it should have, is separate from the failure to collect in VAT and thereby cause it loss. In respect of the first, a failure to register by itself may not cause damage. Similarly, if a company's supplies are exempt from VAT there can be no question of loss being caused from a failure to collect-in. There will be no obligation to pay tax due to the exemption. In respect of the second, loss will, in my judgment, be caused to a company by failure to collect-in, in the event that the supplies of the company to its customers attract VAT. That is because the VAT liability will have to be met from the company's own assets whereas the liability could have been discharged from monies collected-in from customers on the supply of goods or services. In my judgment, the pleaded case is made out, and the Company suffered loss as a result of a failure to collect-in VAT when its supplies were subject to VAT.

Assessment of quantum

43. The case has been run on the basis that all the Directors are liable for the breach of duty of care. There has been no distinction between dates of appointments or individual Director actions. In his witness statement Mr. Raithatha says:

"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."

44. That is not surprising as the Liquidator is a stranger to the affairs of the Company. Throughout the trial the Directors have been treated as one. I therefore make no distinction on director appointment dates for the purpose of liability and take the last appointed director as the correct date of what has been termed in the evidence given by DH "the newly constituted board". There may be some unreality in selecting one start date, but it is not argued otherwise.
45. Treating the Directors (on the specific facts of this case) as one, it was reasonable for the newly constituted board to have some time to acquaint themselves with the financial and strategic position of the Company. In my judgment, the January 2010 meeting with Watergates was the time when the Directors should have addressed the financial position of the Company in detail including asking about liability for VAT on supplies. Although HMRC suggested backdating VAT invoices only from the date of registration, there is no evidence the customers would have paid if such invoices were issued. At best there was a chance of recovery, but this was not argued (probably for good reason) and no evidence has been produced for the court to value the chance. Any losses before this date cannot and should not, in my judgment, be laid at the door of the Directors. If advice had been asked for and received by the Company, DH's evidence is that the Company would have registered for VAT. There would have necessarily have been a time gap between January 2010 and the receipt of advice and subsequent registration before invoices including VAT would have been sent to customers.
46. Taking account of a time gap which I deem as reasonable, I find that the Company should have been invoicing and collecting-in VAT from April 2010: the beginning of the new financial year. The failure to invoice and collect-in from the new financial year to presentation of the petition to wind up the Company represents the loss caused to the Company. There is a causal connection between the failure to pay the VAT assessment and failure to collect in the VAT from customers during this time period. The failure to collect in and pay the VAT was as a result of the breach of duty of care, skill and diligence identified above.

Relief and section 1157 of the Companies Act 2006

47. The amended defence pleads, if the Directors are liable for breaches of duty they should be exonerated as they acted honestly and reasonably in relying on professional advice as to the Company's liability for registration for VAT, and ought, in all the circumstances be fairly excused from liability.
48. I have mentioned before I have no difficulty in finding DH a reliable and honest witness. The issue is whether, by relying on "professional advice" the Directors ought in all the circumstances be fairly excused.
49. Prior to 24 January 2011 (when the liability in respect of VAT was raised by HMRC) the Company did not seek any professional advice in respect of VAT. I do not accept the submission by Mr Doyle that the Directors were "properly entitled to rely on the role of Watergates in dealing with the financial accounting aspects of the Company's business, and … there was nothing to indicate that VAT registration was necessary (or even a consideration), …..". There can be no question of succeeding on an argument that the Directors acted reasonably by taking professional advice, when in fact they did not do so.
50. That is not the end of the matter. The Directors were not appointed until several years after the Company should have been paying VAT. In 2009 the Company obtained charitable status and was required to move from producing abbreviated accounts to audited accounts. In the accounts for the year ended 31 March 2010 there is an express provision for VAT. I note that the accounts were signed off in April 2011 prior to the interview with HMRC, notification of the outcome of the meeting, voluntary registration and the prime assessment. The notes in the accounts state:

"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."

51. Mr Couser argued that this provided evidence the Directors had acted knowing that the VAT threshold had been breached and knowingly failed to register for VAT. I accept Mr Doyle's submission on this issue. The statement should not be read as representing a complete factual analysis. The Directors would have known or will be deemed to have known about the threshold for registering VAT by knowing of the Company's turnover. The evidence is that they did not form a view as to VAT liability because they had not questioned the Company's VAT status (but had assumed the position) when they took office. The statement in the accounts is therefore of limited value save that the Directors must be deemed to have accepted the liability when the accounts were signed. I infer that there were conversations between Watergates and the Directors from 24 January 2011, but not before.
52. The test of reasonableness is objective: Bairstow v Queens Moat Houses Plc [2001] All ER 211. It is said that the test is to be viewed through the eyes of a man dealing with his own affairs with reasonable care and circumspection: Re Duomatic Limited [1969] 2 Ch 365, 377 where Buckley J said:

"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."

53. There are more recent cases. In Towers v Premier Waste Management Limited [2012] BCC 72 a failure to disclose to the board of directors a personal loan from a client led to a finding that the director had breached the duty of loyalty he owed to the company. The court (Court of Appeal) was not prepared to grant relief in circumstances where there was no mitigation and the arguments supporting relief were the same as those supporting the defence to breach of duty. In Smith v Butler [2012] EWCA Civ 314 the Court of Appeal refused relief as the managing director had acted unreasonably in causing the company to resist court applications by an excluded chairman. These cases provide illustrative value, but they also some guidance.
54. The arguments raised by the Directors for relief mainly constitute a regurgitation of the arguments run to resist the claim for a breach of duty or argue loss was not caused by the breach:

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.

55. In Duomatic the absence of dishonesty did not assist with the determination of reasonableness. In Towers the absence of any finding of bad faith or of any actual conflict; the reasonableness of reliance on another, to sort matters out; the relationship of trust with that other person, and the absence of quantifiable loss by the Company or the negligible profit to the respondent director, did not justify relieving him from the consequences of his breach of fiduciary duty.
56. I follow the same reasoning. Although all the factors submitted by Mr. Doyle are made out, they do not in my judgment represent objective reasonableness in the context of a claim for breach of duty of care, skill and diligence. The failure to properly explore or explore at all, the tax position on appointment or soon after, and failure to take advice to enable those in control to reach a decision are unreasonable failures to take steps that, as directors of the company, they should have taken. The claim for relief fails.
57. Order accordingly.