There is some – at least, anecdotal – evidence that HMRC have recently been making much greater use of their powers to make directors personally liable for the national insurance debts of their failed companies. The power derives from section 121C of the Social Security Administration Act 1992, which allows HMRC to issue personal liability notices (PLNs) when a company has failed to pay NI contributions and that failure is “attributable to the fraud or neglect of one or more individuals who were, at the time of the fraud or neglect, officers of the company” (known as “culpable officers”).
“Fraud” is defined as falsification with intent to deceive. The generally accepted definition of “neglect” is that laid down in 1856 in the case of Blyth v Birmingham Waterworks Company as “the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a reasonable and prudent man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a reasonable person taking reasonable precautions would not have done”.
Mr O’Rorke had been the finance director of a company called L Wear Limited, which went into administration in March 2007 owing HMRC £321,307 in unpaid NICs. HMRC duly issued a PLN against him, and he appealed the PLN claiming that he had been suffering from an addiction which affected his behaviour.
In his defence he relied in part on the comments which had been made in the House of Lords during the passage of the legislation, where Lord Haskel had said “the investigation of each director’s responsibility will be carried out so that only those shown to have acted knowingly and deliberately will be penalised”. Mr O’Rorke claimed that this meant that it had been envisaged that a defence that a director did not know what he was doing (for example, because of incapacity caused by mental illness) could be used, a defence which would not be available if applying the strict Blyth v Birmingham Waterworks definition.
The Tribunal noted that section 121 is contained within a part of the Social Security Administration Act which deals largely with criminal offences. It concluded that the purpose of the provision – to transfer a liability from the company as employer, to its officers – was a form of punishment. It decided that the context of the word “neglect” within the legislation reinforced its view that it was a penal provision, especially when used alongside the word “culpable”, and that under European human rights law the PLN provisions should be classified as criminal.
Taking all those things together, the Tribunal found that the state of mind of the individual against whom the PLN forms an essential ingredient of assessing liability. A full transcript of the Tribunal’s decision can be found at BAILII. How wide the application of the decision will be, remains to be seen. For now though, let’s toast a small victory for the little man against the might of HMRC.
We’re grateful to Reynolds Porter Chamberlain LLP for bringing this case to our attention.
tri group offer corporate recovery and insolvency advice, with an approach tailored to suit your specific needs. We can find a solution for your problems.