Directors personally liable for cost of mounting no-hope defence

Two company directors have been held personally liable for the costs involved in mounting a no-hope defence against a winding-up petition.

The court heard that HMRC brought a petition to wind up the company based on an alleged liability for VAT of £1.6m, and because of a number of tax issues.

The company applied for the petition to be dismissed on the basis that its appeal against the VAT assessments had a real prospect of success.

The judge held that it did not and refused the company’s application. A winding-up order was subsequently made and the company was ordered to pay HMRC’s costs.

HMRC then applied for two directors of the company to be held personally liable for paying both their company’s costs and the costs incurred by HMRC.

The judge held that the crucial issues in the case were whether the directors had a genuine belief that the company had a defence and whether they acted in the best interests of the company.

The directors claimed they had followed professional advice but their assertions were not supported by any evidence. Their failure to support their claims with evidence of advice from solicitors or counsel mirrored their failure to support their claims with evidence about the challenged tax issues.

They had not explained how spending substantial sums defending the petition was in the company’s, rather than their own, interests. It was necessary to make an order for costs against them personally, since otherwise their opposition would have been at no cost to themselves.

Please contact Simon Porter if you would like more advice about the issues raised in this article or any aspect of company law.