Personal liability for directors: a pre-packed problem

Year Published: 2011

Pre-pack transactions create an enormous number of ethical headaches; one of the main objections being that directors of a failed business can effectively “dump” debt and other liabilities and start afresh under a new company.

However, it’s not really that easy or simple. More frequently than not, if directors have given personal guarantees in relation to the ailing business, they may not be able to “get off the hook” that easily. The position is the same for members of ailing Limited Liability Partnerships, as the members of failed firm Halliwells LLP will be more than aware.

To add to the woes of directors and members considering selling via a pre-pack, HM Revenue & Customs (HMRC) are increasingly serving them with Personal Liability Notices (PLN). A PLN is quite simple: when sent to a director, it makes him or her personally liable for the company’s unpaid PAYE deductions and National Insurance contributions.

The PLN is not a new idea. HMRC’s powers derive from section 121(c) of the Social Security Administration Act 1992. As far as we are aware, given the present economic climate and the need to decrease the deficit; HMRC are now using their powers to issue PLNs on a wider basis.

Yet HMRC cannot simply issue a PLN on a whim. In essence a PLN becomes capable of being served if it appears to HMRC that the failure of the company to pay its tax liabilities is “attributable to [a] fraud or [any] neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers” of the company.

A director may be able to appeal a PLN in 4 circumstances:

1. the total amount claimed in the PLN is not covered by a relevant provision;
2. the failure to pay the tax liability was not attributable to any fraud or neglect on the part of the directors;
3. the director in question was not an officer at the time of the alleged fraud or neglect; or
4. HMRC have acted in an unreasonable manner.

As a result of HMRC making wider use of the PLN; directors and officers may exercise greater caution in settling claims brought by liquidators and / or administrators.

For further information please contact a member of our Corporate team on 0161 475 7676.

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