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Directors’ Liability From Insolvent Companies

One of the major reasons for trading through a limited company, as opposed ot being self employed or being in a partnership, is that the owners / managers of the company are generally not liable for the debts of the company in the event of insolvency.

Consequently on the liquidation of a company, creditors are unable to seek recovery of unpaid debts from directors and shareholders.

In the Finance Act 2020,HMRC have been granted recovery powers which mean that directors can face personal liability for debts of the company in the event of insolvency. The clause only applies to HMRC debts.

The terms of the clause of the Finance Act 2020 apply to a period up to 5 years after the company entered into insolvency. The clause is designed to attack individuals who repeatedly wind up companies, leaving behind significant unpaid tax liabilities.

The extended powers are applicable to repeated insolvency and non-payment and not designed to be used in normal ‘one off’ liquidations.

The 4 conditions which need to be met for the clause to apply are as follows:

  • In the last 5 years an individual was connected with at least 2 companies which were liquidated with unpaid tax debts.
  • A new company has been carrying out a similar trade to one of the liquidated companies.
  • The relevant individual is connected to the new company.
  • The unpaid tax liabilities of the old companies amount to at least £10,000 and the tax liability represents more than 50% of the total unsecured creditors of the old companies.

Once notice is issued by HMRC, the director is jointly and severally liable for the tax debts of the old companies. The director is also liable for the tax debts of the new compay for a period of 5 years from the date of the notice.