Volunteer Directors of not for profit community company held personally liable for VAT losses

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The High Court ruling in Situl Devji Raithatha (as liquidator of Halal Monitoring Committee Limited) and Mira Nazeer Ahmed Baig and others 2017 underlines the duties incumbent upon Directors and their responsibility to grasp an understanding of them, even when they are volunteer directors in a community not for profit company. It also highlights the need for Directors to be proactive and inquisitive when seeking and relying on professional advice.

The central issue in this case was the question of whether the directors of the company should be held liable for the failure to register for VAT and pay it accordingly.

Halal Monitoring Committee Limited was incorporated as a not for profit community project to ensure that the meat and poultry consumed by the Muslim community was Halal. Despite a request made by HMRC, it was not VAT registered. Following non-payment of a VAT assessment, HMRC issued a winding up order in 2012 which was unopposed.

It transpired that the company had suffered a loss resulting from the failure to register for VAT and collect it. The liquidator’s case against the directors was that this failure constituted a breach of the duty of care, skill and diligence held by the Directors on behalf of the company and that, consequently, they should be held personally liable for the loss of VAT.

The Directors, whilst admitting failure to address the VAT issue, contested the claim of a breach of duty on the basis that they were non-specialist volunteers and therefore entitled to rely on the advice of independent specialists and that of their company accountants.

The Chief Registrar of the Court found that the company should have been VAT registered from 2005 and that, under section 174 of the Companies Act 2006, the Directors had a duty to obtain ‘sufficient knowledge and understanding of the Company’s business to enable them to discharge their duties.’ Furthermore, in the Chief Registrar’s judgement, ‘the Directors had worked on an assumption and did not take any proper steps to discharge their duty of care or skill.’

The Court confirmed that the loss suffered by the company was as a direct result of a failure to collect VAT from its customers, which instead had to be covered using its own resources.

It also found that the Directors should have asked the company accountants for guidance regarding VAT liability and that they failed explore further the situation regarding tax. Consequently, the Court ruled that, in this instance, the Directors could be held personally liable for the loss of VAT.

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