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Commercial Litigation Specialists and The Corporate Veil

Commercial Litigation Case Study.

Where Personal Financial Liability was Imposed on Directors Following an Unsuccessful Defence of a Winding Up Petition. 

As Insolvency and Commercial Litigation Specialists, the recently reported case of Winnington Networks Communications Ltd (‘the Company’) v Revenue & Customs Commissioners (2015) is of great interest to us and our clients. This is because it represents a further attack on the ‘corporate veil’ and demonstrates the willingness of the Court to look behind the company and impose Costs Orders on directors personally. This article looks at the details of this case, and concludes with a recommendation that when threatened with a winding up order, directors should always take legal advice to protect themselves personally from significant and financially damaging cost orders.

The Details of This Commercial Litigation Case

The directors, on behalf of the Company decided to defend a Winding-Up Petition brought by HM Revenue & Customs (‘HMRC’) seeking payment from the Company of VAT owed of £1.6million. The Company appealed against the VAT Assessments raised against it by HMRC, opposed the Winding-Up Order and applied for it to be dismissed, on the basis that the Company’s appeal against the VAT Assessments had a real prospect of success. However, the Judge refused the Company’s application, a Winding-Up Order was made against the Company and the Company was ordered to pay HMRC’s costs on the indemnity basis. HMRC then applied to the Court for an Order that the directors of the Company personally pay HMRC’s costs (in prosecuting the Winding-Up Petition) and also the Company’s costs incurred in opposing the Winding-Up Petition. In other words, an attempt by HMRC to pierce the corporate veil of protection that many directors believe is still in place to protect them personally. The directors opposed the application against them on the basis that they had a genuine belief in the merits of the Company’s defence. They also argued that defending the Winding-Up Petition had been in the Company’s best interests.

The Court Rejects the Directors’ Opposition to The Winding Up Application

In considering the position and the existing law the Court confirmed that simply causing the Company to defend the Winding-Up Petition was not enough to attract personal liability to the directors. Indeed, if the position were otherwise, in commercial litigation cases such as this, directors would always be vulnerable to the making of a personal Costs Order against them. Instead, the Judge found that the crucial issue in this case was to determine whether the directors really did have a genuine belief that the Company had a good defence and whether they acted in the best interests of the Company. In opposing the claim for costs against them personally, the directors’ assertions that they followed professional advice, was (unfortunately for them) not supported by evidence from solicitors or Counsel. The Court found that it was not bound to accept the directors’ assertions that they believed that the Company had a defence. It was not explained by the directors to the satisfaction of the Court how spending Company money defending the Winding-Up Petition was in the Company’s, rather than the directors’ own, interests. The Judge on these facts considered it just and appropriate to make an order for costs against the directors personally as a matter of discretion. The Court also decided that the fact Orders had been obtained validating the Company’s expenditure before the Winding-Up Order, was no bar to the Court making a Costs Order against the directors’ personally. The directors were ordered to pay personally both HMRC’s Petition costs and the Company’s own costs.

Comment on This Case from Our Commercial Litigation Specialists

This case is the clearest possible warning to Company directors, in the context of a threatened or issued Winding-Up Petition, to very carefully consider the position from the point of view of the company and to seek and to obtain legal advice that they can rely upon, to protect themselves personally from potentially ruinous adverse costs orders. It is remarkable that the Court not only ordered the directors to personally pay HMRC’s costs (as the successful party in the Petition) but also ordered the directors, personally, to reimburse to the Company in liquidation the legal fees that they caused the company to expend in defending the Winding-Up Petition. HMRC are probably the most frequent presenter of Winding-Up Petitions in the Courts of England and Wales. Opposing and negotiating out such Winding-Up Petitions is possible.  Care and skill in doing so is however required.  The NDP team of commercial litigation specialists are well placed to advise and help in such matters.

Contact our Commercial Litigation Solicitors Early for Help and Advice

The Commercial Litigation Solicitors in the NDP team have both represented and defended Winding-Up Petitions for HMRC. We know what the solutions are and how to achieve them, and it’s one of the reasons why we have been shortlisted for Law Firm of the Year, 2016 (up to 4 partners) in Birmingham Law Society’s annual awards.  It is always the case, however, that the earlier that you get in touch with us the better, when your company is first threatened with a Winding-Up Petition.  That is because it is more likely that we can help you. Options available to the Company will always include refinancing, restructuring and negotiating the position. Please contact us or call us today on 0121 200 7040, or why not email a copy of the threatening letter that you or the Company may have received to law@ndandp.co.uk for a no obligation/no pressure chat.