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bigduckontax
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Hello Ive been offered a small stake in a ltd company.

Customer Question

Hello

I've been offered a small stake in a ltd company. It's normally profitable, however the owner made a few bad decisions last year and I understand he is going to struggle to pay the corporation tax. However I'm sure this will get paid!

However would/could I be liable at all for this debt as a new director if he failed to pay?

Thanks
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.

Directors do have responsibilities and one is to ensure that a company is operated in such a manner as to be able to meet its liabilities; this is the concept of prudency. If persons, particularly other directors, have received moneys from the company which puts the company into a position where it cannot meet other liabilities then this constitutes a fraudulent preference. I have known of cases where the receiver of a company in liquidation tried not only to persue a director for moneys remitted to him to reimburse trading bills neccesary to operate the company's business, but employees too under the misapprension that they were directors also. This approach failed in both cases, but only because of the extensive and correct accounting and company records maintained. This caused considerable angst to the individuals concerned as you can imagine! In the circumstances you set out I cannot, at this stage, see similar future actions being successful as far as you are concerned as you have no involvement in these earlier decisions.

Of course, if the current owner settles the tax bill personally and creates himself as a creditor in the company's books, I would suggest with no entitlement to interest nor any repayment schedule, then the mattter is stayed off indefinitely until better future times under firmer management. Mark you, this payment in itself could create a fraudulent preference if unpaid preferential debts (eg wages, secured loans scheduled repayments etc) are outstanding. Tax debts are not preferential; they used to be but not now hence HMRC no longer use their once favourite process of winding up an organisation to get their money over everyone elses!

Also a petition to wind up a company can always be taken in the High Court and the level of the debt invoolved is very small, it used to be a mere 50 quid, it's 750 now! In one relatively recent case a petition for winding up was lodged against a huge company whose counsel simply scoffed at the suggestion. The learned judge merely looked over his spectacles and asked him why such a petition should not be granted, the money was owed and above the limit, everyone agreed that. The big organisation very hurridly settled and, of course, had to meet the plaintiff's costs to boot!

I hope I have helped with this general run down of the position. If you become a shareholder you incur no responsibilities, but as a director you do from the moment you are appointed so just be careful. A director also has a duty to put his company into liquidation if insolvency looms.

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