The High Court in England has made an interesting decision in the case of ED Games Limited. A director of that company procured that it did not pay VAT for a period prior to its liquidation and in that period, the net deficit on the company's balance sheet increased. The High Court has held that the director could be held personally liable for the increase in such net deficit.
What is particularly interesting in this case is that the court held that the failure to pay VAT was a breach of fiduciary duty. As a result of the failure to pay the VAT, the company was able to continue to trade (in effect the non-payment of VAT meant that HMRC was providing an involuntary overdraft to the company).
Section 212 of the Insolvency Act 1986 allows a liquidator to obtain a court order requiring a director to "contribute such sum to the company's assets by way of compensation in respect of" a breach of fiduciary duty.
The case serves as a reminder that the conduct of directors in the period prior to insolvency will be scrutinised by insolvency practitioners and courts and, if such conduct is found to be wanting there can be serious financial consequences for the directors.