The High Court judgement details the successful claim brought by joint liquidators (JLs) against the directors of an umbrella company for breach of fiduciary duties, stemming from a scheme to divert millions in revenue to a related company while fraudulently retaining the substantial tax liabilities within the original, insolvent company.
Facts:
The central dispute involved a “company”, incorporated in 2010, hereafter referred to as “The Company”, and its directors, Shams (the de jure director) and Shahid (the central operator and de facto director). SJ Payment Services Ltd. was subsequently incorporated on 21 December 2020, later changing its name to Vision Payroll Ltd. – an umbrella payroll services company – on 7 November 2022. Vision Payroll’s sole de jure director was Teresa Clive, but Shahid was also heavily involved in that business.
Vision Payroll was subject to a winding-up order on the petition of HMRC dated 29 November 2023, and the claims against Vision Payroll are stayed. JLs were appointed in December 2023.
Although the “Company” was incorporated on 13 July 2010, it remained dormant until about April 2017. From circa April 2017, the Company traded as an umbrella payroll services company until it entered creditors’ voluntary liquidation on 15 November 2022, when the JLs were appointed primarily due to an unpaid tax liability to HMRC exceeding £20.5m.
Both the “Company” and Vision state that they outsourced the day-to-day administration of their accounting and payroll services to a company in Pakistan called AD (Overseas) Ltd. All companies relied almost entirely on an external Pakistani administration firm, ADL (headed by Mr. Khan), which had operational control over bank accounts and communications.
In February 2019, Shahid, without informing Shams, diverted the business to an umbrella by instructing ADL to notify the agencies of a “change of bank account details” while continuing to use the “Company’s” name and details. The second diversion occurred in January 2021, following a purported agreement to transfer the business from the “Company” to Vision.
Decision:
The High Court found both directors liable for breach of their fiduciary duties, resulting in an order for the payment of equitable compensation to the “Company’s” JLs. Moreover, the Court ruled that there was a total failure in terms of any commercial justification for the transaction, and conclusive evidence pointed to the fact that the directors were neither honest nor reasonable in their conduct.
The Judge ruled that both directors failed to promote the success of the “Company” as required under Section 172 of the Companies Act 2006. No intelligent or honest director could reasonably have believed that transferring a business generating £100,000s in gross profit for a potential, unpaid debt of only 10% of net profit was in the “Company’s” best interest. The transaction was structured to retain all the accrued tax liabilities, such as PAYE, NIC, VAT, in the “Company” while diverting the necessary receipts needed to meet those liabilities to Vision Payroll.
Since the Company was immediately rendered insolvent, if not so already, by the diversion of payments, the directors’ duty had shifted to prioritising the interests of the creditors (primarily HMRC). In allowing the diversion of the revenue stream necessary to cover the “Company’s” substantial tax obligations, the directors breached this duty, causing the “Company” to become unable to meet its liabilities.
The conduct, including the failure to retain any documents, the blind reliance on ADL, and the reckless execution of the agreement, was deemed at the very least negligent, constituting a breach of the care, skill and diligence duty.
Implications:
The implications of this case are significant, primarily for directors of umbrella companies and in the broader context of corporate governance and insolvency law. The case confirms that the courts will impose liability for equitable compensation based on the full value of the funds diverted as a result of a director’s breach of duty. The aim is to put the “Company” back into the financial position it would have been in, save for the breach. This is particularly punishing where the breach involves diverting revenue and leaving liabilities behind.
The case strongly reinforces the principle that directors who act recklessly or for personal will face the harshest sanctions, as their conduct fundamentally compromises the company’s best interests. The Court held both the de jure and de facto directors equally liable. This is a crucial warning – simply being absent or delegating all responsibility does not absolve statutory directors of their fiduciary duties.
