Company Law

Company Law

Introduction

The recent decision of the Supreme Court in Holland (Respondent) v The commissioners for Her Majesty's Revenue and customs (Appellant) and another [2010] UKSC 51, throws much light on the puzzling area of directors identity. This paper critically evaluates this statement with reference to the different types of director and the various measures which are designed to hold such officeholders to account. The paper explores some of the basic rights and responsibilities of directors and examines the potential liability of directors under the contemporary forms of corporate governance.

Case: Holland v. The commissioners for Her Majesty's Revenue and customs & UKSC 51

The Holland's ran a business which was based on looking at the business and tax affairs of contractors that were based in various sectors. In 1999 Mr and Mrs. Holland set up a range of complicated structures of companies. Holland's both held 50% of this issued share capital of a company that owned two separate subsidiaries. One of the subsidiaries (Paycheck Ltd) was appointed to be the sole corporate director of 42 further companies, and the other was appointed as the secretary of these companies. The contractors would be regarded as an employee of one of the 42 companies whereby they would receive salary and dividends.

Following a formal HMRC inquiry in 2003, HMRC issued assessments on the basis that the 42 companies should have been paying the higher rate of corporation tax (and not the small companies' rate).  The 42 companies went into administration in October 2004 owing approximately £3.5 million to HMRC in respect of unpaid corporation tax.  HMRC alleged that Mr Holland was a de facto director of each of the 42 companies and responsible for causing these companies to pay dividends when they had insufficient distributable reserves to do so.

The parent company was paid by an agency that provided a contractor's service to clients. The parent company and the subsidiaries were arranged in a way so that each company would be regarded as a composite to one another. Mr and Mrs. Holland had structured the company with an aim of reducing their annual tax liabilities for each of their composite companies. For having a lower tax liability, they made sure that there pre-tax profits did not exceed £300,000, at which they would have to pay corporate tax applicable to small companies. Broadly seen as Holland's interest, the tax liability kept on soaring up to the point where the composite companies got insolvent. HMRC, the only creditor for composite companies, alleged that the company directors 'Mr. and Mrs. Holland acted as de facto directors for the insolvent companies. HMRC held them responsible quoting restriction of section 212 that prohibits companies to pay dividends when distributable reserves are insufficient. HMRC demanded a £13mcompensation from the directors of the insolvent companies.

Judgment and Comments on the Case

In November 2010, the United Kingdom Supreme Court handed down the judgment in Holland v The Commissioners for Her Majesty's Revenue and Customs and another. The case concerned the issue with relation ...