Warning to directors of non-profit making companies
Trustees and directors of non-profit-making companies are advised to heed a very serious warning, following a landmark High Court ruling. Adam Marham looks at the decision.
Indeed, the decision will make uncomfortable reading for some as it sets out the directors’ responsibilities of such enterprises – and those responsibilities may well be more than many believe.
The case involved a community project that went into liquidation for non-payment of VAT. The company behind the project was not registered for VAT when it was incorporated back in 2004 and only did so in 2011, when it was alerted to the issue. By then the bill was too high and as a result the company folded.
But what happened next will shock many - as the liquidator took proceedings against the directors of the company, suggesting that they failed in their duty to exercise reasonable care, skill and diligence.
The directors argued that they were ‘non-specialist’ volunteers who had to rely on accountants’ advice and therefore should accept no responsibility. They also said they had not been the original directors when the company was set up.
But their arguments did not wash with the Court, which decided the new directors should have formed their own opinion and not relied on accountancy advice.
The Court added it felt it was “incumbent on the directors to have sufficient knowledge of the company’s business and understanding of its operations to be compliant with all statutory requirements, including trading standards, health and safety and taxation”.
This decision certainly suggests that, while directors are not required to have the specialist knowledge, they are required to ask questions rather than rely on the position of previous advice to the company. Failure to act in this way could mean they are liable to pay compensation where the company enters into insolvency.
Furthermore, the case demonstrates the importance of taking legal advice as soon as possible in circumstances where a company is faced with potential insolvency, in order to be prepared and avoid further problems further down the line.