The Malta Independent 15 April 2024, Monday
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A landmark judgement

Malta Independent Sunday, 18 November 2012, 10:03 Last update: about 11 years ago

Earlier this week, the Civil Court delivered a landmark judgement on the responsibility of non-executive directors of companies with regard to Value Added Tax (VAT) due to the Director General of the VAT Department.

The VAT Department had the benefit of rewriting the VAT law after it was tried and tested between 1994 and 1998. One of the consequences of this rewriting was that the then-Commissioner of VAT, who clearly had mano in pasta in the drafting of what is commonly-referred to as VAT II, was that this law was written in such a way that it protected the department, and hence the government, with total disregard of other long-established legal principles, namely the protection offered under company law by the corporate veil and the limited circumstances wherein it may be lifted by a court of law. This principle is the basis on which people invest in commerce, long established since the risks brought about by unlimited liability were having an effect on trade to the extent that merchants were choosing not to invest in trade.

The natural reaction to all this was the creation of the concept of limited liability, which in essence laid down the foundations that offered protection for investment in trade, without requiring investors to subject the totality of their patrimony to the possibility of it being all lost as a direct consequence of trade which went wrong. This principle has become the commercial fabric of modern commerce and services and it is a principle that is violated, hence lifted, in very restricted circumstances.

As a result of the rewriting of the VAT Act back in 1998, the Commissioner of VAT then saw it fit to attempt to create a statutory in-road into this long upheld legal principle. The Commissioner of VAT, through the wording of Articles 66(4) and (5), attempted to instil the new principle that directors are responsible for unpaid VAT of companies in which they hold no executive role and in which they do not hold, control or manage money or other assets of the company.

The clear interpretation of the department has been that the very fact that one occupies the role of director renders that person responsible for unpaid VAT dues. This in essence means that no person who is not in a physical controlling position of a company may ever accept to sit as a director on a board of directors of a commercial company, because it is not humanly, logically or even commercially possible for any non-executive director to have control on whether VAT is duly filed with the VAT Department.

In practice, directors have got to rely on accountants and employees of the firm for compliance with the company’s statutory obligations. The attempt to lift the corporate veil and to render directors personally responsible for unpaid VAT solely because they are directors of that company is not only unfair but also harmful to trade in general and surely the legislator never appreciated these risks.

Furthermore, the interpretation given by the department through the demand notices it issues under Article 59 of the Act, the result of which is that the director must file proceedings himself against the department to annul the demand notice or the consequences of such demand notice, notably the executive title which is issued as a result, basically puts all directors in one basket, whether of good or bad intention, whether diligent, meticulous or irresponsible, without any evaluation as to what participation they had in the default. To make matters worse, the department, through the above, leaves no room for business that goes wrong or bankrupt, which can happen in a relatively short period, and insists that while the conditions leading to bankruptcy may be genuine, in essence directors are still to be held responsible for VAT due. This interpretation has created much anxiety among directors and if pursued and affirmed by the Civil Courts, it could only lead to an exodus of directors from boardrooms.

The decision delivered by the Civil Court this week clearly lays down that directors do not answer for any unpaid dues solely because they sit on the board of directors and their only role is to attend board of director meetings. The Court has laid down that one has got to interpret Articles 66(4) and (5) rather rigidly and that for a director to be personally responsible and thus held liable in solidum for pending dues to the department, such director must have personally had in his/her control assets of the company.

This decision enables trade to proceed and any decision to the contrary would have meant that only those who have controlling majorities, thereby directly appointing management of companies, would have been permitted to exercise in trade. This would not only have led to a brain drain in the commercial world, but also to the lack of much-needed resources in the commercial sector at a time when such resources do not come easy.

In my opinion, the lifting of the corporate veil is not to be permitted, notwithstanding that laws are written or proposed by any department holding an interest in the lifting of the veil, since this would constitute a frontal attack on commerce, leading to direct consequences which would ultimately affect revenue. Clearly, the lifting of the corporate veil is to be permitted when there is abuse, fraud or misappropriation. However, one should never attempt to lift the corporate veil simply on the basis that one participates in trade.

The VAT Department unfortunately persists in this direction. Hopefully, this week’s court judgment will not only change its mentality, but also that of the Ministry of Finance, which was undoubtedly aware of this direction, but evidently comfortable with same, sat on the fence on this issue.


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