Case Study: Dismissing a Director for Gross Misconduct due to Tax Fraud and other Serious Allegations

How Fiona Martin, expert Employment Law solicitor based in our Gatwick office helped a company dismiss a Director for gross misconduct due to tax fraud.

The situation

Adam was the Commercial Director and founder of Catalyst, a Public Relations company. Catalyst was bought by Saucer PR, and Adam initially retained his position as CEO.

The other directors of Saucer PR discovered that prior to taking over the firm, Adam had given himself an inflated salary of £100,000 and 70 days holiday. In addition, they had evidence he was concentrating on his own business interests rather than working for the company.

Adam had told the company he was at risk of bankruptcy and they should divert a larger part of his salary to his wife, Lucy. He assured the other directors that this was legal even though it was unclear how much work or what work Lucy would be doing for the £60,000 he was diverting to her as a gross payment. Adam provided a consultancy contract which stated that Lucy was to carry out marketing activities.

What Martin Searle Solicitors did

Fiona was asked to advise Saucer PR about the difficulties they were having with Adam. She advised the directors that they needed to inform their accountants about this salary diversion. Their accountant was able to reverse the payments but this meant having to double pay the salary diverted to Lucy to Adam in the sum of £31,000. The company also had to pay a tax bill of £24,000 as no tax had been paid on the gross payments made to Lucy.

Fiona advised that what had been set up was tax evasion which was gross misconduct and Adam was suspended on full pay.

Adam was invited to a disciplinary meeting but provided numerous GP certificates to show he was too unwell to attend. In the meantime, other serious misdemeanours had been discovered and were put to Adam.  Fiona advised they postpone on the first occasion but when it became clear Adam was trying to avoid being disciplined, the hearing finally went ahead in Adam’s absence in February 2021. His dismissal was communicated on the same day in writing. The decision maker found that he was guilty of gross misconduct on four counts, the first being the tax fraud, the second being failing to comply with all reasonable and lawful directions, the third failing to keep confidential information which harmed a relationship with a partner of the firm, and falsification of time logs when he was working on his own business.

Adam appealed this decision and his appeal was not upheld on any count.

The company decided they wanted to buy Lucy’s remaining shares so that the company had complete control and so that Adam and Lucy no longer had an interest in the company.

We referred this work to Stone & Good, another solicitor’s firm, to deal with the issues around the original sale and whether the transfer had been legitimate as it had not been registered properly.

We also threatened to sue Lucy if she did not return the money illegally paid to her to try and recover some of the losses in reversing the payments to her and repaying this part of the salary to Adam. Stone & Good’s commercial litigator followed this up.

A Settlement Agreement was drawn up which included an agreed sale share for the sum owed by Lucy, a small amount of compensation and payment of Adam’s legal fees in exchange for Lucy’s shares and for him reaffirming his post termination restrictions.

Adam transferred the shares without the Settlement Agreement being entered into.

Fiona advised that now they had the shares it was not in their interests to offer Adam any money in the Settlement Agreement. Also the post termination restrictions were for only three months and therefore it was not worth reaffirming these now they had the shares. On her advice they withdraw the offers in this Settlement Agreement.

Throughout this case, Adam had also made excessive Subject Access Requests (SAR) which we responded by asking him to narrow the scope of his requests.

The result

Fiona issued cost warnings that if an Employment Tribunal claim for unfair dismissal was lodged she would apply for the company’s costs in defending this on the basis the claims were unreasonable and vexatious. No claims were made within the required time limit.

The Directors of Saucer PR were pleased that this difficult situation had been resolved without a need to litigate in the Employment Tribunal. They bought back all shares, saved the cost of Adam’s salary of £100,000 plus 70 days of holiday and Adam narrowed the scope of his SAR so we were able to help our client comply with GDPR requirements.

For expert advice about employee gross misconduct and director-level disputes, contact our Employment Law Team on 01273 609911, or email info@ms-solicitors.co.uk.