Directors could become liable for a company's tax bills if Inland Revenue wins a case against former businessman John Russell, from whom it is seeking $138 million, his lawyer Simon Judd said yesterday.

Russell, who is appealing against a Taxation Review Authority decision in the High Court at Auckland, is an elderly, ill man who does not have the money, Judd said.

The original amount the Inland Revenue Department (IRD) sought from Russell was $5 million, but a decade of interest and penalties has pushed that amount up to $138 million, he said.

Judd said Russell deposited $800,000 into finance companies he was the director of in 1985 and then withdrew the money "like someone would from a bank and there is nothing wrong with that".

He said the IRD believed he had benefited financially from the companies he managed and had withdrawn money that was not his, therefore making him liable for $5 million the IRD claims it is owed in tax.

"There is no reason why they [IRD] could not have taken steps to recover the tax then [in 1985]. They [the company] had the money. They could have paid the tax. Russell has no ability to pay this. This is costing everyone huge amounts in legal bills. You wonder what the point is. There is no way they'll [IRD] get the money. Russell never had the money, he never received it and he certainly does not have it today.

"He is not a flash person. He doesn't drive a Porsche. He drives a Toyota.

"A company is separate from a director. What this means [if IRD wins] is that every director of every company would then be liable if a company has not paid its tax."

In contrast to what IRD believes, Russell was owed money by the finance companies, not the other way round, and was always in credit to them, Judd said.

"He never benefited from anyone else's money. Right from day one, right from 1985."

Judd said IRD's argument was based on the fact that as a director Russell had control of the companies, that no longer exist, and therefore had the ability to take money from them if he wanted.

"This is not true. Had he taken the company's money, and not the money he had deposited, he would have breached his duties as a director.

"He never pocketed a cent from those companies. These are his words."

Judd said this case was not a "Penny and Hooper" situation, because Russell never benefited financially from managing these companies nor paid himself less and then received additional money through a trust. Penny and Hooper, two Christchurch-based orthopaedic surgeons, avoided tax by restructuring their business affairs, the Court of Appeal recently ruled.

Judd said Russell's case was not the same.

"He was always in credit to these companies.

"He has not received a single cent of income, of which the commission is wanting to tax him on. The money deposited was with a finance company he controlled, but there is nothing wrong with withdrawing money he had deposited." The amount Russell is alleged to owe Inland Revenue is $138 million as of April.

The case is expected to end on Friday. Today the IRD will present its case to Justice Edwin Wylie.