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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Hyde & Ors v Todd [2024] EWHC 1423 (Ch) (11 June 2024) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2024/1423.html Cite as: [2024] EWHC 1423 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
CHANCERY APPEALS (ChD)
On appeal from the order of Chief Insolvency and Companies Court Judge Briggs
made on 24th November 2022 – Case Reference: CR-2020-004447
7 Rolls Buildings Fetter Lane London, EC4A 1NL |
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B e f o r e :
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| (1) ADRIAN CHARLES HYDE (2) KEVIN ANTHONY MURPHY (in their capacity as joint liquidators of Radarbeam Limited, a company in liquidation) |
Appellants/ Applicants |
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| and |
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| SUKHWINDER TODD |
Respondent |
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Maxwell Myers (instructed by Rainer Hughes Solicitors) for the Respondent
Hearing date: 26th April 2024
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Crown Copyright ©
Remote hand-down: This judgment was handed down remotely at 11.00am on Tuesday, 11th June 2024 by circulation to the parties and their representatives by email and by release to the National Archives.
Mr Justice Edwin Johnson:
Introduction
The conventions of this judgment
The parties
The Company
The relevant history of the Company
(1) For the reasons set out in the FTT Decision, the Company's appeal was dismissed.
(2) It was part of the Company's case that the Company had not known and neither could nor should have known of the frauds in the supply chains relevant to the Denied Returns for 04/06 and 05/06. It was also part of the Company's case that the supply chains relevant to the Denied Return for 06/06 were not tainted by fraud.
(3) These parts of the Company's case failed. After reviewing the evidence in great detail, the FTT found that the Company had actual knowledge of the fraud in the relevant supply chains in relation to the transactions in all three accounting periods; see the summary of the findings of the FTT in paragraph 106 of the FTT Decision.
(4) The FTT made specific findings that the Respondent had been aware of the relevant fraud in the supply chains; see paragraphs 114-133 of the FTT Decision. It is not entirely clear to me, on reading the FTT Decision, whether there was a finding as to when the Respondent first acquired knowledge of the fraud. Paragraph 126 of the FTT Decision contains what I take to be a finding that the Respondent's knowledge of the fraud went back, at least, to 2005.
"133. For all these reasons we find that BCC's trade was fraudulent and was carried out as part of an overall scheme to evade the payment of VAT. There is no other rational or realistic conclusion that can be drawn. We also find that the Appellant had knowledge of the fraud, clearly demonstrated by all the factors we have identified and the findings we have made in relation to deals 1 – 9.
134. The Appellant's appeal therefore fails in its entirety. We direct that the Appellant should pay the Commissioners costs of and incidental to and consequent upon the appeal, such costs to be assessed by a costs judge of the High Court in the event of their not being agreed."
"34. Whilst the Company's insolvency in 2006 is not in question, the actual level of its insolvency at that point is. We will show that in 2006 the HMRC level of debt increased from near zero (or otherwise repayment of any input tax would not have been made by HMRC) to £1,530,200 (being the aggregate of the amount of input tax denied/claimed in respect of the 03/06 Assessments [the Demanded Sum]) when an invalid return with regard to this period (03/06) was filed. It would appear that the Company submitted the 03/06 Return on 31 March 2006."
Section 214
(1) Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.
(2) This subsection applies in relation to a person if—
(a) the company has gone into insolvent liquidation,
(b) at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and
(c) that person was a director of the company at that time;
but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.
?(3) The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)) he ought to have taken.
(4) For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both -
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
(b) the general knowledge, skill and experience that that director has.
(5) The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.
The Section 214 Claim
(1) In 2006 the indebtedness of the Company to the Revenue went from near zero to £1,530,200 (the Demanded Sum), as a consequence of the submission of the March Return on 31st March 2006. The March Return was invalid, as demonstrated by the subsequent notifications of assessment issued by the Revenue on 3rd November 2008 and 31st March 2009, requiring repayment of the Demanded Sum.
(2) In the Statement of Affairs, signed by the Respondent on 6th May 2014, the Respondent stated that the Company had estimated total assets available for preferential creditors in the sum of £4,975,000, the status of which was described as uncertain. This is assumed by the Appellants to have taken account of the sum of £4,963,525, which was the subject of the Denied Returns.
(3) The Company continued to trade in and after 2006, notwithstanding its insolvent state, with the Respondent taking no steps to improve or rescue or preserve the Company's financial position.
(4) When making the invalid claims for input tax in 2006, comprising the March Return and the Denied Returns, which were all made in relation to transactions connected to fraudulent activity, the Respondent knew or ought to have concluded that there was no reasonable prospect that the Company would then avoid going into insolvent liquidation.
(5) Alternatively, the Respondent knew or ought to have concluded that there was no reasonable prospect of the Company avoiding insolvent liquidation at the time (16th October 2007) when the Company was formally notified by the Revenue of the rejection of the Denied Returns.
(6) In the further alternative, the Respondent knew or ought to have concluded that there was no reasonable prospect of the Company avoiding insolvent liquidation on a series of subsequent dates which are identified by Mr Hyde in paragraphs 50 and 51 of his first witness statement. The Appellants say that there were at least eleven alternative occasions when the Respondent knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent administration or liquidation. These dates are itemised in paragraph 61 of Mr Hyde's first witness statement. The earliest of these dates was 31st March 2006, when the March Return was submitted. The last of these dates was the date of the FTT Decision; being 10th September 2010.
(7) The Company's asset position, including reasonably anticipated realisations, was clearly insufficient to enable it to meet its liabilities, either in the short, medium or long term and, in continuing to trade, the Respondent's conduct resulted in a loss to the Company in the sum of £2,119,485; being the amount claimed by the Revenue in its proof of debt in the liquidation.
(8) Despite knowing that there was no reasonable prospect that the Company would avoid going into insolvent administration or insolvent liquidation, the Respondent took no steps to minimise the potential loss to the Company's creditors of the kind which, in the circumstances, a reasonable director would have taken.
(9) The Company was worse off as a result of the continuation of trading (and/or any other continuing financial activities), as the Company's debts owed to HMRC continued to increase. The Respondent must have known or ought to have known there were no apparent reasonable prospects of the Company being able to successfully trade out of its financial difficulties.
(10) The Company was not placed into insolvent administration until April 2014, some 8 years after the Company first became insolvent. Had the Respondent taken steps to wind up the Company earlier, the Company's debts owed to HMRC (its only creditor) would have crystalised when the Company was placed into administration. As a minimum, the interest accruing on the HMRC debt would not have continued to increase. The Company's rights of appeal against the HMRC decision and the FTT's initial decision would have subsisted in the administration and so there was no good reason to delay taking action to put the Company into administration.
(11) As soon as the Respondent knew that the Company had insufficient assets for the payment of its debts in 2006 (and notwithstanding the fact that the Company decided to appeal to the FTT at a later time against HMRC, without success, in respect of the input tax of £4,963,525), the Respondent should have introduced robust financial controls, which would have shown the inevitability of insolvent liquidation. This would also have been the case had the Respondent sought insolvency advice at the time. By submitting the March Return and the Denied Returns, from March 2006 onwards, the Respondent was knowingly increasing the Company's liabilities to HMRC, whilst at the same time causing further loss to HMRC.
(12) In all the circumstances the Respondent should be required to make a contribution to the Company, pursuant to Section 214, in the sum of £2,119,485; that is to say the amount of the debt owed to HMRC.
The Application – summary of the Appellants' case
(1) The findings of fact made by the FTT in the FTT Decision can be relied upon by the Appellants in the Section 214 Claim.
(2) The FTT made the finding of fact that the Respondent was aware that the Company was involved in fraudulent trading, in and from 2006. In addition to this, in its applications to the Upper Tribunal for an extension of time for applying for permission to appeal and a stay of the application itself Mr Ahmed, who appeared for the Company on the hearing of these applications, stated that there was no challenge to this finding of fact by the FTT; see paragraph 13 of the decision of Upper Tribunal Judge Wallace released on 7th March 2012.
(3) As such the Respondent must have known that the Company was not entitled to submit either the March Return or the Denied Returns because these were claims for the recovery of input tax in relation to transactions involving fraudulent activity. Equally, the Respondent knew or should have known that it was not possible for the Company to continue trading or to avoid insolvent liquidation because any continuation of its trading would have required the Company to continue to be involved in what the Respondent knew to be transactions involving fraudulent activity.
(4) Putting the findings of fact in the FTT Decision together with the subsequent history of the Company up to the times when it entered into insolvent administration and then liquidation, the conditions in subsection (2) of Section 214 are satisfied.
(5) The statutory defence in subsection (3) of Section 214 is not available to the Respondent because there was no step which the Respondent did take or could have taken to minimise the potential loss to the Company's creditors. Once the Respondent knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation or entering insolvent administration, there was no step which the Respondent did take or could have taken to minimise the potential loss to the Company's creditors. The appeal to the FTT against the denial by the Revenue of the Denied Returns was always hopeless, and could and should have been seen by the Respondent to be hopeless. Continued trading was not an option, because continued trading would have meant further involvement in fraud, and an increase in the Company's liability to the Revenue.
The evidence in the Application
The Application – summary of the Respondent's case and the Appellants' response to that case
"33. Further to paragraph 29, the Court will no doubt be aware that, in Brooks v Armstrong the court accepted that although the directors were guilty of wrongful trading (i.e. should have put the company into liquidation sooner – which is not accepted I am guilty of) but the directors were successful in establishing that, as the only creditors were HMRC for historic debt and the landlord (who would have suffered rent arrears for the fixed terms of the lease irrespective of the point of liquidation) the continued trading did not in fact cause an increase in deficiency to creditors.
34. Looking at what the asset/liabilities position of the Company was at that point and what the outcome would have been if the I had placed the company into liquidation at that point, it is clear that this does not mirror what the Claimant asserts. According to the filed accounts for May 2006, the company had cash in the bank account of £11,000 and debtors of £12 million, I assume (given the length of time which has elapsed) that this money was formed of suppliers and other debtors, which is why the debtors were written down to £500,000 in the May 2007 accounts. I submit that an expert may need to interrogate those debtors figures to ascertain how much would actually have proven collectable had the company gone into liquidation at that point – as the Claimant has not done so. By May 2007, the company's assets comprised of cash at the bank of £458,000 and debtors of £500,000. The position remained unchanged up to and including the May 2013 accounts. In other words, the position to creditors did not deteriorate over that period at all.
35. I am unsure as to why the administration statement of affairs did not list cash in the bank as an asset and why the liquidators have only recovered cash in the amount of £338,000. The Claimant has yet to explain why the cash at the bank figure dropped from £458,000 to £338,000 after May 2013 – I do not know why this occurred as I was not responsible for filing the accounts. As a result of the above, the Applicant is to explain why this is the case and only this money has been recovered.
36. I maintain, in my opinion, that I actually improved the position by converting those debts into cash between June 2006 and May 2007 rather than worsening it, and then acted entirely properly by preserving that cash at bank up to the point of the administration.
37. I believe there is a strongly arguable case that the overall detriment to creditors by virtue of the continued trading between those periods was only £121,000 being the reduction in the cash at bank during that period. Again, this is subject to any explanation as to why the cash at bank balance dropped from £458,000 to £337,000. However, this is subject to an explanation as to why the bank balance has dropped.
38. The continued trading or otherwise between 2006 and 2013 is entirely irrelevant to the wrongful trading argument unless that trading increased the overall deficit to creditors, which is not the case as HMRC are the only creditor and that all relates to pre-June 2006 liabilities. The interest point is also entirely irrelevant due to the fact that the debt to HMRC would have remained unpaid and therefore continued to accrue interest whether the company was placed into liquidation in 2006 or 2013.
39. However, as stated throughout these proceedings, my position is reserved as to the instruction of a forensic expert, which could aid the Court in calculating the exact figures referred to above and throughout the Applicant's statement."
"28. Mr Todd continues to make bald and misleading assertions in an effort to confuse matters. As shown above, where we have had responses from the people Mr Todd claimed advised him of the good prospects in respect of the FTT decision and any subsequent appeal it is clear they did not. That is supported by the findings in the FTT Decision. Mr Todd also falsely claimed that he had passed the Company's books and records to the former administrator.
29. At the relevant time Mr Todd involved the Company in transactions that were connected to the fraudulent evasion of VAT. Mr Todd had actual knowledge of the fraud in those chains. There can be no basis for him to argue that he was acting other than in breach of Section 214 Insolvency Act 1986. That clearly distinguishes this case from the circumstances in Brooks v Armstrong [2016] EWHC 2893 (Ch)."
"20. Despite being given every opportunity to plead his case, Mr Todd's witness statement dated 18 March 2021 is mere obfuscation. We have contacted the parties he has identified in his witness statement and they have not provided the confirmation Mr Todd suggested they would. This is dealt with in my previous witness statement other than in respect of Smith & Williamson, as the documents were received after the date of my previous statement, being 22 April 2021.
21. The additional documentation we have obtained from Smith & Williamson do not suggest any advice was obtained by the Company or Mr Todd as to merits and/or prospects of success on the Company's appeals to the FTT Decision. On the contrary, it indicates Mr Todd did not have any reasonable grounds to continue with the sustained appeals. Mr Todd had actual knowledge of fraud.
22. Mr Todd continued with the appeals as by that time there was nothing more he could do. He was entrenched in the MTIC fraud.
23. Mr Todd has based his defence on the belief that his appeals in respect of the FTT Decision would ultimately be successful. On the facts that was not a decision that would be made by a director having due regard to Section 214 of the Insolvency Act 1986 and his obligations to the Company and its creditors.
24. In respect of the assertions made by Mr Todd in his witness statement dated 18 March 2021, I can confirm I have contacted all advisers mentioned by him and their responses were detailed in my previous witness statement ACH3 and in paragraph 21. Their responses did not support his assertions.
25. There is no evidence of any advice given to Mr Todd that he had a good case. The only documentation we have from the various counsel instructed relates to skeleton arguments and there are no opinions from counsel to support this assertion by Mr Todd. This is not surprising given the facts adduced at the hearing before the FTT Decision.
26. No director could be considered to have taken "every step with a view to minimising the potential loss to the company's creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)) he ought to have taken" if he were to involve the company in transactions he knew to be fraudulent.
27. As mentioned above, as far as I am aware, no appeals proceeded in respect of the HMRC decisions on the 03/06 Assessments.
28. In any event, and as stated in my previous witness statement, the Company's rights of appeal against the FTT Decision would subsist in administration and so there was no good reason for Mr Todd to delay placing the Company into administration until some 8 years after the Company first became insolvent (when the returns for 03/06, 04/06, 05/06 and 06/06 were submitted)."
"4. The fourth witness statement of Mr Adrian Hyde dated 12 October 2021 seeks to generally argue:
(i) that the finding of the First Tier Tribunal decision in Radarbeam Ltd v Revenue & Customs [2010] UKFTT 431 (TC) (10 September 2010) ("FTT Decision") is conclusive of the facts and is the basis of the application for summary judgment.
(ii) Radarbeam's pursuance of the FTT case and subsequent appeal against the FTT Decision was contrary to legal advice.
5. In respect of the first point, (i) above, I continue to dispute the finding of the FTT Decision and will leave the legal arguments for my representatives at the hearing of his matter.
6. As to the second point, (ii) above, I have been provided with and have read a copy of the witness statement of Mr Liban Ahmed dated 7 March 2022. I agreed with the contents of that statement and the adopt the same without repeating it in my witness statement. I add that Radarbeam never received at any time any legal advice from any of its representatives, as set out in my first witness statement, suggesting that Radarbeam had a weak case that was bound to fail. My clear understanding of the advice given at all times was that there was a realistic prospect of success. It was acting on and in reliance upon that advice that Radarbeam continued.
7. Attached marked Exhibit ST2 is the last response from my own efforts to contact Mr Michael Patchett-Joyce and Mr Stephen Climie. As is evident, and despite Mr Climie being recorded in the judgment as having represented Radarbeam at the FTT, neither have responded.
8. I believe that there are genuine triable issues in this matter that require a full hearing with oral evidence."
"29. Despite having had some 15 months to adduce evidence in support of his defence, the Respondent has failed to do so, instead serving Mr Murphy and me only with ST2 and the flimsy witness evidence of Mr Ahmed, a statement which provides no positive evidence and, instead, is largely based on challenging the comments provided to our solicitors by the Company's barrister, Mr Patchett-Joyce with no grounds to support such challenges."
The Judgment
"7. Mr Hyde relies heavily on the findings of the FTT [46] and concludes that VAT claims made from "03/06, 04/06/ 05/06 and 06/06" were connected to fraudulent activity. He sets out a series of alternative dated from which he says the Respondent knew or ought to have known that there was no reasonable prospect that the Company would avoid going into insolvent liquidation and details how he calculates losses. It can be seen at once that [the] on a summary judgment application the court is asked to not only find that there is liability but that the liability began on one of the alternative dates and that the amount of liability is a certain sum. In the context of a wrongful trading claim summary judgment is unusual. This is due to the many possible factually sensitive elements of such a claim, the discretionary nature of the relief and potential statutory defence. However, that does not mean summary judgment is not viable. In this case the Applicant says that the Respondent makes "no case out". This may be seen as the heart of the summary judgment application which itself is based upon the failure of the Respondent to file evidence despite the court granting further time to do so."
"10. The Applicant relies on a signed statement of affairs and the decision of the First Tier Tribunal dated 10 September 2010 to provide the facts that are said to make the application for summary judgment justifiable and the basis for arguing that the Respondent has no real prospect of successfully defending the claim pursuant to CPR 24.2. It is argued that the key facts have now been established by the Tribunal (and the Applicant does not need to do so again) and the Applicant concurs with the findings of the Tribunal following his investigations and now concludes there is no defence for the Respondent. Mr Mace for the Applicant submits (in his written submission):
"The Applicants have made this application for summary judgment on the basis that the First Tier Tribunal made a finding that the Respondent knew that the transactions the Company was a party to were connected to fraud which led to losses for HMRC."
11. The Applicant argues that the Respondent accepted the finding of the FTT which included a finding that the Respondent knew that the Company was a party to fraud which led to a failure to pay the debt owed to HMRC. This means it is not possible for the Respondent to argue that he had taken "every step with a view to minimising the potential loss to the company's creditors" if he had involved the Company in transactions he knew to be fraudulent or connected to fraud. The argument has merit."
"20. I have been referred to the rule in Hollington v Hewthorn [1943] KB 587 a decision about a conviction for a criminal offence where it was found that in civil proceedings the evidence of the fact that the convicted person committed the offence was inadmissible. This was reversed by section 11 of the Civil Evidence Act 1968 so that the fact that a person has been convicted of an offence in a UK court is admissible in evidence to prove that they committed the offence and the person wishing to prove that they did not commit the offence may do so on the balance of probabilities."
"21. The case was recently discussed by Sir Julian Flaux in Ward v Savill [2021] EWCA Civ 1378 who noted that the rule in Hollington v Hewthorn still applies in respect of judgments in previous civil proceedings so that a judgment, verdict or award of another tribunal is not admissible evidence to prove a fact in issue or a fact relevant to the issue in other civil proceedings between different parties. And the Court of Appeal dismissed an appeal not to make admissible a finding that a declaratory judgment obtained in earlier proceedings, to which the defendant was not a party.
22. In the course of the discussion in Ward v Savill reference was made to Rogers v Hoyle [2013] EWHC 1409 where Leggatt J (as he then was) considered the admissibility of an air accident report. He said [59]:
"A central part of a judge's task in a civil case is to evaluate the evidence adduced by the parties and to decide what conclusions may properly be drawn from that evidence. It is a cardinal principle, and an essential ingredient of the right to a fair trial before an impartial and independent tribunal, that in carrying out this task judges must form their own opinions by making their own evaluation of the evidence and must not defer to the opinion of anyone else."
23. In his thorough examination he referred to Bird v Keep [1918] 2 KB 692, where the question arose whether the finding of a coroner's jury that a workman had died from suffocation by smoke was admissible as evidence of the cause of his death in later compensation proceedings brought by his widow. To Waddle v Wallsend Shipping [1952] 2 Lloyds Rep 105 where a wreck commissioner assisted by two naval architects and a ship's captain had made a previous decision about compensation for the applicant's losses following her husband's death. To claims in BCCI v Bank of England where the Treasury and the Bank of England had previously instituted an independent inquiry to review the adequacy of its supervision of BCCI, presided over by Bingham LJ. The report was not admissible at trial. And to Hollington v Hewthorn to which he gave extended consideration. Referring to the Privy Council in Calyon v Michailaidis [2009] UKPC 34, where Lord Rodgers said (at para 27):
"…the essential reasoning is compelling: unless the second court goes into the facts for itself, it cannot actually tell what weight it should properly attach to the previous decision. Which means that the previous decision itself cannot be relied upon."
24. Leggatt J said:
"In the case of judgments in previous civil proceedings, I respectfully agree that this reasoning is compelling, once it is recognised that the opinion of a civil court on a question of fact is not as a matter of principle entitled to be treated as authoritative other than as between the parties to the proceedings."
25. The appeal court, Christopher Clarke LJ (with whom Arden and Treacy LJJ agreed), whilst reiterating (and neatly summarising) the principle upheld the first instance decision explaining:
"[39] As the judge rightly recognised the foundation on which the rule [in Hollington v F Hewthorn & Co] must now rest is that findings of fact made by another decision maker are not to be admitted in a subsequent trial because the decision at that trial is to be made by the judge appointed to hear it ("the trial judge"), and not another. The trial judge must decide the case for himself on the evidence that he receives, and in the light of the submissions on that evidence made to him. To admit evidence of the findings of fact of another person, however distinguished, and however thorough and competent his examination of the issues may have been, risks the decision being made, at least in part, on evidence other than that which the trial judge has heard…
[40] In essence, as the judge rightly said, the foundation of the rule must now be the preservation of the fairness of a trial in which the decision is entrusted to the trial judge alone…
[48] …The [air accident] report is not a bare finding such as one of carelessness or ownership of a painting. The statements of fact contained in the report, eg as to the position of the wreckage or the reported observations of the eye witnesses, are evidence which the trial judge can take into account in like manner as he would any other factual evidence, giving to it such weight as he thinks fit."
"26. The Applicant invites the court to make a finding that the Respondent had actual knowledge of fraudulent evasion of VAT, based on the findings summarised in the FTT as (i) they were thoroughly explained in the decision and (ii) they were subsequently conceded by the company at subsequent hearings. Those findings (matters of opinion) or any admissions made were in the context of proceedings where the parties are not the same. What characterises a judicial finding is that it is an opinion of a court or other tribunal whose responsibility is to reach conclusions based solely on the evidence before it. In my judgment this is more than a fanciful defence. The case needs to be proved."
"27. It is possible that the alleged fraud is unconnected with the allegation of wrongful trading as far as loss is concerned. The alleged fraud could of course cause loss to the Company but wrongful trading concerns losses that continued after a date when the Company should have ceased to trade. I can understand why the joint liquidators feel that this matter could be disposed of without trial because of the label attached to the actions of the Company in seeking to reclaim back the VAT. However, that does not necessarily answer the questions of fact to be determined in a wrongful trading claim. The trading to the detriment of creditors after the date of the VAT fraud is something that needs to be proved. That is sufficient to dispose of the application as it is said that the fact of the fraud is sufficient to demonstrate that the Respondent knew that the company would enter insolvent liquidation from the date the VAT challenge. The evidence put forward by the Respondent is that there was no fraud that he acted reasonably, acted on advice and that there were no or minimal losses from the date elected by the joint liquidators. In my judgment the arguments advanced by the Respondent today are more than merely fanciful."
"28. In argument the loss in this case is identified as interest accruing on a debt owed to the only creditor of the company, HMRC. This is because the debt said to be owed to HMRC arose before the date elected by the joint liquidators to pin-point the time when the Respondent knew or should have known that the Company could not avoid insolvent liquidation. There has to be a causal connection between the continuance of trade and the accrual of interest after 2006. I have not been persuaded that statutory interest was caused by an extended period of trade: See the analysis in Ralls Building [2016] 1 WLR 5190. The liquidators have simply failed to grapple with the test for loss merely relying on an assessment made by HMRC. In short the liquidators failed to advance and establish a properly formulated case that there had been any increase in net deficiency during the period of wrongful trading. There is a question of fact that also has to be decided. The Respondent says there was sufficient funds in the bank, FCIB, to pay the interest at the time and the costs and in any event he did not know of the debt at the time of Administration."
"29. In my judgment this is a case where evidence can reasonably be expected to be available at trial that could affect the outcome."
"30. The joint liquidators have nailed their colours to the mast in terms of the relevant dates (using alternative dates) after which the Respondent knew or ought to have concluded that the Company would not avoid insolvent liquidation. The case may seem obvious to the joint liquidators, but it deserves fuller investigation into the facts than what is possible on this application. I have hesitated in making a final decision because given the legal test for wrongful trading, the potential defence, the evidence of the Respondent, given the rule in Hollington v Hewthorn and given the issues raised about contribution, I am of the view that reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case."
The grounds of appeal
(1) Ground 1 - the Judge went wrong in law or in the exercise of his discretion, in overlooking or alternatively giving insufficient weight to the findings in the FTT Decision and to the fact that the Respondent had previously accepted the findings of the FTT in respect of his knowledge of fraud and the Company's connection to the fraud. The Judge was wrong in law to find that the FTT Decision was not binding on the basis that the findings in the FTT Decision and the Respondent's acceptance of those findings were made in the context of proceedings which were not between the same parties.
(2) Ground 2 - the Judge misdirected himself with regard to the facts of the case when, in Paragraph 28, he identified the loss in the case as interest accrued on the debt to the Revenue. The loss to the Company was identified as both the Demanded Sum and the interest accrued on the sums comprising the Demanded Sum.
(3) Ground 3 - the Judge misdirected himself with regard to the facts of the case and the law when he found, in Paragraph 28, that he was not persuaded that the accrual of the statutory interest was caused by an extended period of trade.
(4) Ground 4 - the Judge misdirected himself with regard to the facts of the case and the law, in Paragraph 28, when he questioned the ability of the Appellants to rely upon the assessment made by the Revenue. This assessment has never been questioned by the Revenue and is supported by the Statement of Affairs. The "assessment" referred to in this ground (Ground 4) is not identified, but I take the reference to be to, or at least to include the notifications of assessment issued on 3rd November 2008 and 31st March 2009 in relation to the respective amounts of £937,125 and £593,075. It will be recalled that these two sums, which I am referring to as the Demanded Sum (£1,530,200), were the subject of a claim for repayment of input tax by the March Return. The Company was repaid the claimed input tax, in the total amount of the Demanded Sum, on 25th May 2006. Subsequently the Revenue notified the Company of its decision to deny this input tax, and raised the notifications of assessment which I take to be "the assessment" or part of "the assessment" which is referred to in Paragraph 28 and Ground 4.
(5) Ground 5 - the Judge misdirected himself with the regard to the facts of the case and the law when he stated, in Paragraph 30:
"I have hesitated in making a final decision because given the legal test for wrongful trading, the potential defence, the evidence of the Respondent, given the rule in Hollington v Hewthorn and given the issues raised about contribution, I am of the view that reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case."
The Judge had already misdirected himself with respect to the rule in Hollington v Hewthorn and then went on to find that there might be a potential defence and additional evidence of the Respondent, in circumstances where the Respondent had failed to adduce any material evidence in the two years from the issuing of the underlying proceedings (the Section 214 Claim), and in circumstances where the Respondent had been found, by the FTT Decision, knowingly to have been involved in MTIC fraud.
Applications for summary judgment – relevant guidance
"The court may give summary judgment against a claimant or defendant on the whole of a claim or on an issue if—
(a) it considers that the party has no real prospect of succeeding on the claim, defence or issue; and
(b) there is no other compelling reason why the case or issue should be disposed of at a trial."
"15. As Ms Anderson QC rightly reminded me, the court must be careful before giving summary judgment on a claim. The correct approach on applications by defendants is, in my judgment, as follows:
i) The court must consider whether the claimant has a "realistic" as opposed to a "fanciful" prospect of success: Swain v Hillman [2001] 2 All ER 91;
ii) A "realistic" claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]
iii) In reaching its conclusion the court must not conduct a "mini-trial": Swain v Hillman
iv) This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10]
v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550;
vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63;
vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725."
"In ED&F Man Liquid Products Ltd v Patel [2003] EWCA Civ 472, it was said that under r.24.2 the overall burden of proof rests on the applicant to establish that there are grounds to believe that the respondent has no real prospect of success and that there is no other reason for a trial. The existence of this burden is indicated by para.2(3) of Practice Direction 24; the applicant must: (a) identify concisely any point of law or provision in a document on which they rely; and/or (b) state that the application is made because the applicant believes that, on the evidence, the respondent has no real prospect of succeeding on the claim or issue or (as the case may be) of successfully defending the claim or issue to which the application relates, and in either case state that the applicant knows of no other reason why the disposal of the claim or issue should await trial. The essential ingredient is the applicant's belief that the respondent has no real prospect of success and that there is no other reason for a trial.
If an applicant for summary judgment adduces credible evidence in support of the application, the respondent then comes under an evidential burden to prove some real prospect of success or other reason for having a trial: Sainsbury's Supermarkets Ltd v Condek Holdings Ltd (formerly Condek Ltd) [2014] EWHC 2016 (TCC) at [13]. A respondent to a summary judgment application who claims that further evidence will be available at trial must serve evidence substantiating that claim: Korea National Insurance Corp v Allianz Global Corporate & Specialty AG (formerly Allianz Marine & Aviation Vershicherungs AG) [2007] EWCA Civ 1066; [2007] 2 CLC 748:
"It is incumbent on a party responding to an application for summary judgment to put forward sufficient evidence to satisfy the court that it has a real prospect of succeeding at trial. If it wishes to rely on the likelihood that further evidence will be available at that stage, it must substantiate that assertion by describing, at least in general terms, the nature of the evidence, its source and its relevance to the issues before the court. The court may then be able to see that there is some substance in the point and that the party in question is not simply playing for time in the hope that something will turn up. It is not sufficient, therefore, for a party simply to say that further evidence will or may be available, especially when that evidence is, or can be expected to be, already within its possession, as is the case here …" ([14] per Moore-Bick LJ)."
The Appeal - analysis
"2. The principal question raised by the appeal is when, following the decision of the Supreme Court in BTI 2014 LLC v Sequana SA ("Sequana"), does a director's duty to take into account the interests of creditors arise, in circumstances where the company is at the relevant time insolvent, but its insolvency is due to a tax liability which the directors (wrongly, as it later turned out) believed at the relevant time had been avoided by a valid tax avoidance scheme entered into by the company. I will refer to this duty as the "creditor duty", recognising that it is nevertheless a duty owed to the company."
"47. The fact that the Company disputed that anything was due to HMRC does not change the fact that it was insolvent. A disputed liability is not a contingent liability. At the time (i.e. throughout the relevant period) there either was an actual liability to HMRC or there was not: see, for example, Integral Memory PLC v Haines Watts [2012] EWHC 342 (Ch), per Richard Sheldon QC, sitting as a deputy High Court Judge, at §32. In fact, as is now know, there was an actual liability."
"51. It is important to emphasise that I have heard no contrary argument at all so that my conclusions have been reached solely on the basis of the arguments advanced on behalf of Mr Hunt. For the reasons which follow, however, I consider that Ms Hilliard's contention is broadly correct. In my judgment, assuming some element of knowledge is required, where a company is faced with a claim to a current liability of such a size that its solvency is dependent on successfully challenging that claim, then the creditor duty arises if the directors know or ought to know that there is at least a real prospect of the challenge failing."
"A judgment obtained by A against B ought not to be evidence against C, for, in the words of the Chief Justice in the Duchess of Kingston's Case (1776) 2 Sm LC 13th ed. 644, "it would be unjust to bind any person who could not be admitted to make a defence, or to examine witnesses or to appeal from a judgment he might think erroneous: and therefore .... the judgment of the court upon facts found, although evidence against the parties, and all claiming under them, are not, in general, to be used to the prejudice of strangers." This is true, not only of convictions, but also of judgments in civil actions. If given between the same parties they are conclusive, but not against anyone who was not a party. If the judgment is not conclusive we have already given our reasons for holding that it ought not to be admitted as some evidence of a fact which must have been found owing mainly to the impossibility of determining what weight should be given to it without retrying the former case. A judgment, however, is conclusive as against all persons of the existence of the state of things which it actually affects when the existence of that state is a fact in issue. Thus, if A sues B, alleging that owing to B's negligence he has been held liable to pay xl. to C, the judgment obtained by C is conclusive as to the amount of damages that A has had to pay C, but it is not evidence that B was negligent: see Green v. New River Co (1792) 4 Term Rep. 589, and B can show, if he can, that the amount recovered was not the true measure of damage."
"81. Turning to the first ground of appeal, the starting point is the scope of the rule in Hollington v Hewthorn. The relevant passage in the judgment of the Court of Appeal is that at pp 596-7 of the Law Report as set out at [34] above. It is quite clear from that passage that the appellants' purported distinction between factual findings in a judgment which are not binding on a stranger to it and the legal effect of a judgment, which the appellants contend is binding on a stranger, is not a distinction recognised by the rule. The citation with approval from the Duchess of Kingston's case refers to "the judgment of the court upon facts found" distinguishing between the facts and the judgment and, as Mr Mather correctly pointed out, the circumstances of the Duchess of Kingston's case itself demonstrate that the rule is not limited to findings of fact but extends to the legal consequences of those findings, as determined by a court in its judgment."
"85. In Calyon Mr Steinfeld QC, who also appeared for the claimants in that case, sought to persuade the Privy Council to depart from the established principles underlying Hollington v Hewthorn, but they declined to do so. In [28] of the judgment, the Privy Council recognised that, whilst the actual decision in Hollington v Hewthorn had been criticised, it continued to embody the common law as to the effect of previous decisions. It was in that context that they referred at [30] to [31] to the Report of the Law Reform Committee and concluded, not just that the reasoning of the Court of Appeal in Hollington v Hewthorn on this aspect of the law was compelling, but that it was significant that, in passing the Civil Evidence Act 1968, Parliament made no change to this aspect of the law. In other words, the rule in Hollington v Hewthorn represents a well-established principle of law which this Court should follow.
86. That the rule in Hollington v Hewthorn is not limited to the inadmissibility of findings of fact in an earlier judgment against a stranger to it, but encompasses also the legal effect of that earlier judgment, is consistent with the wider principle of procedural fairness enunciated in Gleeson v Wippell (as set out in [57] above) and applied by this Court in Powell v Wiltshire, that the suggestion that a stranger to an earlier judgment is bound by it is contrary to fundamental principles of natural justice. That wider principle is not limited to factual findings in the earlier judgment, but extends to the legal effect of the earlier judgment, hence the conclusion in Powell v Wiltshire that Mr Powell was not bound by declarations as to title in the aircraft in the earlier judgment: see per Latham LJ at [26] and Arden LJ at [37]. The wider principle was also succinctly summarised by Sales J (as he then was) in Seven Arts Entertainment Limited v Content Media Corporation Plc [2013] EWHC 588 (Ch) at [73]:
"…the basic rule is that, before a person is to be bound by a judgment of a court, fairness requires that he should be joined as a party in the proceedings, and so have the procedural protections that carries with it. This includes the opportunity to call any evidence he can to defend himself, to challenge any evidence called by the claimant and to make any submissions of law he thinks may assist his case. Although there are examples of cases in which a person may be found to be bound by the judgment of a court in litigation in relation to which he stood by without intervening, in my judgment those cases are illustrations of a very narrow exception to the general rule. The importance of the general rule and fundamental importance of the principle of fair treatment to which it gives expression indicate the narrowness of the exception to that rule."
"28. I have also concluded that to permit the issue as to Mr Potiwal's knowledge to be relitigated would indeed bring the administration of justice into disrepute, in the eyes of right-thinking people. In Re Thomas Christy (in liquidation) [1994] 2 BCLC 527 Mr Manson sought to relitigate with his company's liquidator issues as to breach of duty and misfeasance which had been decided against him in earlier disqualification proceedings brought by the Secretary of State. The liquidator expressly disclaimed any suggestion that he and the Secretary of State had the requisite privity of interest to give rise to an estoppel per rem judicatam. After a review of the authorities, Jacob J said this, at page 537:
"The Companies Court of the Chancery Division of the High Court has found, after a full trial, Mr Manson guilty of the five wrongful acts specified above. To allow relitigation of those before the self-same court would seem absurd to Joe Citizen who through his taxes pays for the courts and whose own access to justice is impeded by court congestion. Doing a case twice over would make no sense to him: all the more so if he was told that the costs of this would in all likelihood be borne by innocent creditors of the company which Mr Manson ran."
29. It makes no difference in my view that, in the present case, two different tribunals are involved, namely the VAT Tribunal and the Companies Court. Apart from that, Jacob J's words are fully applicable to the present case. Where, as here, the issue as to a director's knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue relitigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again. In that context the facts that Mr Potiwal was indeed in privity of interest with Red 12, that he was its sole director and that he had the conduct of Red 12's appeal makes the point all the stronger."
"30. Re Thomas Christy Ltd was considered, without any apparent disapproval, in Secretary of State v Bairstow, at paragraph 32. It was treated as an application of the principle established in Hunter v Chief Constable of West Midlands. In Taylor Walton v Laing, after citing from the Hunter case, Buxton LJ said this, at paragraph 12:
"The court therefore has to consider, by an intense focus on the facts of the particular case, whether in broad terms the proceedings that it is sought to strike out can be characterised as falling under one or other, or both, of the broad rubrics of unfairness or the bringing of the administration of justice into disrepute."
31. In my judgment a focus upon the thoroughness and fairness of the way in which the issue as to Mr Potiwal's knowledge of the underlying VAT fraud was conducted by the VAT Tribunal (and upheld on appeal), in proceedings in which, with full control of Red 12's case, Mr Potiwal had every opportunity to exonerate himself, but failed, demonstrates that this is a case to which both limbs of the Hunter principle fully apply.
Conclusion
32. The result is that those passages in Mr Potiwal's evidence in which he denies that he had knowledge of the VAT fraud in which Red 12 participated, to the extent found against him by the VAT Tribunal, should be struck out as an abuse of process. The result is that the disqualification proceedings against him may be pursued in a very much more economical and efficient manner than would otherwise have been possible. I will give directions for the further case management of the proceedings, if they cannot be agreed."
"16 However, she also submitted, and I agree, that this case is on all fours with the decision in that case of an abuse of process. She particularly submitted, and I accept, that it would be manifestly unfair for this applicant to have to undertake the expenditure required to conduct what would, in effect, be a re-trial of the many days spent before the Tribunal concerning the MTIC fraud and the respondent's knowledge. She also submitted that the respondent had had every opportunity at that hearing, both in giving evidence and during cross-examination, and indeed in regard to the preparation of the company's case, to defend both the company and himself against the allegations of knowledge. She also submitted, with which I also agree, that account should be taken of the thoroughness and fairness of the hearing – apparent from the judgment – before the VAT Tribunal, in circumstances of the respondent being in control of the company and its appeal, and the company being represented. Finally, she submitted it was clear that to ask this court to carry out the same exercise using the court's relatively limited resources would bring the administration of justice into disrepute, in particular taking into account also resources that the applicant would have to use. In all those circumstances, her submission is that the respondent must be held to the outcome before the Tribunal, both as to findings of fact and decision.
17 I agree. In my judgment, it would be an abuse of process for him to cause the company to run a defence and seek to re-argue precisely the same facts and matters without being bound by the findings and any decision relevant to them. He was, after all, the director in charge of the conduct of the litigation, with a duty to ensure that it was properly conducted. It is apparent from the First-tier Tribunal's decision that this was a full-scale witness action, involving a complete denial by the company that the VAT input was not deductible. That might not have precluded new matters being asserted in evidence in this case (an issue which has not arisen) but it cannot be right that the respondent should, in effect, be allowed two bites of the cherry. Not only would it bring the administration of justice into disrepute, but it would be contrary to the overriding objective which applies to these proceedings."
"30. Re Thomas Christy Ltd was considered, without any apparent disapproval, in Secretary of State v Bairstow, at paragraph 32. It was treated as an application of the principle established in Hunter v Chief Constable of West Midlands. In Taylor Walton v Laing, after citing from the Hunter case, Buxton LJ said this, at paragraph 12:
"The court therefore has to consider, by an intense focus on the facts of the particular case, whether in broad terms the proceedings that it is sought to strike out can be characterised as falling under one or other, or both, of the broad rubrics of unfairness or the bringing of the administration of justice into disrepute."
31. In my judgment a focus upon the thoroughness and fairness of the way in which the issue as to Mr Potiwal's knowledge of the underlying VAT fraud was conducted by the VAT Tribunal (and upheld on appeal), in proceedings in which, with full control of Red 12's case, Mr Potiwal had every opportunity to exonerate himself, but failed, demonstrates that this is a case to which both limbs of the Hunter principle fully apply."
"26. The Applicant invites the court to make a finding that the Respondent had actual knowledge of fraudulent evasion of VAT, based on the findings summarised in the FTT as (i) they were thoroughly explained in the decision and (ii) they were subsequently conceded by the company at subsequent hearings. Those findings (matters of opinion) or any admissions made were in the context of proceedings where the parties are not the same. What characterises a judicial finding is that it is an opinion of a court or other tribunal whose responsibility is to reach conclusions based solely on the evidence before it. In my judgment this is more than a fanciful defence. The case needs to be proved."
"15. The Judge had already misdirected himself with respect to the rule in Hollington v Hewthorn and then went on to find there might be a potential defence and additional evidence of the Respondent when the Respondent had failed to adduce any material evidence in the two years from the issuing of the underlying proceedings and in circumstances where the Respondent had been found to knowingly be involved in MTIC fraud."
An additional point
"16. For the reasons above the Appellants submit that the Summary Judgment order ought to be set aside and/or the findings made, as detailed above, be reconsidered."
The outcome of the Appeal
