Deepak Bhatia v Christopher Purkiss (as Liquidator of JD Group Ltd)
| Jurisdiction | England & Wales |
| Judge | Sir Anthony Mann |
| Judgment Date | 03 April 2023 |
| Neutral Citation | [2023] EWHC 775 (Ch) |
| Docket Number | Case No: CR-2014-002247; Appeal ref: CH-2022-000041 |
| Court | Chancery Division |
[2023] EWHC 775 (Ch)
Sir Anthony Mann (sitting as a judge of the High Court)
Case No: CR-2014-002247; Appeal ref: CH-2022-000041
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
ON APPEAL FROM MS RAQUEL AGNELLO KC sitting as a Deputy Insolvency and
Companies Court Judge
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF JD GROUP LIMITED IN LIQUIDATION (“JD GROUP”)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Kevin Pettican (instructed by Treon Law) for the Respondent/Appellant
Peter Shaw KC (instructed by Wedlake Bell LLP) for the Applicant/ Respondent
Hearing date: 25 th–26 th January 2023
Approved Judgment
Remote hand-down: This judgment will be handed down remotely by circulation to the parties or their representatives by email and release to The National Archives. The deemed time and date of hand down is 10.30am on 3 rd April 2023.
Introduction
This is an appeal from an order of Deputy ICC Judge Agnello made on 3 rd February 2022 in which she declared that between March 2006 and May 2006 the appellant Mr Bhatia, a director of JD Group Ltd (“the Company”), was a knowing party to the carrying on of the business of the Company with intent to defraud a creditor by causing the Company to participate in a Missing Trader Intra Community (“MTIC”) VAT fraud transaction, and is liable to contribute to the Company's assets, pursuant to Insolvency Act 1986 section 213. She also declared that the participation in the fraud during that period, and the submission of a VAT return for that period claiming VAT input credits, was a fraudulent breach of his duty, pursuant to section 212 of the Act. As a result he was ordered to pay £1,785,892 to the company in respect of the claims and a sum of over £782,000 in respect of interest. Her judgment has the neutral citation number [2022] EWHC 202 (Ch).
In short, Mr Bhatia appeals the finding of the deputy judge on the overall basis that the judge's assessment of Mr Bhatia's state of mind was flawed in terms of the conclusions drawn from the evidence and because of a failure to consider other evidence properly or at all. Accordingly the dishonesty assessment was flawed. He also appeals the basis on which the damages were calculated.
There is also a respondent's notice seeking to uphold the decision, if necessary, on the basis of non-fraudulent breach of duty. If this becomes relevant then there is a limitation point which arises. The judge below did not consider this point on the footing that she had already found against Mr Bhatia and it was not necessary to do so.
Mr Kevin Pettican appeared for Mr Bhatia; Mr Peter Shaw KC appeared for the respondent liquidator.
MTIC fraud
There was no dispute as to the general nature of MTIC fraud, an activity which has become significant under the current VAT regime and which has become increasingly familiar to the courts. As cited by the judge in this case, it was summarised by the Court of Appeal in Natwest Markets plc v Bilta (UK) Ltd [2021] EWCA Civ 680 in the following terms:
“4. The criminals involved in MTIC fraud exploit the fact that imports and exports of goods between Member States of the EU are VAT-free. Like all successful forms of fraud, the essential mechanics are simple. A trader (“the defaulter”) imports goods from State A into State B, and sells them on within the latter State. No VAT would be payable on the goods when imported, but the onward sale (and any sales further down the chain within State B) would attract a liability to VAT until such time as the goods are exported to another Member State (which could be State A or State C). The final link in the chain will be the person who exports the goods, who is often an accomplice of the defaulter. The intervening sales and purchases are known as “buffer transactions”.
5. The initial buyer in the chain in State B will pay the price of the goods plus VAT to the defaulter, or sometimes to a third party nominated by the defaulter (often, ostensibly, the person from whom he purchased the goods). The buyer would then be able to offset the VAT he had paid to the defaulter against any liability which he had to account to the revenue authority in State B for VAT received on the price of the goods he sold on. The exporter at the end of the chain can claim back from the revenue authority in State B the VAT that he has paid to the person from whom he purchased the goods, because the goods have now been exported to another EU State in a zero-rated transaction. Meanwhile, the defaulter would pay the price of the goods to its supplier in State A, syphon off the VAT (or pay it to an associate) and then vanish or, if a company, go into liquidation without accounting to the revenue authority in State B for the VAT.”
The transactions in this case and how the present claim arose
The transactions which were the subject of this claim were 12 in number, though they were part of a much larger number of apparently similar transactions in which the company was involved over the period between September 2005 to August 2006. They involved the purchase and onward sale of large numbers of mobile phones. In that period the company conducted 530 such transactions. The 12 transactions in this case were conducted in a limited part of that period in April and May 2006, and were all included in the company's VAT return for the period ended 31st May 2006. They were part of chains which HMRC identified as being chains down which the mobile phones passed. In 7 of the chains the company was the exporter of goods which had been imported at the beginning of the chain shortly before the export sale. The goods were passed down the chains (involving a number of entities) and the company exported them. It had paid VAT on its own purchases in these chains but did not need to collect VAT on the export. That ostensibly gave it the right to reclaim the input tax it had paid to its seller. In 5 of the chains the company was the importer in a chain which ended with an export. In those chains the company did not pay VAT on its purchase but collected VAT when it sold them on into the chain but in the end did account for it properly to HMRC.
Details of the chains appear in the judgment below at paragraphs 17 to 29 and it is unnecessary to reproduce that detail at this point. It is sufficient to record that:
(i) In the 7 export chains (ie the chains in which the Company was the exporter) the original importer defaulted in accounting for VAT arising at the beginning of the chain, and the company reclaimed the VAT that it had paid on its purchase on its VAT return for the period.
(ii) In the 5 import chains (in which the company was the importer) the company was stated to be the recipient of VAT on its onward sale, and sought to account for that in the same return.
(iii) The judge below found that those chains were each part of an MTIC fraud (see paragraph 32 of her judgment), and that finding is not challenged on this appeal.
At the end of the relevant month the company filed a VAT return. There were a lot of transactions included within that return but for present purposes it is necessary to note (as found by the judge) that two of the elements were:
(a) £2,117, 762 as reclaimed input tax on the transactions in which the company was the exporter; and
(b) £1,243,200 declared as output tax on the import transactions in which the company was the importer (free of tax) and sold to another UK company and was paid output tax. That would normally give rise to an offset of the one sum against the other, leaving a net claim in favour of the Company. However, after an investigation HMRC disallowed the offset of the £2,117,762 on the basis that the Company knew or had the means of knowing that the transactions were connected to MTIC fraud, and HMRC had suffered loss. The effect of this disallowance was that the Company was left with a net liability for VAT of £1,246,736 which comprised primarily the output tax on the 5 import transactions.
The Company appealed that determination and in that connection served what the judge described as extensive evidence, on some of whose content (or absence of content) she relied to a certain extent in her own determination. The appeal was allowed to drag on until it was struck out on 22nd March 2012. That helps to explain part of the highly undesirable delay in this matter.
On 21st March 2014 HMRC issued an assessment for a misdeclaration penalty in the sum of £285,897 pursuant to section 63 of the VAT Act 1994 in respect of the misdeclaration in the May 2006 VAT return. There was no appeal by the Company in respect of that assessment and HMRC's claim in the liquidation is in the sum of £1,286,470.78 and the £285,897 penalty. The large sum largely reflects the VAT liability in respect of that May 2006 assessment.
The present proceedings were issued on 7th May 2020. The liquidator 1 claims the sum of £457,975 plus the penalty sum under section 213 of the Act (fraudulent trading), or alternatively the sum of £2,117,762 less profits on the transaction, but adding the penalty sum, in relation to the statutory misfeasance (section 212) claim.
The judge's findings
Having considered the liquidator's evidence, the documents and having heard from Mr Bhatia in person, the judge found that he had actual knowledge of the MTIC fraud in this case and found him liable accordingly. Her judgment considers the 12 chains on which the HMRC assessments were based and (as I have said) found them to be the constituents of an MTIC fraud. She then set out the relevant tests for dishonesty arising out of the cases (to which I will come) and there is no challenge to...
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