Manolete Partners Plc v Ebrahim Dalal
| Jurisdiction | England & Wales |
| Judge | Lord Justice Arnold,Lord Justice Newey,Lord Justice Moylan |
| Judgment Date | 14 March 2023 |
| Neutral Citation | [2023] EWCA Civ 269 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2022-001386 |
[2023] EWCA Civ 269
Lord Justice Moylan
Lord Justice Newey
and
Lord Justice Arnold
Case No: CA-2022-001386
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, BUSINESS AND PROPERTY
COURTS OF ENGLAND AND WALES, BUSINESS LIST (ChD)
Stephen Jourdan KC sitting as a Deputy High Court Judge
[2022] EWHC 1597 (ChD)
Royal Courts of Justice
Strand, London, WC2A 2LL
Peter Shaw KC (instructed by JMW Solicitors LLP) for the Appellant
Richard Leiper KC and Emma Fisher (instructed by Ward Hadaway LLP) for the Respondent
Hearing date: 1 March 2023
Approved Judgment
This judgment was handed down by the Court remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be 10:30 on 14 March 2023.
Introduction
This is an appeal by the Claimant (“Manolete”) against an order of Stephen Jourdan KC sitting as a Deputy High Court Judge dated 24 June 2022 dismissing Manolete's claim against the First Defendant (“Mr Dalal”) for misappropriation of money from Bolton Poultry Ltd (“the Company”) for the reasons given in the judge's judgment of the same date [2022] EWHC 1597 (Ch). The judge also dismissed claims by Manolete against Mr Dalal's son Sajid and daughter-in-law Anisha and the estate of his late wife Johra, but there is no appeal by Manolete against those parts of his order, and those claims can be ignored for the purposes of the appeal.
The claim
The Company was incorporated on 18 April 2005. Until it went into creditors voluntary liquidation on 30 January 2015, it carried on business in the Bolton area as a slaughterer and wholesaler of halal chicken meat. It supplied restaurants and retailers with (i) whole chickens and chicken parts which the Company had slaughtered and (ii) fresh and frozen whole chickens and chicken parts which the Company had itself bought in from suppliers. Mr Dalal was a director of the Company throughout this period. Sajid, Anisha and Johra were directors until 20 June 2008, but not thereafter. Johra passed away in May 2018.
Manolete claims as assignee from the Company and its liquidator of claims against Mr Dalal. In summary, the claim is that: (i) over the period of the Company's trading life its turnover was considerably greater than the overall total of £30,716,557 that appeared in its annual accounts and had been reported to HMRC in its corporation tax returns; and (ii) Mr Dalal, as director of the Company, is liable to account for the additional profits the Company made.
As is explained in more detail in the judge's judgment, the genesis of the claim was an investigation conducted by Her Majesty's Revenue and Customs (“HMRC”) between 2011 and 2015 into the Company's corporation tax return for the year ending 30 September 2009. HMRC had been provided with information obtained by officers of the Meat Hygiene Service, and subsequently the Food Standards Agency (“FSA”), who, in accordance with their prescribed statutory functions, attended at the Company's premises and (and amongst other things) recorded the quantities and weights of the chickens entering the premises.
In January 2013 the Company's then accountants SCB sent HMRC completed Outline Disclosure forms on behalf of each of the Defendants. Mr Dalal's form acknowledged that there appeared to be understatements in the Company's accounts for the years ending 30 September 2006 and 2007, but said it was “less clear” whether there were any understatements in subsequent years.
The investigation resulted in a report referred to as the Business Economics Exercise (“the BEE”) which HMRC sent SCB in March 2014. The BEE estimated the true level of the Company's sales for the year ending 30 September 2009. It was prepared on two bases: method 1 used a sale price of £2.75 per kilogram of chicken derived from “HMRC 3 rd party sources”. Method 2 analysed the actual sale prices of 43 items across five of the Company's invoices to three customers in 2009, yielding an average price of £2.62 per kg of chicken. Method 1 resulted in an estimate of total sales of £6,179,200. Method 2 resulted in an estimate of £5,887,092. Both figures were significantly greater than the figure of £2,695,644 recorded in the Company's accounts for that year (and even more so if sales of livestock and “purchases for own use” recorded in the accounts of £281,244 were deducted from the latter figure).
In August 2014 the Company instructed new accountants, AMS, to respond to the BEE. In late November 2014 AMS wrote to HMRC accepting that the Company's record keeping was “far from perfect” and that there was “some evidence that the declared sales figure was incorrect”. The letter went on:
“Having discussed your figures with our client, we believe that the level of additional sales should be closer to 20% of the additions proposed in your letter.”
In June 2015 HMRC served corporation tax assessments on the Company's liquidator which were revised in March 2016. Using method 2 in the BEE, HMRC determined that there had been total sales of £5,887,092 in the year ending 30 September 2009. Applying the presumption of continuity, HMRC assumed that the Company had made the same level of sales in every year it had traded. HMRC deducted the sales reported in the Company's accounts. This produced a total figure of additional sales of about £36.6 million. HMRC treated the AMS letter as an admission that the figure was at least 20% of that total, and thus calculated the Company's liability to corporation tax on the basis that it had made additional sales of at least £7,123,644 over the 10-year period.
In September 2015 AMS produced a report (“the AMS Report”) concluding that sales had been under-reported, but only to the extent of £849,278, and that costs had also been under-reported, leaving an under-reported trading profit of £61,249. As explained in more detail below, the AMS Report included analyses of both sales invoices and purchase invoices.
The liquidator assigned all rights to pursue claims against the Defendants in July 2019. In November 2019 Manolete commenced these proceedings. As explained in more detail below, Manolete adopted HMRC's calculations in its Particulars of Claim and claimed a total of £7,123,644 in respect of the claim presently under consideration.
There is no dispute as to the legal basis for Manolete's claim, but Mr Dalal denies that the Company made sales additional to those reported in its accounts and corporation tax returns. This is a pure question of fact turning upon the evidence before the judge.
The documentary evidence available at trial was significantly incomplete for at least three reasons. First, although the FSA records for each year were available, the underlying documentation was not. Secondly, HMRC had destroyed most of the documents produced during the course of the investigation. Thirdly, although it appears that AMS had considerable access to the Company's sales documents for the purposes of producing the AMS Report, none of the documents used by AMS in drawing up the Report were delivered to the liquidator or disclosed by the Defendants in the proceedings. I shall return to this point below.
The judge's judgment
Having set out the factual background, the judge identified the witnesses and gave his assessment of them. Manolete called the liquidator, the officer in HMRC's Fraud Investigation Service who had carried out the investigation into the Company and a representative of the FSA. All three were described by the judge as careful witnesses. The Defendants called Mr Dalal, Sajid and Anisha (but no representative of either SCB or AMS). The judge's assessment of their evidence was as follows:
“59. [Mr Dalal] gave evidence from his home in India, via an interpreter. He is 84 years old and suffers from a number of ailments. He said in his witness statement, and again at the beginning of his evidence, that his memory was defective. He struggled to understand many of the questions, and his answers to many of them were that he could not remember the relevant events.
60. Sajid was a very nervous witness, who struggled to understand some of the questions he was asked.
61. Anisha was an intelligent and articulate witness, who listened carefully to the questions she was asked and gave clear answers to them.
62. Insofar as the evidence of the witnesses was challenged, I will evaluate it by reference to the uncontested facts, the documentary material I was taken to in the course of the trial and the inherent probabilities. I do not think any of the witnesses were giving evidence they believed to be false, but human memories are fallible, and the evidence of a witness may be incorrect even if they believe it to be accurate.”
The judge started his consideration of the present claim by observing at [90]:
“The claim is, therefore, based firmly on the HMRC tax assessments, which in turn were based on the second method used in the HMRC Business Economics Exercise. The issue is whether that method is sound and, if so, whether it produces the conclusion that there were Additional Sales Receipts in the year ending 30 September 2009. If there were, then it will then be necessary to consider the position in respect of the other trading years. As to that, HMRC applied the presumption of continuity, but [the liquidator] produced a calculation which applied the logic of the Business Economics Exercise to the other trading years, which seems to me preferable. However, first it is necessary for me to determine if the evidence establishes that there were Additional Sales Receipts in the year ending 30 September 2009.”
The judge then discussed some general considerations bearing upon this question, only...
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