Michaela Joy Hall v Deepak Bhatia
| Jurisdiction | England & Wales |
| Judge | Agnello QC |
| Judgment Date | 03 February 2022 |
| Neutral Citation | [2022] EWHC 202 (Ch) |
| Docket Number | Case Number CR-2014-002237 |
| Year | 2022 |
| Court | Chancery Division |
(as liquidator of JD Group Limited)
[2022] EWHC 202 (Ch)
DEPUTY INSOLVENCY AND COMPANIES COURT JUDGE Agnello QC
Case Number CR-2014-002237
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (Ch D)
IN THE MATTER J D GROUP LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
7 The Rolls Building
Fetter Lane
London
EC4A 1NL
Mr Peter Shaw QC (instructed by Wedlake Bell) for the Applicant Liquidator
Mr Kevin Pettican (instructed by Treon Law) for the Respondent
Hearing dates: 26 – 28 October 2021
Introduction
This is the trial of the application dated 7 May 2020 issued by the Applicant, being the Liquidator of JD Group Limited (‘the Company’) against Mr Deepak Bhatia (‘the Respondent’) seeking relief pursuant to section 213 (fraudulent trading) and section 212 (breach of fiduciary duty) of the Insolvency Act 1986. On 9 May 2014, the Company went into a creditors voluntary liquidation. This was superseded by a winding up order made on 12 May 2014 on the undefended petition of Her Majesty's Customs and Excise (‘HMRC’). At all material times, the Respondent was effectively the sole director of the Company. Prior to 2005/6, the Company had an established business of dealing in babywear. In 2005/6 the Company entered into the world of trading mobile phones.
In summary the Liquidator's case is as follows:-
(1) The Respondent was a knowing party to the carrying on of the Company's business with intent to defraud HMRC, as a creditor or for a fraudulent purpose and that the Respondent do contribute to the Company's assets in the sum of £743,872 (being £457,975 plus £285,897) plus interest (section 213 of the Insolvency Act 1986);
(2) Alternatively, the Respondent acted in:
(i) fraudulent breach of duty, alternatively
(ii) breach of the duty to act honestly, bona fide and/or to exercise his director's powers for the purpose for which they were conferred (a non fraudulent breach of duty);
(3) In so far as the Liquidator's case relating to breach of duty is established, the Liquidator seeks an order that the Respondent contributes to the Company's assets in respect of the breaches of duty in the sums of £285,897 (the misdeclaration penalty) and the total input tax paid to suppliers, being £2,117,762 less the profits (£692,500) plus interest on the total sum.
Section 213 of the Insolvency Act 1986 states as follows:-
(1) ‘If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper.’
The relevant parts of section 212 of the Insolvency Act 1986 which are, as both Counsel agreed, a statutory shortcut for office holders to bring misfeasance proceedings as against former office holders of a company, are:
‘(1) This section applies if in the course of the winding up of a company it appears that a person who—
(a) is or has been an officer of the company,
….has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him—
(a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or
(b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.’
Summary Factual Background
The Liquidator's case derives from transactions, being the purchase and sale of mobile phones undertaken by the company during the period August 2005 to August 2006. In particular, the Liquidator relies on the VAT return for the period ended May 2006. In that period, the Company recorded 7 export transactions, being the purchase of phones from 2 UK suppliers, Mana Enterprises Ltd (‘Mana’), Regal Portfolio Ltd (‘Regal’) and sale to 3 overseas purchasers – URTB Sarl (‘URTB’); Compagnie Int'l de Paris SARL (‘Compagnie Paris’) and Rakha SARL (‘Rakha’). The total VAT paid by the Company to the 2 UK suppliers in these chains was £2,117,762. In the May 2006 VAT return, the Company sought to claim this sum as part of its total input deductions of £37,943,297 to set off against its output tax liability on its sales. The Company recorded total output tax liabilities of £37,072,271 in this period, consisting of both UK to UK sales and the output tax liability on 5 import transactions. These 5 import transactions consisted of purchases from a single supplier, a Polish registered company, Pol Comm Trading sp z o.o (‘Pol Comm’) and the onwards sales all to the same company, being the The Export Company (UK) Limited (‘TEC’). The total output tax liability in respect of those sales was £1,243,200. After conducting a verification exercise into the Company's claim to offset the £2,117,762 input tax on the 7 export transactions, it disallowed the claimed credits on the basis that (1) the Company knew or had the means of knowing that those transactions were connected to missing trader intra community VAT fraud (MTIC fraud); (2) HMRC had suffered a tax loss in those transaction chains in that each one could be traced back to a defaulter who had deliberately not paid its output tax liabilities. The effect of this disallowance of the input tax liability was that the Company was left with a net VAT liability of £1,246,736.17 in respect of the March – May 2006 period which primarily comprised of the £1,243,200 output tax within the 5 import transactions.
On 3 September 2008, the Company appealed to the First Tier Tribunal against the refusal by HMRC to allow the claimed input tax credit. This appeal was combined with the appeal issued on 17 December 2007, by JD Net Solutions Ltd, being another company which had traded in mobile phones and where at the relevant time, the Respondent was also a director. Extensive evidence was served by both the Respondent on behalf of the Company and by HMRC. The witness statements filed by the Respondent in the Tribunal proceedings were exhibited by the Respondent and relied upon as part of his defence to these proceedings. The Liquidator also sought to rely on the extensive evidence served by HMRC in those proceedings. Mr Kevin Pettican, Counsel on behalf of the Respondent, made the point before me that all the documentation which was before the First Tier Tribunal may well not have been before me. I entirely accept that might be the case, but the witness statements filed on behalf of the Company by the Respondent are in the evidence alongside those filed by HMRC. This enables me to see the evidence relied upon, including any documentation exhibited and relied upon, as well as consider the points made by the Company in its appeal. This remains the case even taking into account that there may well have been documents included in bundles for the purpose of the First Tier Tribunal hearing which were not before me. Mr Shaw did not suggest that all the documents which had been filed before the First Tier Tribunal were before me.
On 29 February 2012, the Tribunal directed that unless the Company confirmed within 21 days its intention to proceed with the appeal, it would be struck out. As there was no response from the Company during the requisite period, the appeal was thereafter automatically struck out on 22 March 2012. No application was made by the Company seeking to reinstate the tribunal process.
On 21 March 2014, HMRC issued an assessment for a misdeclaration penalty pursuant to section 63 of the VAT Act 1994 in the sum of £285,897 in respect of the misdeclaration in the May 2006 VAT return relating to the claimed and disallowed input tax credits. There was no appeal by the Company against that assessment. HMRC's VAT claim in the liquidation is the sum of £1,286,470.78 and £285,897.
The current proceedings
These proceedings were issued on 7 May 2020 with the witness statement of the Liquidator dated 7 May 2020 in support with additionally Particulars of Claim with an Appendix. The Respondent filed witness statements dated 18 June 2020 and 2 August 2021, with the latter relying heavily on the two witness statements filed by him in the Tribunal proceedings. He also filed a defence on 10 August 2020 to which the Liquidator filed a reply dated 18 September 2020. The two Tribunal witness statements relied upon as part of the defence in the current proceedings are dated 26 June 2010 (with a list of documents) and 14 October 2010 with exhibits. There were numerous witness statements filed on behalf of HMRC in the Tribunal proceedings. None of the makers of those statements were called to give evidence. Mr Shaw submitted that the purpose of the HMRC witness statements was to enable the documents which were primarily those which had been produced by the Company relating to the various transactions to be before the Court. The evidence also consisted of schedules produced by HMRC relating to the transactions. Additionally, Mr Shaw submitted that it was unhelpful for me to have the evidence of the Respondent in the Tribunal processing without being able to consider the evidence he was replying to. Mr Pettican's...
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