Chancery Division – Directors’ Duties – VAT fraud

29 July 2011

On 29th July 2011 Mr. Justice Mann handed down judgment in favour of the liquidator, Deloitte LLP, in the case of Payless Cash & Carry (in liquidation) v. Patel (and others), [2011] EWHC 2112 (Ch) in which Rupert Butler appeared for the liquidator, pursuing claims against the director of a company who used his business to conduct a multi-million pound VAT fraud.

Issues

The issues were: (1) the extent of director’s duties to a company; (2) whether the trade of the company was genuine or fraudulent; (3) if fraudulent did the trade give rise to wrongful reclaims of VAT input tax.

Background

Since at least 2007 the company’s director had been running a cash and carry, Payless, in South London, selling alcohol and cigarettes. On investigation HMRC suspected that a proportion of suppliers to Payless had common characteristics which suggested they were not genuine traders. While all of these purported suppliers were registered for VAT they had no background in alcohol sales, no trading premises, no storage facilities, no haulage, no insurance, no capital, no terms of business, no credit facilities, and no visible directors with experience in commerce. On inspection, there was no evidence of any trading with Payless, although Payless held, in its possession, large quantities of invoices suggesting suspicious trade valued at over £30 million, and which it used to make VAT input tax reclaims, which were set-off against its output tax liability.

In December 2009, HMRC petitioned to place the company into provisional liquidation and Louise Brittain, then of Baker Tilly and now of Deloitte, was appointed provisional liquidator and then liquidator. The company, with an annual turnover of £40m was immediately closed down. The liquidator sought freezing injunctions and issued proceedings against Mr. Patel, the director, claiming relief under s.212 of the Insolvency Act 1986 and asking the court to award equitable compensation against him to the extent of the amounts of VAT input tax that had been wrongfully reclaimed.

The case then involved a close forensic analysis of Payless’ over 200 boxes of books and records to compare all of its trades and to sort out those that were fraudulent from those that were genuine. Mr. Patel defended the claim asserting that all of his trade was genuine and pointing to the evident commerce being conducted through a thriving cash and carry – his supplies were coming from somewhere. During the 11 day trial Rupert Butler presented the claim for the liquidator against leading counsel, using 10 fraudulent suppliers as the basis of his case, whose activities were analysed in minute detail by the court with the assistance of a forensic accountant from Deloitte and HMRC officers. Cross-examining Mr. Patel for over 5 days, Rupert Butler also scrutinised Payless’ books and records, including many volumes of manuscript ledgers and computer records, said to be compiled by Mr. Patel and several of his staff, who claimed these proved his trade was genuine.

In a 79 page judgment Mr. Justice Mann made detailed findings in respect of each supplier and the witnesses in general, before agreeing with Rupert Butler’s case and finding that Mr. Patel had conducted his business fraudulently and used concocted transactions to mask his trade and form which he benefitted by making a fraudulent VAT input tax reclaim exceeding £3.6m.

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