Phoenix Tech Ltd had carried on business to defraud HMRC by participating in a kind of VAT fraud sometimes called “missing trader intra-community” fraud or “carousel” fraud. It had submitted a VAT return claiming the right to deduct VAT and a repayment in respect of various transactions in the sum of £4.5 million. HMRC denied the input tax claim in relation to the transactions and issued a misdeclaration penalty for £607,387. The company appealed to the First-tier Tribunal (Tax Chamber). The appeal was dismissed, the FTT finding that HMRC had established fraudulent tax losses as part of an orchestrated scheme for the fraudulent evasion of VAT. In relation to Mr Khan, a director, the FTT concluded that he had both the means of knowledge and actual knowledge that the transactions were connected to fraud and rejected his submission that he had been an “innocent dupe.”
In due course Phoenix went into compulsory liquidation on an HMRC petition based on the misdeclaration penalty.
The main application in Hellard v Khan & Anor (Re Phoenix Tech Ltd – Insolvency Act 1986) [2024] EWHC 1130 (Ch) took the form of a claim by the liquidator under ss 212 and 213 Insolvency Act 1986. The respondents, Mr Khan and Mr Singh, had both been directors of the company during some or all of the period during which the fraudulent transactions took place. The claim was defended.
The liquidator applied to strike out Mr Khan’s defence (see CPR 3.4) on the bases that:
(1) He was estopped per rem judicatam by reason of the FTT decision from denying that he had knowledge of Phoenix’s participation in the fraud;
(2) His attempt to defend the claim on that basis was an abuse of process because it was manifestly unfair to put the liquidator to the cost and delay of proving allegations that had already been proved in the FTT; and
(3) Mr Khan’s defence of the claim was also an abuse of process because it would bring the administration of justice into disrepute to allow it to be relied on in relation to allegations that had already been proved in the FTT.
The liquidator also applied for summary judgment (see CPR 24.3).
The approach to a strike out application based on abuse involves a two-stage test. The first stage is to consider whether the conduct complained of is abusive; the second is to consider whether to exercise discretion to strike out the case. That means conducting a balancing exercise to identify the proportionate sanction, mindful that striking out is a last resort (see Cable v Liverpool Victoria Insurance Co Ltd).
A great deal of ICC Judge Mullen’s judgment involves a detailed review of the extensive case law on estoppel/res judicata and the connected question of privity of parties.
A major point taken on behalf of Mr Khan was that the FTT had made no finding of dishonesty against him. ICC Judge Mullen started from what the FTT had concluded:
(1) That Mr Khan intended to trade in electronic such as mobile phones and other equipment from the outset, and his failure to bring this to HMRC’s attention was an attempt to disguise his true intentions;
(2) That the only reasonable explanation for his failure to tell HMRC about the nature of his trade until after registration for VAT was that “he was attempting to hide his true intention from HMRC.”;
(3) That due diligence carried out by Phoenix was “no more than window dressing” and the only reasonable explanation for that was that the company was aware of the contrived nature of the deals; and
(4) That Mr Khan was an intelligent man with experience of business who was aware of the prevalence of MTIC fraud in the industry.
He agreed that it was not open to Mr Khan to go behind those findings and struck out his defence that he had not known about the fraud. He also accepted, however, that the FTT had not decided, and had not needed to decide, that Mr Khan had been dishonest. On that he said:
“It does not seem to me that the additional allegation of dishonesty would justify the exercise of my discretion against striking out the defence in relation to knowledge of the fraud. Having struck out the defence that Mr Khan did not know of the fraud, it must follow that there can be no defence to the allegation that he caused the company to participate in the scheme dishonestly. The findings of the tribunal establish what Mr Khan knew for the purposes of the first element of the Ivey v Genting test. There is simply no basis on which it could be said that his submission of VAT claims in relation to transactions that he knew to be connected to fraud was not dishonest in the objective sense contemplated in Ivey. None is offered.”
On the privity issue he considered a number of cases including Secretary of State for Business, Innovation & Skills v Potiwal. He accepted there was difficulty in equating the interests of HMRC with those of the liquidator: he was not a trustee, although his relationship with HMRC as a creditor was analogous to that of a trustee and beneficiary as contemplated in Gleeson v J Wippell & Co Ltd; he was bringing the claim for the benefit of creditors, and the only creditor to have proved was HMRC.
Ultimately, costs appear to have been the judge’s centre of focus:
“It is true,” he said “that this case does not, as in Potiwal, risk the expenditure of large sums of public money twice over to prove the same facts. Nonetheless substantial public money has already been expended on a trial. Here it does appear to me that the identity of the principal creditor is relevant. HMRC would be subjected to the delay in the administration of the company’s affairs occasioned by relitigating a question that it had gone to considerable time and expense in litigating already. Again, while the liquidator has entered into no win, no fee arrangements and has the benefit of indemnity insurance and [counsel for Mr Khan] submits there is no risk of further expense to the taxpayer, it is inevitable that relitigating the issue of knowledge is likely to lead to costs and expenses that will erode the sums available for distribution to creditors.”
He also took into account that it would be wrong to give Mr Khan what would amount to a second bite of the cherry by relitigating the question of knowledge; that other court users would be prejudiced by a trial that would be longer rather than shorter; and that the hearing of other matters would be delayed by the repeat of the fact-finding exercise. “It seems to me that this plainly would bring the administration of justice into disrepute.”
He concluded:
“The only proportionate response to such a wholesale abuse of process is to strike out the offending parts of the points of defence. I am therefore satisfied that the points of defence must be struck out as an abuse of process insofar as they are inconsistent with the findings of the tribunal. That is in reality the entirety of the defence, as its sole premise, aside from a short point of limitation, is predicated on absence of knowledge.”
The limitation point did not apply by reason of the claim arising out of fraud.
Having been persuaded to strike out Mr Khan’s defence, ICC Judge Mullen went on to give summary judgment to the liquidator.