Nemish Mehta was the sole registered director (and joint shareholder, along with his wife) of E-Tel (UK) Limited (the “Company”), a company involved in purchasing and selling mobile phones. The Company was involved in MTIC fraud causing loss to HMRC by the non-payment of input VAT and/or the reclaiming of output VAT falsely represented as due in VAT returns.
On 19 June 2014, the First-tier Tribunal (“FTT”) concluded that 57 transactions were connected to fraudulent losses of VAT, specifically noting Mr Mehta’s knowledge and involvement of the MTIC fraud. That decision led to proceedings by way of civil claim, and summary judgment was granted against the Company in favour of HMRC on 19 February 2015 for £959,592.29.
The Company was later wound up compulsorily on 10 August 2015 by petition by HMRC and Mark John Wilson of RSM was appointed as the Liquidator of the Company on 30 September 2015.
On 19 January 2022, Mr Wilson (“Applicant”) served an application in the High Court against Mr Mehta (“Respondent”) under sections 212 and 213 Insolvency Act 1986: fraudulent trading, and/or fraudulent breach of fiduciary duties, asserting that the company was involved in MTIC fraud and that the Respondent was responsible for that involvement. The application was also made under sections 172 and 174 of the Companies Act 2006: for breach of duty by a director including of the duties to promote the success of the company and to exercise reasonable care, skill and diligence.
The Applicant sought to rely on the decision of the FTT. However, there was prima facie issue, as the parties before the FTT were the Company (which appealed the VAT debt) and HMRC (opposing that appeal), where as the parties before the High Court were the Applicant Liquidator and the Respondent Director. The general principle is that every judgment is conclusive evidence for or against all persons of its own existence, its date and legal effect, including what was judicially decided. However, subject to judgments in rem and to abuse of process, the findings of fact and the decision reached will only be binding upon the parties and their privies (the Court referring to Hollington v Hewthorn [1943] K.B. 587, CA).
In response, two submissions were made: first that the Respondent was a privy of the Company having been its sole director and the person who caused it to appeal to the FTT and advance a case asserting that input VAT could be recovered, and second, that it would be an abuse of process to allow the Respondent to re-litigate those assertions (referring to the common law decisions in Secretary of State for Trade and Industry v Bairstow [2003] EWCA Civ 321, [2004] Ch 1, Shierson v Rastogi [2007] EWHC 1266 (Ch), [2007] BPIR 891 and Secretary of State for Business, Innovation & Skills v Potiwal [2012] EWHC 3723 (Ch), [2013] LR F.C. 124).
The Court accepted that the Applicant was entitled to rely upon the findings of fact and the decision of the FTT for the following reasons:
- It would be manifestly unfair for the Applicant to have to incur expenditure to conduct (effectively) a re-trial of the FTT hearing concerning the MTIC fraud and the Respondent’s knowledge.
- The Respondent had every opportunity to defend both the Company and himself against the allegations of knowledge.
- The Court has taken into account the thoroughness and fairness of the previous hearings.
- For the Court to carry out the same exercise using their relatively limited resources would bring the administration of justice into disrepute, in particular taking into account resources that the Applicant would have to use.
- It would be an abuse of process for the Respondent to cause the Company to run a defence and seek to re-argue precisely the same facts and matters without being bound by the findings and any decision relevant to them.
- The Respondent was the director in charge of the conduct of the litigation.
- The FTT decision was a full-scale witness action, involving a complete denial by the Company that the VAT input was not deductible. It cannot be right that the Respondent should, in effect, be allowed two bites of the cherry. This would bring the administration of justice into disrepute and it would be contrary to the overriding objective.
The Court found that in the circumstances of the FTT’s judgment being binding, it was plain that sections 212 and 213 of the Insolvency Act 1986 were satisfied. It also inevitably follows that the Respondent acted in breach of his fiduciary duties as a result.
The Court then considered the quantum of loss. The Court first applied the principles in Moblix Ltd (in administration) v Revenue and Customs Commissioners [2010] EWCA Civ 517, [2010] STC 1436, that the Respondent is liable to make contributions to the Company in the amount of the liability owed to HMRC. It was found that the loss was attributable to the defaults of the Respondent as the director of the Company. The contributions comprise of the following: (a) the officer’s assessment of £959,592.29, (b) less £47,500 paid by the Company between 21 April 2015 and 15 June 2015, (c) a missed declaration penalty assessment of £248,980, (d) an automatic assessment of £248,980, (e) interest (accepted at a discretionary rate of 6%) and (f) there was also a Part 36 offer made and not accepted.
In addition (g) costs and expenses of the liquidation were considered. The costs and expenses of the liquidation therefore equally flow from the breaches aforementioned and therefore were found to be included in the compensation. In the unreported case of Mark John Wilson (in his capacity as Liquidator of Arete Systems Limited (In Liquidation) v Robindra Jagroop the quantum of loss including the costs and expenses of the liquidation were also considered and accepted by ICC Judge Jones.