Official Receiver v Kelly (Re Walmley Ash Ltd and Company Directors Disqualification Act 1986) [2023] EWHC 1181 (Ch) deals with an application for a disqualification order under s 6 Company Directors Disqualification Act 1986 against Andrew John Kelly arising out of his conduct as a director of Walmsley Ash Ltd which was wound up by the court on an HMRC petition in 2017. The conduct relied on was that:
(a) between 30 May 2006 and 1 June 2006 Mr Kelly caused the company to participate in transactions which were connected with the fraudulent evasion of VAT, such connections being something which Mr Kelly either knew or should have known about; and
(b) on the company’s May 2006 VAT return, Mr Kelly caused or allowed the company to wrongfully claim £1,748,687.50 from HMRC.
At the root of the case was an MTIC fraud. The nature of MTIC fraud is now well known: see the helpful summary in Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (Ch) to which HHJ Cawson KC (sitting as a High Court judge) refers in his judgment in this case.
The company’s main business was the wholesale of mobile phones and cameras.
On 16 January 2003 HMRC visited the company, the visit being triggered by a suspected MTIC trader seeking to verify the company through HMRC’s Redhill verification procedure. During this visit, the company was warned about the high risk in its trading activity and advised of the importance of verifying VAT registration numbers via the Redhill verification procedure. However, in the period 21-25 March 2003, the company undertook transactions with a net value of over £10 million, which were the subject of an investigation. Later that year HMRC informed the company that it had been involved in a supply chain with a hijacked company. The company was warned in correspondence that if it continued to trade in a supply chain with businesses that represented a risk to the collection of VAT, and if it could not demonstrate that it had taken reasonable steps to verify the legitimacy of its suppliers and customers, then HMRC might require security from it. HMRC also sent the company letters, informing it of the de-registration for VAT of specified companies and warning the company that any input tax claimed in relation to transactions post-dating the de-registration might not be verified. There was more in a similar but familiar vein.
Following Secretary of State v Corry and Secretary of State v Warry [2014] EWHC 1381 (Ch) the judge said that, where the conduct said to demonstrate unfitness relates to involvement in MTIC fraud, the questions for the court in deciding unfitness were:
(a) whether the transactions in issue were connected with the fraudulent evasion of VAT;
(b) if so, whether the company knew or ought to have known that that was the case;
(c) if so, whether Mr Kelly’s conduct as a director of the company made him unfit to be concerned in the management of a company;
(d) Mr Kelly’s role in the company and the extent of his knowledge of and involvement in the transactions in issue;
(e) whether the matters relied on by the Official Receiver amounted to misconduct;
(f) if so, whether they justified a finding of unfitness;
(g) if they did, what period of disqualification should be imposed.
The evidence, which took very much the usual form for cases of this kind, led the judge to say:
“I am driven to conclude by what I consider to be the overwhelming evidence that the Company, and through the Company Mr Kelly, was aware that the Company, by entering into the transactions that formed its part of the 05/06 Deals, was involving itself in transactions involving the fraudulent evasion of VAT through MITC fraud, or at the very least that the Company and Mr Kelly turned a complete blind eye to such being the case.”
Among the many facts that drove him to that conclusion were the following:
(a) The warnings from HMRC, which meant that Mr Kelly was, on his own admission, aware of MTIC fraud and its hallmarks; he knew the level of due diligence that HMRC advised ought to be carried out before engaging in transactions of the kind that the company did engage in.
(b) A significant number of the features of the transactions in which the company was involved, particularly when viewed together, pointed to the fact that the company, and through it Mr Kelly, was aware that those transactions were connected with the fraudulent evasion of VAT; or at the very least to a blind eye being turned by the company and Mr Kelly. Those were, in particular:
- the back-to-back nature of the transactions through the chain up to the missing trader;
- the fact that there were three transactions on the same day with the same customer and supplier;
- the circularity of the payments involved (i.e. use of money received from one deal to fund the next deal);
- the fact that the company, without any obvious explanation, did not pay the full price (inclusive of VAT) for what it purchased;
- given the high value of the deals, the general absence of a written contract, and the highly unusual features of the written contract that was actually produced, which failed to deal with matters one might have expected to have been dealt with in a proper commercial contract between genuine and bona fide commercial parties;
- the odd timing of various steps in the transaction process, including the company placing a purchase order before entering into a contract to sell on or the receipt of a seller declaration;
- the lack of insurance of the kind one would expect in the case of high value transactions undertaken by a genuine commercial trader carrying on a legitimate business;
- the fact that the company never took possession of the mobile phones in question;
- the lack of clarity as to who paid transportation costs;
- the company only registered for VAT a couple of months before the deals were carried out;
- the company had no commercial premises, or vehicles capable of providing a service: it conducted business with very few assets, and it traded out of a residential flat.
One factor relied on by the Official Receiver to which the judge gave little weight, at least taken on its own, was the low profit the company made on the sale of the mobile phones in question: “One would expect that a genuine commercial sale of items such as mobile phones by way of export would yield a significant profit,” the judge said, but “That, in itself, does not, as I see it, point to involvement in fraud. What is, perhaps, of more significance in the present case is that other transactions in the chain did not yield any significant profit…”
The judge rejected an argument advanced by Mr Kelly that amendments to the Company Directors Disqualification Act 1986 made by the Small Business, Enterprise and Employment Act 2015 precluded the Official Receiver from relying on conduct before 1 October 2015.Guided by the factors identified by HHJ Hodge QC in Secretary of State v Warry, he considered that a period of disqualification towards the middle to top of the top Sevenoaks bracket was appropriate:
“I regard it as an aggravating factor that Mr Kelly has defended the present proceedings without recognising in any way the error of his ways, cf Re Howglen Ltd [2002] 2 BCLC 625. So far as mitigating factors are concerned, there are two possible considerations that I have identified. Firstly, Mr Kelly refers to the directors of [the defaulting company] having been disqualified for 13 years and 6 years respectively. Unfortunately, there is no evidence as to what roles these directors actually played, but certainly the VAT losses sustained as a result of [the defaulting company’s] activities were significantly more, so it would seem, than those in respect of the Company, particularly given that the Company’s claim for input tax was rejected. It might be said that it would be unjust to disqualify Mr Kelly for the same period, or longer than the 13 year period said to have been imposed in respect of [the defaulting company]. Secondly, it might be said that some discount is appropriate bearing in mind the length of time since the events that found the basis for the finding of unfitness in the present case. I consider there to be some force in this latter point.”
The judge went on to impose a disqualification order for a period of 12 years.