QEB Metallics Ltd v Peerzada & Ors

A person may be liable for a company’s wrongdoing according to the substance of his conduct, rather than the label applied to his role. A person who controls a company’s affairs and acts as its real directing mind may be accountable under Insolvency Act 1986, including sections 212 and 213, and in equity. The civil standard of proof applies, although serious allegations require careful assessment. Compensation should restore the company’s loss caused by the inequitable conduct. A liquidator is not generally obliged to pursue an expensive and speculative challenge to a tax assessment where the loss resulted from fraud or inequitable conduct.

The claimant company was in compulsory liquidation, with HMRC as its principal creditor, following an alleged missing-trader intra-Community VAT fraud. It brought claims against three defendants, including the third defendant, an accountant who had provided office, administrative and nominee services and was alleged to have been the real controlling mind behind the company.

The second defendant settled by submitting to judgment. The first defendant was untraced and took no part in the trial. The central issue was whether the third defendant, rather than or in addition to the nominal directors, controlled the company and was responsible for the unpaid VAT. The court also determined the appropriate compensation and interest.

1. Standard of proof. The trial was civil. The civil burden and standard of proof applied, notwithstanding the seriousness of the allegations. The court nevertheless approached the evidence with particular caution.
2. Substance over labels. The court should first determine what the alleged wrongdoer actually did. Labels such as “shadow director” and “de facto director” are commonly associated with particular statutory provisions and should not obscure the substance of the relationship. The third defendant controlled the company’s operations, gave instructions to the nominee director and was its real influence and controlling mind. He was more than a mere manager.
3. Liability. The third defendant’s conduct fell within sections 212 and 213 of the Insolvency Act 1986. As the person managing the company, he owed fiduciary duties to it and was accountable for the fraudulent business carried on with intent to defraud HMRC. The same conclusion followed through equitable accountability and, if necessary, dishonest conspiracy.
4. Compensation. The appropriate loss was the full VAT liability of £2,141,510.80. The liquidators were not obliged to undertake an expensive and speculative challenge to HMRC’s assessments, particularly where the loss arose from fraud or inequitable conduct and success was uncertain.
5. Interest and orders. Although compound interest was sought, the court awarded simple interest on the VAT amounts from the dates when they should have been accounted for, at the applicable late-payment rate, to judgment. Judgment was entered against the first defendant for £988,357.08 and against the third defendant for £2,141,510.80, in each case with simple interest as directed.