Goldfarb v Higgins & Ors

For liability under the fraudulent trading provisions, the applicant must establish that the respondent participated in carrying on the company’s business with knowledge that the transactions were intended to defraud creditors. Knowledge may include blind-eye knowledge, but only where there is a firmly grounded and targeted suspicion of specific facts and a deliberate decision to avoid confirming them. Mere negligence or failure to appreciate fraud is insufficient.

Contributions under section 213 of the Insolvency Act 1986 are assessed individually. The court may impose joint and several liability, but it must determine what each respondent should contribute. The contribution is compensatory, requires a nexus with the creditor’s loss, and must not be punitive.

The applicant, the liquidator of Overnight Ltd, sought declarations under section 213 of the Insolvency Act 1986 against three respondents arising from missing trader VAT fraud. The company had purchased computer processors from Germany and resold them in the United Kingdom without accounting for the VAT collected.

The first respondent had acted as company secretary and operated the bank account through which the transactions were conducted. The second respondent was the company’s director and participated in the trading. The third respondent was alleged to have been centrally involved, but did not appear. The issues were whether each respondent knowingly participated in fraudulent trading and, if liable, what contribution should be ordered.

1. Fraudulent trading. The company’s business was carried on with intent to defraud HMRC because the transactions would have been loss-making if the VAT had been accounted for. Section 213 was therefore engaged.
2. Knowledge and participation. Liability under section 213(2) required both participation in carrying on the business in the fraudulent manner and knowledge that the transactions were intended to defraud HMRC. The first respondent’s control of the account, his handling of rapidly moving large sums, and his implausible explanations established actual knowledge or, at minimum, blind-eye knowledge. The second respondent, as sole director, knowingly participated in the business despite the obvious absence of arrangements to account for VAT.
3. Blind-eye knowledge. A respondent cannot rely on a deliberate refusal to ask questions where there is an actual appreciation that the answers would disclose fraud. However, the suspicion must be firmly grounded and targeted on specific facts. A merely negligent failure to appreciate that fraud was occurring is insufficient.
4. Third respondent. The evidence against the third respondent was unsatisfactory and substantially depended on unreliable evidence from implicated witnesses. Although he may have been involved, the court could not make the serious finding required on that evidence alone. The claim against him was therefore not established.
5. Contributions. The wording of section 213, read with the substantially similar wording of section 214, indicated that the court should assess each respondent’s contribution individually. Joint and several liability remained available, but was not the mandatory starting point. Contributions were compensatory rather than punitive and required a nexus with the loss caused to the creditor. The first respondent was ordered to contribute the full loss caused to HMRC; the second respondent’s contribution was assessed at 50 per cent of that loss. Quantification and consequential directions were to be determined after further submissions.

First-instance decision. The judgment records an earlier preliminary limitation judgment in favour of the liquidator: Re Overnight Ltd [2009] EWHC 601 (Ch), but the present judgment determined the substantive fraudulent trading application.