Revenue & Customs v SED Essex Ltd

On an application concerning provisional liquidators appointed after presentation of a creditor’s winding-up petition, the court should first ask whether the petitioner is likely to obtain a winding-up order. If so, it must then decide whether maintaining the provisional liquidators is a proper exercise of discretion pending the petition hearing.

A statutory appeal against a VAT assessment does not, by itself, establish a substantial dispute preventing reliance on the assessment. In a Kittel case, the petitioner must show a likelihood of proving both a VAT fraud connected with the relevant purchases and that the taxable person knew, should have known, or ignored obvious inferences that the purchases were so connected. The second-stage discretion includes risks concerning management integrity, asset dissipation, preservation of records and the least irremediable prejudice.

HM Revenue & Customs presented a creditor’s petition seeking the compulsory winding-up of SED Essex Ltd, based on four VAT assessments exceeding £3 million. The company had appealed the assessments to the First-tier Tribunal, but that appeal was stayed.

Provisional liquidators had been appointed without notice under the Insolvency Act 1986. The company applied to discharge the appointment before the petition was heard. The central issues were whether HMRC was likely to obtain a winding-up order and, if so, whether the provisional liquidators should remain in office pending the petition hearing.

1. Disputed VAT debt. A winding-up petition ordinarily cannot proceed where the debt is disputed in good faith on substantial grounds. The company must properly explain the basis of the dispute and show that it is substantial. A bare assertion of dispute or the existence of a statutory appeal is insufficient.
2. Applicable threshold. Under the two-stage approach in Rochdale Drinks, HMRC had to show that it was likely to obtain a winding-up order. In this case that required a likelihood of proving both that fraudulent evasion of VAT was connected with the company’s purchases and that the company, through its sole director, knew or should have known that connection, or ignored obvious inferences from the circumstances.
3. The court accepted that HMRC did not need to establish the precise form or commercial context of every fraud at this interlocutory stage. The evidence nevertheless had to be approached with particular care where the alleged fraud’s context was not established. The evidence of the supply chains, repeated VAT irregularities, trading patterns and inadequate explanations raised a powerful inference of connected fraud.
4. The company’s right of appeal against the assessments did not defeat the petition. The assessments could found the petition if the company could not show a real prospect of success or a bona fide dispute on substantial grounds.
5. Second stage. The court had to decide whether maintaining the provisional liquidators was appropriate. Relevant considerations included management integrity, the reliability of accounting and business records, risks of asset dissipation or destruction of records, the need for investigation, the prospect of a validation order under section 127, and which course would cause the least irremediable prejudice.
6. HMRC had satisfied both stages. The court considered the company’s prospects of resisting the assessments to be very limited, identified real concerns about management integrity and record keeping, and concluded that returning control to the company would be unsafe. The application to discharge the provisional liquidators was dismissed.