The Secretary of State for Business Innovation and Skills v Warry

For a directors’ disqualification application arising from MTIC fraud, the court must first determine whether the company participated in transactions connected with fraudulent evasion of VAT. It must then determine the director’s personal knowledge, involvement and responsibility, and whether that conduct makes the director unfit under section 6 of the Company Directors Disqualification Act 1986.

Actual knowledge or wilful blindness may justify a disqualification in the top bracket. Where the director did not know of the fraud but, without wilfully shutting his eyes, ought to have known of it, the appropriate period generally falls within the middle bracket. Gross negligence or total incompetence in an expressly assigned due-diligence function may establish unfitness even without dishonesty or actual knowledge.

The Secretary of State applied under section 6 of the Company Directors Disqualification Act 1986 to disqualify William Nicolas Warry, a director of Chapter 6 Limited. Chapter 6 had traded in wholesale mobile phones and had participated in transactions connected with MTIC fraud. It had also made substantial claims for repayment of input VAT which were disallowed.

The central issues were whether Mr Warry knew, or should have known, that the transactions were connected with fraudulent evasion of VAT; whether he had allowed Chapter 6 to participate in them; and whether he had caused or allowed the wrongful VAT repayment claims. The application was tried against Mr Warry alone after the other director accepted a disqualification undertaking.

1. Statutory test. The Secretary of State had to prove, on the balance of probabilities, that Mr Warry was a director of an insolvent company and that his conduct made him unfit to be concerned in the management of a company under section 6 of the Company Directors Disqualification Act 1986.
2. MTIC inquiry. The court adopted the approach in Secretary of State v Corry. The inquiry has two stages. First, the court determines whether the company was a participant in transactions connected with fraudulent evasion of VAT, applying the principles derived from Kittel v Belgium and Mobilx Limited v Revenue & Customs Commissioners. Secondly, it determines the director’s personal knowledge of and involvement in the fraud, and the effect of that conduct on fitness.
3. Mr Warry did not know of the connection with MTIC fraud, did not wilfully shut his eyes to it, and was not an active participant in the transactions. However, he had expressly undertaken responsibility for checking due diligence on all deals. His checks were wholly perfunctory and inadequate against a known background of widespread VAT fraud. The transactions had clear features indicating that they were too good to be true. He therefore ought to have known of the fraud.
4. His conduct amounted to gross negligence or total incompetence in discharging his assigned functions and made him unfit. The court treated cases involving actual knowledge or wilful blindness as falling within the top bracket, and cases involving an absence of actual knowledge but a failure to recognise an obvious fraud as falling within the middle bracket.
5. The appropriate starting point was seven-and-a-half years. Extenuating circumstances, including Mr Warry’s subordinate role, lack of personal gain, absence of dishonesty, age, reduced future risk and preoccupation with his mother’s terminal illness, justified a reduction to six years.
6. Mr Warry was disqualified for six years. He was ordered to pay the Secretary of State’s costs, with a payment on account of £25,000 due by 24 March 2014.