MICHAELA JOY HALL v DEEPAK BHATIA

A director may be liable for fraudulent trading where he knowingly causes a company to participate in a missing trader intra-community VAT fraud. Knowledge of every participant, transaction or precise mechanism is unnecessary. The court must first find the defendant’s actual knowledge or belief as to the facts, including any blind-eye knowledge, and then assess dishonesty objectively by the standards of ordinary decent people.

Under section 213 of the Insolvency Act 1986, the contribution should compensate the loss caused to creditors by the fraudulent business. It is not punitive. A fraudulent breach of fiduciary duty may also justify relief under section 212.

The applicant liquidator sought relief against the respondent, effectively the company’s sole director, under sections 213 and 212 of the Insolvency Act 1986. The company had traded in mobile phones through export and import chains and claimed substantial input VAT.

HMRC disallowed input tax credits after tracing the export chains to VAT defaulters and imposed a misdeclaration penalty. The company’s appeal to the First-tier Tribunal was struck out and no appeal was made against the penalty. The central issues were whether the transactions formed part of MTIC fraud, whether the respondent knowingly and dishonestly caused the company’s participation, and the proper measure of loss.

1. MTIC fraud. The liquidator established that the relevant transaction chains displayed the characteristic features of MTIC fraud, including VAT defaulters at the head of export chains, rapid back-to-back transactions, modest margins until export, contrived pricing, inadequate commercial documentation and goods being released before payment.
2. Dishonesty. The applicable test was the two-stage test in Ivey v Genting Casinos [2018] AC 391. The court first determined the respondent’s actual state of knowledge and belief. It then applied the objective standards of ordinary decent people. A genuinely held belief that conduct was honest did not prevent a finding of objective dishonesty.
3. The respondent had extensive actual knowledge of MTIC fraud through HMRC warnings, meetings and Notice 726. He deliberately permitted high-value transactions without meaningful pre-transaction due diligence. His explanations about oral checks, ongoing due diligence and the commercial nature of the transactions were rejected. Knowledge of the identity of the defaulters or every detail of the fraud was unnecessary.
4. The respondent was therefore knowingly and dishonestly party to the carrying on of the company’s business for a fraudulent purpose and was liable under section 213. His conduct also constituted a fraudulent breach of duty under section 212. It was unnecessary to determine the alternative non-fraudulent breach of duty or its limitation defence.
5. Loss. The section 213 contribution was compensatory, not punitive. The relevant loss was the loss caused to HMRC by the fraudulent trading, including the misdeclaration penalty under section 63 of the Value Added Tax Act 1994. For the section 212 claim, the higher loss suffered by the company was recoverable. The respondent was ordered to pay £1,785,892, with interest to be addressed separately.
6. The respondent’s attempt after trial to adduce further insurance evidence was refused. The evidence could have been obtained with reasonable diligence, the issue had been apparent at trial, and no exceptional circumstances justified reopening the case.