MICHAELA JOY HALL v DEEPAK BHATIA

Key legal principles and grounds for decision:

• The Liquidator brought claims under section 213 (fraudulent trading) and section 212 (misfeasance / breach of fiduciary duty) of the Insolvency Act 1986 arising from the Company's dealing in mobile phones during 2005–2006 and a disputed VAT input claim in the May 2006 VAT return.
• The court found that the relevant chains of transactions exhibited the characteristic features of Missing Trader Intra-Community (MTIC) fraud (same‑day or short‑span transactions, very low mark‑ups until the export leg, sales made before payment, links to identified defaulters) and that those export chains caused HMRC losses.
• Applying the two‑stage Ivey test for dishonesty, the judge concluded the Respondent (the effective sole director) had actual knowledge of the risk of MTIC fraud (through HMRC meetings and Notice 726) and deliberately failed to carry out proper pre‑transaction due diligence; his conduct was objectively dishonest.
• Accordingly the Respondent was liable under section 213 for fraudulent trading and under section 212 for fraudulent breach of duty. The court quantified loss on the section 212 basis (input tax paid less profits plus the misdeclaration penalty) and ordered the Respondent to contribute £1,785,892. The court refused a late application to adduce further evidence about insurance matters.

Background and procedural posture: The application was the Liquidator's trial claim, issued 7 May 2020, against the Respondent (effective sole director) seeking contributions under section 213 and section 212 of the Insolvency Act 1986 in respect of mobile phone trading by JD Group Limited in 2005–2006. The Company entered liquidation in May 2014 and HMRC had disallowed input tax claimed in the May 2006 VAT return; a misdeclaration penalty under section 63 VAT Act 1994 was later assessed. The Company’s appeal to the First‑Tier Tribunal had been struck out in 2012. The trial lasted three days (26–28 October 2021).

Nature of the claim / relief sought: The Liquidator sought a contribution from the Respondent for fraudulent trading under section 213 (seeking £743,872 plus interest) and alternatively contributions for breaches of fiduciary duty under section 212 (seeking a higher sum based on input tax paid to suppliers less profits, plus the misdeclaration penalty).

Issues framed:

• Whether the transactions in which the Company participated were part of MTIC fraud.
• Whether the Respondent had the requisite knowledge or was wilfully blind and therefore dishonest under the Ivey test.
• Whether the Respondent had breached fiduciary duties (fraudulently or negligently) and, if liable, the correct quantification of loss under section 213 and/or section 212.
• Whether delay prejudiced the Respondent’s ability to have a fair trial and whether late evidence (post‑trial on insurance) should be admitted.

Court’s reasoning and findings:

• The court analysed in detail the documentary deal packs for numerous sale chains (labelled Deals 1–12), finding the export chains (Deals 1–7) traced back to traders identified by HMRC as VAT defaulters and exhibiting MTIC characteristics (rapid onward sales, low intermediate mark‑ups, goods released before payment, use of offshore end‑buyers, weak or post‑dating due diligence documents).
• The Respondent had received HMRC guidance and Notice 726 and attended meetings; the judge found he had read and understood the Notice and its warnings and required checks. The Respondent repeatedly asserted that robust due diligence had been performed, but the contemporaneous documentation showed that many checks or references were sought only after the transactions and that essential documentary evidence was absent.
• Applying Ivey (and related authorities cited in the judgment), the judge found the Respondent had actual knowledge of the nature and risk of MTIC fraud, and that his conduct (deliberate failure to carry out proper pre‑transaction checks and creating the impression of checks after the event) was objectively dishonest. The judge rejected the Respondent’s oral assertions of pre‑transaction verification absent documentary support.
• Given those findings, the court held the Respondent liable under section 213 for fraudulent trading and under section 212 for fraudulent breach of fiduciary duty. On quantification the judge accepted the Liquidator’s higher calculation under section 212 — input tax paid to suppliers (£2,117,762) less profits and including the misdeclaration penalty (£285,897) — and ordered the Respondent to pay £1,785,892. Interest was to be addressed subsequently.
• The judge also refused a post‑trial application to adduce further evidence about insurance, finding no satisfactory explanation why the evidence could not have been obtained earlier and that the new material would not have altered the primary findings.

Wider context: The judgment applies established principles on MTIC fraud and dishonesty (Ivey), confirms that traders down a chain may be liable where they participate knowingly or with blind‑eye knowledge, and illustrates the significance of HMRC guidance (Notice 726) and contemporaneous documentary due diligence in such disputes.

This is a first instance decision. The court held that the Liquidator's claims succeeded: the Respondent was liable for carrying on the Company's business with intent to defraud (section 213) and for fraudulent breach of fiduciary duty (section 212). The Respondent was ordered to pay £1,785,892 to the Liquidator. The judge's reasons were that the transaction chains exhibited MTIC fraud characteristics, the Respondent had actual and/or blind‑eye knowledge (having received HMRC Notice 726 and attended HMRC meetings), and he deliberately failed to conduct meaningful pre‑transaction due diligence; his conduct was therefore dishonest under the Ivey test. The court refused a late application to adduce further evidence about insurance, finding it would not alter the findings.