The Official Receiver v Andrew Anthony Kelly

In a directors’ disqualification claim arising from suspected MTIC fraud, the court must determine whether the company was connected with fraudulent VAT evasion, the extent of the director’s personal knowledge and involvement, and whether his conduct makes him unfit to manage a company.

The Kittel principle may be used as the first stage of that inquiry. The court must then assess the director’s own conduct and state of mind. A sole director cannot avoid responsibility by relying on employees or accountants where he knew, or ought to have known, of the relevant transactions and failed to supervise them.

The Official Receiver sought a disqualification order under section 6 of the Company Directors Disqualification Act 1986 against the sole director of Walmley Ash Ltd, formerly Balmoral Ltd.

The claim concerned three mobile-phone transactions in May and June 2006, which the First-tier Tribunal had found connected with fraudulent evasion of VAT, and a related input-tax claim of approximately £1.75 million. The defendant disputed that the proceedings could rely on pre-1 October 2015 conduct and denied knowledge of the fraud.

The court had to determine the preliminary limitation issue, whether the company knew or ought to have known of the connection with VAT fraud, whether that knowledge and conduct were attributable to the defendant, and the appropriate period of disqualification.

1. The preliminary objection was rejected. Section 108 of the Small Business, Enterprise and Employment Act 2015 extended the relevant limitation period from two years to three years where the company became insolvent after 1 October 2015. It did not restrict reliance on conduct occurring before that date. The proceedings were therefore brought in time (paras [91]-[98]).

2. In an MTIC-fraud disqualification case, the court should first consider whether the company was a participant in transactions connected with fraudulent evasion of VAT. It must then consider the extent of the director’s personal knowledge of and involvement in the fraud, and how that affects fitness to manage a company, following Secretary of State v Corry and Secretary of State for Business Innovation and Skills v Warry (paras [88]-[90], [160]-[161]).

3. The company’s back-to-back transactions, circular payments, inadequate due diligence, unusual contractual arrangements, absence of meaningful inspection and insurance, use of freight forwarders, and other features were cumulatively inconsistent with ordinary commercial trading. The company knew, or at least turned a blind eye to the fact, that the transactions were connected with fraudulent VAT evasion. Alternatively, it ought to have known that fact under the Kittel principle (paras [156]-[158]).

4. The company’s state of mind was attributable to the defendant. He was the sole director, shareholder and bank signatory, knew of the transactions and had substantial awareness of MTIC fraud and the due diligence expected by HMRC. He could not rely on employees’ involvement or on the preparation of VAT returns by an accountant to avoid responsibility (paras [157], [159]-[161]).

5. The defendant’s conduct made him unfit to be concerned in the management of a company. Section 6(1) imposed a duty to make a disqualification order once the statutory conditions were satisfied. A period of 12 years was appropriate, having regard to the knowing or wilfully blind involvement in MTIC transactions, the aggravating effect of defending the proceedings without recognising wrongdoing, the passage of time and the comparative circumstances (paras [162]-[168]).