Kevin John Hellard v Nizakat Khan & Anor (Re Phoenix Tech Limited)

The liquidator applied under sections 212 and 213 of the Insolvency Act 1986 for declarations and monetary relief against the former directors of Phoenix Tech Limited for participation in MTIC (VAT carousel) fraud. The First-tier Tribunal (Tax Chamber) had previously found that Mr Khan had actual knowledge that the company’s transactions were connected with fraud. The High Court held that, insofar as Mr Khan sought to relitigate his lack of knowledge, his defence was an abuse of process and must be struck out because relitigation would be manifestly unfair and would bring the administration of justice into disrepute. The court granted summary judgment on the allegation that Mr Khan dishonestly caused the company to participate in the scheme and entered declarations under section 213 and for breach of duty under section 212. The decision applied principles on strike out and summary judgment (CPR 3.4 and CPR 24.3), the doctrine against collateral attack, and the Ivey test for dishonesty.

This is a first instance insolvency application by the liquidator of Phoenix Tech Limited under sections 212 and 213 of the Insolvency Act 1986, seeking declarations, contributions and compensatory orders against two former directors for the company’s participation in MTIC VAT fraud.

Background and procedural posture:

• Phoenix was VAT-registered in late 2005 and carried out a series of brokered transactions (November 2005 to May 2006) which HM Revenue & Customs treated as connected with MTIC fraud.
• Phoenix claimed input VAT repayment of £4,502,932.15; HMRC denied the claims and imposed a misdeclaration penalty. Phoenix appealed to the First-tier Tribunal (Tax Chamber) where, after an 11-day hearing, the tribunal found that HMRC had established fraudulent tax losses and that Mr Khan had actual knowledge of the fraud.
• HMRC presented a winding-up petition and the company entered compulsory liquidation; the liquidator, Mr Hellard, brought this application against Mr Khan and Mr Singh.

Relief sought:

• Declarations that the respondents knowingly participated in carrying on business to defraud creditors (s.213); orders for contributions to the company’s assets; findings of misfeasance or breach of directors’ duties and compensatory relief (s.212); specific sums claimed tied to the rejected input tax claims and the misdeclaration penalty.

Issues framed by the court:

• Whether Mr Khan is estopped or otherwise barred from denying knowledge of the fraud by reason of the FTT findings (issue estoppel / abuse of process / collateral attack).
• Whether relitigation would be manifestly unfair or would bring the administration of justice into disrepute.
• Whether, on the facts established or admitted, there is fraudulent trading under section 213 and misfeasance / breach of duty under section 212, and whether knowledge of the fraud imports dishonesty for the purposes of relief.

Court’s reasoning and outcome:

• The court applied the two-stage test for abuse of process and the summary judgment principles. It concluded that Mr Khan, having been the company’s director, shareholder and the appellant who conducted the FTT appeal, had a sufficient alignment of interest with Phoenix to make it manifestly unfair to require the liquidator to relitigate the issue of knowledge. The FTT hearing was thorough and fair; Mr Khan had every opportunity to give and test evidence.
• Relitigation would involve substantial re‑examination of issues already adjudicated at length and risked wasting public and court resources and bringing the administration of justice into disrepute. Accordingly the defence denying knowledge was struck out as an abuse of process.
• Once the denial of knowledge was struck out, the court held that there was no real prospect of avoiding a finding of dishonesty in this case: the FTT findings on knowledge (the subjective element of Ivey) combined with the conduct of submitting the VAT claim established objective dishonesty for Ivey purposes. Summary judgment was entered for the liquidator on the principal allegations against Mr Khan and declarations under section 213 and breach of duty were granted. The court reserved detailed orders on quantum and interest for further hearing.

At first instance the court struck out Mr Khan’s defence insofar as it denied knowledge of the MTIC fraud and denied dishonesty, holding that relitigation of the factual findings of the First-tier Tribunal would be an abuse of process (manifestly unfair and bringing the administration of justice into disrepute). The court granted summary judgment against Mr Khan on the allegation that he dishonestly caused the company to participate in the VAT fraud, and granted the declarations sought under section 213 (fraudulent trading) and for breach of duty under section 212. The court reasoned that the FTT’s thorough and fair findings on Mr Khan’s knowledge, together with his role in prosecuting the appeal, made relitigation unjustified and that, on the established facts, objective dishonesty was unavoidable under the Ivey test.