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

A director cannot relitigate findings made by a tax tribunal where he controlled the earlier proceedings, had a full and fair opportunity to contest the issue, and relitigation would be manifestly unfair or bring the administration of justice into disrepute. The court must distinguish knowledge that transactions are connected with VAT fraud from dishonesty, but the facts may make dishonesty irresistible. Under Insolvency Act 1986, s 213, fraudulent trading requires fraudulent business, knowing participation and dishonesty. The contribution must reflect loss caused to creditors, rather than punish the wrongdoer. Equivalent dishonest participation may amount to misfeasance and breach of directors’ duties under s 212.

The liquidator of Phoenix Tech Limited applied under sections 212 and 213 of the Insolvency Act 1986 for declarations and compensation against its former directors, Nizakat Khan and Jasbinder Singh. The company had participated in MTIC transactions and HMRC had rejected its input-tax claims and imposed a misdeclaration penalty.

Before the First-tier Tribunal, Khan had represented Phoenix and advanced the case that he was an innocent dupe. The tribunal dismissed the appeal and found that he had actual knowledge that the transactions were connected with VAT fraud. In the present proceedings Khan denied knowledge and dishonesty. The liquidator sought strike out and summary judgment, raising issue estoppel and abuse of process. The central questions were whether Khan could reopen the knowledge issue and whether the tribunal’s findings established dishonesty for the present claims.

1. Abuse of process. The defence denying knowledge of the fraud was struck out. Although the parties in the tax proceedings and the present proceedings differed, Khan had a sufficient privity of interest with Phoenix: he was its director, shareholder and the person who conducted the appeal. The liquidator was not automatically in privity with HMRC, but the circumstances made relitigation manifestly unfair and contrary to the administration of justice.
2. The First-tier Tribunal hearing had been thorough and fair. Khan had controlled the litigation, given evidence and cross-examined witnesses. He had chosen to present the case that Phoenix was an innocent participant, and could not have a second opportunity to contest the same extensive factual issue. The approach in Conlon v Simms was distinguishable because Khan had initiated and controlled the earlier proceedings.
3. Dishonesty. Knowledge that a transaction is connected with fraud does not invariably amount to dishonesty. The tribunal had not been required to decide dishonesty. Applying Ivey v Genting Casinos (UK) Ltd, however, the tribunal’s findings established Khan’s actual state of mind, and no alternative explanation was advanced for knowingly submitting VAT repayment claims connected with fraud. Dishonesty was therefore irresistible on the pleaded facts and the defence denying it was struck out.
4. Fraudulent trading. Under s 213 of the Insolvency Act 1986, the liquidator had to establish fraudulent business, knowing participation and dishonesty. Participation in MTIC fraud fell within the section. Khan’s established knowledge and dishonest conduct satisfied those requirements. The contribution under s 213 must compensate the loss caused to creditors, including the misdeclaration penalty and liabilities resulting from rejection of the input-tax claims; it must not contain a punitive element.
5. Misfeasance and breach of duty. Khan’s knowing participation in a dishonest tax-evasion scheme breached his duty to act honestly and in the company’s interests and caused the company to incur the relevant liabilities. The limitation defence did not assist because the claim concerned fraud.
6. Summary judgment was entered against Khan in the principal sum claimed. The court granted the declarations sought under s 213 and concerning breach of duty. The form of order and interest were reserved for further hearing.

This was a first-instance decision on the liquidator’s strike-out and summary-judgment applications. The judgment records the earlier First-tier Tribunal decision dated 29 June 2015, which dismissed Phoenix’s VAT appeal and found that Khan had actual knowledge of the connection with fraud.