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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Thiel-Czerwinke & Anor v Crabb (Courtside Recycling Ltd, Re) [2024] EWHC 337 (Ch) (21 February 2024) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2024/337.html Cite as: [2024] EWHC 337 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF COURTSIDE RECYCLING LIMITED (CRN.08888876)
(IN LIQUIDATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Rolls Building Fetter Lane London EC4A 1NL |
||
B e f o r e :
____________________
DOMINIK THIEL-CZERWINKE and JAMIE TAYLOR (Joint Liquidators of Courtside Recycling Limited) |
Applicants |
|
- and - |
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NICHOLAS JAMES CRABB |
Respondent |
____________________
John Vickery (instructed by Ackroyd Legal (London) LLP) for the Respondent
Hearing dates: 8-10 and 13 November 2023
____________________
Crown Copyright ©
ICC JUDGE PRENTIS :
"The First Claim: that in deliberately and persistently
(i) under-declaring the VAT for which the Company was liable to HMRC;
(ii) extracting large cash sums from the Company for no apparent benefit to the Company; and
(iii) destroying the Company's books and records,
the Respondent was knowingly party to the carrying on of the business of the Company with intent to defraud creditors (in particular, HMRC) and/ or for a fraudulent purpose within the meaning of s.213 of the Insolvency Act 1986 ("IA86") and is consequently liable to contribute to the assets of the Company such sums as the Court thinks proper".
"The Second Claim: for misfeasance pursuant to s.212 IA86 in respect of the facts and matters set out at (i) to (iii) above".
"The Third Claim: that the Respondent caused the Company to make payments totalling £28,426.61 to himself and third parties post presentation of the winding-up petition, which payments are void pursuant to s.127 IA86, and that he is consequently liable (i) to repay the sums paid to himself and (ii) in misfeasance to contribute the total sum of £28,426.61 to the Company by way of compensation".
Fraudulent trading
"(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper".
"There are therefore three elements to be established: (1) that the business of the company in liquidation has been carried on with intent to defraud the creditors of the company or for any other fraudulent purpose; (2) that the defendant sought to be made liable… participated in the carrying on of the business of the company in that manner; and (3) that it did so knowingly: ie with knowledge that the transactions it was participating in were intended to defraud the creditors of the company or were in some other way fraudulent.
"62 Dishonesty is by no means confined to the criminal law. Civil actions may also frequently raise the question whether an action was honest or dishonest. The liability of an accessory to a breach of trust is, for example, not strict, as the liability of the trustee is, but (absent an exoneration clause) is fault-based. Negligence is not sufficient. Nothing less than dishonest assistance will suffice. Successive cases at the highest level have decided that the test of dishonesty is objective. After some hesitation in Twinsectra Ltd v Yardley [2002] 2 AC 164, the law is settled on the objective test set out by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378: see Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476, Abou-Rahmah v Abacha [2007] Bus LR 220 and Starglade Properties Ltd v Nash [2011] Lloyd's Rep FC 102. The test now clearly established was explained thus in the Barlow Clowes case [2006] 1 WLR 1476, para 10 by Lord Hoffmann, who had been a party also to the Twinsectra case:
'Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court of Appeal held this to be a correct state of the law and their Lordships agree.'
63 Although the House of Lords and Privy Council were careful in these cases to confine their decisions to civil cases, there can be no logical or principled basis for the meaning of dishonesty (as distinct from the standards of proof by which it must be established) to differ according to whether it arises in a civil action or a criminal prosecution. Dishonesty is a simple, if occasionally imprecise, English word. It would be an affront to the law if its meaning differed according to the kind of proceedings in which it arose. It is easy enough to envisage cases where precisely the same behaviour, by the same person, falls to be examined in both kinds of proceeding. In Starglade Properties Ltd v Nash [2011] Lloyd's Rep FC 102 Leveson LJ drew attention to the difference of test as between civil cases and criminal cases, and rightly held that it demanded consideration when the opportunity arose. Such an opportunity is unlikely to occur in a criminal case whilst R v Ghosh [1982] QB 1053 remains binding on trial judges throughout the country. Although in R v Cornelius [2012] Lloyd's Rep FC 435 the opportunity might have arisen before the Court of Appeal, Criminal Division, it did not do so because there had been in that case no false representation of which the honesty needed to be examined; moreover, there is some doubt about the freedom of that court to depart from R v Ghosh [1982] QB 1053 in the absence of a decision from this court…
74 These several considerations provide convincing grounds for holding that the second leg of the test propounded in R v Ghosh… does not correctly represent the law and that directions based upon it ought no longer to be given. The test of dishonesty is as set out by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan… and by Lord Hoffmann in Barlow Clowes International Ltd v Eurotrust International Ltd…, para 10: see para 62 above. When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual's knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest".
"In applying the civil burden of proof on balance of probabilities inherent probabilities can be weighed alongside or against specific evidence from a particular case. But care must be taken in working out what in a particular case is inherently probable or improbable. It is generally correct that, absent other information, the more serious the wrongdoing, the less likely it is that it was carried out, because most people are not serious wrongdoers. The standard of proof remains the same, but more cogent evidence is required to prove fraud than to prove negligence or innocence because the evidence has to outweigh the countervailing inherent improbability".
"The authorities were exhaustively reviewed recently by this court in R (N) v Mental Health Review Tribunal [2006] 2 WLR 850. They showed that there could be no 'straitjacket of classification' and that '… the civil standard of proof is flexible in its application and enables proper account to be taken of the seriousness of the allegations to be proved and the consequences of proving them.' (per Richards LJ, at para 59). Thus in civil proceedings, the 'presumption of innocence' is not so much a legal rule, as a common sense guide to the assessment of evidence. It is relevant not only where the cause of action requires proof of dishonesty, but wherever the court is faced with a choice between two rival explanations of any particular incident, one innocent and one not. Unless one is dealing with known fraudsters, the court should start from a strong presumption that the innocent explanation is more likely to be correct".
"There must, as it seems to me, be some nexus between (i) the loss which has been caused to the company's creditors generally by the carrying on of the business in the manner which gives rise to the exercise of the power and (ii) the contribution which those knowingly party to the carrying on of the business in that manner should be ordered to make to the assets in which the company's creditors will share in the liquidation. An obvious case for contribution would be where the carrying on of the business with fraudulent intent had led to the misapplication or misappropriation of the company's assets. In such a case the appropriate order might be that those knowingly party to such misapplication or misappropriation contribute an amount equal to the value of assets misapplied or misappropriated. Another obvious case would be where the carrying on of the business with fraudulent intent had led to claims against the company by those defrauded. In such a case the appropriate order might be that those knowingly party to the conduct which had given rise to those claims in the liquidation contribute an amount equal to the amount by which the existence of those claims would otherwise diminish the assets available for distribution to creditors generally; that is to say an amount equal to the amount which has to be applied out of the assets available for distribution to satisfy those claims".
Misfeasance
"…it was not open to the respondent to the proceedings in the circumstances of this case to escape liability by asserting that, if the books and papers or other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator".
"a director is anyway under the separate fiduciary obligations to cause the company to keep proper records of its transactions, and to provide an account of his own dealings with company property, of which he is treated as being a trustee".
s.127
Structural facts and conclusions
42.1 Courtside operated under two VAT regimes: the standard scheme, and a Margin/ Global Accounting Scheme. The latter is available to certain types of trade, and leads to a charge (in simple terms) of 1/6th of the profit on an item. The seller therefore does not (and must not) charge VAT separately. If a Scheme is not used properly, standard VAT rules apply.
42.2 Courtside carried out its Scheme trades using the Lloyds and Barclays accounts only. There was therefore a gap in its use between the closing of the former in October 2014 and the opening of the latter in May 2015. Mr Crabb describes these accounts as the trading accounts, to distinguish them from the Santander account, which is his core account.
42.3 In his witness statement Mr Crabb says that he would calculate the profit, and then provide to ESW that figure "alongside the VAT on it which would be subject to the reduction of one sixth under the margin scheme". It follows that these figures would disclose the non-standard VAT charge.
42.4 He then gives a worked example. Courtside buys stock for £4,900, which it sells for £6,500; a profit of £1,600 on which VAT will be due of £266. But what Courtside also does in this example is charge VAT on the sale price, albeit Mr Crabb says there was only a single figure in its invoice of £7,800. Apparently (although I emphasise that there is no claim as to this) it just pockets the £1,300 extra it had claimed for VAT.
ESW's knowledge
"Neither ESW generally nor I specifically were aware of either Recyferro or Courtside operating separate 'trading accounts' and we were never informed of such by the Respondent, Recyferro or the Company".
The only account of Courtside's of which they were told was Santander.
"Mr Crabb only notified us of the existence of the Lloyds Bank account… following the assessment raised by HMRC on 6 March 2018.
Consequently, we had no knowledge of, and did not give any advice to Mr Crabb regarding the VAT liability on trading through this account, and no amounts in this respect were declared within the above returns", being those for the quarters 5/14, 8/14 and 11/14.
"Forward for examination all the business books, records, bank statements, cheque book stubs, and paying in book stubs and stock records for the period from 12 February 2014 to 31 May 2015. This includes all the prime records of income and expenditure and assets and liabilities".
"Our client has advised us that he had difficulties initially in opening a bank account for the company. He applied to open an account in March 2014, but became engaged in protracted correspondence with the bank regarding the necessary Environmental Agency licences of the business before Santander agreed to open the account in November 2014".
"Our client explained that he overcame this issue by agreeing with his customer at the time to be paid in cash for the initial few sales invoices raised. The intention was that this arrangement should only be in place for a few weeks until the company bank account was opened. As it became apparent that there were delays in opening the bank account, both parties realised that an alternative arrangement had to be sought because of the potential levels of cash involved".
"This assessment has been made because HMRC holds evidence, including sales invoices, to show that between 25th March 2014 and 28th October 2014 payments were made to a bank account… held in the name of Courtside… with Lloyds. In the absence of evidence to the contrary, it is reasonable to assume that these payments related to supplies made by the company. The level of payments made to the account far exceeds the level of… sales declared by Courtside… on the VAT returns submitted by or on behalf of the company in respect of its 05/14, 08/14 and 11/14 return periods".
The underdeclared VAT was assessed at £219,363.
"We have now met with our client who has acknowledged that the Company did operate the bank account noted in your letter, and the transactions on this account have been omitted from the VAT returns and accounts.
The director has explained that this account was utilised as a trading account for the buying and selling of predominantly non-ferrous metals, reclaimed bricks and other recyclable construction materials. For VAT purposes he believed this represented trading in 'second hand goods', so that a margin scheme would apply, and the company would only need to declare any profit element of the trading and VAT on that profit alone.
During the course of our discussions, the director admitted that in many instances purchases had been made by cash from a wide range of sources".
"1. Failure to properly incorporate the transactions on this bank account within the Company's accounts.
2. Failure to determine the correct VAT treatment of trading activities through this account, and the application of the margin scheme not appropriate to those trading activities.
3. Failure to declare income in relation to 3 sales arising from this trading credited to his personal bank account.
In view of the above, our client accepts that there is a liability to VAT. As a result, the company is now insolvent and has ceased trading, and the director has therefore met with Begbies Traynor on 25 April 2018 in order to obtain insolvency advice".
"I admit that I have neglected my duties in relation to:
(i) Ensuring that the company maintained and preserved adequate accounting records.
(ii) Submitting correct VAT and other returns for the company.
(iii) Producing accurate prepared accounts for the company".
He has been disqualified for 4 years, I understand on the basis of those admissions.
"The utilisation of the Global Accounting Scheme by Recyferro and the paying of VAT on the margin of the profit between sales and purchases of scrap metal did not form part of this enquiry. Further, there was no information (business records or explanations) supplied to us by either Recyferro or the Respondent during the course of the enquiry to indicate a margin scheme was being operated".
Document destruction
"…around June 2014 the Company entered into an oral contract with waste removal operatives, believed to be from the Traveller community, to remove from the Company's premises unprofitable low level waste, including paper and cardboard. The Company's hard copy books and records for the period from incorporation to October 2016 were contained in cardboard boxes. In the absence of the Respondent from the Company's warehouse premises, and without the knowledge or consent of the Respondent, the waste removal operatives inadvertently removed the Company's hard copy books and records and, it is assumed, disposed of the same".
"The Respondent admits that he did not keep hard copies of all of the Company's books and records for the period from October 2016 to the date of liquidation. Until October 2017 the Respondent retained soft copies of the Company's books and records on his laptop. The soft copies were destroyed as a consequence of a ransomware attack in or around October 2017… the Respondent instructed a friend, a computer expert, to attempt to recover the data contained on the laptop's hard drive… the expert was unable to do so… the laptop was scrapped by the Respondent following its return to him".
"I accept that after October 2017 I purposefully destroyed business records. I did this after discovering the loss of the accumulated records of the business from what I assume was an inadvertent error on the part of members of the travelling community who were engaged by the company to remove cardboard and other items of rubbish… I accept that this was a serious error on my part, however it was not done with fraud in mind".
"It was not until September 2017 that I discovered that the books and records were missing. It was only as a result of me needing to put together some documents for ESW that I had cause to enter that part of the premises… My panic at discovering the loss of the books and records led me to make the fatal error in the purposeful destruction of the continuing books and records. I cannot say why I did this, other than out of panic".
"After these records were thrown out I panicked and I think this is where I failed in my duty of care to the company. Realising that I no longer had complete records for the company I just ended up throwing out any records that the company had on a weekly basis".
Cash
"The simple fact is that the cash withdrawals were legitimate business expenses, used to create revenue for onward sale of scrap metal and other arisings, and were not used for my personal benefit. There is no evidence to suggest that this was the case".