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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Secretary of State for Business, Energy And Industrial Strategy v Selby & Ors [2021] EWHC 3261 (Ch) (08 December 2021) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2021/3261.html Cite as: [2021] EWHC 3261 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
RE: X E SOLUTIONS LTD (no.07025602)
AND RE: THE COMPANY DIRECTORS DISQUALIFICATION ACT 1986
Fetter Lane, London EC4A 1NL |
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B e f o r e :
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THE SECRETARY OF STATE FOR BUSINESS, ENERGY AND INDUSTRIAL STRATEGY |
Claimant |
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- and – |
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1. DAVID IAN SELBY 2. AL SAYED 3. TAHIR AWAN 4. STEPHEN JAMES BAMFORD |
Defendants |
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Max Cole (instructed by Moriarty Law Limited) for the Third Defendant
The Second Defendant and the Fourth Defendant appeared in person
The First Defendant did not appear
Hearing dates: 4-8, 11-15 October 2021
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Crown Copyright ©
ICCJ PRENTIS:
"Between at least 3 September 2012 and 12 March 2013… [he] caused or allowed [the Company] to participate in transactions which were connected with the fraudulent evasion of VAT, such connections being something which Mr Selby either knew or should have known about";
and that he:
"caused or allowed [the Company] wrongfully to claim at least £1,129,579 from HM Revenue & Customs in relation to the VAT periods 09/12, 12/12 and 03/13 (inclusive)".
"Between at least 3 September 2012 and 1 January 2016 [he] abrogated his responsibilities as a director of [the Company]. During this period:"
and there then follow five bullet points:
- "[the Company] participated in transactions which were connected with the fraudulent evasion of VAT;
- [the Company] wrongfully claimed at least £1,129,579 from [HMRC] in relation to the VAT periods 09/12, 12/12 and 03/13;
- On 8 May 2013 Mr Bamford was involved in authorising Mr Selby, who was not formally appointed as a director, to deal with the financial affairs of [the Company];
- Mr Bamford signed the financial statements for the period ended 28 February 2014 despite them carrying a warning from the auditors. It is not clear what action, if any, he took in relation to the auditors concerns;
- Mr Bamford only met with HMRC once during the period from 24 October 2013 to liquidation; he did not respond to numerous HMRC enquiry letters despite them being addressed to him and hampered HMRC's investigation into the fraudulent transactions by not engaging with it."
"The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied (1) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and (b) that his conduct as a director of that company… makes him unfit to be concerned in the management of a company".
"There is no single test, but an important starting point is the company's corporate governance structure. The court is seeking to identify functions that were the sole responsibility of a director or board of directors… Those who assume and exercise powers and functions that can only properly be exercised or discharged at that highest level of management will, consistent with the purpose of the disqualification legislation, be within its scope as de facto directors. Those who are subordinate and accountable to that highest level of management will not be. (c) The test has been described as whether the individual was participating, or had the ability to participate, in decision-making as part of the corporate governing structure (which I take to mean the highest level of management decision-making)… (d) There is a distinction between being consulted about, advising on or otherwise being involved in, decision-making in some other capacity (even in circumstances where real influence is exerted) and actually participating in making a decision as a director. (e) The question is one of fact and degree…".
"[49] …the threat of MTIC fraud is so persistent, and so pervasive, and the loss to the revenue to the state is potentially so great, that I cannot conceive of any case in which disqualification for a period in the bottom bracket (of 2 to 5 years) would be appropriate.
"[50] In any case where the respondent director has been knowingly involved, and has played a significant role, in MTIC fraud, then a period of disqualification in the top bracket (of over 10 years) should be imposed. This is also likely to be appropriate in cases where the director has wilfully closed his eyes to MTIC fraud…
"[52] In any case where it is proved that the respondent director did not actually know but (without wilfully closing his eyes to the obvious) ought to have known of the MTIC fraud, the period of disqualification should be within the middle bracket (of more than 5 and up to 10 years). Absent extenuating circumstances, in my judgment, in such a case the disqualification period is likely to fall in the top half of that bracket, and thus between seven-and-a-half and 10 years."
"[2] This case concerns what is called "Missing Trader Intracommunity Fraud" ("MTIC fraud"). Anyone reading this judgment is likely to be familiar with this expression, which has been explained in several tribunal and High Court decisions. The classic way in which the fraud works is as follows. Trader A imports goods, commonly computer chips and mobile telephones, into the United Kingdom from the European Union ("EU"). Such an importation does not require the importer to pay any VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There are then a series of sales from B to C to D to E (or more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has received from C, but will claim to deduct (as an input tax) the output tax that A has charged to B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain – E – will then export the goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so Trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chains in question may be quite long. The deals giving rise to them may be effected within a single day. Often none of the traders themselves take delivery of the goods which are held by freight forwarders.
"[3] The way that the fraud works is that A, the importer, goes missing. It does not account to HMRC for the tax paid to it by B. When HMRC tries to obtain the tax from A it can neither find A nor any of A's documents. In an alternative version of the fraud (which can take several forms) the fraudster uses the VAT registration details of a genuine and innocent trader, who never sees the tax on the sale to B, with which the fraudster makes off. The effect of A not accounting for the tax to HMRC means that HMRC does not receive the tax that it should. The effect of the exportation at the end of the chain is that HMRC pays out a sum, which represents the total sum of the VAT payable down the chain, without having received the major part of the overall VAT due, namely the amount due on the first intra-UK transaction between A and B. This amount is a profit to the fraudsters and a loss to the Revenue…
"[5] A jargon has developed to describe the participants in the fraud. The importer is known as "the defaulter". The intermediate traders between the defaulter and the exporter are known as "buffers" because they serve to hide the link between the importer and the exporter, and are often numbered "buffer 1, buffer 2" etc. The company which export the goods is known as the "broker".
"[6] The manner in which the proceeds of the fraud are shared (if they are) is known only by those who are parties to it. It may be that A takes all the profit or shares it with one or more of those in the chain, typically the broker. Alternatively the others in the chain may only earn a modest profit from a mark up on the intervening transactions. The fact that there are a series of sales in a chain does not necessarily mean that everyone in the chain is party to the fraud. Some of the members of the chain may be innocent traders.
"[7] There are variants of the plain vanilla version of the fraud. In one version ("carousel fraud") the goods that have been exported by the broker are subsequently re-imported, either by the original importer, or a different one, and continue down the same or another chain. Another variant is called "contra trading", the details of which are explained in paragraphs 9 and 10 of the judgment of Burton J in R (on the application of Just Fabulous (UK) Ltd) v HMRC [2008] STC 2123 . Goods are sold in a chain ("the dirty chain") through one or more buffer companies to (in the end) the broker ("Broker 1") which exports them, thus generating a claim for repayment. Broker 1 then acquires (actually or purportedly) goods, not necessarily of the same type, but of equivalent value from an EU trader and sells them, usually through one or more buffer companies, to Broker 2 in the UK for a mark up. The effect is that Broker 1 has no claim for repayment of input VAT on the sale to it under the dirty chain, because any such claim is matched by the VAT accountable to HMRC in respect of the sale to UK Broker 2. On the contrary a small sum may be due to HMRC from Broker 1. The suspicions of HMRC are, by this means, hopefully not aroused. Broker 2 then exports the goods and claims back the total VAT. The overall effect is the same as in the classic version of the fraud; but the exercise has the effect that the party claiming the repayment is not Broker 1 but Broker 2, who is, apparently, part of a chain without a missing trader ("the clean chain"). Broker 2 is party to the fraud."
"The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who 'should have known'. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact…".
"If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connection with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met… A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises".
"… there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra-trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place.
"[38] Similarly, I consider that there are likely to be many cases in which facts about the transaction known to the broker are sufficient to enable it to be said that the broker ought to have known that his transaction was connected with a tax fraud, without it having to be, or even being possible for it to be, demonstrated precisely which aspects of a sophisticated multifaceted fraud he would have discovered, had he made reasonable inquiries."
"The idea for trading in chemicals stems from an approach to Mr Sayed by a Dutch company that offered him the distribution rights for the supply of chemicals in the UK. This Dutch company wanted Mr Sayed to trade their products as their official UK distributor.
"Mr Sayed spoke to his long established business associate Ian Selby who was, at that very time, looking to import chloride in bulk…
"After substantial research, Mr Sayed decided that there was a lucrative market in certain chemicals and he decided to manufacture his own product and build his own brand. Mr Sayed caused to be produced a chemical that kills bacteria in water and was designed for the fresh produce market during the washing process…
"The product was manufactured under licence…
"Further research discovered that Xziox not only killed bacteria in the water supply, it also killed bacteria on the produce and poultry during the washing process. Mr Sayed had clearly created a product that had huge commercial value and potential. From that moment, he and others, have worked tirelessly to take the product worldwide and into many other industries".
"As for large scale equipment for the various projects, [Mr Selby] said that they were no longer taking part in this after the problems in the past… [Mr Selby] remarked (in respect of the issue with EU Traders UAB) 'We feel we got sucked into something and are now being very cautious'".
"In brief, there are three main areas of business that have been undertaken by the company. The manufacture and supply of chemicals, the purchase and sale of the equipment relating to the use of those chemicals and the purchase and sale of other equipment connected to this industry. As we understand it, it is alleged that tax losses have been discovered in the supply chains relating to the sale of other equipment…".
"The business traded successfully until 2012 when it became engaged in a business sector connected to the supply of water treatment equipment for use in the process for fracking…".
"In or around 2012, we decided to expand [the Company's] business into a related area- that of the supply of water-treatment equipment for the use of fracking."
"As to the nature of the business, we were approached by your employee Mr Mark Tidswell regarding the sourcing and supply of bespoke dosing equipment for your water disinfection business. We had many discussions over some period of time attempting to supply your company's requirements although ultimately we failed to come to a mutually satisfactory conclusion…
I proposed to Mark that [the Company] take over chemical & equipment supply to some of our existing contracts, pending my forthcoming retirement. This was ultimately agreed whereby Ximax would secure an agreeable commission against each transaction processed".
"The business traded successfully until 2012 when it became engaged in a business sector connected to the supply of water treatment equipment for use in the process of fracking. This business was introduced through a third party contact of an ex-employee, and although it was not in line with the normal core business… it seemed to offer a simple opportunity to make a small profit without the need to tie up any working capital as it was virtually self-funding.
"The trade continued for about eight months and produced a turnover of several million pounds, but the extremely small profit being generated in relation to turnover was having a detrimental effect on the company as it was seriously distorting the otherwise high gross profit margin. This meant that statistically a false impression of the company's performance was being created and on that basis it was decided to discontinue with the low margin trade".
"In or around 2012 we decided to expand XES's business into a related area- that of the supply of water-treatment equipment for the use of fracking. We structured our trade in this area to be largely self-funding and accordingly we were fully aware that the profit margins would be low. However, given the growth of unconventional fossil fuel extraction around the world, we thought that this was potentially a major growth market for our products. We genuinely believed that it was an opportunity to gain a small profit for limited risks attached".
"Like I say, it's not clear when the companies in question were onboarded and by whom. It's not clear under what circumstances these 24 transactions took place, like who dealt with them, what was the process of that."
"It's not clear how and when I would have been expected to know that there's something wrong, given that it's a short period of time in terms of five months from my directorship to the last allegation, if you like".
"Although my tenure as director is linked to 4 deals… I would state that I have never met with any of the companies mentioned, and any contact I may have had was to simply service an enquiry that I was asked to do, as any employee of a company would do when asked to do so by their respected [sic] line managers".
He then denied sending the emails which we will look at below initiating the transactions, a denial which has now been withdrawn.
"In respect of the pumping equipment, the suppliers were obtained from the list compiled by Mark Tidswell and I sourced the client".
"The Company sold pumping equipment used for fracking, for which commission was earned. As I understand it, in terms of the sale process, the sales staff would first set the specifications for the supply. In turn, the buying clerk would source what was needed from a designated pool of suppliers, the members of which were determined by [Mr Sayed and Mr Awan]. The sales staff would then carry out marketing on the Company's behalf to potential customers. Engineers would then survey the envisaged work sites. Equipped with the results of the survey, the sales staff would then price the job and hopefully close the deal".
"…extremely helpful (and to a degree successful)… there are certain matters that, as she has indicated, require input at director level. Whilst Ian Selby's involvement is acknowledged this has generally failed to provide the necessary information and consequently I would therefore welcome a meeting with you (as the sole appointed director of the company) to discuss my ongoing enquiries into the VAT affairs of your company… May I ask at this stage that you kindly contact me in order that we can agree a suitable date, time and venue for a meeting (my telephone number and email address appear at the top of this letter)?"
"At no time in this trial has the Claimant ever admitted that this action was catastrophic to [the Company], based on unproven allegations, and a direct attack on the shareholders of the Company. In my opinion they have much to answer for… Whatever the motives of HMRC, the effect was to create the inevitable insolvency of [the Company]".