This is an application under the “fraudulent trading” provision in section 213 of the Insolvency Act 1986 (“the 1986 Act”) which provides:

The company concerned is Overnight Limited (“the Company”) which was wound up by order of the court on 5 December 2001. The applicant is a licensed insolvency practitioner and partner in the firm of Griffins. He was appointed liquidator of the Company on 10 December 2001. The only creditor of the Company was Her Majesty’s Customs and Excise, which has since become Her Majesty’s Revenue and Customs (“HMRC”). For convenience, I shall refer to them as HMRC throughout.

There are three respondents to the application. The first respondent, Mr Higgins, and the third respondent, Mr Chareb, did not respond to the application or appear at the hearing. As regards Mr Higgins, there is before the Court an affidavit of personal service of the Notice of Application and Particulars of Claim on a Mr Arthur Higgins on 18 December 2007. I note from the affidavit of service that at the time Mr Higgins was served he asserted that he was in fact the cousin of the first respondent and not himself the first respondent but that he would ensure that the documents were passed to his cousin. However, from the details set out in the affidavit of Mr Terrence O’Connell, I am satisfied that there are good grounds to accept that the Mr Arthur Higgins who was personally served is in fact himself the first respondent. As regards Mr Chareb, the applicant has been unable to find him and on 12 February 2008 Mr Registrar Simmons made an order for substituted service on Mr Chareb by post to the two last-known addresses that were available for him. I am satisfied on the evidence that Mr Chareb was duly served in accordance with that order.

The second respondent, Mr Charalambous, served a Defence to the proceedings settled by Counsel. That raised a limitation defence on the grounds that the application was issued only on 30 November 2007. This was heard as a preliminary issue and a judgment in favour of the liquidator was given by the Chancellor on 11 February 2009: Re Overnight Ltd [2009] EWHC 601 (Ch), [2009] Bus LR 1141. Subsequently, Mr Charalambous has acted in person and he so appeared at the hearing of this application before me. However, he had the assistance of a McKenzie friend, Mr Mohammed, who works at the firm of solicitors which previously acted for him. Mr Charalambous asked that Mr Mohammed be permitted not only to provide him with assistance but to address the court directly on his behalf. The Chancery Guide (December 2009) provides, at paragraph 15.12:

Further, although not referred to in this Practice Note, in Izzo v Philip Ross & Co [2002] BPIR 310, Neuberger J (as he then was) stressed that any application by a litigant to be represented by a McKenzie friend should be considered with care, balancing the competing considerations. While noting the considerations which may point against allowing such a friend to have a right of audience, Neuberger J set out the following as considerations which pointed the other way (at 313E-314A):

Here, Mr Mohammed explained that he is acting without remuneration as he feels a moral obligation to Mr Charalambous who could no longer afford legal representation but was faced with a serious claim against him for potentially a very large amount of money. Mr Mohammed was very familiar with the circumstances of these proceedings. With the consent, indeed encouragement, of the liquidator, I therefore allowed Mr Mohammed under section 27(2)(c) of the Courts and Legal Services Act 1990 to address the court on behalf of Mr Charalambous and to cross-examine the one witness called by the liquidator. I consider that here there are exceptional circumstances so that the overriding objective in CPR 1.1 in terms of fairness to Mr Charalambous and the efficiency of proceedings before the court justified this course. I should add that Mr Mohammed carried out this role with efficiency and courtesy throughout.

At the outset of this hearing on Thursday, 25 February 2010, Mr Charalambous renewed an application that he had made before Vos J two days previously that the proceedings be adjourned for some 4-6 weeks to permit him to call a witness currently said to be in Dubai. This potential witness is a Mr Andreas Antoniades from whom a very short witness statement dated 31 December 2009 was produced which stated that he had worked as an undercover agent for the “Department of Revenue & Customs” and recruited Mr Charalambous to act as such an agent and that Mr Charalambous had carried out surveillance on the Company under Mr Antoniades’ “instructions and guidance”. There is no mention of this matter in Mr Charalambous’ Defence and, indeed, it was first raised with the representatives of the liquidator in correspondence only in January 2010. Mr Charalambous then informed the liquidator by letter dated 19 February 2010 that he wished to have an adjournment of the hearing so that he could call Mr Antoniades to give evidence. I refused the application for an adjournment on the grounds that this matter was raised so very late but I said that the court could hear video evidence from Mr Antoniades from Dubai and extend the trial accordingly to Monday 1 March (Friday not being a working day in Dubai). The next day, 26 February, I was informed that Mr Charalambous had spoken to Mr Antoniades the previous evening but he was not in a position to give evidence by video-link, allegedly on the ground of ill-health. I did, however, grant a half-day adjournment so as to enable Mr Mohammed to assist Mr Charalambous in preparing for the hearing and Mr Mohammed himself to become more familiar with the papers.

The case concerns VAT fraud of the kind often described as “carousel” fraud, although in this case it is of a rather simpler nature that is referred to as “missing trader fraud”. In essence, it is alleged that the Company was engaged in purchasing high-value computer processing units (“CPUs”) for importation into the United Kingdom from Germany. As the export from Germany was within the EU, no VAT was payable on that purchase. The Company then rapidly re-sold these goods within the United Kingdom at a price including VAT. By a series of transactions conducted within a very short timeframe, the Company rapidly accrued a large VAT liability. But that VAT was never paid to HMRC and before HMRC could discover the fraud and intervene, the proceeds of the resale largely disappeared and the Company remained as a hollow shell unable to pay the VAT due.

The Company, which was previously registered for VAT, was purchased on 12 July 2001 when the original director was replaced by Mr Charalambous and the original company secretary was replaced by Mr Higgins. The Company purchased CPUs from an unlimited company registered in Germany, Far East Electronic Consulting (“FEEC”), which is run by a Mr Maik Pelikan. The first of those purchases was made on about 10 August 2001 and the final shipment from FEEC was sent on 18 September 2001. The Company resold those goods to an English company, Worldkey Limited (“Worldkey”) run by a Mr Nicholas Nicolaou. The VAT-exclusive price at which the CPUs were resold to Worldkey was less than the original purchase price that the Company paid to FEEC. That it was only through retention of the VAT element that the Company would make a profit. Moreover, the Company never operated a bank account. All payments were made and received through an account operated by Mr Higgins, trading as “Direct Legal Assistance” (the “DLA account”).

The Company’s activities ceased when HMRC obtained a freezing order on 19 September 2001 against its assets, expressed to include the monies in the DLA account. On 16 October 2001, HMRC obtained a default judgment against the Company in the amount of £334,808 in respect of VAT due. I was told that because not all payments had been quantified at the time that the application for the default judgment was prepared, a further amount of VAT subsequently accrued which explains why the total VAT liability of the Company on the evidence before me is £426,457.90. However, the liquidator’s efforts have been able to realise the amount of £275,369.24. That still leaves a very substantial debt and, in addition, there are the costs of the liquidation to be brought into account.

Since the only transactions in which the Company was engaged over this short period would have been carried out at a loss if VAT had been duly accounted for to HMRC, I can readily conclude that the Company’s business was carried on with intent to defraud a creditor or with a fraudulent purpose within the terms of section 213(1): see Re: L Todd (Swanscombe) Limited [1990] BCLC 454. On that basis, section 213(2) is engaged. This involves consideration as regards each respondent whether he (a) participated in the carrying on of the business of the Company in that way; and (b) did so “knowingly”: ie with knowledge that the transactions in which he was participating were intended to defraud HMRC: see Re: BCCI [2003] EWHC 1868 (Ch), [2004] 2 BCLC 236 at [243]. The question of what is required by “knowledge”, in the context of the test for dishonesty in a civil statute, was considered by the Privy Council in Barlow Clowes Limited v Eurotrust Limited [2005] UKPC 37, [2006] 1 WLR 1476. Lord Hoffmann there stated (at [10]):

Knowledge for this purpose includes shutting one’s eyes to the obvious. See Re: BCCI, where Patten J (as he then was) stated, as regards liability under section 213 (at [11]):

Mr Higgins was appointed secretary of the Company on 12 July 2001 and, as stated above, operated in his own name the bank account where all monies were received for the sale by the Company of CPUs to Worldkey and were paid by the Company for purchases from FEEC. On 11 March 2002 he made an affidavit in the liquidations proceedings, prior to the issue of the present application. He there stated that he was told to expect payment into his account of monies from Worldkey and then told what amount to send out and to whom by Mr Pelikan “or his colleague” at FEEC or, sometimes, by Mr Nicolaou. He said that he was sometimes told by Mr Nicolaou or Mr Pelikan to deliver money to people other than FEEC and that was his explanation for the cheques that he wrote in large amounts to cash. In particular, there were cheques drawn by Mr Higgins between 18 July and 31 August 2001 in amounts that included: £30,000 (two cheques); £13,750; £25,000; and £20,000. He said that he was introduced to Mr Charalambous by Mr Nicolaou on the basis that Mr Charalambous wanted assistance in setting up a company and that he volunteered to be company secretary as a favour to Mr Charalambous because the latter needed someone to act as company secretary. He asserted that he was never involved in the Company’s affairs except for the operation of his DLA account. He said: “I do not remember how it was that the DLA account came to be used by the Company”.

Mr Higgins also gave a lengthy interview on 19 September 2001 to two investigating officers from HMRC. In that interview, he eventually gave an account that the monies would come in from Worldkey and be paid out to FEEC on instructions of either a foreign gentleman called Mike who called him from Germany (which appears to be a reference to Mr Pelikan) or Nick who has a Greek surname from Worldkey (which is clearly a reference to Mr Nicolaou). He professed no awareness of what was really going on in making all those payments.

In my judgment, on the basis of the undisputed facts regarding the movement of monies in and out of Mr Higgins’ account, and the explanations that he himself has given, I am satisfied that Mr Higgins either knew much more than he has been prepared to admit or, at the very least, deliberately chose not to make enquiries as to the basis on which these large sums were coming in and out of his account, for the business of a separate company of which he was the secretary and which he must have realised appeared to be engaged in dishonest transactions. Mr Higgins has chosen not to appear in these proceedings but it is utterly incredible, in my judgment, that in signing the cheques and being fully aware of the sums of money being moved so rapidly in this way, he considered that these were honest transactions. I find that his state of mind accordingly meets the requirement of section 213(2).

Mr Charalambous appeared at the hearing and gave evidence. As set out above, he served a witness statement by Mr Antoniades and his own more recent witness statements were similarly to the effect that he got involved in the Company on the instructions of Mr Antoniades, although he does not assert that Mr Antoniades required him to be involved in any fraudulent trading. He said that he knew Mr Antoniades “pretty well”, having first met him in about 1998-99. His case is that Mr Antoniades told him that HMRC were interested in a Mr Ronnie Decker and wanted Mr Charalambous to try to find out if there was any link between the third respondent, Mr Chareb, and Ronnie Decker or a company called Q.Tech Distributions Limited (“Q.Tech”) in Scotland with which Mr Decker was apparently involved. In his witness statement made on 25 February 2010, just before the start of the hearing, Mr Charalambous said that his initial meeting with Mr Chareb was at the instigation of Mr Antoniades and that he regularly reported to Mr Antoniades while working at the Company. In his oral evidence, he added that he used to meet Mr Antoniades about once a week at a place they would arrange by telephone. Mr Antoniades would ask him if he had learnt anything about Mr Decker or Q.Tech in his work at the Company, and when he responded that they had not come up then Mr Antoniades told him to continue and, in effect, “keep his ears open” for any such connection.

By way of explanation as to why this account of Mr Antoniades’ involvement was first raised only in mid-January 2010 and not in his Defence or any of his previous three witness statements, Mr Charalambous said that Mr Antoniades was very a powerful figure and that he had been worried about mentioning him in case there should be repercussions; and that he always thought that Mr Antoniades would sort the matter out though his connections with HMRC so that the claim against Mr Charalambous would not be proceeded with.

Mr Charalambous exhibited to his witness statement and relied on a press cutting about Mr Antoniades from The Sunday Times of 24 July 2005. That article indeed speaks of Mr Antoniades as an undercover agent for HMRC, running a network of sub-informants. However, it also says that in June 2001 Mr Antoniades was arrested in Germany where he spent nine months in prison. Accordingly, if that account is accurate (and Mr Charalambous did not suggest otherwise - indeed it was he who produced it) it was impossible for Mr Antoniades to have held regular meetings with Mr Charalambous while he worked at the Company in July-September 2001, as he claims. When the court asked Mr Charalambous how he could explain this, he was unable to do so.

Based on the above, and indeed Mr Charalambous’ evidence as a whole, I have come to the conclusion that his whole story that he was working as an informant for Mr Antoniades is incredible and untrue. I find that it is an invention which Mr Charalambous came up with as the hearing of this application drew close in the hope that it could be used to absolve him from blame. However, although Mr Charalambous’ credibility is seriously weakened as a result, that does not necessarily mean that I should reject all his evidence as untrue. People can tell lies when in a difficult situation in an effort to help themselves; but that does not make all their material answers or statements dishonest. It is therefore necessary to consider the evidence in the round to ascertain what was Mr Charalambous’ involvement in, and knowledge of, the Company’s activities.

Mr Charalambous in his evidence recognised and accepted, on the basis of material that he has now seen, that the Company was run so as to defraud HMRC. His case, in essence, was that he knew nothing about this at the time. I should add that the story that he was working as an informant for Mr Antoniades and thus, indirectly, for HMRC did not involve a suggestion that the Company itself was being run fraudulently and that he was there to report on the activities of this Company; it was all concerned with Ronnie Decker and Q.Tech. As regards the Company, Mr Charalambous said that everything that he did was on the instigation of the third respondent, Mr Chareb.

Mr Charalambous’ evidence was that Mr Chareb was in the business of buying and selling CPUs and that is how Mr Charalambous got involved. His previous work had been as a cutter in the garment industry. He said that Mr Chareb had his own company, L. C. Connections Limited (“LC Connections”), and wanted Mr Charalambous to become his partner in that company. He said that he became a director of LC Connections in June 2001 but resigned after about a month because he wanted to be a sole director and “run the business”. He said that when he bought the Company it was Mr Chareb who put up the sum of £300 that was required. However, once the business started it was run not by him but by Mr Chareb. Mr Charalambous said that he was not involved in negotiating purchases from FEEC and did not deal with Mr Pelikan, whom he claimed he had never met. He was involved in the onward sale to Worldkey in that he had known Mr Nicolaou before and would contact him when there were goods to sell. But it was Mr Chareb who worked out the price and arranged all paperwork.

Mr Charalambous said that all that he really did in the Company was to go to the warehouse to check the boxes being delivered, sign for them and then leave and report the details to Mr Chareb. In effect, he said he was like a delivery boy. For this he was paid £500 per week. He accepted that this was “easy money” but he trusted Mr Chareb and that he was running the Company properly. Apparently, the reason for Mr Chareb being involved at all was that Mr Charalambous wanted Mr Chareb to show him how to run the business as Mr Charalambous had no experience in that field. However, in the approximately seven weeks that the Company traded, this never happened: Mr Chareb never gave him any explanation or made any attempt to involve him in the business, nor did Mr Charalambous seek greater involvement.

This account by Mr Charalambous is fundamentally inconsistent with the account given in affidavits of Mr Nicolaou and Mr Pelikan, both of whom said that Mr Charalambous was heavily involved in setting up the transactions. In his affidavit sworn on 14 January 2002, Mr Pelikan stated that he had met Mr Charalambous at an IT exhibition in January 2000 when Mr Charalambous was trading on his own account; that in July 2001 Mr Charalambous contacted him and told him that he had now established a company to trade in CPUs; and that it was Mr Charalambous who introduced him to Arthur Higgins as someone who could help with the banking arrangements. Mr Pelikan said that he also met Mr Charalambous when he came over to London with the first consignment on 13 August 2001 when there were discussions about how the payment transaction would be handled. Commenting on this evidence, Mr Charalambous said that it was completely untrue and he had no idea why Mr Pelikan should invent it. Mr Nicolaou, in his witness statement dated 19 September 2001, essentially said that all the contacts that he had regarding transactions with the Company were with Mr Charalambous and, to a lesser extent, Mr Higgins. He does not mention Mr Chareb at all.

Since neither was called to give evidence, the statements by Mr Nicolaou and Mr Pelikan are hearsay and there was no opportunity for them to be cross-examined by or on behalf of Mr Charalambous. Having regard to the circumstances surrounding these transactions and the temptation for each of the persons involved to try and put the blame on others, I consider that their evidence has to be approached with considerable caution. Nonetheless, making such allowance in Mr Charalambous’ favour, I find his evidence wholly unsatisfactory and impossible to accept. I consider that he is not as naive as he sought to make out. He previously had his own company, Lima Limited, which operated a clothing factory and which he ran for about one and a half years. That company, he said, was registered for VAT. I consider that he is not unfamiliar with the basic essentials of running a business, of the need to account for VAT and keep necessary records, and of the responsibilities of a director. He was of course well aware that he was a director of the Company. It is fanciful to suggest that Mr Chareb, who on Mr Charalambous’ own evidence had a separate company dealing in CPUs, would help set up a new one and operate it for the purposes of engaging in the same trade as his existing company, using the account of DLA, just to help Mr Charalambous set up in business. It is all the more incredible since Mr Charalambous said that Mr Chareb did not explain anything to him while the Company was running, nor did he (on his account) seek any explanation or instruction from Mr Chareb.

Moreover, Mr Charalambous completed and signed a Form L75.01 preliminary information questionnaire under the Insolvency Act 1986, on 4 February 2002. Under the heading “duties and responsibilities ie what did they do on a day to day basis”, Mr Charalambous wrote for himself: “day to day running of the business”. In his evidence to the court, he asserted that what he wrote there was not correct. I note that Mr Charalambous wrote on the form that Mr Chareb also acted as a director of company. But whatever the involvement of Mr Chareb may have been, I consider that, at the very least, Mr Charalambous would have been aware that there was something dishonest about the transactions in which the Company was engaged and deliberately chose not to make further enquiry. He was content to receive £500 a week for assisting in transactions concerning the rapid purchase and sale of the CPUs with all the monies channelled through the DLA account and without any attempt to keep records or funds to account to HMRC for VAT that would clearly be due on the resale of the goods. Furthermore, as the sole director of the Company, Mr Charalambous would have been aware that the principal responsibility fell on him. I therefore conclude that he had the requisite knowledge that the business of the Company was being carried on in a fraudulent manner.

Mr Chareb did not appear at the hearing nor did he attend for any interview with HMRC It appears that all attempts to trace him have been unsuccessful and there is no statement from him at any stage in these proceedings. The issue as regards Mr Chareb is therefore more difficult as the evidence against him is heavily dependent on the testimony of Mr Charalambous. Indeed, as stated above, Mr Charalambous in accepting that the Company must have been engaged in an attempt to defraud HMRC sought to put all the blame on Mr Chareb. However, Mr Pelikan in his affidavit makes no mention of Mr Chareb at all. He says that all his dealings were with Mr Charalambous and, to some extent, with Mr Higgins. Mr Nicolaou also makes no mention of Mr Chareb: all his dealings on behalf of Worldkey were with Mr Charalambous, although he did have some contact with Mr Higgins. Mr Higgins, in his affidavit of 11 March 2002 does not assert that Mr Chareb had direct dealings with him regarding the transactions but he makes the striking statement that he was on holiday in Florida of the period 4-15 September 2001 because:

The evidence given on behalf of the liquidator by Mr Hunt, a partner in Griffins, that seeks directly to implicate Mr Chareb in the fraudulent dealings is based entirely on what was said by Mr Charalambous. Moreover, in his oral evidence at the hearing Mr Hunt explained how missing trader fraud operates and, based on his experience of investigating such frauds, that the “mastermind” behind such frauds generally looks for people who can serve as “trusted lieutenants” whose name will be used for the company and on the records but who generally have no access to the bank account. This evidence, albeit of a general kind, strongly suggests that others were involved besides Mr Charalambous. Nonetheless, I have to ask if evidence of that nature together with the statements of Mr Charalambous and Mr Higgins, both of whom were themselves implicated in the fraud, is a sufficient basis for a finding that Mr Chareb was involved in carrying on the business. Given that Mr Higgins was not called to give evidence and that I found that Mr Charalambous’ evidence was self-serving and unreliable, I have in the end concluded that the case against Mr Chareb is not established. It may well be that he was heavily involved or even the person who profited most from the dishonest trading by the Company. But I consider that it would be wholly unsatisfactory to make a serious finding of that nature based only on the evidence of Mr Charalambous or Mr Higgins. It is obviously unattractive that Mr Chareb may have avoided liability through his failure to appear or respond to enquiries but the court can make findings only on the basis of evidence which is credible and satisfactory. Here, in my judgment, such evidence as against Mr Chareb is lacking.

The final question is what “contributions” Mr Higgins and Mr Charalambous should be ordered to pay pursuant to section 213(2). The liquidator’s case is that they should be jointly and severally liable for the totality of the loss. However, Mr Morgan, appearing of the liquidator, was not able to point to any authority that considers whether the statute on its proper interpretation requires joint and several liability and he expressly recognised that the court has a wide jurisdiction.

I find some assistance in that regard from the judgment of Park J in In Re Continental Assurance Co [2001] BPIR 733. That case concerned not section 213 but section 214 of the 1986 Act. Section 214 is concerned with wrongful trading and provides that the court may declare that “a person who is or has been a director of the company” is liable “to make such contribution (if any) to the Company’s assets as the court thinks proper”. Where several respondents were subject to an application by the liquidator under section 214, Park J rejected the argument that the starting point is one of joint and several liability. He held that the wording of the section clearly “concentrates individually on each director who is a respondent to an application by a liquidator” [386]. And he continued at [387]:

The wording of section 213 is different from section 214 in that the statutory jurisdiction under the former is addressing “persons” in the plural rather than a single “person”. But the reference in section 213 to “contributions” is in my view a clear indication that the contribution need not be the same for each respondent. I think it would be surprising if the 1986 Act sought to prescribe a different approach in a fraudulent trading case within section 213 from that in a wrongful trading case within section 214. The fact that immediately adjacent provisions in the statute adopt almost identical wording is in my view a strong indication that, as a matter of interpretation, no such distinction is intended.

The researches of Mr Morgan did not find any authority as to the criteria according to which the individual contributions of persons liable under section 213 should be determined, save only that the contribution is compensatory and should not include a punitive element, and that there must be a nexus between the loss caused to the creditor or creditors and the contribution ordered: see the observations, albeit obiter, of Chadwick LJ (with whom Aldous LJ and Munby J agreed) in Morphitis v Bernasconi [2003] EWCA Civ 289, [2003] Ch 552 at [53] to [55]. On the basis of those observations, insofar as there is such a nexus the total contribution should cover the full loss.

It is clearly possible for the court to determine that several respondents should all be jointly and severally liable for the full loss caused to the creditor(s). However, in my judgment, it is appropriate to make a separate assessment of the contribution of Mr Higgins and of Mr Charalambous on the facts here. Mr Charalambous said that he was paid £500 in cash per week. The investigators from HMRC said in their interview of Mr Higgins: “We have got nothing that show Charalambous has made any money out of it”. The liquidator has not identified any money going to Mr Charalambous apart from that weekly payment and Mr Hunt explained that from the nature of the fraud he would not expect the named individual to receive a large payment. By contrast, it was Mr Higgins who controlled the bank account and was drawing large sums in “cash” cheques. Having read his lengthy interview with the HMRC investigators, I find that he was not giving a full or honest account of what he knew regarding the destination of the money.

Having regard to all the facts as they have emerged on the evidence before the court, I conclude that it is appropriate for Mr Higgins to be liable to contribute to the Company’s assets the full loss caused to HMRC as a creditor of the Company. I consider that the proper contribution in the circumstances to be made by Mr Charalambous on a joint and several basis is for 50% of that loss. The figures that have been placed before the court include the Company’s costs of the liquidation which vary according to the amount finally recovered. I shall accordingly hear Counsel as to the appropriate quantification of the amounts that should be the subject of a declaration and whether any further directions are appropriate under section 215(2).