Payless Cash & Carry Ltd v Patel & Ors

This is an action in which the claimant company, which is in liquidation, claims the sum of almost £4m from the first defendant (“Mr Patel”) as a director who wrongfully and fraudulently caused it to incur a liability to HMRC for wrongfully claimed input tax on various liquor purchases. The defendants other than Mr Patel were joined as entities which are said to hold assets which are Mr Patel’s or which hold assets which are controlled by him. They are joined solely for freezing order purposes and no relief is sought against them. The issues that arise, or might arise, between them and the claimant have not been dealt with during the trial before me; it was accepted that the determination of those issues could wait until the issues of liability were decided between the claimant (“Payless”) and Mr Patel. Of those other defendants, only the second defendant was represented at the trial (though its representative withdrew once the postponement of relevant questions was in place). Two of them are debarred from defending. In the light of the agreed position I do not need to deal with any of the questions that arise as regards those other defendants and can concentrate on the main question of liability as against Mr Patel.

Payless operated as a cash and carry for liquor and tobacco. On 30^th November 2009 HMRC raised an assessment in the sum of over £3.9m in respect of the quarters between May 2007 and January 2009, and on the footing of that assessment petitioned to wind it up by a petition presented on 1^st December 2009. On the same date a without notice application was made for the appointment of a provisional liquidator and, immediately on her appointment she commenced (or undertook to commence) the present proceedings and sought a freezing order against Mr Patel. In due course on 27^th January 2010 a winding up order was made, and the provisional liquidator (Miss Louise Brittain) became the liquidator in the winding up.

At the trial the claimant was represented by Mr Rupert Butler; Mr Patel was represented by Mr Philip Hackett QC.

Although some of the terminology used in this case is similar to that used in what have become known as missing trader (MTIC) cases with which these courts have become familiar, this is not such a case. This is not a case in which the fraud alleged is one involving a sequence of sales and purchases, with small “commissions” taken on each sale in the chain. The present case is less complex in the structure of its alleged fraud, though the analysis of the facts relied on is itself of some complexity. It is as follows.

Payless had a substantial trade in the wholesale purchase and re-sale of liquor and tobacco. A large part of this trade is accepted for present purposes by the liquidator as being genuine. In the period of the returns under investigation in these proceedings the recorded value of the purchases which are not challenged is almost £95m. The top four of them, namely purchases from Bestway Cash & Carry Ltd, Elbrook Cash and Carry Ltd, Imperial Cash and Carry Ltd and The Wine Cellar have been used as comparators in the sense that the records relating to trading with them have been compared with the trading with the 10 entities whose trades are disputed. The liquidator accepts, and indeed avers, that the documentation which exists in relation to the trading with these entities is what one would expect in relation to proper trading and the company’s records in relation to this trade can be relied on. In the course of its trade Payless paid VAT on its purchases from those entities and claimed it as a deduction in its accounting to the Commissioners of Revenue and Customs (HMRC). In this action it is accepted that that activity was apparently properly conducted.

However, between May 2007 and January 2009 Payless also claimed to deduct input tax in respect of 10 other entities, namely (in alphabetical order):

The liquidator has not appealed the assessment. It is of the essence of her present case that it is a proper one, and that Mr Patel has wrongfully caused the company to incur that liability.

In the terminology of this case these 10 entities have from an early stage been called the “missing traders”, that description doubtless having been borrowed from other MTIC cases. In terms of the usual MTIC phraseology, that is an inaccurate description of their status in this case, but in the light of the entrenched use of that description in the case, and without indulging in any pre-judgment of the issues, I shall continue to use that term (as all parties did at the trial). I shall call the suppliers as to whom no dispute exists the “accepted suppliers”.

There is another group of suppliers which do not fall into either category. They are a group which demonstrate some of what the liquidator says are the attributes of missing traders, but they are not relied on as such. On the other hand, they are not treated as comparators in the same way as the accepted suppliers are. The parties agreed that they were to be treated as "neutral", to use Mr Hackett's word. Neither side relied on them, or relied on non-reliance by the other side. It will not be necessary for me to refer to them as a category (though some of the names occasionally crop up in the narrative).

Mr Patel maintains that the input tax in question was properly claimed and was the result of proper and genuine transactions. The entries which purported to record them in the records of the company recorded genuine transactions, and the invoices (where available) were genuine invoices.

The principal issue can thus be simply stated - were the underlying trades, or purported trades, with the missing traders genuine or not? The Particulars of Claim seem to make a claim on the basis that there was no trade at all with the missing traders. The case as advanced and put by Mr Butler developed in a different way - there might or might not have been some trade with the missing traders, and it could well be that there was some, but whether there was or not it was not the transactions or purported transactions in respect of which VAT input tax was claimed in the relevant quarters (which tax was the subject of the assessment). At one stage in his final submissions Mr Hackett seemed to be saying that the liquidator was not entitled to run any case other than one based on an absence of any trade with the missing traders, so that if some trade was established that was an end of the case, at least so far as the claims in respect of that missing trader were concerned. He said that that was the case his client had come to court to meet. However, that was contrary to an express indication that he had given in opening, and on the basis of which the trial proceeded. In that indication Mr Hackett accepted that the issue in the case was the principal issue described in the first sentence of this paragraph, and in due course he backed away from what seemed to be his altered stance. In those circumstances the principal issue is the one thus stated. It would not be inconsistent with that issue that some sort of trade was or might have been taking place between Payless and the missing traders (or some of them). What matters is the particular trading as was implicitly referred to in the returns and the assessment. To the extent that those trades were not genuine trades, the claim succeeds and Mr Patel is liable. Mr Hackett never disputed that if those trades were not genuine, then his client would inevitably be liable in misfeasance.

The burden of proof is plainly on the claimant, and since fraud is alleged I bear in mind the elevated requirements for proof that more serious allegations require - see Re H [1996] AC 563. I also have to bear in mind part of the overall picture that the liquidator did not seek to prove. The liquidator's case is that the VAT input tax in the relevant assessments, in respect of the missing traders, was dishonestly claimed in that the claimed underlying transactions (as reflected in printouts from Payless’s Sage accounting package) did not exist as such. Strictly speaking, the liquidator would win if those bare facts were proved. However, generally speaking people do not perpetrate fraudulent acts for no reason, and it will usually help in establishing the fraud to establish the reason or commercial context of the alleged fraud. In most cases that will be obvious from the nature of the fraud itself, but in the present case it is not so clear. The liquidator did not advance any positive case as to what was happening other than the generation and submission of inaccurate returns. It was not, however, said that there was no trade in the relevant products going on at the time. It was suggested to Mr Patel that there was some sort of trade, and the returns were somehow done to mask that trade, but beyond that general sort of description no wider facts, of which the impeached returns formed part, was put, and no attempt was made to prove one. This means that there was no attempt to prove the fraud in a wider overall context. That does not mean that it cannot be proved; the liquidator does not have to prove the wider context. But it does mean, in my view, that I must approach the alleged fraud with even more care.

Payless was incorporated on 7^th January 2004. It was running the cash and carry business by June 2004, when Mr Patel purchased it in June 2004 for what he said was an aggregate sum of £500,000. For that purpose he claims that be borrowed £450,000 from a company known as Crystal Gold Finance Limited, which his witness statement presented as an arm’s length company owned by a friend of his, Mohinder Singh Kang. Mr Patel estimates its turnover to have been about £30m per year. He was its sole director and shareholder from 2005 onwards.

The company’s premises were a warehouse and ancillary buildings at Units 1, 2 and 10, Penhall Business Park, 19 Penhall Rd, Charlton, London SE7 8RX. Units 1 and 2 were side by side, and comprised the cash and carry and a supporting warehouse. Unit 10 was a short distance down the road, and was a further warehouse, supporting the other two units.

The company operated its own fleet of vehicles - 10 lorries of various sizes, and 8 vans. One individual, Mr Barry Knight, was for much of the time in charge of transportation.

He is a chartered accountant with Deloitte LLP, the liquidator’s firm. His witness statement was an analysis of the accounting information which was available in relation to the apparent trade (or some of it) between Payless and the missing traders, and between Payless and the accepted suppliers, for the period starting 11^th November 2006 until liquidation. He worked from the available records (including interview records) and his evidence is the main evidence that the liquidator relies on in showing the allegedly anomalous nature of the recorded dealings and the inconsistencies in the records. There were some omissions and shortcomings in his analysis, pointed out in cross-examination, and although in one or two limited respects they detracted from the force of what he had apparently found in the limited area on which he was cross-examined, they did not undermine the rest of his evidence, which I find to have been reasonably carefully put together and analysed. There was no suggestion that the flaws that were exposed fundamentally undermined the rest of the analysis. It was suggested that later assessments of Payless (which are not the subject of this action) demonstrate that his work in relation to the missing traders is incomplete because there were other transactions, invoices and balances, but this point was not pursued in detail. I find that I can rely on his analysis, not least because the bulk of it was not challenged.

She is the liquidator of Payless and gave evidence which in essence consisted of drawing together information from other sources. In her cross-examination she was criticised for putting in background material which was said to be unfair to Mr Patel, but I find that that criticism is itself unfair and inaccurate. She was not actually challenged on the material parts of her evidence.

Ms Taberer is an officer of HMRC who provided an affidavit for the purposes of the initial application for a provisional liquidator. She gave evidence of much of the documentary material relied on as establishing the allegedly fraudulent activities of Payless. Her cross-examination was largely confined to an examination of the whereabouts of relevant documents in HMRC’s custody, and why it was that relevant documents emerged in stages and (in some cases) late in the day. She was a reliable and fair witness. She was not cross-examined much on the material which she deployed in her affidavit (and in a corrective witness statement).

He is an HMRC officer and carried out a visit to Delta in April 2008, where he met Mr Dhanda. His credibility was not impeached and I can accept all his evidence.

She is an HMRC officer who made a visit to ALB in April 2008. Her cross-examination was as to various documentary records. There was no challenge to the accuracy of her evidence, and I can accept it in full.

He is an HMRC officer who participated in various visits to Applebeas, Cube and Shotts. Once again his evidence was not challenged and his cross-examination was confined to trying to get a little more detail on documentary matters.

Witness statements were served for a number of other officers who had conducted visits to one or more of the missing traders on one or more occasions. They were not required for cross-examination, and it is not necessary to list them here. Their evidence stands unchallenged. So far as it is relevant it is recorded (not necessarily linked with them) in various sections of the narrative below.

Mr Patel gave a principal witness statement which was surprisingly short, bearing in mind the detail of the case with which he was faced, and surprisingly lacking in detail, but I suspect that might have been attributable to lack of funding in this litigation. While it is true that a lot of the detail of the case emerged at the stage of exchange of witness statements, he still did not seek to meet it by further evidence in chief. He was cross-examined at length.

To some extent Mr Patel was at a disadvantage in not having a mastery of detailed facts about the accounting of the company. He is not to be criticised for that. It affected a number of the points on which he was cross-examined. However, even allowing for that, his evidence was often very unconvincing. He would tend to take refuge in purported ignorance in a manner which suggested it was a convenient refuge from a question he did not want to answer. Various of his answers were deeply unconvincing. I deal with some of them below. His evidence on the very important question of how it was that transactions were deleted from the Sage system, and how entries came to be altered in a record called the red books, was particularly unconvincing, both in its content and in its manner of delivery. He was not, in my view, a reliable witness. It does not, of course, follow from that alone that he was guilty of the fraud alleged against him.

Of more importance was some evidence that he gave about his starting to write up the red books in February 2007. By then he was the owner of the business, and had originally left its management to its previous manager. He described that after a serious internal dispute between that manager and Mr Ramachandran he (Mr Patel) started to write up the company’s red cash books. He wrote them up at the dictation (literally) of the previous manager, inserting amounts for some cash payments but leaving a blank where the payee should be and inserting the name later. This was evidence with a high degree of inherent incredibility, and I do not accept it. I think that Mr Patel was desperately contriving a story to explain why he wrote the name of the supplier in later. Since it goes directly to the authenticity of key records which Mr Patel insists were genuine, accurate and crucial it is much more damaging to his overall credibility. I think this was a calculated lie in relation to a central matter.

Other aspects of his evidence were, in my view, fabrications made up for the purposes of this case. They included:

She worked on telephone sales within Payless and gave evidence of that. It was not easy to see the relevance of this evidence, and her cross-examination did not produce any really relevant material either. She was obviously trying to be accurate in her evidence.

He has worked in cash and carries for some time, and from February 2007 until December 2009 he worked at Payless. He sat in the back office of one of the units occupied by Payless, working on purchases from the major suppliers (not any of the missing traders). He described the process of ordering goods and checking invoices when they arrived. I consider him to be an honest and reliable witness.

Mr Singh was a lorry driver and the director of a haulage firm which owned heavy goods vehicles. He gave evidence that he delivered beer to Payless from “various cash and carry’s on many occasions”, through his witness statement. In cross-examination he said there were 14 occasions (he was very specific on the number) and identified one supplier only, represented by “James”, from whom he picked up beer from a farmhouse called Rogers Yard. This is a material difference. I did not find him to be a credible witness. His witness statement promised supporting documents which, it then turned out, were lost in a burglary in 2010, as was a laptop computer on which he created invoices. His demeanour, lack of consistency and quality of evidence as a whole was such that I could not treat him as giving generally credible evidence. He was the only person called to corroborate Mr Patel’s claim that large amounts of goods were actually delivered by the missing traders in accordance with the invoices.

Jaimin Patel (“Jaimin”, to distinguish him from Mr Patel) was the person who created many of the cash book entries. He is a form of cousin, through marriage, of Mr Patel, and lives in the same house. He is a young man of 25.

I did not consider him to be a reliable witness. His evidence was on occasions inherently implausible and on others he was evasive. From time to time I got the distinct impression he was giving answers he had been asked to give, or that he thought he should give, instead of what would have been the correct answer. There was one striking pause before he answered a question about who filled in the red books when he was not there, as though he could not remember what he was supposed to say. In the end he identified Hiren – but he gave me the impression he did not know whether he was supposed to say that. He went to India at one stage and did not resume writing up the red books straight away, though he went to the office. His explanation for this was not plausible. All in all, I did not consider his evidence to be reliable or always truthful.

At least one key witness was missing, namely Mr Ramachandran. He was the bookkeeper responsible for entering transactions on to the computer. His evidence would have been very illuminating, because the liquidator’s case is so dependent on the method and integrity of the record keeping, and Mr Patel avows its integrity. However, he did not give evidence. Mr Patel said he was not calling him because he was terminally ill and his wife had expressed the view that whatever life he had left he should enjoy. Mr Patel did not know if he was bedridden. No medical certificate or doctor’s letter was produced.

This court is entitled to draw adverse inferences from the failure to call an important witness without any justifiable explanation. The evidence of Mr Patel does not contain a very good justification for these purposes, particularly bearing in mind the misgivings I have about Mr Patel’s credibility generally. There was no evidence that Mr Ramachandran is not fit to come and give evidence. It does not follow that a terminal illness renders him unfit, without more. Nor is there evidence that Mr Ramachandran has even refused to come. The evidence was merely about what his wife said. Mr Patel said that he had seen Mr Ramachandran working at Payless’s old premises (now operated by the 5^th defendant) as recently as 18^th March 2011. I therefore treat his absence as the absence of a witness whose evidence is relevant and important, and whose absence has not been satisfactorily explained.

There was also no good reason advanced for his not calling another potentially very significant witness. Mr Patel’s case has always asserted the integrity and centrality of a set of red cash books as records of cash actually paid. They were made up by various people from time to time, including Jaimin Patel and a young man called Hiren. Hiren was, in my view, an obviously appropriate, if not necessary, witness to explain what he did in relation to the red books (particularly since some of his entries have obviously been altered) but he (unlike Jaimin) was not called. Mr Patel knows where he lives (they are relations) but did not proffer a reason for not calling him.

It is also to be noted that Mr Patel did not call any witnesses to the actual supply from missing traders (either suppliers or transporters) other than Mr Kuldeep Singh. Mr Singh’s evidence was not credible, and in any event it did not extend to more than a limited number of deliveries over a limited period. I consider that to be significant. Genuine suppliers and their transporters ought to have been capable of generating more witnesses than that. (I bear in mind that while Payless had its own transport operation, its drivers were not involved in the obtaining of supplies from the missing traders, so the absence of Payless’s drivers is not significant in this context.) No good reason was advanced for not calling any of these people. One of his contacts (Nihat - see below) has apparently been deported, which would obviously be an obstacle to his personal attendance, but no attempt was made to get his evidence by other means. So far as one of the apparent representatives of a supplier was concerned (a Mr Bissenden) Mr Patel had even spoken to him the day before he gave evidence, yet he was not called to give evidence.

All these are, in my view, significant matters when it comes to considering the credibility of his case.

Much of the liquidator’s case depends on the treatment (or absence of treatment) of the claimed trades with the missing traders in the book-keeping and accounting records of Payless, and inconsistencies in the recording of transactions in the various records. It is therefore necessary to start by setting out what those records were.

The company operated two accounting packages on its computers - Sage for purchases, and Quickbooks for sales. There is a suggestion in the evidence of Mr Hill that this demarcation was not rigidly adhered to, but the extent of any departure is not apparent to me and this case does not involve sales, so I can ignore the involvement of Quickbooks.

Sage and Quickbooks were operated principally by a Mr Ramachandran on two or more computers at the company’s premises. The purchases were all said by Mr Ramachandran (in an interview with the liquidator) to have been properly entered by him into Sage. It was the source from which the VAT returns were composed, and it is by working back from this that HMRC and the liquidator show that the disputed returns contain claims in respect of trades with the missing traders. The returns are consistent with printouts which were apparently produced for VAT return purposes, and it is from these printouts that the amounts can be identified.

Purchases are apparently recorded in invoices, or at least are supposed to be. Mr Patel said that if a purchased load was picked up by one of Payless’s drivers, the driver would check that the load matched the invoice. If the load was delivered by the seller, the delivery was checked at Payless’s warehouse. That is a plausible system. A point arose at the trial as to the manner in which that would be likely to be done, and whether the invoices would be marked (because no relevant missing traders’ invoice bore any markings consistent with that process). I deal with that below. Mr Patel said that there was a book which recorded inward deliveries; the liquidator disputed that, saying none was found and putting that there never was one (because Mr Patel would not have wanted there to be one).

A considerable amount of Payless’s trade was conducted in cash. This cash was recorded in various ways:

The principal records of Payless which are available in this case, and which have been relied on by the liquidator as demonstrating that the impeached trades were not genuine, were as follows:

A large part of the case of the liquidator involves comparing how these can (or cannot) be reconciled in the case of the missing traders, and to an extent comparing the success (or lack of it) of this exercise when so carried out with the records relating to the accepted suppliers. Mr Hill’s findings, which I find to be true, are that the transactions recorded in the various elements present inconsistencies - thus some paper invoices are not recorded in Sage, and some entries in Sage are not supported by paper invoices (or at least not existing invoices). Similarly, in relation to cash payments, there are non-correspondences between the transactions shown in the Sage records and the red cash books. There is a period at the beginning of March 2009 for which there are two overlapping sets of red book entries. Pages (perhaps as many as 20) have been torn out of the beginning of one red book (though the first available page ties up chronologically with where the previous one left off, with the help of some loose pages from another book). There are a number of instances where cash payments to some missing traders are tippexed out and cash payments to another are written in. Different instances of Sage were apparently run on two different computers.

Mr Patel’s evidence as to how they were dealt with was as follows.

He had formerly been responsible for all the company’s purchases, but as time went on found he could not do them all and delegated purchasing from larger suppliers to Mr Hirani. He retained the smaller suppliers - about 50 in all. The missing traders fall into this category - he was the only person who arranged purchases from these traders.

Larger suppliers required payment by cheque. Customers often paid in cash; cash was paid into the bank to make sure that funds were available on which cheques could be drawn. Other suppliers often preferred cash, which Mr Patel says he found to be a more economical and efficient way to run the business. A daily takings summary was drawn up, from which the amount of cash left over at the end of the day would be apparent. The cash was kept in a safe overnight.

His witness statement says that suppliers who were paid in cash would be paid as and when cash was available. Many suppliers gave credit, the amount of credit sometimes growing as they came to know the company better.

Mr Ramachandran was responsible for maintaining computer records of transactions (and in particular for running the SAGE accounting package) and for preparing VAT returns; Mr Patel signed the latter. Mr Patel maintained that they were accurate, though he never operated the computer himself.

Mr Patel said he placed orders with the missing traders by phone. He negotiated prices which included delivery to him. He would be told on a daily basis what his stock situation was, and would make an assessment of what he required. He claimed to be looking one or two weeks ahead, and deliveries would take between 3 and 5 days to arrive. Sometimes he was let down.

Some stock was delivered by suppliers; some was picked up by Payless's own fleet of vehicles. If the latter happened the driver would check the quantity against the invoice on pick up, and they would be checked on arrival at the warehouse or cash and carry premises. If the goods were delivered by the supplier, the goods would be checked against the invoice at the warehouse. If there was a discrepancy he or Mr Hirani would take it up with the supplier, though Mr Patel's evidence was that in all the time of dealing with the missing traders there were no discrepancies, shortfalls or breakages which needed to be taken up.

If cash was the agreed method of payment then the cash, or an agreed proportion of it, would be paid to an appropriate nominated person and that person would sign a receipt for it. These cash payments were entered in the red cash book, which was “sometimes filled in on a daily basis and sometimes updated every few days”. There was no satisfactory evidence of where the cash payment was written down pending its being communicated to the writer of the cash book (most often Jaimin), so either Mr Patel had a good memory (to the penny or odd number of pounds in some cases) or there were relevant pieces of paper which have not survived at all, and about which Mr Patel has forgotten. In his cross-examination Mr Patel said that payments were recorded on daily cash sheets, but in interviews with the liquidator or her staff Mr Ramachandran (who would have a much better knowledge of systems than Mr Patel) referred to such sheets as recording only takings, not payments. I reject Mr Patel’s evidence about this, which leaves the unsatisfactory lack of evidence as to what happened between payment out of cash and the physical entry into the red books.

The cash that was paid was generally not paid to satisfy identified invoices, either in whole or in part. It was paid on account from time to time. Mr Patel would pay as and when cash was available and not required elsewhere. Mr Patel would pay the representatives of the missing traders himself, when they called, and on occasions would pay their delegates. The sums involved were often several tens of thousands of pounds at a time.

His business had credit periods agreed with suppliers. His oral evidence was clear enough in relation to the major accepted suppliers. He had periods of a few days to 15 days, depending on the goods and apparently, in some cases the transactions. He paid by post-dated cheques (at least sometimes). Coca Cola gave him rather longer periods, between 45 and 60 days. However, the arrangements, such as they were, with the missing traders were different and much more confused. He started by saying that he had no express agreements, and then proceeded to give a confused picture, saying that he negotiated with the representative every time he bought. His evidence was confused on this. I do not accept he reached such agreements as a matter of general practice, on every purchase. He also claimed that credit periods of as long as 90 days were common in the trade. I regarded that as a matter of unsubstantiated and convenient assertion.

While his witness statement clearly said that invoices would be provided with delivery of the goods, in his cross-examination Mr Patel said that sometimes he would get an invoice in advance of getting goods from a missing trader. On some occasions Ravi (a representative of various missing traders) would do that. He explained this unlikely occurrence on the footing that Ravi would sometimes go to Dubai, where he dealt in flats, and would provide an invoice in advance if he was going to be away. The fact of invoices being delivered in advance emerged in the context of cross-examination as to invoices which had apparently been entered on Sage but subsequently deleted. He explained the deletion on the footing that they must have been deleted because the goods in question were not delivered ("I can assure you that must have been the reason."). This, logically, required the delivery of an invoice in advance of the goods. The manner in which this invoicing point emerged made the evidence very unconvincing and I do not accept it. I think that Mr Patel was making it up to provide a convenient possible explanation for the deletions, because the real reason would have been unpalatable. I deal further with these deletions below.

Mr Patel described how he conducted what he called due diligence. He was aware of the need, or desirability, of verifying the VAT status of those with whom he traded. Accordingly he tended to take three steps to verify that status in the case of new traders. He looked at a copy of their VAT registration certificate; he checked the status on available on-line records; and he asked Customs and Excise to verify the status. The latter step, he claimed (with some plausibility), took some time. He also suggested that Customs and Excise prevaricated. He does not seem to have carried out any credit or other checks on new traders when he started trading with them. He seems to have treated a check on their VAT registration status as being the most important thing to check. I find he was certainly and strongly aware of the need to be seen to be dealing with someone who was registered for VAT purposes if he was to be able to reclaim VAT. He regarded registered status as a green light for the purposes of starting to trade. In a significant number of cases the representative of the new trader (usually Ravi) would arrive with "due diligence paper" (i.e. VAT records). He also had some further limited and ultimately unhelpful information on some of the missing traders - thus on Stealth he also had an unsigned letter of introduction and a copy of the passport entry of one of the directors (whom he never met). The essence of this picture is that if his evidence is to be believed he started trading with a number of traders knowing nothing about them other than their VAT status, the identity (name only) of a director or two (in some cases) and that they purported to be willing and able to supply him with beer (and occasionally wine). The picture he presented was not one consistent with a regularly and conscientiously conducted business, particularly bearing in mind the scale of the business involved.

Aspects of this account were also dealt with by other witnesses. Mr Hirani (whose evidence I accept) gave evidence of the checking of the price of incoming goods against an invoice in relation to goods from the major suppliers. He said that goods were checked at the warehouse before he got the invoice. He would raise any price discrepancies (comparing invoice prices with the last price charged, or against a price list) with Mr Patel.

Mr Jaimin Patel described in some detail how he dealt with orders from customers (sales) but he did not deal with suppliers. Nevertheless, since he had the key to the safe and was dealing with cash from customers, he was part of the payment process. He said that payment was not made to suppliers on an “invoice to invoice basis” - it was on an account basis according to how much was due to the supplier. Suppliers came to Payless to receive payment and would sit in the back office with Mr Patel for 15-30 minutes. Mr Ramachandran had a record of how much was due and Mr Patel decided how much he would pay. Jaimin Patel then got the cash ready. At the end of the day, or occasionally the next day, Mr Patel would tell him the details of the payments made by cash and he would record them in the red cash book. On a daily basis he entered the previous balance, how much was received that day and the payments out (nature of payment, or recipient, and amount).

The liquidator’s case relies principally on the comparative analysis referred to above. The analysis covers the period of the assessment and extends either side as well, in order to present the context in which the disputed transactions lie. It draws attention to the quality of the documentation which is said to underpin the trades underlying the input tax and in the documentation of the company generally. The following is a general description of points that are common to some or all of the missing traders. It will be useful to describe them here in general terms, so that the detail in the context of each of the missing traders can be more readily understood (and can be more shortly expressed).

Payless does not seem to have sought to impose any terms of trading. No evidence of any such terms were found at its premises, though one copy of a set of terms was found at the premises of one of the missing traders (Yaterex).

No method of stock recording was found at Payless’s premises. Mr Patel claimed that there was a book recording stock, and complained that it had not been produced. I find either that there was none, or that there was a record which has been suppressed by Mr Patel.

Mr Hill’s work (which did not cover the whole of the period of the company’s trading, but started as at 11^th November 2006) revealed the following differences between the way trade was conducted with missing traders as a whole and the accepted suppliers as a whole. A great deal of what he found was not challenged in detail. I find the following as a result of his exercise.

The vast bulk of the trade with the missing traders was in cash. According to the records, just under 95% of the trades were in cash. This contrasts with the cash element of trade with the accepted suppliers which he puts at 12%. He arrives at his figure by omitting the “neutral” traders from the picture. I find his figures are correct, but the significance of this by itself is limited.

It is not possible to match the majority of purported payments to the amounts apparently invoiced to the missing traders. Other than some payments apparently noted on the face of the invoices, sums are not allocated in any way. This is contrasted with the most significant accepted supplier (Bestway) where it has been possible to match 206 out of 245 payments to specific invoices.

Generally speaking, the period of trading with each of the missing traders (with the exception of Cube and Applebeas) is short, whereas trading went on with the accepted suppliers throughout the entire period. I note the periods in question when I deal with each of the missing traders separately. I accept this difference. By way of illustration, the period of trading with each of the major accepted suppliers was over 1000 days. For most of the missing traders it was very much less.

In relation to several missing traders there are apparently invoices for which no reclaim of VAT input tax was made. The most significant was Applebeas - 59 invoices totally £2.2m gross (£340,000 odd input tax). This is said to cast doubt on the validity of invoices. The others are Cube (3), Sunfyne (8) and Stealth (4).

On the face of the records, each of the missing traders extended a significant amount of credit to Payless over the period of trading. This is a conclusion which Mr Hill arrives at by comparing the invoices from each of them on the one hand and the alleged cash payments, and striking a running balance. Its effect was not disputed by Mr Patel. He did not find this remarkable. I disagree with that - some of the figures (if accurate) are very remarkable and are not what one would expect in a regularly run business. The actual amount of “credit” in relation to each missing trader appears from the details below.

Mr Hill drew attention to the fact that the invoices for some of the missing traders demonstrate a higher proportion of identical amount invoices than is demonstrated by the invoicing pattern for the accepted suppliers. I find this true as a matter of fact (again, it was not challenged); it is a factor capable of demonstrating a series of fabricated invoices, but its weight is limited. In the case of one set of repetitions (3 identical Applebeas invoices on the same day) Mr Patel said it was because there were identical deliveries in separate loads to each of the three buildings of Payless on the same day; each load required an accompanying invoice. I did not find this wholly convincing, but Mr Patel would be entitled to make the valid counter-point that if he was fraudulently creating false invoices he would have to be very inept simply to repeat figures and amounts on previous invoices.

The red cash books are firmly propounded by Mr Patel as being an accurate record of cash transactions that he conducted. They contain a large number of records of what he says are genuine cash payments paid to the missing traders. The liquidator’s case is that they are a fabrication, at least so far as recorded payments to missing traders are concerned. At its highest the liquidator’s case is that entries were made in batches of weeks at a time to create entries which would support fictitious trading, and then some of them were altered further.

Mr Patel’s case is that the cash books record accurately the cash expenditure of the company. They were created by Jaimin and others. He said he could not really answer questions about detailed entries because he did not create them, though he suggested possible reasons for some alterations made to missing trader entries.

Jaimin, however, described in some detail how he created them during the period for which he was responsible for them. He said they were written up by him either on the day of each entry, or within 3 or 4 days if he was too busy to do them at the time. He did not take primary records and enter them directly into the cash book. Rather, he first wrote down the relevant entries on to a piece of paper and then wrote up the cash books from that. The intermediate pieces of paper were destroyed. He got the information from Mr Ramachandran, from other records or, in the case of cash payments to suppliers, from Mr Patel.

The cash books are each standard red A4 lined exercise books, without any special lined columns for figures. The format of each day’s entries is, by and large identical. That format matters, so I have to describe it, but it is best done by reference to a sample page, a copy of which, as written by Jaimin, is annexed to this judgment as Appendix 1. Each entry consists of the date in the centre of the page, followed sometimes by one blank line (occasionally two) and sometimes none, with cash receipts on the left hand side of the page and payments on the right. The first figure on the receipts side is a carried forward figure, and the second is receipts for the day. On the right the last figure is a carried forward figure, which is a balance which can only be struck by taking into account the preceding payments. There is then usually at least one blank line before the next date. That is how Jaimin generally did it. One can see that for weeks at a time the entries are all in the same pen (save for some odd individual transaction entries, which are challenged) and then the pen colour might change and remain in that changed colour for some more weeks, and then change back again. The last book is, for reasons which were not satisfactorily explained, entirely in pencil. For a period when Jaimin was in India a gentleman called Hiren did the entries, and for a brief period Mr Ramachandran did as well, but by and large they adopted that format (save that Hiren sometimes did not leave as many blank lines). Mr Patel wrote some entries in the earlier stages of his ownership of Payless.

There were 5 books of this kind (an earlier book, in a completely different format, was also kept, but I do not deal with that here). The first of those books starts at 15^th November 2006 and runs to 4^th August 2007; the latter entries in this book were made by Mr Patel himself. The second starts with 5^th August 2007 (Jaimin’s first entry) and runs to 12^th August 2008. The third (still in Jaimin’s hand at this stage) starts at 13^th August 2008 and runs to 19^th March 2009. From 28^th December 2008 the handwriting changes to that of Hiren, and he continues to the end of the book. This change of handwriting would coincide roughly with the beginning of an absence of Jaimin in India; he returned in March. The fourth book itself starts at 16^th March 2009, and runs to 7^th May 2009. It starts with Mr Ramachandran’s handwriting and changes to Hiren’s on 22^nd March. However, it also contains some loose sheets, in Mr Ramachandran's handwriting, starting at the beginning of the month. There is thus an overlap between books 3 and 4; the entries in that overlap are by no means identical. The fifth book starts at 19^th May, in Jaimin’s handwriting again, and runs to 26^th November 2009. Hiren’s handwriting takes over from 11^th September, though he also seems to have completed the entry for 10^th September which was started by Jaimin.

There are various unexplained oddities in these books thus far, which cast significant doubt on their accuracy and worth.

It is also apparent that significant entries have been altered some time after the dates on which they purport to have been recorded. This inference is drawn from the following material.

In the back of book 2 there are some loose sheets, one of which is a list headed with Applebeas’ name and containing lists of amounts against dates. On its front the dates start in Jaimin’s handwriting in black for some 33 entries, changing to blue for 16, then back to black for some 21. Then they change to Hiren’s handwriting to the end of the document. The alignment of the entries on the page shifts half way down Hiren’s list, suggesting that it was compiled on at least two different occasions.

Jaimin said that this list was (so far as he was concerned) compiled for the benefit of Mr Patel so that the latter could see the sums that had been paid. He said that it should contain the same figures as the red book; the inference would be that it would be extracted from the red book, not least because (if Jaimin is right about its purpose) that is where it would have to have been taken from. It is noteworthy that Mr Patel did not ask for this to be done, and in substance he said that these pieces of paper would be of no use to him. Their evidence therefore conflicts. I think that Jaimin must be the more accurate here. There is no-one other than Mr Patel who would be interested in these summaries.

The red book has an entry on 5^th December 2008 recording cash paid to Applebeas on that date. The sum currently showing is £30,780.94, but that is written on Tippex which overlays an original sum which is no longer readable. The loose sheet records £40,105 as being the sum for Applebeas on that date. That is likely to be the sum under the Tippex. However, the date of the change is significant. The new sum in the book is written in Hiren’s handwriting. No satisfactory explanation was given for this. If the cashbook was accurate and written up as Jaimin described it, it is not apparent how or why this can have happened. It does not appear it was the correction of a simple mistake. The alteration was written in Hiren’s hand, so it must have been written after he took over the book, which was apparently on or about 31^st December - a minimum of 3 weeks later.

The same point is apparent in relation to an Applebeas entry in Jaimin’s hand for 15^th December, where an original entry has been tippexed out and substituted by £65,580.93 in Hiren’s hand. The listed entry (in the summary sheet) was £74,000. In this day’s case other adjustments are apparent as well. It is obvious that Hiren has entered an additional item into the day’s cash payments, above Jaimin’s. The item is a cash payment to Wine Cellar of £8,419.07. When added to the altered sum one has a total of £74,000, the sum extracted by Jaimin and which, probably, underlies the Tippex. So at some stage after Jaimin stopped doing the red books a decision has been taken to alter an apparent cash payment to Applebeas and change the amount to one to Applebeas and one to Wine Cellar. I do not consider that this is some form of mistaken allocation of a cash payment, as some of Mr Patel’s evidence would have me believe. I think that it is a deliberate alteration of the records for some unexplained purpose.

There are further unexplained inconsistencies between the apparent summary and the existing red book entries. They include obliterated entries in the cash book (with listings in the list), and attributions of payments to Applebeas in the list but to another payee in the red book (this time apparently without Tippex).

The red books, and the evidence adduced by Mr Patel in relation to them, also present numerous other obstacles to their being treated as being accurate contemporaneous records.

The matters referred to above are the most significant matters arising out of a consideration of the red books. Taken in aggregate they reveal that the red books cannot be treated as the reliable indicator of cash payments that Mr Patel would say they are. I think that they demonstrate that, so far as missing traders are concerned, they are not reliable, and are to a very material extent, if not completely, a contrivance. I am not satisfied that the alterations which are clearly demonstrated are the correction of mistakes, or some legitimate and genuine reallocation of a payment.

I have referred above to the existence of more than one Sage record. When Mr Hill first conducted his analysis of Payless’s records he worked from what he thought was an appropriate version. In the parlance of this case it became known as backup 2. It was apparently a backup of the database as at 10^th September 2009. Then he discovered evidence of prints from an earlier version (backup 1 – 25th November 2007), covering some of the same period. The two versions did not contain identical transactions in the overlap period, though some were the same. The existence of these two versions suggested parallel, not consecutive, records. Although no reason was given for this, it was not pressed on me as being, of itself, sinister. Mr Hill did not treat it as having any sinister import. In the absence of a clear case being put that it was, I do not so treat it.

Then shortly before the trial Mr Hill discovered a third version (backup 3 dated 23^rd November 2009). It appears that this is a later version of what was in backup 2 - it is not a parallel version. But a comparison of the two does have a relevance in considering the alleged transactions in relation to some of the missing traders.

What follows is an account of the relevant facts in relation to each of the missing traders. Again, there are some generally applicable points which can be made at this stage because they are applicable to more than one trader.

With the exception of Stealth, which is the subject of a suspended striking off from the register, all the missing traders are either in winding up (Cube, Condor and Yaterex) or dissolved (the remainder).

Although there are 10 missing traders, they shared a more limited number of representatives. Mr Patel dealt with specified individuals in relation to each of them, none of which seemed to be directors of their respective companies. They were as follows.

In respect of some of the missing traders it can be seen that as one ceased to supply another took over, according to the trading records of Payless. Thus it will be seen from the dates of trading that as Yaterex stopped, Condor started, and as Condor stopped, Delta started. Later, ALB gave way to Applebeas, which gave way to Sunfyne, and as Sunfyne was finishing Shotts started. Mr Butler suggested that this smacks of baton-passing in the sense of finding a new purported supplier when an existing one had its VAT-registered status terminated, the essence of his point being that what was required by Payless, and supplied by the representative in question, was a new VAT-registered company. A chronological picture of the general method of trading as represented in Payless’s records, and the pattern of payments relating to each missing trader, can be seen from this bar graph produced by Mr Hill:

The following facts are material in considering whether there was genuine trade with Cube to back the VAT input tax claims.

Practically all the factors above give rise to the greatest suspicion as to the reality of the purported trading between Payless and Cube. There are few indicia of what would be regarded as normal trading practices; most of the above are indicia pointing against a normal trading relationship.

Payless’s records suggest that there was trading with Yaterex between February 2007 and May 2007, with cash payments recorded from February 2007 to June 2007. There are 87 invoices, dated on the majority of the working days from February to May. The following facts are material.

The overall picture given by the evidence is not one of a normal supplier engaging in normal trade with its customer.

Invoices from Condor span the period from 1^st June 2007 to 29^th June 2007. 33 invoices appear in Payless’s records, with an aggregate amount of just over £1m. The following further facts are relevant.

Once again the method and pattern of trading does not suggest regular trading with the characteristics one would expect in arm’s length trading of this magnitude.

Payless’s records suggest that trading with Delta started in July 2007. The first recorded invoice is dated 5^th July 2007. Chronologically at least it seems to have taken up where Condor left off, but the pattern of trading is different when compared with other missing traders. There are 24 invoices between then and 27^th July; then a gap until 4^th October when there are 5 in 2 days; then a gap until 6^th November when there are 7; then a gap until 4^th December when there are 6 over 3 days. Excel spreadsheets then indicate a resumption of trading in February 2009 for about a month. This last period of trading is not reflected in the assessments in which this action is rooted.

The following additional facts are material.

I do not think that the first phase of trading with Delta demonstrates the same shortcomings as the other missing traders, or at least not to the same extent, and there are pointers to genuine trade. There are significant non-cash payments; the trading is three or 4 short bursts; and the representative of Delta has corroborated the fact of some real dealing. I do not find the claim established in relation to that point. The second phase (2009) falls outside the scope of the present claim.

Trading with ALB ostensibly started in April 2008 according to the apparent invoicing, as Cube left the scene. It went on until May. Payments ostensibly went on until June. In that time the trade was apparently just over £1.5m. The following facts and matters are relevant.

Once again a large number of these factors cast serious doubts as to the genuineness of the alleged trading. They do not present a picture of what can be described as a normal substantial trading relationship.

The first transaction with Applebeas is recorded as being 15^th May 2008 - just a week after ALB was de-registered. Mr Patel’s evidence was that Ravi presented this company as a new trading partner when ALB ceased. The last recorded invoice was 14^th November. 396 invoices are apparently recorded, an average of over 2 invoices per day. The gross invoice sum from the available records is £13.7m.

The following material facts emerge.

The overall picture in relation to Applebeas is not one of regular trading with a regularly conducted supplier. The above facts are so far out of the normal that it is not possible to treat the Applebeas recorded transactions as being genuine trades.

The material facts in relation to Sunfyne are as follows.

These are all serious irregularities, which are overall inconsistent with regular trade. They are badges of a contrived trade, not an actual trade.

The relevant and significant facts in relation to Stealth are as follows.

Once again, the features of these trades, and especially the gap between invoices and payment, indicate strongly that this is not genuine, regular trading.

Trade with this company was only brief and sporadic. There is a recorded payment by cheque of £4,772 in February 2008, with no apparent matching invoice. In July 2008 a cheque payment of £3,524 was made. This can be matched, at least in amount, with an invoice of the same month. There is nothing irregular or suspicious about any of this activity.

Between 30^th May 2009 and 5^th June 2009 there were 5 invoices totalling £237,172.32. From 21^st June 2009 to 18^th August 2009 unallocated cash payments (apparently on account) of £244,322 are recorded, leaving an overall overpaid balance of £11,932. Thus again there was an apparent extended credit period, and trading with AHA had ceased over 2 weeks before any payment was made.

The following further relevant facts exist in relation to trade with this company:

Payless’s records suggest that it traded with Shotts between January 2009 and July 2009. The total amount invoiced appears to be £7.663m. There were 201 invoices in a 193 day period. Between May 2009 and October 2009 payments of £5.114m were made, all but £12,000 being in cash. This gives rise to an apparent debt of £2.5m still owing from Payless. There is no recorded demand for its payment.

The following relevant facts emerge from the evidence:

Once again this pattern of events presents non-regular (in the sense of out of the ordinary) trade and is reflected in business records which are not conventionally constructed.

Having made those findings I turn back to the question of whether it has been established that the claims for input tax which are the subject of recoupment under the assessments referred to above were proper claims, based on real transactions which are all reflected in the original returns, or whether they are not based on proper transactions and are contrivances which do not reflect reality. If they are the latter then they were deliberate acts and were wrongful, and (as observed above) Mr Patel through his counsel accepts that Mr Patel will inevitably be liable for having brought them about.

I bear in mind that the liquidator bears the burden of proof in relation to this matter. She must show that the transactions cannot and should not be treated as genuine, so the real question for me is not so much which of two alternatives I should choose from, but whether the liquidator has proved her case. I also bear in mind the enhanced standard of proof (within the test of balance of probabilities) that such a serious charge attracts.

The above findings demonstrate at the very least a very unconventionally carried on business whose record-keeping was poor and inaccurate. However, a badly run business, with badly kept books, and with unorthodox business practices, is not necessarily a fraudulently run business. The liquidator has to satisfy me that the shortcomings of the business in relation to the missing traders was not just an odd approach, or incompetence, but that they demonstrate a business in which its primary accounting records and evidence cannot be right and were deliberately fabricated to reflect something other than reality.

I have come to the clear conclusion that that is indeed the effect of the evidence. The cumulative effect of the shortcomings cannot, in my view, be attributed to accident, incompetence or an honest mistaken view of the business world. It is unnecessary and inappropriate for me to rehearse again the factors which I have described above, but I can summarise the main points as follows:

These principal matters, and the findings that I have made above, demonstrate to the required standard that the trade with the missing traders was not as it was represented in the company’s records so far. I reject Mr Patel’s account of his dealings with the missing traders so far as he sought to project a sequence of events which consisted of orders, deliveries, proper invoices reflecting those orders and payment of invoices. He may well have ordered goods but he did not do so from the missing traders in that orderly and conventional fashion. Something else was going on. The company’s records were intended to project what Mr Patel wished them to project, which was not the reality. I find that invoices and Sage records were generated in order to be able to make a claim for input tax and without there being underlying trades corresponding to what those invoices and records purported to reflect. In short, the trade with the missing traders, if any (and subject to the limited exceptions appearing above) was not what it purported to be. The due diligence exercises were conducted for the sake of form (so that Mr Patel could say he carried out some checks). What was important to him was to have a company which could be identified as having an active VAT number, so that he could purportedly invoice it for VAT purposes. As soon as it no longer had a valid VAT registration he dumped the use of that company in favour of another. If he made a mistake, as he did with Applebeas, and failed to notice (or be informed) that the VAT registration of his “seller” had been terminated then he had the invoices relating to the non-registered period deleted from the records.

Mr Patel was frequently at pains to point out that there must have been some trades because he was selling large amounts of the sort of things he says he was buying from the missing traders and he must have been getting them from somewhere. So, he said, there was no reason to doubt the apparent trades with the missing traders because that is where he said he got the beer (and wine) from.

It was no part of the liquidator’s case that there was no trade at all in beer and wine. It was not necessarily part of her case that there was no trade at all with the missing traders. Her case was, whatever trade there may or may not have been, it was not the trade reflected in the disputed input tax claims. There are various possibilities, including different trade with the missing traders at a different level and not involving VAT; trading with other completely different entities, free of VAT, for which the documentary trade with the missing traders is a cover; or no trade at all. There are doubtless other possibilities. The liquidator does not seek to prove any of them. She is entitled to adopt that stance of saying that the purported trade with the missing traders did not take place as documented, and does not have to go further and work out what was actually going on in Payless. As I have observed, in many cases the proof of a fraud will, in practice, require it to be demonstrated what the context of the fraud was – otherwise the fraud is less plausible – but it is not an absolute necessity and in the present case the evidence that the purported trades were not genuine is sufficiently strong that the inability to complete the actual trading picture does not detract from the inferences that are to be drawn from the primary facts as I have found them to be.

I have considered the other points raised by Mr Hackett in his final speech as pointing away from the fraud relied on. One of the most compelling is the existence of some verifiable and verified bank payments made to some missing traders. I have referred to their amounts above. In the case of those payments there can be no doubt that money was paid to the missing trader. However, it does not follow that they should be treated as a badge of legitimacy which demonstrates that all other transactions with that trader happened no matter how questionable they may otherwise seem. Save for those transactions which I have already indicated were genuine, I do not find that those payments were necessarily linked to genuine invoices giving rise to genuine input tax. The remaining suspicious factors in each case lead me to the conclusion that while money has been paid, the underlying trading is not as claimed. Otherwise Mr Hackett’s submissions seek to demonstrate that the liquidator’s case does not create a smooth, internally and externally consistent whole. That may be the case. There are some wrinkles, but overall it is a compelling case and I find it established.

I therefore find that the claim in this case is made out. Payless submitted VAT returns which contained claims for input tax which were not justified because, so far as they reflected missing trader trades, those trades did not take place as claimed and VAT input tax was not paid as claimed. Mr Patel was responsible for that and as director he is liable to the company for the amounts wrongly claimed; as I have observed, Mr Hackett accepted that if wrongful claims were made then Mr Patel must, on the facts, be liable, and that sensible concession avoids discussion of precisely what the chain of causation was between Mr Patel and the returns. The amount of the liability will have to be finalised – I have found a couple of small corners of the missing trader trading to be valid, or not demonstrated as invalid, and the award of damages or compensation will have to reflect that. That finalisation can be done by agreement (I would hope), failing which I will rule on it. I will also have to rule in due course on the appropriateness of continuing injunctive relief against the 2^nd to 5^th defendants.