Secretary of State for Business, Innovation & Skills v Potiwal (Rev 4)

This is an application by the Secretary of State for Business, Innovation and Skills to strike out part of the evidence of Mr Nadhan Singh Potiwal in response to the Secretary of State’s application that he be disqualified as a director under section 6 of the Company Directors Disqualification Act 1986, on the grounds that the deployment of the evidence amounts to an abuse of process.

The grounds on which the Secretary of State claims that Mr Potiwal is unfit to be concerned in the management of a limited company are that:

Between February and August 2006 he caused Red 12 Trading Limited (“Red 12”), a company of which he was then the sole director, to participate in transactions which were connected with the fraudulent evasion of VAT, such connections being something which Mr Potiwal either knew or should have known about; and,

That he caused Red 12 wrongfully to claim more than £2m by way of VAT refund from HMRC in respect of trading during that period.

Mr Potiwal now admits that Red 12 did participate in transactions connected with the fraudulent evasion of VAT during part of that period (namely February and March 2006), but he has denied in affidavit evidence that he either knew or ought to have known that Red 12 was participating in that fraud. The reason why the Secretary of State seeks to characterise that denial as an abuse of process is because, in a written Decision published on 2 January 2009 on an appeal by Red 12 from HMRC’s disallowance of its VAT claims for (inter alia) that period, the VAT Tribunal concluded that he knew that Red 12 was participating in the fraudulent evasion of VAT.

Mr Mark Cunningham QC for the Secretary of State submits that Mr Potiwal is estopped per rem judicatam from denying that he had the requisite knowledge in relation to Red 12’s participation during February and March 2006. Alternatively, he submits that his denial is an abuse of process because it would be manifestly unfair for the Secretary of State to be put to the substantial cost and delay of proving that allegation against him and/or that to permit the issue as to Mr Potiwal’s knowledge to be re-litigated would bring the administration of justice into disrepute.

Miss Alison Graham-Wells for Mr Potiwal submits that there can be no question of res judicata between the Secretary of State and Mr Potiwal, due to the absence of the requisite privity of interest between them and the parties to the proceedings before the VAT Tribunal, namely HMRC and Red 12. Further she submits that there can be no unfairness in requiring the Secretary of State to prove that serious allegation of knowledge against Mr Potiwal by deploying admissible evidence in the disqualification proceedings, nor would Mr Potiwal’s denial that he had the requisite knowledge in those proceedings bring the administration of justice into disrepute.

Counsel were agreed that the principles relevant to the Secretary of State’s application to strike out are to be found in the decision of the Court of Appeal in Secretary of State for Trade and Industry v Bairstow [2003] EWCA Civ 321. Mr Bairstow had been the chairman and joint managing director of Queen’s Moat House plc (“QMH”) until dismissed in August 1983. QMH successfully resisted his claim for damages for wrongful dismissal by proving allegations of misconduct, breach of duty and breach of his service agreement by Mr Bairstow, at a trial before Nelson J in 1997 to 1998, and Mr Bairstow had his appeal dismissed in May 2001. In subsequent disqualification proceedings against him he sought by way of defence to re-litigate those allegations, but on an application by the Secretary of State at a pre-trial review Pumfrey J held that he was bound by the findings made against him in those earlier proceedings. The Court of Appeal allowed his appeal from that decision. After a lengthy review of the authorities, the Vice-Chancellor held that they established the following propositions:

“A collateral attack on an earlier decision of a court of competent jurisdiction may be but is not necessarily an abuse of the process of the court.

If the earlier decision is that of a court exercising a criminal jurisdiction then, because of the terms of ss. 11 to 13 Civil Evidence Act 1968, the conviction will be conclusive in the case of later defamation proceedings but will constitute prima facie evidence only in the case of other civil proceedings. …

If the earlier decision is that of a court exercising a civil jurisdiction then it is binding on the parties to that action and their privies in any later civil proceedings.

If the parties to the later civil proceedings were not parties to or privies of those who were parties to the earlier proceedings then it will only be an abuse of the process of the court to challenge the factual findings and conclusions of the judge or jury in the earlier action if (i) it would be manifestly unfair to a party to the later proceedings that the same issues should be relitigated or (ii) to permit such relitigation would bring the administration of justice into disrepute.”

Mr Bairstow was, of course, a party both to the earlier proceedings and the disqualification proceedings, but it was not suggested that QMH and the Secretary of State were privies. The Court of Appeal held that there was nothing unfair to the Secretary of State in requiring him to prove his serious case of misconduct against Mr Bairstow by admissible evidence, and that the judgment of Nelson J in the earlier proceedings against QMH was not admissible as evidence of the relevant facts. Similarly, the Court of Appeal held that, having regard in particular to the Court of Appeal’s control over disqualification proceedings, permitting Mr Bairstow to relitigate the issues as to his alleged misconduct and breach of duty would not bring the administration of justice into disrepute.

The question whether parties in successive litigation are in a relationship of privity, so as to give rise to estoppel per rem judicatam is not the subject of a wealth of authority. In Carl Zeiss Stiftung v Rayner & Keeler and ors [1967] 1AC 583, Lord Reid said, at page 910 G:

In Gleeson v J Wippell & Co Ltd [1977] 1WLR 510, at 515, having rejected mere curiosity or concern, including reputational concern, as sufficient to establish privity of interest, Megarry VC continued as follows:

In Johnson v Gore Wood & Co [2002] 2 AC 1, at 32, Lord Bingham expressly approved the first of those passages from Gleeson & Wippell as a correct statement of the doctrine of privity in relation to the closely related rule in Henderson v Henderson 3Hare 100, holding that Mr Johnson was plainly a privy of a company in which he held all but two of the issued shares, and which he had caused to bring a negligence claim against the defendant’s solicitors in earlier proceedings.

Finally, in Dadourian Group International Inc v Sims and ors [2006] EWHC 2973 (Ch), after a review of the authorities including Gleeson v Wippell and Johnson v Gore Wood, Warren J said, at paragraph 721:

I agree with Warren J. Furthermore, although the second of the passages from Gleeson v Wippell which I have quoted above was not in terms approved as a correct statement of the law in Johnson v Gore Wood, I consider that it is. It enables the court to ask not merely whether it would be just to hold the losing party in the earlier proceedings bound, but whether it would be just if the decision in the earlier proceedings had gone the other way.

Notwithstanding Mr Cunningham’s rather faint submission to the contrary, it is clear that there can be no estoppel unless both parties to the second proceedings are either the same as, or in privity with, both parties to the earlier proceedings. By contrast with the cases on privity to which I was referred, this is a case in which there is no common party to both proceedings, so that privity must be established both as between the Secretary of State and HMRC and as between Mr Potiwal and Red 12.

In cases where there is not the requisite privity, abuse of process by bringing the administration of justice into disrepute by relitigation is commonly alleged upon the ground that the party seeking to relitigate a point decided earlier is mounting a collateral attack on the earlier decision: see for example Hunter v Chief Constable of the West Midlands [1982] AC 529 and, more recently, Taylor Walton v Laing [2007] EWCA Civ 1146. There is a well recognised exception, where fresh evidence is relied upon which entirely changes that aspect of the case: see Phosphate Sewage v Molleson [1879] 4 App Cas 801 at 814, per Earl Cairns LC.

It is convenient first to address the question whether Mr Potiwal was in privity of interest with Red 12 in the proceedings before the VAT Tribunal. He was, as I have said, the sole director of Red 12 at the material time and held 40% of its shares. He was in sole charge of Red 12’s commercial activities, including therefore the transactions by which Red 12 assumed the role of exporter under the MTIC fraud was found to have occurred in those proceedings, and now admitted by Mr Potiwal to have occurred. Furthermore, Mr Potiwal had the conduct of Red 12’s appeal to the VAT Tribunal (in the sense that he gave all relevant instructions to Red 12’s solicitors and counsel). He was its only witness of fact and was both cross-examined during the proceedings and disbelieved by the Tribunal in its Decision.

Red 12’s appeal sought to challenge a disallowance of the company’s VAT claim in amounts exceeding £2m. It is clear from what I was told about Red 12’s financial position that, had the VAT appeal succeeded, a very substantial amount of the payments which would have been recovered from HMRC would have constituted distributable profits in the hands of the company, thereby available by way of distribution to Mr Potiwal either in the form of director’s remuneration or dividend. Accordingly, he had a strong financial interest in the VAT appeal entirely coincident with that of Red 12, as well as a reputational interest in preserving his (until then) good name from the very serious allegations upon the basis of which HMRC had disallowed his company’s claim.

In my judgment Mr Potiwal and Red 12 were clearly privies in the context of the proceedings before the VAT Tribunal, even though he was neither asserting a personal claim of his own, nor was he exposed to personal liability for costs in the event (as occurred) that the appeal failed. He was only slightly less obviously in privity of interest with his company than Mr Johnson was with his company in Johnson v Gore Wood. In my judgment the fact that he was only a 40 per cent shareholder in Red 12 by no means undermines an otherwise clear case for privity of interest between the two.

Rather more difficult is the question whether the Secretary of State has the requisite privity of interest with HMRC. Both are (or represent) government departments charged with the protection and furtherance of the public interest, and both are funded ultimately from the public purse, i.e. by the taxpayer. Apart from that, Miss Graham-Wells submitted that all other relevant considerations pointed away from a sufficient privity of interest. She reminded me that HMRC is an entity separate from central government and answerable in part to Parliament, even though the Treasury is its sponsoring ministry. She pointed out that the Secretary of State and HMRC serve different public interests and that, save in relation to some criminal proceedings, HMRC has no power of its own to secure the disqualification of a director. She said, correctly, that the Secretary of State could not have been a party in the proceedings before the VAT Tribunal, nor HMRC a party in the present proceedings.

Finally, Miss Graham-Wells relied upon the fact that HMRC could not of its own motion share information derived from the pursuit of its own functions with other government departments, even though the Secretary of State could by use of statutory powers obtain relevant information from HMRC upon request. Miss Graham-Wells submitted that, taken together, all those factors pointed decisively against the existence of the requisite degree of community or identity of interest between the Secretary of State and HMRC.

After some hesitation I have concluded that, despite the substantial overlap in interest between HMRC and the Secretary of State in relation to the issue as to Mr Potiwal’s knowledge, it is not quite sufficient to make them privies. My reasons follow. First, the question is whether the degree of identification of interest makes it just for the one to be bound by the outcome of proceedings about that issue involving the other, and bound regardless which way that outcome goes. The effect of identification of two parties as privies is automatic, and gives rise to an estoppel which prevents the dispute or the issue being revisited, regardless of the circumstances of the first trial, and of the outcome. It is precisely because those consequences are automatic and potentially far-reaching that the law should in my view be slow to recognise privity of interest between different persons. As Megarry VC put it in Gleeson v Wippell:

Secondly, the modern tendency, exemplified by Johnson v Gore Wood, is to treat the res judicata principle as an aspect of the law of abuse of process. Thus, whereas it used to be thought that a situation to which the rule in Henderson v Henderson applied automatically barred the pursuit of a matter which could have been pursued in earlier proceedings, the modern rule is only that it may do so, if in all the circumstances it would be an abuse. I consider that it would therefore go against the grain of the development of the law about abuse of process to identify for the first time a new class of privity of interest between two very different arms of government pursuing different aspects of the public interest, and being motivated in particular cases by different policy and funding considerations when doing so.

The result is that the first way in which the Secretary of State puts his case on this application fails. Although there was privity of interest between Mr Potiwal and Red 12 on the question as to his knowledge of the VAT fraud in which his company participated, there is no estoppel binding him because of the absence of the requisite privity of interest between HMRC and the Secretary of State in relation to that issue.

It by no means follows from my conclusion that it would not be just to treat the Secretary of State and HMRC as privies that the relitigation of the issue as to Mr Potiwal’s knowledge is nonetheless not an abuse. That question requires an examination of the circumstances of the hearing before the VAT Tribunal, from which it appears that HMRC expended over £400,000 of taxpayers’ money in successfully resisting Red 12’s appeal, by the meticulous presentation of the intricacies of the MTIC fraud in a way sufficient to persuade the experienced tribunal that Mr Potiwal knew about it, notwithstanding his detailed and determined challenge, through Red 12, of every element of HMRC’s case. Red 12 went into creditors’ voluntary liquidation after the conclusion of the proceedings, and no part of that expenditure on costs was recouped by HMRC from Red 12, despite the Tribunal’s order that it should be.

The Secretary of State’s evidence on this application demonstrates that, if Mr Potiwal is to be permitted by a simple denial of the requisite knowledge to require the case to be proved against him a second time, hundreds of thousands of pounds of further costs, again funded by the taxpayer, will have to be incurred by the Secretary of State, again with no evidence that, if successful, a costs order will be practically enforceable against Mr Potiwal at the end of the day.

True it is that, as Miss Graham-Wells submits, Mr Potiwal does not now put in issue the existence of the underlying fraud. But proof against the management of an exporter of the requisite knowledge in an MTIC case is nonetheless an intricate process, requiring meticulous deployment of the underlying facts, and of the circumstances in which those facts were, or ought to have been, apparent to the company’s senior management. Taking a broad brush, I consider it reasonable to assume that the cost to the Secretary of State of relitigating the issue as to Mr Potiwal’s knowledge is likely to equal or exceed £200,000. The question is whether it would be manifestly unfair to visit that expenditure upon the Secretary of State in all the circumstances.

Those circumstances include the fact that Red 12 pursued but lost an appeal against the decision of the VAT Tribunal, and was refused permission for a second appeal, and that Mr Potiwal’s evidence in the present proceedings, far from placing a different complexion on matters, consists of little more than a simple denial of knowledge. No challenge is or could be made to the substantive fairness of the proceedings before the VAT Tribunal. It is in my judgment nothing to the point that its procedure rules may be different and, in certain respects, less formal than those applicable to these disqualification proceedings. Furthermore, Mr Potiwal had every opportunity both in giving evidence and subjecting himself to cross-examination to defend himself against the allegations of knowledge which the Tribunal found to be proved, when rejecting swathes of his testimony as incredible.

In those circumstances I consider that it would indeed be manifestly unfair to impose the cost of relitigating that issue upon the Secretary of State. The critical distinction between this case and Secretary of State v Bairstow is that, prior to the disqualification proceedings against Mr Bairstow, the taxpayer had incurred no costs at all in relation to the issues which Mr Bairstow wished to relitigate. The previous proceedings had been between him and his solvent company. By contrast in the present circumstances, the taxpayer has been the funder of the litigation involving Red 12 and Mr Potiwal throughout, first for the purpose of defending the public purse from a fraudulent claim, and now for the purpose of seeking the disqualification of the sole director of a corporate participant in that fraud.

I have also concluded that to permit the issue as to Mr Potiwal’s knowledge to be relitigated would indeed bring the administration of justice into disrepute, in the eyes of right-thinking people. In Re Thomas Christy (in liquidation) [1994] 2 BCLC 527 Mr Manson sought to relitigate with his company’s liquidator issues as to breach of duty and misfeasance which had been decided against him in earlier disqualification proceedings brought by the Secretary of State. The liquidator expressly disclaimed any suggestion that he and the Secretary of State had the requisite privity of interest to give rise to an estoppel per rem judicatam. After a review of the authorities, Jacob J said this, at page 537:

It makes no difference in my view that, in the present case, two different tribunals are involved, namely the VAT Tribunal and the Companies Court. Apart from that, Jacob J’s words are fully applicable to the present case. Where, as here, the issue as to a director’s knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue relitigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again. In that context the facts that Mr Potiwal was indeed in privity of interest with Red 12, that he was its sole director and that he had the conduct of Red 12’s appeal makes the point all the stronger.

Re Thomas Christy Ltd was considered, without any apparent disapproval, in Secretary of State v Bairstow, at paragraph 32. It was treated as an application of the principle established in Hunter v Chief Constable of West Midlands. In Taylor Walton v Laing, after citing from the Hunter case, Buxton LJ said this, at paragraph 12:

In my judgment a focus upon the thoroughness and fairness of the way in which the issue as to Mr Potiwal’s knowledge of the underlying VAT fraud was conducted by the VAT Tribunal (and upheld on appeal), in proceedings in which, with full control of Red 12’s case, Mr Potiwal had every opportunity to exonerate himself, but failed, demonstrates that this is a case to which both limbs of the Hunter principle fully apply.

The result is that those passages in Mr Potiwal’s evidence in which he denies that he had knowledge of the VAT fraud in which Red 12 participated, to the extent found against him by the VAT Tribunal, should be struck out as an abuse of process. The result is that the disqualification proceedings against him may be pursued in a very much more economical and efficient manner than would otherwise have been possible. I will give directions for the further case management of the proceedings, if they cannot be agreed.