The Secretary of State for Business Innovation and Skills v Warry

JUDGE HODGE QC: This is the trial of a director’s disqualification application brought by the Secretary of State for Business Innovation and Skills under section 6 of the Company Directors Disqualification Act 1986 and issued on 18 May 2012. Originally, there were two respondents, Mr Shahab Khan and Mr William Nicolas Warry. The claim against Mr Khan related to his activities as a director of two companies, Buzz Talk Traders Limited and Chapter 6 Limited. The claim against Mr Warry relates to his activities as a director of Chapter 6 alone. Although he was the company secretary of Buzz Talk, no allegations are made against the conduct of Mr Warry in relation to that company. The matters of unfitness alleged against Mr Warry are identified at paragraphs 14 and 15 of the supporting affidavit of Mr Kenneth David Beasley, an Official Receiver in the Public Interest Unit of the Insolvency Service, sworn on 8 May 2012:

For the Secretary of State, Miss Lisa Linklater of counsel invites the court to note the following: (1) That 16 May 2006 is the date of the first trade between Chapter 6 and A-Z Mobile Accessories Limited (“A-Z”). It is also the date of the first deal in the VAT period ending 31 May 2006 with Intertrade Worldwide Limited. (2) 31 August 2006 is the date of the last deal with A-Z. (3) 6 June 2006 is the date of the VAT return for the quarter ended May 2006; that return was signed by Mr Warry. (4) 5 September 2006 is the date of the return submitted for the VAT quarter ended August 2006; that VAT return was signed by Mr Khan, the first defendant. (5) £1,599,594 relates to the VAT reclaimed by Chapter 6 on the purchase of mobile telephones for six deals in the period ended May 2006; the balance of £2,842 odd relates to VAT on expenses claimed. (6) £54,285 relates to VAT reclaimed by Chapter 6 on the purchase of mobile telephones denied in the quarter ended August 2006.

Essentially, it is said by the Secretary of State that Mr Warry is unfit to be concerned in the management of a company because he caused or allowed Chapter 6 wrongfully to reclaim input tax as part of a missing trader intra-community VAT fraud (or MTIC fraud).

On 16 August 2013, Mr Khan gave a director’s disqualification undertaking which was accepted by the Secretary of State on 28 August 2013. The disqualification period of 12 years commenced on 18 September 2013. In relation to Chapter 6, Mr Khan did not dispute the following matters: He was a director of Chapter 6, which went into liquidation on 28 May 2010 with assets of £11,146 and liabilities of £2,038,153. Chapter 6 had a deficiency as regards creditors of £2,027,007 and a share capital of £1,000, making a total deficiency, as regards creditors and shareholders, of £2,028,007.

The matters of unfitness in relation to Chapter 6 were as follows: First, between 16 May 2006 and 31 August 2006, Chapter 6 participated in transactions which were connected with the fraudulent evasion of Value Added Tax, such connections being something Mr Khan should have known about. In particular: (1) Mr Khan ought to have been aware that MTIC VAT fraud is rife in the trade in wholesale mobile phones in which Chapter 6 was engaged because: (a) Mr Khan had previous experience in the mobile phone industry and was aware or ought to have been aware of the dangers of trading in an area at risk of MTIC VAT fraud; (b) Chapter 6 had been warned of it by way of a letter from Her Majesty’s Revenue & Customs’s Redhill office on 31 January 2006, explaining the problems they were experiencing in Chapter 6’s trade sector. (2) The trading in which Chapter 6 was involved had features which should have put Mr Khan on inquiry about the legitimacy thereof as follows: (a) whilst Mr Khan had previous experience of that sector, Chapter 6 was not established in the trade of wholesale mobile phones yet very quickly it was able to generate turnover in the VAT periods between January 06 and August 06 of over £12 million, of which over £9.5 million was generated between 16 May and 31 August 2006; (b) Chapter 6 was able to source goods and complete purchases and onward sales within a very short space of time, usually on the same day; (c) Chapter 6 was always able to sell exactly the same quantities of mobile phones and other electronic goods as it purchased; (d) the amount of profit made by Chapter 6 on the transactions in which it was involved reflects a common pattern in VAT fraud. (3) In the period between 16 May and 31 August 2006, Chapter 6 was involved in 17 broker deals which Revenue & Customs has traced back to four contra-traders. Revenue & Customs had identified significant tax losses of £47,205,911 by defaulting traders within the broker transaction chains of the four contra-traders. Revenue & Customs denied input tax of £1,653,878 in respect of the 17 broker deals carried out by Chapter 6. (4) Despite being aware of VAT fraud in Chapter 6’s trade sector, Mr Khan failed to ensure that Chapter 6 carried out effective steps, checks and/or due diligence in respect of its trading partners. In particular, Chapter 6 failed to carry out adequate due diligence on its trading partners involved in the 17 broker deals undertaken in the period between 16 May and 31 August 2006. Only one credit check was undertaken and this credit report, along with the documents held in respect of the other trading partners, had insufficient information from which to conclude that the trading partners were bona fide businesses or of such size and/or experience to contract with it in the volumes proposed. Secondly, Mr Khan also accepted that on 6 June and 5 September 2006 he had permitted Chapter 6 to wrongfully claim the sums of £1,599,593 and £54,285 respectively from Revenue & Customs.

In the light of that disqualification undertaking, the trial of this application has therefore proceeded against Mr Warry alone. He appears as a litigant in person. The Secretary of State is represented by Miss Lisa Linklater (of counsel), instructed by Howes Percival. The trial documentation extends to some eleven lever-arch files comprising over 3,100 pages, together with a core bundle of 216 pages, a bundle of correspondence, and a bundle of authorities.

The nature of MTIC fraud is described, and a summary of the terminology used, is provided at paragraphs 169 through to 174 of Mr Beasley’s first affidavit. Reference is there made to observations of Christopher Clarke J in Red 12 Trading Limited v Revenue & Customs Commissioners [2009] EWHC 2563 (Ch), reported at [2010] STC 589 and of Moses LJ in Mobilx Limited v Revenue & Customs Commissioners [2010] EWCA Civ 517, reported at [2010] STC 1436. In her written skeleton argument, Miss Linklater also referred me to observations on MTIC fraud by Lewison J in both Revenue & Customs Commissioners v Livewire Telecom Limited [2009] EWHC 15 (Ch), reported at [2009] STC 643 and Revenue & Customs Commissioners v Brayfal Limited [2011] UKUT 99 (TCC), reported at [2011] STC 1338, and also by Briggs J in Megtian Limited v Revenue & Customs Commissioners [2010] EWHC 18 (Ch), reported at [2010] STC 840. I should record that I have derived particular assistance from (1) Briggs J’s observations in Megtian at paragraphs 37 to 38; and (2) Lewison J’s summary at paragraph 4 of Brayfal of the effect of the Court of Appeal’s decision in Mobilx.

In the first of those citations, Briggs J said this (at paragraphs 37 and 38):

In the second of the two cases, Brayfal, Lewison J summarised the law (at paragraph 4) in the following terms:

A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and fails to meet the objective criteria which determine the scope of the right to deduct ....

If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met ....

The principle does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion ....

The test is simple and should not be over-refined. It embraces not only those who know of a connection, but those who ‘should have known’. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact ....

If HMRC wishes to assert that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct, it must prove that assertion ....

In answering the factual question, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation from them is that his transactions have been or will be connected to fraud. The danger in focusing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was ....”

Since other judges have undertaken the task of explaining how MTIC fraud works on other occasions, I do not see the need to repeat the exercise beyond citing from what would appear to be a standard-form letter sent out by the Redhill VAT office of Her Majesty’s Revenue & Customs to businesses supplying commodities regularly involved in MTIC fraud, together with its accompanying notice 726 on joint and several liability. Copies were sent to Chapter 6 on 27 June 2005 (prior to Mr Warry’s appointment as a director) and again on 31 January 2006 (shortly after his appointment).

Turning first to the letter of 31 January 2006, it begins by stating that:

The accompanying notice 726 contains the following material paragraphs:

Paragraph 2.1 identifies what is the joint and several liability for VAT unpaid on the supply of specified goods. Paragraph 2.3 identifies why this measure has been introduced:

Paragraph 2.4 addresses the question: How do I know whether this measure affects me?:

Paragraph 4.4 addresses the question of how one can avoid being caught up in MTIC fraud:

Paragraph 4.5 addresses what are reasonable steps:

Paragraph 4.6 addresses the question: Can you tell me exactly what checks I should undertake?:

Paragraph 8.1 identifies checks the reader can undertake to help ensure the integrity of his supply chain. Paragraph 8.2 identifies various checks carried out by existing businesses. It emphasises that the list is not an exhaustive one, but does show some of the more common subsidiary documentation.

By section 6 of the Company Directors Disqualification Act 1986, the court is required to make a disqualification order against a person where it is satisfied: (1) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently); and (2) his conduct as a director of that company “makes him unfit to be concerned in the management of a company.” The burden of proving these matters, on a balance of probabilities, lies on the Secretary of State. The minimum period of disqualification is two years, and the maximum period is fifteen years.

Here it is not in dispute that Mr Warry was a director of Chapter 6 between 24 January 2006 and 24 March 2007 (as was the first defendant). Nor is it in dispute that Chapter 6 was placed into creditors’ voluntary liquidation on 28 May 2010. It is also not disputed by Mr Warry (and on the evidence I find as facts): (1) that the transactions in which Chapter 6 participated between 16 May and 31 August 2006 were connected with the fraudulent evasion of VAT; (2) that Mr Warry signed the VAT return for the quarter ending May 2006 on 6 June 2006; (3) that Revenue & Customs disallowed the claims for recovery of input tax made by Chapter 6 (a) on 6 June 2006 to the extent of £1,599,593; and (b) on 5 September 2006 to the extent of £54,284; and (4) that those decisions were never successfully appealed. In any event, any claim for deduction of input tax in respect of these periods is now statute-barred by Regulation 29 (1A) of the VAT Regulations 1995. I accept Miss Linklater’s submission (and I find as a fact) that these claims for the recovery of input tax should be treated as wrongly made.

The live issues between the parties are: (1) Whether Mr Warry either knew, or should have known, that the transactions in which Chapter 6 participated between 16 May and 31 August 2006 were connected with the fraudulent evasion of VAT; (2) Whether Mr Warry “allowed” Chapter 6 to participate in such transactions; and (3) Whether Mr Warry “caused or allowed” Chapter 6 to make the wrongful claims to recover input tax of £1,599,593 and £54,285.

In his opening skeleton argument, Mr Warry reminded me that in Re Sevenoaks Stationers Limited [1991] Ch 164 at page 176 letters B to C, Dillon LJ stated that the test laid down in section 6 of whether a person’s conduct as a director of a company “makes him unfit to be concerned in the management of a company” involves “ordinary words of the English language” which “should be simple to apply in most cases.” Dillon LJ also stressed the importance of holding to those words in each case. Mr Warry also drew my attention to the later citation by Dillon LJ (at page 176D) of an earlier observation of Sir Nicolas Browne-Wilkinson V-C in Re Low Line Electric Motors Limited [1988] Ch 477 at 486:

In her opening skeleton (at paragraph 27) Miss Linklater observed that this is not the first case in which a director’s disqualification has been sought on the grounds of MTIC fraud. Around 500 such cases are said not to have reached the stage of a contested trial, either because an undertaking has been accepted, or because the application has been dealt with by way of uncontested disposal. This is said to be only the fourth contested MTIC fraud trial. Two of the earlier contested cases were cited to me. The first is Secretary of State v Nassir Ahmed [2011] EWHC 693 (Ch), a decision of His Honour Judge Stephen Davies (sitting as a judge of the Chancery Division in the Manchester District Registry) on 22 March 2011. There the Secretary of State’s case was not that the defendant actually knew, but that he ought to have known, that he was involving the company in question in transactions which were part of a chain involving MTIC fraud. The judge was satisfied on the evidence that the defendant had knowingly put the company at risk of being involved in transactions connected with MTIC fraud. At paragraph 63, sub-paragraphs (8 )and (9), Judge Davies said this:

The defendant in that case (who was represented by counsel) was disqualified for seven-and-a-half years. Judge Davies expressly took into account (at paragraph 64) “the extenuating circumstances of his relative youth and lack of business experience at the time these events occurred.”

The second case (in which the earlier decision of Judge Stephen Davies was fully considered) is the decision of His Honour Judge Pelling QC (also sitting as a judge of the Chancery Division in the same District Registry) on 9 January 2012 in Secretary of State v Corry. Judge Pelling was satisfied (at paragraph 34) that the company in question had been involved in very significant tax fraud and that significant losses had been inflicted on the public as a result. He concluded that the defendant had been knowingly involved in the fraud as the sole or principal controller of the company during the relevant period. At paragraphs 31 and 32 of his judgment, Judge Pelling said this:

Earlier in his judgment (at paragraphs 6 through to 9) Judge Pelling had referred to the approach to be applied to claims to deduct input tax in cases where a trader has become involved in MTIC fraud, as identified by the European Court of Justice in Kittel v Belgium [2008] STC 1537, and explained by the Court of Appeal in Mobilx (previously cited). The judge then proceeded to consider the relevance of this approach to directors’ disqualification proceedings. Judge Pelling concluded as follows:

I respectfully agree with this approach, and I adopt Judge Pelling’s formulation (at the end of paragraph 7 of his judgment), although I would emphasise (as Judge Pelling’s formulation of the appropriate test makes clear) that in the context of a directors’ disqualification claim, the question of whether the relevant company is to be regarded as a participant in a transaction or transactions connected with the fraudulent evasion of VAT is only the first stage of the inquiry, with the court then having to move on to consider the extent of the respondent director’s personal knowledge of, and involvement in, that fraud, and how that impacts upon his fitness to be concerned in the management of a company.

The trial of this claim opened at about 10.40 on the morning of Monday 10 February 2014. I had had the opportunity to pre-read Miss Linklater’s detailed 44 page skeleton argument (dated 4 February 2014) and its accompanying chronology, Mr Warry’s shorter six page skeleton argument (dated 7 February 2014), and also the documents in the core bundle. Miss Linklater opened the core documents, and her client’s case, for about an-hour-and-twenty-minutes (see transcript day 1, pages 1 to 31). After a short break, Mr Warry addressed me very briefly (see transcript day 1, pages 32 to 34). I then explained to Mr Warry (as I had previously done at the pre-trial review on 21 October 2013) how the trial would proceed, and also the matters he should be prepared to address in cross-examination of the Secretary of State’s witnesses. The court then adjourned (as planned) at about 12.30 pm for me to read the principal witness statements (as identified at paragraph 9 of Miss Linklater’s skeleton) and for the parties to finalise their preparations for the remainder of the trial.

There is a written transcript for the first three days of the trial, comprising the oral openings and the witness evidence. It is therefore unnecessary for me to summarise the evidence in detail, particularly in the light of admissions made by Mr Warry before, and during, the course of his evidence.

The trial resumed at 10.00 am on Tuesday 11 February. I heard first from the Secretary of State’s three live witnesses. The first was Mr Beasley. He had made three affidavits (on 8 May 2012, 16 January 2013 and 6 March 2013); and he was in the witness box for a little over 30 minutes (see transcript day 2, pages 2 to 20). He had made it clear (at paragraph 6 of his first affidavit) that he had “no contemporaneous or direct knowledge of any of the matters referred to” in that affidavit. I next heard from Mr David Neil Taylor, who is an officer of Revenue & Customs employed in its Missing Trader Intra-Community Fraud Team; and he was the case worker for Chapter 6. His affidavit was sworn on 15 January 2013; and he was in the witness box for about 25 minutes (see transcript day 2, pages 20-31). The Secretary of State’s third, and final, witness was Mr Thomas Guy Alvey, who was the MTIC team case worker for Buzz Talk. His affidavit was made on 15 January 2013; and he was in the witness box for only some 10 minutes (see transcript day 2, pages 31 to 34). There was no challenge to the honesty, the probity, or the reliability of any of these witnesses; and I accept them all as witnesses of truth, who are doing their best to assist the court. Indeed, the evidence adduced, and relied upon, by the Secretary of State went largely unchallenged by Mr Warry.

At the conclusion of the Secretary of State’s evidence, at about 11.15 am, and at the request of Mr Warry (who wanted to get his papers into order), the court adjourned for 45 minutes, until 12.00 noon, when Mr Warry entered the witness box. Mr Warry had made one short witness statement dated 25 June 2012. He was in the witness box for a little over 7 hours, starting at 12.00 noon on day 2 and continuing until about 4.00 pm on day 3 (see transcript day 2, page 36 through to transcript day 3, page 133). The court then adjourned until 10.00 am on Monday 17 February for the parties to prepare written closing submissions.

On the morning of Friday 14 February I received Miss Linklater’s written closing submissions, extending to some 17 pages. Early on the morning of Monday 17 February I received Mr Warry’s written closing submissions, comprising some four pages, together with a summary of his estimated costs, preceded by a preamble. I had read these documents before coming into court on Monday 17 February. As a result, it was only necessary for Miss Linklater to address me for about 35 minutes, mainly on matters raised by the court. Mr Warry addressed me in response for about 40 minutes. Miss Linklater then addressed me for about 10 minutes in reply. At about 11.35 am I reserved judgment until Monday 24 February.

Miss Linklater invited me to find that Mr Warry is (and was, while a director of Chapter 6): (1) highly intelligent; (2) skilled in accounting and bookkeeping and, by extension, reading financial information; (3) skilled in business and, by extension, reading and understanding a wide range of documentation recurring in business, e.g. purchase orders, invoices, due diligence, information from Her Majesty’s Revenue & Customs (such as “Intrastat Declarations”, as explained at transcript day 2, page 104); (4) very assertive; (5) independently minded; (6) a strong personality; (7) careful in what he says and does; (8) someone who thinks ahead; (9) someone who thinks about the effect that what he says and does will have on a particular situation; (10) someone who paints himself in the best possible light; and (11) dominant. Further, Miss Linklater submits that Mr Warry’s evidence was unreliable because: (1) by his own admission, he had a poor recollection of events from 2006 to 2007: see paragraph 16 of his witness statement); (2) he had little independent, written, corroborative evidence to support his account; (3) perhaps (or perhaps not) unwittingly, he was inclined to adjust his evidence at times to paint a favourable picture of himself and what he had done in 2006, despite having an admittedly poor recollection of events: see, for example, transcript day 3, page 40, line 23 through to transcript day 3, page 41, line 14; (4) at times he was evasive in his responses to cross-examination.

Taking those matters into account, Miss Linklater invites me to prefer the Secretary of State’s evidence to Mr Warry’s where their evidence is in conflict. Where it is not, she invites me to treat Mr Warry’s evidence as unreliable, through poor recollection, and as lacking in objectivity; and either to reject such evidence or to place little weight upon it.

As previously stated, the principal live issues in this litigation are the extent of Mr Warry’s role and responsibilities within Chapter 6, and the extent of his knowledge of the MTIC fraud. Outside these areas, there is really little, or no, relevant conflict of evidence; and the Secretary of State’s witnesses are unable to give direct factual evidence about these areas from their own knowledge.

During the course of cross-examination, Mr Warry accepted that he was a language graduate who had taught himself accountancy and book keeping in the late 1970s, and that he had had some 30 years’ involvement in that field at the time he had joined Chapter 6 early in 2006. He was then 58 years of age, and a skilled and highly experienced businessman who described himself as “an accountant”, (but not a “chartered” accountant), and he had held 52 company appointments. (This is to be contrasted with the first defendant, who was then 29 years of age and held only three company appointments). To this extent, but no further, I accept Miss Linklater’s description of Mr Warry.

Having observed, and listened to, Mr Warry throughout the course of this trial, both as a witness and as an advocate, I do not find him to be “highly intelligent, very assertive, independently minded, a strong personality, dominant, careful in what he says and does, someone who thinks ahead, someone who considers what effects his words and actions will have, or someone who paints himself in the best possible light.” In the witness box, I found Mr Warry to be a quietly spoken and reflective witness, who tried to be careful and considered in his evidence. He was obviously uncomfortable under cross-examination; and at times he was clearly struggling to provide an answer to Miss Linklater’s questions in cross-examination: see, for example, the pauses recorded at transcript day 2, page 67, line 9 and day 2, page 79 at lines 23 to 25. I consider that Mr Warry was embarrassed that he had not done more, and acted otherwise, than he had done whilst acting as a director of Chapter 6. Mr Warry had a poor recollection of certain matters - which is not entirely surprising after more than 7 years - and I do not find his evidence to be entirely accurate or reliable; but I do not find that he was being deliberately dishonest or evasive in his evidence to the court. I do not find Mr Warry to have been “highly” skilled, or expert in business and financial matters; and I accept his evidence (at transcript day 2, page 48) that he was “involved more in the mechanics than in advice on accountancy matters.”

Miss Linklater invites me to find that the first defendant understood Mr Warry to be a “chartered” accountant; that the first defendant relied upon Mr Warry; that the first defendant was open to influence by Mr Warry; and that Mr Warry was not subordinate to the first defendant. However, I accept Mr Warry’s evidence that he never described himself to the first defendant as a “chartered” accountant”. I do not accept that the first defendant ever placed any reliance upon Mr Warry in matters relating to Chapter 6’s business dealings and affairs (except in relation to its communications with Revenue & Customs) or that Mr Warry was ever in a position to influence the first defendant, who effectively controlled the company and was, at all times, in a position to remove Mr Warry from office. I accept Mr Warry’s evidence that the first defendant relied upon him only “to be the mouthpiece to represent the company towards the various statutory authorities”: see transcript day 2, pages 50 to 51. I find that Mr Warry was subordinate to the first defendant. In that regard, I bear in mind what was said at paragraphs 3 and 4 of CDI Legal’s letter of 23 November 2011, written on behalf of the first defendant to the Official Receiver’s office (at bundle 5, pages 1163 to 1164): “ Although Mr Warry was registered as a director of the company between 24 January 2006 and 24 March 2007, he was in fact not a director, but the company’s accountant and secretary, so his role and responsibilities were those consistent with his position as the company’s professional adviser. Mr Khan was the sole director and so his role and responsibilities were those consistent with his position as such; that is the management, direct and indirect, and decision making, delegated or otherwise, in respect of the company during his period in office.” Indeed, that letter overstates the extent of Mr Warry’s responsibilities and role because it is clear that a third party firm was responsible for preparing the accounts of Chapter 6, and not Mr Warry’s own accounting practice.

Where it conflicts with Mr Warry’s own evidence, I reject what is said about Mr Warry’s role within Chapter 6 in CDI Legal’s later of 23 March 2012 (at core bundle pages 169 to 171), also written on behalf of the first defendant. I do so because: (1) the letter is factually inaccurate as to the true, and limited, extent of Mr Warry’s role in the completion and the signing of Chapter 6’s VAT returns; (2) the letter is unsupported by any evidence from the first defendant; and (3) because of the admissions made by the first defendant in his disqualification undertaking. I note that in the record of the visit by officers of Revenue & Customs on 7 March 2006 (at core bundle, pages 34 to 36) Mr Warry was described, not as a director of Chapter 6, but merely as its company secretary, which tends to indicate that Mr Warry’s role was perceived by the relevant officers of Revenue & Customs as subordinate to that of the first defendant. I accept Mr Warry’s evidence (at transcript day 2, pages 82 to 84) that the first defendant was not going to be influenced by Mr Warry because it was the first defendant who was the company. I also accept Mr Warry’s evidence (which is supported by Mr Beasley’s evidence at transcript day 2, pages 5 to 6) that if Mr Warry had not filled in any VAT return for Chapter 6, the first defendant, or someone else on his behalf, would have done so in Mr Warry’s place: see transcript day 2, page 80 and day 3, pages 99 to 100. However, I reject the submission (originally advanced by Mr Warry but, I think, later retracted during his cross-examination) that because someone else would have completed and submitted the relevant VAT return for Chapter 6, he cannot properly be said to have “caused or allowed” Chapter 6 wrongfully to claim the relevant input tax from Revenue & Customs. The fact is that it was Mr Warry’s responsibility to undertake due diligence on the transactions in relation to which a claim for repayment of input tax was made. By not properly discharging this function, Mr Warry “allowed” Chapter 6 to make the repayment claim (as was explained by Mr Beasley in his evidence at transcript day 2, pages 13 to 14). Indeed, in actually preparing and signing the VAT return for the quarter ended May 2006, Mr Warry actually “caused” that claim to be made.

During the course of his cross-examination, Mr Warry accepted the following: (1) The first defendant had told him at the time he accepted his appointment as a director of Chapter 6 (early in 2006) that there were problems with VAT fraud in the mobile phone business sector in which Chapter 6 was trading, and also of the need for due diligence: see transcript day 2, page 39, pages 63 to 4. By May 2006, Mr Warry knew that VAT fraud was rife in Chapter 6’s business sector and that one had to make certain checks: see transcript day 2, pages 109 to 11. Under the terms of his appointment letter of 24 January 2004 (at core bundle, page 9), it was Mr Warry’s express responsibility “to check the due diligence procedures on all [Chapter 6’s] deals.” On 2 February 2006 (at core bundle, page 27) Mr Warry had written to Revenue & Customs informing them of this. Although in that letter Mr Warry had requested “a meeting with a local VAT officer to make sure we are following all recommended procedures” (a factor upon which considerable reliance was placed by Mr Warry by way of defence to the Secretary of State’s claim), when such a meeting was not forthcoming: (i) Mr Warry never followed up on his request; and (ii) he failed to raise the matter at the meeting which he did attend with Revenue & Custom officers on 7 March 2006. I find that there was no reason for Mr Warry not to do so if, as he asserts, he had no reason to doubt the honesty and integrity of the first defendant at that time. At this time also, Mr Warry had access to specialist VAT expertise and advice because he had retained specialist VAT consultants (Leadenhall Contracts Limited) to act for Chapter 6 in relation to its VAT affairs: see the letter dated 17 February 2006 and accompanying authority signed by Mr Warry and dated 16 February at core bundle, pages 30 to 32. Mr Warry could not recall whether he had received and read Revenue & Customs’s standard form letter on MTIC fraud which had been sent to Chapter 6 on 31 January 2006 and its accompanying notice 726 (previously cited); but he accepted that he had “quite possibly” done so by the time of the relevant deals in May 2006. He also had a feeling that he had looked something up on the internet, and, if he had done so, that it was “quite likely” that he would have come across notice 726 by that route: see transcript day 2, pages 85 to 89. (2) Mr Warry accepted that Chapter 6 was actively participating in deals which were connected with the fraudulent evasion of VAT and that Chapter 6 (through the first defendant) knew of this: see transcript day 2, pages 117 to 118. (3) Mr Warry accepted that each of the deals into which Chapter 6 had entered in the VAT periods ending May 2006 and August 2006 were concerned with the fraudulent evasion of VAT: see transcript day 2, pages 117 to 118 and transcript day 3, page 41. (4) Mr Warry accepted that the total amount of tax losses in the supply chain of the contra-trader, A-Z Mobile Accessories, was just over £47 million: see transcript day 2, pages 116 to 117. (5) Mr Warry accepted that Chapter 6’s supply chain lacked commercial credibility, and that the whole scheme of trading was contrived: see transcript day 3, pages 2 to 3, 53 to 54, 62 to 63 and 86. (6) Mr Warry accepted that he had completed and signed Chapter 6’s VAT return for the period ending May 2006 (at core bundle, page 62) and that if he did not “cause” it to do so, Mr Warry at least “allowed” Chapter 6 to submit this return, and also the later VAT return for the period ending August 2006 (core bundle, page 90), which had been signed by the first defendant: see transcript day 3, pages 104 to 106. Mr Warry also accepted that Chapter 6 had wrongfully reclaimed input tax of £1,599,593 and £54,285 in these two returns: see transcript day 3, pages 99 to 100, 102 and 104 to 106. Mr Warry further accepted that in January 2007, he had been continuing to press for the repayment of this input tax even after he had received documentation which he accepted in cross-examination was entirely inadequate for the purposes of due diligence: see transcript day 3, pages 9 to 16 and 21 to 22.

Despite these admissions, and in the face of a persistent, detailed, skilful and probing cross-examination by Miss Linklater, Mr Warry continued to deny that: (1) he was personally involved, or had actively participated, in the deals in May and August 2006 which were connected with the fraudulent evasion of VAT: (2) that he knew all along that these deals were so connected; and (3) that if he did not know this, he had wilfully closed his eyes to what was obvious: see especially transcript day 2, page 118 and transcript day 3, pages 35 to 41, 57 to 58 and 93 to 98. At the conclusion of his cross-examination, Mr Warry said this (at transcript day 3, pages 116 through 117):

Despite the many points so forcefully put by Miss Linklater by way of challenge to Mr Warry’s denials (including references to Mr Warry on three of the deal documents;), despite the matters advanced, in particular, at paragraphs 48 to 53 and paragraph 55 of Miss Linklater’s written closing submissions, and despite the matters I raised at the end of Mr Warry’s evidence (at transcript day 3, pages 127 to 132), I do accept Mr Warry’s evidence that: (1) he was not personally involved, and he did not actively participate, in these fraudulent deals; and (2) he did not know, and did not wilfully shut his eyes to the fact, that these deals were connected with the fraudulent evasion of VAT, or involved MTIC fraud. I also accept Mr Warry’s evidence that he still did not consider the claims for the repayment of import tax to be wrongful in January 2007: see transcript day 3, pages 108 to 109.

At the time of these deals in May and August 2006, Mr Warry was 59 years of age. There is no suggestion that he had previously been involved in any underhand or dubious, still less any dishonest or fraudulent, business practices or activities. There was no suggestion put to Mr Warry that he had ever received, or expected to receive, anything more from Chapter 6 or from the first defendant, other than his salary of £500 per month gross (and even this was not paid after September 2006). For this, Mr Warry was expected to work for Chapter 6 one day a month, although the way it worked out it approached one day a week: see transcript day 2, page 60, lines 1 to 4. Since there was no potential financial or other advantage to Mr Warry in knowingly participating in an MTIC fraud, I simply cannot see any convincing answer to the point repeatedly made by Mr Warry that it would have been “stupid” for him to have knowingly participated in such a fraud since it was inevitable that he would have been found out; and I accept his evidence that had he known of such a fraud, he would have “run a mile” because “I’d be putting my head onto the chopping block, because if I knew that they were connected, I would also know that they’d almost certainly be likely -- well, be very likely, to be found”: see transcript day 2 at pages 65 and 68 and transcript day 3, page 36. At transcript day 3, page 40, line 21 through to page 41, line 14, the cross-examination of Mr Warry proceeded as follows:

Later, on the same day, day 3 at page 98, line 23 and continuing to page 99 at line 10, the cross-examination proceeded thus:

In my judgment, the true explanation for Mr Warry’s conduct (which I accept would otherwise be wholly consistent with his knowing involvement in an MTIC fraud or, at the least, consistent with wilfully shutting his eyes to the obvious) is to be found contained within a letter he wrote to the first defendant on 19 February 2007 (at core bundle, page 161) in which he stated that during the summer of 2006 he had been very pre-occupied with his mother’s illness and subsequent death. I asked Mr Warry about this at the end of his cross-examination (at transcript day 3, pages 122 to 123), and he told me that his mother had died in October 2006; that he had been preoccupied with her illness for most of that year; and that, initially, he was caring for her at her home, and then in hospital. At the end of my questioning of Mr Warry I asked (at transcript day 3, page 132, lines 3 to 6) the following:

That is also possible, my Lord.”

However, for the reasons so convincingly explored in evidence, and which (in his written closing) even Mr Warry acknowledged amounted to “a daunting array of evidence against” him, I am entirely satisfied that Mr Warry should have known of this MTIC fraud in May 2006 and thereafter. Whilst I accept that by the time he was being cross-examined, Mr Warry genuinely believed that more must have been done by way of due diligence than the documents disclosed in this litigation would suggest, I reject his evidence to that effect, for which there is no objective support. I consider that such evidence is the product of wishful thinking, motivated by the realisation that, with the benefit of hindsight, derived from the knowledge acquired during the course of this litigation, the documents in fact generated at the time were woefully inadequate for the purpose of establishing the credibility and integrity of Chapter 6’s supply chain (its suppliers, customers and freight forwarders) and of the transactions into which it was entering.

I find that (for the reason previously identified) Mr Warry’s due diligence was wholly perfunctory, amounting to no more than consulting the figures in the invoices and purchase orders, without having regard to the nature, or verifying the reality, of the underlying deals; and that it was entirely inadequate for the due discharge of the serious responsibilities which Mr Warry had assumed, against a known background of rampant VAT fraud in Chapter 6’s business sector, of checking the due diligence procedures on all of Chapter 6’s deals. If Mr Warry had given the matter any real thought, and proper consideration, he would have concluded (as he now appreciates) that these deals were simply too good to be true, involving features such as low margins on what were high-value, commercially incredible, self-financing, exclusively back-to-back deals, all taking place at the end of Chapter 6’s VAT period, and involving a substantial increase in turnover, a “funny” offshore bank account and dubious finance. I am entirely satisfied that Mr Warry’s conduct in this regard involved such gross negligence, or total incompetence, in the discharge of his assigned functions as a director as to make Mr Warry unfit to be concerned in the management of a company.

What then should the period of disqualification be? It is desirable, in the interests of legal certainty, and for the purpose of facilitating settlements in other cases, that there should be a consistency of approach to the disqualification of directors in cases of MTIC fraud. Without seeking to provide a straight jacket for judges in later cases, I shall attempt to provide some guidance.

In my judgment, the threat of MTIC fraud is so persistent, and so pervasive, and the loss to the revenue of the state is potentially so great, that I cannot conceive of any case in which disqualification for a period in the bottom bracket (of 2 to 5 years) would be appropriate.

In any case where the respondent director has been knowingly involved, and has played a significant role, in MTIC fraud, then a period of disqualification in the top bracket (of over 10 years) should be imposed. This is also likely to be appropriate in cases where the director has wilfully closed his eyes to MTIC fraud.

In Corry, Judge Pelling imposed an 11 year period of disqualification; and I consider that this should be the minimum period in such cases. It can be justified in Corry because the defendant in that case had not attended the trial, and had not sought to justify his conduct in court. Where a defendant does so unsuccessfully, then such conduct may only serve to reinforce his unfitness to be concerned in the management of a company, and it is likely to justify a period of disqualification of 12 years or more.

In any case where it is proved that the respondent director did not actually know but (without wilfully closing his eyes to the obvious) ought to have known of the MTIC fraud, the period of disqualification should be within the middle bracket (of more than 5 and up to 10 years). Absent extenuating circumstances, in my judgment, in such a case the disqualification period is likely to fall in the top half of that bracket, and thus between seven-and-a-half and 10 years. In Ahmed, the extenuating circumstances of the director’s youth and lack of business experience at the time of the relevant events were held to justify a disqualification period of seven-and-a-half years despite the seriousness of the findings of unfitness made against him. But for those factors, in my judgment, a longer period of disqualification would have been justified.

In the present case, the first defendant offered, and the Secretary of State accepted, a disqualification period of 12 years. He did so on the basis that Chapter 6 had participated in transactions which were connected with the fraudulent evasion of VAT, and that such connections were something he should have known about. The first defendant also accepted that he ought to have been aware that MTIC fraud was rife in the trade in wholesale mobile phones in which Chapter 6 was engaged, and that he was aware, or ought to have been aware, of the dangers of trading in an area at risk of MTIC fraud. The first defendant also accepted that he had permitted Chapter 6 wrongfully to claim the sums of £1,599,593 and £54,285 from Revenue & Customs.

I am satisfied that a 12 year disqualification period is appropriate to such conduct, provided that the first defendant wilfully closed his eyes to such matters. I am satisfied that such a conclusion is amply justified on the evidence which has been placed before me. The expressions “should have known” and “ought to have known” are ambiguous as to whether or not the director to whom they are being applied has wilfully shut his eyes to the obvious, because he did not wish to know of the connection between the transactions in which the company was participating and the fraudulent evasion of VAT. In my judgment, it would be desirable if, in the future, the terms of any disqualification undertaking avoid any such ambiguity, and make it clear whether or not the director is accepting that he deliberately shut his eyes to the obvious.

In the present case I have found that Mr Warry did not deliberately shut his eyes to the obvious. Rather, the basis for my finding of unfitness is gross negligence, amounting to total incompetence, in the discharge of the duties expressly assigned to Mr Warry. In my judgment, the starting point is therefore the top half of the middle bracket (and thus between seven-and-a-half to 10 years).

The Secretary of State urges upon me a period of disqualification at the very top end of this range, a period of 10 years. This is said to be consistent with the period of disqualification for 12 years accepted by the first defendant, on the basis that he was also guilty of unfitness in his conduct of the trading activities and business practices of a second company, Buzz Talk, as well as at Chapter 6. However, this submission is founded upon the premises (which I have rejected): (1) that Mr Warry was an active participant in transactions connected with the fraudulent evasion of VAT; and (2) that if he did not do so with actual knowledge of that connection, Mr Warry, at the very, least, wilfully shut his eyes to the obvious.

In my judgment, on the particular facts of the present case, the starting point should be a period of disqualification of seven-and-a-half years; but I consider that in this case there are particular extenuating features and circumstances which justify reducing this period to one (at the lower end of the middle bracket) of 6 years. In this connection, I bear in mind the following: (1) My findings that: (a) Mr Warry was not personally involved, and did not actively participate, in these fraudulent deals; (b) he did not know, and did not wilfully shut his eyes to the fact, that these deals were connected with the fraudulent evasion of VAT, or involved MTIC fraud; and (c) at the time when he was pressing Chapter 6’s claims for the repayment of input tax in January 2007, Mr Warry still did not consider those claims to be wrongful. (2) At the time of these deals, in May and August 2006, Mr Warry was 59 years of age and had not previously been involved in any underhand or dubious, still less any dishonest or fraudulent, business practices or activities. (3) Mr Warry neither derived, nor stood to derive, any personal, financial or other advantage or gain from this MTIC fraud. (4) Since the repayment claims were disallowed by Revenue & Customs, it has suffered no direct financial loss from Chapter 6’s involvement in this particular MTIC fraud. Miss Linklater relies upon the role played by Chapter 6 as a broker in the supply chains of the overall MTIC fraud, and upon Mr Warry’s acceptance that the total amount of tax losses in the supply chain of the contra-trader, A-Z Mobile Accessories, was just over £47 million. But I do not consider this to be a relevant factor when considering the period of disqualification to be applied to Mr Warry, given his ignorance of the connection of the transactions in which Chapter 6 was engaged to MTIC fraud, still less the details of the fraud itself. (5) Had Mr Warry not completed and submitted the VAT return for the period ended May 2006, the first defendant (or someone else on his behalf) would have done so, as happened with the next VAT return for the following quarter ended August 2006. (6) I have no doubt that Mr Warry is a chastened, and much better informed, man as a result of his experience with the affairs of Chapter 6 and his involvement in this litigation, and that he will be very much more alive to the risks of VAT fraud generally, and MTIC fraud in particular, and will strive hard to avoid being dragged into such dishonest practices in the future. (7) The explanation for the matters giving rise to my finding of unfitness is Mr Warry’s pre-occupation with his mother’s terminal illness. (8) Mr Warry is now almost 67 years of age. I accept his submission that because he is approaching the end of his working life, any period of disqualification will weigh much more heavily on him than it would upon a younger man, with many more years left before retirement. I also acknowledge that because of his age, the risk to the public from Mr Warry being entitled to act as a director is correspondingly reduced.

For all of these reasons, I will disqualify Mr Warry for period of 6 years.

So far as the issue of principle is concerned, this is a case which the Secretary of State has had to bring. The Secretary of State has not secured the 10 year period of disqualification which he was seeking; but Mr Warry has been demonstrated to be unfit for the purposes of section 6 of the 1986 Act, and the court has disqualified him for 6 years. That is a period within the same bracket, albeit at the other end of the bracket, of disqualification which the Secretary of State had been seeking. I am told that there had been no offer by Mr Warry to accept any lesser period of disqualification than 10 years; and, in those circumstances, it seems to me quite clear that it is the Secretary of State who has been the successful party. I can identify no reason why costs should not follow the event; and I will therefore order Mr Warry to pay the Secretary of State’s costs of these proceedings, to be the subject of a detailed assessment on the standard basis, if not agreed.

The Secretary of State also seeks an order for a payment on account of those costs of £25,000. That is the same sum as I have already ordered the first defendant to pay on account of costs. I have no doubt that that is a reasonable and proportionate sum to order to be paid on account. The normal period for payment is 14 days from the date of the court’s order; but having heard what Mr Warry has had to say about his financial circumstances, I propose to require that payment on account to be made, not in 14 days from today, but 28 days from today, which will take it to 24 March 2014. Within that extended period, Mr Warry can seek to put forward a proposal to the Secretary of State for some form of instalment payments; and if he cannot achieve anything in that regard, he can consider making an application, supported by evidence of his financial circumstances, to one of the Chancery District Judges in this District Registry, seeking an extension of the time for payment. At this stage, it seems to me that the most that I should do is to allow Mr Warry twice the normal period of time to make that interim payment.