The Official Receiver v Andrew Anthony Kelly

Contents

This is an application brought by the Official Receiver by Claim Form dated 10 December 2019 seeking a Disqualification Order under s. 6 of the Company Directors Disqualification Act 1986 (“the CDDA 1986”) against Andrew John Kelly (“Mr Kelly”) in respect of Mr Kelly’s conduct as a director of Walmsley Ash Ltd, formerly known as Balmoral Ltd (“the Company”).

The Official Receiver appeared by Ms Jennifer Newstead Taylor of Counsel. Mr Kelly appeared in person.

The trial was due to commence on Monday, 27 April 2023. However, on Friday, 24 April 2023, Mr Kelly lodged an application with the Court seeking an adjournment of the trial on the grounds that he was suffering from ill health. Mr Kelly did not attend at the commencement of the trial on 27 April 2023. Nevertheless, I gave consideration to his application for an adjournment, but was not satisfied that the evidence in support thereof satisfied the guidance set out in Levy v Ellis Carr [2012] EWHC 63 (Ch) with regard to the evidence generally required to support an application for an adjournment on the grounds of ill-health. However, I considered that the appropriate course was to adjourn the commencement of the trial to 2 PM on Tuesday, 18 April 2023 in order to provide Mr Kelly with a final opportunity to attend trial, either in person or remotely, and/or to provide further evidence in support of his application. I directed that any further evidence should be filed and served by 1 PM on 18 April 2023, and that if Mr Kelly should wish to attend remotely by CVP, then he should provide his contact details to the Court.

Mr Kelly did not attend at Court at 2 PM on Tuesday, 18 April 2023, and nor did he provide his contact details to the Court to enable him to attend remotely. However, he did write to the Court indicating that he was seeking a doctor’s appointment and to say that he wished to pursue his application for an adjournment of the trial, also raising a further potential ground for seeking an adjournment, namely that his Solicitors had only recently come off the record and he was without legal representation. I considered the position at 2 PM on Tuesday, 18 April 2023, and gave an extempore judgment dismissing the application for an adjournment for the reasons set out in that judgment. I directed that the trial should commence at 10:30 AM on Wednesday, 19 April 2023, and that Mr Kelly should be given a further opportunity to attend remotely should he prefer to do so instead of attending in person.

In the event, Mr Kelly did attend remotely by CVP at 10:30 AM on Wednesday, 19 April 2023, and the trial then proceeded with Ms Newstead Taylor opening the case for the Official Receiver. Mr Kelly attended, again remotely, on 20 and 21 April 2023. For the reasons referred to below, the Official Receivers’ witnesses did not attend for cross examination, but Mr Kelly did tender himself for cross examination, and was cross examine by Ms Newstead Taylor. The trial concluded with submissions on 21 April 2023. I did not, during the course of the trial, detect any signs of ill-health on Mr Kelly’s part that hindered his ability to properly participate in the proceedings. Mr Kelly was invited to attend in person on 20 and 21 April 2023, but indicated a preference to attend remotely.

The conduct on the part of Mr Kelly that it is alleged by the Official Receiver makes him unfit to be concerned in the management of a company in accordance with s. 6 (1) (b) of the CDDA 1986 is that:

The Official Receiver’s original allegation of unfitness covered three VAT periods, namely August 2004, May 2006, and July 2006. However, the allegation is now limited simply to the May 2006 VAT Return.

The Official Receiver’s application is supported by the following evidence, namely:

Mr Beasley has retired during the course the present proceedings. Mr Smith has effectively adopted Mr Beasley’s report in his own third report, as well as updating the evidence in the light of the Order of DDJ Brightwell (as he then was) dated 20 October 2022. During the course of the trial, I granted permission for Mr Beasley’s report to be adopted in this way.

Paragraph 9 of DDJ Brightwell’s Order dated 20 October 2022 (“the Brightwell Order”) required Mr Kelly to confirm which of the Official Receiver’s witnesses were required to attend for cross examination by 4 PM on the day 28 days before trial. Mr Kelly did not do so. On 5 April 2023, DJ Richmond acceded to an application made by the Official Receiver for Mr Smith’s and Mr Siddle’s attendance at trial to be excused.

In these circumstances, the evidence of Mr Smith and Mr Siddle in the form of their third report and affirmation respectively was formally put in evidence without them attending for cross examination, and was not, to that extent, challenged.

In defence of the application seeking to disqualify him as a director, Mr Kelly filed and served the following evidence, namely:

As I have already mentioned, Mr Kelly did tender himself cross examination, and was cross examined by Ms Newstead Taylor at some length. Prior to Mr Kelly being cross examined, I explained to him the purpose of cross examination, and that Ms Newstead Taylor was likely, during the course of cross examination, to seek to undermine his evidence and case. On the other hand, I explained to Mr Kelly that if he were not cross examined, then I would be bound to place limited weight on his affidavits and witness statement. In response, Mr Kelly made clear that he wished to be cross examined.

The claim in respect of import tax in the sum of £1,748,687.50 made by the Company’s May 2006 VAT Return was rejected by HMRC and became the subject matter of an appeal by the Company to the First-tier Tribunal Tax Chamber (“FTT”). This appeal to the FTT was unsuccessful. In its decision dated 7 March 2016 (“the 2016 FTT Decision”), and in rejecting the appeal, the FTT made a number of findings adverse to the Company and Mr Kelly in respect of the Company’s involvement, by the 05/06 Deals, in transactions involving the purported sale of mobile phones, which were connected with the fraudulent evasion of VAT, and in particular MTIC (Missing Trader Intra-Community) fraud.

These adverse findings go to the heart of the matters alleged to determine unfitness in the present case given that the transactions and VAT Return relating thereto under consideration by the FTT are the same as those under consideration in the present case.

By paragraph 1 of the Brightwell Order, on 20 October 2022, on the hearing of an application by the Official Receiver to strike out parts of Mr Kelly’s evidence in the light of the 2016 FTT Decision, DDJ Brightwell ordered that Mr Kelly was: “debarred from denying that between 30 May 2006 and 1 June 2006 the Company participated in three transactions, being the 05/06 Deals, which were connected with the fraudulent evasion VAT, as found by the First-tier Tribunal Tax Chamber in its decision Walmley Ash Limited (formerly Balmoral Ltd) v The Commissioners for Her Majesty’s Revenue & Customs [2016] UKFTT 160 (TC).”

Given that the allegations in the present case centre upon the Company’s involvement with transactions related to MTIC fraud, before considering the background to the case in any detail and the Official Receiver’s case in respect thereof, it is necessary to explain what MTIC fraud involves. A helpful judicial description thereof is to be found in Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (Ch), per Christopher Clark J (as he then was) at [2]-[3] and [5]-[10], as follows:

“2.

This case concerns what is called “Missing Trader Intracommunity Fraud” (“MTIC fraud”). Anyone reading this judgment is likely to be familiar with this expression, which has been explained in several tribunal and High Court decisions. The classic way in which the fraud works is as follows. Trader A imports goods, commonly computer chips and mobile telephones, into the United Kingdom from the European Union (“EU”). Such an importation does not require the importer to pay any VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There are then a series of sales from B to C to D to E (or more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has received from C, but will claim to deduct (as an input tax) the output tax that A has charged to B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain – E – will then export the goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so Trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chains in question may be quite long. The deals giving rise to them may be effected within a single day. Often none of the traders themselves take delivery of the goods which are held by freight forwarders.

3.

The way that the fraud works is that A, the importer, goes missing. It does not account to HMRC for the tax paid to it by B. When HMRC tries to obtain the tax from A it can neither find A nor any of A's documents. In an alternative version of the fraud (which can take several forms) the fraudster uses the VAT registration details of a genuine and innocent trader, who never sees the tax on the sale to B, with which the fraudster makes off. The effect of A not accounting for the tax to HMRC means that HMRC does not receive the tax that it should. The effect of the exportation at the end of the chain is that HMRC pays out a sum, which represents the total sum of the VAT payable down the chain, without having received the major part of the overall VAT due, namely the amount due on the first intra-UK transaction between A and B. This amount is a profit to the fraudsters and a loss to the Revenue.

…

5.

A jargon has developed to describe the participants in the fraud. The importer is known as “the defaulter”. The intermediate traders between the defaulter and the exporter are known as “buffers” because they serve to hide the link between the importer and the exporter, and are often numbered “buffer 1, buffer 2” etc. The company which export the goods is known as the “broker”.

6.

The manner in which the proceeds of the fraud are shared (if they are) is known only by those who are parties to it. It may be that A takes all the profit or shares it with one or more of those in the chain, typically the broker. Alternatively the others in the chain may only earn a modest profit from a mark up on the intervening transactions. The fact that there are a series of sales in a chain does not necessarily mean that everyone in the chain is party to the fraud. Some of the members of the chain may be innocent traders.

7.

There are variants of the plain vanilla version of the fraud. In one version (“carousel fraud”) the goods that have been exported by the broker are subsequently re-imported, either by the original importer, or a different one, and continue down the same or another chain. Another variant is called “contra trading”, the details of which are explained in paragraphs 9 and 10 of the judgment of Burton J in R (on the application of Just Fabulous (UK) Ltd) v HMRC [2008] STC 2123 . Goods are sold in a chain (“the dirty chain”) through one or more buffer companies to (in the end) the broker (“Broker 1”) which exports them, thus generating a claim for repayment. Broker 1 then acquires (actually or purportedly) goods, not necessarily of the same type, but of equivalent value from an EU trader and sells them, usually through one or more buffer companies, to Broker 2 in the UK for a mark up. The effect is that Broker 1 has no claim for repayment of input VAT on the sale to it under the dirty chain, because any such claim is matched by the VAT accountable to HMRC in respect of the sale to UK Broker 2. On the contrary a small sum may be due to HMRC from Broker 1. The suspicions of HMRC are, by this means, hopefully not aroused. Broker 2 then exports the goods and claims back the total VAT. The overall effect is the same as in the classic version of the fraud; but the exercise has the effect that the party claiming the repayment is not Broker 1 but Broker 2, who is, apparently, part of a chain without a missing trader (“the clean chain”). Broker 2 is party to the fraud.

8.

HMRC will have records of whatever returns have been made to them by companies registered for VAT and will know what has been accounted to them and what has not. Using those records and information provided by VAT registered companies they are able to trace a chain of transactions in respect of which output tax received has been accounted for and claims to deduct imput tax have been made. They can, thus, trace back from exporter E to (say) importer A. But at some stage the trail is likely to go cold. In the classic version of the fraud it will do so when HMRC gets to A because A and its documents have disappeared. HMRC will know that A has defaulted on its obligations in respect of VAT since it will not have received any of the output tax paid by B to A (as accounted for by B).

9.

However, HMRC may not be in a position to know whether A is in fact the importer or whether there may have been earlier companies in the chain, either as purchasers or transferees, such that its full length was (say) Y – Z – A – B etc. In that example there will have been a defaulter (A), who will not have accounted to HMRC for VAT, but there will also have been an importer (Y). Whether or not Y or Z are liable to account for VAT may depend on the exact nature of the dealings between Y, Z and A, between whom money may not have changed hands.

10.

In a chain of transactions between traders all of whom are honest each trader will account to HMRC for the output tax received (in respect of which the trader acts, broadly speaking, as agent for HMRC: Elida Gibbs Ltd v Customs & Excise Comrs [1997] QB 499), less any input tax incurred, which he will claim from HMRC. He will, ordinarily, need most of the money received from his sales to pay his supplier and the VAT due. The full extent of any chain will be patent. Where there is dishonesty the position is different. It is in the interests of those who seek to defraud HMRC of VAT to hide the full extent of any chain by the use of buffer companies. Such persons lack any interest in seeing that they, or the companies through whom they operate, are able to account to HMRC for all the VAT that they should.”

In the present case, in respect of the transactions in question, it is the Official Receiver’s case that, to use the terminology in Red 12 Trading v HMRC at [5] and [7], the Company acted as the broker.

The reclaiming of input tax in respect of VAT is governed by Ss. 24, 25, and 26 of the Value Added Tax Act 1994 (“VATA”) and Reg 29 of the VAT Regulations 1995, which give effect in domestic law to Articles 167 and 168 of Council Directive 2006/112/EC. In essence, there is a right to deduct from VAT payable, or to reclaim VAT due or paid, in respect of supplies of goods and services to the relevant party registered for VAT.

There is a body of European case law concerning the circumstances in which the relevant tax authority (in the present case HMRC) has a right to refuse repayment of input tax.

Earlier cases of the Court of Justice had held that:

In Axel-Kittel v Belgium; Belgium v Recolta Recycling [2006] ECR 1-6161; [2008] STC 1537 at [51]-[61], the Court of Justice considered the middle ground between the two cases referred to above where the taxpayer in question seeking to claim the input tax was not himself seeking to evade tax, but did have knowledge or means of knowledge of a fraud by someone else. In essence, the Court of Justice held that where, having regard to objective factors, the taxable person knew or should have known that he was participating in a transaction connected with the fraudulent evasion of VAT there would not be a right to deduct input tax in relation to the transactions concerned even where the criteria of supplies and economic activity were met (“the Kittel principle”).

The Kittel principle has been discussed and applied by the English courts in a number of cases:

S. 6(1) of the CDDA 1986 provides:

“6.

– Duty of court to disqualify unfit directors of insolvent companies

Re Howglen Ltd, Secretary of State for Trade and Industry v Reynad [2002] 2 BCLC 625 at 629, per Mummery LJ, provides authority for the proposition that a defendant director’s conduct in the disqualification proceedings can be taken into consideration on the issue of fitness or in fixing the disqualification period.

It follows from the wording of S. 6 (1) CDDA 1986 that the Official Receiver must satisfy the Court that Mr Kelly: (i) was a director; (ii) of a company which became insolvent; and (iii) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company. In the present case, there is no issue that Mr Kelly was a director of a company which became insolvent. The final unfitness issue is very much in issue.

As the conduct said to demonstrate unfitness took place before 1 October 2015, the now repealed s. 9 of the CDDA 1986 still applies (see paragraph 95 below), which requires the Court when determining unfitness to have regard to the matters mentioned in Part I of Schedule 1 to the CDDA 1986 and, where the company has become insolvent, to the matters mentioned in Part II of that Schedule. However, Re Amaron Ltd [1998] BCC 264 at 268G-H is authority for the proposition that the fact that a ground is not specified in Schedule 1 to the CDDA 1986 does not militate against its importance. On behalf of the Official Receiver, it is submitted that Re Amaron remains good law and, accordingly, allegations of unfitness must be considered on their merits whether or not they fall within the Schedule 1.

The test for unfitness is helpfully explained in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 at 174 G-H, per Dillon LJ, as follows:

“The test laid down in s.6 … is whether the person’s conduct as a director of the company or companies in question “makes him unfit to be concerned in the management of a company.” These are ordinary words of the English language and they should be simple to apply in most cases. It is important to hold to those words in each case. The judges of the chancery division have, understandably, attempted in certain cases to give guidance as to what does or does not make a person unfit to be concerned in the management of a company. Thus in Re Lo-Line Electric Motors Ltd, Sir Nicolas Browne-Wilkinson V-C said: “Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt in extreme cases of gross negligence or total incompetence disqualification could be appropriate.” Then he said that the director in question: “has been shown to have behaved in a commercially culpable manner in trading through limited companies when he knew them to be insolvent and in using the unpaid Crown debts to finance such trading.” Such statements may be helpful in identifying particular circumstances in which a person would be clearly unfit. But there seems to have been a tendency, which I deplore, on the part of the Bar and possibly also on the part of the Official Receiver’s Department, to treat the statements as judicial paraphrases of the words of the statute, which fall to be construed as a matter of law in lieu of the words of the statute. The result is to obscure that the true question to be tried is a question of fact, what used to be pejoratively described in the Chancery Division as “a jury question.”

In Re Structural Concrete Ltd [2001] BCC 578 @ 586 Blackburne J said:

“[A]ssuming … that the qualifying conditions laid down by s 6(1)(a) are satisfied (i.e. that the person against whom a disqualification order is sought is or has been a director of a company which has at any time become insolvent) the requirement, laid down by s6(1)(b), “that his conduct as a director of that company … makes him unfit to be concerned in the management of a company” involves a decision by the court whether the conduct upon which the Secretary of State or Official Receiver relies .., taking into account any extenuating circumstances has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies. See Re Grayan Building Services. That decision involves a three stage process: (1) do the matters relied upon amount to misconduct, (2) if they do, do they justify a finding of unfitness; and (3) if they do, what period of disqualification, being not less than two years, should result?”

The purpose of the CDDA is to protect the public and encourage higher standards in the management of companies – see Re Westmid Packing Services Ltd [1998] BCC 836 at 841H. It is well established that this is achieved in three ways:

The burden of proof in disqualification proceedings is on the applicant. The standard of proof is the civil standard. However:

In considering whether a defendant director’s conduct is such as to make him unfit, the Court is entitled to have regard to the fact that a director cannot simply fail to involve himself in the affairs of a company and/or fail to monitor, supervise or keep himself informed of the same. As stated by HHJ Cooke in Secretary of State v Earley (unreported) and approved by HHJ Behrens in Re Brampton Manor (Leisure) Ltd [2009] EWHC 1796 at [58 (2)]:

“where a director simply fails to undertake, whether through lack of knowledge, incompetence or whatever, those duties which he ought to undertake, he is as guilty as those who do positive wrong, and, if anything, probably even more dangerous.”

The allegations of unfitness in the present case, as framed, include allegations that Mr Kelly “caused or allowed” the Company act in the ways said to demonstrate unfitness on his part. As to the expressions “caused” and “allowed”:

If the Court concludes that the defendant director’s conduct does make him unfit to be concerned in the management of a company, then the mandatory nature of s. 6(1) requires the Court to make a disqualification order, and the question then arises as to the period of disqualification.

Under S.6 (4) of the CDDA 1986: “…the minimum period of disqualification is 2 years, and the maximum period is 15 years.”

In Re Sevenoaks Stationers (Retail) Ltd (supra), the Court of Appeal gave guidance as to the appropriate duration of a disqualification order, specifying: 2 – 5 years for not very serious cases, 6 – 10 years for serious cases not meriting the top bracket and 10 – 15 years for particularly serious cases.

In Re Westmid Packing Services Ltd (supra) at 843H, Lord Woolf MR expressed the view that fixing the duration of a disqualification order was:

“[an] exercise that is … little different from any sentencing exercise. The period of disqualification must reflect the gravity of the offence. It must contain deterrent elements. That is what sentencing is all about, and that is what fixing the appropriate period of the disqualification is all about … We do not consider that it would send out a wrong message to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for the mitigating factors, in much the same way as a sentencing court would do.”

In Secretary of State v Corry (Unreported, 9 January 2012), HHJ Pelling QC considered the interplay between VAT fraud and directors disqualification proceedings. Specifically, he considered the application, in the context of directors disqualification proceedings, of the Kittel principle as undertaken by the Tax Tribunals when hearing appeals against decisions denying entitlement to input tax on the grounds that the trader has become involved in MTIC fraud. HHJ Pelling QC, at [7], held that:

“7.

... It seems to me that the Secretary of State is entitled to seek to demonstrate unfitness by establishing first that the company concerned is to be treated as knowingly involved in MTIC fraud by carrying out the steps that would normally be expected in a Kittel inquiry, and then that such knowledge as is to be attributed to the company was, in fact, knowledge of the relevant director for the purpose of bringing a disqualification application.”

In Secretary of State for Business Innovation and Skills v Warry [2014] EWHC 1381 (Ch), HHJ Hodge QC, correctly in my judgment, endorsed and applied HHJ Pelling QC’s approach, adding this gloss at [27]:

“27.

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.”

In Secretary of State for Business Innovation and Skills v Warry, HHJ Hodge QC provided some helpful guidance, which I endorse, with regard to period of disqualification where the relevant company has been involved in transactions connected to MTIC fraud:

“49.

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.

50.

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

51.

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.

52.

In any case where it is proved that the respondent director did not actually know but (without wilfully closing his eyes to the obvious) ought to have known of the MTIC fraud, the period of disqualification should be within the middle bracket (of more than 5 and up to 10 years). Absent extenuating circumstances, in my judgment, in such a case the disqualification period is likely to fall in the top half of that bracket, and thus between seven-and-a-half and 10 years. 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.”

The following individuals and entities are relevant to the present proceedings:

The Company was incorporated on 30 January 2002 under company number 04363953. The Defendant was, from incorporation, the Company’s sole registered director and sole shareholder. The Company’s main business activity was the wholesale of mobile phones and cameras.

On 1 July 2002, the Company was registered for VAT with VRN 784 1497 93.

On 29 July 2002, HMRC undertook a pre-registration visit to validate the bona fide nature of the business of the Company.

On 14 January 2003, the Company’s trading address changed to 66 The Qube, Scotland Street, Birmingham, B1 2EJ (“66 The Qube”).

On 16 January 2003, HMRC visited the Company, the visit being triggered by a suspected MTIC trader seeking to verify the Company through HMRC’s “Redhill” verification procedure. It is the Official Receiver’s case, evidenced by contemporaneous correspondence, that, at this visit, the Company was warned about the high level of risk in its trading activity, that conditions were agreed for the Company’s future trading, and that the Company was fully advised as to the importance of verifying VAT registration numbers (“VRNs”) via the Redhill verification procedure. The conditions agreed were subsequently set out in correspondence dated 25 March 2003.

In the period 21 - 25 March 2003, the Company undertook transactions with a net value of over £10 million. As evidenced by contemporaneous visit reports, between 26-31 March 2003, HMRC investigated these transactions. This investigation included attendances upon Mr Kelly, and Beverley Tookey (“Ms Tookey”), an employee of the Company who Mr Kelly said had previously been involved with him in a business concerning the retail of mobile phones, and who was Company Secretary of the Company between 1 March 2003 and 4 August 2003. The visit reports record HMRC as having been informed that the relevant transactions took place whilst Mr Kelly had been away from the business in order to sort out personal problems, and after he had asked Ms Tookey to “hold the fort” for him, and that Ms Tookey had been responsible for involving the Company in the transactions. The transactions concerned what purported to be purchases primarily from an entity called Conductive, and sales to SL Logistics, with input tax of £1,784,249.30 on such purchases. However, the evidence available to HMRC indicated that Conductive and another supplier involved had been “hijacked”, i.e., their VRN had been falsely used by a third party for the transactions, and that as the Company had no available bank account, SL Logistics paid the suppliers directly. There was no evidence of the Company having carried out any checks on the suppliers.

In consequence of its involvement in these transactions, on 31 March 2003, HMRC told the Company that it was being de-registered for VAT to protect the revenue. On 1 April 2003, WJB Chiltern challenged Balmoral’s de-registration, with the result that on 30 April 2003, the Company’s VRN was re-instated subject to conditions.

On 2 October 2003, HMRC informed the Company that it had been involved in a supply chain with a hijacked company. The relevant correspondence contained a warning to the Company that if it continued to trade in a supply chain with businesses that represented a serious risk to the collection of VAT, and if it could not demonstrate that it had taken reasonable steps to verify the legitimacy of its suppliers and customers, then HMRC may require security from it.

On 4 February 2004, HMRC wrote to the Company noting their belief that the Company had ceased trading, as three of its VAT Returns were outstanding, and stating that it would therefore be de-registered. Shortly thereafter, the Company was then de-registered for VAT. On 17 February 2004, Mr Kelly wrote to HMRC stating that the Company required its VRN. On 20 February 2004, Mr Kelly wrote to HMRC requesting re-consideration of the decision to de-register the Company for VAT. On 6 April 2004, HMRC upheld its decision to de-register the Company.

On 29 April 2004, Mr Kelly on behalf of the Company applied for a new VRN. On 20 May 2004, HMRC undertook a pre-registration visit to check the bona fides of the Company’s business. With effect from 6 February 2004, the Company was re-registered under VRN 833 3270 47 and placed on monthly returns.

On 22 June 2004, HMRC sent the Company an MTIC fraud advice letter, advising as to the prevalence and serious problems caused by MTIC fraud, and as to the Redhill verification process. The correspondence specifically identified mobile phones as being amongst the commodities frequently involved in MTIC fraud.

Between 22 August 2004 and 1 June 2006, HMRC sent to the Company a number of veto letters, informing the Company of the de-registration for VAT of specified companies and warning the Company that any input tax claimed in relation to transactions post-dating the de-registration might fail to be verified.

One such veto letter, dated 23 August 2004, related to Direct Phones Ltd (“Direct”). As recorded in a Tribunal decision dated 14 May 2008 on an unsuccessful appeal brought by the Company against the refusal of HMRC to admit a claim of £2,017,336 input tax in relating thereto, between 17 and 20 August 2004, the Company had bought as many as 26 consignments of mobile phones from Direct in circumstances in which the identity of Direct had been hijacked. After the Company had claimed credit for the input tax incurred in the purchases in question from Direct, and credit in respect thereof had been allowed, HMRC subsequently issued an assessment dated 3 October 2005 to recover the input tax in question. In the event, HMRC successfully relied at the above appeal not on the hijack of Direct’s identity, but upon the fact that none of the invoices which supported the Company’s claim for input tax contained Direct’s VRN, with the consequence that they were not valid VAT invoices.

On 25 August 2004, Mr Kelly telephoned HMRC’s Officer Emery cancelling a visit arranged due to a hijack concern, i.e. relating to Direct.

On 20 October 2004, HMRC re-issued their warning letter dated 2 October 2003 referred to in paragraph 49 above.

On 21 October 2004, following the Company’s involvement in a further deal chain resulting in a tax loss to the Revenue, identified as the deal chain involving Direct, HMRC required the Company to give security by guarantee or cash deposit in the sum of £1,541,300.00 for the payment of any VAT due then or in the future.

On 26 October 2004, Dass Solicitors, on behalf of the Company, appealed HMRC’s decision requiring the Company to give security in the sum of £1,541,300.00. On 10 August 2005, the FTT dismissed the Company’s appeal.

On 4 October 2005, HMRC disallowed input tax in the sum of £2,017,366.92 on the grounds that the Company’s purchase invoices in the 08/04 VAT period did not contain the supplier’s VAT number and, consequently, did not qualify as valid VAT invoices (“the 08/04 Decision”). This related to the matters referred to in paragraph 54 above. On 23 January 2006, HMRC wrote correcting the letter dated 4 October 2005 and clarifying that the correct amount disallowed was £2,107,453.50 and not £2,017,366.

On 31 October 2005, Dass Solicitors, on the Company’s behalf, appealed the 08/04 Decision.

On 30 November 2005, HMRC informed the Company that its 08/05 and 09/05 VAT Returns had been selected for extended verification in order to establish the veracity of the repayment claims, albeit that a £65,701.94 repayment claim for 08/05 was released on a without prejudice basis.

On 14 February 2006, HMRC informed the Company that its 12/05 VAT Return had been selected for extended verification in order to establish the veracity of the £41,561.63 repayment claim made thereby, albeit the repayment was again released on a without prejudice basis.

On 2 March 2006, HMRC informed the Company that its VAT Return for 01/06 was subject to ongoing verification and requested information about three sales to Spanish Global Assistance Trade BV (“SGA”). On 16 March 2006, Mr Kelly responded to HMRC providing further information. Notwithstanding, on 30 March 2006, HMRC informed the Company that its three sales to SGA did not qualify for zero rating and that, in the absence of further information, VAT at the standard rate would be due. On 5 April 2006 and 10 April 2006, Mr Kelly provided further information.

On 5 April 2006, Mr Kelly wrote to HMRC requesting a change in the Company’s trade classification code to the same as its sister company Balmoral Solutions Ltd (“Solutions"). The grounds for the request were stated to be that the Company was a wholesaler, and not a retail company, trading in the same goods as Solutions, save that the Company dealt solely with exports.

On 28 April 2006, HMRC informed the Company that it had discovered, as a result of extended verification into the 01/06 VAT Return, that all three of the transactions selected for verification started with defaulting traders resulting in a loss to the revenue, together exceeding £1,094,800. The transactions all involved sales to SGA, whose Dutch VAT registration had been withdrawn with effect from 15 December 2005 with the consequence that any further supplies made to SGA would carry the standard rate of VAT.

By their correspondence on 28 April 2006, HMRC directed the Company to Notice 726 relating to joint and several liability in the supply of specified goods. Specifically, HMRC advised that:

“As explained in Notice 726, where you have genuinely done everything you can to check the integrity of the supply chain, can demonstrate you have done so, of any indications that VAT may go unpaid and have no other reason to suspect VAT would go unpaid, the joint and several liability measure will not be applied to you.

However, if you knew, or have reasonable grounds to suspect, that VAT would go unpaid then the measure can be applied to you”

On 31 May 2006, the Company entered into the three deals for the purchase of mobile phones (the 05/06 Deals) that comprise the transactions connected with the fraudulent evasion of VAT the subject matter of the allegations of unfitness in the present case. These can be summarised as follows:

The prices paid by the Company to International in respect of the three transactions were, respectively, £2,716,500 plus VAT, £3,638,000 plus VAT and £3,638,000 plus VAT. In each case, the mobile phones were sold on to Online in Spain for £2,944,500, £3,952,000 and £3,952,000 respectively, with no VAT being payable on the sale for export.

Each of the three transactions involved exactly the same parties in the same position in the chain as follows: United Traders (EU) ›– West 1 ›- International ›– the Company ›– Online. The freight forwarder for each of the deals was ASC until the goods were exported to KPP International Logistics, a freight forwarder in Rotterdam.

Each of the payments made through the chain and in respect of each transaction therein were effected through FCIB. The way in which the transactions, here described as deals 1, 2 and 3 respectively, took place were helpfully described in paragraph [172] – [177] of the 2016 FTT Decision, as follows:

“172.

Deals 2 and 3 are identical in terms of goods and quantity and the payment descriptions do not include invoice numbers so although the Officers have conflated the payments in deals 1 and 2, it could equally be a conflation of deals 1 and 3 with deal 2 standing alone. It makes no difference. The funds for the conflated two deals appear to move in tandem.

173.

In each case the funds moved in a circular fashion through the known participants in the transaction chain on 31 May 2006. However, in addition in every case Hunzie introduces the funds to Online from outwith the United Kingdom.

174.

In deals 1 and 2 the payments were all made within one hour. In those deals Online, which had been invoiced a total of £6,896,500 by Balmoral (zero rated), paid that sum to Balmoral at 20:09:03 having received £7,000 more than that from Hunzie three minutes earlier. Balmoral owed International £7,466,537 (inclusive of VAT) but paid only £6,896,000 at 20:12:04. International who owed West 1 £7,462,425 paid £6,896,500 at 20:15:17 and West 1 in turn then paid that sum to United Traders. Then at 21:03:13, United Traders paid more than £5 million to Hunzie and in excess of £1.5 million to a Spanish company, which ultimately remitted the funds to the USA.

175.

There is therefore a shortfall in Balmoral’s payments to International and indeed onward through the chain. There are no other payments through FCIB in this matter.

176.

In deal 3 all payments were made within 18 minutes. The chain started at Hunzie who paid £3,956,000 to Online at 21:06:02 who paid £3,952,000 to Balmoral at 21:09:02, which sum then passed through West 1 to United Traders finishing back at Hunzie at 21:24:02. Again, because Balmoral was paid the sum due on a zero rated supply and the same sum passed through the chain, no other party was paid in full.

177.

Crucially, it has been identified that all of the transactions utilised the same IP address.  HMRC officers have established that there is a minimum of a three minute gap between any single transactions from an IP address (ie the refresh).  That is the gap each movement of funds except between International and West 1 where it is six minutes in both deal chains.”

On 7 June 2006, HMRC received the Company’s VAT Return for the 05/06 period making a claim for the input tax of £1,748,637.50. On 10 July 2006, the Company’s 05/06 VAT Return was selected for extended verification.

On 21 September 2006, Mr Kelly attended a Means of Knowledge interview in which he confirmed he was the sole director and shareholder of the Company, and maintained that the 05/06 Deals were done by employees not himself.

On 9 October 2006, FCIB accounts were frozen by the Central Bank of the Netherlands on the suspicion that FCIB had aided financial fraud.

On 29 January 2007, HMRC informed the Company that following extended verification it had been established that the 05/06 Deals traced back to defaulting traders resulting in a loss to HMRC exceeding £1.74 million.

On 18 January 2008, HMRC denied the Company the input tax of £1,748,687.50 on the purchase of mobile phones in VAT period 05/06 (“the 05/06 Decision”). Mr Kelly, on behalf of the Company, subsequently appealed this decision.

On 27 February 2008, HMRC informed the Company that in the absence of evidence of continuing intention to trade it would be de-registered for VAT. Further, HMRC adjusted the Company’s VAT Return for the 05/06 period as no records supporting the return had been provided.

On 14 May 2008, the FTT dismissed the Company’s appeal in respect of the 08/04 Decision, and upheld the same as referred to in paragraph 59 above.

On 5 June 2008, Balmoral was de-registered for VAT.

On 3 August 2010, the Company was dissolved, having been struck off the Register of Companies.

On 21 October 2010, despite having been dissolved, a resolution was passed changing the name of the Company from Balmoral Ltd to Walmley Ash Ltd.

On 21 January 2011, on hearing of the Mr Kelly’s application dated 23 November 2010, the name of the Company was restored to the Register of Companies. However, this was on the basis that Mr Kelly had, as recorded on the Order of Registrar Derrett dated 21 January 2011, undertaken, amongst other things, that the Company would not carry on business or operate in any other way other than to take the necessary steps to recover and distribute the refund of VAT from HMRC in respect of the 05/06 VAT return, and thereafter take steps to place the Company into liquidation. The restoration to the Register was to enable the Company to pursue the appeal against the 05/06 Decision on the basis that it would thereafter be wound up.

The appeal to the FTT in respect of the 05/06 Decision was heard between 2 and 4 November 2015. On 7 March 2016, the FTT handed down the 2016 FTT Decision, and dismissed the Company’s appeal finding that, in the 05/06 VAT period the Company and Mr Kelly had participated in transactions that were connected to the fraudulent evasion of VAT. There was no further appeal.

On 30 November 2016, HMRC issued the Company with a Notice of Assessment of Misdeclaration Penalty in respect of the 05/06 Decision. This required the Company to pay £196,727 immediately.

On 16 October 2017, the Company was wound up on a petition presented by HMRC on 24 August 2017.

The Insolvency Service served notice under S. 16 of the CDDA 1986 on Mr Kelly on 27 April 2018, and the Claim Form in the present proceedings was issued on 10 December 2019.

Mr Kelly takes a procedural point that that it is not open to the Official Receiver, in the present case, to rely upon conduct as demonstrating unfitness if that conduct occurred prior to 1 October 2015. His argument is, essentially, that whilst S. 108 of the Small Business, Enterprise and Employment Act 2015 (“SBEEA 2015”) extended the time period for bringing disqualification proceedings as provided for by S. 7(2) of the CDDA 1986 from 2 years to 3 years from when the company became insolvent (in the present case from when it was wound up) where the insolvency event occurred after 1 October 2015 (as in the present case), then the relevant provisions of SBEEA 2015 and the associated implementing statutory instrument are to be construed as having the effect that where, in disqualification proceedings, the Secretary of State or Official Receiver relies upon the new three year limitation period in relation to a company which has become insolvent after 1 October 2015, then he/she can only rely for that purpose upon conduct which took place after 1 October 2015. If that is right then the Official Receiver would not be able to rely upon the conduct that he seeks to rely upon and the claim would fail.

Subject to this preliminary point, there being no issue that Mr Kelly was a director of the Company and that the Company has become insolvent, the real issue is the present case is as to whether the conduct relied upon by the Official Received make Mr Kelly unfit to be concerned in the management of a company (“the Unfitness Issue”).

It follow from Secretary of State v Corry (supra) and Secretary of State v Warry (supra) that where the conduct said to demonstrate unfitness relates to involvement in MTIC fraud, the questions for the Court in deciding the Unfitness Issue are:

As to the above questions going to the Unfitness Issue:

Before addressing the Unfitness Issue, I will deal shortly with Mr Kelly’s preliminary issue.

The preliminary issue identified by Mr Kelly was specifically considered in Secretary of State v Bains (Unreported, October 2018), a decision of HHJ McCahill QC sitting in the Birmingham County Court, where HHJ McCahill QC rejected the argument of the defendant director that where the Secretary of State or Official Receiver relies on the new three year limitation period in relation to a company which has become insolvent after 1 October 2015, the Secretary of State or Official Receiver is confined to relying upon conduct which took place on or after 1 October 2015. Being a County Court decision, this decision is not binding upon me. Nevertheless, I am satisfied that it was correctly decided.

S. 108(1) of the SBEEA 2015 simply provided that, in S. 7(2) of the CDDA 1986, “3 years” was substituted for “2 years”. S. 108(2) then said that S. 108(1): “applies only to an application relating to a company which has become insolvent after the commencement of that subsection.”

The SBEEA 2015 amended and revised other provisions of the CDDA 1986 by Ss. 104, 106 and 110 thereof.

The Small Business, Enterprise and Employment Act 2015 (Commencement No. 2 and Transitional Provisions) Regulations 2015 (“the SBEEA 2015 Regs”) governed the commencement of the SBEEA 2015 and included a number of transitional provisions. So far as S. 108 is concerned, reg 2(e) thereof simply said that S. 108 would come into force on 1 October 2015. No other provision of either the SBEEA 2015 of the SBEEA Regs 2015 sought to restrict the operation of S. 108(1) apart from S 108(2), which, as we have seen, simply provided that the new 3 year time limit would only apply where the relevant company became insolvent after 1 October 2015.

In contrast, in respect of Ss 104, 106 and 110, specific transitional provisions were included in Part 1 of Schedule 1 of the of the SBEEA Regs 2015 as follows:

“2.

The amendments to sections 6 and 8 of the Disqualification Act (as made by section 106 of the Act) in respect of overseas companies apply in respect of a person’s conduct as a director of an overseas company where that conduct occurs on or after 1st October 2015.

3.

Save where conduct is considered by a court or by the Secretary of State under section 5A of the Disqualification Act (as inserted by section 104 of the Act), section 12C of the Disqualification Act (as inserted by section 106 of the Act) and Schedule 1 to the Disqualification Act (as substituted by section 106 of the Act) apply to a person’s conduct as a director where that conduct occurs on or after 1st October 2015.

4.

Sections 15A to 15C of the Disqualification Act (as inserted by section 110 of the Act) apply in respect of a person’s—

These transitional provisions do seek to limit the scope of the relevant sections of SBEEA 2015 to where one is concerned with conduct of the director on or after 1 October 2015. However, I do not see any scope for applying these provisions by analogy to S. 108(1). Had it been intended that the scope of S. 108(1) should be limited to conduct of the director on or after 1 October 2015, then one would have expected there to have been a specific provision in Part 1, Schedule 1 of the SBEEA Regs 2015, so providing, but there is not. In contrast, by S.108(2) the scope of S 108(1) is only limited to those cases where the relevant company became insolvent before 1 October 2015.

In the circumstances, I must reject Mr Kelly’s submission that it is not open to the Official Receiver to rely upon conduct that occurred before 1 October 2015.

The Company became insolvent on 16 October 2017 when it was wound up. The present proceedings were commenced on 10 December 2019, less than three years thereafter, and in time.

It is the Official Receiver’s case that the Company:

It is the Official Receiver’s primary position that the Company knew that the only reasonable explanation for the circumstances in which the 05/06 Deals took place was that they were transactions connected with the fraudulent evasion of VAT.

It is then the Official Receiver’s case that Mr Kelly’s role and position in respect of the Company was such that the Company’s state of mind in respect of these matters is to be attributed to him on the basis that he caused or allowed the Company to act in the way that it did in relation to the 05/06 Deals.

The Official Receiver relies upon a number of particular features and matters in respect of the way that the Company carried on business, and in relation to the circumstances behind the 05/06 Deals, as supporting his case as to the state of knowledge of the Company in relation to the connection of the 05/06 Deals to the fraudulent evasion of VAT, as to the extent to which this should be attributed to Mr Kelly, and thus as to the seriousness of conduct said to demonstrate unfitness on Mr Kelly’s part.

The Official Receiver points to the fact that the Company:

The Official Receiver points to these factors as being typical hallmarks of a company involving itself with the fraudulent evasion of VAT, trading with no appreciable assets but generating turnover running into hundreds of thousands or even millions of pounds in circumstances in which the volume of turnover, rather than profitability, drives the amount of VAT that can be fraudulently extracted. The Official Receiver submits that the Company’s reported turnover of in excess of £40 million between February 2004 and January 2005, and in excess of £10 million in respect of the 05/06 Deals is simply not credible.

The Official Receiver relies upon the fact that the Company traded in mobile phones, and that the 05/06 Deals involved mobile phones, being high value, low bulk goods. These are said to be the types of goods frequently associated with MTIC VAT fraud, because trading results in high transaction costs (leading to large VAT reclaims on re-export), but low freight and storage costs.

Further, reliance is placed by the Official Receiver on the fact that the mobile phones the subject matter of the 05/06 Deals were SIM free, EU and/or US specification (i.e., two pin plugs). The Official Receiver submits that the fact that EU specification mobile phones were being traded in the UK should have alerted the Company to the possibility of MTIC fraud notwithstanding assertions made by Mr Kelly that the sale in the UK of non-UK specification mobile phones is neither illegal nor unusual.

It is the Official Receiver’s case that prior to the 05/06 Deals taking place, the Company, through Mr Kelly himself, had a fairly comprehensive awareness of MTIC fraud, including the need to take reasonable steps to establish the credibility and legitimacy of customers, suppliers and supplies. Particular reliance is placed by the Official Receiver upon the events, and contact with HMRC referred to in paragraphs 46 to 66 above, and the fact that on 21 September 2006, in the course of a formal Means of Knowledge interview, Mr Kelly confirmed that he had read various notices and practice statements including notice 726.

Further, the Official Receiver relies upon the fact that in paragraphs 20, 25 and 26 of his affidavit dated 29 May 2020, Mr Kelly further acknowledged and accepted that prior to the 05/06 Deals, he was aware of MTIC fraud as follows:

“20.

I was aware that HMRC had concerns about the sector that I was trading in and that they had suffered losses as a result of traders going missing. HMRC did issue some guidance and I did my best to comply with it and co-operate with HMRC. As far as I am concerned I did what HMRC asked of me to the best of my ability. Due to the passage of time I do not recall the conversations and letters referred to in paragraphs 64 to 117 of the Report albeit those documents are contained within the bundle”

…

25.

I acknowledge that HMRC wrote to Balmoral about the risks associated with the trading activities of Balmoral. However, I do not recall getting all of the letters listed in pages 26 to 29 of the claimant’s report. I also do not remember being warned by HMRC at a visit on the 16th of January 2003

26.

At this time, I had heard of carousel fraud within the industry which is where a trader goes missing without paying VAT…”

I have described the 05/06 Deals in paragraph 67 to 70 above. Reliance is placed by the Official Receiver upon the fact that the 05/06 Deals were conducted back-to-back, and specifically that all deals in the chain, and not just the Company’s own purchases and sales, took place on the same day, and involved the same model of mobile phone in the same volume, with the goods all being dispatched on 31 May 2006.

Deal 1 concerned 6,000 Nokia 8800 mobile phones at a net purchase value £2,716,500 and net sales value of £2,944,500. Deal 2 concerned 8000 Nokia 8801 at a net purchase value of £3,638,000 and net sales value of £3,952,000. Deal 3 concerned a further 8,000 Nokia 8801 at a net purchase value of £3,638,000 and net sales value of £3,952,000. The Official Receiver submits that:

The Official Receiver points to the fact that none of the 05/06 Deals can be traced to a manufacturer, authorised distributor or end user, and he contends that the absence of an end user is notable because the mobile phones in question were designed and marketed internationally for consumers in circumstances in which one would expect profitability to increase when the mobile phones were broken up for retail sale, something that Mr Kelly would have been aware of given his previous experience in retail.

Reliance is also placed by the Official Receiver on what was said by HMRC in making the 05/06 Decision dated 28 January 2008 referred to in paragraph 75 above:

“all deals were back-to-back, being made on the same day for the same amount of goods and the same product. Balmoral was never left with stock that it hadn't sold. It would be expected that a reasonably conscientious business carrying on a commercial venture would, if it was buying goods to sell on, hold unsold stock, or if it was contacted first by a customer and then went out to source the goods, that there would be a delay between obtaining the order and finding someone able to supply the precise quantities and specification of goods required by the customer. The fact that these requirements could be instantly matched suggests that the deals were artificially contrived.”

The Official Receiver submits that back-to-back transactions of this kind are classic hallmark of MTIC VAT fraud.

Given the Company’s and Mr Kelly’s awareness of MTIC fraud and of the consequences of inadequate due diligence, it is the Official Receiver’s case that the Company and Mr Kelly were, at the time that the Company embarked on the 05/06 Deals, fully aware of the importance of conducting due diligence in order to establish the legitimacy of the Company’s suppliers, customers and suppliers and thereby establish the integrity of the supply chain. It is submitted that, although Mr Kelly has maintained at paragraphs 54 and 56 of his affidavit dated 29 May 2020 that he “… took reasonable and proportionate steps to verify [his] suppliers…”, and that “To the best of [his] knowledge due diligence was carried out”, in fact the Company undertook no or no adequate due diligence on its trading partners.”

As to the Company’s supplier, International:

As to the Company’s purchaser/customer, Online:

As to ASC (the Company’s freight forwarder), there is no evidence of the Company having undertaken any due diligence notwithstanding the value of the goods purported to have been entrusted thereto.

The Official Receiver submits that the Company’s due diligence in respect of its trading partners was minimal, amounted to little more than box ticking (mainly showing that the companies existed) and was largely ignored, such that it did not and could not provide any comfort that the companies in question were legitimate trading partners. The Official Receiver submits that this is particularly so in the light of what are said to be inconsistencies the Company chose to ignore. Reliance is placed upon an example of such an inconsistency with Mr Kelly having said at the Means of Knowledge interview on 21^st September 2006 that the Company would not have dealt with a party if it received a negative Veracis report, the Company was seemingly unconcerned by Online’s history of making third party payments and by dealing with it in respect of sums significantly in excess of the suggested credit limit.

The Official Receiver submits that the only reasonable explanation for the Company to enter into the 05/06 Deals in circumstances in which it had carried out no or no adequate due diligence is that the Company knew that the 05/06 Deals were connected to the fraudulent evasion of VAT. Alternatively, the Company must have turned a blind thereto. Alternatively, in the circumstances, the Company should have known that the 05/06 Deals were so connected.

There is something of a lack of clarity with regard to written contracts. At the Means of Knowledge interview on 21 September 2006, Robert Holland of Dass told HMRC that the Company had no formal contract. However, at the same interview, the Company’s employee, Jackie Harris, said that some applications to trade with suppliers had terms and conditions on them.

As to International, a Purchase Agreement dated 31 May 2006 has been produced, reportedly between International and the Company. However, the Official Receiver refers to the fact that, in a number of places, it refers to Solutions rather than to the Company, and purports to have been signed by SF Cole on behalf of Solutions. Further, it does not contain a number of provisions that one might expect to find in a sales contract for the sale of valuable goods, e.g. covering the transfer of title, delivery, or returns.

So far as Online is concerned, no written contract has been produced. The Official Receiver relies upon the absence of a written contract as being indicative of the Company knowing that the 05/06 Deals were connected to fraud, in particular bearing in mind the high value of the goods in question.

During the course of the Means of Knowledge interview on 21 September 2006, Mr Kelly stated that ASC undertook inspections, namely 10% checks, that were paid for by the Company and faxed to the Company after the goods had been dispatched. The Official Receiver says that, even if it is true that the Company did pay for inspections, this must have been purely a box ticking exercise as there is no evidence that the Company took any steps to ensure that the inspections were done or to understand the results of such inspections, which were, in any event, provided after the goods had been dispatched.

However, the Official Receiver challenges Mr Kelly’s assertion that inspections were carried out by ASC and asserts that there is no evidence that the Company undertook, either itself or by paying ASC, any inspections of the mobile phones to confirm, among other things, their quantity and/or condition. Accordingly, it is submitted that the Company did not know whether or not the very expensive mobile phones that it was supplying were complete and in good condition.

Further, reliance is placed onthe fact that the Company did not record any International Mobile Equipment Identity (“IMEI”) Numbers, i.e., the unique 15-digit number given to every phone that allows a network to identify valid phones and block stolen phones. Regardless of any legal requirement to do so, the Official Receiver submits that a genuine, commercial company would record IMEI numbers so as to avoid dealing in stolen phones, avoid dealing in the same phones more than once, and to provide verification for returns and insurance claims.

Again, the Official Receiver maintains that the only reasonable explanation for the Company not to undertake any inspections and not to record IMEI numbers is that Balmoral knew that the 05/06 Deals were connected to fraud.

The Official Receiver refers to the fact that the 05/06 Deals concerned mobile phones worth in excess of £10,000,000 which were being moved from the UK to the EU and submits that a legitimate business dealing with goods of this value would consider insurance an essential pre-requisite of trading.

In paragraph 62 of his affidavit dated 29 May 2020, Mr Kelly says that he believes that insurance was in place. However, the Official Receiver submits that there is no evidence that the Company obtained any insurance for the mobile phones. In the course of the Means of Knowledge interview on 21 September 2006, Mr Kelly stated that ASC insured the goods in transit and that Online paid for insurance in storage, albeit no details of insurers were provided. In contrast, it is the Official Receiver’s evidence that ASC, when interviewed by HMRC, stated that it covered the goods in the warehouse but that insurance during transport was the haulier’s responsibility. In any event, no insurance policy and/or proof of payment of an insurance premium was provided by the Company.

It is the Official Receiver’s case that what is said to be this casual attitude to insurance points to the 05/06 Deals being contrived, and that the Company’s lack of concern with regard to any issues with or risks to the mobile phones can be explained only on the basis of it being aware that the 05/06 Deals were connected to transactions involving the fraudulent evasion of VAT.

The Company used its FCIB account for the 05/06 Deals. Only Mr Kelly had access to this account as the sole signatory thereon. HMRC traced all the payments by the participants in the chain of transactions making up the 05/06 Deals through accounts held with FCIB. As is apparent from paragraphs 172-177 of the 2016 FTT Decision referred to in paragraph 17 above, this tracing exercise was fundamental to the conclusion reached in the 2016 FTT Decision that the 05/06 Deals were connected with the fraudulent evasion of the VAT. The Official Receiver submits that the same considerations apply for present purposes.

Apart from payments, further timing aspects are relied upon by the Official Receiver as indicative of the fraudulent evasion of VAT, including the following:

The Official Receiver submits that the only reasonable explanation for the circular movement of the monies, the speed with which the payments were made in the parties’ tolerance of the payment shortfalls, and the timing considerations referred to in paragraph 131 above was that the Company knew, or ought to have known, that the 05/06 Deals were connected with fraud.

The Official Receiver observes that in the transactions making up the 05/06 Deals, the Company traded as a broker exporting the mobile phones to the EU, and that whilst the buffers added only 25p, being 0.06%, the Company added £38 per unit (8.39%) in Deal 1 and £39.25 per unit (8.63%) in Deals 2 and 3. The Official Receiver notes that Mr Kelly claims in paragraph 60 of his affidavit dated 29 May 2020 that it is the nature of the wholesale business to buy at one price and sell at another in order to make a profit. However, the Official Receiver submits that as all UK traders were operating in the same market, there is no obvious reason, absent fraud, for such a large increase by the Company, especially given that the Company sold on the same mobile phones without enhancement or modification. In addition, the Official Receiver submits that it is notable that the Company never made a loss and that its markups were consistent across the 05/06 Deals despite the fact that they concerned different mobile phones and volumes.

The Official Receiver points to the use of freight forwarders as being indicative of VAT fraud given that the use thereof enables goods to move through the chain of deals quickly and without additional transport costs. Reliance is therefore placed on the role played by ASC in allowing goods to move up the chain, and the Company’s knowledge as to the use thereof.

Reliance is placed by the Official Receiver on the lack of clarity as to who paid the transportation costs, and upon the fact that the Company never took possession of the mobile phones.

The Official Receiver relies upon the following evidence concerning ASC itself. ASC’s registered business address was Abbey House, 450 Abbey Road, Longford, Heathrow, UB7 0E. Its main business activity was courier post. It was registered for VAT on 8 March 2006, only 2 months before the 05/06 Deals took place. In its VAT1, ASC’s estimated turnover was £750,000. However, the actual turnover for the business in the first two months as reported to HMRC was £1.8 million. HMRC’s enquiries disclosed that it had no commercial premises, no vehicles capable of providing a service and that the owner of the premises where the goods were said to be stored denied any knowledge of the business.

Further, the Official Receiver relies upon the fact that whilst Online was a company registered in Spain, it required delivery of the mobile phones to KPP International Logistics, a freight forwarder in Rotterdam. Whilst delivery to freight forwarders might not be not uncommon, it is the Official Receiver’s case that the risk of goods being re-dispatched to the UK (i.e. going round in circles) was well publicised, and it is submitted that the delivery of the mobile phones to Rotterdam (from where they could easily be re-dispatched to the UK) should have caused the Company to make further enquires, which it did not do. Further, it is submitted that there is no evidence that the mobile phones ever reached Online or any end user

The Official Receiver submits that, certainly taken together, the above facts, matters and circumstances relied upon are highly inconsistent with normal commercial trading, and demonstrate that the Company had knowledge of, or at the very least least ignored fraud as the obvious explanation for the 05/06 Deals and turned a blind eye to, the fact that the 05/06 Deals were contrived for the purpose of facilitating fraud. Alternatively the Company ought to have know that the 05/06 Deals were connected to transactions involving the fraudulent evasion of VAT.

So far as Mr Kelly himself is concerned, the Official Receiver submits that his conduct, and whether it makes him unfit to be concerned in the management of a company, requires to be considered against the background of what is said to be his long-standing experience of the mobile telephone industry as evidenced by:

The Official Receiver relies upon the following as showing that Mr Kelly knew, or should have known, that the 05/06 Deals were connected with the fraudulent evasion of VAT:

It is therefore submitted on behalf of the Official Receiver that the above matters should have put Mr Kelly on enquiry as to the credibility and legitimacy of the 05/06 Deals. It is submitted that the only reasonable explanation for Mr Kelly’s failure to make any, or any adequate, enquiries into any of these factors is that he knew that the 05/06 Deals were connected with fraud, or at least turned a blind eye to this being the case. Alternatively, considering the above factors, it is submitted that Mr Kelly ought to have known that the 05/06 Deals were connected with fraud.

As to Mr Kelly causing or allowing the Company to participate in the 05/06 Deals, the Official Receiver relies upon the legal principles referred to in paragraph 33 above. The Official Receiver submits that:

In the circumstances, the Official Receiver invites me to reject the statements made by Mr Kelly in his affidavit dated 29 May 2020 that he and the Company were entirely innocent (paragraph 10), that he is “…as much of a victim of the VAT fraud as HMRC” (paragraph 97), and he and the Company got “… caught up in this through no fault of their own…” (Paragraph 32). It is the Official Receiver’s case that the Company and Mr Kelly were knowing participants in VAT fraud, turned a blind eye to the same, or, at the very least, had the means of knowledge and ought to have known that the 05/06 Deals were connected to the fraudulent evasion of VAT.

With regard to the second allegation against Mr Kelly, namely that by the Company’s 05/06 VAT Return he caused or allowed the Company to wrongfully claim the sum of £1,748,687.50 from HMRC, the Official Receiver relies upon the following:

The Official Receiver submits that in the light of the matters referred to in paragraph 144 above, Mr Kelly knew that VAT Returns would be submitted in respect of the 05/06 Deals, knew of the risk that the Company would wrongfully reclaim VAT, but failed to act and, accordingly, caused the Company to wrongfully claim the sum of £1,748,687.50 from HMRC.

Alternatively, Mr Kelly ought to have known that VAT Returns would be submitted in respect of the 05/06 Deals which risked the Company wrongfully reclaiming VAT and, in failing to appreciate the obvious, allowed the Company to wrongfully claim the sum of £1,748,687.50 from HMRC.

It is primarily the Official Receiver’s case that this is a case where Mr Kelly has been knowingly involved in MTIC fraud such that a period of disqualification well within the top bracket of over 10 years should be imposed, as it should if the Court concluded that, rather than being knowingly involved in transaction concerning MTIC fraud, he wilfully closed his eyes to a connection between the 05/06 Deals and transactions concerning MTIC fraud. Recognising that period of disqualification is a question for the Court, the Official Receiver suggests a period of disqualification of 13 years.

Mr Kelly’s case is set out in his affidavits dated 29 May 2020 and 21 December 2022, and he developed a number of further points in the course of submissions.

The gist of Mr Kelly’s case in response to the allegations of unfitness that are made against him can be summarised as follows:

Mr Kelly’s second affidavit dated 21 December 2022 was made after the making of the Brightwell Order. At paragraph 7 thereof, he said this:

“The events complained of took place 18 years ago. Memories have clearly faded over the years. In short, those explanations and reasons were that:-

a.

I had no actual knowledge that the Company’s purchases were connected with the fraudulent evasion of Tax, by others, within the claim of transactions.

b.

I do not consider that the circumstances in which those transaction took place, were sufficient or adequate to put me on notice of their connection to the fraudulent evasion of Tax, by others, within the claim of transactions.

c.

At the Tribunal hearing, I had no real opportunity to contest the allegations of dishonesty that were levelled at me during that hearing. I rely upon the terms of the Judgment of Deputy District Judge Brightwell, as set out in the transcript of his decision dated 05 January 2022 on this point.

d.

I will at final hearing herein, rely upon the terms of my First Witness Statement (sic) in this Action, signed off by me and dated 29 May 2020, in support of my position in this case (insofar as that evidence does not contravene the terms of the Court Order sealed on 18 November 2022). I stand to be cross-examined on this and my earlier evidence, in light of Officer Siddle’s evidence, at Trial herein.”

During the course of submissions, Mr Kelly took a new point that, in about February 2008, he had used HMRC’s Security Guarantee Condition, which allowed the use of a third party such as a bank to provide a guarantee to enable security to be given for VAT payable, or to become payable. He said that he came to terms with Northern Rock with regard to the payment of interest on a monthly basis on the amount of the deposit behind the guarantee. He says that he then had the idea of a commercial venture involving marketing such product, and obtained Bank of Ireland’s interest therein with Bank of Ireland even offering £100 million insurance cover. However, he says that HMRC effectively prevented him from pursuing any such venture as part of a vendetta or witch-hunt against. He maintains that the present proceedings effectively amount to a continuation of this vendetta or witch-hunt against him, and that the present proceedings required to be so viewed by the Court.

In the above circumstances, it is Mr Kelly’s case that the present proceedings should be dismissed.

It is fair to say that it is by no means ideal that the Court is being required to consider Mr Kelly’s fitness as a director based primarily on events that took place some 17 years ago, in May 2006. In these circumstances, it would be no surprise if Mr Kelly has little or no real recollection of the events in question, or if documentation that might otherwise have been available to assist in understanding what occurred is not now available. Having said this, the Company did, at Mr Kelly’s direction, pursue the appeal to the FTT that ultimately led to the 2016 FTT Decision. Although this appeal was disposed of some seven years ago, it will have provided something of a more recent focus for Mr Kelly on the events in question. Nevertheless, in considering Mr Kelly’s evidence, and the case that he advances, I must take into account the considerable difficulty that he must inevitably face in responding to allegations made concerning events that took place so long ago.

However, notwithstanding giving what I consider to be all due credit in respect of the passage of time, I did not find him to be a satisfactory witness able to give a plausible explanation of events. Three particular points in respect of his evidence stood out to me:

The answer referred to at the end of sub-paragraph 154(c) above was generally fairly typical of the answers given by Mr Kelly in cross-examination to various challenges made by Ms Newstead Taylor in respect of matters relied upon by the Official Receiver in support of his case. Again, I recognise that the Court is dealing with matters many years after the event, but even so, I would have expected at least some cogent and credible answers to be given to the questions that were posed. However, in fact, I found that very few if any of the answers given by Mr Kelly served to assist his case, and that very many of them served to damage it through the inability to provide reasoned explanation in respect of a significant number of matters even giving credit for the fact that the events in question occurred so long ago.

I am driven to conclude by what I consider to be the overwhelming evidence that the Company, and through the Company Mr Kelly, was aware that the Company, by entering into the transactions that formed its part of the 05/06 Deals, was involving itself in transactions involving the fraudulent evasion of VAT through MITC fraud, or at the very least that the Company and Mr Kelly turned a complete blind eye to such being the case. I consider the evidence to be overwhelming notwithstanding the passage of time, and notwithstanding having given what I consider to be appropriate credit to Mr Kelly in respect of the difficulties that he has faced in defending the claim so many years after the events in question. Should I be wrong as to this, then I certainly conclude that, on the facts, the Company and Mr Kelly ought to have known, applying the Kittel principle, that the 05/06 Deals were connected with transactions involving the fraudulent evasion of VAT.

The following factors, in particular, have led me to the conclusion that I have reached with regard to the involvement and knowledge of the Company and Mr Kelly:

The one factor relied upon by the Official Receiver to which I attach rather less weight, at least taken on its own, is the profit margin made by the Company on the sale of the mobile phones in question. One would expect that a genuine commercial sale of items such as mobile phones by way of export would yield a significant profit. That, in itself, does not, as I see it, point to involvement in fraud. What is, perhaps, of more significance in the present case is that other transactions in the chain did not yield any significant profit, although the Company was not necessarily aware thereof. However, the yet further significant consideration is, as I see it, the point referred to above with regard to the Company not paying the full consideration due to International, but a lesser sum or closely aligned with the consideration that it received, without any VAT being included, on its sale to Online. This does, as I see it, strongly support the Official Receiver’s case.

So far as the submission of the 05/06 VAT return is concerned, and the allegation that Mr Kelly caused or allowed the Company to wrongly claim the sum of £1,748,687.50 from HMRC, I do not consider that Mr Kelly can hide behind the relevant VAT return as having been prepared by the Company’s accountant in that Mr Kelly, as sole director of the Company, was ultimately responsible for the submission of VAT returns, and Mr Kelly was not merely aware of the fact of entry of the Company into the transactions related to 05/06 Deals, but, on the basis of my findings above, the fact that the transactions in question were connected with the fraudulent evasion of VAT, in which case the Company would have no entitlement to recover the VAT in question.

As identified in Secretary of State v Corry (supra) and Secretary of State v Warry (supra), when considering, in the context of allegations of involvement in MTIC fraud, the “jury question” identified in Re Sevenoaks (supra) as to whether a defendant director’s conduct in relation to a company makes him unfit to be concerned in the management of a company, it is necessary to consider whether the relevant company is to be regarded as a participant connected with the fraudulent evasion of VAT, and to then consider the extent of the defendant director’s personal knowledge of, and involvement in, that fraud, and how that impacts on his fitness to be concerned in the management of the company.

Carrying out this exercise in the circumstances of the present case, and for the reasons explained above, I am satisfied that, on the present facts, the Company was aware that it was participating in transactions that were connected with the fraudulent evasion of VAT, or at the very least that it turned a blind eye thereto, and that the knowledge of the Company, and its state of mind, is to be to be attributed to Mr Kelly given what I have found to be his role as sole director and shareholder, and sole signatory on its bank accounts, with the knowledge of the transactions in question that I consider that he had.

In the circumstances, I am satisfied that the Official Receiver has demonstrated on the evidence that Mr Kelly has shown by his conduct in relation to the Company that he is unfit to be concerned in the management of a company, and that this being the case, I am required to make a disqualification order against him.

I find it difficult to accept that Mr Kelly was subject to the vendetta or witch-hunt by HMRC that he contends that he was. However, I do not consider this relevant to the question of unfitness. The present proceedings are not bought by HMRC, but by the Official Receiver who, following the entry of the Company into liquidation, will have had to consider whether it was appropriate that disqualification proceedings be brought against Mr Kelly. There is no evidence to suggest that there is any flaw in the process by which the present proceedings were brought by the Official Receiver based on the evidence made available to him.

In all circumstances, therefore, I consider that I am bound to make a disqualification order against Mr Kelly.

Guided by the factors identified by HHJ Hodge QC in Secretary of State v Warry at [49] et seq, on the basis of my finding the Mr Kelly has, through the Company, been knowingly involved in transactions involving MTIC, or at the very least turned a blind eye to whether the transactions in question involved MTIC, I consider that a period of disqualification towards the middle to top of the top Sevenoaks bracket is appropriate.

I regard it as an aggravating factor that Mr Kelly has defended the present proceedings without recognising in any way the error of his ways, cf Re Howglen Ltd (supra), referred to in paragraph 25 above. So far as mitigating factors are concerned, there are two possible considerations that I have identified. Firstly, Mr Kelly refers to the directors of West 1 having been disqualified for 13 years and 6 years respectively. Unfortunately, there is no evidence as to what roles these directors actually played, but certainly the VAT losses sustained as a result of West 1’s activities were significantly more, so it would seem, than those in respect of the Company, particularly given that the Company’s claim for input tax was rejected. It might be said that it would be unjust to disqualify Mr Kelly for the same period, or longer than the 13 year period said to have been imposed in respect of West 1. Secondly, it might be said that some discount is appropriate bearing in mind the length of time since the events that found the basis for the finding of unfitness in the present case. I consider there to be some force in this latter point.

Having regard to the above considerations, I have come to the view that a period of disqualification of 12 years is appropriate in the circumstances of the present case.

I shall therefore make a disqualification order against Mr Kelly for a period of 12 years.

This Judgment will be handed down remotely by email to the parties or their legal representatives, and released to the National Archives. No attendance will be required. Unless a final order can be agreed dealing with all outstanding issues, there will need to be a further hearing dealing with consequential matters arising from this Judgment, which I would hope can be listed in the near future. I will adjourn consideration of any applications for permission to appeal to this consequential hearing and extend the time for filing an appellants’ notice with the Court of Appeal until 21 days after the latter.