ON APPEAL FROM THE HIGH COURT OF JUSTICE
Mr Justice Floyd
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIMER
LORD JUSTICE LEWISON
| THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
|- and -
|ROCHDALE DRINKS DISTRIBUTORS LIMITED
Mr James Pickup QC and Ms Rosanna Foskett (instructed by Burrows Bussin) for the Respondent
Hearing dates: 15 and 16 September 2011
Crown Copyright ©
Lord Justice Rimer :
A. The application before Peter Smith J
Delta Drinks Limited
Vintners Suppliers Limited
AHA Wholesale Limited
Apex Brokerage Limited
The 'missing traders' - generally
I-K Drinks Limited
Suppression of output tax
Inflation of input tax
B. The evidence before Floyd J
C. Floyd J's judgment
'9. … There is a difference in impact between a company which arises out of the ashes of a former company to carry on where another left off and branching out into a new albeit related area of business. Moreover the fact that the business was a cash and carry business helps to explain why the company would have such large sums in cash which it could use to pay suppliers. The fact of a new business suggests, as Shakeel in fact states, there were commercial reasons for wanting to go in to cash and carry and thus to start a new company.'
'10. I turn to the risk of dissipation. Mr Pickup QC who appears on behalf of [RDD] submits that there is no real risk of dissipation of assets here. He submits that in future HMRC can disallow any claims for repayment of input tax which they did not accept and that the position can therefore be safeguarded. Ms Frazer submits that there is a real risk that if [RDD] is handed back to the directors they will continue to make false claims and fail to account for output tax. Moreover she submits that there is evidence that sums are taken out of the company which are unaccounted for. The assets in question are the stock of the company and sums to [RDD's] credit in its bank account. Various matters were pointed to as giving rise to a suggestion that there was a risk of dissipation of these assets. It is beyond dispute that [RDD's] record-keeping is inadequate. The provisional liquidator has expressed himself as dissatisfied with this and with considerable justification. An inquiry made into a payment to a company called MDD for some £50,000-plus resulted in a guarded response from that company. Other matters related to Liquorflow which was the subject of settled proceedings. I take all those matters into account but in the light of the case as now revealed by the evidence as a whole, I consider the risk of dissipation of assets not to be sufficiently great to justify the appointment of a provisional liquidator. The well recognised consequences of taking such a step are not justified by the evidence as to risk of dissipation. Put shortly, the step is disproportionate.'
'… has been unable to match [RDD's] STL stock-system printout to any Sunfyne invoices with the exception of a single invoice. The system produces delivery dates in April and May 2009. He has not been able to find any contemporary documents. HMRC make the point that the STL system is purely internal and the documents it generates do not provide independent corroboration of the fact of delivery of goods. One is therefore left with invoices'.
'… The STL printout seems to align the Vintners account with that of Delta, the next missing trader. Only two Vintners' invoices could be matched to the STL printout. No delivery notes have been found. Mr Humphreys has however been able to do a cash reconciliation between a purchase ledger and a cash reconciliation sheet.'
I think the judge may have been in error in saying that no delivery notes had been found: I referred in paragraph  above to Mr Mann's evidence that one was found.
'… There are some external delivery notes for Delta signed by Mr Battersby who has now retired. HMRC do not accept that these delivery notes are genuine. Mr Humphreys has performed an extensive accounting exercise here as well, tracing cash payments to the invoices.'
'15. Apex was incorporated on 7 August 2008 and dissolved on 16 March 2010. It was registered for VAT on 1 March 2009 and deregistered six months later on 9 September. The period of invoices with [RDD] is 1 September to 30 December 2009, a period of four months. The vast majority of the trade occurred after Apex had been deregistered. The schedule of invoices shows a total volume of business of £1.375 million including VAT. Most of the invoices are for £20,000-30,000-worth of goods. Apex's VAT registration indicates that their current or intended business was "food wholesale" but by June 2009 they had altered their classification to "energy consultant". Their directors, who have come and gone are recorded as having Italian nationality and record their occupations as porter and architect. The existing director is also Italian and is a waiter. Apex's last VAT return filed for the period ending October 2009, on 5 November 2009, recorded a nil return. This therefore does not support the fact of any supplies to [RDD] in September and October. HMRC did issue an assessment to Apex on 21 June 2010 but subsequently withdrew it. Mr Mann's evidence about this points to the fact that, although there are internally generated goods received notes and purchase orders, there are no delivery notes from Apex. [RDD's] answer to this, through the evidence of Shakeel, is the assertion that stock was indeed received from Apex; that Imran and Mr Mistry dealt with this company and that payments to Apex were made in cash. Shakeel's evidence that it was Imran that dealt with Apex is expressly contradicted by Imran. Imran told the provisional liquidator that he had never dealt with them. Mr Mistry told the provisional liquidator that he had heard of them but never dealt with them. There is no evidence from Mr Mistry until the morning of the hearing and his witness statement makes no mention of Apex. Accordingly, [RDD] have failed to put in any direct evidence to substantiate this trade beyond a bald assertion that stock was received. The evidence about who was concerned with it is conflicting. The main answer put forward for [RDD] is through the evidence of their forensic accountant, Mr Humphreys. His second affidavit, produced just before the hearing, dealt with Apex for the first time. He had been able to print out from [RDD's] STL stock keeping system a schedule of delivery dates. About half of these by value could be matched to invoices in terms of their exact amount but the other half are unmatched. The total cost is some £1 million, leaving a substantial amount for which there is an invoice but no entry on the STL system.'
'Whilst HMRC has shown an arguable case, perhaps even a good arguable case, in relation to some of the traders that the supplies or some of the supplies did not take place, I am unable to accept that the evidence as it stands before me at the moment is so strong that there is no genuine or substantial issue to be tried, whether this trade actually occurred. The evidence of the directors themselves is, I accept, quite thin but in many cases it is supported by documents which have been uncovered by Mr Humphreys or by his attempts to relate the case to the invoices and the other accounting exercises which he has performed.'
In the judge's view, the right place for the issues to be tried was the VAT & Duties Tribunal (now the Tax Chamber of the First-tier Tribunal), by way of appeals by RDD against HMRC's assessments. In his view it was wrong to use HMRC's claims as a basis for the continued appointment of a provisional liquidator.
'22. Even if one places to one side the case advanced by HMRC based on the missing and buffer traders, there remains a claim based on unpaid tax. I have therefore been taken through a considerable amount of evidence concerning the solvency of the company. Whilst there has been some debate about the figures, Mr Humphreys says that even valuing the stock at £1 million the company has negative net assets of £335,000 as at June 2010. On the other hand, whilst the provisional liquidator values the stock closer to £700,000, his preliminary investigations show that there may be a small surplus of assets over liabilities. Mr Humphreys explains that the company is dependent for its continued trading on the support of its directors. He suggests that there is no reason that it will be withdrawn.
23. Against this background, Mr Humpreys concludes, at the end of his second affidavit, that he agrees some £340,000 of the assessment. At the moment it appears that there is an undisputed sum owing to HMRC. [RDD] says that it has a genuine and substantial counterclaim for a greater amount. There is, I accept, very little material before me on which to assess whether this is the case. The outstanding amount goes back to early 2008. It may be that at the hearing of the petition it will be shown that this is a genuine and substantial counterclaim sufficient to defeat the petition if it were limited to the undisputed sum.
24. This is of course a very different scenario from that being considered by Peter Smith J, faced with a petition for much small sums with a real possibility of a counterclaim exceeding the debt. I do not think he would have considered the appointment of a provisional liquidator to be a just and proportionate response. Whether or not that is right, I do not consider it to be one myself. It may be very many months before the petition is heard. It is in my judgment wrong for [RDD] to be prevented from trading for that period.'
'(1) A company is deemed to be unable to pay its debts –
(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or
(b) if, in England or Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or …
(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. …'
'There are two matters though, which seem to be relevant for me to consider. The first is whether the department has made out a good prima facie case for a winding-up on the hearing of the petition. Any views I express about the matter now are of course provisional only because I am not trying the petition at the present time. If the department has not made out a good prima facie case for a winding-up order then clearly I think it would not be right to appoint a provisional liquidator. On the other hand, if the department has made out a good prima facie case for a winding-up order then the second matter for my consideration arises, namely, whether in the circumstances of this case it is right that a provisional liquidator should have been appointed.'
'23. … [RDD] says it has a genuine and substantial counterclaim for a greater amount. There is, I accept, very little material before me on which to assess whether this is the case. The outstanding amount goes back to early 2008. It may be that at the hearing of the petition it will be shown that this is a genuine and substantial counterclaim sufficient to defeat the petition if it were limited to the undisputed sum.
24. This is of course a very different scenario from that being considered by Peter Smith J, faced with a petition for much smaller sums with a real possibility of a counterclaim exceeding the debt. I do not think that he would have considered the appointment of a provisional liquidator to be a just and proportionate response. Whether or not that is right, I do not consider it to be myself. It may be very many months before the petition is heard. It is in my judgment wrong for [RDD] to be prevented from trading for that period.'
'(g) full details of the company's financial position including details of its assets (including details of any security and the amount(s) secured) and liabilities, which should be supported, as far as possible, by documentary evidence, e.g. the latest filed accounts, any draft audited accounts, management accounts or estimated statement of affairs;
(h) a cash flow forecast and profit and loss projections for the period for which the order is sought;'
The paragraphs are taken from the Practice Note – Validation Orders (Insolvency Act 1986, ss.127 and 284)  BCC 91. Paragraph 9 also provides that:
'The court will need to be satisfied by credible evidence that the company is solvent and able to pay its debts as they fall due or that a particular transaction or series of transactions in respect of which the order is sought will be beneficial to or will not prejudice the interests of all the unsecured creditors as a class …'.
Lord Justice Lewison :
Lord Justice Pill :