England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Floyd

[2011] EWHC 988 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/10/2011

Lord Justice Rimer :

Introduction

1. This appeal, by The Commissioners for Her Majesty's Revenue and Customs ('HMRC'), is against an order made by Floyd J in the Chancery Division on 5 April 2011. The respondent is Rochdale Drinks Distributors Limited ('RDD'). Permission to appeal was granted by Patten LJ, who also directed the hearing of the appeal to be expedited, as it has been. HMRC were represented by Stephen Davies QC and Lucy Frazer, RDD by James Pickup QC and Rosanna Foskett. Apart from Mr Davies, all counsel also appeared before the judge.
2. On 24 February 2011 HMRC, claiming to be creditors of RDD, presented a winding up petition for its compulsory winding up on the grounds of its insolvency. On the same day, HMRC made a without notice application to Peter Smith J for the appointment of a provisional liquidator. The application was supported by two affidavits of Christopher Mann, an officer of HMRC. Its basis was that HMRC had a prima facie case for the winding up of HMRC and that, unless a provisional liquidator was appointed, there was a risk pending the making of a winding up order of jeopardy to RDD's assets and to its effective and efficient winding up. Peter Smith J made an order appointing as provisional liquidator Ian Defty, of Kingston Smith & Partners LLP.
3. On 18 March 2011 RDD issued an application for the discharge of that order. It was heard inter partes by Floyd J, before whom the evidence was fuller than it had been before Peter Smith J. Following three days of argument at the end of March, the judge delivered an oral judgment on 5 April 2011 giving his reasons for ordering the immediate discharge of the appointment that Peter Smith J had made. In summary, he concluded that: (i) as to the bulk of HMRC's claimed debt, it was the subject of substantial dispute such that a petition based upon it was unlikely to succeed; (ii) the balance of the claimed debt was admitted but was said to be the subject of a counterclaim exceeding it; (iii) the risk of dissipation of assets pending the hearing of the petition was not sufficiently great to justify the appointment of a provisional liquidator; and (iv) the appointment was not a just or proportionate response to HMRC's case.
4. By their appeal, HMRC challenged these conclusions and submitted that the judge misdirected himself in arriving at them. RDD's position was that the judge was exercising a discretion, that he exercised it unimpeachably and that this court should not interfere with the way in which did so.

A. The application before Peter Smith J

5. Mr Mann's principal affidavit occupied 126 pages and 684 paragraphs and was accompanied by voluminous exhibits comprising some 3,000 pages. He supplemented it with a short corrective affidavit. What follows in this section of my judgment is a summary of the essence of the case that his evidence presented to Peter Smith J.
6. The nub of it was that RDD had been run for the purpose of facilitating and undertaking the fraudulent evasion of VAT. HMRC asserted that RDD had falsely claimed input tax on invoices for supplies by six traders, five of whom they described as 'missing traders' and one as a 'buffer trader'. HMRC disputed the making of supplies by such traders and, therefore, the genuineness of the invoices upon which RDD relied. They asserted that RDD had inflated its input tax claims by using the same invoices repeatedly and had suppressed the output tax due to HMRC on its sales. The alleged supplies and the actual sales were in wholesale dealings in alcoholic drinks.
7. RDD was incorporated on 11 October 2005. Its secretary was Cobat Secretarial Services Limited ('Cobat'). Imran Awan ('Imran') was a director from 6 June 2007 to 5 November 2010, when he resigned. Adhila Awan (his sister) was a director from 16 June 2010 until 20 October 2010, when she resigned. Mussawer Iqbal became a director on 16 June 2010 and remains a director. The annual return for the period ended 11 October 2006 showed that Imran held 75 of RDD's 100 shares and Neil Battersby the other 25 (he had, until 6 June 2007, also been a director). On 16 July 2007 Mr Battersby transferred his 25 shares to Imran.
8. RDD applied to register for VAT in June 2007 and was registered as from 24 July 2007. It advised HMRC that its business was the wholesale cash and carry and delivery of food, cigarettes, soft drinks and alcohol. Its principal place of business was at Units B and D, Trafalgar Centre, Belfield Road, Rochdale, Lancashire.
9. HMRC asserted that RDD was a phoenix-type successor to Liquorflow Limited. A successful application for a provisional liquidator, on almost identical grounds as were now relied upon against RDD, had been made in respect of Liquorflow on 10 February 2009. Imran had been the director and sole shareholder of Liquorflow. Shakeel Awan ('Shakeel'), his brother, had played a role in the governance of Liquorflow, as he also had in RDD. Liquorflow's secretary was also Cobat. Liquorflow's 100 shares were owned by Imran (32), Akeel Awan (34) and Shakeel (34). The trade class for which Liquorflow registered with HMRC for VAT purposes was the wholesale of wine, beer, spirits and other alcoholic beverages. Mr Mann asserted that RDD had 'taken over the business of Liquorflow and is continuing the fraudulent evasion of VAT in the place of Liquorflow'. The provisional liquidator appointed for Liquorflow was Ian Defty, who also became its liquidator when it was placed in compulsory liquidation on 22 April 2009. It was Mr Defty whom Peter Smith J appointed as provisional liquidator of RDD.
10. HMRC asserted the VAT tax loss caused by RDD to be at least £2,327,948.49, although Mr Mann explained that RDD claimed to be due repayments of VAT from HMRC totalling £400,061.99, which, although disputed, would still leave £1,927,886.50 due to HMRC. That is said to be the counterclaim referred to in paragraph [3] above. At the time of the application to Peter Smith J, no assessment had been raised, a deliberate omission for which HMRC's explanation was that they did not wish thereby to excite RDD's interest in the matter and, in consequence, increase the risk of a dissipation of its assets. The plan was to raise and serve the assessment together with the winding up petition and the order that HMRC hoped Peter Smith J would make, whereupon the amount assessed would become a statutory debt due and payable immediately. Mr Mann did not foresee a realistic prospect of an appeal by RDD against any such assessment. The onus was on RDD to make good its input tax claims.
11. Mr Mann explained why HMRC regarded RDD as insolvent. The last accounts it had filed, signed by Imran, were for the year ended 30 June 2009. Whilst they showed net assets of £146,717, RDD's solvency was dependent upon a figure for debtors that included a VAT repayment claim of £369,505 (part of the £400,061.99) which HMRC disputed. Further, Mr Mann asserted that RDD did not have the resources to pay its debts as they fell due, particularly in the light of the impending VAT assessment; and HMRC also expected RDD to face large claims for corporation tax, excise duty, penalties and interest. In addition, they assessed that RDD had traded at a loss of £5,083,011 during the VAT periods from April 2008 to December 2010.
12. Mr Mann explained how HMRC made an unannounced visit to RDD's premises on 24 January 2008. RDD's first VAT return was for the period ended 30 April 2008 and claimed a VAT repayment of £171,569.04. This led to a visit by HMRC to verify the claim and HMRC uplifted the available business records with a view to analysing them. Mr Mann explained, at some length, the course of communications between HMRC and RDD over the subsequent period down to November 2010, during which they investigated with RDD the justification for the returns for that and subsequent quarters down to September 2010. Following a full investigation, HMRC were satisfied that RDD could not verify the claims made. It had failed to supply satisfactory documentation and/or explanations in order properly to support its input tax claims. HMRC believed they were fraudulent. Mr Mann explained HMRC's case in relation to the input tax claims that RDD had made in respect of each of the 'missing' or 'buffer' traders. I summarise it as follows.

Sunfyne Limited

13. Sunfyne was incorporated on 28 March 2008. By June 2008 there had been four changes of director, its last being Alan Bullock, who had a history relating to MTIC and excise fraud. Sunfyne was dissolved on 3 August 2010. It had been registered for VAT as from 1 February 2008 (before its incorporation), its intended business being said to be 'company management, account, payroll and company admin'. Mr Bullock told HMRC on 26 August 2008 that it had 'not strictly traded as yet' but planned to start in September 2008. He notified HMRC on about 7 November 2008 of a change of trade class to 'other wholesale' as it was then dealing 'in all food, confectionery and beverages'. It was deregistered for VAT with effect from 18 December 2008.
14. RDD's VAT return for the period to January 2009 declared purchases from Sunfyne of £528,826.57 and claimed input tax of £68,977.38. The claimed purchases were supported only by 20 invoices dated between 1 and 29 December 2008, 13 of them post-dating 18 December when Sunfyne was deregistered. No output tax on the alleged supplies was declared by Sunfyne after its deregistration; and whilst its VAT return covering the period 1 to 18 December 2008 declared output tax of £49,178.55, it was unclear whether this included any RDD supplies. HMRC's attempts to verify Sunfyne's VAT returns prior to deregistration were unsuccessful because of Sunfyne's failure to respond to them. RDD's bank statements showed a £10,000 CHAPS payment to 'Sunfyne' on 23 February 2009, but that did not correspond to any of the invoice amounts. None of RDD's cheques drawn in this period appeared to have been payable to Sunfyne. There were no other documents supporting RDD's alleged trade with Sunfyne. On 4 December 2008 Mr Bullock produced to HMRC a list of customers and suppliers with which Sunfyne had dealt to date, but it did not include RDD to whom it had, according to RDD, by then supplied £108,406.65 worth of goods. Mr Mann explained the contact that HMRC had attempted with Sunfyne and the unsatisfactory nature of the information that it had provided.

Delta Drinks Limited

15. Delta was incorporated in August 2004 and registered for VAT on 2 September 2004, its intended business being that of 'drinks wholesale to the licensed trade'. It was deregistered with effect from 21 August 2009, having been deemed to be a missing trader. RDD's records included 35 invoices from Delta relating to the April 2009 quarter. RDD claimed input tax on 36 invoices dated between 3 February and 24 April 2009 for the supply of wine and beer. The value of the alleged purchases was £1,309,750.23 and the input tax claimed was £171,071.51. The invoices were the sole evidence of the claimed supplies. RDD's bank statements recorded no payments to Delta. None of the cheques drawn during the period appeared to have been payable to Delta. By contrast, RDD's admittedly legitimate supplies from various well-known companies (Diageo, Coors, Scottish and Newcastle, for example) were paid for by bank transactions. The cash sheets recorded no payments to Delta. No purchase orders, delivery or release notes relating to the supplies were produced. There was no documentation reflecting the trading relationship between RDD and Delta. Whilst RDD had claimed the input tax, Delta had failed to submit a VAT return for the periods of its claimed trade with RDD and so had not declared any output tax on the claimed sales. Mr Mann asserted that as Delta was now missing, any attempts to verify the transactions with it were fruitless. The director of Delta from incorporation to 13 March 2009 was Kavineet Dhanda, who was succeeded by Gary Bissenden. Delta was dissolved on 20 April 2010. In 2009 both Mr Dhanda and Mr Bissenden refused to co-operate with HMRC and Delta was deregistered following the latter's failure to attend a meeting with HMRC or to contact it.

Vintners Suppliers Limited

16. Vintners was incorporated on 24 October 2008 and dissolved on 25 June 2010. It was registered for VAT as from 1 March 2009, its intended business being stated by Ian Truesdale, its director, as that of 'wholesaler and distributor of liquor and other drinks'. It was deregistered with effect from 24 August 2009.
17. RDD's records included 58 Vintners invoices relating to the June and September 2009 VAT periods. They were dated between 23 April and 15 August 2009 and related to the purported supply of wine and beer. The total value of the purchases was £1,997,021.57. The input tax claimed in respect of the period to June was £189,625.41 and that in respect of the period to September was £70,818.25. RDD's bank statements recorded no payments to Vintners, none of its cheques raised in this period being apparently payable to Vintners.
18. RDD did, however, compile cash reconciliations sheets for August, September and October 2009 that showed a column headed 'cash to vintners'. Those for November and December 2009 renamed the column 'cash to invoices'. HMRC could not tally any amounts in the former column to any trader, all the amounts being round sums, which the invoice sums were not; and no payments in the nature of what might be regarded as balancing payments were shown. RDD's records included purchase orders and goods receipt forms for the Vintners purchases but they were all generated by RDD's internal STL computer system. There was, however, also a delivery note dated 23 April 2009, the same day as one purchase order and invoice for £29,792 worth of beer. Vintners' VAT returns for the periods covering 1 March to 24 August 2009 declared no output tax.

AHA Wholesale Limited

19. AHA was incorporated on 6 January 2006. At the date of Mr Mann's affidavit, it was still active but faced a proposed striking off from the register. It was registered for VAT with effect from 1 May 2006, its stated intended business being the 'wholesale of soft and alcoholic drinks'. It was deregistered with effect from 24 August 2009.
20. RDD's records showed just one invoice purportedly from AHA, relating to the September 2009 VAT period. It was dated 20 September 2009 and so post-dated AHA's deregistration. The value of the alleged purchase was £30,634.02 and the input tax relating to AHA and claimed by RDD on its return for the period to September 2009 was £3,995. That invoice (misspelling AHA's name by omitting the first 'e' in 'Wholesale') was the only supporting evidence for the purchase. AHA submitted a nil return for the same period, declaring no output tax on the claimed supply. An HMRC officer visited AHA's place of business on 14 September 2009 and found no sign of the trader.

Apex Brokerage Limited

21. Apex was incorporated on 7 August 2008, following which it had three changes of director, Pasquale Melino becoming its director on 15 June 2009. It was dissolved on 16 March 2010. It was registered for VAT on 1 March 2009, its intended business being stated as 'food wholesale'. It was deregistered with effect from 9 September 2009 following an inability on the part of HMRC to make contact with Mr Melino to discuss its business activities.
22. For the two VAT periods to September and December 2009, RDD declared total purchases from Apex of £1,375,781.65 and claimed input tax in respect of such purchases of £38,311.97 and £141,138.06 respectively. The purchases were supported by 45 invoices, of which 42 post-dated Apex's deregistration. No output tax was declared on any return submitted by Apex, all its returns having been nil returns. The September invoices were supported by purchase orders and goods receipt forms generated by RDD's own internal STL computer system: the later invoices were not so supported. There were no delivery notes from Apex. None of RDD's cheques drawn during this period appeared to have been payable to Apex.

The 'missing traders' - generally

23. HMRC relied on the common pattern relating to all these claimed transactions. In the case of each trader, its VAT registration had been cancelled because it had not been possible for HMRC to contact the trader or because the trader did not appear to be trading in the manner it had suggested to HMRC. In each case the traders either failed to file VAT returns or filed returns that did not reflect the claimed trade with RDD. The pattern of RDD's claimed trade with the five traders was that it dealt with each successively, and intensively, for a short period of time between December 2008 and December 2009. There was, in relation to each trader, no lead-in time in which trade started slowly and built up; and no tail-off time. The total value of the invoices from the five traders was £5,242,012. By contrast, between 1 July 2008 and 31 December 2009 RDD traded with seven genuine suppliers; RDD's trade with each overlapped with its trade with others and the total invoice value for the period was £2,036,335.30; and RDD paid for most of its supplies from these traders by cheque. HMRC's case was that RDD's claimed trade with the missing traders was bogus and that it had created the invoices in order to perpetrate a fraud on HMRC. HMRC had disallowed all input tax claims based on RDD's claimed trade with these traders. They were aware that RDD had recently started trading with another suspect company, Arete Systems.

I-K Drinks Limited

24. Mr Mann turned to RDD's trade with IKD, the so-called 'buffer trader'. IKD was incorporated in February 2006. Hasan Baig became its director in October 2007. Its sole shareholder shown in its last annual return, as at 8 February 2009, was Tamveer Ahmad. It was registered for VAT with effect from 1 March 2006, its stated intended business being a 'fast food outlet'. In December 2007 Mr Baig contacted HMRC to notify a change of its main business activity to one including the wholesale of alcoholic beverages. Mr Mann set out at length HMRC's contact with IKD and what it knew about IKD's suppliers. In relation to the latter, one such supplier was understood to be Eden Wines and Food Limited. Mr Baig informed HMRC that Eden had no warehouse space and that it, and other suppliers, would deliver straight to IKD's customers, which included RDD. He could give no explanation why the customers would not go straight to the suppliers other than that the trade was based on 'trust'. He stated that his mark up was 10p to 15p per case. HMRC found 61 Eden invoices in IKD's records relating to the period 14 December 2009 to 27 February 2010. Some of this stock was then apparently onward sold to RDD back to back on the same day and in the same invoiced quantities. The net invoice value of the Eden supplies was £873,291.90 which was invoiced to RDD by IKD for the net sum of £879,690.50. The average mark up was 0.73%. For the 18 VAT periods covering its period of registration, Eden submitted ten returns declaring nil trading and failed to submit seven other returns that it should have made. IKD's only other return, for the period to January 2010, declared £100,231.35 input tax and £101,383.65 output tax, with net tax payable of £1,152.30. The invoices for supplies to IKD for that period included VAT of £209,057.27, a figure far in excess of the output tax declared by it for the period. Eden had purportedly supplied goods to IKD from 2 to 27 February 2010 which had not been declared on any Eden return. The invoices had a total output tax value of £80,087.29. Eden's VAT registration was cancelled with effect from 11 March 2010 because of its non-production of records and confirmation of trading activities.
25. IKD purportedly supplied RDD with wines and beers between 14 December 2009 and 18 September 2010. The value of the supplies was £7,416,925.75 and the input tax relating to IKD that RDD claimed for the relevant periods was £1,094,638.84. The supplies were supported only by 181 invoices: there was no additional supporting accounting evidence. None of RDD's several cheques and bank transfers raised during the period apparently related to IKD. Any payments must have been in cash but no accounting records supported this. Mr Baig had, however, confirmed to HMRC that RDD paid IKD with cash and cheques.
26. HMRC's assertion was that IKD's role was to act as a buffer providing paperwork to RDD to support its holding of substantial stock. They found no evidence that IKD ever held the stock, took title to it or was in any way involved with it. They did not accept that IKD had made any genuine supplies to RDD.

Suppression of output tax

27. HMRC claimed that RDD had under-declared its output tax up to the September 2010 period, an assertion based on a comparison of RDD's turnover shown in its accounts with the declarations in its VAT returns. The under-declaration was said to be £214,634.52. I will not summarise the detail of HMRC's case: this aspect of it was not at the forefront of the issues before Floyd J or this court.

Inflation of input tax

28. In addition to their case based on the missing and buffer traders, HMRC regarded the claimed input tax as falling to be disallowed in part for other reasons. They asserted that £334,736.81 had been overclaimed. For example, input tax had been claimed in respect of invoices not addressed to RDD, certain claims had been duplicated, and four invoices were for hospitality facilities at a well-known football club and so were for non-business supplies. For like reasons as in relation to the under-declaration of output tax, I will not summarise the detail of HMRC's case.
29. In the remaining paragraphs of his affidavit, Mr Mann advanced HMRC's grounds for believing that those in control of RDD had provided false information either to HMRC, the liquidator of Liquorflow or both, that they were not to be trusted and that, if no provisional liquidator were appointed, there was a real risk of a dissipation of assets to the detriment of creditors. The basis for these assertions was fully set out and I will not rehearse it. HMRC offered an undertaking in damages if the appointment of a provisional liquidator was made.
30. Peter Smith J made the order sought. The petition, VAT assessment and order were served on RDD on 25 February 2011. The assessment was for £2,327,948.48, reflecting HMRC's disallowance of input tax claims of £683,938.32 in respect of the missing traders and £1,094,638.84 in respect of IKD. On 3 March 2011 HMRC served two further assessments in the sums of £339,443 and £388,808.

B. The evidence before Floyd J

31. What follows does not purport to be a comprehensive account of the further evidence: it is no more than a summary of its essence.
32. Mr Defty made his first statement on 3 March 2011. He explained why he had previously been in possession of RDD's trading records: the liquidation of Liquorflow had led to claims against Imran, Shakeel and RDD, and a freezing injunction was obtained against them save that RDD was entitled to trade in the ordinary course of business provided that trading information was furnished to Mr Defty.
33. Whereas Mr Iqbal was the only known director of RDD at the date of the application before Peter Smith J, Mr Defty learnt that Shakeel had been appointed a director on 27 January 2011. Mr Defty spoke to RDD's bookkeeper, Mahed Hassan, and its cashier, Shravan Kumar, with a view to understanding the trading position as at 25 February 2011, but this was difficult because of what Mr Defty called 'the parlous state of [RDD's] books and records'. He assessed their state to be extremely poor 'with bank statements, cheque book stubs, invoices, purchase orders, delivery notes and other accounting information distributed in a wide variety of places'. There appeared to be no central accounting function. RDD did not run any established accounting system. It did, however, have a sales system called STL Distribution. Mr Defty was directed to Mr Mistry, an employee, who was said to be in charge; and was told that Imran was also in charge. Whilst Mr Mistry denied to him that he had any knowledge of the general running of RDD, Mr Defty later discovered that he had substantial such knowledge.
34. Mr Defty learnt on 28 February 2011 that RDD was in arrears with its rent (£12,950) and service charge and owed money in respect of utilities. On the same day someone turned up at RDD's premises claiming that he owned the forklifts and was owed £20,000.
35. Adhila Awan told him that she had been appointed a director of RDD in order to look after the interest in it of her father, Bashir Awan ('Bashir'), but could only say that his interest related in some way to his house. She could not tell Mr Defty why she had resigned as a director on 20 October 2010, nor at whose request she had done so. She could not explain why Bashir's interest no longer needed looking after: after 5 November 2010, when Imran resigned, Mr Iqbal was the sole director. She had had no involvement with RDD's suppliers and said that Mr Mistry was the man to speak to about that. Mr Defty was told that Mr Iqbal had been ill for months so that between 5 November 2010 and Shakeel's appointment in January 2011 there was no director in effective control of RDD.
36. Shakeel told Mr Defty that he had only been appointed a director in order to give instructions to RDD's solicitors, Burrows Bussin, concerning certain claims that RDD had against HMRC relating to the seizure and confiscation of goods. He had been an employee of RDD throughout its trading period but had no knowledge of its business or dealings. As regards suppliers, he said that Mr Defty should speak to Mr Iqbal (who had been with RDD throughout its trading history) and Mr Mistry (who had worked for it since about April 2009). Shakeel said he held no books, records or assets of RDD.
37. Imran told Mr Defty that since resigning as a director on 5 November 2010, his role was confined to that of a salesman. During the time he was a director, he said he was not involved in the purchase of supplies: Mr Iqbal and Mr Mistry were the people to speak to about that. He knew of a 'Gary' at Delta, but did not know if it was Gary Bissenden. He had heard of Sunfyne. He knew nothing about Vintners. He had not heard of Apex or AHA but had heard of Arete. Arete had become a recent substantial supplier. Imran remained on the bank mandate and signed cheques when told to. Decisions as to payment by cheque were made by Mr Mistry and Bashir. Imran had been the sole shareholder of RDD but on 5 November 2010 had transferred all the shares to HBR Acquisitions Limited ('HBR'), a company owned and controlled by Bashir that had been incorporated two days before. Imran said that Bashir then attended RDD's premises on a daily basis for an hour to check that everything was all right, although nobody else mentioned his involvement. Imran gave what Mr Defty found to be a confused account of the share sale to HBR, the emphasis of Imran's explanation being that he was owed £600,000 by RDD. The evidence of Wendi Bussin (a partner in Burrows Bussin, by then acting for RDD's directors and HBR) was that the consideration for the share purchase was the fair value of the shares as at 31 October 2010, an assessment to be made by independent auditors that had not yet been made. She produced a stocktake report as at that date which valued RDD's stock at £727,454.78.
38. Mr Kumar, the cashier, told Mr Defty's staff that Imran had removed £12,000 in cash from the cashier's office on 25 February and that two days earlier Mr Mistry had removed £35,700. Ms Bussin later explained that this was to pay Arete, although Imran, for his part, denied having taken the £12,000. Imran also explained that one of the reasons he resigned as a director was that he just wanted to get out of RDD: and that he was also concerned that he was likely to be disqualified as a director following his involvement in Liquorflow. Imran made no witness statement in these proceedings. At the time of his first statement, Mr Defty had not been able to interview Mr Mistry.
39. Mr Defty's conclusion in his first statement was that RDD was 'hopelessly insolvent'. He set out an apparently crude statement of affairs based on the limited information he had, showing assets of £447,000 and liabilities of £3,532,000 and including an approximate figure for suppliers of £1,000,000. On the basis that RDD was insolvent, he asked for a variation of Peter Smith J's order to permit him to realise assets for the benefit of creditors: he pointed out that all the goods had a sell by date that was fast approaching.
40. Ms Bussin made a statement on 3 March 2011. She disputed the reliability of a schedule of RDD's creditors that Mr Defty had uplifted from an RDD computer, asserting that it did not prove the suggested indebtedness and was based upon poor accounting documents. She said only Mr Mistry could explain the true position. Her assertions in this respect confirmed Mr Defty's assessment as to the quality of RDD's records. Whereas, for example, the schedule of creditors showed £150,000 odd as owed to IKD, IKD claimed that RDD owed it nothing. (It emerged that it was in fact owed £7,000: RDD's recent cheque for that sum had been dishonoured following Mr Defty's appointment). She pointed out that the trades of Liquorflow and RDD had not been identical: Liquorflow dealt just in alcohol, whereas RDD was now also an established cash and carry business dealing in goods in addition to alcohol. She emphasised the importance of Mr Mistry's evidence, describing him as the 'manager of RDD and primarily responsible for buying stock'. She disputed the accuracy of the summary statement of affairs that Mr Defty had set out in his statement.
41. In a later statement of 18 March 2011, Ms Bussin asserted that RDD's only debts were the £7,000 to IKD and about £193,000 to Arete. She further explained that in the proceeding brought by Mr Defty against Imran, Shakeel and RDD (see paragraph [32] above) the terms of the freezing order permitted RDD to trade on terms that included the regular provision to Mr Defty of sales and purchase information, till readings and bank statements. She said that RDD 'continued to trade under the auspices of Mr Defty'. Mr Pickup made the same point to us, although Mr Davies disagreed that it was an accurate statement of what had happened. The position, he submitted, was that problems arose almost immediately and, he said, the agreed documents were not provided. Such information as was provided suggested that there had been a breach of the freezing order, and on 10 August 2010 Mr Defty issued an application for the committal to prison of Imran and Shakeel for contempt of court and for a fine against RDD. He referred us to the assertions to this effect in the affidavit of James Latham made on 10 August 2009 sworn in support of the committal application (he is a partner with Moon Beever Solicitors, who were acting for Liquorflow and Mr Defty). In the event that application was withdrawn and the whole proceedings were settled by a consent order of 20 August 2009 under which the defendants made no admission of liability although they paid £400,000 towards Mr Defty's costs. Mr Davies also submitted that the information that had been provided to Mr Defty was inaccurate, as Mr Mann had asserted in his principal affidavit.
42. Ms Bussin said that on 28 February 2011 she had herself seen RDD cheque book stubs showing 'cash to IK Drinks' and cheque payments to IKD as well (one of them was for the £7,000). Hasan Baig (of IKD) made two statements to the effect that IKD had traded with RDD since December 2009. His first statement said that IKD dealt with Imran (who had, however, told Mr Defty that he did not deal with supplies) and with Mr Mistry. His second was to the effect that Imran told him that day to day dealings would be with Mr Mistry, but Mr Baig said that he would often meet Imran on his visits to RDD, which were once or twice a week. He said that RDD had paid IKD by cash, cheque and on one occasion a bank transfer. IKD did not supply invoices on delivery: they would normally be supplied up to three weeks later. It provided credit of up to six weeks. It retained purchase and sales invoices and payment received receipts in order to evidence its sales. Mr Baig did not exhibit any documents confirming IKD's trade with RDD.
43. Naresh Kailayanathan, a director of Arete, made a statement to the effect that Arete had been trading, and supplying RDD, since September 2010. Arete had dealt with Mr Mistry. It generally took up to three weeks to supply invoices to customers. RDD usually paid it with cash or by cheque. As at 15 March 2011, RDD owed it £219,000.
44. Shakeel made a statement on 18 March 2011. His role at RDD had been as a supervisor, which required 'making sure the different elements of the business such as accounts, buying and booking in were running smoothly'. RDD's accountants had been Brian Nuttgens Accountants. Mr Nuttgens' company, Cobat, was the secretary. RDD had one bank account, with Barclays, and no overdraft facility. It handled a large amount of cash in order to pay wages and 'those suppliers who prefer to be paid in cash'. All cash was reconciled with tills 6 and 7 in the cash room each day. He said the two sums of £37,500 and £12,000 referred to in paragraph [38] above (the latter of which Imran had denied) had been taken to pay Arete for stock. He accepted that RDD owed rent of £12,950 to its landlord for February and March 2011.
45. Shakeel said that when he became a director in January 2011 his role did not change save that he assumed the task of instructing RDD's solicitors in its then current litigation with HMRC. Mr Iqbal had joined as a general manager in August 2008, becoming a director in June 2010. It was he who was responsible for general day to day running and he established the procedures for the cash office, internal accounting functions and the STL system. He was also predominantly responsible for purchasing goods. He became ill in early 2010, was off work for several weeks and Mr Mistry performed his duties. Mr Mistry continued performing them after Mr Iqbal's return to work. Mr Iqbal had a stroke in September 2010 following which he had not returned to work although he remained a director; and Mr Mistry became the general manager of the cash and carry side of the business. Bashir was a director of HBR and his house stood as security for RDD's business loan from Barclays. Following HBR's acquisition, Bashir worked a couple of hours at RDD every morning with Mr Mistry. Shakeel said that one reason that Imran resigned as a director in November 2010 was that he knew that consideration was being given to the making of an application to have him disqualified as a director.
46. Shakeel explained the difference between the trades of Liquorflow and RDD. He said that RDD carried out due diligence in respect of all those it traded with other than large, well-known suppliers. As for the deals with the 'missing traders', he denied Mr Mann's assertions of fraud. He said that RDD received stock from each such trader, but gave no explanatory evidence supporting that assertion. He said that Mr Mistry and Mr Iqbal dealt with Delta, which was paid in cash and by cheque and that there was CCTV footage of cash being collected by Delta (there was, however, no evidence that anyone had looked at it). Imran and others had dealt with Sunfyne (all, however, that Imran had said about Sunfyne was that he had heard of it) and it too was paid in cash and by cheque. Mr Mistry and Imran dealt with Apex (although Imran had told Mr Defty he had never heard of Apex) and RDD paid it in cash. Mr Mistry and Mr Iqbal dealt with Vintners, it was paid in cash and there was also like CCTV footage of the cash payments. Imran deal with AHA and it was paid in cash (although Imran had told Mr Defty he had never heard of AHA).
47. Mr Mistry made a witness statement on 30 March 2011. He started working for RDD as an assistant manager in April 2009. He worked with Mr Iqbal, who was responsible for buying alcoholic goods, which also became his primary responsibility. When Mr Iqbal became ill in the spring of 2010, he took over his work and was responsible for placing orders after discussing them with Imran. He would tell Imran what stock was needed, and Imran would tell him which suppliers to approach (Imran had, however, told Mr Defty that he was not involved with supplies). He undertook due diligence checks on new suppliers. When Mr Iqbal returned to work, Mr Mistry continued in his role but under Mr Iqbal's supervision. He described how RDD was approached by IKD, Arete, Vintners and Bestco and how he visited Vintners in Scotland, where he saw their office and a warehouse full of stock. Once a price was agreed, RDD would generate a purchase order on the STL system and fax it to the supplier: he would either do that himself or instruct others to do it. Stock would be delivered in a matter of days and taken to the 'goods in' bay. The purchase order would be compared with the delivery note by 'goods in' staff, of whom there were two or three. Such staff would generate a 'Goods Received Note' on the STL system, although not normally on the same day the goods were received. The purchase order, GRN and delivery note would then be sent up to the accounts office. Until Imran's resignation in November 2010, Mr Mistry took his instructions from him but after that he took them from Bashir, with whom he would meet on a daily basis. Imran would sign any cheques that were required.
48. Mr Mistry said he kept a record of outstanding payments due to suppliers who required cash. He set this up on his computer at RDD and kept a copy on a memory stick, which he regularly updated at home. When the cash was collected, the cash office would record it, inform Mr Mistry and he would update his computer. Cash was sometimes paid on account. If Mr Mistry ever paid a supplier in cash after hours, the supplier would sign a cash collection sheet and Mr Mistry would hand it to the cash office the next day. The cash would then be allocated to 'cash to invoice'.
49. In a further statement of 24 March 2011, Mr Defty explained how his investigations left him faced with significant discrepancies in the information with which he had been provided. He had not yet been satisfied as to the identity of RDD's employees as at the date of his appointment. He had had a formal stocktake carried out, which valued the stock (wholesale) at £721,814. There were outstanding question as to the ownership of various vehicles that had apparently been used by RDD. He remained of the view that RDD's accounting records were extremely poor. His assessment of the STL system was that it was only 'usefully used to record sales': as for supplies, his interrogation of it revealed that RDD had a negative value of stock of some £4,000,000, whereas the stock take had shown otherwise. He had received differing explanations as to who was ultimately responsible for the maintaining of RDD's records in accordance with the Companies Act 2006. His assessment was that they had not been kept in such accordance. Shakeel, Imran, Adhila Awan and Mr Mistry all denied having any accounting records in their possession. Mr Mistry had told him that the accounting functions were undertaken by the bookkeeper, Mr Hassan, by Mr Nuttgens its former accountant and, most recently, by RSM Tenon, who had on 19 January 2011 become its new accountants. Mr Hassan had told him that he had not operated any form of double entry bookkeeping and could not tell what RDD's liabilities were. He had said that his immediate superior was Mr Mistry and that his role was to enter purchase invoices collected from Mr Mistry's office on to a spreadsheet and then send them to the accountants. Mr Nuttgens had told Mr Defty that his main contacts were Imran and Mr Iqbal and that he was not in possession of any RDD records (Mr Defty's staff had uplifted such records as he had had upon Mr Defty's appointment). Tenon advised Mr Defty that it had not yet carried out any services for RDD.
50. Mr Defty explained that he had interviewed Bashir, who said he had had no involvement in RDD before 5 November 2010. His interest related to a loan that Imran had taken out to support RDD, the repayment of which was secured on Bashir's house. Mr Defty had not been able to verify the loan. Bashir had, following his acquisition of the shares in RDD, attended its premises daily in order to speak to Mr Mistry and ask how much he had sold and what was in the bank account. He said he had no involvement in RDD's paperwork. He gave no purchase instructions and did not know RDD's suppliers or customers. He explained Shakeel's appointment as a director on 27 January 2011 as being because he looked after things when Mr Mistry was on holiday. Nothing had been paid for the transfer of the RDD shares. Mr Defty's assessment was that Bashir had been a de facto director of RDD since 5 November 2010. Mr Defty had not been able to interview Mr Iqbal. Mr Defty had written to the five 'missing traders' but had received no response from any of them. He had found miscellaneous documents relating to IKD and had made contact with it and I have referred to Mr Baig's evidence. He focused in some detail on the very recent trading of RDD, although that period of its history was not at the forefront of the matters in issue before the judge. His conclusions as to such recent trading included that (i) RDD could not have paid out more in cash than it had received, (ii) RDD was 'very exact in recording its sales figures but completely lacking and unsatisfactory in recording its purchases and purchase payments', (iii) the alleged invoices from suppliers meant that RDD was paying excessive prices for its stock, and (iv) RDD was allegedly selling stock for less than it had allegedly paid for it. Mr Defty's conclusion was that RDD was insolvent, with assets of £1,112,431 and liabilities of £4,742,091, although that included HMRC's original assessment of £2,327,948 and two subsequent assessments they had raised.
51. RDD's case before Floyd J depended principally on two affidavits of John Humphreys, a chartered accountant and partner in RSM Tenon, RDD's new accountants and auditors. He made statements on 18 and 31 March 2011, the latter sworn on the morning of the commencement of the hearing before Floyd J. His instructions had been to investigate HMRC's allegations and assessments and to report to the court 'on the extent to which there is evidence that [RDD] might be able to mount a successful defence to the allegations'. He had been given access to RDD's documents and electronic material and the opportunity to discuss matters with the personnel to whom I have referred. Given time constraints, his first statement was confined, as regards the 'missing traders', to his investigation into RDD's supplies from Delta and Vintners.
52. Contrary to Mr Mann's evidence, Mr Humphreys considered that RDD's accounting records included significant evidence that supplies were received from the missing traders and IKD, including purchase orders, delivery notes, goods received notes and details of payments made. He exhibited various printouts from RDD's STL system relating to Delta, Vintners and IKD, which showed purchase order numbers, goods received numbers and the value of goods booked into the stock system. He had matched values booked onto stock with invoices from Delta, Vintners and IKD. He had done work in tracing payments to Delta, Vintners and IKD and had been able to trace cash paid to cash reconciliation sheets. He had found some delivery notes from Delta, date stamped and signed by Peter Battersby at RDD, whom he understood to be responsible for booking in goods received: these were documents that had been provided to Mr Defty under the monitoring arrangement in place during the currency of the freezing order but had not been provided to HMRC.
53. Mr Humphreys dealt at some length with RDD's solvency or otherwise. He agreed with Mr Mann that the solvency reflected in its balance sheet as at 30 June 2009 depended on the validity of its VAT debtor of £369,505. He had considered Mr Nuttgens' draft accounts for the year ended 30 June 2010, which showed net assets of £415,143. He disagreed that they showed a fair picture, as they grossly overstated the assumed value of RDD's stock. His own assessment of the likely value of the stock (£1,000,000) meant that RDD had net negative assets of £335,000 at 30 June 2010, leaving aside any adjustment to the VAT debtor. RDD was therefore insolvent on a balance sheet basis. It was also loss-making, Mr Humphreys' assessment of the loss to 31 October 2010 being £1,521,000. The viability of RDD was therefore dependent on continuing financial support from its directors. Mr Humphreys also acknowledged that a revision of HMRC's assessment of 25 February 2011 as a result of his own findings (£95,167.29 was said to be in error and £1,971,104.16 was said to be disagreed) left a liability of £261,677.04.
54. Mr Mann responded to Mr Humphreys' first statement, with an affidavit of 20 March 2011. He was dismissive of it, pointing out that (save for some Delta delivery notes dated between 3 February and 2 April 2009) the evidence relied upon was derived primarily from RDD's own STL computer system and so was self-generated and uncorroborated by independent material. Two new Delta invoices that Mr Humphreys had produced were dated 1 May 2009, the day following the day when other evidence suggested that Delta had ceased to trade. Mr Humphreys' appendix 6 showed that in the case of the majority of Delta transactions (£856,695.02 worth), Mr Humphreys was unable to match values booked on to stock with Delta invoices. With regard to Vintners, Mr Humphreys' appendix 6 showed that the majority of supplies (£1,696,925.68 worth) were also unmatched. Of the 58 Vintners invoices that Mr Humphreys had compared to the STL printout, he had only been able to match two of them. Mr Mann's assessment was that Mr Humphreys' work showed that the vast majority of the disputed supplies could not be traced to RDD's own stock control system.
55. As for IKD, Mr Mann pointed out that many of the documents that Mr Humphreys relied upon as evidence of the supplies were again print outs from RDD's STL system rather than independent corroboration. Several delivery notes, which were not so generated, had been faxed together on 24 February 2010, whereas the deliveries to which they related had allegedly been made a month before. As regards matching between the invoices and the entries on the STL system, Mr Humphreys had been unable to match invoices to the value of £1,470,004.11. Mr Mann questioned, as he explained at some length, the reliability of the exercise Mr Humphreys had performed in tracing payments to Delta, Vintners and IKD. He noted that Mr Humphreys assessed RDD to be insolvent on a balance sheet basis. Insofar as Mr Humphreys had recognised that the viability of RDD was dependent upon continuing financial support from its directors, Mr Mann observed that there was no reason to accept that Mr Humphreys was correct in any assumption that such support would continue. There was no evidence indicating that either Shakeel or Mr Iqbal would or could provide it.
56. Finally, I come to Mr Humphreys' second statement. He had in the meantime been able to consider the position with regard to Apex, AHA and Sunfyne, and had also considered RDD's recent trade with Arete. In relation to those supplies, he produced printouts from the STL system showing purchase order numbers, goods received numbers and the value of goods booked into the stock system. He had not had time to trace cash payments before March 2009 as he had had limited time and also limited access to RDD's records. He produced some additional delivery notes relating to supplies from Delta. He accepted that the STL print outs did not provide independent corroboration of the disputed supplies but pointed out that purchase orders and goods received notes (as compared with delivery notes) are always generated internally. Mr Mann's original case had been that there were no purchase orders for the RDD supplies: but Mr Humphreys had provided them. As regards tracing goods received from the disputed traders into RDD's stock system and then into sales records, he acknowledged that a full tracing exercise could not be carried out 'using the normal STL interface' and that although he considered it likely that such an exercise could be carried out using computer interrogation techniques, this could not be done in the time available. He disagreed with aspects of Mr Mann's criticisms of his earlier conclusions and explained why. He re-asserted his opinion that there was significant evidence that supplies were received from Delta and the other traders. I do not propose to attempt to summarise the considerable detail of Mr Humphreys' further evidence, much of which covered matters that were not the subject of argument before us. In paragraph 91, he said, by way of overall summary, that 'Based on the information currently available to me, I set out my findings in respect of the assessments raised at Schedule 12. Out of the total assessments of £2,928,587.49, I agree £340,715.52. This is still less than the VAT debtor of £400,061.99'.

C. Floyd J's judgment

57. The judge summarised the factual background and identified the three categories of HMRC's claim: (i) that RDD did not buy the supplies from the missing traders that formed the basis for its input tax claims; (ii) that it had likewise not bought the goods from IKD that formed the basis of further input tax claims; and (iii) that it had suppressed the output tax due from it. He said that overall HMRC asserted an indebtedness of £1.9m and that 'If that sum is due and owing, [RDD] do not contend that they would be able to pay. They contend that they do have a defence at least to a very large part of the assessment.'
58. I should say something about that figure of £1.9m. HMRC's assessment served on 25 February 2011 was for £2,327,948.49 and it was that sum that, in paragraph 11 of his first affidavit, Mr Mann had asserted to be due. He had there also recognised that RDD claimed that, on the contrary, HMRC owed it VAT repayments of £400,061.99 but he had also made it clear that HMRC disputed that claim: and he had said that even if that repayment claim was well-founded, it would still leave a sum of £1,927,886.50 due to HMRC. It is, I presume, that sum to which the judge was referring as HMRC's claimed indebtedness, but it appears to me that that may perhaps have been an error. It was made plain to us by Mr Davies that the £400,061.99 claim is disputed by HMRC; and Mr Pickup (who, unlike Mr Davies, appeared before the judge) did not suggest that HMRC's case before the judge was in this respect different. Having said that, I note (although neither side referred us to it) that the petition, both in its original form before the judge and as amended following an order of 18 April 2011 (after the judge's order), appears to give credit for the £400,001.99 claim and to assert indebtedness of only £1,927,886.50. That was not, however, how the case was argued before us.
59. The judge then summarised the basis of RDD's application for the discharge of Peter Smith J's order: (i) material non-disclosure to Peter Smith J; (ii) no sufficient risk of dissipation of assets if no provisional liquidator were in office; (iii) no prima facie case that RDD would be ordered to be wound up.
60. Dealing first with the non-disclosure allegations, the judge rejected them save only that he did find that HMRC had materially failed to disclose to Peter Smith J the difference between the Liquorflow and RDD businesses. He said:

'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.'

61. Having so found, the judge said that it was unnecessary to consider whether such non-disclosure was itself sufficient to require the discharge of the order. He bore the non-disclosure in mind but made it clear that he needed to consider whether Peter Smith J's order could be justified on substantive grounds. If the judge was to any material extent wrong in his assessment of those substantive grounds, Mr Pickup did not submit to us that his order could and should anyway be sustained on the ground of non-disclosure alone. I will not therefore refer to that aspect of the matter again.
62. The judge dealt next with the risk of dissipation. He disposed of HMRC's assertions of such risk in a single paragraph, as follows:

'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.'

63. On one reading of that paragraph, it might be concluded that the judge would have discharged the appointment on that ground alone, without any need first to consider whether or not HMRC had a good prima facie case for the winding up of RDD: and the significance of the latter question is that if the answer to it was negative, it is difficult to see how it would then be necessary to consider the risk of dissipation at all. This was, if I may respectfully say so, therefore perhaps a slightly surprising point in the judgment at which to consider the risk of dissipation. As I shall explain below, it would normally arise for consideration only upon the judge being satisfied as to there being a good prima facie case for a winding up.
64. The judge then moved on to consider the disputed trade, opening it by saying that the 'largest area of contention related to the allegations of fraud themselves'. He pointed out that the case put to Peter Smith J was that, beyond the invoices, there was simply no evidence that the trade took place. He then summarised the story with regard to each of the five missing traders, dealing first with Sunfyne in paragraph [11]. He referred to Shakeel's evidence about Sunfyne and said that Mr Humphreys:

'… 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'.

65. The judge dealt with Vintners in paragraph [12]. He again referred to Shakeel's evidence and continued:

'… 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 [18] above to Mr Mann's evidence that one was found.

66. The judge then dealt with Delta. He recorded that Mr Mistry had told Mr Defty that he did not know Delta but that Imran had said he knew someone there called 'Gary'. The judge did not record that Imran had told Mr Defty that he was not involved in RDD's purchase of supplies. He continued:

'… 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.'

67. The judge then dealt briefly with AHA, pointing out that there was a delivery note for the single invoice relating to it. He dealt next rather more fully with Apex in a long paragraph which Mr Davies relied upon in particular as illustrating how thin RDD's case was. I shall set it out:

'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.'

68. I point out that in fact Imran told Mr Defty not that he had never dealt with Apex, but that he had never heard of it. Finally, the judge dealt briefly with IKD in paragraph [16], devoting his account mainly to a summary of Mr Baig's evidence in his two witness statements.
69. The judge came to his conclusions. He reasoned first, in paragraphs [17] and [18], that HMRC's case that the invoices were bogus was one based on forgery and fraud, which had to be established 'to a high standard'. The paper exercise before the judge was not a safe or satisfactory way of determining whether forgery has occurred. The evidence showed that there was a dispute about whether the trade had taken place. The judge said that:

'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.

70. The judge considered next Ms Frazer's submission that all that was needed for the appointment of a provisional liquidator was that HMRC had a good prima facie case for the compulsory winding up of RDD, a submission based on Plowman J's decision in Re Union Accident Assurance Co Ltd [1972] 1 All ER 1105. The judge reminded himself that he was not trying the petition, but said that he had to ask himself whether there was a good prima facie case that, at such hearing, the court would accept that there was no substantial ground upon which to dispute the debt. His conclusion was that, as he could see there were likely to be real and substantial disputes, that test was unlikely to be met.
71. The judge dealt finally with an additional case advanced by HMRC. As this assumed some importance at the hearing before us, I shall set out what he said:

'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.'

72. The outcome was that the judge therefore made an order for the immediate discharge of the appointment of the provisional liquidator.

D. Discussion

73. Section 122 of the Insolvency Act 1986 provides that a company may be wound up by the court if (amongst other grounds) 'the company is unable to pay its debts'. So far as material, section 123 defines an 'inability to pay debts' as follows:

'(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. …'

74. Section 124 provides that an application to the court for the winding up of a company shall be by a petition presented by (amongst others) 'any creditor or creditors'. The winding-up petition in this case was presented by HMRC as creditors of RDD. They seek its winding up on the ground of its insolvency. They assert that they have a solid case that they are creditors of RDD and that it is insolvent.
75. The court's jurisdiction to appoint a provisional liquidator is conferred by section 135 of the Insolvency Act 1986. Section 135(1) provides that 'Subject to the provisions of this section, the court may, at any time after the presentation of a winding-up petition, appoint a liquidator provisionally'. Section 135(2) provides that in England and Wales, 'the appointment of a provisional liquidator may be made at any time before the making of a winding-up order; and either the official receiver or any other fit person may be appointed'. Section 135(4) provides that the provisional liquidator shall carry out such functions as the court may confer on him; and section 135(5) provides that that his powers may be limited by the order appointing him. The power to appoint a provisional liquidator is, therefore, a broad and general one in the sense that, provided that the jurisdictional conditions in section 135(1) and (2) are met, the section imposes no limitations upon, nor does it prescribe, the criteria to be adopted by the court when considering an application for such an appointment (see Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105, at 1109h, per Plowman J; and In re Highfield Commodities Ltd [1985] 1 WLR 149, at 158G to 159F, per Sir Robert Megarry V-C).
76. The appointment of a provisional liquidator to a trading company is, however, a most serious step for a court to take. It is likely in many cases to have a terminal effect on the company's trading life. It is not an order to be made lightly and its making requires the giving by the court of the most anxious consideration. In Union Accident Assurance, Plowman J explained the twofold approach that he proposed to adopt. He said, at [1972] 1 All ER 1105, 1110b:

'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.'

77. With one qualification, I would respectfully regard that as a good working approach to the disposition of an application for the appointment of a provisional liquidator. The qualification is that I would, however, regard the continued use in this context of the phrase 'good prima facie case' as unsatisfactory. In American Cyanamid Co v. Ethicon Ltd [1975] AC 396, at 404F, Lord Diplock said of the phrase 'prima facie case' that it 'may in some contexts be an elusive concept', and Plowman J's chosen phrase also included a 'good', which may perhaps tend to increase the risk of elusiveness. Given the potential seriousness of the appointment of a provisional liquidator, I consider that in the case of a creditor's petition the threshold that the petitioner must cross before inviting such an appointment ought to be nothing less than a demonstration that he is likely to obtain a winding-up order on the hearing of the petition.
78. The first, and critical, question that I consider therefore fell to be considered by the judge was whether HMRC were likely to obtain a winding up order on the hearing of their petition. RDD's suggested answer to that question was in the negative, on the basis that HMRC's debt was (i) disputed, and (ii) to the extent that it was admitted, was exceeded by RDD's counterclaim. There appears also to have been an issue as before the judge as to RDD's solvency. Before coming to the facts, I should say something about the position that arises when a petitioning creditor's debt is the subject of dispute.
79. A well-settled rule of practice, which has long been familiar to users of the court's winding up jurisdiction, is that a debt that is wholly disputed on substantial grounds cannot ordinarily found the basis for the making of a winding up order. A petition based on a debt shown to be the subject of such a substantial dispute will ordinarily be dismissed. Perhaps more commonly, any such dispute as to the petition debt will be likely to provoke an early application by the company to restrain the advertisement of the petition and a successful application to that effect will be likely to result in the removal of the petition from the file (or, more colloquially, its striking out). In the present case, RDD's application of 18 March 2011 sought no such striking out: it sought no more than the discharge of the appointment of the provisional liquidator.
80. It perhaps hardly needs to be said that the rule does not, however, entitle a company to do no more than assert that it disputes the debt and then expect the petition to be struck out or, if the hearing is the substantive one, dismissed. It is not sufficient for the company merely to raise a cloud of objections. It has, in the old-fashioned phrase, to condescend to particulars by properly explaining the basis of the claimed dispute and showing that it is a substantial one. If, despite the company's protestations, the alleged dispute can be seen on the papers to be no dispute at all, or to be no dispute as to part of the debt, the petition will ordinarily be allowed to proceed. If, however, the dispute is shown to be one whose resolution will require the sort of investigation that is normally within the province of a conventional trial, the settled practice is for the petition to be struck out or dismissed so that the parties can contest their differences before whichever other forum may be appropriate.
81. In the present case, having reviewed the disputed trades, the judge concluded that whilst HMRC had shown an arguable, perhaps a good arguable, case that in relation to some of the traders the (or some of the) supplies had not taken place, he was unable to conclude that the evidence was so strong as to show that there was no genuine or substantial issue to be tried as to whether the trade had actually occurred. He said that 'allegations of this seriousness, of forgery and fraud, have to be established to a high standard'. In his view those issues had to be tried in an appropriate forum, namely the Tax Chamber of the First-tier Tribunal; and it was wrong to use such a claim as the basis for the continued appointment of a provisional liquidator. He then considered whether a good prima facie case for a winding-up order was made out and came to the conclusion that it was not.
82. I am well aware, as Mr Pickup forcefully impressed upon us, that the exercise that the judge was performing in coming to the conclusions just summarised was one of judgment on his part. He heard no oral evidence and so this court has before it the same material that he did. Even so, I need no persuading that it is not for this court simply to make its own assessment of the written evidence and, if it were disposed to arrive at a different conclusion from that of the judge, to substitute its own different conclusion for his. This court ought in my view only to re-consider the soundness of the judge's assessment of the evidence if it is first satisfied that his assessment of it was in some manner perverse or if he arrived at his conclusion on an erroneous basis.
83. I would not characterise the judge's conclusion as perverse. I do, however, consider with respect that he approached the issue before him in relation to the missing and buffer traders on an erroneous basis. His approach was that HMRC had advanced a serious case of fraud and forgery against RDD; that such a case has to be proved by evidence that cogently supports it; that it cannot be safely or satisfactorily made good on the papers alone; and that the right forum for its determination was not the Companies Court on the hearing of a winding up petition, but the First-tier Tribunal on the hearing of an appeal against the assessments by RDD.
84. Whilst I well understand that process of reasoning, I respectfully consider that it mischaracterised the nature of the issue that was before the judge. It is true that HMRC had levelled serious allegations of fraud against RDD. It was, however, in my view wrong to regard the differences between the parties as differences in which the burden was on HMRC to prove the alleged fraud down to the last penny and in which RDD's task was simply to defend their claims. What HMRC were asserting was that they did not accept that any of RDD's input tax repayment claims were genuine. Their protracted investigations had revealed what appear to me to have been ample grounds for adopting that stance. Their VAT assessment served on 25 February 2011 proceeded on the basis that the tax repayment claims were false. RDD was entitled to appeal against the assessment, as it has done. The evidential burden of proof on the hearing of that appeal may perhaps undergo some degree of inter-party shifting. It appears to me, however, that it is an oversimplification to regard RDD's appeal as one in which it can expect to put the entire burden of disproof upon HMRC. The substantive reality is that HMRC had raised a case in respect of the disputed invoices that was sufficient to cast upon RDD the burden of proving their genuineness.
85. The fact, however, that the assessment raised by HMRC was one that could be the subject of an appeal by RDD (and it has now launched an appeal, although it had not done so at the time of the hearing before the judge) does not mean that the assessment could not found the basis for a petition for the winding up of RDD. Put another way, it was not open to RDD to challenge and defeat the petition merely on the basis that it had a statutory right of appeal against the assessment before another forum. The existence of a right of appeal says nothing as to whether any appeal will have merit; and it was open to HMRC, as they did, to present their petition against RDD on the basis that their claimed debt, or at least a material part of it, was not capable of serious dispute and so could properly found the basis for a winding up order.
86. There is no doubt that HMRC's evidence raised serious questions as to the genuineness of the invoices. If RDD was to challenge the basis of the petition, and therefore the appointment of the provisional liquidator, the burden was therefore upon it to show that it at least had a good arguable case that its claimed trade with all the disputed traders was genuine. It sought to do so, although, so it seems to me, by adducing evidence of breathtaking inadequacy. The appalling state of RDD's accounting records meant that there are no records sufficient on their face to answer HMRC's case. The judge had no evidence from any RDD director who was in office during the time when the disputed trades were said to be happening. He had no evidence supporting the trades from any of the five missing traders. RDD therefore had to resort, perhaps fairly remarkably, to the services of a forensic accountant with a view to trying to meet HMRC's case. Mr Humphreys' efforts produced documents that HMRC's original efforts had not, although to the extent that they were generated by RDD's own STL system their evidential cogency was obviously limited. To the extent that they produced a limited number of delivery notes (in relation to Delta and AHA), they were obviously more valuable. It may turn out that at least the supplies so evidenced were genuine. It does not, however, follow that all the other supplies were. The evidence supporting their genuineness was, overall, lamentable. In particular, the judge's summary of the claimed trade with Apex shows just how suspicious it was. Beyond Shakeel's bald assertion that stock was received from Apex, RDD could not even agree who had dealt with Apex. Shakeel said it was Imran and Mr Mistry. But Imran had said that he had never heard of Apex; and Mr Mistry denied dealing with them. The trade with Sunfyne was, on the judge's findings, equally suspicious: Mr Humphreys had been able to match RDD's STL stocktake system printout with only one invoice and had not been able to find any contemporary documents.
87. In my judgment, the real question before the judge on the 'missing traders' issue was whether RDD had shown by its evidence that, upon the hearing of the petition, it was likely to be able to show that in relation to all the alleged trades it claimed to have carried out it had a good arguable case that they were genuine. The judge did not, however, as I read his judgment, approach the case from that angle. In my view he should have done. Had he so approached it, I consider that he could only have concluded that RDD had not discharged that burden. The judge himself recognised that HMRC 'perhaps [had] a good arguable case, in relation to some of the traders, that the supplies or some of the supplies did not take place.' Put the other way round, in relation to such supplies RDD had provided no good arguable answer to HMRC's case. The judge appears to have preferred the approach that something might turn up and that RDD should be given the benefit of the doubt. So it might, but on the inadequate evidence before him, and on his own findings, I am of the view that he ought to have held that HMRC had established a likelihood that the court hearing the petition would hold that at least a very material part of the disputed supplies had not been shown to have taken place.
88. HMRC also had a further claim to be creditors, namely that on Mr Humphreys' own calculations, and having re-worked HMRC's assessment, he agreed at least some £340,000 of it. I have earlier set out how the judge dealt with that, but will for convenience repeat it:

'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.'

89. I am not entirely clear what the judge was finding with regard to the counterclaim. I prefer the view, however, that he was not going to the length of finding that RDD had an arguable cross-claim. He was saying no more than it was possible that on the future hearing of the petition RDD would be able to set up a cross-claim. He was not saying that it had done so before him. His conclusion to that effect was not therefore one that purported to treat the admitted debt as one that was answered by a substantial cross-claim for an amount exceeding it. I interpret him as accepting that HMRC were admittedly creditors for at least about £340,000, but as then holding that the possibility that RDD might set up an arguable counterclaim in the future was a circumstance that made the reliance upon the admitted debt as a basis for the appointment of a provisional liquidator disproportionate.
90. I do not, with respect, find that reasoning convincing. I do not in fact understand quite what point the judge was making in paragraph [24]. He had already decided, in paragraph [10], that there was no sufficient risk of dissipation of assets to justify the appointment of a provisional liquidator. I infer from his reasoning in paragraph [24], however, that he considered that, given that HMRC were admitted creditors, he still had to assess whether the appointment of a provisional liquidator was appropriate. Having rejected the existence of any material risk as to the dissipation of assets, the judge did not explain what other reasons there might be for retaining the provisional liquidator in office. He said no more than that such an appointment would be a disproportionate response. I do not find that a helpful explanation. Either there were other grounds, apart from any dissipation risk, justifying such an appointment or there were not. If there were such grounds, the judge should have explained what they were, weighed them and made his decision. If there were none, then that was the end of it: the appointment of the provisional liquidator had to be discharged.
91. So far as the suggested counterclaim is concerned, the judge's findings appear to me to show that RDD had failed to make good any case that it did have a counterclaim exceeding the £340,000 or so that it admitted it owed HMRC. In Re Bayoil SA [1999] 1 WLR 147 this court expressed the view that, whilst the dismissal of a petition based on a disputed debt is not a matter of discretion, the like treatment of a petition based on a cross-claim can only be a matter of discretion. The cross-claim must, however, be shown to be 'genuine and serious or, if you prefer, one of substance' ([1999] 1 WLR 147, at 150D to H; and at 155F, per Nourse LJ, in a judgment with which Ward and Mantell L.JJ agreed). The citation above from Floyd J's judgment shows that he was not satisfied that the suggested cross-claim satisfied the Bayoil test (see again the last sentence of his paragraph [23]), and that little attempt had been made to show him that it did. He made no attempt to explain what the cross-claim was, if indeed he knew. It appears to have been put before him merely as a matter of assertion.
92. Mr Davies said that there had been no mention of any counterclaim in the evidence or the skeleton arguments before the judge. He said its origin derived from the last two sentences of paragraph 91 of Mr Humphreys' second statement, which I quoted in paragraph [56] above. It was, therefore, a reference to the £400,061.99 to which Mr Mann had made reference in paragraph 11 of his first affidavit, namely the amount of RDD's claimed repayments of input tax at the conclusion of the relevant periods.
93. That case was nowhere sought to be made good in the evidence, and Mr Davies' submission was that, despite Mr Humphreys' second quoted sentence referring to the £400,061.99, the suggested cross-claim made no sense. That is because Mr Humphreys had himself worked through HMRC's calculations for all the relevant VAT periods, an exercise in which, whilst specifically not conceding HMRC's position in relation to the input tax claims, he still arrived at the position that RDD was a net debtor to HMRC for about £340,000. It is, submitted Mr Davies, impossible to understand how on that basis the £400,061.99 claim can survive as a cross-claim. Mr Humphreys had offered no explanation as to how it could.
94. I would accept that submission. Neither the exiguous evidence on this topic, nor Mr Pickup's contrary submissions, satisfied me that there is a genuine cross-claim for any such amount. Moreover, since the £400,061.99 claim, if it exists at all, is at best based on the genuineness of all the disputed invoices, I would, for reasons given, anyway discount the weight to be attached to it. In my judgment, if and insofar as the judge may have treated the suggested cross-claim as a factor somehow entitling him to discount the admitted indebtedness of some £340,000, he was in error. Quite apart from the lack of any convincing answer from RDD as to the bulk of the claimed indebtedness, that admitted indebtedness ought by itself to have been sufficient to satisfy the court that HMRC were likely on the hearing of the petition to make good their claim to be creditors of RDD.
95. That would not, by itself, be enough to obtain a winding-up order. HMRC would also have to prove that RDD was insolvent. The judge noted that, ignoring HMRC's claim, Mr Defty assessed RDD to have a small surplus of assets over liabilities, whereas RDD, by Mr Humphreys' evidence, acknowledged that it was insolvent on a balance sheet basis as at June 2010 and was dependent for its survival on funding from its directors. There was no evidence before the judge that any such funding would be forthcoming. The judge does not appear to have made a finding as to whether RDD was insolvent. It appears to me, however, that if, as I consider he should have done, he had also brought into account RDD's failure to provide any sufficient evidential answer to the bulk of HMRC's claimed indebtedness and its continued history of loss making, he could only have concluded that RDD was insolvent, or at least was likely to be shown to be insolvent at the hearing of the petition. In my view he should have so concluded.
96. Overall, therefore, I would conclude that, had he directed himself correctly, the judge should have found that HMRC was likely to obtain a winding up order on the hearing of the petition. The next question to which he would then have to turn would be as to whether, pending judgment on the petition, he should maintain the provisional liquidator in office.
97. One of the considerations raised by that question is the risk of dissipation of assets in the meantime. The judge addressed that risk in paragraph [10] of his judgment, before giving any consideration to the quality of HMRC's claim to be creditors of RDD or, therefore, the likelihood that they would obtain a winding up order. I have already ventured my view that that was perhaps a premature moment at which to consider that question, and in any event, as I shall explain, I consider that for the judge merely to focus on the risk of 'dissipation of assets' was to take too narrow an approach. There is, however, in my view anyway a problem with paragraph [10], namely that it is, with respect, materially unreasoned. The judge's view was that the evidence before him showed that 'the risk of dissipation of assets [was] not … sufficiently great to justify the appointment of a provisional liquidator'. He did not, however, identify what evidence he had in mind and, speaking for myself, I do not know what it could have been. He nowhere provided an explanation for his conclusion.
98. In these circumstances, and having arrived at the conclusions (i) that the judge ought to have held that HMRC had established that they were likely to obtain a winding-up order on the hearing of the petition, and (ii) that his decision that it was anyway inappropriate for a provisional liquidator to be appointed was essentially unreasoned, I consider that it falls to this court to consider afresh whether or not the appointment of a provisional liquidator made by Peter Smith J ought to be restored. HMRC sought permission to adduce further evidence before us, which RDD answered. The evidence goes to events occurring since Floyd J's order. We admitted it on the basis that we would consider it only if we reached the point at which we would be required to make a decision afresh: and Mr Pickup raised no objection to our admitting the evidence for that limited purpose. I also record that we refused to admit by way of further evidence the fourth affidavit of Mr Mann, which was sworn on 13 September 2011, two days before the hearing. It was of such volume that we considered it unfair for RDD to have to deal with it.
99. I turn, therefore, to whether Peter Smith J's discretionary exercise of judgment in appointing Mr Defty as provisional liquidator of RDD ought to be discharged or maintained. I start from the premise that RDD is insolvent, or is at likely to be shown to be insolvent at the hearing of the petition; and that HMRC are likely to obtain an order for its winding up. That is not, I consider, sufficient without more to justify the appointment of a provisional liquidator. The usual basis on which such an appointment is sought is because of a risk of jeopardy to the company's assets, namely the risk of their dissipation before the winding up order is made, with the consequence that their collection and rateable distribution between the company's creditors will be frustrated. Such risk does not refer to (or only to) 'dissipation' in the sense in which that word is ordinarily used in the context of freezing orders, that is a deliberate making away with the assets so as to frustrate the enforcement of a future judgment; it includes any serious risk that the assets may not continue to be available to the company (see Re a company (No 003102 of 1991), ex parte Nyckeln Finance Co Ltd [1991] 1 BCLC 539, at 542, per Harman J). I consider that Harman J probably had in mind the type of case in which, despite the presentation of a petition, an apparently insolvent and loss-making company simply continues to trade without obtaining an order under section 127 of the Insolvency Act 1986.
100. The circumstances justifying the appointment of a provisional liquidator are not, however, confined to jeopardy of this particular nature. In cases in which there are real questions as to the integrity of the company's management and as to the quality of its accounting and record-keeping function, it will be an important part of a liquidator's function to ensure that he obtains control of its books and records so that he can engage in all necessary investigations of its transactions. These will or may include investigations of those who have been managing the company with a view to considering the bringing of claims against them; and the consideration of whether any of the company's directors ought to be the subject of a report to the Secretary of State to the effect that it appears to the liquidator that they were unfit to be concerned in the management of a company. Such a report might then lead to an application to the court for their disqualification. If there is any risk that, pending the hearing of the petition, records may be lost or destroyed, that will also found the basis for the appointment of a provisional liquidator, who will be able immediately to secure them and commence his own inquiries into the affairs of the company and the conduct of its management.
101. In the present case, I consider that there are ample grounds justifying the maintenance in place of the appointment made by Peter Smith J. Whilst no finding of dishonesty has been, nor at this stage can be, made in respect of anyone involved in RDD's trading history, the evidence has revealed how unsatisfactory its corporate governance has been. It has filed no accounts since those for the year ended 30 June 2009. Its keeping of books and records has been lamentable. Mr Defty's evidence was that there appeared to be no central accounting function in RDD and that it did not appear to run any established accounting system. He had received differing explanations as to who was ultimately responsible for maintaining its records in accordance with the Companies Act 2006 and his assessment was that its records had not been so maintained. Mr Hassan was said by Mr Mistry to have undertaken the accounting functions but he told Mr Defty that he did not operate any form of double entry bookkeeping and could not tell what RDD's liabilities were. The absence of proper records verifying the trades that are the subject of dispute, particularly in a company like RDD which deals in large amounts of cash, serves to raise a justified concern as to the integrity and competence of RDD's management; and RDD's lack of proper records in relation to their claimed trades with the missing traders casts inevitable suspicion upon them. HMRC, claiming as creditors of RDD in respect of VAT, are in this respect in a more disadvantageous position than ordinary trade creditors, since unlike ordinary trade creditors they are in the nature of involuntary creditors and do not have their own counterparty records. They have, therefore, a particular interest in ensuring the preservation not only of RDD's cash and other assets but of such records as there are by a provisional liquidator so that an early investigation into RDD's affairs and into the acts or omissions of its management can be embarked upon. RDD was loss-making, probably insolvent and, HMRC claims, liable to it for very large sums of money in unpaid VAT, RDD not having paid any VAT at all throughout its trading period. Imran had been its owner and main director, and apparently the driving force behind it, throughout the whole of that period and had suddenly resigned in November 2010. The reasons for that are obscure although he was apparently vexed with a concern that he was likely to face proceedings for his disqualification as a director as a result of his activities in Liquorflow. He is the man who, one might think, ought to have been a key witness in explaining and making good RDD's claimed trades with the missing traders, yet he chose to make no witness statement in the proceedings before Floyd J.
102. This summary of RDD's affairs justifies in my view the appointment of a provisional liquidator. The events since Floyd J's order appear to me to underline the need for it. The evidence is as lengthy as most of the evidence in this case and I do not propose to refer to very much of it.
103. On 27 April 2011 RDD applied to the Companies Court for an order under section 127 of the Insolvency Act 1986 authorising it to trade in the ordinary course of business. Shakeel's evidence was that, ignoring HMRC's petition debt, RDD was solvent and able to pay its debts as they fall due. Such an application is ordinarily required to be supported by evidence including:

'(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) [2007] 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 …'.

104. RDD's evidence did not meet those requirements of the Practice Note and on 17 May 2011 Ms Registrar Barber adjourned its application so as to enable RDD to file the required evidence. She also ordered RDD to pay the costs of the hearing, which HMRC attended. RDD has not filed the required further evidence. Ms Bussin's evidence is that the problem is not that RDD lacks the documentation but that it does not have the funds with which to instruct Mr Humphreys to prepare it. So much, therefore, for any suggestion that RDD can expect to receive continued financial support from its directors. HMRC asserts that, despite the absence of any section 127 order, RDD has engaged in an informal winding up of its affairs. This way of putting it is disputed, although Ms Bussin has accepted that since 17 May 2011 RDD has 'undertaken limited trading'. She has explained that it has sold stock for some £90,000 (it was said to be reaching its 'sell by' date) and has paid nearly £55,000 on utility bills, rent, security costs, telephone bills, wages and other miscellaneous expenses. In response to questions from HMRC, she explained that 'the primary concern is to sell stock which is reducing in value due to shelf life although other stock is available for sale to customers'. RDD has also paid pre-petition debts owing to Arete, in sums totalling some £169,000. Despite selling stock, RDD has not filed any VAT returns in respect of disposals. Nor has it filed any annual accounts since the 2009 accounts.
105. In the absence of a section 127 order, it was irresponsible for RDD to engage in these transactions. Whatever may be said about the arguable merit in selling the stock, the various payments that RDD has made were potentially void. In particular, RDD's preference of Arete was inexcusable; nor did Mr Pickup seek to excuse it. It was a blatant misapplication of its assets and just the sort of dealing that the appointment of a provisional liquidator would have prevented. In my judgment, HMRC can have no confidence that pending the hearing of the petition the conduct of RDD's affairs is in safe hands.
106. Since writing this judgment I have had the advantage of reading Lewison LJ's judgment in draft. I agree with all he says save only that I do, however, have respectful reservations as to what I read to be a criticism of HMRC for having made their application to Peter Smith J without giving notice of it to RDD, or explaining in their evidence why they had not given such notice. The propriety of HMRC's chosen procedure in the present case was not the subject of argument before us and I regard it as probable that they would defend their recourse to such exceptional procedure by saying that, in the light of the seriousness of the case they had made against RDD, the need for it was self-evident. As, however, this was not in issue before us, I should prefer to say no more about it.

Disposition

107. I would allow HMRC's appeal and make an order for the immediate restoration of the appointment of Mr Defty as provisional liquidator of RDD.

Lord Justice Lewison :

108. I agree that HMRC's appeal should be allowed; and would like to add some observations of my own. They are no more than footnotes to Lord Justice Rimer's comprehensive judgment, with which I agree.
109. The appointment of a provisional liquidator is, as the phrase suggests, an interim remedy. It takes place before the facts have been found. Not only is it an interim remedy, it is one of the most intrusive interim remedies in the court's armoury. In many, if not most, cases its effect will be to stop the company trading; and to cause the company's employees to lose their jobs. In deciding whether to grant or refuse an interim remedy the overriding principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. Among the matters which the court may take into account are the prejudice which the claimant may suffer if the remedy is not granted or the defendant may suffer if it is; the likelihood of such prejudice actually occurring; the extent to which it may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the remedy will turn out to have been wrongly granted or withheld, that is to say, the court's opinion of the relative strength of the parties' cases: see National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16 [2009] 1 WLR 1405 §§ 17, 18.
110. If a business is shut down wrongly, the cross-undertaking is unlikely to provide adequate compensation to the company concerned, let alone to the employees who will have lost their jobs and to whom no cross-undertaking will usually have been offered. In addition once a provisional liquidator has been appointed the company's books and records will pass into his control; and will no longer be accessible, as of right, to the company's directors. This latter consequence may hamper the company and its directors in defending allegations made in the petition. I agree, therefore, with Lord Justice Rimer (§ 76) that the appointment of a provisional liquidator requires the most anxious consideration.
111. This leads on to the next point. Because the appointment of a provisional liquidator is so intrusive, an application for such an appointment made without notice needs to be justified by exceptional circumstances. A judge should not entertain an application of which no notice has been given unless either giving notice would enable the defendant to take steps to defeat the purpose of the remedy (as in the case of a freezing or search and seizure order) or there has been literally no time to give notice before the remedy is required to prevent the threatened wrongful act. Any notice is better than none: see National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16 [2009] 1 WLR 1405 §13. Nor is the judge's task helped by the extraordinary volume of the evidence and exhibits to which Lord Justice Rimer has referred (§ 5). In the present case the problem is worse. Although, as Lord Justice Rimer has explained, HMRC had been investigating RDD for over three years before the application to Peter Smith J, in all his 126 pages Mr Mann gave no evidence at all to justify the making of the application without notice. I regard this as a serious omission before Peter Smith J; although by the time of the contested hearing before Floyd J it had lost its significance.
112. To my mind the key to the case lies in the admitted debt to HMRC of some £340,000. In the course of his very effective reply Mr Davies QC demonstrated convincingly that this admitted debt took into account the claims for repayment of input tax that RDD had already made. In other words there was no counterclaim. Once the alleged counterclaim had disappeared it was plain that RDD was insolvent on both a balance sheet and a cashflow basis. The contested allegations of fraud could be put on one side. In those circumstances there was a very strong case that a winding up order would be made.
113. As Lord Justice Rimer has explained (§ 99) the mere fact that a winding up order is likely to be made on a creditor's petition is not enough on its own to justify the appointment of a provisional liquidator. Something more is needed. Although the phrase "dissipation of assets" has crept into this branch of the law it is important not to fall into the trap of equating the criteria for the appointment of a provisional liquidator with the criteria for the grant of a freezing order. For one thing, a freezing order will not (at least in theory) prevent transactions that take place in the ordinary course of business, whereas if a provisional liquidator is appointed the business will usually grind to an instant halt. For another, the need to preserve books and records may be an important factor in deciding whether or not to appoint a provisional liquidator. This may be so where there is clear evidence of fraud; or even (as in this case) where there is almost irrefutable evidence of chaos. In some cases this kind of concern may be alleviated during an interim period by the giving of undertakings by the company and its directors. But no undertakings were offered in this case. In addition in some cases the appointment of a provisional liquidator of an insolvent company may be justified because of his ability to investigate possible claims against directors for fraudulent or wrongful trading: Re Latreefers Inc [1999] 1 BCLC 271. It may also be of considerable significance to consider the prospect of the company's obtaining a validation order under section 127 of the Insolvency Act 1986. If there is no real prospect of obtaining such an order, then the company may have to cease trading anyway; in which case the harm caused by the appointment of a provisional liquidator may be diminished.
114. Lastly, it is important to recall that the petition in this case is a creditor's petition. There is power under section 124A of the Insolvency Act 1986 to present a winding up petition on the ground that it is expedient in the public interest that a company should be wound up. But the power to present such a petition is reserved to the Secretary of State alone. At times it seemed to me that HMRC's appeal to the public interest trespassed into forbidden territory. Given the fact that, as Lord Justice Rimer points out (§ 75), section 135 does not prescribe criteria which must be satisfied before a provisional liquidator is appointed, the approach in the case of a public interest petition may differ from the approach in the case of a creditor's petition. That question will have to be decided in a case in which it matters.
115. Having reached the conclusion that there was a very strong case that a winding up order would be made on the basis of the admitted debt, I agree with Lord Justice Rimer that for the reasons he gives the appointment of a provisional liquidator was justified.

Lord Justice Pill :

116. For the reasons he gives, I agree with the order proposed by Rimer LJ.