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
HIS HONOUR JUDGE KAYE QC
HC05C00158

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th May 2012

Lord Justice Patten :

1. This is an application by the third defendant in these proceedings, Mr Nouman Hafiz, for permission to re-open his earlier application for permission to appeal against an order of the 22^nd December 2009 made by HH Judge Kaye QC (sitting as a High Court judge) that Mr Hafiz should pay the sum of £2,141,510.80 to QEB Metallics Limited ("QEB"), a company in liquidation. That order was made by Judge Kaye QC under s.212 of the Insolvency Act 1986 which provides that:

"(1) This section applies if in the course of the winding up of a company it appears that a person who—

(a) is or has been an officer of the company,

(b) has acted as liquidator or administrative receiver of the company, or

(c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company,

has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

…..

(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him—

(a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or

(b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just."

2. The application for permission to appeal was dismissed at an oral hearing by Etherton LJ on 13^th May 2010. In order to understand the reasons for his decision and the grounds of the present application it is necessary for me to set out the not uncomplicated background to these proceedings. I can do that by reference to the following paragraphs in Judge Kaye's judgment:

"6. In June 2007 QEB started to trade with a smelting company known as Engelhard Sales Ltd ("ESL"), a subsidiary of a German company, BASF. There is no reason to suppose ESL is other than a bona fide reputable company.

7. HMRC assessed QEB for some £1,849,422.41 VAT but over a 9 month period between 18 July 2007 and 4 April 2008 the liquidators identified 70 transactions between QEB and ESL whereby QEB sold precious metals (platinum, palladium and silver) to ESL for refinement generating a turnover of £12,255,655.58 giving rise, in turn, to a VAT liability of £2,141,510.80.

8. Over the same period the company should have made four VAT returns for quarters ending June, September and December 2007 and March 2008. Only 3 VAT returns were filed (for June, September and December 2007) all (falsely) purporting to show a "nil" return despite substantial trading in the period to which the return related other than the quarter ending June 2007 (there was no relevant trading before about July 2007). No VAT return at all was filed for the last quarter ending 31 March 2008. In consequence none of the VAT has been accounted for and paid to HMRC which is how they come to be creditors of QEB.

9. ESL was instructed to pay the VAT element on the transactions into a sterling bank account and the net proceeds of sale (after deducting charges for ESL's refinement services) into a dollar bank account, both with Credit Suisse in Switzerland from whom bank statements were eventually obtained.

10. QEB apparently obtained the precious metals it supplied to ESL either from addresses in Columbia (CI Encol SA) or Dubai, UAE (Passi Jewellers LLC or Ibrahim Al Hammadi Garage) though there is some uncertainty as to this given the limited documentation on this aspect of the case. Assuming there were genuine imports, no input tax would arise on such foreign purchases."

3. The last sentence of paragraph 10 is incorrect but, for reasons which I will come to, nothing turns on that. The judge went on to find that attempts by the liquidators to obtain further information either from QEB, their suppliers or their freight forwarders have been unsuccessful and that the mechanics of the fraud were, in essence, admitted by Mr Hafiz during the course of the proceedings. He was also satisfied that Mr Hafiz had directed the operations of QEB in, as he put it, a significant manner and to a significant degree and was the real influence in the affairs and business of the company. For those reasons, he concluded that Mr Hafiz was a de facto director of QEB throughout the relevant period of its operations. In terms of liability, his conclusions as set out in paragraphs 59 and 60 of his judgment were as follows:-

"59. In my judgment Mr Hafiz was the controlling mind behind QEB, he was, as I have said, at the epicentre. He it was who, on the balance of probabilities with others, set up the business in QEB and directed its operations and gave Mr Khan instructions as to how the operations were to be conducted. He knew, in my judgment, precisely what was going on and knew there was a fraudulent design behind the activities of the company, namely to deprive HMRC of VAT. His instructions emanated, as it were, from the board of directors for the simple reason he was the board of directors. I infer (which does not seem to me unreasonable having regard to the evidence) that Mr Peerzada was as much his creature as others like Mr Khan. Mr Hafiz was more than a mere manager. He controlled the company and its activities. He was the person with real influence in the corporate affairs of the company. He was sufficiently implicated in the fraud carried on by QEB to make him accountable in equity (see Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 per Lord Millett at para. 141). Despite his protestations I find it more probable than not that he had full knowledge of the attempt to cheat and defraud HMRC and knew it was a dishonest plan and was morally and culpably responsible for it.

60. Accordingly, since the action is brought by the liquidators, it does seem to me that Mr Hafiz's activities fall within both s 212 and s 213 Insolvency Act 1986. So far as the former section is concerned Mr Hafiz was the management and as such owed fiduciary duties to the company. As to the latter it follows he well knew the activities of the company were carried on with intent to defraud HMRC. If it were necessary I would also find Mr Hafiz guilty of a dishonest conspiracy (with Mr Peerzada and with others unknown) to defraud the company of its claim to the VAT. The effective result is the same via a number of different routes, whether by the statutory provisions referred to or in equity or at common law, they all point in the same direction that Mr Hafiz is in my judgment liable."

4. The judge then turned to consider the question of quantum. Section 212(3) gives the court power to order anyone who has taken part in the management of the company to pay, restore or account for any money or property which he has misapplied or retained or to contribute such sum as the court thinks just to the company's assets by way of compensation in respect of the alleged misfeasance or breach of fiduciary duty. One of the arguments raised at the hearing was that the liquidators should have challenged the assessment which forms the basis of the petition debt. As indicated by the judge, this was based on the £2.14 million of output tax payable on the sale from QEB to ESL. The argument put to the judge was that, because the goods had been imported from outside rather than from within the EU, VAT would have become payable on their importation by the importer thus giving rise to input tax which QEB could use to deduct from the output tax generated by the onward sale to ESL. The judge rejected this argument as follows:

"63. Mr Brown [Mr Hafiz's counsel]… submits that the liquidators should have disputed even the amounts assessed on the basis that the goods were not bought from another EU member state (on which no VAT would be paid) but from Dubai (VAT being payable on the importation by the importer) and accordingly, as I understood the argument, there would have been input VAT to deduct from a similar output figure. Mr Ingram [one of the joint liquidators of QEB] fairly accepted this point but his evidence was that he had little material with which to challenge HMRC on the assessments. Given the difficulties the liquidators have faced in this case owing to the lack of documentation (save, as I say, such as has been largely supplied by ESL) I do not consider the liquidators are under any obligation, particularly where the loss was occasioned by fraud or inequitable conduct, to embark on what might be an expensive and speculative challenge to the amounts claimed by HMRC where I am by no means convinced they would or could succeed. It is by no means even clear the material was paid for or how, or whether it was in fact imported into the UK, apart from an obvious inference it must have been obtained from somewhere, somehow.

64. In my judgment therefore, whichever way one looks at it Mr Hafiz is liable for the full loss of the VAT namely £2,141,510.80."

5. On the application for permission to appeal quantum remained the only issue. Mr Hafiz did not challenge the judge's findings about the fraud or about his participation in the affairs of the company as one of its de facto directors. That remains the position before me today. Before Etherton LJ the argument that the liquidators had proceeded on a wrong basis was repeated. Mr Brown submitted that, on the evidence before the court, the goods were imported from Dubai and the liquidator was therefore wrong to proceed on the footing that no VAT was chargeable on their importation. This submission was, of course, made on the basis that QEB was the importer and that ESL had simply allowed its duty deferment account to be used for this purpose. If that is right it would seem to follow that input tax should have been chargeable on the importation of the goods from Dubai and therefore allowed for in the calculation of QEB's tax liabilities for the relevant periods of trading. That assumes, however, that QEB paid input tax when it imported the goods. During the course of his submissions, Mr Brown also set out other possible ways in which the transaction might have been structured. Etherton LJ described them in these terms:

"9.     Mr Brown articulates before me various factual scenarios which could account for the way in which these goods were sold to ESL and imported. I only need to deal with two of them because only two of them were ways which were advanced at the trial and put to one of the joint liquidators, Mr David Ingram, and articulated before the Judge. One possibility is that the sale transaction between QEB and ESL took place before importation. This arises because, as I have said, it appears there is evidence that ESL had allowed its duty deferment account to be used for the importations and there is no clear documentary evidence showing QEB as the importer. On that scenario there would be no VAT payable by QEB at all because the sale took place before there was any importation into the United Kingdom. The second scenario that was put to the liquidator and advanced at the trial was that, even if there had been an importation by QEB of the metals which were subsequently sold to ESL, QEB would be entitled to reduce the output tax by the input tax referable to the purchase cost that was paid by QEB itself on importation.

10. So far as the latter scenario is concerned, Mr Brown articulated various ways in which it would have been feasible and indeed not particularly difficult for the liquidators to have established what the amount of input tax should be. They could have referred to ESL itself, whose duty deferment account, as I have said, may well on the evidence have been used for importation. Secondly, they could have inquired into details of import entries on the airways bills. And thirdly, they could have inquired of Brinks, the freight agents, as to import entries in their own records. Those matters, combined with the invoices and other documentation available in respect of the sale of these materials by people in Dubai, would, Mr Brown submitted, have led to either a significant reduction of the VAT liability or indeed its reduction to nil."

6. Etherton LJ rejected all of these arguments principally on the ground that the liquidators would have faced almost insuperable difficulties in challenging the assessments given the relative lack of documentation in their possession. He said:

"13.     The Judge's assessment of compensation is based on his findings of fact. First, he held that, although QEB "apparently", by which I think the Judge means "ostensibly", obtained the precious metal from Colombia or Dubai, there was some uncertainty as to that, given the limited documentation: paragraph [10] of the judgment quoted above. Secondly, he found that the enterprise of QEB was characterised by "smoke and mirrors" and the picture was "opaque", which are the hallmarks of fraud: paragraph [40] of the judgment. Thirdly (this is the most critical of all), he found that the liquidators would have faced difficulties in challenging the assessments in view of the lack of documentation. They would have had to embark on an expensive and speculative challenge to the amounts claimed, the success of which would have been doubtful: paragraph [63] of the judgment. The Judge's conclusion on that last point depended upon the evidence that was before him. That was not merely the documentary evidence and the witness statements, but also the questions that were put to, and the answers on behalf of, the liquidators. When I asked Mr Brown whether he had put to Mr Ingram, one of the joint liquidators who gave evidence, the precise points which he has raised on this application as to the means of establishing what input tax there might have been to reduce the output tax, he candidly said that he put, he thought, some of the points but could not in all honesty say whether he put all of those points and put them in the way that he addressed me. The difficulty is there is no transcript of the oral evidence. The further difficulty is that, even without a transcript, we do not have any agreed or other record of the questions put and the answers to them in cross-examination.

14.     I asked Mr Brown whether he put to the witnesses or to the Judge the first scenario which I have mentioned, which was that the transaction between QEB and ESL took place outside the United Kingdom altogether. He frankly, fairly and candidly accepted that he could not say precisely that he had done so. In my judgment, the inference must be that, because the Judge does not deal with this point at all in his judgment, the point was not raised or not clearly raised."

7. As the basis for the present application Mr Brown, on behalf of Mr Hafiz, relies on the subsequent disclosure by HMRC of the import entries (C88's) for the goods which were supplied by QEB to ESL. These documents have at all material times been in the possession of HMRC but were not made available to the liquidators or to Mr Hafiz until they were disclosed in July 2010. The import entries are said to show that the clearing agent, Brinks Limited, acted as the direct representative of the consignee, ESL, for purposes of Article 5 of Council Regulation (EEC) 2913/92 and that, by importing the goods in its own name, those goods must have been transferred to ESL by virtue of Article 14(1) VAT Directive 2006/112/EC, failing which ESL could not properly have declared itself as the importer and reclaimed the import VAT as input tax. All this is consistent, Mr Brown submits, with there having been a supply of the relevant goods within the meaning of Article 14(1) prior to their importation from Dubai which has the tax consequence that QEB was never liable for VAT in respect of the supply of the goods to ESL.
8. None of this, of course, fits with what we know of the structure of the transaction in so far as it took place between QEB and ESL and was presented to HMRC. As the judge found, the purchase price of the goods paid by ESL included some £2.14 million of VAT which was raised by ESL as part of its self-billing process. ESL has, as I understand it, used the input tax generated by the sale by setting it off against output tax from other transactions and, if Mr Brown is right, it would seem that the input tax paid on the importation of the goods by ESL has also been used as a set off against its other VAT liabilities. If this is correct then it has occasioned a net loss of revenue to HMRC but that is because ESL has paid QEB £2.14 million of VAT on the sale which it was not liable for. The ability of ESL to set this off against its other output tax has had the effect of passing this loss to the Exchequer but had what Mr Brown says is the correct tax treatment been applied ESL would have had a claim against QEB to recover the additional VAT which it had no obligation to pay.
9. The analysis of the transactions now relied on by Mr Brown corresponds to the first scenario referred to by Etherton LJ in paragraph 9 of his judgment quoted above. It is therefore inconsistent with the case presented to him and to Judge Kaye which proceeded on the basis that QEB was the importer from Dubai thus giving it an input tax liability to set against the output tax generated by the sale. It is also inconsistent with the version of events given by Mr Hafiz in certain other contexts such as the director disqualification proceedings brought against him in which he maintained that ESL had imported the goods on behalf of QEB.
10. Similarly, in correspondence with the Insolvency and Security Service in August 2010 following the disclosure of the C88 forms, the solicitors then acting for Mr Hafiz said that the C88's had been completed in error by either Brinks Limited or ESL and that QEB should have been identified as the importer. The case then put was that QEB was entitled to retain the input tax paid at the time of importation by setting it against the output tax on the sale.
11. Given this state of affairs, it is hardly surprising that the liquidators took the decision not to appeal against the assessment to VAT based on ESL's self-billing so that there is now a liability on QEB for the amount of the assessment.
12. Mr Brown puts his application on the basis that it would be unjust for Mr Hafiz to be made to account in effect for a tax liability on QEB which should not exist. And he relies on the late disclosure of the C88's as bringing the case within CPR 52.17. Mr Hafiz has attempted unsuccessfully to assert a sufficient locus in the tax appeal to allow him to pursue the appeal in the light of the liquidator's unwillingness to do so. Having failed there, his only possible recourse is by re-opening the application for permission to appeal against Judge Kaye QC's order.
13. To bring the case within CPR 52.12 based on fresh evidence it must be shown::

"…not merely that the fresh evidence demonstrates a real possibility that an erroneous result was arrived at in the earlier proceedings (first instance or appellate), but that there exists a powerful probability that such a result has in fact been perpetrated.  That, in our view, is a necessary but by no means a sufficient condition for a successful application under CPR 52.17 (1).  It is to be remembered that apart from the requirement of no alternative remedy, "[t]he effect of reopening the appeal on others and the extent to which the complaining party is the author of his own misfortune will also be important considerations" (Taylor v Lawrence, 547).  Earlier we stated that the Taylor v Lawrence jurisdiction can only be properly invoked where it is demonstrated that the integrity of the earlier litigation process, whether at trial or at the first appeal, has been critically undermined.  That test will generally be met where the process has been corrupted.  It may be met where it is shown that a wrong result was earlier arrived at.  It will not be met where it is shown only that a wrong result may have been arrived at."

See Re Uddin (a Child) [2005] EWCA Civ 52.

14. Even if Mr Hafiz is able to overcome the obvious issues of credibility referred to earlier, the objection outlined by Etherton LJ remains. In the light of the paucity of documentation and other reliable evidence, it is difficult to say that the liquidator was at fault in not pursuing the appeal against the assessment on the basis that QEB was entitled to file the nil returns which it did. Although the importation of the goods from Dubai created a charge to VAT, Mr Hafiz continued to contend that QEB was the importer which would not have entitled it to claim input tax unless it had actually been paid. It does not now suggest that was the case.
15. But the real and short answer to the application is that none of this really matters. Whatever is the correct tax treatment to be applied to the transaction, the fact remains that Mr Hafiz has extracted the £2.14 million paid by ESL as VAT on its purchase of the goods and has paid this money into a Swiss bank account to his order. He was not a de iure director of the company nor is he one of its shareholders. No attempt has been made by him to legitimise what, on the face of it, is the unlawful retention or misappropriation of an asset of the company.
16. The liquidator was appointed to get in the assets of the company and to distribute them to the company's creditors. Any surplus of assets over liabilities will inure for the benefit of the shareholders. If the liquidator is at fault in failing properly to defend the company against the claims of HMRC he is accountable to the creditors and perhaps the contributories. But that is a matter to be resolved once the liquidator has recovered the £2.14 million from Mr Hafiz which represents the tax claimed by HMRC. In the meantime, Mr Hafiz can have no answer to the liquidator's claim to recover from him an asset to which he is not entitled. Whether that asset (if recovered) is used to pay off the liability to HMRC or is dealt with in some other way is irrelevant. That dispute cannot give Mr Hafiz a title to the money.
17. For those reasons, I consider that an appeal against the judge's order would have no real prospect of success and that the application to re-open the permission hearing must be dismissed.