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Official Receiver and Neil Hickling v. Dhiren Doshi [2001] EWHC Ch 451 (1st March, 2001)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

GLC 407/99

Royal Courts of Justice
Strand
London WC2A 2LL
01 March 2001

B e f o r e

MR JUSTICE HART

BETWEEN:

The Official Receiver - Claimant
Neil Francis Hickling - Claimant
and
Dhiren Doshi - Defendant

Mr Adrian Francis (Instructed by Messrs Argles Stoneham Burstows, Solicitors) appeared on behalf of Official Receiver.

Mr Christopher Boardman (Instructed by Messrs Taylor Johnson Garrett, Solicitors) appeared on behalf of Mr Hickling

Mr Dhiren Doshi - Litigant in Person.

DRAFT JUDGMENT

Hearing: Friday 20 November - 11 December 2000

Judgment: Thursday 1 March 2001

I direct pursuant to CPR Part 39 P.D. 6 that no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.

Signed: ...................................................... The Honourable Mr Justice Hart

Date: ......................................................

This judgment when handed down in approved final form will be made available on the Court Service web site:

http://www.courtservice.gov.uk/sitemap.htm under the heading "judgments" on the homepage

INTRODUCTION

1. I have heard over a period of 21 days two applications against the respondent Dhiren Doshi ("Mr Doshi") arising out of the compulsory liquidation in March 1995 of V K Vintners Limited ("VKV"). The first is an application by the Official Receiver, pursuant to section 6 of the Company Directors Disqualification Act 1986, for a disqualification order. The second is an application by VKV's liquidator, Mr Hickling, for an order pursuant to section 214 of the Insolvency Act 1986, requiring Mr Doshi to contribute up to Ł2.69 million to the assets of VKV, by reason of VKV's wrongful trading over its entire trading period. The applications were ordered to be tried together by an order dated 17 July 2000 made by Neuberger J.

2. VKV's business consisted of the importation of wines and spirits and their distribution and sale to retail outlets in the UK. It commenced trading on 22 February 1992, taking over the assets of a previous company owned by members of the Doshi family, Universal Merchandises (Wines) Limited ("Wines") shortly before Wines went into compulsory liquidation with an apparent deficiency to creditors of Ł1.1m. According to its audited accounts for the period ended 28 February 1993 VKV had achieved sales in that first period of Ł4,010,825.00, but had traded at a loss (after writing off Ł40,000 of goodwill arising on the purchase of Wine's business) of Ł11,621. The audited accounts for the 10 month period ended 31 December 1993 showed sales of Ł6,661,142.00 and a pre-tax profit of Ł30,586.00 (post tax Ł22,336). Those accounts also show the profits/losses to have been calculated after charging director's remuneration of Ł58,333.00 (to 28 February 1993) and Ł52,500.00 to 31 December 1993). On 6 September 1994 VKV's premises were entered and searched by Her Majesty's Customs and Excise (HMCE). At the same time HMCE entered and searched the premises of Mr Doshi's brother Mahesh ("Mahesh"), who was the owner and sole director of a company then known as EMX Limited but which had previously had the name Picton Mount Limited ("PML"). Both brothers were subsequently charged and tried for offences connected with the VAT affairs of VKV and PML, as also was VKV's in-house accountant Mr Jamal Merchant ("Mr Merchant"). The last available accounts for VKV, prepared by Mr Merchant as management accounts for the 10 month period ended 31 October 1994, showed the company as having made a loss of Ł43,071 over that period from sales of Ł5,137,108.00. On 20 January 1995 HMCE presented a petition for the winding up of VKV based on arrears of VAT, penalties and interest of Ł282,412.00. The petition was advertised on 10 March 1995 and VKV was ordered to be compulsorily wound up on 21 March 1995.

3. The HMCE "raid" of 6 September 1994 was not the only blow suffered by VKV at that time. Throughout its relatively short trading history its trade had been financed by a factoring agreement with RoyScot Factors Limited (later named "RBIF"). RBIF terminated its factoring agreement with effect from 31 August 1994. Thereafter VKV's terms of trade with its customers became cash on delivery ("COD"), the only credit facilities available to VKV being those afforded to it by London City Bond Ltd ("LCB"), the owner of the bonded warehouse which held the stocks of imported wines traded by VKV.

4. By the date of the winding up order it appeared that VKV was bereft of all assets save for a credit balance of Ł118.00 in its Barclays Bank account. Its trading stock, vehicles, office equipment and furniture had found their way into the ownership of another company which Mr Doshi had formed in October 1994, Cliftonrise Limited ("Cliftonrise"). By a process commencing from about 23 January 1995 Cliftonrise effectively took over the business and assets of VKV, and thereafter traded as VK Vintners, i.e. precisely the same trading name as VKV.

5. As a result of these events Mr Doshi has found himself embroiled in two earlier sets of proceedings. The first was a criminal trial at Knightsbridge Crown Court which took place over a seven week period between 1 July and 22 August 1996. In those proceedings Mr Doshi, Mahesh and Mr Merchant faced serious charges under the VAT legislation. In essence the offences with which they were charged were that (1) with intent to deceive HMCE they produced a false VAT return for the period ended 31 July 1993 ("the July 1993 Tax Return") showing net tax due of Ł34,323 when the true liability was over Ł170,000.00, and (2) they fraudulently produced tax invoices in the name of PML and EMX and used them to reduce the VAT paid by VKV, and produced and sent false VAT returns for the periods ended 31 October 1993, 31 January 1994 and 30 April 1994. The latter of these charges centred on the nature and purpose of a course of dealing which took place, or which appeared to have taken place, or which had been given the appearance of having taken place, between VKV and PML over a period commencing in September 1993 ("the PML agreement").

6. In broad outline the PML agreement involved VKV in selling all its existing stock to PML, and in PML then selling stock back to VKV as and when VKV required stock for sale on to the retail trade. It also involved PML being interposed as the purchaser under supply contracts for future stock (where the suppliers concerned were prepared to countenance the change), and then again re-selling the stock to VKV as and when required by VKV for onward sale by VKV to the retailers. Where the suppliers were not prepared to deal with PML, VKV continued to be the initial importer, selling the stock to PML, and then buying it back from PML as and when required. The prices at which these transactions took place were designed to allow PML, as the interposed wholesaler, to cream off a pre-determined percentage of what would otherwise have been VKV's gross profit from the import and re-sale of the stock in question. The apparent effect, for VAT purposes, of the PML Agreement was that VKV now had input VAT, invoiced to it by PML, which it could deduct from the output tax invoiced to its customers in calculating its net VAT liability to HMCE at the end of each VAT quarter. That input tax would otherwise not have been available to it in respect of imports from the European Community following changes to the VAT regime consequent upon the introduction of the Single European Market on 1 January 1993. From the point of view of VKV what would otherwise have represented a liability to HMCE was transmuted into a liability to PML, and a substantial proportion of the VAT which would otherwise have been collected by HMCE from VKV now fell to be owed to HMCE by PML.

7. It is possible that none of this would ever have been questioned, at least by HMCE, had PML duly made VAT returns to HMCE and accounted for the consequent VAT liability. It did not, however, do so. It was not in fact until well after the HMCE raid that Mahesh on behalf of PML made any returns to HMCE for the relevant period. When he eventually did so (in July 1995) he completed returns for PML's VAT quarters ended 30 November 1993 and 28 February 1994 showing PML as not having traded in these periods.

8. One of the questions which the jury had to decide at the criminal trial was whether the PML Agreement had been a fraudulent scheme the object of which had been to reduce VKV's liability to HMCE and to cause PML to fail to account for VAT owed by it. Before me that question has been formulated as being whether the PML Agreement was a "sham". At the criminal trial Mr Doshi's evidence was that the purpose of the PML Agreement had been to produce a tax-efficient method of continuing to supply Mahesh with payments of some Ł10,000 a month with which Mr Doshi had been supplying Mahesh since the collapse of Wines through the medium of a loan account (in the name of Mahesh) with VKV.

9. Another of the questions for the jury related to the July 1993 Return. That return had indeed been incorrect, purporting to deduct as input tax sums which in fact represented what is known as "acquisition VAT" in respect of European Community imports. Mr Doshi's evidence was that this was the result of a simple mistake by Mr Merchant which he (Mr Doshi) did not notice at the time. Mr Merchant gave a different version of events, in essence that Mr Doshi had insisted on the form of the return against his, Mr Merchant's, advice.

10. An important element in Mr Doshi's defence to the criminal charges was his assertion that there would at no material stage have been any difficulty for VKV in finding the money with which to pay its VAT liabilities to HMCE as they arose. This was because, on Mr Doshi's account, VKV enjoyed a very flexible arrangement so far as the RBIF facility was concerned. In the first place he claimed the benefit of an agreement with Mr Bradley, the operations director of RBIF, under which VKV's facility could on request be increased by 10 per cent. Secondly, Mr Bradley was content to countenance the raising by VKV and subsequent factoring by RBIF, of "fresh air", that is to say false, invoices provided that the amount of such fresh air was limited to some Ł150,000 at any one time.

11. On 22 August 1996 Mr Doshi, Mahesh and Mr Merchant were each acquitted of all the charges which had been brought against them.

12. The second set of proceedings in which Mr Doshi has been involved were proceedings initiated by Mr Hickling in respectively November and December 1998 against (1) his mother Revti Doshi ("Revti") and Doshi Financial Services Limited ("DFS"), (2) Mr Doshi's wife Shilpa ("Shilpa") and (3) Mahesh, which were tried together in the Croydon County Court in early October 1999 by District Judge Freeborough. Mr Doshi appeared as a witness in those proceedings and also acted as advocate for Revti, DFS and Shilpa.

13. The liquidator's claims against Revti and DFS arose out of the following transactions. Revti had apparently advanced a sum of approximately Ł80,000 to VKV at its incorporation. On 14 November 1994, apparently following a request for repayment by Revti, VKV entered into an agreement with her, in reduction of her loan, whereby it sold to her various vehicles and office equipment for Ł44,050 (including VAT of Ł5,250). Commencing from 7 December 1994 certain payments were made from VKV's monies into an account at Leeds Building Society in the name of Revti and Mr Doshi. These totalled some Ł16,005.79 of which Ł13,059 related to the period prior to the commencement of the winding up and the balance after. On 6 January 1995, Ł9,000.00 was paid by VKV to DFS on behalf of Revti in further reduction of her loan. Before the commencement of the winding up further sums totalling Ł28,167 were paid out of VKV's bank account to DFS for the account of Revti. Mr Hickling attacked the transfer of the chattels as a voidable preference under s.239 of the 1986 Act. He also attacked the Ł9,000.00 payment on that ground, claiming alternatively that it was voidable as a transaction at an undervalue under s.238. In relation to the other payments, he attacked them under s.238 insofar as they pre-dated the commencement of the winding up and under s.127 insofar as they followed it. In relation to the latter the liquidator in fact limited his claim to a net balance of some Ł5,730.92. The District Judge gave judgment against Revti in a sum of Ł11,416.50 in respect of the chattel transfer, against Revti and DFS in respect of the Ł9,000 sum, and against DFS in respect of the sum of Ł5,730.92. Revti and DFS appealed, and Mr Hickling cross-appealed. In a judgment dated 13 March 2000 Evans-Lombe J dismissed the appeals and allowed Mr Hickling's cross appeal in relation to the Ł11,416.50 figure. The District Judge had placed a value of that sum on the chattels which had been transferred. Evans-Lombe J held that the District Judge had not had evidence before him supporting that valuation, and that the only evidence of value before the court had been the figure of Ł38,800.00 being the value placed on the chattels by the parties to the transaction. He also allowed Mr Hickling's cross-appeal against the District Judge's refusal to hold Revti liable for the Ł5,730.92. He dismissed Mr Hickling's cross-appeal in relation to the payments into the joint Leeds Building Society account.

14. Mr Hickling's claims against Shilpa attacked all the payments which had been made to her by VKV by way of director's remuneration prior to the commencement of the winding up (totalling some Ł81,666.76) under s.238, and also sought to make her liable in respect of the Ł5,730.92. The District Judge rejected the first claim, but allowed the second. Shilpa's appeal was dismissed. There was no cross-appeal.

15. Mr Hickling's claims against Mahesh were to recover (1) Ł33,500 (paid to him in respect of his mortgage, life policy and living expenses) under s.238 and (2) Ł5,730 of a payment of Ł6,000 which had been paid to him after the commencement of the winding up. During the course of the hearing Mahesh (who was separately represented at that stage) consented to an order that he pay Ł39,500 plus interest and costs. He subsequently unsuccessfully sought to appeal that order before Evans-Lombe J, being represented on that occasion by Mr Doshi.

THE CHARGES OF UNFITNESS

16. The Official Receiver relies on the following matters as relevant for determining Mr Doshi's unfitness to be a director. There are first six matters set out in the initial report to the court of Mr Flood, the Deputy Official Receiver, dated 14 March 1997. Those are:

"1. The Respondent caused VK to continue the business of Universal Wines without any significant change in its operations after Universal Wines had failed and has in turn caused Cliftonrise, trading as "VK Vintners" and Doshi Wines to trade in the same business ....."

I will call these "the Phoenix allegations".

2. The Respondent was responsible for VK entering into transactions in the sum of Ł92,308 when VK was insolvent for his personal benefit and that of his wife and to the detriment of unsecured creditors. The Respondent was also responsible for VK entering into transactions in the sum of Ł44,050 when VK was insolvent for the benefit of his mother and to the detriment of unsecured creditors .....

I include these in what I call the "Insolvency Act allegations".

3. The Respondent financed VK's business with monies of Ł1,666,801 retained from revenues collected on behalf of the Crown. These represent 60% of the known liabilities of VK ....."

I will call these "The VAT allegations".

4. The Respondent failed to disclose property of VK to the Official Receiver when he did not disclose a bank account he was aware of which held funds of Ł28,151 at the date of the Winding up Order ......"

These are part of what I call the "Insolvency Act allegations".

5. The Respondent failed to ensure that VK maintained proper accounting records in contravention of Section 221 Companies Act 1985, as amended .....

I call this "the lack of proper accounting records allegation".

6. The Respondent, in contravention of Section 216 Insolvency Act 1986, is a director of a company, Cliftonrise Limited, which traded as "VK Vintners" until at least 20 December 1995, a prohibited name to the Respondent as VK was known by that name in the period 12 months before it went into liquidation ....."

I call this "the s.216 allegation".

These charges were added to in June 2000 by seven (now reduced to six) further charges as summarised in paragraph 48 of the report to the Court dated 27 June 2000 of Mr Robert Peck, Deputy Official Receiver. The further charges so far as still pursued are formulated as follows:

"(1) Mr Doshi has caused or permitted the company to defraud RBIF Limited, and to breach the terms of the company's factoring agreement, by dishonestly raising false invoices, in order to obtain finance to enable the company to trade, despite its insolvency.

I call this "the false invoicing allegation".

(2) Mr Doshi has caused or permitted the company to enter into, act upon, and in its dealings with Customs & Excise to rely upon, an agreement with Picton Mount Limited, which was not a bona fide commercial arms length agreement, for the purpose of (a) enabling the company to trade, despite its insolvency, by avoiding payment of VAT properly due and/or (b) making monthly payments to Mr Doshi's brother of Ł10,000 for no consideration.

I call this "the PML allegation".

(3) Mr Doshi has obstructed legitimate investigations into the company's affairs by HMCE and the liquidator and has misled the court by giving a false account of (i) the factoring agreement with RBIF Limited and the circumstances in which false invoices were raised by the company and (ii) the purpose of the agreement with Picton Mount Limited and the circumstances in which it was entered.

These and (4) (5) and (6) below are also part of what I call the "Insolvency Act allegations".

(4) in breach of section 239 of the Insolvency Act 1986, Mr Doshi has caused or permitted the company to give voidable preferences, namely

(a) on 14 November 1994, by transferring to his mother vehicles, furniture and office equipment worth Ł44,050

(b) on 6 January 1995, by payment of Ł9,000 to DFS.

(5) Mr Doshi has wrongfully caused or permitted the company to make void payments, after presentation of the winding up petition, by the transfer from its bank account of Ł51,694: of which Ł31,114 was paid to or for the benefit of his mother; Ł11,471 was paid to his wife and Ł6,000 was paid to his brother..

(6) In breach of section 238 of the Insolvency Act 1986, Mr Doshi has caused or permitted the company to enter into transactions at an undervalue, namely between 4 November 1994 and 17 January 1995, by making payments totalling Ł33,500 to Mr Doshi's brother.

(7) If, by the date of the trial herein, judgment is entered against Mr Doshi in the liquidator's proceedings for wrongful trading, that to the extent disclosed by such judgment Mr Doshi has caused or permitted the company to trade when he knew or ought to have concluded there was no reasonable prospect that the company would avoid going into insolvent liquidation and that he failed to take every step he ought to have taken to minimise the potential loss to the company's creditors."

I call this "the wrongful trading allegation".

17. As appears from that list, there is a good deal of matter which Mr Doshi has been called upon to answer, with the charges ranging from some matters of extreme gravity to others of a comparatively less serious nature. In relation to each of them (with the exception of the s.216 allegation) Mr Doshi claims to have a complete explanation, and where he does not have a complete explanation he claims substantial mitigating grounds. Moreover, Mr Doshi claims that his explanations are in most cases supported by the documentation which has been produced in support of the case made against him, and that where they are not directly so supported they would be if the relevant prime documentation were now still available to him. He lays heavy emphasis on the fact that, in relation to one of the most serious charges against him - relating to the VAT liabilities of VKV - his role has already been the subject of minute examination in the criminal proceedings in which he was acquitted by the jury of any fraudulent intent. He also points out that his evidence on a number of significant matters was also tested in Mr Hickling's proceedings before District Judge Freeborough, and withstood the challenge. District Judge Freeborough had commented on him as a witness in the following terms:

"Dhiren Doshi has taken this case as an attack on his personal integrity. It has to be said that he has presided over a number of insolvencies as a director. It is also true to say that he has sought to benefit his own interests and the interests of his family over outside creditors, such as Customs and Excise and the Inland Revenue, but he has been acquitted of the Customs and Excise charges and where he has been disbelieved in the past in relation to, for example, the Leeds Building Society account and the part that it played in the running of VK Vintners and the location of his mother at significant times, he has, where he has previously been disbelieved, been proved to be right. He told me at the end of his submissions that he has always answered letters and been open with the position. The fact is he has simply not been believed when perhaps he might have been, and in the circumstances I can find no evidence of his dissembling in relation to the documents. I do, however, find that there was a difference in the evidence he gave to me in relation to his transactions with his brother and the evidence given at his trial. That is merely a comment, but overall I found him to be a person not as bad as painted initially at the outset of these proceedings."

18. Mr Doshi defended himself throughout the trial of these proceedings before me. Despite the number and complexity of the allegations against him, and faced with a mass of documentation not arranged on any very coherent basis, he conducted his defence, both when cross-examining, when under cross-examination and in argument, with a skill which would have been the envy of a trained and experienced advocate. He was also unfailingly courteous in his dealings with the court. Even the ranks of Tuscany, in the form of Mr Francis who appeared on behalf of the Official Receiver, could not forebear to pay tribute in his closing submissions to what he described as Mr Doshi's "brilliant mind", his "extraordinary" performance as a litigant in person, and his meticulousness in dealing comprehensively with all of the issues in this case "leaving not a stone unturned".

19. There is no doubt that in these proceedings Mr Doshi's personal integrity is under serious attack. If any of the more serious allegations is proved then Mr Doshi is in my judgment not only proved to be "unfit to be concerned in the management of a company" but he will have been shown to be capable of a level of mendacity which is breathtaking in its audacity and remarkable for its fluency. It is appropriate therefore that I should examine first the allegation in respect of fresh air invoicing. This is arguably the most serious of the charges facing Mr Doshi. It is also the only charge in respect of which I have heard conflicting accounts in oral evidence given by persons who were directly involved in the material transactions. It has the added narrative advantage of requiring a chronological exposition of significant parts of VKV's trading history.

THE FALSE INVOICING ALLEGATION

20. There is much common, or at least unchallenged, ground as to the background to the factoring agreement entered into between VKV and RBIF. In about 1990 Mr Doshi, on behalf of Wines, had asked for a factoring or invoice discounting arrangement in relation to that part of Wines' business which consisted of larger customers who required relatively generous credit terms. RBIF had said that they could not finance a percentage only of Wines' sales ledger, and the solution adopted had been to hive off the relevant part of Wines' sales ledger into a new company formed for the purpose, Otto Beiser (UK) Ltd ("Otto Beiser (UK)"). RBIF then entered into an invoice discounting agreement with Otto Beiser (UK), under which Otto Beiser (UK) remained the legal owner of the debts with the power and duty to collect them. So far as Wines and Otto Beiser (UK) were concerned this involved what were essentially paper transactions on an inter-company account, the real profit from the retail sales still being earned by Wines. In late 1991 Mr Doshi told RBIF that, as a result of a decision by himself and his brother to cease being in business together, the arrangement was being terminated. This caused some alarm and despondency at RBIF who were owed about Ł400,000 at the time. Mr Doshi reassured RBIF that he would get in the outstanding debtors, and in due course did so. In the course of doing so he told RBIF that he was proposing to set up on his own account the business of VKV and explored with them the possibility of a factoring agreement. It was indicated to him that if the outcome of the Otto Beiser (UK) termination turned out satisfactorily RBIF would be prepared to view his new project favourably. Thus it was that Mr Bradley came to the negotiations over the VKV agreement with a pre-existing moral obligation to arrive at terms.

21. The written terms of the agreement entered into are contained in a document dated 18 February 1992. These were on RBIF's standard form of factoring agreement. This envisaged that, unlike the type of invoice discounting arrangement operated by Otto Beiser (UK), the debts would be legally assigned to RBIF (notice of the assignment being given to the debtors), and the management of the ledger and the collection of the debts would be the responsibility of RBIF. In fact from a very early stage (possibly right from the start as Mr Doshi contended) responsibility for collection was delegated, or devolved, to VKV. There were good practical reasons for this. Many of VKV's customers were small retailers with little or no English who were more comfortable with, and amenable to, personal approaches by Mr Doshi and his (i.e. VKV's) salesmen than they were, or would have been, to the more formal and faceless interface with RBIF. This variation of the written terms was never itself formalised in a written document.

22. The terms of the written agreement (so far as material) included the following

(1) All VKV's debts (subject to certain exceptions) from customers were purchased by RBIF (clause 3,5 and 24.2) at their invoice value less an administration charge (clause 7). The purchase price of each debt (less any "Initial Payment") would be credited to VKV's running account with RBIF as and when RBIF received value from the customers (clause 7.3). The administration charge was 1.27% of the value of each debt subject to a minimum of Ł1,000.00 per week (clause 7.1 and 7.2);

(2) Provision for notification of debts to be given RBIF and notices of assignment to the customers (clause 4);

(3) Provision for RBIF to be able to specify a funding limit in respect of individual customers and to withdraw or vary the funding limit at its discretion. A debt in respect of which funding was withdrawn was called a "Disapproved Debt" (clause 6 and 24.2);

(4) VKV guaranteed to RBIF the payment of all debts at the expiry of the Recourse Period (90 days after the end of the month in which the debt was created) or the earlier insolvency of the customer (clause 11.7).

(5) On a request by VKV, RBIF might (but was not obliged) to make an Initial Payment ("IP") of up to 70% of the purchase price of any approved debt (clause 7.4 and schedule). VKV had to pay interest (the Discount Charge) on the balance owing in respect of initial payments at 2.5% over RBS base rate or 8% whichever was higher (clause 7.5 and schedule);

(6) RBIF had the right to deduct from any sums otherwise owing to VKV a retention (the Minimum Balance) to cover present or contingent sums owed by VKV (clause 7.8 and schedule).

(7) In addition to the guarantee (see (4) above), VKV gave certain warranties in respect of the debts, and agreed to pay direct to RBIF the amount of any cash discount or debit or credit note issued to a customer (clause 11 (4) (f)), and the amount of any debt disputed by the customer (clause 11.6). The warranties included a warranty that the debt related to goods which had been delivered to the customer (clause 11.4 (a)) and that the amount payable by the customer was not less then the Invoice Value and was payable no later than the date specified on the invoice or if not so specified within 30 days of delivery (clause 11.4 (d));

(8) RBIF was entitled to insist on accountancy information from VKV (clause 10) and in fact asked for, inter alia, monthly management accounts (see clause 5 of the quotation).

(9) Both Mr Doshi and Shilpa entered into written guarantees of VKV's obligations.

23. In economic effect, therefore, what VKV obtained under the agreement was the equivalent of an overdraft facility with RBIF of up to 70% of the sums outstanding on the sales ledger, so far as those sums related to debts which were for the time being approved by RBIF. The amount of the facility was in the final analysis subject to the discretion of RBIF which could control it either by reducing the percentage of IP, by disapproving debts for IP purposes, by imposing cash limits per individual customer or in relation to the overall "lending", or by exercising its rights of retention in respect of the Minimum Balance.

24. There was some common ground that until the autumn of 1992 the account ran relatively smoothly. A note by Mr Ellis, the RBIF account executive handling VKV, recorded the position at the end of June 1992. The sales ledger was then Ł466,272 and IP 64%. On a daily basis the facility was being used to its maximum availability (70%). VKV had 421 live accounts which were planned to increase to 1200 by September. Mr Doshi was promising to produce management accounts in July. Mr Ellis recorded that "there is a trigger figure of 45 days. Debt turn for June was 39 days". (The "trigger figure" was the date at which a debt, if not then paid, would become disapproved for funding. The "debt turn" was the average time being taken for debts to be paid). Mr Ellis concluded that "this client seems to be re-building his business successfully. A good visit.".

25. By 3 December 1992 VKV had produced to RBIF a set of management accounts for the period 7 February 1992 to 30 September 1992. These were marked "Draft Accounts for Discussion Purposes Only". They showed inter alia sales of Ł2.544m., a gross profit of Ł372,000 (14%) and a trading loss of Ł13,545.80. In a client visit report of that date, Mr Ellis recorded the ledger as at 25/11/1992 being Ł894,756, and the IP as Ł551,759 (62%). The usage was described as high, the disapproved debt as Ł67,026 (7%) and the average credit notes as Ł55,934 (2%). It is clear from the figures that the 62% is a calculation by reference to the total of the debts purchased before adjustment is made either for the disapproved debt or the credit notes. Mr Ellis reported the average debt turn under normal circumstances as being 37 days, but that for October and November it had averaged 44 days. Evidently the explanation for this given to him by Mr Doshi had been that certain customers had been offered extended terms of 60 days in this period. The trigger figure remained at 45 days. The report adverts to a problem, which was to become a running sore, of allocating cash received by VKV to particular invoices. Absent such allocation, the invoices in question ran the risk of becoming disapproved debt for the purposes of the factoring agreement.

26. According to the evidence given by Mr Doshi at his criminal trial, RBIF had changed their administration system in October 1992 in some manner which reduced the amount of available IP. He said that at a meeting to discuss the consequences of the change it was agreed that the solution was for VKV to issue fictitious invoices of between Ł100,000-Ł150,000 following Mr Doshi's assertion that the effect would otherwise be that VKV would have to close down. He also told the jury that he had a further arrangement with Mr Bradley, of which Mr Ellis was also aware, that he could if necessary be advanced up to 10% more than whatever the formal contractual limit was at any one time.

27. That the first of these agreements were made in October 1992 is no longer asserted by Mr Doshi. Apart from other explanations which may exist for this change in recollection, the original location of this agreement in October 1992 seems quite inconsistent with the tenor of a letter dated 6 October 1992 from Mr Ellis to VKV recording an agreement (reached in August) to increase the IP from 70 to 72% when required on an exceptional basis. The account now given by Mr Doshi is contained in a witness statement produced by him during the course of the trial and dated 27 November 2000 (Mr Bradley having given evidence on 20 and 21 November, Mr Ellis on 23 November). This is now Mr Doshi's account:

"In October '92, during my monthly meeting with Alec Bradley, he informed me that there were going to be some changes in administration. Debt turn was being introduced to all factoring clients for the first time, even though they were in charge of collection. Any form of discrepancy on the delivery note will result in the whole invoice disallowed. Part cash payments would no longer be allocated to the oldest invoices. Any form of dispute from the client will result in the whole invoice in question being disallowed. I asked him why?. He mentioned to me that they had a Ł140m credit line and they were about to approach this. Also it was to improve their security with all clients.

I told him that I was not going to be happy if at the end of the day it was going to restrict funding below 65% less over genuine 90 day debts. He said, well you know he had already authorised 2% extra anyway; let us see what happens in later months. I was also told that in any event as in certain cases, some factoring clients were getting 80% funding; he had a discretion to give an extra 10% funding whenever I really needed it.

In December '92 I was told by Ian Ellis my debt turn had been exceeded and I would be losing funding. I faxed Ian my concern and Mr Bradley confirmed to Ian Ellis to let things stay as they were.

Similar problems in January '93 and February '93, where once again Alec Bradley told Ian Ellis to let things be as they were. However, by middle February '93, the computer figures for disapproval's were beginning to get out of hand. The computer was also generating higher disapproval's than those that actually were disapproved.

I informed Alex Bradley in our next meeting that I cannot work with this arrangement. Please return back to the agreement we had signed otherwise I have to find another factoring company. I was told by him to put in more invoices to the value of Ł100k - Ł150k to cover these disapproval's. I asked him whether he was sure and he said he was, as this did not affect his security. The administration and computer errors were obviously restricting funding artificially and it was not your fault. I asked him what if clients were to ring them upon receiving statements. He informed me he would turn a blind eye. He asked me to make it obvious which are the Fresh Air invoices. I would either have to credit of these invoices later or pay them of VK cheques.

I had a good relationship with Alex Bradley and I started the Fresh Air invoicing, making sure there was never any more than Ł150k in their ledger. The average was probably around the Ł125k level.

We were one of their largest clients at the time and at that time in 1992, 1993, their net profits were not that significant. If they lost our account, they would have lost a further Ł100k from their net line as they had not recruited any staff just fro VK Vintners Ltd.

I consulted Mr Merchant regarding this matter. He advised me that provided it was in agreement and provided we kept a separate list of these invoices, he could see no problem. He informed me that when the VAT returns are due I should give him the correct sales figure; i.e. the genuine sales."

28. That account has to be viewed in the light of the contemporary documents. A fax from Mr Doshi to Mr Bradley dated 1 December 1992 gave explanations of the debt turn deterioration, asserted that funding was currently only at 65%, and recorded that Mr Ellis had been insisting on a gradual reduction of funding by 15% (by 1% a day). Mr Doshi asserted that it was imperative that funding levels be sustained as "the next 14 days are the most important selling dates for whole year" and that if the reduction was enforced "this would be a real problem .... and we would not be in a position to sell any wine effective as from 11 December on present projections". Mr Bradley answered this plea by authorising Mr Ellis to implement a relaxation "for the month of December alone". That is hardly consistent with the existence of a relaxed exercise by Mr Bradley of a discretion to increase funding by 10%. An internal file note of RBIF, prepared for a meeting to be held with Mr Doshi on 11 February 1993, raised concerns that all proofs of delivery were not being received from VKV and that as a result RBIF were funding invoices before the goods had even left the bond. Following the meeting Mr Ellis wrote (on 16 February 1993) recording Mr Doshi's agreement to a tighter regime: debts disputed by customers would be withdrawn from funding unless the dispute was resolved within two days; the funding limits per customer were to be reduced to Ł7,500.00 on 15 March 1993 and to Ł5,000.00 on 1 April 1993; there would be a retention of 25% of the disapproved balance until 31 March 1993 and thereafter a retention of 33.3%. RBIF agreed not, for the time being, to send reminders to customers (allowing VKV to do the chasing) but insisted on continuing to send monthly statements to the customers of the amounts outstanding.

29. In his oral evidence to me Mr Doshi described this letter as being "the final straw" in his relationship with RBIF which led to his remonstrating with Mr Bradley, and Mr Bradley in turn making the suggestion that VKV solve its problems by producing, for factoring, fictitious invoices in the range of Ł100,00-Ł150,000. Thereafter, on Mr Doshi's evidence, VKV proceeded to adopt that course. The value of the false invoices was in due course paid to RBIF by cheques drawn on VKV's bank account (which by this time was an account with Barclays). The PODs in respect of the false invoices were produced by the simple device of forging a "squiggle" signature of the customer on a copy of the invoice. Bogus management accounts were produced by VKV for internal RBIF consumption which included the value of the false invoices in the sales figures. To cater for the sensibilities of Mr Merchant FCA, Mr Doshi employed the services of Deepak Thakrar, a VKV bookkeeper, to produce these accounts. On Mr Doshi's version of events Mr Bradley (but no-one else at RBIF) knew these accounts to be bogus. Furthermore, according to Mr Doshi, Mr Bradley was content to tolerate this fresh-air invoicing up to the alleged limit of Ł150,000. Letters subsequently written by Mr Doshi to Mr Bradley which contained other explanations or excuses for the level of Barclays cheques being written by VKV were explained by Mr Doshi as being a kind of code between the two of them for referring to the fresh air element in the ledger. Questions raised at the time as to the reason for the level of Barclays cheques being received were explained either as having been raised by RBIF employees who were ignorant of the arrangement, or as having been raised by, or at the behest, of a Mr Bradley anxious to be reassured that Mr Doshi was not abusing it by exceeding the Ł150,000 limit.

30. A note by an RBIF employee records the results of a meeting held on 1 April 1993 between Mr Bradley, Mr Ellis, Ms Haworth and Mr Dopson of RBIF and Mr Doshi to discuss the debt turn. RBIF agreed to extend the trigger date to 55 days and, subject to collections remaining satisfactory to continue funding at 64% of the ledger. That agreement was repeated at a further meeting in May 1993. On 1 June 1993 Mr Bradley wrote to Mr Doshi expressing disappointment at the collections made in May and requiring a graduated reduction in the IP to 59% by the end of June 1993. Further discussion between Mr Bradley and Dr Doshi resulted in some relaxation of this: IP was to remain at 63% for the whole of June provided that certain revised collection targets were met. Before going on holiday that year Mr Bradley wrote a memorandum to the relevant RBIF executives with a copy to RBIF's managing director Mr Butterworth. After summarising the current state of the account ("a commitment of Ł846,000 or 61% of the Ł1,378,000 sales ledger balance") Mr Bradley wrote:

"You will all recall that I agreed to take this client on last year following Mr Doshi's helping us to collect out from a very serious situation on his former company, Otto Beiser. He showed his Bona Fides then and try, as I do, I cannot find anything in his dealings with us which lead me to conclude that he is not still behaving entirely properly. The fact that I don't like the quality of his debtors or that there are vast numbers of them and that we now have over Ł800,000 out there in the bushes is what makes me nervous. Mr Doshi's cash flow is extremely tight as evidenced by his daily drawing of maximum availability.

The message I want to get across is that whilst this account must be kept under the very closest daily scrutiny and review, we must also ensure that we do not allow ourselves to give Mr Doshi the impression that we do not trust him. As I have said above, I cannot find anything he has done wrong."

The memorandum concluded, after setting out calculations which re-assured the reader that in reality the exposure was probably only in fact to some 49% of the ledger, with the following

"Conclusion: This is a tricky account. We need to keep a good relationship going with Mr Doshi. His ability to collect the debts now and even more in a bust situation is vital to us. I do realise that circumstances could arise in the future which would leave us with no alternative to falling out with him but we must try to avoid doing so. We can and must be firm but reasonable and try to formulate the prepayment rules in such a way as to maximise Mr Doshi's incentive to collect debt. To this end, I would like Moira and Ian to negotiate new targets (and possibly penalties) for July based on what was agreed for June. Also keep close to Sam Dopson - he is very well informed on this account.

Sorry this is such a tome but these things need to be recorded"

Mr Doshi relied on this document as showing that Mr Bradley was happy with the security of the ledger, and was keen that in his absence no awkward questions should be asked by over-zealous employees.

31. As envisaged by the memorandum new collection targets were set by Mr Ellis in July, the funding rate being provisionally set at 62% subject to a 1% reduction if the weekly targets were not met. An overall limit (of Ł875,000) on the amount outstanding on the current account was, for the first time, set. At a further meeting on 1 August 1993 further targets were set for collections and for the reduction of disapproved debt (then amounting to Ł414,000 with Ł334,000 being "code 10s"). Assuming the targets were met RBIF agreed to resume normal (i.e. 70%) funding by the end of August. They indicated, however, that they wished to see the Ł875,000 overall limit reduced. Mr Doshi asked for it to be increased. In order to help him meet the targets Mr Doshi asked Mr Ellis to produce a letter (to be shown to the sales reps) threatening withdrawal of funding from all accounts over 60 days old.

32. By the beginning of September 1993 RBIF were willing to revert to an IP of 70% but subject still to an overall limit of Ł875,000. They were, however, expressing concern in relation to three matters. First, they required VKV's audited accounts to 28 February 1993 to be supplied by 20 September 1993 on pain of a 1% reduction per week until receipt. Secondly, they required the debt turn at the end of September to be no more than 45 days. Thirdly, they drew attention to the fact that they had received Ł486,000 in August in Barclays cheques. They extracted a promise from Mr Doshi to reduce this to Ł40,000 a month, with an indication from him that in September the level would be not more than Ł150,000. If either of those concerns was not allayed, the overall limit was to be reduced to Ł825,000: see Mr Ellis's letter to Mr Doshi dated 3 September 1993.

33. Mr Doshi's case is that the great bulk of the Ł486,000 represented fresh air invoicing, that this was known to Mr Bradley, and that the concern expressed by Mr Ellis in that letter reflected Mr Bradley's anxiety that Mr Doshi was abusing the Ł150,000 limit. There are, as it seems to me, difficulties about that case. In the first place the existence of the agreed Ł150,000 limit on fresh air is contradicted by the requirement that the level of Barclays cheques be kept below Ł40,000 per month. Secondly, given that it is no part of Mr Doshi's case that Mr Ellis knew or must have known of the fresh air invoicing, some other plausible explanation must have been given by Mr Doshi of the level of Barclays cheques. Possible reasons (other than fresh air invoices) which might cause VKV to issue Barclays cheques included the collection and banking of cash by VKV, the issue of genuine credit notes to customers in respect of discounts or disputes, or (I think) the fact that a genuine debt had become irrecoverable as a result of the customer's inability to pay. One does not need to posit that the Barclays cheques represented fresh air to justify RBIF's concern at their level.

34. RBIF were however concerned that they might be factoring bogus invoices. On 13th September 1993 Mr Doshi came to see Mr Bradley, who recorded what was then discussed in a letter sent the following day. It was in the following terms:

"1. We expressed our serious concern about the volume of money being paid to us from your Barclays Bank account (approximately half a million pounds in August). This, we understand, is because your customers pay in cash and you have to bank it and pass it on to us. I must ask you to ensure that we are sent either the customers' original cheques or the actual cash itself (either in notes if local or through The Leeds Building Society - see below).

2. We shall open up an account at the Leeds Building Society into which you will in future pay all monies which in the past have been paid into your own "Leeds" account. Ian Ellis will shortly notify you of the account number, so that you can tell your Reps what it is.

3. Please note that under the terms of our Factoring Agreement, ALL customer payments must come direct to us and that all their cheques must be made payable to us - even when handed to you or your Reps.

4. We agreed that the Initial Payment percentage would be reduced at the rate of 1% per week to 65% from 70% commencing (at 69%) on 20/9/93. This is to provide us with some comfort for the fact that goods are delivered two days after the invoice is assigned to us (we shall have to have an arrangement over the next few months which will allow us only to ledger invoices with PODs).

5. We shall in future automatically disapprove any invoice for which we have not received a POD by the 10th working day after receipt of the invoice by us. (This will not, of course, preclude us from disapproving any invoice earlier than this if we find it necessary).

6. You are confident you can get the debt turn down to 45 days and if this can be done by our receiving 90% of debtor cash direct from them, I shall feel very much happier."

This was clearly an attempt to impose a much tighter regime that had previously been in place, and one which, if complied with, would render any fresh air invoicing which had been going on much more difficult to continue. Mr Doshi explained this letter, however, as being consistent with Mr Bradley's willingness for fresh air invoicing to continue at a level of up to Ł150,000. He derived this from Mr Bradley's final reference to "90% of the debtor cash", reading this as a coded way of Mr Bradley signalling to him that up to 10 per cent of the outstanding sales ledger could be settled by Barclays' cheques, i.e. might consist of fresh air. If that was the code being employed, it was an ingenious one since the uninstructed reader might suppose that the reference to "debtor cash" was a reference to debtors who paid in cash, and that the 10% was 10% of the volume of (supposedly) cash of over Ł400,000 taken in by VKV in August. That would fit with the Ł40,000 figure referred to in Mr Ellis' letter of 3rd September.

35. On 14th September Mr Doshi wrote to Mr Bradley in the following terms

"Reference our earlier conversation. These customers, have received goods, as per invoices raised, but have made deals with the rep concerned that they wish to pay cash after 60 days,.

Collection P.O.D's will be with you by Friday.

The sales reps have copies of all transactions and gave me the details last night.

I have made it perfectly clear to them, that no such deals, will be permitted in the future and that they must

A: State quite clearly to all clients that our terms are 30 days

B: Payment should be made by cheque to RoyScot Factors Ltd

I have stated the amount next to each client.

I will endeavour to get these clients to pay by cheque rather than cash over the next 8 weeks and clear the problem raised accordingly. I will appreciate if I am left to handle these clients by myself in view of the possible sensitivity."

Enclosed with the letter were a list of the invoices (totalling some Ł165,107) to which it referred. This letter was, according to Mr Doshi, a further piece of code between himself and Mr Bradley designed to identify for Mr Bradley the accounts in respect of which fresh air invoices had been raised, thus enabling Mr Bradley to monitor the Ł150,000 limit. On any view the contents of the letter were a lie. No goods had been delivered, no special deals had been agreed with the customers concerned, the PODs promised would be forgeries, the sales representatives had no copies of the transactions, and there was (on Mr Doshi's version of the "code") no question of the customers paying whether by cheque or by cash. On any view of the letter it demonstrates the facility with which Mr Doshi can write fiction. On any view of the letter it was calculated so as to deceive someone within RBIF. Mr Doshi's case in respect of the letter is no better than that it was not calculated to, nor did it in fact, deceive Mr Bradley.

36. In support of that case Mr Doshi relied on some further events during September 1993. Along with the tightening of controls, Moira Froggett of RBIF made the suggestion that strong letters be written in the debtors' mother tongues insisting that all payments be made to RBIF. This was not in the event actioned. What did happen shortly thereafter was an attempt by RBIF to audit VKV's books. This took place on 7 and 11 October 1993. The findings of the audit team included the following:

"i) Credit notes are raised on a timely basis but are not assigned until a week or more after their creation.

ii) There are credit notes that appear on a monthly basis dated the day after the due date of the invoice and cancelling the invoice in full. The invoices are not supported by signed POD's. We should shorten the dispute days for invoices without POD's from 10 to 5 days.

iii) We were unable to put our finger on what was going on as with Jamal Merchant's accountancy experience the disjointed audit trail is deliberate. The relationship between the client and the London City Bond is extremely close, and they may be party to any deception that is going on.

iv) In conclusion, the only way to ensure our security would be to physically monitor goods being released from the London City Bond and to collect debtors' cheques/cash personally instead of the reps doing so."

"The purchase ledger exceeds the value of the sales ledger as at 30 September by nearly Ł300k. If called on, this company could not meet its creditor claims."

"6. Preferential Creditors

These were examined and found to be in order. However, with the VAT they are overpaying tax to the Customs and Excise albeit to a small extent.

The client accepts that all his output tax should be based on sales which are always factored. Consequently our client statements detailing the turnover is used to assess their tax liability. The overpayment results from the occasional interbond sale which is not subject to VAT. These sales are factored.

Merchant assumes incorrectly that all the turnover through RFL is subject to VAT. Dhiren was not worried about the overpayment of VAT and claimed that it was a small amount when the business as a whole was assessed." .........

"Computer System

It was impossible to get a clear audit trail from the sales ledger. Although the computer was used to raise invoices it did not print a sales day book. The only record was the copy invoice and a statement print.

The system to say the least is very crude. Provided the invoice is raised correctly the balance on the computer system should be accurate." .........

"We were told that there was little need to maintain accurate sales ledger records as reliance was placed on RoyScot. Our records would only be as good as the information they supplied. " ...............

"POD's can only be obtained where the delivery is for less than 100 cases. Larger orders are delivered by a carrier. This is due to the client's vans only having a limited weight capacity.

The carriers do not retain a copy of their proof of delivery."

"Credit Notes

There are a number of reasons for credit notes which are all approved by Dhiren. The reasons are as follows:-

Non delivery due to breakages - deducted from van drivers' wages

Customer over orders.

Returns of slow moving stock for replacement by faster moving lines.

Customer cancels the order.

Overcharge.

Reasons 3 and 4 are the main reasons we were told for credit notes coming into existence."

37. In his closing submissions to me Mr Doshi stated that the audit report was further evidence of Mr Bradley taking steps to put "something down on paper to show that he is making effective controls, because certain questions must have been asked by his members of staff or fellow directors ..." (Day 18 pp 30-31); that the audit team could not have failed to uncover the evidence of the fresh air invoicing; that they must have been instructed by Mr Bradley not to report it; and that the fact that the report was not made until 2nd November demonstrates the lack of urgency with which this investigation was in fact pursued. An alternative explanation is that, as the report itself suggests, the audit team found genuine difficulties with what they described as the "disjointed audit trail", genuinely formed the impression that this had been deliberately constructed to make difficulty for them, genuinely suspected that there was "deception going on", were lied to as to the outstanding VAT position, and were given false explanations as to the reasons for the absence of PODs and for the issue of credit notes. It was no doubt the case that, had they looked in the right places, the wool would have been removed from their eyes. Inspection of the VAT returns would have given the lie to what they reported themselves as having been told on the subject, and a close examination of the credits to the Barclays account over the relevant period might have falsified the explanation given by Mr Doshi for the cash receipts in August. The fact that the audit team missed these points does not by any means entail that they must have been under "strict instructions" from Mr Bradley to ignore them: it is equally consistent with their having been diverted from the truth by Mr Doshi, Mr Merchant or Mr Thakrar.

38. By 1 November 1993 it was clear that collections for October (Ł636,000) had fallen well below target (Ł950,000) , and that the debt turn was 64 days (against a trigger figure of 50 days). That implied that the IPP for November should reduce to 37%. After much discussion RBIF relented from a strict enforcement of their position, agreeing instead to a graduated reduction (from 65%) to 58% for November provided for that certain new collection targets were met, on pain, if they were not, of further reductions of 7% per week.

39. It is evident from the contemporary RBIF documentation that Mr Doshi found himself under considerable financial pressure in the busy run up to, and the aftermath of, the Christmas 1993 period. At a meeting on 6 January 1994 collection targets were set, a programme put in place for reduction of the line from Ł895,000 to Ł825,000 by 17 January 1994, and a draconian (85%) increase in fees proposed to Mr Doshi. It was agreed to increase the trigger figure to 55 days until 31 May 1994 by which time Mr Doshi was expecting the debt turn to be in the mid forties. On the same day Mr Doshi was obliged to seek an over-payment from RBIF of Ł34,000 in order to settle a liability to LCB, usually the most tolerant of his creditors. Mr Ellis agreed to this, emphasising by a letter of that date that "this is the last time that such an overpayment will be agreed."

40. By this time Mr Bradley had ceased to be directly responsible for the VKV account. The person with whom Mr Doshi had to deal was Andrew Curry. In his witness statement Mr Doshi said:

"I was not getting any positive treatment between 7 January and 17 January from Andrew Curry. There seemed to be a total disregard to get the computer figures corrected; cash figures allocated etc. in order that proper funding could be calculated. I went to see him on 18th. In the end I told him that I would like to meet his superiors as I was told neither Alec Bradley or Martin Morrin were in. I told him I could not continue with the way I was being treated.

I had a call later that he had got agreement to the funding I required and I should come and see him that afternoon which I did. He informed me that the Directors felt this was the right time to part company. I agreed although I was surprised. I asked if I could speak to Alec Bradley. I was told he was not in the offices.

I received a letter from Andrew Curry dated 19th and I faxed my reply the same day of receipt on the 20th Jan. I later went to see Alec Bradley who informed me that he could simply not over rule Andrew Curry as he was being promoted and he was going to make all the key decisions at Glasgow. He informed me that the agreement would continue and my immediate funding requirements for the next 4 months would be catered for. He would arrange a February meeting with Martin Morrin and in the meanwhile he would arrange a meeting between Andrew Curry, him and me; which he did.

The impression I was firmly given was that things were said at the moment which should be retracted as RoyScot wished to retain me as a client but also not appear that they had not accepted the decision of Andrew Curry.

In February meeting, funding was virtually as I had wanted it; we were to have a further meeting in April. I had however decided by end January that we would start to go back to Universal terms of 14 days credit to most of our clients and give 30 day terms only to larger clients. By April this resulted in VK Vintners Ltd requiring less funds from RoyScot Factors and further decline in requirement was anticipated.

I met or spoke to Alec Bradley in March 94. We were still sending in fresh air invoices and Barclays cheques. He told me that I can continue. I told him Neil Harvey was phoning fresh air clients. He told me do not worry about it and send Marion a fax. This would stop it. I send Marion the fax as requested by Alec Bradley. I asked Alec Bradley if it was their intention to continue with the agreement failing that I might as well agree with another company immediately. He made it quite clear to me that I had his full support and that the agreement would continue. I further informed Alec that I was going to change my terms to my clients and many will be on 14 days and some on 30 days. I told him my requirement by August would be about Ł400k - Ł450k.

I was told in April 94 meeting that there would be a further review in August. Indications were given that they would be happy with a smaller ledger if I could not pay more fees and that Ł400k was the limit they were happy to work with."

41. Mr Doshi's account that he was told that the factoring agreement could continue is not borne out by the contemporary documentation. Mr Curry made a very full note of his meetings with Mr Doshi on 18th January, which concluded:-

"Two alternatives were identified and discussed:-

1. That we give immediate notice and that the company ceases to trade. In this situation Doshi will lose the Ł200,000 he has invested in the business and his work force would become unemployed - a situation with which he is not happy. Doshi expressed the view that in this situation many debtors would come up with all sorts of excuses not to pay and he felt we might be faced with a shortfall of some Ł200,000.

2. We continue to support Doshi for the time being but that his business ultimately reverts to a COD only basis, precisely the basis on which trade was carried out before we became involved. The following was agreed by both parties:-

VK Vintners will continue to trade normally until the 28 February 1994 whereupon shorter payment terms with customers will be negotiated with no terms longer than 14 days being accepted. The current account will be down to Ł650k by 31.1.94 whereupon the limit will be reduced to that figure.

By the end of February the line is to be reduced further to Ł500,000. Thereafter the line is to be reduced by Ł50,000 per week which should see RBIF clear by mid-May.

It is further suggested that any factoring charges levied as from 1 March 1994 will be refunded once we are clear.

Doshi parted on amicable terms and I impressed upon him that it was my sincere wish that at the end of this he should be left with a livelihood which I believe is his incentive to see us clear. Only time will tell."

Mr Curry wrote formally to Mr Doshi on 19 January setting out the proposed modalities of the parting of the ways. The aim was progressively to reduce the "line" until it was fully cleared out by a series of reductions that should "in theory" be complete by mid May. Mr Doshi replied on the 20 January in a long fax, which in part acknowledged the need to engineer and agree a smooth transition, and in part sought to explain why, if only certain matters could be resolved, a continued relationship could be workable. In that connection, the fax blamed the way in which the RBIF computer identified disputed debt and delays at the RBIF end in allocating cash to certain accounts. It is of some significance that Mr Doshi then asserted "The computer figure has been correct within 5% of the true figure up to end November 1993 and then it has gone out of control." (My emphasis) It will be recalled that at the criminal trial Mr Doshi had identified October 1992 as the date when administration charges at RBIF had necessitated fresh air invoicing, and that in the present proceedings he puts that date in early March 1993. Mr Curry's reply, dated 26 January 1994 promised "as much flexibility as possible" but maintained the RBIF stance that the relationship had to come to an end, if possible by the sticking to parameters set out in his earlier letter. Mr Doshi continued to wriggle. By fax of 6 February 1994 he put two options to Mr Curry: (1) to stick to Mr Curry's timetable, which would mean "VK Vintners Ltd ceasing to exist, as it does not permit it to arrange possible finance from other sources, to continue funding future trading, or to get its clients to pay earlier, or to make other adjustments necessary"; (2) to allow VKV to make a smooth transition to COD trading and at the same time give it an opportunity of demonstrating that the relationship was after all workable. To this end Mr Doshi proposed that the line be reduced to Ł600,000 by the end of May, when, if RBIF still wanted to terminate, the line be reduced by Ł50,000 per week until it was cleared by the end of August. A meeting held on 9th February attended by Mr Curry, Mr Martin Morrin (who had taken over from Mr Bradley as Operations Director of RBIF) and Mr Doshi went some way to agreeing this revised programme, but there is no support whatsoever in the letter written to Mr Doshi following that meeting that RBIF were any the less intent than before on bringing the relationship to an end.

42. In addition to faxing Mr Curry on 6 February 1994, Mr Doshi had also faxed Mr Bradley seeking to explain how his difficulties with Mr Curry had arisen, and expressing his understanding that it was no longer Mr Bradley's but Mr Morrin's decision, as to whether the relationship could continue, but also that Mr Bradley would support the idea of the relationship continuing if Mr Doshi could demonstrate his ability to keep within agreed parameters. The letter concluded:

"4: IF MARTIN, POINT BLANK, DOES NOT WISH THE RELATIONSHIP TO CONTINUE, YOU BELIEVE THAT A LONGER TIMETABLE THAN THAT CURRENTLY AGREED, CAN BE PERMITTED.

IF THIS SITUATION IS TO HAPPEN ON THE 9TH, I WILL APPRECIATE A MEETING WITH BOTH MARTIN AND YOURSELF OR WITH THE CREDIT COMMITTEE, IN ORDER THAT, MATTERS CAN BE FINALISED IN A MANNER THAT NEITHER PARTY IS NOT HAPPY, I.E. BOTH PARTIES INTEREST ARE LOKED [sic] AFTER

I AM LOOKING FORWARD TO MEETING MARTIN ON WEDNESDAY, ANDREW WILL BE ADVISING ME OF THE EXACT TIME. I BELIEVE STRONGLY THAT ONCE WE DELIVER THE FULL 100% OF OUR WINE THROUGH OUR OWN DRIVERS, WE WILL BE BACK TO THE PRE-NOV 92 SITUATION, AND THAT WE CAN LOOK FORWARD TO WORKING TOGETHER FOR MANY MORE YEARS."

43. In the course of his closing submissions the following exchange took place between myself and Mr Doshi:

"Mr Justice Hart: What is the reference in the final paragraph:

"I believe strongly and once we deliver the full 100 per cent of our wine through our own drivers, we will be back to the pre-November 1992 situation."

Mr Doshi: My Lord, that is the question of the fresh air.

Mr Justice Hart: But how does the driver situation come into it?.

Mr Doshi: I think it was just some context I was putting down to it. We were delivering all the wine ourselves anyway.

Mr Justice Hart: But it reads as though at some point you had given an excuse for the situation that you were using other drivers. So that would have been cash being collected.

Mr Doshi: Yes.

Mr Justice Hart: And the drivers not following your instructions. Would that have been the kind of excuse that was going on?

Mr Doshi: I do not think so, my Lord. The drivers always collect cash and they came back to the office the very next day.

Mr Justice Hart: So although the rest of this letter is, as it were, completely private between yourself and Mr Bradley, this final paragraph is another bit of fiction, is it?

Mr Doshi: Yes, my Lord. But also it relates to the debt turn was changing. The debt turn changed in November 1992: it was starting to increase.

Mr Justice Hart: You say that:

"Once we deliver the full 100 per cent of our wine through our own drivers, we will be back to the pre-November 1992 situation"

is code for "In a short time I should have got the debt turn down sufficiently to be able to do without fresh air invoicing."

Mr Doshi: That is correct, my Lord, because the whole point was that Mr Bradley obviously knew that Mr Morrin would be taking over as operations manager full-time, so that certainly would not be tolerable. My Lord, is there any other point you want to make on that?

Mr Justice Hart: No, thank you. I just wanted to make a note. It is learning the codes, Mr Doshi, is what I am trying to do. It is the difficulty of knowing which bits are true and which bits are false in this situation where a deliberate deception has been carried on. You see my problem."

The passage is not only illuminating for its reference to November 1992 as the time when fresh air invoicing commenced. Mr Doshi had also adverted to the problem of the hauliers and mentioned the November 1992 date in his fax to Mr Curry. It was odd to use the same "code" in both communications when one recipient (Mr Curry) was not privy to the key. By the end of that day's evidence Mr Doshi had had his attention drawn to the passage in the Curry fax. Overnight industry enabled him to come up with a new explanation for the pre-November 1992 reference. He referred me to some notes made by Mr Ellis in February 1993 on the way in which invoices and PODs were processed. That note did describe a change in practice. It read in part:

"The client was supplying a copy of a letter from London City Bond with the invoices, which confirmed delivery of goods on invoices. The PODs were then received about 3 days later.

We are now receiving the Bond letter after the invoice and are not always receiving PODs. ......

We are therefore funding the invoices before the wine has even left the Bond. We have tried to insist that PODs are provided with each invoice, but Doshi is resisting."

44. Mr Doshi said that this was the change in practice which had occurred in November 1992, and that it had nothing to do with fresh air: it was, he implied, a genuine problem which had arisen as a result of the late receipt by RBIF of PODs. On the basis of that explanation, Mr Doshi's unqualified assertion the previous day that the reference to the problems with hauliers had been a coded reference to fresh air was plainly unsustainable. It was not untypical of Mr Doshi's boldness that, in his final submissions to me, he claimed credit for his candour in having made "the correction". He said "The first thing which struck me when I was going home [scilicet on the evening of Day 18] was why would I be sending a coded letter to Mr Curry? It does not make sense. The next day I came up and openly submitted it, that this was with reference to the delivery problem we had in November 1992, and it was not a lie from that point of view."

45. The episode illustrates the potential slipperiness of taking any assertion by Mr Doshi as a premise for further inquiry. One starts with the proposition that the reference to "our own drivers" in the fax to Mr Bradley is "just some context I was putting down to it", i.e. was an untruth and known to be such by Mr Bradley: "We were delivering all the wine ourselves anyway." When asked, in a different context the same day about the reference to hauliers in the fax to Mr Curry, he airily explained that "that arises because around that time was the Christmas 1992 period and London City Bond were making some deliveries for us. That was relating to PODs not receiving them in due time" (Day 18 page 60). In the middle of that answer he realises that that is not a sufficient explanation for all of the problems which have been experienced since November 1992, and so he mixes in the following: "That is the reason for the November 1992 date, and that was a time when the debt turn increased as far as Alec Bradley was concerned ... So in Alec Bradley's mind it was November 1992, which is when the debt turn changed". The debt turn problem experienced since 1992 is not related further by Mr Doshi to the use of LCB as a carrier in November 1992. This was all a plain example in my judgment of Mr Doshi making things up as he went along.

46. On 13 April RBIF (Mr Morrin and Mr Bradley included) met Mr Doshi to review progress. The RBIF note of the meeting reads inter alia:

"1. Doshi opened the meeting requesting that we reverse our decision to terminate. He felt that the relationship had improved and that the facility was running well.

2. Martin stated that the decision to terminate would not be reversed, but that we would be flexible in negotiating the withdrawal.

Both Martin and Alec state that we are not in control of the ledger and, in view of this, the relationship could not continue."

By this time it is clear that those at RBIF dealing with the account had come to the conclusion that it was highly probable that they were the victims of a sustained "fresh air" fraud. An investigation by an RBIF employee, Neil Harvey, of a sample of invoices revealed a suspicious number of cases where the debtor claimed not to have ordered goods, where PODs appeared to have been signed by someone other than the debtor and where it appeared to be possible to correlate such invoices with cheques drawn on VKV's Barclays account. He plainly thought that the best course was to terminate the agreement at the earliest opportune moment or, as he tersely put it "Finish with VK when the trend of the factored crap is low, i.e. a period equivalent to last Sep/Oct or this January (see graph)". That appears to have been the strategy thereafter pursued by RBIF. Mr Doshi's strategy was to keep his borrowing as high as possible in the hope that he could persuade RBIF that, with an improving debt turn, the arrangement could be allowed to continue. At the April meeting it was agreed that the account would be reviewed in August. In the intervening period Mr Doshi had some success in persuading Mr Morrin to relax the programme of progressive reductions in the credit limits which by then was in place.

47. On 19 August 1994 Mr Doshi had a meeting with Mr Bradley. Mr Doshi's account was that at this meeting Mr Bradley told him that RBIF were happy to continue with the factoring agreement at a limit of Ł400,000 which had by then been achieved, but that the fresh air invoicing had to stop. He said that Mr Bradley advised him to put in writing a cover story for the past fresh air invoicing and supply a list of the existing fresh air so that the ledgers could be reconciled. Mr Doshi wrote two letters that day to Mr Bradley. They were, according to the letter, (a) to explain why RBIF had been receiving VKV's Barclays cheques and (b) to set out a business case for VKV's remaining a client of RBIF. The first explanation consisted of a detailing of practices which were admittedly in breach of the factoring agreement, namely (1) overnight use by VKV of cash collected from customers in order to overcome the stringency of the reduced borrowing limits and (2) the entering into numerous "sale or return" contracts as a marketing ploy to get across to a better, more credit-worthy, class of retailer (VKV having taken the decision to "delist" some 300 potentially risky customers who were accounting for Ł1.2m sales per year but whose custom had given rise to bad debts of some Ł62,000 in the period December 1993 to April 1994). In the letter Mr Doshi stated that there had been a further reason for his visit which he had not had time to canvass, namely to seek continued support from RBIF until 31 January 1995. The letter concluded:

"Having started, and now having, a solid new client base, totally new office staff, driver staff, a new solid sales team, well trained, having placed new controls, having now done all the work, and having set the foundations totally right, it would be a great pity to lose your support at this stage. I therefore very much hope and trust that I can have your support, at least until 31 Jan 1995, in order, that the next 5 to 6 months, can prove, that VK Vintners Ltd are a good client.

I look forward to meeting John, Martin and yourself, on Tuesday 23rd August."

The second letter was shorter, referred to the fact that the meeting that morning had been attended also by Mr Butterworth, and enclosed a list of the sale or return transactions. A further meeting took place on 23 August 1994 at which Mr Butterworth was present. It is common ground that Mr Doshi's explanation of the sale or return invoicing was accepted by Mr Butterworth at face value. He wrote saying, inter alia,

"5. We will meet again on 30/8 to discuss the position and the future cash flow requirements/RBIF's need to reduce the facility.

6. It is RBIF's requirements in a 2 month time scale - whatever else happens - to eliminate cash invoices.

7. The stock invoice question remains open and will be considered in the light of 1 above. You have given us your unqualified personal undertaking that no more stock (or SOR) deliveries will be notified to RBIF."

48. By 30 August 1994 RBIF had decided to terminate the agreement, and Mr Doshi was informed of this at the meeting held that day. Mr Doshi broke down in tears, fell to his knees and implored the RBIF team to reconsider the decision. They were, however, adamant.

49. Whatever else they show the letters of 19 August 1994 demonstrate the coolness and plausibility with which Mr Doshi is able to construct a story in order to explain an inconvenient fact. On any view the explanation given of the Barclays cheques by the first letter was a tissue of fabrication. It was designed to allay the reader's suspicions of the greater fraud of "fresh air" by confessing to the smaller sin of a breach of contract committed for good commercial reason. It was an explanation which, if believed, might have elicited a forgiving attitude on the part of RBIF and caused it to reverse, or at least postpone, the termination which it had been trying to achieve since the beginning of the year. It was designed to deceive Mr Butterworth and Mr Morrin. The only issue is whether it was also designed to deceive Mr Bradley.

50. Mr Doshi's case before me has consistently been that Mr Bradley suggested to him that he should indulge in fresh air invoicing, and that Mr Bradley was a party to concocting the lies contained in the 19 August 1994 letters. Mr Bradley has been equally consistent in denying these allegations. I have no hesitation whatsoever in preferring Mr Bradley's evidence on these matters to Mr Doshi's. Mr Doshi's case is not credible for a number of reasons. First, it is part of his case that the agreement was such that it should at all times be obvious what was, and what was not, "fresh air". Yet if it were made obvious it would be obvious not only to Mr Bradley but also to anyone concerned with the account at RBIF. All of the contemporary documentary evidence, particularly from August 1993 onwards, shows that there was concern within RBIF at the Barclays cheques. A great deal of executive time was consumed in trying to get a handle on the reasons for this. To accept Mr Doshi's account requires one to accept that Mr Bradley was authorising, or at least standing by during the course of, these investigations in the full knowledge of what was really going on. Moreover, notwithstanding Mr Doshi's opening position that it was Mr Bradley alone who knew of, and had instigated, the fresh air invoicing, the logic of his case required him in due course to go on to say that others in RBIF must also have known and that their queries and investigations were either an elaborate charade (semble, the explanation for the results of the October 1993 RBIF audit) or were designed merely as a check on the supposed Ł150,000 limit. And yet, despite all this knowledge, or presumed knowledge within RBIF, it was still thought worthwhile to indulge in the concoctions of the 19 August in order to deceive Mr Butterworth and Mr Morrin into believing that something more innocent had been going on. The whole thesis is frankly preposterous.

51. What the thesis boiled down to was that Mr Bradley must have known of and acquiesced in the fresh air invoicing because otherwise Mr Doshi would not have got away with it for so long. RBIF sent statements on a monthly basis to debtors, and these would have included the "fresh air" debts. Mr Doshi suggested that RBIF would regularly have received protests from debtors challenging the amounts due and must have deliberately turned a blind eye to them. The documents do show isolated examples of such protests, and plausible excuses being given by Mr Doshi when the matter was raised with him. It is quite possible, however, - indeed probable - that the volume of such protests was limited as a result of reassurances given directly to the customers concerned by Mr Doshi and his salesmen. Mr Bradley was himself eloquent as to the nature of the suspicions which he harboured and the degree to which he felt it possible or prudent to confront Mr Doshi directly with them. Given the sustained attack which has been launched on Mr Bradley's integrity, it is fair that I should quote the following passages from his lengthy cross-examination by Mr Doshi verbatim:

Day 7, p40:

"Q So are you saying that what you do is you extract information from your clients in a very friendly way, and then just close them down. A: I think that is an interesting observation. I do not think that I was ever quite that cynical, but our relationship was conducted by not only myself but my colleagues. It was rather like playing a salmon, Mr Doshi: we never knew whether we were going to land the fish or not, and in the end we sort of half landed it and half did not. It was a game of skill between us, but the trouble is you knew what you were doing and we did not have the proof. But there we are."

Day 7, pp.45-46

"Q. What I am going to put to you, Mr Bradley, is that what you did was, having got that list, any complaints by any clients that they did not owe money, if those clients who complained happened to be on that list you told your staff to ignore it. A. That is complete fabrication of your fertile imagination.

Q. Is it? A. It is.

Q. So all these clients who have got fresh --- A. And I think you ought to ask Ian Ellis if that is right as well.

Q. I am sorry? A. You should ask that question of Mr Ellis as well.

Q. I will. For example, I have no objection to Mr Ellis or Mr Morrin sitting in to listen to your replies. I have waived my rights to ask you some questions and find out whether you will answer it differently from them. A. All I can tell you, Mr Doshi, is that if you had ever told me that you were raising fresh air invoices I would have been in to see Mr Butterworth as quick as a dose of salts and we would have closed you down. Or we would have terminated your contract, which would have had the same effect as closing you down."

Day 7, p.64

"Q. You said, "Put more invoices in". Now, what is Mr Doshi going to think about that? A. Yes, but you say I said to you, "Put in more invoices". I think it is highly unlikely that I said such a thing. The only reason I absolutely refute saying such a thing is there might have been, conceivably, some reason why I might have said that, but I do not think I did say it, but I am on oath here and I cannot remember whether I said it or not, and that is why I am not being absolutely 100 per cent in refuting that statement, though I would very much like to, because I do not think I did say it.

Q. You see, you did say that, and what Mr Doshi understood from that was, "Put in more invoices to cover up the shortfall of the funding". A. Well, you know and I know that that is not the case.

Q. That is the case, Mr Bradley. A. It is not the case, Mr Doshi. I have spent 25 years in this industry trying to defeat people like you, and what I loved about my industry was being able to have the cut and thrust of things. The last thing I am ever going to do is to tell a client of mine to do the very thing that I have spent my life trying to catch them out at. It is just not plausible.

Q. You see, Mr Bradley, I am a Jain and I never lie. A. I am sorry, my Lord, I cannot answer that question or that statement."

I interpose that the way in which Mr Doshi puts his case here (" ....and what Mr Doshi understood from that ....") contrasts markedly with the express agreement subsequently deposed to in his witness statement.

Day 7, p.70

"Q. You see, all Mr Neil Harvey had to do was look at the ... cheques and match them up with the payments and it would be absolutely obvious to anyone that these are bogus invoices. A. You may well be right, Mr Doshi, and if you were right then all I can say is we should have matched it up more cleverly ourselves and we were not being as clever as you were, that is all.

Q. It is not a question of being clever, it is a question of giving in cheques which it is quite obvious what they are for. It could not be more clear. It matches the fresh air invoice. It happens once or twice a week. It cannot get more obvious than that, can it? A. It is quite a different thing to be sitting in a court room in the year 2000, six or seven years away from where we were, and sitting and looking at the thing on the ground at the time, trying to believe the best of your client, not really believing what he has to say to you. What you are telling me may well be so. It may well be that we were not diligent enough. Insofar as that is a crime, we are at fault. Nevertheless, we did not feel that we had sufficient evidence to call you in and say. "Here is absolute proof of your having raised fresh air invoices". Apart from anything else, if we had done I will guarantee you a pound to a pinch of salt that you would have come up with some very very plausible explanation as to every single case, as you always did."

Day 7, p.76

"Q. And it summarises, of possibly 200 Barclays accounts, about one-half will have over Ł4,000 - worth of fresh air on them at any one time. A. But this is mere speculation and surmise on the part of the person preparing this document. You have to remember that we talk in a lot of jargon in our business, my Lord, and in looking at Mr Doshi's company we would inevitably have been walking around saying, "I'm absolutely sure Mr Doshi is raising fresh air invoices on us", but whether or not we had the specific truth that we could have actually taxed him with and not got some kind of plausible response in every single case I singularly doubt."

Day 7, p.37

"Q. Well, Mr Bradley, you did not wish the agreement to be terminated at that time, did you? A. I did actually. Well, no, if I am absolutely honest with myself, I had mixed feelings, yes, about it. I felt that perhaps we could reduce the commitment even further before giving notice, but my colleagues decided that we ought to bite the bullet there and then and that was the decision that was taken, and again with hindsight my colleagues were right. There is no question of that."

52. I was left in no doubt whatsoever that Mr Bradley was speaking the truth and that Mr Doshi was not. Not only did Mr Doshi perpetrate a deliberate fraud on RBIF, but he has attempted to justify himself by falsely claiming that Mr Bradley was a party to the fraud. Apart from other implausibilities in this scenario, Mr Doshi was quite unable to suggest to me what Mr Bradley's motivation can have been. Mr Doshi's case was that VKV was a large and valuable client of VKV whose account Mr Bradley did not want to lose. That, if true, might have explained (had it been the case) why Mr Bradley had been very relaxed and flexible in adjusting the principal parameters of the account in terms of customer credit limits, overall credit limits, size of the IPP and the setting of trigger dates for disapproval. In fact we see no signs of such relaxed flexibility in relation to any of these matters. What it signally fails to explain is why Mr Bradley should have been prepared to countenance, behind the backs of his own board, an elaborate system of fraud which potentially put both his company and his own career at risk. On Mr Doshi's own case, the extent of the fraud did not in practice involve VKV in borrowing large sums in excess of what would otherwise have been available to it. If that was the case, it is altogether inexplicable that Mr Bradley should have resorted to fiction in meeting these modest additional needs of VKV. From no angle, except one misted over by a fog of (at best) self-deception, does Mr Doshi's version of events begin to make any sense or carry any conviction.

53 My conclusion is therefore that this serious allegation has been proved. It is obvious that the conduct in question makes Mr Doshi unfit to be concerned in the management of a company within section 6 of the CDDA 1986.

THE VAT ALLEGATIONS and THE PICTON MOUNT ALLEGATION

54. Throughout the whole history of VKV's trading there was never an occasion on which a VAT return was made which was both accurate and on time. VKV's VAT quarters ended on the last day of April, July, October and January, returns being due by the last day of the following month. In order to identify the issues which arise, and the background to them I set out in tabular form the VAT liabilities of VKV as declared to HMCE by VKV itself. The negative figures represent claims for repayment of VAT to VKV:

VAT Quarter

Stated Liability
Date of HMCE Receipt

of Return

April '92

- Ł 3,068.09

17.06.1992

July '92

Ł 8,153.43

24.06.1993

October '92

[-Ł 5,468.81]

10.11.1992

January '93

Ł 3,235.86

[24.06.1993]

April '93

Ł122,173.41

15.04.1994

July '93

Ł173,425.39

07.04.1995

October '93

Ł 10,360.20

07.12.1993

January '94

Ł 10,118.12

09.03.1994

April '94

Ł 1,306.52

20.06.1994

July '94

- Ł 43,920.96

07.03.1995

October '94

- Ł 58,631.41

13.04.1995

January '95

Ł 7,410.00

13.04.1995

55. The two quarters of central importance are those for April 1993 and July 1993. Before dealing with them, however, a number of introductory points need to be emphasised. First, there is a consistent pattern throughout of the returns being made late. The April 1992 return (which claimed a refund) was not made until some 9 days after the due date, and was subsequently found to have been inaccurate (since it claimed input tax deduction which should properly have been claimed in the next quarter). This mistake, if such it was, was to the advantage of VKV's cash flow. No return was made for the July 1992 quarter until after the due date for the October 1992 quarter return. When making the October 1992 return, Mr Doshi chose to include the July figures in the October return with a consequent claim for a refund. Had the July return been rendered in time VKV would have had to find Ł8,153 by the end of August 1992. In the table the refund claim of Ł5,468.81 was made in relation to two quarters, and is in square brackets for that reason. Once again a "mistake" had been made which favoured VKV's cash flow. Secondly, there are some doubts as to the accuracy of the January 1993 return. In evidence Mr Doshi told me that he had, wrongly, failed to include in that return the VAT in respect of some Ł˝m worth of "sale or return" transactions which had been done in that period, those transactions subsequently being accounted for by him in the April and July 1993 returns. If that is true it represents another example of Mr Doshi making a mistake in favour of his own cash flow. There are, however, substantial grounds for doubting the veracity of Mr Doshi's account of this matter, since the story only emerged as part of Mr Doshi's argument that fresh air invoicing had only commenced in the post February 1993 period. A further point to note (but which I have not been able to resolve) is that Mr Doshi claimed that the January 1993 return had been sent on time, notwithstanding HMCE's contention that it had not been received until 24 June 1993. It certainly appears, consistently with Mr Doshi's case in this respect, that no default assessment was raised by HMCE as a result of non-receipt of a return. Thirdly, of the six returns which were made for periods after the conclusion of the PML agreement in September 1993, Mr Doshi accepted in the course of his submissions to me that the last three must have been inaccurate.

56. There was at least one very good reason why Mr Doshi may have thought it in his interest to make this last concession. The existence of claims for repayment of substantial sums for the July and October 1994 periods suggested that VKV was trading at a loss during those periods: see the passages in Mr Doshi's submissions to me at Day 19 pp 65-67. This would strongly support Mr Hickling's case that VKV had been trading insolvently during the whole period from at least the end of April 1994. Since it was in Mr Doshi's interest to avoid that inference being drawn, he readily accepted my suggestion that VKV must in fact have been incurring net VAT liabilities during this period. He ascribed the repayment claims to an erroneous "double-counting" of the PML input tax, the error having been made as a result of documents having been lost because of the Customs raid in September 1994. Mr Doshi asserted that the probable quarterly VAT liability with the PML agreement in place would have been running at Ł10,000 to Ł20,000 per month.

57. Coming at the stage at which they did (and otherwise than as formal evidence) these explanations and assertions were not further investigated by the claimants. One can, however, comment that it is difficult to see how the loss of documents can itself lead to double-counting of the kind suggested. It is also difficult to see how Mr Doshi can, on his own argument, possibly have believed that the two large repayment claims were genuinely due (even supposing input tax on the PML supplies to have been deductible). The explanations and assertions also cast considerable doubt on the validity of the returns for October 1993, and January and April 1994: they show liabilities of respectively Ł10,360.20, Ł10,118.12 and Ł1,306.52, where trading at a respectable level of gross profit would (on Mr Doshi's account) have been in the "Ł10-20,000 mark per quarter". My final comment is that this passage in Mr Doshi's submissions provides a useful (but by no means unique) illustration of his ability to move smoothly and without embarrassment between two incompatible propositions, in this case the submission that on a true analysis VKV's VAT liability was on the one hand Ł165,000.00 (Day 19 p66, lines 37-42) and on the other Ł400,000 (Day 19, p67, lines 35-43). The latter figure was, incidentally, calculated on the basis that Ł20,000 per quarter for the last six (post PML agreement) quarters was an appropriate figure to take.

58. Mr Doshi explained the facility with which he was able to handle these various propositions by reference to the considerable experience and knowledge of VAT which he has acquired subsequently, both in business and as a result of having had to defend himself in these and the earlier proceedings. He invited me to approach his actual conduct at the relevant times on the footing that he was then altogether much more naive and ignorant about these matters. This I do not find myself able to do. Mr Doshi is a highly intelligent man. He has a degree in Economics and Statistics which he obtained at the age of 20 at University College London in 1977. Since that time he has been continuously engaged in various businesses, from 1983 onwards principally in the wine trade. While I can accept that the introduction of acquisition VAT accounting as from 1 January 1993 might legitimately have led to teething troubles for any business, it was well within Mr Doshi's abilities to get to grips with these. He did not deny that he had been responsible for completing the last two of the returns made by Wines and VKV's returns until 1 March 1983.

59. Mr Doshi's case, in relation to the April and July 1993 returns, is essentially that he was very badly let down by Mr Merchant who had joined VKV as from 1 March 1993 and whose job it then was to ensure that VAT returns were compiled. The system was that Mr Merchant would prepare the return which Mr Doshi would then review and then, if satisfied, sign, together with a cheque for the amount due. The April 1993 return was due by 31 May 1993, but none was made. On 17 June 1993 HMCE issued a default assessment for Ł4,276.33. Mr Merchant drew this to Mr Doshi's attention, and a cheque was sent to HMCE to cover the assessment. According to Mr Doshi he accepted Mr Merchant's assurance that the return would shortly be done. Mr Merchant did not, however, prepare a return. In due course HMCE arranged to visit VKV's premises on 1 September 1993. Alerted by Mr Merchant to the imminence of the HMCE visit, and to the fact that the completion of the return was outside Mr Merchant's competence, Mr Doshi himself sat down over the August Bank Holiday weekend and completed the return. It showed a liability of Ł122,173.41. Mr Doshi says that he gave the return and a signed cheque to Mr Merchant, with instructions "to give it to Mr Shafi [the HMCE officer] the next day or post it the same day".

60. During the course of Mr Shafi's visit (for which Mr Doshi was not present) it appears that he asked questions about the April 1993 return and was told that it had been made. It seems likely that he was shown (by Mr Merchant) a photocopy of the return and the cheque and told that it was in the post. His attention at any rate appears to have been focused on the non-completion of the July 1993 return. From his inspection of the books in the company of Mr Merchant, the view was formed that the VAT liability for the July quarter was likely to be in the order of Ł150,000. Mr Shafi indicated that that return must be submitted within 30 days. It was not. Nor was the April return and the accompanying cheque ever received by HMCE. According to HMCE it was later found by them at VKV's premises, never having been sent. Mr Doshi invited me to conclude that HMCE had fabricated evidence to this effect which was put before the jury in the criminal proceedings. This was a case he had not previously made, and I find no evidence to support it.

61. VKV's cash position at this period was (as was typical) very tight. Mr Boardman put to Mr Doshi a schedule of reconciled bank statements which demonstrated a consistently negative pattern at the month end from March 1993 onwards. While Mr Doshi never accepted the materiality of this schedule he did accept that it was an accurate reconciliation of the bank account with the cheques drawn by Mr Merchant as payable (and included by Mr Merchant on the list supplied by him to Mr Doshi). That shows no source from which the April and July 1993 VAT liabilities could have been met on their due dates. RBIF was threatening reduction of its overall limit (see paragraph 31 above). The (admittedly bogus) management accounts being furnished by VKV to RBIF were showing increasing losses on P & L account. An unprecedentedly large sum had also been found in August to clear out some of the consequences of earlier fresh air invoicing (see paragraph 32 above). It is impossible to see how VKV expected to be able to pay the amounts due in respect of the April and July 1993 VAT quarters at this time. Mr Doshi's explanation that the sums would in fact have been easily managed, probably by deferring payment of other bills or by negotiating some stage payment arrangement with HMCE, is not acceptable. Allowing Mr Doshi every ingenuity in playing one creditor off against another, it must have been plain that, however the backlog had arisen in the first place, the situation could only get worse in the future as each succeeding VAT quarter threw up a new bill of similar proportions. Nor can I believe his assertion that he was at all times unaware (i.e. simply did not notice) that the April 1993 liability had never been discharged. This, the largest cheque which VKV had ever written, should have been expected to be presented in early September 1993 if Mr Doshi is to be believed. But if this were so, Mr Doshi would have had carefully to plan how it was to be met and allow for it when making other payments. That he could just forget about it I find incredible. The non-receipt by HMCE of the April 1993 return was, I find, no accident. The tale told to Mr Shafi that it was in the post was a deliberate ruse designed to throw him off the scent of that return. It appears to have been successful in that respect. Similarly, I find it impossible to believe that Mr Doshi did not have at the end of August 1993 a reasonably good idea of what the July 1993 liability would turn out to be if and when the return was properly made: if, as he claims, Mr Doshi had sufficient management controls in place to know how the business was performing, he must have had sufficient information to be able to estimate the net VAT liability being incurred. His assertions in evidence (Day 15, pp. 2,8) that he had absolutely no idea what the April 1993 VAT liability was, that he gave no thought to it when authorising the payment of the default assessment, and that it did not occur to him that it was appropriate for him as a director to take the question up with Mr Merchant, are simply not credible. Moreover, it is simply implausible for Mr Doshi to assert that he gave no thought to the likely scale of the July quarter liability when tackling the completion of the April 1993 return over the bank holiday.

62. It is against this background that I have to assess the credibility of Mr Doshi's claim that, in entering into the Picton Mount agreement, he gave no thought at all to the VAT consequences. The claim is inherently implausible. In his report dated 27 June 2000 in support of the disqualification application Mr Peck has summarised the various different accounts which have at different times been given Mr Doshi of the origins of this agreement. The account now given by Mr Doshi is contained in paragraphs 44 to 48 of his witness statement dated 27 November 2000 (produced after the close of the claimants' case). That document gave an account which sought to reconcile so far as possible the earlier accounts, while at the same time avoiding the trap of admitting that the function of the agreement had simply been to divert some Ł10,000 per month to Mahesh. The latter had been the tenor of the explanation given at the criminal trial, but was obviously an inconvenient explanation to maintain in the context of misfeasance proceedings.

63. Mr Doshi's present account is that prior to August 1993 (and following the collapse of Wines) he, Mr Doshi, had been supporting Mahesh and his family by making payments to him of about Ł55,000.00 per annum. Mahesh in August 1993 told him that he needed about Ł120,000.00 per annum to maintain his living standards. Mahesh proposed that PML become VKV's principal supplier. In this way part of VKV's profit could be enjoyed by PML (and thus Mahesh) in a tax-efficient way, and at the same time PML could establish itself as an apparently successful and credit-worthy trading entity. By this means therefore Mahesh could continue for the time being to enjoy Mr Doshi's bounty under an arrangement which offered at least the possibility that Mahesh, through PML, might develop a business which would later render such bounty unnecessary.

64. Even this account (as so far summarised by me) would not fully meet the sting of the misfeasance allegation that the agreement was of no commercial benefit to VKV. That was dealt with by another element in Mr Doshi's account, namely that Mahesh had promised that he would involve himself directly in the import side of the business: this offered VKV the advantage that it would free up a large amount of Mr Doshi's time for devotion to sales and marketing.

65. All this seems to me inherently implausible. I am prepared to grant that Mr Doshi had strong family reasons to wish to continue to support Mahesh financially; that Mahesh did not wish to appear either to his family or to the wider community as a mere remittance man of his younger brother; that Mr Doshi had strong motives for finding a way of paying the remittances which would be deductible in the computation of VKV's taxable profits; and even, for the sake of argument, that there was some prospect of Mahesh playing an active role in the import of the wines being sold by VKV. Even granted those matters, I am unable to see how they explain the elaborate and, in the final analysis commercially unworkable, arrangements constituted by the Picton Mount agreement. All those objectives could have been achieved (with no less semblance of legitimacy) by some form of simple consultancy or agency arrangement for which PML might have invoiced VKV a periodic charge. Instead the arrangements entered into involved what must have been the extremely time-consuming process of creating an elaborate paper chain of invoicing, and the construction and maintenance of a complex inter-company account. Moreover the arrangements (if they were in fact implemented in the way in which Mr Doshi alleges) were potentially unworkable. When a VKV customer's order was taken, and the stock delivered, one could not know (according to Mr Doshi's submissions to me) whether or not PML was going to authorise the intermediate sale to VKV. That would depend on whether or not Mahesh ever "approved" the relevant invoice: see the exchanges between Mr Doshi and myself on Day 18 at p4. The agreement could only work in practice if VKV, both on its own behalf and on behalf of PML, retained control of the invoicing by both companies and orchestrated the whole exercise. It must in my judgment have been the original intention that this should be the case.

66. These are all a priori reasons for supposing that the whole elaborate arrangement had some purpose other than those claimed for it by Mr Doshi. The evidence points in the same direction. There was no credible evidence that Mahesh ever did, or attempted to, play any direct role in the process of importation, in dealing with existing suppliers, or in seeking out new ones. Nor does the evidence support the idea that there can ever have been any genuine expectation that he would. To the extent to which Mr Doshi in his evidence to this court has suggested the contrary, his evidence is inconsistent with that given by him at the criminal trial. There is, likewise, no evidence that PML was during this period carrying on any business on its own account, or that it was expected to. All the liabilities to suppliers which it incurred as a result of its participation in the arrangement were discharged, if at all, by payments direct to the supplier by VKV. All instructions given to suppliers, or to the bond, came from Mr Doshi. Apart from the creation of the paper chain (which did involve PML in some "real" relationships with suppliers), the operational conduct of VKV's business remained exactly as it had been before the creation of the arrangement.

67. My conclusion is that the only really credible explanation for the PML agreement is that advanced on behalf of the Official Receiver. It had the effect of limiting the amount of future VAT liabilities of VKV at a time when VKV was already in severe difficulties in satisfying existing ones. It offered the possibility of PML itself delaying or avoiding payment of the corresponding output tax by the simple device of failing to file returns for as long as it could get away with doing so. That is what in the event happened. The simplest hypothesis on which to explain that fact is that, like the rest of this carefully orchestrated operation, it was intended to operate as it did in fact operate. It is significant that the first VAT return put in by VKV (for October 1993) after the PML agreement was in place was made (almost within time) at a stage when the July 1993 return was still outstanding. The October 1993 return claimed input tax of Ł325,000.00 as a direct result of the PML Agreement. The relative alacrity with which that return was made and the modest resulting liability was paid gives the lie to Mr Doshi's assertion that he was kept in ignorance by Mr Merchant of VKV's VAT position and paid no attention to it. I return below to the subsequent history in relation to the July 1993 return.

68. Mr Doshi objected that this hypothesis was unsustainable. He pointed out that the arrangement did not reduce VKV's liabilities in respect of VAT. While it enabled VKV to reduce its liability to HMCE this was only the result of its being able to deduct input tax charged to it as part of PML's invoices. To the extent to which it had discharged its liability to PML in respect of those invoices by making payments on PML's behalf it had paid that input tax. To the extent to which it had not done so, it remained liable. The consequence of the arrangement, if it had the object which I have hypothesised, would be that PML would in due course go into liquidation (probably on the petition of HMCE) and the liquidator would then claim the amounts owing by VKV to PML on inter-company account. That is no doubt a correct analysis of the consequences, other things being equal. By the time all these consequences worked themselves out, however, other things might well not have remained equal. The complexities of the inter-company account, and the amount and quality of the information available to the liquidator of PML might prove obstacles to his progress. VKV might by then have ceased to trade. Another company or companies, carrying on the same or different businesses, might by then be supporting the lifestyle of the extended Doshi family. I interpose that there was some evidence that while VKV was still trading Mr Doshi caused large numbers of limited companies to be set up apparently in contemplation of offering a wide range of accountancy and other professional services. In the meantime VKV had at least a breathing space in which to marshall its resources to deal with the accrued VAT liabilities which (exclusive of interest and penalties) already totalled some Ł290,000.00 (of which some Ł118,000.00 - the April 1992 balance - appeared to be being overlooked by HMCE). VKV did not of course pay PML against the latter's invoices: the only payments it made were either to suppliers or to Mahesh.

69. It does not follow from my conclusion that the underlying purpose of the PML Agreement was the avoidance of liabilities of VKV to HMCE that the subsequent assessments by HMCE on VKV correctly determined those liabilities. Those assessments were as follows. First, by an assessment dated 4 April 1995 the input tax claimed in the periods October 1993, January 1994 and April 1994 was disallowed. This threw up an additional liability of Ł536,679.00. On 9 October 1995 HMCE wrote to the liquidator indicating that input tax claimed on the returns for July 1994, October 1994 and January 1995 would also be disallowed. On that basis the Official Receiver appears to have re-submitted returns for those periods showing a liability in the sum of Ł729,403.00.

70. I heard a good deal of argument on the question of whether or not these liabilities had been correctly calculated. The sole issue was whether or not VKV had been entitled to claim deductions for the input tax arising as a result of the invoices generated by PML following the conclusion of the PML agreement. In summary the rival contentions were as follows. For the Official Receiver it was submitted that the input tax claimed had been correctly disallowed because the PML agreement and the paper-chain which it generated was a sham. It was submitted that it was a sham both in the classic sense of the word as defined by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786, 802, and in the broader sense in which the word was applied in Gisborne v Burton [1988] 2 EGL 9. He also submitted that it was an invalid transaction as being of no benefit to VKV. Mr Boardman on behalf of Mr Hickling adopted this analysis, but also put the point in two other ways. First, he submitted that Mr Doshi could not be heard to say that the PML agreement was a perfectly genuine agreement "when the whole point was to pay his brother in breach of fiduciary duty". Secondly, he submitted that HMCE's refusal to allow the input tax could be justified by an application of the principle in Furniss v Dawson [1984] AC 474, 527. He submitted that it was a matter for this court to determine whether or not HMCE was correct in its approach, and that I should in effect make a declaration as to the VAT liability on the footing that it was. Mr Doshi submitted that at worst the PML agreement had as its object the deferral of a VAT liability, and submitted that there was no reason why the PML invoices should not be given full effect for VAT purposes.

71. So far as the disqualification proceedings are concerned, the correct answer to this question is not in my judgment decisive. Once one finds that the main purpose of the PML agreement was to provide a cover for gratuitous payments to Mahesh while at the same time assisting VKV to trade without paying its liabilities as they fell due improper conduct has been shown. The correct VAT consequences of that improper conduct are more important for the purpose of determining what sum might be ordered to be contributed by Mr Doshi under s.214.

72. In my judgment it is not for this court to rule on what the true liability of VKV for VAT is in the sense of deciding whether the assessments have been properly made. That is a matter to be established pursuant to the provisions of the Value Added Tax Act 1994. Whether or not an assessment has been validly made is a matter in the first instance for the VAT appeal tribunal. Unless and until the assessment has been successfully appealed the amount assessed is due as VAT and recoverable accordingly: see sections 73 (9) of the VATA 1994. Mr Doshi's real complaint is that Mr Hickling has acted negligently in the conduct of the liquidation in not appealing the assessments, and that Mr Doshi should not have to suffer as a result of that negligence. As to that I am satisfied that Mr Hickling has not been negligent. Any appeal against the assessments would require to be funded. He has no funds for that purpose. Any appeal would have to rely on tendering Mr Doshi himself as a witness to the fact that (contrary to the VAT returns made by Mahesh to HMCE of PML) there were genuine supplies between PML and VKV. The best point might be that, at least in relation to those suppliers with whom PML contracted, property in the relevant goods passed to PML when payment was made and the goods moved out of bond: the very fact that those suppliers agreed to deal with PML involved at least that 'real' legal consequence. The same point would not, however, be available in the case of those suppliers who insisted on dealing with VKV. In those cases everything continued exactly as before apart from the interposition of the paper transactions of sale from VKV to PML and back again. The suggestion that PML remained free to sell stocks so acquired otherwise than to VKV rendered the arrangement unworkable, but if PML was not so free the whole thing was an elaborate charade. It seems to me that HMCE had relatively strong grounds for assessing VKV's liability on the ground that the PML agreement, and the "supplies" made under it, were shams in the Snook sense. I do not express a view as to whether, short of that, the assessments should be viewed as capable of being upheld on the basis of reasoning similar to that applied in Gisborne v Burton (supra) or in Furniss v Dawson (supra), save to sound a note of caution about those authorities in this context (cf. per Lord Hoffmann in Customs Commissioners v Thorn Ltd [1998] 1 WLR 1106 at 1120). I would add that I am not attracted by the argument that simply because the "supplies" were made in breach of fiduciary duty under a voidable agreement they should not be treated as supplies for VAT purposes.

73. I return to the narrative in relation to the July 1993 return. As indicated earlier (at paragraph 60 ) Mr Shafi had warned on 1 September 1993 that the return should be completed within 30 days and it was not. This inevitably exposed VKV to a default surcharge and to the possibility of an estimated assessment being raised. In due course Mr Shafi raised such an assessment (dated 18 October 1993) in a sum of Ł148,846.00 (a sum calculated by reference to figures he had seen on his visit after allowing for a central assessment for the period which had been paid). VKV countered this with a letter promising to examine the assessment and to write again. On 16 November 1993 HMCE wrote threatening to distrain, to which VKV responded by saying that the October 1993 return was about to be filed and that the return for July 1993 would also shortly follow . On 29 November 1993 HMCE wrote again threatening action, and claiming Ł165,567.00 (a sum which included a 15% surcharge for failing to file a return). Mr Doshi's evidence at the criminal trial and before me was that he was kept in ignorance of these claims and threats by HMCE by Mr Merchant, and that he did not learn of them until 13 January 1994. His evidence was that he then confronted Mr Merchant over the situation and received the latter's assurance that the matter would be dealt with. Eventually, on 2 February 1994, a return for July 1993 was sent in by VKV. That return showed a liability of Ł34,323.72. The true liability was Ł173,425.39. There was an acute conflict of evidence between Mr Doshi and Mr Merchant at the criminal trial. Mr Doshi's account was that the figure of Ł34,323.72 had been supplied to him by Mr Merchant and that he had signed the return without checking it. Mr Merchant claimed that Mr Doshi had insisted on the calculations resulting in that figure despite Mr Merchant having insisted they were wrong. The jury were evidently not satisfied beyond reasonable doubt that Mr Doshi's account of this episode was untrue.

74. I do not myself have much doubt why this return contained that figure. VKV was not even in a position to pay that sum still less the very much greater liability which an accurate return would have admitted. It had to proffer two post-dated cheques in satisfaction (both of which were in fact stopped and replaced by substituted cheques, only one of which was in the event met). Mr Merchant knew very well that he and Mr Shafi had calculated the liabilities in September as being in the Ł150,000 region. I do not believe that Mr Doshi could have been under any illusion from late August onwards but that the liabilities were at least of that order. On the evidence of what had transpired in August 1993 he cannot have been confident of Mr Merchant's abilities to complete a VAT return accurately. If (which I do not accept) Mr Merchant supplied the Ł34,323.72 figure to Mr Doshi, it would have been immediately apparent to Mr Doshi that there was something wrong with the figures and he would have checked them. The much more probable explanation is, as Mr Merchant's evidence in the criminal trial implied, that the "mistake" in the return was deliberate. Whether it was expected by its author permanently to deceive HMCE is another matter. The nature of the "mistake" was such as to lend itself to the "innocent" explanation which was given when it was pointed out. It may have been committed simply to buy time. It seems to me, however, improbable in the extreme that it would ever have been corrected had its correctness never been challenged by HMCE.

WRONGFUL TRADING AND THE PHOENIX ALLEGATIONS

75. Section 214 of the Insolvency Act 1986 is, so far as material, in the following terms:

"(1) Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.

(2) This subsection applies in relation to a person if -

(a) the company has gone into insolvent liquidation,

(b) at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and

but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.

(3) The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation) he ought to have taken.

(4) For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both -

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b) the general knowledge, skill and experience that that director has.

(5) The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.

(6) For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up........."

There is no doubt that VKV went into insolvent liquidation when it was wound up on 21 March 1995. The question is whether Mr Doshi knew or ought to have concluded at some time before the commencement of the winding up that there was no reasonable prospect that VKV would avoid going into insolvent liquidation, and if so when that was.

76. At its highest, Mr Hickling's case was that Mr Doshi was guilty of wrongful trading in this sense from the commencement of VKV's trading history in February 1992. In broad outline, his case was that the business carried on by Wines had collapsed with a deficiency of Ł1.1m, that VKV had simply taken over and continued to run the self-same business, and that Mr Doshi can have had no reason to suppose that the business would be carried on any more successfully by VKV than it had been by Wines.

77. I do not find that case proved on a balance of probabilities. There is simply insufficient evidence before me as to the true cause of the failure of Wines. Mr Doshi ascribed the failure to two causes: first, a threat by the Inland Revenue to assess Wines to PAYE in respect of certain personnel who had been paid by Wines on the footing that they were self-employed. This had led Mr Doshi to take the decision, against Mahesh's wishes, to close down the Otto Beiser operation. Secondly, Wines had in early January 1992 been the subject of a Mareva injunction. He also acknowledged, however, that Wines had been suffering from trading difficulties from about April 1991 onwards.

78. It seems clear that the Mareva injunction was the final straw. What is not clear is whether the difficulties which Wines found itself facing from at least April 1991 onwards were difficulties with which any successor business would necessarily find itself faced. Mr Doshi suggested that, apart from the impact of the recession, some at least of those difficulties were the result of a simple business misjudgement, namely a failure to spot the consumer trend in favour of cheaper East European wines. The size of the deficiency cannot, however, be explained by a relatively sudden deterioration in trading coupled with the impact of the closure of Otto Beiser UK and the Mareva. This was recognised by Mr Doshi himself: he countered that the deficiency was not in reality as large as the proofs of debt suggested. He provided no evidence in support of this. Examination of the proofs of debt show a history of non-payment going back to the Autumn of 1990.

79. I am satisfied that I have only been given a very partial account by Mr Doshi of the causes of Wines' demise. Nevertheless, I have not been persuaded that there were systemic defects in the business which it conducted such as to make it obvious and inevitable that that business could never trade successfully. So far as the evidence goes that business had in fact traded without mishap since 1983, during which time Mr Doshi had been intimately involved in its fortunes.

80. Mr Doshi was cross-examined at length in relation to the question whether he had been a de facto director of Wines. His contention was that he was a mere employee, co-managing the business with Mahesh under the direction of a board consisting of Revti and Mahesh's wife Lata. I have no doubt that he was a de facto director of Wines. It was more or less accepted by him that Lata was a director in name only, and his account of monthly meetings with Revti at which he and Mahesh would report on the company's affairs suggested that Revti's grip on the business was a very loose one. The outside world saw Mahesh and Mr Doshi as the active face of the business, and it was they who owned and controlled the Otto Beiser operation through which a large portion of Wines' business was channelled. They also entered into personal guarantees of Wines' liabilities and had cheque signing authority. Had it been necessary to decide the point (which it seems to me it is not) I would have had little hesitation in holding Mr Doshi to have been a de facto director of Wines.

81. Before leaving the subject of Wines' altogether I should advert to two matters which arose during the hearing. If the inferences which I am invited to draw by the Official Receiver are correct both are very much to Mr Doshi's discredit. The first concerns the manner in which VKV acquired the goodwill furniture and office equipment of Wines. According to what Mr Doshi told the Official Receiver on 26 August 1992 Ł5,000.00 was paid for the furniture and equipment and Ł20,000.00 was paid for goodwill. That corresponded with a letter, apparently signed by Revti, on behalf of Wines, dated 6 March 1992 to VKV enclosing an invoice. It did not, however, bear any relation to the figures shown in VKV's September 1992 draft management accounts, where the figure for goodwill purchased appears to be Ł30,000.00. Nor does it tally with the draft management accounts for the period ended 28 February 1983 which were prepared by Mr Merchant. In those accounts the figure for goodwill is Ł40,000.00. That figure is supported by an invoice from Wines to VKV dated 26 February 1992 which is all ascribed to "sale of goodwill". It seems to me an inescapable inference that this latter invoice was created at some point in time after the September 1992 draft accounts had been prepared and for the purposes of the accounts for the period ended 28 February 1993. Mr Doshi, when cross-examined on the subject, and taxed with the proposition that it was a back-dated document, was evasive. He was unable (unusually) to offer any explanation for the existence of these incompatible documents. I see no reason not to draw the obvious conclusion that the Ł40,000.00 invoice was drawn by Mr Doshi, or at his direction, after the event.

82. The second matter relates to the effect of the Mareva injunction which had been obtained against Wines on 17 January 1992. Mr Doshi asserted in evidence that Wines had subsequently successfully sought a discharge of the Mareva. Further investigating by Mr Hickling (including inspection of the Court file and in due course a witness statement from the solicitors acting for the plaintiff Willy Welther gmbh) revealed that, while Wines had obtained a substantial relaxation of the Mareva to permit ordinary trading, it was untrue that it had ever been discharged. The transfer by Wines to VKV of the whole of its furniture, office equipment and stock seems therefore to have been in breach of the Order.

83. In the criminal trial Mr Doshi had given evidence that in any event Wines did not have goodwill of any value. Taxed with this inconsistency, Mr Doshi had no very satisfactory answer, suggesting implausibly that Wines had had goodwill of value in February 1992 but that the value of that goodwill had been almost immediately destroyed by the circumstance of Mahesh setting up PML and attempting to trade in competition with VKV. The fact of the matter was that what must have been motivating Mr Doshi in early 1992 was the need to achieve three goals, namely the discharge of Wines' overdraft with the bank (in respect of which he, Mahesh and Revti were guarantors), the transfer of Wines' trading stock and office equipment to VKV, and the seamless take-over by VKV of Wines' trade connections. The fact that the achievement of these goals involved a preference of (inter alios) himself and a breach of the Mareva did not inhibit him.

84. Whatever the reason for the collapse of Wines, it is undoubtedly the case that, when VKV commenced trading, it did so against an unpromising general economic background and without a great deal in its favour apart from its knowledge of Wines' customer and supplier base. In particular it had, effectively, no working capital. Its only source of finance was the RBIF factoring agreement. By its nature that could only provide finance as and when sales were actually achieved. In order to acquire the stock with which to commence trading VKV had to rely on the credit terms offered by suppliers (it had acquired only Ł20,000.00 of stock from Wines). Those were said to have been 90 day terms. VKV typically offered 30 day credit facilities to its own customers, and VKV (unlike Wines) enjoyed no overdraft facilities. It was therefore obvious that the cash flow of the business was from inception a critical matter.

85. Mr Doshi's business plan was rudimentary in the extreme. Indeed, on his own admission it existed only in his head. He knew what his overheads were, and what level of sales and gross profit needed to be achieved to break even. The management information available to him was described by him in the following terms:

"What I am saying is that I could not make a proper budgeted document. What I did do was to put down all the monthly costs which I would have on that side, so how many staff was employed, what were their costs, what were the operating costs of running it, and from that I knew that if I worked on a GP of, say, 23 per cent or whatever this would be the amount of sales required to do that. And what I also did was to look at the profit of every case of wine which was to be sold, the cost price and the price we were selling at and what the computer will do is every case that was sold it will start adding up the actual gross profit on a daily basis, so on each day I would have a gross profit figure and therefore on a monthly basis I would know exactly what was the gross profit for that month, and so on the one hand I had the gross profit of the sales on that side to give me an indication whether the first example, "was the GP running correctly?" And on the second side, I knew my monthly costs, and so I had a pretty good idea of what I was doing." (See Day 15 p.97)

Earlier he had told me:

"My position was quite simple: it was elementary bookkeeping, I suppose. I was looking at the sales ledger, what was owed, creditors, debtors, stock position, bank position." (See Day 14 page 83 lines 32-38 and, to the like effect Day 13, page 27 lines 3-15).

86. The structure of the financing made it inevitable that VKV's ability to trade profitably depended on its ability (a) to sell stock at a sufficient mark-up to cover its costs and (b) to collect the resulting debt from its customers. The easier the terms offered to customers the easier it would be to achieve sales at the desired prices. The corollary, of course, would be that extending credit to the customers would impose a strain on the cash flow. Any evidence of difficulty in recovering debt would necessarily cast doubt on the inherent viability of the business. That is one reason why the monitoring of "debt turn" was such an important control for RBIF.

87. Some evidence that collections were proving a worry to RBIF is provided by an internal RBIF memorandum by Mr Bradley dated 24 June 1992. That alluded to the "scores of post-dated cheques on this account" and to the fact that, even allowing for these, collections appeared to be very low against new sales. The memorandum also makes clear that at that date the "trigger figure" was 45 days. As recorded at paragraph 28 above it is clear that by 1 December 1992 VKV was under such pressure that RBIF had to be asked to increase funding levels to a higher than agreed level. Even with RBIF's reluctant agreement to that request, it appears on Mr Doshi's own account that part of the VKV funding in fact obtained in December 1992 was wrongly obtained on the back of some Ł0.5m sale or return transactions which ought never to have been submitted for factoring.

88. Mr Hickling's case was that the inevitability of VKV's eventual liquidation must have been apparent to Mr Doshi from (at the latest) the time when its trading was supported by fresh air invoicing and that (contrary to Mr Doshi's evidence to this court) this started well before March 1993.

89. That thesis is supported by a number of pieces of evidence. There is, first and foremost, Mr Doshi's own evidence in the criminal proceedings pointing to the autumn of 1992. That in turn was supported by his reference to "the pre-November '92 situation" in his fax to Mr Bradley of 6 February 1994 (see para 42 above). It was also supported by Mr Bradley's own evidence to me (supported by contemporaneous RBIF documentation) that the factoring arrangement ran relatively smoothly until about September 1992.

90. The available accounting information points very strongly in the same direction. As already noted, VKV produced audited accounts for its first 12 months trading as at 28 February 1993. These showed sales of Ł4,010,825, the same figure as shown in management accounts produced for RBIF. That figure exceeded the total sales, as shown by the workings underlying the VAT calculations for the same period, by a total of Ł487,526.00. As I understood it, Mr Doshi's explanation of that discrepancy was that in the Christmas 1992 period VKV had made some Ł0.5m "sale or return" sales, which Mr Doshi should have, but mistakenly did not, include in the VAT return for the January 1993 quarter. He had, however, counted these sales for factoring purposes (telling Mr Ellis after the event what he had done). They thus appeared in the management accounts submitted to RBIF. For internal purposes (and also for VAT purposes) the sales were only booked as and when the sales in fact completed during the course of the next two quarters. This explanation does not, however, extend to explaining how VKV's auditor (Mr Rajpal) found himself auditing the figure of Ł4,010,825. We know that the February 1993 audited accounts made a provision for Ł115,000.00 in respect of VAT liability, the totality of which was said to be no longer required as at 31 December 1993 "as it represents VAT on Credit Notes and Returns" (see Mr Doshi's letter of representation to R K Rajpal & Co, the auditor, dated 5 July 1994). Writing off the whole of that provision implies that all the sales in respect of which it was made had resulted in returns. However, Mr Doshi's case was that half of the sale or return transactions had in fact resulted in sales.

91. The probability in my judgment is that the Ł487,526 discrepancy is attributable to a significant extent to fresh-air invoicing rather than to the existence of a substantial volume of genuine sale or return transactions. Either explanation would account for the existence of a high level of Barclays cheques being paid to RBIF right from the beginning of March 1993. If my finding is correct Mr Doshi has invented the "sale or return" explanation in order to camouflage the existence of fresh-air invoicing during a period of up to at least three months before that date.

92. The position at any earlier period than, say, November 1992 is more opaque. For hard evidence of fresh-air invoicing at this earlier time Mr Boardman drew attention to the discrepancy between the VAT sales figures and the draft management accounts for the period ended 30 September 1992 - a discrepancy of Ł377,361.00. Mr Doshi's explanation for this was that the draftsman of the draft management accounts (said to have been Gibson Partners) had included figures gross of VAT in those sales figures. It is true that grossing up the VAT sales figures produces a figure which approximates to the figure given in the management accounts, and it is just conceivable (allowing for some small errors either in the VAT returns or in the compilation of the management accounts), that the explanation is correct. On balance, however, it seems to me more likely that some other explanation has to be found. It would be very odd if the sales figure given in the management accounts did not correspond with the figure appearing from RBIF's ledger: if presented with a higher figure in the management accounts it would immediately appear that, contrary to the terms of the factoring agreement, VKV was not factoring all of its debts. And it would in any case be surprising to find that professional accountants had used grossed up figures for the purposes of the management accounts. Given that VKV was prepared to indulge in fresh-air invoicing for factoring purposes, the application of Ockham's razor suggests that fresh-air invoicing is the explanation for the discrepancy of Ł377,361.00 which had arisen by 30 September 1992.

93. This suggests that VKV had cash flow difficulties at a very early stage in its trading life of sufficient severity to impel it into the fraudulent exercise of fresh-air invoicing. This is consistent with the contemporary evidence, sparse as it is, of RBIF during this period. It is also consistent with the picture painted by the September 1992 management accounts themselves. These show creditors (Ł1,275,168.00) in excess of current assets (Ł1,161,015). The current assets include stock at director's valuation of Ł450,000.00 and include debts owing from associated companies of Ł28,500.00. Of the latter Ł26,000.00 was owed by a creature company of Mr Doshi's, Doshi Insurance Services Limited, which had no assets and was not trading. The net assets figure of Ł26,454.20 is only arrived at after taking account of a "goodwill" figure of Ł30,000.00. The P/L account shows a loss for the period of Ł13,545.80.

94. Management accounts for the year ended 28 February 1993 (which on Mr Doshi's evidence were prepared by Mr Merchant and were not bogus) purport to show total assets of Ł82,142.00 and a trading loss of some Ł39,075.00. The net assets figure is, however, suspect. It includes the Doshi Financial Services debt as a current asset, and does not include a liability to Mrs Revti Doshi of some Ł82,142.00 in its computation. If corrections are made for these two items, balance sheet insolvency is shown. The assets figure also includes as an asset goodwill (now of Ł40,000.00) and "investments" of Ł125,000.00. Stock is included in current assets at Ł207,638.72. The audited accounts for the same period purport to show net assets of Ł28,379.00 and the company as having traded profitably on ordinary activities (profit of Ł28,379.00) before writing off goodwill of Ł40,000.00. The profit on ordinary activities is, however, suspect since the closing stock figure employed in the calculation is stated as Ł247,639.00, exactly Ł40,000.00 more than the figure used in the management accounts. The notes to the accounts reveal this figure to have been the result of a valuation by the directors "based on the stock sheets provided by the bonded warehouse". It seems certain that the figure which those stock sheets gave was the Ł207,638.72 figure given in the management accounts, and that Mr Doshi chose to raise it by Ł40,000.00 simply to enable the goodwill to be written off. The Ł125,000.00 investment is revealed to be "the cost of acquisition of 15% of the share capital of Julius Trapp & Co GMBH a company registered in Germany. The investment is stated at cost as the market value as at 28 February 1993 could not be determined with the subsidiary being overseas and recently incorporated. The directors consider the market value of the investment is in the region of amount stated above". Included in debtors was a sum of Ł29,059 owing from Doshi Insurance Services. Note 13 to the accounts reads "we [by which is presumably meant Rajpal & Co] are informed by the directors that this amount will be repaid to the company".

95. The audit report of Rajpal & Co was qualified by reference, inter alia, to the stock figure and the value of the minority interest in Julius Trapp. Accordingly in relation to three items on the assets side of the balance sheet (stock of Ł247,639.00, the investment of Ł125,000.00 and the Doshi Insurance Services debt of Ł29,059.00) the fact that these are audited accounts provides no comfort as to their accuracy. The figures given are accepted by the auditor because of what Mr Doshi has chosen to tell him and for no other reason. The probability is that the balance sheet overstates the realisable value of the company's assets as at 28.2.1993 by at least some Ł194,049.00. The revaluation of the stock by Ł40,000.00 appears artificial; the Doshi Insurance Services debt was plainly valueless; and there is no evidence that the minority interest in Julius Trapp had the value attributed to it. Little reliance can, of course, be placed on the P and L account since even on Mr Doshi's case the turnover figure of Ł4,010,825.00 included some Ł0.5m of sale or return transactions not accounted for as such in the accounts.

96. It is quite clear that by 28 February 1993 the business was in serious difficulties. Even on Mr Doshi's account he had done Ł0.5m of sale or return transactions in December which had been wrongly factored. Even on his own account it was necessary from this point onwards to factor false invoices of up to Ł150,000 per month. The stress being suffered by the business is revealed in the number of debts which were not being paid on time, or in respect of which special arrangements had to be negotiated with the creditor. On 11 March 1993 VKV was served with a statutory demand for a sum which it did not settle until after presentation of a winding up petition on 13 May. There was clear evidence of VKV having difficulty in paying even quite small creditors.

97. I have already indicated my view that Mr Doshi must have been fully aware of the scale of VAT liabilities which were accruing in the Spring of 1993. It seems to me perfectly clear that by the end of the April 1993 quarter he not only should have been but would have been well aware of the size of the liability which the business would have to fund by the end of May 1993. Even if I had not been so satisfied, I should have had no hesitation in finding that a director in his position ought to have been aware of it. The reconciled bank statements show a negative bank balance from March 1993 onwards. In April 1993 we find Mr Doshi admitting to RBIF that there is still Ł70,000 of December sales to be collected (a potentially large amount of bad debt). The management accounts for the year end to 28 February 1993 showed trading at a loss. Mr Doshi's repeated claim that the business suffered no cash flow difficulties until August 1994 was, in my judgment, plainly false. On the evidence available to me I cannot see how VKV could have paid the VAT liability of Ł122,000 which fell due to be paid at the end of May 1993. Nor can I see any basis other than pure Micawberism on which VKV could be expected to trade out of its difficulties. Its original under capitalisation had caught up with it. Its only available source of finance was being used up to the hilt and, given the fresh air invoicing, beyond. Mr Doshi's insistence to me that he could, if necessary, have found alternative and more flexible factoring arrangements elsewhere is not credible. I am quite sure that if he had been able to find any such alternative sources he would have done so.

98. My conclusion is that from the moment he realised that the business could not survive without the fraudulent invoicing, he ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. That moment was, at the latest, November 1992. In my judgment the liquidator is entitled on his application to a declaration that Mr Doshi is liable to contribute to so much of the deficiency of VKV as is attributable to creditors in the liquidation in respect of debts incurred after November 1992.

99. That conclusion renders it unnecessary for me to review the whole of the remainder of VKV's trading history in detail. Apart from the dubious evidence of the audited accounts for the 10 month period ended 31 December 1993, all the contemporary documentary evidence points to a steadily deteriorating situation, with RBIF continually trying to tighten the screws, VKV unable significantly to improve its debt turn, and unpaid liabilities for VAT mounting inexorably all the while. I have already summarised the principal features of the remainder of 1993 in my review of the evidence relating to the false invoicing allegation, and the pressures being exerted by HMCE in the Autumn of 1993. The principal features are the huge increase in the Barclays cheques in August 1993, the steps taken by RBIF from September 1993 onwards to close down the possibility of false invoicing, and the continued failure by VKV to satisfy the VAT liability incurred in respect of the April and July quarters. From early 1994 onwards it was recognised by both RBIF and VKV that if the factoring agreement were to be summarily terminated there would be a deficiency of at least Ł200,000. Mr Doshi must have known that such termination would have been effected had RBIF had proof of false invoicing.

100. The audited accounts of VKV at 31 December 1993 purport to show a profit of Ł22,336 for the 10 month period from 1 March 1993, and net assets of Ł50,715. The latter figure is arrived at after inclusion, inter alia, of the Julius Trapp investment at Ł125,000 and the Doshi Insurance Services debt of Ł30,000. The amount owing to Mr Revti Doshi (of some Ł80,000) was shown under the heading of "Amounts falling due after one year" even though (according to Mr Doshi) Revti Doshi in fact demanded payment of the sum in January 1994. Notwithstanding the PML agreement there was still some Ł193,218 of stock in the balance sheet. The audit report was qualified in this respect by reference to the inability of the auditors "to attend the stock date". Once again reliance was placed on stock sheets supplied by LCB and on the directors' valuation. It was also qualified as follows: "Continuity of the business is dependant on the support of the factoring company and other alternative sources of finance. The financial statements have been prepared on a going concern basis which assumes continuity of that support. Should the company be unable to continue trading, adjustments would have to be made to reduce the value of assets to their recoverable amount, to provide for any further liabilities which might arise and to reclassify fixed assets and long term liabilities as current assets and liabilities".

101. In addition to this important qualification it is clear that Mr Rajpal was only prepared to sign off his report after being given explanations of the working of the PML agreement, and of the consequences of the false invoicing, which were false. As to the former, Mr Doshi's letter to Rajpal & Co dated 5 July 1994 expressly represented that sales by VKV to PML of Ł1,791,160,00 and purchases by VKV from PML of Ł2,509,397.00 were arms length transactions. From the letter it seems clear that one of Mr Rajpal's concerns must have been whether input tax deductions had been properly claimed. But that is unlikely to have been his only concern, since the figure of Ł1,791,160.00 was included in the sales turnover figure of Ł6,661,142.00 in the profit and loss account. As to the latter, Mr Rajpal was also given an assurance in relation to Ł1,973,300.00 worth of payments by VKV to RBIF that these were "abortive sales, goods on sale or return and payments in lieu of credit notes. Any return of stock in respect of the above has been properly accounted for". The true explanation was that the payments were in respect of false invoices which RBIF had factored.

102. The transactions with PML were, even on Mr Doshi's account, anything but at arm's length. Furthermore the way in which the PML agreement was operated meant that Mr Doshi was able, within any particular accounting period, to create assets or liabilities almost at will: nothing would be owed to PML unless and until an invoice was raised by PML. This was within Mr Doshi's control. This may serve, at least in part, to explain discrepancies between the management accounts and the audited accounts for the 10 month period ended 31 December 1993. The two sets of accounts agree on the turnover figure of Ł6,661,143.00 but disagree markedly in relation to stock, debtors, and creditors. The management accounts also omit (for the first time) the investment of Ł125,000.00 in Julius Trapp. As to this, Mr Doshi subsequently asserted that the investment had been disposed of in 1994, with VKV obtaining a stock credit in return. None of the accounting records of VKV records either how this investment was originally acquired or how it was disposed of. The suggestion that VKV received a stock credit in respect of its disposal is inconsistent with the fact that, standing the PML agreement, stock was held by PML and not VKV.

103. The management accounts for the remainder of 1994 show continuing losses (Ł56,390.00 for the 3 month period to 31 March 1994). Those same accounts continue to show Revti Doshi's loan as a long term loan notwithstanding that, according to Mr Doshi's present case, she had already called for payment of it. Mr Doshi's assertion to RBIF was that, in a liquidation, some Ł200,000.00 of the debtors was likely to be irrecoverable. Notes prepared by Mr Merchant for management accounts for the 10 month period to 31 October 1994 record, inter alia:

"The Company has had a very turbulent period and has consistently faced severe cash flow and operational problems throughout 1994 ...

In the months preceding August 1994 the Royal Bank funding was progressively reduced by Ł20,000 per week. This progressive reduction in funding aggravated the Company's cash flow problems. The cancellation of the RBIF Agreement made matters worse ....."

These notes, prepared in December 1994 with an eye to the possibility of a fairly imminent liquidation, gave the lie to Mr Doshi's claim that no cash flow problems were experienced by VKV until August 1994. The fact of the matter was that by the time RBIF terminated the factoring agreement in September 1994, it was or should have been clear that the game was well and truly finished. On 8 September 1994 RBIF made a formal demand on VKV for immediate payment of Ł356,545.77 and at the same time called on the guarantees of Mr Doshi and Shilpa. I reject Mr Doshi's thesis that the collapse of VKV was caused solely by the disruption caused by the HMCE raid on 6 September 1994. For the reasons I have indicated it was or should have been clear to Mr Doshi that an insolvent liquidation was a reasonable likelihood from the moment when he concluded that fraudulent invoicing was necessary to ensure its day to day survival.

THE INSOLVENCY ACT ALLEGATIONS

104. The preference of Revti. The allegation here is that Mr Doshi, in breach of his duties as a director, took steps in relation to VKV's outstanding indebtedness to Revti (Ł81,218.00) which had the effect of preferring Revti. I have already summarised the relevant transactions whereby this was done in paragraph 13 above. Some debate took place before me as to whether or not Mr Doshi was bound in this respect by the findings of fact and law made by District Judge Freeborough, reliance being placed by Mr Francis on Re: Thomas Christy [1994] 2 BCLC 528. It proved unnecessary to rule on that point, since Mr Doshi did not in the event seek to go behind those findings.

105. As I understood Mr Doshi's defence on this issue it was two-fold. First, there was in fact no real advantage to Revti in the alleged preference or disadvantage to VKV. This was because Revti Doshi passed the proceeds of the preference (Ł28,000.00) on to Cliftonrise which used it to pay wages of VKV staff in February 1995. The balance of the debt (which had been satisfied by the transfer of chattels) was also for the benefit of VKV since the terms of the transaction allowed VKV to continue to use them in its trade, Secondly, Mr Doshi claims to have been unaware that VKV was insolvent at the date of the chattel agreement. If Mr Doshi had really wished to prefer Revti Doshi he would, he argued, have ensured that she was paid in cash. Plainly on the findings which I have already made I do not accept that Mr Doshi was ignorant of VKV's insolvent state. I accept, in relation to the chattels, that there was a sense in which Mr Doshi had no real intention of preferring Revti Doshi. What he wished to achieve was a situation in which the chattels could be routed to Cliftonrise without Cliftonrise having to pay for them and with VKV able to use them until Cliftonrise was up and running. Since Revti (despite allegedly pressing for payment since January 1994) was apparently content to give the chattels (and the Ł28,000.00) to Cliftonrise, this object was achieved. As to the Ł28,000.00, the fact that it ended up, or may have ended up, as the source from which Cliftonrise (or Mr Doshi) funded the wages of VKV's staff in February 1995 is readily attributable to a desire to obtain the benefit on behalf of Cliftonrise of their services rather than an altruistic desire to settle the claims of persons who would otherwise have been preferential creditors of VKV. I reject the defence. Mr Doshi's conduct here was not that which should be expected of the director of a limited company on the brink of insolvent liquidation.

THE PREFERENCE OF RBIF

106. RBIF has already compromised a claim made against it by the liquidator in relation to sums received by it in the six months preceding the onset of insolvency. The issue under this heading turns on whether any of the payments made were made otherwise than out of debt which had been factored. It is an irresistible inference that some at least of the payments made fell into that category from the following: first, a letter from Mr Doshi dated 20 October 1994 to RBIF referred to the difficulty of collecting in the old ledger and proposed a "mutually beneficial" arrangement under which Ł10,000 would be paid by a series of post-dated cheques in the first week of November each in the sum of Ł2000.00; secondly, a similar proposal was made by letter dated 25 November 1994 for six cheques of Ł5000.00 each to be presented during December and the first week of January 1995. This letter actually recorded "As stated in the meeting, these are funds being paid over to you from new sales transactions"; and, thirdly, a schedule produced to me of all the payments made to RBIF or its solicitors between 2 November 1994 and 14 February 1995. With one exception the amount of the payment was for a round sum. There is simply no room (for once) to doubt what Mr Doshi had said in the letter of 25 November 1994.

THE PAYMENTS TO MAHESH FROM NOVEMBER 1994 ONWARDS

107. The allegation is that these payments, totalling some Ł39,500.00, were made at an undervalue. Mahesh's initial position was that these were indeed simple payments for his maintenance: see his letter to Alsop Wilkinson of 15 March 1996. Faced with the liquidator's claims (and following his acquittal at the criminal trial) Mahesh claimed that the sums had been paid in reduction of the debt owed by VKV to PML under the PML Agreement, and moreover that they had not been paid to him but to PML: see his letter dated 8 October 1988. Given my findings in relation to the PML agreement I cannot accept the former part of this claim, and the latter is simply untrue. Mr Doshi's evidence before District Judge Freeborough was that "Had I not paid the aforesaid sums to Picton Mount at a time at which I was trying to save Vintners then Picton Mount would have refused to continue dealing with my company causing even more serious financial and commercial problems". That was plainly nonsense. Even on Mr Doshi's own account of the way in which the PML Agreement operated, no co-operation of PML was necessary for VKV to be able to supply itself and sell to its customers. There was no legitimate reason for these payments to have been made at all.

FAILURE TO DISCLOSE PROPERTY OF VKV TO THE OFFICIAL RECEIVER

108. This allegation relates to the fact that as from 13 September 1994, LCB opened an account with Barclays to receive money direct from VKV's customers. Mr Doshi did not disclose the existence of this account to the Official Receiver but it subsequently came to light. The short issue here is whether or not Mr Doshi knew that the account existed as a separate bank account. It is not in dispute that LCB was, from 13 September 1994, collecting money direct from VKV customers, and using the money so collected to pay duty, defray its own cheques and otherwise deal with the same in accordance with Mr Doshi's instructions. The short issue, on the allegation as framed, is whether Mr Doshi knew about the existence of the account itself. There is no direct evidence that he did, and I can see no reason why he necessarily should have done. The use of such a bank account would have been one convenient way of keeping tabs on the state of the account as between VKV and LCB, but would not have been a substitute for proper accounting records. I am not satisfied that Mr Doshi did know that LCB had chosen to open this account. No specific complaint is made of the way in which it was in fact operated.

THE LACK OF PROPER ACCOUNTING RECORDS ALLEGATIONS

109. The Official Receiver has confined his allegations under this head to the following discrete matters. The first was raised before the main fresh air allegation was made and relates to the statement of debtors in the management accounts to 31 October 1994. The notes to the accounts had recorded that the sales ledger balance at 31 October 1994 as supplied by RBIF was "overstated". The relevant balance was Ł454,226.00. Very little of that proved to be recoverable (the ledger was reduced to Ł437,956.00). The possible explanations for the inability to realise the ledger range from the existence of substantial amounts of fresh air in the ledger, the existence of a large number of recalcitrant debtors or a failure by the liquidator to make recoveries which could have been made. Mr Doshi relied on a combination of the last two explanations. The Official Receiver and the liquidator naturally preferred the first. Given the facts that I have found in relation to fresh air invoicing generally it is unnecessary for me to make any finding as to whether this particular allegation in relation to this particular set of accounts would, had it stood alone, have been made out. I would however comment that the suggestion that more of the ledger than was in fact realised by Mr Hickling should not have been realised is utterly inconsistent with the highly emphatic letter written by Mr Doshi to the liquidator in 1995 the relevant parts of which read as follows:

"I want to make it absolutely clear to you that I have quite categorically given a statement to the official receiver that in my opinion there are no sums outstanding to be collected from anyone. Furthermore, the sales ledger at Royal Bank Invoice Finance is totally incorrect, if this is from where we are picking up the so-called accounting records. If you contact their operations director, Mr Morrin, he will confirm this to you. There are no sums owing on that ledger either."

And then in capital letters:

"IN BRIEF NONE OF V.K. VINTNERS LTD. CUSTOMERS OWE ANY MONIES IN MY OPINION AND AS PER DOCUMENTS SUBMITTED TO YOU BY ME THROUGH THE OFFICIAL RECEIVER. I AM EXTREMELY OFFENDED BY THESE LETTERS BEING SENT OUT. IT IS AFFECTING MY PERSONAL CREDIBILITY WITH THEM. I KNOW THEY KNOW THAT THEY DO NOT OWN V.K. VINTNERS LTD ANY MONIES. I KNOW THAT I HAVE MADE IT PERFECTLY CLEAR TO THE OFFICIAL RECEIVER THAT ON-ONE OWES V.K. VINTNERS ANY MONIES. THAT HAS BEEN MY STATEMENT TO THEM."

Mr Doshi implied that this was a lie which Mr Hickling should not have swallowed [see Day 19, p.41, line 11].

110. The second allegation under this head relates to the motor vehicles of VKV listed in the schedule to the October 1994 management accounts. Of those 25 vehicles, 3 were acquired by Revti Doshi as part of the transaction of 14 November 1994. The complaint is that VKV's accounting records do not disclose how the remaining 22 motor vehicles with a book value of Ł152,966.00 were disposed of between 1 November 1994 and the date of the winding up order. It is the duty of a director to maintain an adequate record of all transactions. No such record appears to have been kept. Mr Doshi had no answer to this allegation, narrowly focused as it was on the absence of an accounting record. His defence was simply that he had made no secret of the fact that the vehicles had passed to Cliftonrise. That was not, however, the point.

111. The third allegation relates to the absence of accounting records in respect of various computer and computer related equipment purchased by VKV after 14 November 1994 for sums totalling Ł21,094.44 (the date of the agreement with Revti). The point once again was simply that the company's records did not reveal what had happened to them. Once again Mr Doshi did not have an immediate answer to the narrowly focused allegation. He did, however, have a variety of explanations of how VKV had come to acquire them which culminated in an ingenious explanation of why there was no accounting record. The earliest in time was in his affidavit dated 24 October 1997 where he explained part of the sums (Ł13,814.00) as relating to "stolen printers/insurance claims; part (Ł3000.00) as relating to software support with no asset value", and as to Ł4200.00 "part upgrade; part insurance claims. A maximum of Ł1500 maybe contributed towards asset increase to Mrs R Doshi's stock". During the course of his cross-examination of Mr Hickling on Day 10 Mr Doshi appeared to accept that the bulk of the assets had been paid for by VKV, and to be putting a case that they had been paid for out of the proceeds of an insurance claim following a burglary. On Day 15 he asserted that they were purchased by VKV "to replace stolen property which were owned by Mrs Revti Doshi". On Day 19 (pp. 71-72) he both elaborated and changed this explanation: he then said that some of the assets sold by VKV to Revti had been burnt, that VKV had bought replacement assets and VKV (which had continued to insure them) had made a successful claim for insurance. He explained the absence of any accounting records by reference to the fact that the purchase of the replacement assets and the receipt of the insurance proceeds were effected by VKV not on its own account but on account of Revti. He admitted, however, that Revti had been ignorant of all this at the time. One might rather have supposed (given her alleged insistence on being repaid her debt) that she would have welcomed a bonfire of office equipment and an assignment of VKV's insurance claim. Whatever the arrangements between Mr Doshi and his mother, it seems to me clear that these purchases were purchases by VKV in respect of which no proper accounting records were kept. Mr Doshi's explanation simply evidenced his tireless ingenuity.

112. The final allegation under this head relates to the disposal of VKV's stock at LCB. The puzzle facing the Official Receiver was the existence of a letter dated 14 March 1995 from PML to LCB in which Mahesh stated that he had sold all his stock to VKV for Ł114,500.00 "and have asked them to pay the monies directly to you. Please transfer all the stocks under bond as from 15 March onwards". There exists a hand-written invoice from PML to VKV in relation to that sale, dated 14 March 1995. The accounting records of VKV available to the Official Receiver do not show how that liability to LCB was discharged or what happened to the stock. Mr Doshi supplied the answer to that question by pointing to a letter dated 21 March 1995 written by Cliftonrise Ltd (trading as VK Vintners) in which Cliftonrise asserts that it has paid various sums on behalf of VKV in the period between 24 January 1995 and 21 March 1995. Included in those sums is a figure of "Ł134,712.82 goods". Mr Doshi put it to me in his submissions "What VK were doing was buying stock from PML and selling it on to Cliftonrise. Cliftonrise were making profit to discharge the VKV debt. That is the way it was working". This does not answer the allegation as to lack of accounting records. The most that the letter of 21 March 1995 does is to provide some support for what Mr Doshi says happened. It does not in fact prove that the Ł134,212.82 figure was related to some agreement between VKV to sell its stock to Cliftonrise for Ł114,500.00 with an uplift of Ł20,000.00, or even if it was, that it was paid. This is, however, beside the point. The point is that the transactions are not reflected in the books of VKV.

THE SECTION 216 ALLEGATION

113. Mr Doshi admitted this allegation. His explanation for having caused Cliftonrise Ltd to trade as "VK Vintners" was that he did not wish suppliers of the new business to be under any illusions about who they were dealing with. He claimed that once he was alerted to the statutory prohibition he ceased to use the prohibited name in his dealings with Cliftonrise's customers, although he did continue to use it in dealings with its suppliers. I have no reason to believe this other than Mr Doshi's own word. The suggestion that use of the prohibited name was in some way intended to dispel confusion is unintelligible, especially when one looks at the way in which it was used. This can be seen from the letterhead used in the letter of 21 March 1995 to which I have just referred: it is obviously designed to be confusingly similar to that of VKV, and the probability is that the intention was in some way to tap in to VKV's goodwill. We know that some confusion did arise since some payments due to Cliftonrise from customers appear to have ended up with the Official Receiver. It has not been shown that the reverse happened and I do not find that it did. It would however be somewhat surprising if it did not. What is clear is that despite being warned of the fact that he was committing an offence, Mr Doshi continued to use the prohibited name as if the statute simply did not apply to him.

OBSTRUCTION OF HMCE AND THE LIQUIDATOR AND MISLEADING OF THE COURT

114. These allegations are raised as a distinct charge but stand or fall with whether or not I accept Mr Doshi's account of the PML Agreement. I have of course rejected it. I do not therefore think that I need give further consideration to it.

UNFITNESS AND THE PERIOD OF DISQUALIFICATION

115. In the light of my findings it is plainly impossible to reach any conclusion other than that Mr Doshi's conduct as a director of VKV makes him "unfit to be concerned in the management of a company" within s.6 of the Company Directors Disqualification Act 1986 and that I am therefore bound to make a disqualification order against him for a minimum period of 2 years and a maximum period of 15 years.

116. The starting point in determining the period of disqualification must be the principle enunciated by Dillon LJ in Secretary of State for Trade and Industry v Sevenoaks Stationery (Retail) Ltd [1991] Ch 164 at 174F where he said:

"(1) The top bracket of disqualification for periods over ten years should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.

(2) The minimum bracket of two to five years' disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.

(3) The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket."

117. Here the findings which I have made in relation to the fresh air invoicing even if they stood alone would qualify the present case for the top bracket. This was a fraudulent exercise from beginning to end, involved the manufacture of some Ł3m worth of false invoices, and was sustained for a substantial period of time. It does not stand alone. There was deliberate failure to pay VAT, a deliberate attempt to deceive HMCE in relation to the July 1993 return, and a deliberate attempt to avoid VAT by creating the appearance of apparently arm's length transactions with PML which were in fact no such thing. I bear in mind, of course, that on those matters Mr Doshi has already been put to the test in his criminal proceedings and was there acquitted. But having made the findings which I have those matters also would, in my judgment, merit an order in the top bracket even if they stood alone. The same applies to the wrongful trading allegation although it is less easy to consider this allegation in isolation from the first two. The other allegations are, relatively, less serious.

118. There is little by way of mitigation of which I can take account when I consider the conduct which is in question. In relation to some of the allegations Mr Doshi made the point that Section 6 does not spell out what the duties of a director are or what may be misconduct under the section. Such an argument does not assist him as a matter of general principle, and, even if it did, it would not serve as an excuse except perhaps in relation to technical offences under the companies and insolvency legislation. That is not, however, principally what I have to deal with here. The only point in relation to which Mr Doshi can be accorded some sympathetic treatment is the time it has taken to bring these proceedings to trial, coupled with the fact that he has already suffered, and survived, the ordeal of criminal proceedings in the meantime covering some of the same ground. I take that into account in his favour. I fix the period of disqualification as 12 years.

FORM OF ORDER IN THE LIQUIDATOR'S PROCEEDINGS

119. Proofs of debt have been lodged in the liquidation totalling Ł1,997,278.00 of which Ł1,610,291 is attributable to HMCE's claims and a further Ł138,270.00 to the Inland Revenue. Trade creditors who have proved amount therefore to some Ł248,789.00. In addition VKV's books show a further Ł1,020,127.00 as owing to creditors who have not proved. That figure does, however, include a sum of Ł891,361 shown as owing to PML. Mr Hickling's application is for a declaration that Mr Doshi is liable to make a contribution of Ł2,692,280.00 to the assets of VKV. That sum included, as I understood it, all the foregoing liabilities, actual or potential, but gave credit for sums recovered by the liquidator (under s.238) from Barclays and from RBIF (totalling some Ł76,000.00). It is accepted that the figure cannot be supported insofar as it includes VAT liabilities calculated on the basis that there were no supplies by PML as well as a liability to PML in respect of those supplies. The figure also needs adjusting to take account of the further recoveries made by the liquidator since the application was issued. In addition Mr Hickling acknowledged that none of the proofs had been admitted for the purposes of dividend and there was some evidence that some of the trade creditors had already been satisfied by payments by Cliftonrise Ltd or other Doshi operated entities. In the circumstances I do not think that I can make an order at this stage in a liquidated sum. I will hear further argument on the exact form of the order, including the extent to which any payment on account should be ordered pending the taking of any necessary accounts and inquiries.