England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Leeds Combined Court Centre The Courthouse, 1, Oxford Row Leeds LS1 3BG
		22 December 2009

Judge Kaye QC:

Introduction

1. This is an action against three defendants allegedly involved in a scheme to defraud Her Majesty's Revenue and Customs ("HMRC") of some £2,141,510.80 by way of a VAT fraud. The claimant is a company, QEB Metallics Ltd ("QEB"), said to be the central vehicle for the fraud. QEB was placed into compulsory liquidation on 30 July 2008 pursuant to a petition of HMRC presented on 20 May 2008. Mr David Ingram and Mr Kevin Murphy were appointed first as provisional liquidators on the presentation of the petition and as liquidators subsequently following the making of the winding up order. To all intents and purposes the sole creditor of QEB was and is HMRC. The action is brought in the name of the company by the two liquidators.
2. The present action was commenced against the first two defendants on 20 May 2008 and widened by amendment on 12 June 2008 to include the third defendant. Freezing orders were obtained against all three defendants and served on the second and third (and on the first by substituted service). On 27 November 2008 the action against the second defendant was settled by his submitting to judgment for the amount claimed as equitable compensation, namely £2,141,510.80, and agreeing in settlement of that to pay £23,500 which I am told he has done.
3. The action has continued against the first and third defendants. The first defendant (whose very existence seemed in doubt at one time) has disappeared and is untraced. Aside from a statement addressed to the court and copied to the liquidators' solicitors of February 2009 (in which he appears to admit liability and exonerate the second and third defendants), he has taken no part in the proceedings and filed no defence. The action and trial has therefore been very much against the third defendant.

The Scheme

4. The scheme was said to be a variation of what is known as an MTIC (Missing Trader Intra-Community) fraud. The essentials of the scheme in this case were as follows: A company with an existing VAT registration, Ress Capital (UK) Ltd, was acquired and its name changed to QEB Metallics Ltd ("QEB") in May 2007. The second defendant, Mr Adnan Khan ("Mr Khan"), a young graduate in forensic biology and then working for the third defendant, Mr Nouman Hafiz ("Mr Hafiz"), an accountant carrying on business as "Rebecca Associates" (and now operating under the name of "Skolars") at 8, Muirhead Quay, Fresh Wharf (or Freshwharf) Estate, Highbridge Road, Barking, Essex IG11 7BG was appointed director of QEB. He remained a director until January 2008.
5. In May 2007 HMRC was informed of the change of company name and the VAT registration of the company was changed to permit wholesale in a variety of goods and precious metals.
6. In June 2007 QEB started to trade with a smelting company known as Engelhard Sales Ltd ("ESL"), a subsidiary of a German company, BASF. There is no reason to suppose ESL is other than a bona fide reputable company.
7. HMRC assessed QEB for some £1,849,422.41 VAT but over a 9 month period between 18 July 2007 and 4 April 2008 the liquidators identified 70 transactions between QEB and ESL whereby QEB sold precious metals (platinum, palladium and silver) to ESL for refinement generating a turnover of £12,255,655.58 giving rise, in turn, to a VAT liability of £2,141,510.80.
8. Over the same period the company should have made four VAT returns for quarters ending June, September and December 2007 and March 2008. Only 3 VAT returns were filed (for June, September and December 2007) all (falsely) purporting to show a "nil" return despite substantial trading in the period to which the return related other than the quarter ending June 2007 (there was no relevant trading before about July 2007). No VAT return at all was filed for the last quarter ending 31 March 2008. In consequence none of the VAT has been accounted for and paid to HMRC which is how they come to be creditors of QEB.
9. ESL was instructed to pay the VAT element on the transactions into a sterling bank account and the net proceeds of sale (after deducting charges for ESL's refinement services) into a dollar bank account, both with Credit Suisse in Switzerland from whom bank statements were eventually obtained.
10. QEB apparently obtained the precious metals it supplied to ESL either from addresses in Columbia (CI Encol SA) or Dubai, UAE (Passi Jewellers LLC or Ibrahim Al Hammadi Garage) though there is some uncertainty as to this given the limited documentation on this aspect of the case. Assuming there were genuine imports, no input tax would arise on such foreign purchases. Hence the entire VAT charged on the sales to Engelhard would be returnable and accountable to HMRC. Attempts by the liquidators to elicit any response from these suppliers to QEB, as well as from their freight forwarders, MAT Securitas, have been largely met with silence (though Mr Hafiz disputed this).
11. Although QEB represented in emails to ESL that it traded from a number of sites including an address at Melford Road, Ilford, Essex (which the liquidators found to be an empty residence with no trace of QEB), administration was in fact carried on from Mr Hafiz's offices at 8 Muirhead Quay. A substantial amount of work was done by email using Mr Hafiz's office email address nhfcca@aol.com. At the QEB end these were often signed "Eddy" or "Eddy Jr", a nom de plume, Mr Khan accepted, sometimes used by him as an anglicised version of his name "Adnan". Similarly on occasions some emails would be signed or addressed to "Newman", an anglicised imitation of Mr Hafiz's name, "Nouman".
12. Mr Khan was formally a director of QEB from 25 May 2007 to 22 January 2008. The first defendant ("Mr Peerzada") was a director of QEB from 22 January 2008 and remained so to the end.
13. There were attempts made to procure QEB to be struck off the register on 1 April 2008 on grounds it had not traded in the preceding 3 months and form 652a (purportedly signed by Mr Peerzada) was filed with the Companies' Registry for this purpose. In fact QEB had traded and continued to trade until 4 April 2008 when it was de-registered for VAT.
14. The mechanics of the fraud are admitted by Mr Khan and largely admitted by Mr Hafiz. Although (as noted above) it is common ground that Mr Khan was appointed director of QEB on 25 May 2007 and that he resigned as director on 22 January 2008, the claimant alleges he remained actively involved however since that date to the end. It is also common ground that he was merely intended to be and did act as a nominee director for the real power behind the throne.
15. Mr Hafiz was never a director of QEB. He denies being involved in any way with QEB beyond the supply by his company (Custom Finance Ltd) or accounting firm (Rebecca Associates) and staff of "limited back office logistics support including nominee services" for a short limited period. He says that Mr Khan is lying in stating he, Mr Hafiz, was the real person in charge of QEB and disputes in any event the damages claimed based on an assertion that ESL used "deferment accounting"^[1]. This was not ultimately pursued though an alternative argument was made that the liquidators should have challenged the VAT assessment on the grounds that the input tax payable would have been set-off against the output tax. I deal with this below.

The Legal Nature of the Claims

16. There is little dispute on the law. The claimant puts its claim against the defendants as follows:

a. The first defendant: as director (albeit only from 22 January 2008) he owed core fiduciary duties of loyalty, honesty and good faith;

b. The third defendant was throughout the relevant period (i.e. from May 2007 onwards) a shadow or de facto director of QEB and therefore owed like duties;

c. Both of them were guilty of misfeasance, breaches of these duties, or an unlawful conspiracy to injure QEB by failing to account to HMRC for the VAT due on the transactions between QEB and ESL;

d. Accordingly these defendants are liable to compensate QEB by contributing to the assets of QEB for the amount of the VAT foregone, i.e. in the case of the first defendant the sum of £988,357.08 from 22 January 2008 to 4 April 2008^[2] , and in the case of the third defendant, the sum of £2,141,510.80, or in damages (for fraudulent conspiracy) for the same amount, or damages for breach of trust, misfeasance, or negligence, plus interest.

17. Additionally the claimants rely concurrently on ss 212-215 Insolvency Act 1986.
18. So far as relevant s 212 not only provides a remedy against a person who has been "an officer of the company" but also against "a person [who] has been concerned, or has taken part, in the … management of the company". A person so described who "has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company … may, on the application of … the liquidator, [be compelled by the court] to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or … to contribute … by way of compensation … as the court thinks just."
19. Section 213 deals with fraudulent trading and provides that "if in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company …, or for any fraudulent purpose … any persons who were knowingly parties to the [fraud] are to be liable … as the court thinks proper." It has been held that deliberate evasion of VAT amounting to an attempt to cheat HM Customs and Excise could fall within the ambit of the predecessor of this section (s 630 Companies Act 1985: see Re L Todd (Swanscombe) Ltd [1990] BCLC 454).
20. Sections 214-215 contain provisions for dealing with wrongful trading by directors including shadow directors.

The Central Issue

21. The central issue is who was or is the real power behind the throne? Was it, as Mr Khan alleged and maintained in his evidence, Mr Hafiz, or was it, as Mr Hafiz alleges, the missing first defendant, Mr Peerzada. The claimant's stance is that it doesn't matter. Both were actively involved in the scheme, both are liable, and Mr Hafiz at least. If a preference were to be taken, the claimant would say that Mr Peerzada was either a fiction (despite property in Harlow, Essex, being registered at HMLR in his name) or a further useful front, as part of the smoke and mirrors to disguise the real culprit, Mr Hafiz.

The Evidence

22. A vast volume of material was placed before me in support of the claim including a considerable amount of documentary and other material as well as witness statements. At the end of the day, however, it came down to whose evidence I preferred, Mr Khan's or Mr Hafiz's. Mr Khan provided no witness statement but was subject to a witness summons. He was interviewed by the liquidators (transcripts of which I have seen), appeared at the trial and was examined and cross-examined. He provided a number of documents to the liquidators.
23. I have also had the assistance of careful and meticulous skeleton arguments and notes from Mr Butler, for the Claimants, and Mr Brown for Mr Hafiz. Mr Peerzada, the first defendant did not appear nor was he represented but he (I say "he" – it was apparently Mr Peerzada) did file the short statement of February 2009 which I have read but upon which I have placed little if any reliance beyond noting he admitted not paying over the VAT he had collected. The action against Mr Khan, the second defendant, was, as I have said, settled.
24. As is often the case with issues of this kind, I accepted some but not necessarily all of the evidence on both sides.
25. For example, Mr Khan's evidence was that he had never met Mr Peerzada and that all his instructions came from Mr Hafiz. Initially he was on the ground floor at 8 Muirhead Quay. Mr Hafiz's desk he said was next door to his. He used to work under his instructions and guidance. After 12 months he was moved upstairs but the same system prevailed with Mr Hafiz's desk being next door to his. When he was away, Mr Hafiz would telephone instructions to him. The transaction files were maintained by Mr Hafiz. (These have since disappeared.) Mr Khan strongly challenged the very existence of Mr Peerzada, he never saw him (though he accepted in cross-examination that Mr Hafiz had described him as a client of his). It is not insignificant that the liquidators and their agents have had no success in tracking him down. Mr Hafiz's evidence (and that of his witnesses) was that Mr Peerzada did exist. In this context I found the evidence of Mrs Seghal, a part-time bookkeeper for Mr Hafiz (who said she had seen him) and her husband, Mr Seghal, a taxi driver (who said he had given a person he understood to be Mr Peerzada lifts), of particular assistance.
26. In assessing the evidence and allegations Mr Brown, for Mr Hafiz, submitted I should apply the criminal standard of proof. In my judgment this is, however, a civil trial and the civil burden and standard of proof applies (see Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 and Re B (Children) (Care Proceedings: Standard of Proof) [2009] 1 AC 11). Nevertheless bearing in mind the seriousness of the allegations I have naturally approached the allegations against the remaining defendants and Mr Hafiz in particular with considerable caution and anxiety. I have read and re-read most of the material placed before me and considered the helpful written material counsel supplied to me also most carefully.

Findings

27. I have set out the details of the scheme above. It is not necessary to go into it in much greater detail but it is necessary to add a little more flesh to what is stated above in order to see the context of my reasons for these findings explained below.
28. The story begins perhaps in December 2004 when a company called Prime Jewellers Ltd was incorporated. This company later changed its name to Silver Rays Ltd ("SRL"). It was owned, according to Mr Hafiz, by a client and friend of Mr Mr Hafiz's called Mr K. Malik (from whom I heard evidence). In February 2005 another company called Mansun Partnership Ltd ("MPL") was also incorporated. Mr Hafiz became a supposed nominee director and company secretary of this company which according to him was owned by a Mr A. Husain (from whom I also heard evidence).
29. In May/June 2006 or so both MPL and SRL commenced to trade in mobile phones using another company connected to Mr Hafiz as a supplier. Mr Hafiz prepared the accounts. By September 2006 both companies had branched out into trading in precious stones and metals. By the end of the year both companies had put in claims for substantial repayments of VAT which HMRC refused to pay, suspecting, it appears, both companies were involved in a VAT fraud. Mr Hafiz was interviewed by officials from HMRC and warned. Mr Hafiz maintained it was not him but a different person of the same name who was interviewed. (Such person was never produced and I found the explanation unconvincing.)
30. In November 2006 Mr Khan, then a young graduate, was introduced to Mr Hafiz by his brother in law, Mr Osmann Younnis, and commenced working for him. Mr Hafiz made Mr Khan Director of a number of companies but never seems to have explained his duties in respect of them beyond asking him to sign a great many documents.
31. At around the same time Mr Hafiz, according to him, met a Mr Peerzada who was introduced by the daughter of a client. He was, according to Mr Hafiz interested in trading in precious metals. Mr Hafiz happened to know about MPL and SRL and thought they might be for sale. A most extraordinary deal was then struck: both Mr Husain (MPL) and Mr Malik (SRL) did not want to lose sight of their VAT reclaim so instead of selling out to Mr Peerzada in return for a sum of money (at least in Mr Husain's case) they effectively allowed Mr Peerzada free rein with their companies in order to trade as he thought fit until they recovered their VAT reclaims when, presumably, they would hand the company's over to Mr Peerzada. At least that was what it amounted to or seems to have amounted to.
32. By May 2007 Mr Peerzada's eyes had lighted on QEB as a fresh company which he could own in his own right. However, he wanted someone else to run it for him which led to Mr Khan's appointment as "nominee" director at Mr Hafiz's suggestion. (Mr Hafiz says it was at Mr Peerzada's suggestion but I do not accept this.) Mr Khan also became the ostensible shareholder of QEB along with Mr Osmann Younnis (from whom I did not hear), the latter also working for Rebecca Associates and who became the company secretary. From July 2007 to April 2008 the transactions in precious metals involving ESL were conducted as previously mentioned.
33. Three VAT returns were signed: the first on 23 July 2007 (for the quarter ending June 2007) by Mr Khan on Mr Hafiz's instructions. This purported to show a "nil" return. Mr Hafiz says that the return was calculated by Mr Peerzada's accountants in Slough. Given Mr Hafiz's rationale behind supplying Mr Peerzada with "back office" nominee services seems to have been to obtain a contract to provide him with accountancy and tax planning services I found this explanation also unconvincing: why keep providing nominee services when the accounting is to be provided by someone else? I find the return was prepared by Mr Hafiz who asked Mr Khan to sign it as a front for his, Mr Hafiz's activities.
34. The second return dated 17 November 2007 (for the quarter ending in September) was also signed by Mr Khan again he says on Mr Hafiz's instructions. Mr Hafiz now says that Mr Khan ran it past him and asked if the "nil" return was all right. By this time Mr Hafiz thought that QEB had traded but, he said, he accepted an explanation from Mr Peerzada that the VAT was to be deferred to the next quarter. Again I did not find this very convincing.
35. The third return was dated 31 January 2008. This too was signed by Mr Khan although Mr Hafiz disputed this. Again it was a nil return. However, by this time Mr Khan had ceased to be a director of QEB (on 22 January 2008) and was replaced by Mr Peerzada (who then disappeared taking with him, according to Mr Hafiz all the QEB papers). Mr Hafiz says he was becoming concerned by now (quite why was not clear) and sought to formalise matters and requested his staff to stop working for Mr Peerzada. By this time other persons also became involved, a Mr Saeed Ashraf was appointed company secretary also on 22 January 2008.
36. Although QEB had a registered office at 47 Hatton Garden, London EC1, and although there is evidence that QEB used various addresses in its dealings with ESL (e.g. 47 Capel Gardens, Ilford, 1A and 2A Melford Road, Ilford) so far as I can tell all the substantial period of trading was done from the offices of Mr Hafiz at Rebecca Associates at 8 Muirhead Quay (Mr Khan said that that was where it traded from). What Mr Hafiz was to obtain from allowing others to use his offices, his e-mail address and staff is not revealed. Mr Khan was supposed to be paid by Mr Peerzada, according to Mr Hafiz, but even that is cloaked in smoke and mirrors. Payments appear to have been made by Mr Hafiz or via a still further corporate vehicle, Hexangle Management Ltd, a company set up by Mr Hafiz.
37. Both MPL and SRL are now in liquidation and the liquidators of QEB are the liquidators also of those companies.
38. Thus it follows I accept Mr Hafiz's evidence that Mr Peerzada did exist.
39. But I also accept the evidence and contentions put forward by and on behalf of the claimants (including the evidence of Mr Khan in this respect) to the effect that whilst, in my judgment, he was involved in the scheme, he was Mr Hafiz's front man and was not nearly so involved on a regular or full-time basis as suggested by Mr Hafiz. The evidence of Mr and Mrs Seghal was indeed telling: they were not often involved with the business in the crucial period or on a daily basis. They saw a gentleman they understood to be Mr Peerzada infrequently.
40. The whole of these enterprises whether MPL, SRL or QEB, are characterised by smoke and mirrors. The picture is opaque and in my judgment deliberately so. Every time one sought to put the focus on someone's activities or some event, the picture became blurred and lacked clarity.
41. Nevertheless in my judgment and I so find the real power behind the throne was Mr Hafiz. To the extent that he sought to play down and minimise his role I do not accept his evidence. I find he was at the epicentre of a scheme in QEB (whatever might be the position in the other companies interlinked or also involved in a peripheral way) namely an attempt to evade, to defraud and cheat HMRC of the VAT properly payable in respect of the company's business transactions. I find he did direct the operations of QEB in a significant manner and to a significant degree and was the real influence in the affairs and business of QEB. I accept Mr Khan's evidence in that respect. To that extent Mr Hafiz was a de facto director of QEB throughout its period of operations. I prefer to find that although never formally appointed director of QEB he acted as such throughout the material period of its trading activities from May 2007 onwards.

Reasons

42. I ought, in the circumstances of this case with such serious allegations against Mr Hafiz to set out my reasons for so concluding. It would not be, I think, fair or just simply to say having seen and heard him in the witness box I prefer the evidence of Mr Khan. It is not as simple as that. There are many reasons and the following is by no means exhaustive nor is it in any particular order of significance. Taken in isolation they may not be individually or in isolation sufficient but as ever, it is the totality of the picture that matters bearing in mind that it is appropriate to draw proper inferences from primary evidence. The latter is important given the conflict of evidence as well as the absence of much evidence that might otherwise have assisted.
43. First, Mr Hafiz's entire modus operandi was to run a firm of accountants providing services to clients. For these purposes he used an enormous number of companies. He provided off the shelf companies together with nominee director or secretary services for clients. Various descriptions were given in his evidence to the court and to the liquidators of these services such as "on a professional basis and we do not get involved in operational activities", "back office logistics", "back logistics office support", "logistics assistance", "back office logistics support including nominee services", "back office logistics support on an ad hoc basis", "back office work", "back office logistics support", "nominee services with back office support", "back office logistics support, which included nominee services and … liaising", "back office services", "back office logistics support" ^[3].
44. After a while this phraseology seemed to become something of a mantra of Mr Hafiz to explain his role to the activities of the various companies mentioned whether QEB, MPL or SRL (or others).
45. His explanation of what this in practice amounted to was always illusive: it seemed to amount to providing mathematical calculations, enquiring about shipment status, arrivals and settlement of shipments as the directors asked him or chasing payments^[4]. It seems to me that this way of conducting business offered Mr Hafiz a very convenient way of apparently distancing himself from the affairs and business of the companies under his control or for which he was responsible.
46. Second, given Mr Peerzada's involvement even on Mr Hafiz's evidence, it seemed surprising that he did not know his whereabouts nor had he any means of contacting him (yet he, Mr Peerzada, seemed to know what was going on because he wrote to the liquidators' solicitors and the court as previously mentioned).
47. Third, if the entire trading history of QEB (and the other companies that featured in Mr Hafiz's activities, namely MPL, SRL and a still further company called Goldiane Ltd (all of whom seem to have generated funds to enable more metals to have been purchased) was as innocent of Mr Hafiz's involvement as he maintained, I found it also surprising that he was not careful to protect himself against accusations of misconduct by ensuring he had adequate and carefully maintained records of his dealings with his "client". Instead the liquidators found very little and were mainly dependent on the recovery of the 2007 desk diary from Mr Khan (in which there is not a single mention of Mr Peerzada) and the provision of documentation from ESL, with whom QEB dealt, or Mr Khan or others. Mr Hafiz complained he knew nothing about the documentation produced by Mr Khan and further complained that the records of QEB had been removed by or on the instructions of Mr Peerzada and that the explanation for nothing being found on his office computers was a virus. I accept none of this. There was in any event some direct evidence linking Mr Hafiz with ESL in the e-mails (see above).
48. Fourth, there are undoubtedly a large number of companies and entities involved in the scheme or with MPL or SRL. I have not burdened this judgment with setting them all out. Mr Butler provided a very helpful chart showing the interlocking connections between these entities and personalities involved. All in some way or another seemed to link with Mr Hafiz.
49. Fifth, I largely accept Mr Khan's evidence and description of the way matters operated between him and Mr Hafiz (as to some of which see above). It was not disputed that before he became involved with QEB, Mr Hafiz had appointed him director of a number of companies in which he had no interest and where, without query or question, he was expected to sign forms, bank transactions using codes provided by Mr Hafiz and other secretarial or administrative functions. In short he was used as a vehicle by Mr Hafiz. He was given no instructions or guidance as to the role of a company director. It was (he said) he was told by Mr Hafiz "an insignificant role". His activities in QEB were very much a continuation of this scenario where he did virtually as he was told by Mr Hafiz, noting down his instructions in an office diary and carrying them out. Loads of documents were put in front of him by Mr Hafiz, he said, which he was to sign. I reject the notion that Mr Khan was the real director, I reject the notion that he was mainly carrying out Mr Peerzada's instructions. Mr Hafiz, he said, was the older man, a professional, and experienced in business matters and well respected in the Asian community. He trusted him (at one point he even admitted he "blindly" trusted him) and accordingly did what he asked. He, Mr Khan, had, he said, no control over the company. Control (including financial control) was in the hands of Mr Hafiz. In my judgment the central and controlling mind behind QEB was Mr Hafiz. The overwhelming impression is that Mr Hafiz used companies and pliable and willing individuals to do his bidding whilst he himself sought to remain hidden behind the front.
50. Sixth, Mr Hafiz himself produced an affidavit not under compulsion to Mr Khan and his family in which he admitted Mr Khan was working under his instructions for QEB and that he, Mr Khan, had no control over QEB nor did he have any financial gains from it (the latter not being entirely true). This affidavit was produced on 29 May 2008 after the service of the freezing order on Mr Khan destroyed what was left of his and his family's relationship with Mr Hafiz. However, Mr Hafiz met the liquidators on 30^th May and never mentioned it to them. He subsequently tried to distance himself from this document as an attempt at acceptance of moral responsibility but nothing more. If he felt that he could have said so at the time especially as he said he had professional assistance in preparing the affidavit.
51. Seventh, Mr Hafiz himself is clearly an accountant and entrepreneur of some experience and wide range of activities from mobile phones, to precious metals, properties, property management and "nominee services" (above). His interests extended not only to the UK but overseas. He had accounts with Credit Suisse in his own name which benefited from payments from QEB and made payments to Mr Khan. He denied anything to do with these accounts but I do not accept that.
52. Eighth, I find it not insignificant that despite a number of witnesses Mr Hafiz could have called (not least his principle secretary or assistant in Rebecca Associates, Carmen Sheridan) they were not. I was not impressed by the evidence of Mr Husain or Mr Malik. Mr and Mrs Seghal, whom I did find helpful, had limited value beyond having seen Mr Peerzada on occasions.
53. Ninth, if Mr Hafiz is to be believed, he allowed Mr Peerzada to use Mr Khan's services and his office premises. Unless it was part of the smoke and mirrors there was little point in using other addresses for QEB yet that is what seems to have happened (above). Moreover, quite what Mr Hafiz was supposed to have legitimately obtained for the extensive use of his premises and facilities by Mr Peerzada was never made clear.
54. Tenth, there is the evidence in the entries and notes in the 2007 desk diary itself. Mr Khan's evidence was that, in the main, these were or reflected the various transactions or instructions given by Mr Hafiz. I accept Mr Butler's submission that they also tend to illustrate the split of profit or payments to various accounts. Mr Hafiz's evidence was to profess ignorance. They also contain memos reminding Mr Khan to ask "UN" what to do about various matters, the reference to "UN" being, as I accept, to "uncle Nouman", i.e. Mr Hafiz. (The reference to "uncle" is simply a sign of respect in the Asian community.)
55. Eleventh, there is the evidence of e-mails from ESL suggesting a more than passing contact between them and Mr Hafiz, contrary to the latter's pleaded assertions.
56. In assessing Mr Hafiz's credibility I do not overlook that of Mr Khan or his deal with the liquidators. But by the time he came to give his evidence, the deal was done. He had nothing to lose by blaming Mr Peerzada (apart from the fact that it would have been inconsistent with the evidence he gave the liquidators, especially in his second interview).
57. Nor do I overlook the points made by Mr Brown on Mr Hafiz's behalf. He points out that the documents produced by Mr Khan came from his own computer, that the 2007 diary was found in his bedroom and was his diary. Both of these points are to some extent justified. Mr Khan's explanation was that he had transferred the files from the computer he was using at Rebecca Associates to his own computer. He also said the diary was the office diary the better to enable him to carry out his instructions as noted down but it was, when in the office, open and accessible to all. It was found at his home because Mr Hafiz had told him to take it home to keep safe at the end of the year, which he did. I accept this evidence. Nor do I overlook the fact that Mr Hafiz was away for much of the time (particularly in February 2008 when he was ill). All of this is consistent with Mr Hafiz's desire to be seen to be distant from the front he had set up. Mr Khan's evidence was that he was contacted by phone by Mr Hafiz when he was not at the office.

Application of the Law

58. In my judgment the court should be astute not to be too confined to labels. Mr Butler has sought to persuade me that Mr Hafiz is liable because he is or was a de facto or a shadow director of QEB. What, in my judgment, is important is to determine first of all what he did in relation to the company. Terms such as "shadow director" are usually applied to a particular statutory provision such as the Company Directors Disqualification Act 1986.
59. In my judgment Mr Hafiz was the controlling mind behind QEB, he was, as I have said, at the epicentre. He it was who, on the balance of probabilities with others, set up the business in QEB and directed its operations and gave Mr Khan instructions as to how the operations were to be conducted. He knew, in my judgment, precisely what was going on and knew there was a fraudulent design behind the activities of the company, namely to deprive HMRC of VAT. His instructions emanated, as it were, from the board of directors for the simple reason he was the board of directors. I infer (which does not seem to me unreasonable having regard to the evidence) that Mr Peerzada was as much his creature as others like Mr Khan. Mr Hafiz was more than a mere manager. He controlled the company and its activities. He was the person with real influence in the corporate affairs of the company. He was sufficiently implicated in the fraud carried on by QEB to make him accountable in equity (see Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 per Lord Millett at para. 141). Despite his protestations I find it more probable than not that he had full knowledge of the attempt to cheat and defraud HMRC and knew it was a dishonest plan and was morally and culpably responsible for it.
60. Accordingly, since the action is brought by the liquidators, it does seem to me that Mr Hafiz's activities fall within both s 212 and s 213 Insolvency Act 1986. So far as the former section is concerned Mr Hafiz was the management and as such owed fiduciary duties to the company. As to the latter it follows he well knew the activities of the company were carried on with intent to defraud HMRC. If it were necessary I would also find Mr Hafiz guilty of a dishonest conspiracy (with Mr Peerzada and with others unknown) to defraud the company of its claim to the VAT. The effective result is the same via a number of different routes, whether by the statutory provisions referred to or in equity or at common law, they all point in the same direction that Mr Hafiz is in my judgment liable.

Damages and Compensation

61. Liable for what? If ss 212-213 are the route it is essentially such amount as the court thinks just. If in equity, he is liable to account for such amount as the court also thinks just in all the circumstances, the aim being to restore to the rightful owner (the company) what has been lost by the inequitable conduct (see Target Holdings Ltd v Redferns [1996] 1 AC 421 per Lord Browne-Wilkinson).
62. Mr Brown, on behalf of Mr Hafiz, relies on the fact that as at April 2008 HMRC had not assessed QEB for an additional £300,000 claimed by the claimants and accordingly the loss should be calculated by reference to the assessed amount, namely some £1.8m rather than £2.1m (see the figures above). The answer to this seems to me that whether or not HMRC have assessed the full amount of VAT the sum calculated represents VAT lost to the company which was never therefore in a position to pay it over to its creditor.
63. Mr Brown also submits that the liquidators should have disputed even the amounts assessed on the basis that the goods were not bought from another EU member state (on which no VAT would be paid) but from Dubai (VAT being payable on the importation by the importer) and accordingly, as I understood the argument, there would have been input VAT to deduct from a similar output figure. Mr Ingram fairly accepted this point but his evidence was that he had little material with which to challenge HMRC on the assessments. Given the difficulties the liquidators have faced in this case owing to the lack of documentation (save, as I say, such as has been largely supplied by ESL) I do not consider the liquidators are under any obligation, particularly where the loss was occasioned by fraud or inequitable conduct, to embark on what might be an expensive and speculative challenge to the amounts claimed by HMRC where I am by no means convinced they would or could succeed. It is by no means even clear the material was paid for or how, or whether it was in fact imported into the UK, apart from an obvious inference it must have been obtained from somewhere, somehow.
64. In my judgment therefore, whichever way one looks at it Mr Hafiz is liable for the full loss of the VAT namely £2,141,510.80.
65. Mr Butler also seeks compound interest on the basis that this is a case where Mr Hafiz has profited from his improper conduct (see Black v Davies [2005] EWCA Civ 531 CA and the judgment of Waller LJ where the authorities were reviewed).
66. There is force in Mr Butler's arguments but having regard to current prevailing economic conditions and interest rates I see little point in doing more than awarding this sum together with simple interest on the amounts of VAT running from the dates the VAT should have been accounted for and at the rate of interest that would have been and is applicable to late payment of VAT down to the date of the entry of judgment.
67. I shall leave counsel to calculate and agree the figures if possible but will of course give them permission to apply.

Mr Peerzada

68. I do not forget the position of Mr Peerzada, for what it is worth. Although I have not accepted Mr Khan's evidence as to his non-existence and have rejected most of Mr Hafiz's evidence as to the role Mr Peerzada played (on the basis that it was Mr Hafiz who carried out the activities he largely ascribed to Mr Peerrzada), nevertheless I have accepted that he did exist and I accept too he was involved albeit in a limited way. He has apparently admitted liability. In my judgment he was part of the conspiracy; he was a director and was implicated in the fraudulent activities that were carried on. Accordingly in my judgment he too is liable in the same way as Mr Hafiz but limited to the amount referred to above, namely £988,357.08.

Conclusions

69. There will be judgment against the first defendant for £988, 357.08 and against the third defendant for £2,141,510.80 together with simple interest as mentioned. The judgment will be formally handed down in Leeds on a date to be notified to the parties. There will be no need for them to attend. If the terms of the order cannot be agreed between counsel and lodged promptly I shall direct a hearing by arrangement through Chancery listing. If the issues are straightforward I am prepared to deal with it by telephone.
70. I am most grateful for counsel and solicitors on both sides for their assistance and patience.

Note 1    See 13/2598-2600 (references are to the trial bundles).    [Back]

Note 2    See para. 31 Particulars of Claim.    [Back]

Note 3    See for example Mr Hafiz’s first witness statement at paras. 14, 15, 18, 21, 40, 46, 48, 49, 58, 81, 110 (2/C/4/191, 193, 194, 199, 202, 203, 207, 217, 227); Hafiz 2, paras. 42, 52 (13/2606, 2610).    [Back]

Note 4    See Transcript 24 July 2008 at 3/D/3/298.    [Back]