Failure of Fawlty Towers defence

The liquidator of a company used to perpetuate MTIC fraud brought proceedings against the company’s sole director to recover the losses caused by that fraud, predominantly large amounts of VAT owed to HMRC, who petitioned for the company’s winding up.

The company had moved from selling baby wear to buying and selling mobile phones on to various foreign entities and seeking to claim substantial VAT input set-off in respect of those transactions, which HMRC refused to accept. Pre-liquidation, the company unsuccessfully appealed that decision, following which it was wound up.

The director did not dispute that the company, of which he was sole director, had committed the fraud, but claimed that he knew nothing about it as his main defence to the action.

The Deputy ICCJ considered the evidence, including evidence given by the director in the tax tribunal proceedings, and concluded that she did not believe the director and that he had “actual knowledge” of the MTIC fraud.

The director was therefore found liable to contribute to the company for the losses it had suffered as a result of the MTIC fraud both as fraudulent trading, by putting the company back in the position it would have been in had the fraud not been committed, plus the losses that the company had suffered as a result of the fraud pursuant to the misfeasance claim. The liquidator was therefore awarded judgment for the full amounts claimed.

Re J D Group Limited and others [2022] EWHC 202 (Ch)

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