Claim No. B30MA282
Neutral Citation Number: [2016] EWHC 2821 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
Manchester Civil Justice Centre,
1 Bridge Street West,
Manchester M60 9DJ
Before:
HIS HONOUR JUDGE HODGE QC 
sitting as a Judge of the High Court

IN THE MATTER OF BRAND MANAGEMENT SERVICES LIMITED
AND IN THE MATTER OF THE COMPANY DIRECTORS DISQUALIFICATION ACT 1986
- - - - - - - - - - - - - - - - - - - - -

BETWEEN:-

THE SECRETARY OF STATE FOR BUSINESS, ENERGY AND INDUSTRIAL STRATEGY
Claimant
-and-

ANDREW SCOTT ROSENBLATT
Defendant

- - - - - - - - - - - - - - - - - - - - -

For the claimant: Mr Joshua Shields instructed by Bond Dickinson, Newcastle-upon-Tyne
For the defendant: Mr Andrew Vinson instructed by DPP Law, Birmingham

Hearing dates: 31st October, 1st, 2nd and 7th November 2016
Judgment date: 9th November 2016 

JUDGMENT
Judge Hodge QC:

Introduction

1.	This is the trial of a director’s disqualification claim brought by the Secretary of State for Business, Innovation and Skills under section 6 of the Company Directors Disqualification Act 1986 (“the CDDA 1986”) in relation to the affairs of Brand Management Services Limited (“BMS”). The claimant is represented by Mr Joshua Shields (of counsel); and the defendant is represented by Mr Andrew Vinson (also of counsel). The claim form was issued on 4 March 2015 and originally there were two defendants, Mr Andrew Scott Rosenblatt (who is 47 years of age) and his younger brother, Mr Stuart Jason Rosenblatt. Mr Stuart Rosenblatt never disputed the claim and the proceedings against him were discontinued on 1 May 2015 after he had given a disqualification undertaking on 29 April 2015, the period of disqualification being 11 years. In the schedule of unfit conduct, Mr Stuart Rosenblatt acknowledged that despite prior warnings from HM Revenue & Customs (“HMRC”) he had failed to ensure that adequate due diligence had been conducted by BMS so that it did not participate in transaction chains connected with VAT fraud. This formulation relates to the way in which the claimant’s case had been put in the supporting (and first) affidavit of Mr Kenneth David Beasley, an official receiver in the Public Interest Unit North of the Department for Business, Innovation and Skills. The case therefore proceeds against Mr Andrew Rosenblatt alone (to whom I shall refer as “the defendant”). 

2.	The allegation made against the defendant is now summarised at paragraph 16 of Mr Beasley’s third affidavit in the following terms: Between 4 April 2011 and 21 October 2011 the defendant caused or allowed BMS to participate in transactions which were connected with the fraudulent evasion of VAT, such connectionS being something which he either knew or should have known about. It is alleged that:

(1) Despite prior warnings from HMRC, the defendant failed to ensure that adequate due diligence was conducted by BMS so that the company did not participate in transaction chains connected with VAT fraud.

(2) In the VAT period 06/11, between 4 April and 14 June 2011, BMS conducted at least 41 deals which have been traced back to a defaulting trader and resulted in a loss to HMRC exceeding £305,175.

(3) In the VAT period 12/11, between 18 and 21 October 2011, BMS conducted at least 2 deals which have been traced back to a defaulting trader and resulted in a loss to HMRC exceeding £14,702.

(4) Prior to these 43 deals being conducted, the defendant had received warning about VAT fraud within the trade sector and information about adequate due diligence procedures via written correspondence and during face-to-face meetings with HMRC. However, the checks conducted by BMS were not adequate.

3.	The claimant’s evidence consists of three affidavits from Mr Beasley (sworn on 2 March 2015, 19 October 2015 and 23 August 2016), two affidavits from the VAT case officer for BMS, Mr Carl Jones (sworn on 15 October 2015 and 26 August 2016), and an affidavit from another VAT case officer, Mr Mahendra Gajjar, sworn on 14 October 2015. Mr Beasley gave evidence before me for about 2 ¼ hours on the afternoon of the first day of the trial and the morning of the second day. Mr Jones gave evidence before me for about ½ hour on the morning of the second day of the trial. Mr Gajjar did not give live evidence before me. The only evidence for the defendant came from the defendant himself, who made two affidavits (sworn on 28 April 2015 and 13 June 2016) and gave evidence for a little under 7 hours, commencing at about 11.40 on the morning of day 2 of the trial and concluding at about 2.45 on the afternoon of day 3. The trial had begun at 2.00 pm on Monday 31 October 2016 and continued on Tuesday 1 and Wednesday 2 November 2016. The evidence concluded at about 2.45 on the afternoon of the third day, when the court adjourned for written and oral closing submissions until Monday 7 November 2016. On that morning I had the opportunity of reading and considering the written submissions of both counsel before the court sat at 11.00 am. I was then addressed orally, first by Mr Shields and then by Mr Vinson. I am grateful to both counsel for their helpful submissions, both written and oral. The hearing concluded at about 12.50 pm, when the court adjourned until (in the event) 11.00 am on Wednesday 9 November 2016 for me to deliver this extemporary judgment.  

Background

4.	BMS was incorporated on 24 November 2008. The defendants’ evidence and case is that he had previously traded in alcohol, mainly under bond, through a former company called AR Commodities Ltd (“ARC”) but that this had ceased to trade due to an unpaid debt from a customer called Parched Parrot. ARC had used a factoring company with insurance for any bad debts and the defendant had been finding it very stressful dealing with the situation with the insurance company and the bad debt. At the same time, Mr Stuart Rosenblatt had been going through a messy divorce and had financial and emotional issues and he had needed something to take his mind off his situation and give him a new direction in his life. As a result, it was decided that BMS would assist him in that regard and Stuart was named as the sole director. The defendant was not formally appointed a director of BMS until 22 December 2011. Despite this, the defendant accepts that he was involved with BMS, that it traded on his name and reputation, and that, for the period that he was not named as a  director, he acted in that capacity. The defendant says that he never sought to hide his involvement with BMS. At the time of incorporation, the registered office and trading address of BMS was 8 Trevor Road, Southport, which was the address of the defendant’s parents and where Stuart was living at the time. BMS traded in wholesale alcohol, buying and selling in bulk. Through the defendant’s previous experience in the alcohol industry he had made business connections and was able to source alcohol and sell it on for a profit. The business structure was simple: it was to keep overheads low in order to maximise profit. As a result, the decision was taken not to have a warehouse to keep stock. Instead, the stock would be delivered by BMS’s supplier directly to BMS’s customer or to where its customer wanted it to be delivered. BMS would purchase goods from suppliers on credit and would then sell them on to customers on a shorter credit term, allowing BMS to pay its suppliers in a timely manner and establish the business. In short, it is said that BMS was effectively acting as a broker in wholesale alcohol, holding no stock, but matching supply to demand. It is said by the defendant that BMS traded successfully from early 2009 until late in 2011, entering into more than a thousand transactions (against the 43 which the claimant now seeks to impugn), until it came to grief as a result of a bad debt from a customer called Ruby Trading Company Limited (“Ruby”).

5.	On any disqualification claim under section 6 of the CDDA 1986, the court must consider three questions:

(1) Was the defendant a director of the relevant company?

(2) Did that company become insolvent?

(3) Does the director’s conduct as a director of that company make him unfit to be concerned in the management of a company?

The third of these questions involves a two-stage process. First, the claimant must establish as facts the matters on which the allegation of unfitness is founded. Then the court must determine whether it is satisfied that the conduct which has been established is sufficiently serious to justify a finding of unfitness warranting at least the minimum period of disqualification of two years. This requires the court to make a “value judgment”. 

6.	In the present case, the first two elements are conceded by the defendant. He accepts that he acted as a director of BMS from its inception until it entered into creditor’s voluntary liquidation on 6 March 2013. Indeed, I am satisfied on the evidence that the defendant was the controlling mind and the moving spirit of the company throughout its lifetime and that he was responsible for all of its business dealings, including the deals on which this claim is founded. Further, the defendant expressly admits that the relevant knowledge of BMS was the knowledge of the defendant for the purposes of this claim. The defendant also accepts that BMS became insolvent. The claimant’s evidence is that the extent of the deficiency exceeded £174,000, and the defendant is unable to challenge this. There is therefore no issue between the parties either as to the defendant’s status as a director of BMS or as to its insolvency. The defendant further concedes that BMS entered into the transactions upon which this director’s disqualification claim is founded. Of the 41 impugned transactions in the VAT period 06/11, BMS’s supplier in the first 37 of them was a company called ATE Consultancy Limited (“ATEC”). In the remaining four transactions (and also in the two during the later VAT period 12/11) BMS’s supplier was Rapheals Ltd (“Rapheals”). In the majority of these 43 transactions, BMS’s customer was Ruby, although BMS also sold goods to entities known as New Turnbull, Mature and Chilled, and Savefayre.

7.	However, it is said on behalf of the defendant that the connection with missing trader VAT fraud was not something which was within his knowledge, and he therefore puts the claimant to proof of this. The claimant asserts that the defaulting missing traders further up the supply chain from ATEC and Rapheals in these 43 transactions were three companies: Fry’s & Dine Limited (“Fry’s”), A Singh (Richmond) Limited (“A Singh”) and ACMER Limited (“ACMER”). Evidence on the activities of these three companies is provided in the form of an affidavit from Mr Mahendra Gajjar, the current assigned HMRC officer for the three companies, sworn on 14 October 2015. The defendant was in no position to challenge this evidence, and Mr Gajjar was therefore not required to give live evidence before me. I accept his unchallenged evidence, which is reliable and credible on its face, and I find that all three of these traders went missing having entered into substantial transactions in respect of which they had failed to account for VAT, resulting in substantial tax losses to HMRC (including the VAT in relation to the supply chains in which BMS appears). I also find that they did so having had no intention of accounting for any of this tax. I therefore find that the connection between the 43 transactions relied upon by the claimant and missing trader VAT fraud is established. I note that in cross-examination the defendant acknowledged that he had no reason to challenge the facts in Mr Gajjar’s witness statement or to doubt that the missing traders had been fraudulent.   

Applicable law

8.	It is against this factual background that I have to determine whether the defendant’s conduct in relation to these 43 transactions makes him unfit to be concerned in the management of a company. The parties are in broad agreement about the legal principles to be applied. In his opening skeleton, Mr Vinson had relied upon observations of Lawrence Collins J in Re Bradcrown Ltd, Official Receiver v Ireland [2001] 1 BCLC 547 at [8] to the effect that while the standard of proof in a director’s disqualification claim is the civil standard of balance of probabilities, the more serious the allegations, the more cogent the evidence the court will require. In closing, Mr Vinson correctly accepted, in the light of the decisions of the House of Lords in Re B (Children) [2008] UKHL 35, [2009] 1 AC 11 and of the Supreme Court in Re S-B (Children) [2009] UKSC 17, [2010] 1 AC 678, albeit in a family law context rather than that of a director’s disqualification claim, that there is no heightened standard of proof in a disqualification context merely because the allegations are serious and that the single civil standard of proof falls to be applied, being proof that the facts in issue more probably occurred than not. Inherent probabilities (if they exist) are simply to be taken into account, where relevant, when deciding where the truth lies.  

9.	In accordance with principles of European Union law derived from the judgment of the Court of Justice of the European Union in Kittel v Belgium [2008] STC 1537 a taxpayer who involves himself in a chain of transactions which he knew or should have known to be connected with the fraudulent evasion of VAT can be denied the right to reclaim or deduct input tax incurred in respect of his involvement in that chain on the footing that the objective criteria for the scope of that right are not satisfied. I have previously considered the law which applies to a director’s disqualification claim in the situation where a director has found himself involved in transaction chains connected with missing trader VAT fraud in the case of Secretary of State v Warry [2014] EWHC 1381 (Ch). Although that case, and the authorities relied on in it, concerned intra-community trading and there is no non-domestic element attaching to any of the transactions in the present case, that legal analysis nevertheless seems to me to hold good for the purposes of the present case. Indeed, I note that in Re Eaglecourt Limited, Official Receiver v Thukral (17 March 2014) at [89] Registrar Derrett agreed that the approach of His Honour Judge Pelling QC in Secretary of State v Corry (9 January 2012), upon which I founded my observations on the law in Warry, was the proper one to adopt even where some of a company’s trading was with non-EU partners. It seems to me that the same applies in a purely domestic context. 

10.	Given the concession in the present case that the knowledge of BMS is also the knowledge of the defendant, the claimant is entitled to demonstrate “unfitness” on the part of the defendant by establishing, on the balance of probabilities, that BMS is to be treated as having been knowingly involved in VAT missing trader fraud. Having found that the 43 transactions upon which the claimant relies in these proceedings were connected with missing trader VAT fraud, BMS is properly to be regarded as having been a knowing participant in that fraud if the claimant is able to prove, on the balance of probabilities, either that BMS knew of that fraud (which is the claimant’s primary case) or that BMS should have known that the only reasonable explanation for the transactions was that they were connected with such a fraud: see Mobilx v Revenue & Customs Commissioners [2010] EWCA Civ 517, [2010] STC 1436 at [59] and [60] per Moses LJ (with the agreement of Carnwath LJ and Sir John Chadwick). In addressing that question, the court is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them: see Mobilx at [83] citing Christopher Clarke J in Red 12 Trading Ltd v Revenue & Customs Commissioners [2009] EWHC 2563 (Ch), [2010] STC 589 at [111]. Further, if a trader chooses to ignore the obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct input tax: see Mobilx at [61]. 

11.	In closing, Mr Shields took me to the most recent relevant decision of the Court of Appeal in Fonecomp v Revenue & Customs Commissioners [2015] EWCA Civ 39, [2015] STC 2254 as confirming that knowledge includes “blind-eye” knowledge. Speaking with the agreement of McFarlane and Burnett LJJ, Arden LJ addressed the issue of the degree of knowledge of a fraud which a trader must have in order to be liable as a participant in it at [45] – [52]. Addressing a submission on behalf of the trader in that case that it could not have found out about the fraud even if it had made inquiries because the fraud did not relate to the chain of transactions with which it had been concerned, the Court of Appeal concluded that the trader did not need to know the specific details of the VAT fraud or its specific mechanics. The trader did not have to have the means of knowing how the fraud that had actually taken place had occurred. “He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge.” In his oral submissions, Mr Shields emphasised that if the court finds that the defendant had actual knowledge that the relevant transactions were connected with VAT missing trader fraud, then it is unnecessary for the court to consider whether there was some other reasonable explanation for those transactions because that is relevant only to the question whether the defendant should have known of the connection. As a matter of abstract legal analysis, that submission may well be correct; but, in my judgment, the existence of some other reasonable explanation for the transactions is a factor to which the court is bound to have regard in determining the state of the defendant’s actual knowledge.

Claimant’s case

12.	It is the claimant’s case that the defendant (and therefore BMS) knew, or alternatively that it should have known, that the relevant transactions were connected with the fraudulent evasion of VAT. In his written opening, Mr Shields submitted that the defendant had been well aware of the incidence, and also of the characteristics, of VAT fraud in the market (the wholesale sale of alcohol) in which he had been trading at the relevant time. He had been well aware of the risks, and also of the importance of commercial checks on suppliers and customers. The defendant had been warned about VAT fraud on many occasions, both in relation to BMS and earlier companies. It is against that background of knowledge that BMS’s transactions fall to be considered. The claimant relied on the following matters (amongst others) in relation to the transactions to establish knowledge or means of knowledge:

(1) There was no evidence that BMS had entered into any negotiations with suppliers or customers.

(2) There were anomalies in terms of the pricing; for example

(a) in deal 7 (BMS invoice number 10869) BMS had charged Ruby £14.19 per unit of Hardy’s VR whereas in deal 6 (BMS invoice number 10870) the unit price had been £14.59. Those deals had occurred on the same day; and

(b) in deal 8 (BMS invoice number 10872) BMS had charged Ruby £14.59 per unit of Budweiser (24 x 330ml) whereas in deal 8 (BMS invoice number 10871) the unit price had been £14.89. Again, those deals had occurred on the same day.

(3) There were anomalies in terms of the paperwork; for example in some deal chains BMS’s invoice had pre-dated the invoices of traders earlier in the chains whilst in others BMS had been identified as taking delivery of stock some time before it had entered into any onward sale.

(4) BMS had enjoyed a massive turnover and had made a substantial profit without risk and without adding any value. It must have been obvious to the defendant that the trading was too good to be true.

(5) Despite the high value of the goods being purchased and sold, BMS had not entered into any formal written contracts with its suppliers or its customers during the periods which were the subject of the disputed transactions. This meant that there was no formal returns/exchange policy for either party should any of the goods be found to be faulty, and such matters as transfer of title, payment and delivery terms were also not subject to any formal agreement.

(6) Despite the high value of the goods involved, BMS had not insured the goods it traded and it had no evidence that any of its counterparties had done so. 

(7) All of the deals in both VAT periods under challenge had been back to back, for the same amount of goods and the same products. BMS had never been left with any stock that it had not sold. The fact that requirements could be matched in every case suggested that the deals were artificially contrived.

(8) The defendant had told BMS’s suppliers the identity of its customers and its customers in many cases had told him the identity of their customers. That was said to be uncommercial. Moreover the defendant had been aware that each transaction that BMS had carried out had been part of a chain of transactions, and had been aware in some cases that that chain had comprised at least 5 traders. There could have been no commercial rationale for goods to pass through so many UK-based traders, and the defendant must have known this.

(9) Goods had been delivered directly by BMS’s supplier to traders further down the line. Not only had no-one at BMS seen the goods or inspected them; the defendant must have known that his customers were likewise not seeing the goods. In a trading sector where fraud was rife, as the defendant had been informed was the case for the drinks sector in which he was trading, this would be commercially unthinkable. It was to be inferred that the defendant had known that the transactions were not commercial but rather were connected with fraud.

(10) It was said that the involvement with BMS of the defendant’s brother, Mr Stuart Rosenblatt, and, to a lesser extent, their father, Mr David Rosenblatt, had been an attempt by the defendant to distance himself from, and to disguise, his running of the company, to attempt to avoid HMRC interest. It was to be inferred that he had known that the transactions that were being carried out were connected with VAT fraud. 

(11) No evidence had been produced that due diligence had been carried out on customers, and it was the claimant’s case that, in the absence of documentary evidence of checks being carried out, no checks had been carried out.

(12) Some due diligence documents in relation to suppliers had been provided to the liquidator of BMS, and some following later requests made by the Official Receiver. Notwithstanding the defendant’s knowledge as to the nature of the market that BMS had been dealing in, the commercial checks carried out on suppliers had been superficial and wholly inadequate. The defendant had failed to act on negative indicators and he had entered into deals regardless. Checks had been casually undertaken. No credit checks had been undertaken. Much of the due diligence had been carried out after deals had already taken place. There could have been no commercial rationale for carrying out checks after deals had been concluded.

(13) The checks that had been undertaken should have been regarded as insufficient to satisfy the defendant that BMS’s trading partners were legitimate, trustworthy and viable. The fact that they had not been so regarded gave rise to the inference that the defendant had known perfectly well that the transactions were connected with VAT fraud, and that BMS’s counterparties would not stand up to scrutiny.

13.	In his closing submissions, Mr Shields made the following points:
(1) On the basis of all the evidence, looked at as a whole, the court should find that the defendant had entered into all of the 43 relevant transactions carried out by BMS knowing that they were connected with fraud. If not, he clearly should have known of the connection with fraud. In the context of this case, the question as to whether the defendant had known of the connection to VAT fraud turned entirely on whether the court accepted his evidence that he was innocent. If that evidence was rejected, the court should find that he had possessed the relevant knowledge; there was said to be no middle ground: if he was not innocent, he must have been a knowing participant in the VAT fraud. This was quite apart from what was said to be very compelling circumstantial evidence suggesting that the defendant had been a culpable and knowing participant in the fraud. If the court did not believe the defendant, the inevitable conclusion must be a finding that he had known that the transactions were connected with fraud.
(2) The evidence as to the defendant’s knowledge of the connection with fraud was wide-ranging. That knowledge was to be judged in the light of his experience generally as a businessman. He was plainly an articulate and intelligent man. At the date of the transactions, he had been in the alcohol industry for over 10 years, he had been in business on his own account for several years dealing in wholesale drinks, and his evidence was that he presented himself to the court as an experienced businessman in this sector. He had been incredibly successful with BMS, achieving a turnover of over £1.2m from the first quarter’s trading (03/09), increasing to over £2m during the second quarter (06/09), and making over £42,000 just on the 43 deals in question. He had taken responsibility for all of BMS’s trading. In cross-examination the defendant had accepted that his supplier, ATEC, must have entered into transactions knowing that they were connected with VAT fraud if it had undertaken proper due diligence. That admission was said to be significant in terms of the overall case because the defendant’s connection with the fraud could not be closer given his purchases from ATEC and his long-running association with Mr Marc Brown who controlled that company (and who had previously controlled an earlier supplier, Fox’s Ltd, which had, to the defendant’s knowledge, been de-registered in December 2010 and, according to Mr Jones, had been purchasing from 11 suppliers all of which had been found to be missing traders).
(3) Clearly it was necessary to have in mind what was actually known to the defendant, and also what he should have known, with the usual safeguards against hindsight. The court was entitled to draw inferences from what the defendant accepted he had known, from what he said and from what he did, including what he had said in evidence. There were powerful inferences to be drawn from his evidence and from the nature of his dealings.
(4) The defendant’s defence was simply a denial that he knew that the deals had been connected with fraud, and an assertion that he was honest. He had called no other evidence: not a single fellow trader, not even his brother, had been called to testify in his favour. In cross-examination, the defendant had said that his brother had not been able to afford to defend the disqualification claim and that the defendant had not wanted to trouble him to give evidence. In this case, then, the defendant’s credibility was a central issue.
(5) The defendant had been an unconvincing witness who, at many points in his evidence, had refused to engage in any objective evaluation of the material. His evidence was not consistent with the candour and the frankness to be expected of an honest witness. He was said to have been very evasive and cagey. Certain parts of the defendant’s evidence, in particular his reluctance to acknowledge the woeful inadequacy of his due diligence, his willingness to overlook all of the indications of fraud, and his total failure in the witness box to objectively consider what his ‘business’ had actually been doing, were said to have captured vividly the defendant’s efforts to avoid engaging with the reality of what he had been involved in. It had been a constant refrain in his answers to cross-examination that this was “the business he was in”.
(6) On the defendant’s behalf much had been made of the fact that there were many other deals transacted by BMS that had not formed part of the allegations in the present case; it had been submitted for the defendant that that amounted to an acceptance that those deals were legitimate. Mr Shields submitted that the evidence suggested that the true position was quite the opposite. BMS’s main supplier in 2010 had been Fox’s Limited, which had been deregistered for abuse of the VAT system in December 2010. More generally, HMRC’s inability to trace the supply chains was said to indicate that fraud had been involved. Mr Shields submitted that HMRC could not be expected to trace every transaction through the relevant supply chain and that it was significant that it had been unable to find a legitimate source for any transaction in which BMS had been involved. The court did not need to find as a matter of fact that all of BMS’s supply chains were connected with VAT fraud. It was said to be enough that there was no evidence that any of the other chains were legitimate since they could not be traced back to a legitimate source, or even to an importer. On this basis, it was submitted on behalf of the claimant that the legitimacy of those other supply chains was questionable, and their existence could not assist the defendant. In his oral submissions, Mr Shields made the point that out of the 43 sales transactions represented by BMS’s invoice numbers 10861 to 10903, some 36 were the subject of the present proceedings. It was said to be highly significant that the evidence disclosed that every single deal that HMRC has been able to trace in relation to BMS had been traced back to a fraudulent tax loss. Following the deregistration of Fry’s on 14 April 2011, BMS’s transactions had started to trace back to A Singh almost without so much as a pause. It was submitted that these chains had been designed for the implementation of fraud, and that it was no coincidence that BMS appeared in them.
(7) Given (a) that since his first visit from HMRC on 19 January 2010 the defendant had been aware of HMRC’s concerns about BMS’s transactions being involved with MTIC fraud and that the defendant’s former supplier Shotts Ltd had gone missing leaving a substantial VAT debt unpaid and, as such, BMS was part of tax loss supply chains; (b) the defendant’s evidence that he had been aware of the contents of the ‘How to spot VAT missing trader fraud’ leaflet and Notice 726 from February 2010 and his acceptance that he had already known that the wholesale alcohol sector was a fertile ground for fraud and, as a result, that he could get drawn into criminal activity with risks to himself, his family and his business; and (c) that HMRC obviously had serious concerns in relation to his business from the close scrutiny to which BMS was subject during 2010, Mr Shields submitted that an honest and respectable trader, and a good citizen, would have walked away. The fact that the defendant had chosen not to do so was said to indicate that he was neither.
(8) The defendant’s evidence in cross-examination was that he had alerted HMRC to the fact that he had been making third party payments to Fox’s Limited and he had explained that he had done so because the director of that company had said he would be on holiday.  The defendant’s evidence was that it was explained to him by HMRC, and he accepted, that this was an obvious indicator of fraud, on the basis that Fox’s Limited would not receive the VAT and it would be diverted elsewhere. His evidence was that he had stopped making third party payments immediately. In fact, the report of the visit of 28 April 2010 records that HMRC had challenged the defendant about the making of third party payments, as opposed to him volunteering the information, and his account of the explanation given to him by the director of Fox’s Limited had been that he was moving premises. The defendant did not just continue to deal with Fox’s Limited, although he knew that their asking him to make third party payments was obviously indicative of fraud. He went on to make further such payments.  His only explanation for this was that he had had no reason to doubt the legitimacy of Fox’s Limited. Mr Shields submits that he had had every reason to doubt its legitimacy, and his failure to acknowledge this, both at the time of the transactions and in the witness box, was characteristic of his refusal honestly to evaluate his actions.
(9) Mr Shields submitted that BMS had been set up to give the false impression that Mr Stuart Rosenblatt was in charge of the company when in fact the company was controlled by the defendant. There was an obvious disparity between the impression given and the reality. The company had been presented as being the business of Mr Stuart Rosenblatt: he was the director; it was he who, on the face of it, had signed and completed the application to register for VAT; it was he who he was the subscriber to the memorandum of association and the sole signatory for the company’s HSBC account. He was the formal face of the company - to the world, to HMRC, to Companies House and to the company’s bank. It was said that the reality could not have been more different. It was the defendant who had controlled the trading: his evidence was that the company had traded on his name and reputation. He accepted that it was his trading that had achieved a turnover in excess of £1.2m in the first quarter of trading.  He accepted that it was he who had negotiated the deals, and that it was he who had done the due diligence on trading partners and had decided whether to trade with them. His brother’s involvement with the company was literally nominal - he had lent his name to it. At all times Mr Stuart Rosenblatt had been working in the retail trade, and he had managed a bar in a restaurant.  His position as set out to the Official Receiver was that he had been a director who had no duties.  That was reflected in the payments made to him: £500 a month paid from somewhere other than the company, of which he was not even an employee.  Notwithstanding the fact that he was the sole shareholder until August 2010, he had received no dividend. In contrast the defendant had received a dividend of over £66,000 net for the period to April 2010, during which period he was not even a shareholder. The form applying to register for VAT had grossly underestimated the first year’s turnover at £190,000 whereas the first quarter’s turnover was over £1.2m.  Given the statement from the company’s accountant that it was the defendant with whom he dealt at all times, and the fact that Mr Stuart Rosenblatt had had nothing to do with the running of the business, it was said that the defendant’s evidence that he had known nothing about the source of the expected turnover for the first year of trading was not credible.  He had misled HMRC at that point and also later when, in June 2011, he had told Officer Jones that he and Stuart Rosenblatt were the shareholders in the company whereas Stuart had in fact transferred his remaining share to the defendant in January 2011. The defendant’s response to this, which was that he had known nothing about it, was said to have been unconvincing given Stuart Rosenblatt’s representation to the Official Receiver that he “did not deal with this it was something Andrew was concerned with” and in the light of the information from the accountant set out above. Mr Shields submitted that the defendant had been wholly unable to explain why there was this obvious disparity between the impression given and the reality. Significantly, the suggestion in the witness evidence that he had let his brother be involved for personal reasons had been only faintly suggested in oral evidence. In any event, it did not in any sense explain why the defendant himself, who was going to be running the company, was not also on the documents. Mr Shields submitted that there could have been no legitimate reason for this presentation of a false impression and no satisfactory explanation for Mr Stuart Rosenblatt’s involvement in BMS and the defendant’s apparent lack of involvement. It was, on the other hand, said to be wholly consistent with the actions of a person who wanted actively to engage in missing trader fraud as a “buffer” - the obfuscation of reality was the whole point of such entities. In doing so, the defendant had managed to evade being picked up by HMRC’s monitoring officers for over a year.
(10) Mr Shields submitted that the circumstances in which BMS had come to deal with ATEC in September 2010 and as to how the trading had continued beyond April 2011 could only be explained on the basis that the defendant had been a knowing participant in VAT fraud. Very little due diligence had been carried out on ATEC prior to the first dealings between that company and BMS. The documents raised serious questions about the nature of ATEC as a trading partner. The defendant’s evidence had been that he was going to be dealing with Mr Marc Brown, whom he knew from Fox’s Limited. Mr Brown was not an officer of the company, and his name did not appear on the company’s letter of introduction (which was signed by the director, Mr Paul Barnett).  The VAT certificate was in the name of Automotive Tool and Equipment Consultancy Limited, which suggested a trade activity completely different from that in which the company was engaged through Mr Brown. On its face, the VAT certificate disclosed that the registration was in respect of a trade classification ‘management consultancy (not financial)’. During the process when the due diligence was being carried out, the company had changed its name to ATEC Limited. Mr Shields submitted that all of this would, in relation to an ordinary commercial deal, have given rise to serious concerns. In a market where there was significant fraud, an honest trader faced with these substantial anomalies in the documentation would have had no hesitation in declining to deal with the company. Yet without even carrying out any financial due diligence on the company, the defendant had gone on to deal with ATEC and had entered into (amongst others) 37 of the deals with which this claim is concerned. Realistically, it was said that the defendant could only have done so on the basis that he had known that the deals were not ordinary commercial deals, and so it did not matter that his counterparty was not credible. The defendant’s reliance on these documents, both to HMRC and in court, was, to use Mr Beasley’s words, “a smokescreen”. The documents could not have been the basis on which the trading relationship had been pursued; and in fact, that was the defendant’s own evidence (at least in cross-examination): he had dealt with ATEC not on the basis of the documents, indeed notwithstanding the documents, but rather due to the connection with Mr Brown. And yet he had relied on the documents in his written evidence and had failed to make any mention of Mr Brown. It was submitted by the claimant that the documents had not been obtained for the purpose of informing the decision to trade but rather for the purpose of persuading HMRC, and now the Court, that the decision to trade had been reasonable. This was said to be emphasised by the defendant’s failure, in giving oral evidence, to accept that the documents were woefully inadequate to give any comfort in dealing with ATEC. It was submitted that the defendant’s continued reliance on the documents was an attempt to mislead the court into finding that he had genuinely carried out due diligence. This was said to be particularly obvious in the light of the communication to BMS of the fact of (but not the reasons for) the deregistration of Fox’s Limited by letter dated 22 December 2010.  The company’s previous supplier, Shotts Limited, had also been deregistered, and the defendant had subsequently been informed that it had gone missing with substantial amounts of unpaid VAT. The deregistration of Fox’s should have caused any honest trader to sever any ties with Mr Brown. The defendant had not even asked HMRC about it, but had continued to trade with ATEC. He must have known that that trading was not legitimate. The use of documentation as a smokescreen was said to be particularly obvious in relation to a report from DDE Limited. This extraordinary document appeared to have been prepared for the purpose of proving that very little due diligence could in fact be carried out in relation to the wholesale alcohol trade because various factors, such as price, were not indicative of commerciality or otherwise. This material could not have afforded the defendant any comfort in terms of satisfying himself that ATEC had been a legitimate trading partner. It was said that the defendant’s reliance on the document appeared calculated to give an impression that genuine commercial checks were being carried out when this was not so. This was emphasised when the contents of the report were considered.  The lease in relation to the premises had been in a different company’s name (that of Fox’s Cash & Carry Limited, the sister company of BMS’s deregistered former supplier). The address of the premises was different to that on the original due diligence. The (amended) VAT certificate (issued on 22 September 2010, after the company’s change of name to ATEC) had remained in the former name of the company, related to that company at its former address, and continued to indicate that the business of the company was ‘management consultancy (non financial)’, although the report itself commented that the trade classification was correct for the business. The director had not provided any utility bill to prove his address. The report contained no financial information. It had been provided to BMS some six months into the trading relationship. Given that the decision to trade had already been made, and the negative indicators in the document were ignored, Mr Shields submitted that the inescapable conclusion was that the document was produced to give the appearance that due diligence was being carried out to satisfy outside parties rather than by way of genuine commercial checks. What, Mr Shields asked, was the point of producing the ATEC documents if the defendant was only dealing with ATEC because of the involvement of Mr Brown? The answer was that they were window-dressing, a smokescreen intended to put people off the scent. The DDE report and documents had told the defendant nothing new; and he had continued to trade with ATEC despite the seriously negative indications within them. 
(11) Mr Shields pointed out that these points could also be considered from the opposite perspective. The defendant accepted that everyone in the industry, and specifically ATEC, carried out due diligence. His evidence was that his relationship with Mr Brown, which he was careful to relegate to being only a business relationship, had started no earlier than when BMS had commenced trading. That being so, Mr Brown, whether through Fox’s Limited or ATEC, could not have been satisfied that BMS was a viable trading partner. BMS had no filed accounts until August 2010, and the first accounts had reported a shortfall of assets of over £10,000.  The defendant did not appear on any of the formal documentation until the end of 2011.  And yet Mr Brown had traded with BMS throughout 2010 and through most of the deals forming part of this case.  The defendant must have known that Mr Brown’s commercial checks on BMS would have indicated that the company was not a viable trading partner.  In those circumstances, it was said that the company being offered the deals by Mr Brown was only explicable on the basis of non-commercial reasons.
(12) Mr Shields also relied upon the failure of any satisfactory due diligence in relation to other trading parties. The position in relation to Rapheals, BMS’s supplier in the other deals to which the allegation relates, was said to be even more extreme. The defendant had dealt with the company on the basis of five documents. The telephone bill provided in respect of Mr Nicky Mayhew was almost 2 years old by the date of the trading and showed a debit balance. There was no evidence of any checks at Companies House. No check had been carried out at Wigan HMRC’s verification unit, and there was no evidence of any VIES (VAT Information Exchange Scheme) check. No credit checks had been carried out. There was no documentary evidence that any site visit had been carried out, but the defendant’s evidence was that in 2010 he had visited the director at the company’s premises, which were a small 3 bedroom terraced house in Hulme. It was said that the defendant could not genuinely have believed that Rapheals could be a viable trading partner. The defendant said that he had not received the DDE report in relation to Rapheals. He accepted that BMS’s financial difficulties had not started until later, and so it was not clear why the company had not paid for the report. Whilst the claimant’s primary case is that the defendant knew that BMS’s transactions were connected with VAT fraud, the report at least indicated what the company should have known. The director, Nicky Mayhew, had started trading in June 2009 before which he had done a year of in-depth research.  Although on the face of it much less experienced in the sector than the defendant, he had apparently still been able to source goods more cheaply than the defendant. The report indicated that Rapheals did not sell wine, but three of the four deals transacted were consignments of wine. The company had moved to a new trading address which had been rented from a family member. As with ATEC, the director had not provided any utility bill. The company had had no web-site and no accountant and yet it had been transacting £6-7m of business a year.  The trade classification code for the company had been the manufacture of wines.  Had the defendant had this information, he could not have evaluated Rapheals as a viable trading partner and would have known that the transactions were part of a fraud. No due diligence at all had been carried out on customers.  It was said that in the light of the defendant’s recent experience with his former company, this would have been unthinkable if genuine commercial trade was being pursued.
(13) Mr Shields submitted that the evidence in relation to the transactions disclosed obvious uncommercial features. The documentation was very unsatisfactory. The defendant’s evidence was that in negotiating the deals, he had carried out two negotiations - one with his supplier and one with his purchaser - which had concluded at the same time.  Key terms such as price, quantity, specification, delivery date and payment terms had been agreed. His evidence was that the deal would only be effective once documents had been sent. He claimed to have sent out purchase orders to his suppliers but none appeared in the bundles. Not only had the documents failed to record the key terms agreed but they in fact contradicted them: in every case, the invoice from ATEC required (under the term: “Due Date”) immediate payment and yet the term the defendant said in evidence that he had agreed was that he was given credit such that he would only have to pay when he was paid.  The timing of the documents did not make sense and was wholly inconsistent with the suggestion that the negotiations had been finalised at the same time. The failure of the documents to reflect the reality of the deals reflected a casual attitude which was not only uncommercial but rather suggested that the deal documents had been generated to create a paper trail rather than as part of genuine commercial dealings. It was said that the payment and risk position was obviously too good to be true. The defendant’s evidence was that in every single transaction, BMS had not had to pay unless the goods were delivered; in other words, unless the other parties completed their deal, BMS had had no obligation, and then BMS did not have to pay until paid.  These benign trading conditions went beyond the realms of the plausible. This was said to be just part of the uncommercial context of the deals.  Many of the deals had involved wine. The defendant had known that there were at least six parties in those deal chains- producer, importer, BMS’s supplier, BMS, BMS’s customer and that party’s customer. To the defendant’s knowledge, BMS had added nothing of value to the chain. No knowledge about the products had been needed and as for contacts, BMS’s supplier had known the identity of BMS’s customer as in fact had its own supplier. The defendant had known too that ATEC had been trading in the same way as BMS, using credit. Despite this, in every deal BMS made a consistent profit, by reference to a mark up to a round 10p figure. This mark-up had been made notwithstanding the price or quantity of the goods; on occasion, the same goods had been sold on the same date at two different prices and yet BMS had made the same mark-up. The goods themselves had played no part in the transactions from BMS’s perspective.  The defendant had neither seen nor sought to inspect the goods, and the company had bought and sold the goods without at any point having possession or title. The defendant had known that ATEC likewise did not take possession of the goods or insure the same. The defendant’s suggestion that he would have title when he had paid for the goods means that he would have paid for goods he had never seen and which were in the possession of a party who had no knowledge of BMS’s interest in the transaction. He would be selling goods he never owned. This was said to be absurd. The situation in relation to the deals as it presented itself to the defendant was made up of all of these factors. The reality of the ‘trade’ was that the defendant and, to his knowledge, ATEC had simply been producing pieces of paper for which they were being paid. Mr Shields submitted that it was all clearly part of a fraud. At the very best it was said that the defendant had turned a blind eye to this, and that was enough to establish knowledge. However it was said that the evidence strongly suggested that the defendant had been more actively involved.  It was submitted that it was clearly no co-incidence that every single deal that could be traced led back to fraud, and the deals made up almost every invoice issued by the defendant between 10860 and 10903. The Defendant appeared to accept that ATEC must have known about the fraud. That BMS’s name appeared on deal documentation between ATEC and the missing traders at a time before BMS was, on the defendant’s evidence, involved in the deals indicated that its participation in the deals had been pre-determined. The defendant had attempted to downplay his relationship with Mr Brown, but it could only have been his involvement with ATEC that had led to the trading. The defendant had accepted, as he had to, that the point of the fraud was to obtain the legitimate VAT money from traders such as B&M. BMS had not been the target of the fraud: the company had been financially negligible. The whole point of the fraud had been to get the money to the missing trader. It was said to be inconceivable that the fraud would be operated with an innocent outsider in the chain. Mr Shields submitted that the court could be well satisfied that the defendant had been a knowing participant in the fraud.
14.	On a consideration of all of the evidence, the claimant invited the court to conclude that:
(1) The defendant was a director of BMS which had become insolvent.
 
(2) The transactions which BMS had carried out had been connected with fraudulent tax losses.

(3) The defendant's conduct as a director of BMS had fallen short of the standard to be expected of a director of a limited company and he was accordingly unfit to be concerned in the management of a company: he had caused the company to participate in transactions which had been connected with the fraudulent evasion of VAT, such connection being something which he had either known about or about which he ought to have known.

Defendant’s case

15.	For the defendant, Mr Vinson submitted that was no evidence in the present case that the defendant had known of any connection to VAT fraud. The claimant’s case was said to be one of inference alone and those inferences did not stand up to scrutiny. In none of the 43 transactions upon which the claimant relied had BMS dealt directly with an alleged defaulting trader. Its direct suppliers had all accounted for VAT and had not been impugned. It was also said to be important to note that BMS had been supplying goods which had clearly existed. Its end customer had often been B&M Retail Limited (“B&M”), a well-known brand with a high-street and retail park presence. It had been Ruby that had had the connection with B&M. The claimant had relied upon certain matters from which it had sought to draw inferences as to knowledge and to allege that BMS had known or ought to have known of a connection to VAT fraud. These had been set out in the Points of Claim. The difficulty that the claimant faced in that regard was that many of these matters did not relate to the allegation pursued. They were said to be comments upon the manner in which BMS had operated generally. There was said to be no basis for any suggestion that BMS had traded otherwise than legitimately over the years in relation to more than a thousand transactions. The claimant criticised only 43 of those, which represented only a very small proportion of BMS’s business. As a result, it was not sustainable for the claimant to suggest that various matters which equally related to BMS’s other transactions could amount to evidence of knowledge of fraud in relation to those 43 transactions, or that they were matters which meant that BMS should have known of any fraud in relation to those 43. Whilst the claimant did not accept the legitimacy of BMS’s other transactions, there was no evidence to impugn them, and the claimant had not included such deals within the allegation against the defendant. It was not for the defendant to establish that the remainder of BMS’s transactions were not connected with fraud. Rather it was for the claimant to allege and establish, on the evidence and on the balance of probabilities, that they were so connected. That had not been alleged, and it could not be established on the evidence. Moreover, BMS had been trading with legitimate companies which had continued to trade well beyond the events in question. The suggestion made in cross-examination that BMS should simply have ceased to operate was, it was submitted, unsustainable. BMS had been entitled to trade in alcohol in the manner in which it had, and that was not something from which an inference of knowledge of a connection to fraud could be drawn. There was another, perfectly reasonable and more probable explanation in BMS wishing to continue to operate its business legitimately. Whilst the defendant had accepted that there was fraud within that business sector, it was not sustainable for the claimant to assert, and he had certainly not established by evidence, that there was no legitimate trade in that sector at all. In closing, Mr Vinson submitted that Mr Shield had set the bar far too high when he had suggested that the defendant should have walked away from the trade when he had been made aware that Fox’s had been deregistered, particularly since he had not known the reason for this (which may have been nothing at all to do with VAT fraud). Mr Vinson also pointed out that on the claimant’s case, all of those involved in the chain of transactions, including Ruby and B & M, should be treated as implicated in VAT missing trader fraud. This showed the scope for innocent parties to become involved in tainted supply chains.
  
16.	In his closing submissions, Mr Vinson submitted that during the course of his evidence:

(1) the defendant had been trying to assist the court with the evidence which he had given;

(2) he had sought to answer the questions put to him as openly and as fully and straightforwardly as possible;

(3) he had been as clear as possible in his evidence and ready to answer the questions put;

(4) he had not been evasive but had been genuinely trying to engage with Mr Shield’s questioning;

(5) suggestions that the defendant had not been engaging with questions were misconceived and a misinterpretation of his demeanour; and

(6) the defendant had accepted reasonable points which had been put to him and he had disputed those with which it was right to disagree.

Mr Vinson submitted that the defendant’s evidence ought to be accepted.

17.	BMS’s business model had been attacked. Mr Vinson submitted that this business model, in itself, was not a matter from which knowledge of a connection to fraud in relation to the transactions in question could be inferred. The defendant had explained BMS’s business model in his evidence and he had defended it in cross-examination. As the defendant saw it, BMS was effectively a broker. It was exploiting opportunities that existed to match requests for products with a source of those products. In that regard, it was not unusual for BMS not to see or to hold stock, and to seek to ensure that it bought no more than it could sell. That was a means of successful trading and maximising profit. Those were the goals of any legitimate business. It was not a business model which could lead to criticism. It was quite common for businesses to operate in the same way in many areas of commerce. It was further submitted that the defendant had also provided a credible explanation as to why BMS had not inspected the goods which it had sold. There had been no need to do so as they would be inspected by the customer upon delivery. Issues had occasionally arisen for BMS in relation to its sales and credit notes in relation to certain transactions could be found in the trial documentation. B&M had taken a shortage in delivery in its stride and had continued to place orders with Ruby thereafter (as Ruby had done with BMS).

18.	It had been suggested to the defendant that BMS had added no value to its transactions and he had been questioned as to what the point of BMS had been. Mr Vinson submitted that the defendant’s evidence had explained BMS’s role and purpose. It had been able to exploit contacts to obtain goods that were desired and its customers had preferred to pay a mark-up rather than to seek to source goods themselves. That was not unusual. If it were, there would be no market or brokerage in many goods or services. Moreover, the price was ultimately paid by the end-customer. That, in itself, was indicative of the fact that there was scope for BMS to add value and answered the claimant’s point. That BMS was making a profit could not be objectionable. It was able to do so. That was not an indication that it ought to have known of a connection to fraud. There was a reasonable and probable answer for the events in question which was not connected to fraud. The defendant had explained how a typical transaction had worked for BMS in his second affidavit and in cross-examination. Mr Vinson submitted that there was no great mystery to this and nothing within it to indicate to BMS that it ought to have been concerned about a fraud. BMS had made sure not to commit itself to purchase before it knew it could sell. That these deals were done relatively informally did not mean that there was, or ought to have been, any awareness of a fraud. Deals had been done largely on the telephone and the paperwork might have taken time to catch up. When questioned about the chronology of the paperwork, the defendant had made the obvious point that BMS only had control over BMS’s own documents. He had explained there might be good reasons why BMS’s paperwork might appear to be differently dated to that of others because an order placed might be re-routed later to another customer, or be incapable of fulfilment at the time but later resurrected. These were incidents which occurred in business and provided reasonable explanations for matters. The claimant was also said to have sought to draw inferences from the fact that certain of the 43 transactions had contained paperwork dated on the same day. That again was unsurprising given the evidence of how BMS had operated. If a deal was done, confirmation of both sale and purchase would happen as close to simultaneously as possible. There was a need for swift decisions in both directions. Once matters had been agreed over the telephone, documents would follow. They would be likely to bear the same date in such circumstances. The nature of the transaction was the explanation, and not a connection to fraud. The defendant’s evidence had been that there were occasions when he was let down by suppliers and that the paperwork presented in evidence was not all of the documentation that had been concluded contemporaneously. It was clear that that must have been the case. If not, how were goods delivered correctly when the details of end-customers were not always set out on the paperwork available, or that paperwork provided for delivery to BMS and not elsewhere? It was said to be clear that the paperwork exhibited in court did not present the whole transaction. In short, Mr Vinson submitted that BMS’s business was not too good to be true and that BMS had had a function in the market in which it had operated. BMS had been dealing in credible quantities of goods which had existed and for which there had been a market.

19.	Mr Vinson submitted that there was nothing in the allegation that BMS’s due diligence was “a smokescreen”. The defendant had provided evidence as to what he would ordinarily do by way of due diligence. He would conduct site visits, obtain company registration documents, VAT certificates and details, letters of introduction and meet the directors whilst checking such information with Companies House. He would also check bank details and phone numbers and the like. He would also check the VAT status of those with whom BMS traded on a weekly basis, using the VIES system, and often more frequently than that. He would not trade with an entity if he could not satisfy himself in relation to it on the basis of his due diligence. He had also used DDE Limited later on to carry out further due diligence on a number of companies for BMS. The attack made by the claimant that the ATEC report was window-dressing given that it was commissioned after BMS had already started to trade with ATEC was said to miss the point. Mr Vinson submitted that it was better explained as evidence of ongoing due diligence. BMS was trying to do what it could to continue to ensure that BMS traded with legitimate entities. Properly analysed, Mr Vinson submitted that the due diligence carried out was not a smokescreen but a genuine exercise on the part of BMS. He relied upon a number of factors:

(1) If BMS had known of a connection to fraud, why conduct due diligence in the first place?

(2) Why pay a third party to carry out that due diligence in the form of DDE and do so in relation to a number of entities? That represented a cost to BMS.

(3) Moreover, if it was a smokescreen one would expect to see the DDE reports in advance of trading and without containing the matters criticised by the claimant.

(4) If BMS had known of a connection to fraud through ATEC, why had BMS chosen ATEC as the subject for its check with HMRC at its Wigan verification unit? It would be odd to draw attention to trade with a company which BMS knew might be called into question, especially if it had not used the Wigan facility beforehand. Why not either check with Wigan all of those with whom BMS dealt or none of them? Mr Vinson submitted that there was an air of plausibility about what the defendant had said about his reasons for ceasing to use the Wigan verification facility.

20.	Mr Vinson submitted that BMS had been attempting to undertake proper due diligence in relation to its suppliers on each occasion. Such action was a good indication that BMS had not known that it was entering into transactions connected with fraud. Whilst criticism had been made of the due diligence carried out in relation to ATEC, the defendant had been able to explain what he had done and why. Mr Vinson submitted that his explanation was credible. He had known that ATEC had been in transition and was aware of its change of name. He had been provided with Companies House documentation that accorded with that explanation. He had also received an explanation from Mr. Brown as to his involvement in ATEC’s business. Moreover, the defendant had verified ATEC’s VAT number with HMRC at Wigan, in the process informing HMRC of the intended trade and providing the relevant documents. As a result, a commercial decision had been taken to trade with a company at which a person known to the defendant was now working. The defendant stated that he had asked whether ATEC did due diligence with those with which it traded and he had been told that it did. In relation to Rapheals, BMS had conducted similar due diligence prior to trading. Rapheals was a known entity in the market and a competitor. Like BMS it traded from a residential address. The defendant’s evidence in relation to Rapheals (as it was in relation to ATEC) was that BMS had not perceived there to be a risk in trading given the material which had been known at the time. Neither ATEC nor Rapheals were defaulters. Even if BMS’s due diligence was criticised, the point remained that no amount of due diligence in relation to ATEC or Rapheals would have revealed matters in relation to Fry’s, A Singh or Acmer (as Mr Beasley had acknowledged in cross-examination). Those were the true defaulters. It had been put to the defendant that Mr Brown must have either have lied to him about ATEC carrying out due diligence or he must have known of a connection to fraud. That might or might not be right; but it did not mean that BMS had known or ought to have known of any such connection. BMS was not responsible for checking the due diligence of others. BMS had not known of Fry’s, A Singh or ACMER and it could not have checked directly upon them. It had checked on ATEC and Rapheals and the defendant’s evidence was that he had taken this seriously and had carried out such checks as he could have done. Notably, most of the checks which HMRC Notice 726 mentions had been undertaken by BMS. Mr Vinson pointed out that Notice 726 stated that it applied to certain specified goods in which BMS did not trade. Whilst emphasis had been placed in cross-examination upon Notice 726 making reference to supply chains, the reality of the situation should be remembered, which was that BMS could not check upon those beyond its immediate supplier. The due diligence checks which BMS had carried out were said to have been appropriate. In the circumstances, Mr Vinson submitted that BMS’s due diligence did not give rise to any inference that BMS knew of a connection to fraud in relation to the transactions in question nor to any inference that it should have known about it when set against the objective background.

21.	Mr Vinson submitted that the defendant’s dealings with HMRC had always been open. He had been open with HMRC about BMS’s trade with ATEC which had followed on shortly from the check with the Wigan verification unit. In cross-examination, the defendant had been challenged as to why his name had not appeared on documents related to BMS when it was incorporated. He had provided the same explanation that he had set out in his affidavit. He had felt that his brother, Stuart, had needed a project to be involved in to take his mind off issues with his divorce and the defendant himself had been dealing with the stress of a bad debt in relation to ARC. Mr Vinson submitted that those were credible reasons for what had occurred. No adverse inferences should be drawn from the fact that Mr Stuart Rosenblatt had washed his hands of the matter.  It was submitted that the suggestion that a picture other than reality was being portrayed to HMRC was not borne out by the evidence. From HMRC’s first visit on 19 January 2010 the defendant had been quite open about his involvement with BMS. There was nothing in the report of that visit, or thereafter, which had expressed surprise on the part of HMRC that the defendant was involved with BMS. Again, from that first visit, the defendant had been quite open about matters which, if there had been knowledge of any connection to fraud, one would have expected to be minimised. These included:

(1) a previous visit from Martin Ward of HMRC;

(2) a full disclosure of trading partners;

(3) consideration of third party due diligence;

(4) estimated turnover; and

(5) BMS’s business model, including mark up, back to back deals, lack of storage etc.

Thereafter, until the defendant began to suffer with depression due to the bad debt from Ruby, BMS had provided HMRC with documentation as requested and had checked to see that it had what it wanted. It had also been open about third party payments, for which it had given an explanation. The openness of the dealings with HMRC was not indicative of an entity which had known, or ought to have known, that some of its transactions were connected to fraud.

22.	In relation to the suggestion of knowledge of any connection with VAT fraud Mr Vinson invited the court to note that no evidence had been adduced, nor any suggestion made, that the defendant had received any payments from any party other than by way of money received from BMS due to that connection. In the absence of such, it was difficult to see why BMS should have entered into these 43 transactions if it had known, or should have known, that they were connected with fraud. In the end BMS had suffered due to a large bad debt from Ruby. The defendant had continued to try and keep BMS trading and, in the end, he had helped to fund the liquidation personally. Those were not the hallmarks of someone who had known, or who ought to have known, that there was a connection to fraud in some of BMS’s transactions. Mr Vinson submitted that the defendant had sought to act properly in line with his responsibilities as a director.

23.	The defendant was said to have explained each and every one of the various matters from which the claimant sought to draw inferences. In summary, Mr Vinson submitted that:

(1) There had been negotiations with suppliers and customers. In his second affidavit the defendant had set out his business practices and the means by which he had sought to match supplies to a buyer and to negotiate the price. He had explained how a typical transaction for BMS had worked. There was no indication of fraud in this means of dealing and nothing to suggest that the defendant had known or should have known of any connection to fraud in relation to the transactions relied upon by the claimant.

(2) Perceived anomalies in terms of pricing had also been explained. Goods had been ordered and supplied on a deal by deal basis and on full trucks and/or pallets. The price for each order might therefore vary depending upon a number of factors. The mark-up applied by BMS had been consistent in most of the 43 relevant transactions because of the defendant’s liking for round numbers. There was no indication of fraud in this, and nothing to suggest that the defendant had known or should have known of any connection to fraud in relation to the transactions relied upon by the claimant.

(3) The defendant had also explained that he had had no control over the paperwork of others. His business model had been clearly set out. There were many potential reasons why paperwork might catch up with a deal concluded on the telephone as the defendant had explained. Weekends might intervene, goods for sale elsewhere might be re-routed, or there might be other delays. Those were matters for speculation, but they were not any indication of fraud which had given BMS knowledge or meant that it should have known of any fraudulent connection.

(4) It was not the case that it should have been obvious that BMS’s business was too good to be true. There was no basis on which to taint BMS’s business. 47 out of over a thousand transactions were alleged to have been connected to missing traders. The claimant was confined to the allegation which he had put forward and to the evidence on which he relied. There was simply no basis or evidence for any wider allegation. BMS had clearly been a legitimate business, conducting over a thousand legitimate transactions over a substantial period. It had been built up by the defendant. The allegation of the claimant seemed to be an attack on BMS’s business model. That model had been legitimate and successful. There was no indication of any knowledge of a fraud or that it should have known of any such connection simply by virtue of its business.

(5) There had been no need for any returns policy or insurance. There were limited examples of such returns, and goods had been the responsibility of the carrier until they were delivered. There had been a degree of informality in the way in which deals had been negotiated and concluded but that was not uncommon in business. 

(6) The defendant had explained how BMS had conducted a typical transaction and why this had meant that deals were back to back;

(7) The defendant had also explained why suppliers had to know the identity of the end-customer for delivery purposes and also why this had been a commercial decision. In the main case of B&M, it had been Ruby that had had the connection and that could not have been supplanted. In any case, the main contact would have been between delivery drivers and warehouse personnel leaving little scope to try and build up any relationship. Moreover, any such approach would quickly have soured business relationships, with no guarantee of replacement.

(8) In relation to chains within the transaction, as the defendant had set out, BMS had only been aware of the supplier and the customer with whom BMS had directly dealt. BMS could not have carried out checks beyond its immediate suppliers (as Mr Beasley had acknowledged in cross-examination). It was submitted that that must be right. BMS could not have carried out checks on entities of which it was unaware. Moreover, no knowledge could be attributed arising from matters of which BMS had not been aware. All manner of due diligence on BMS’s suppliers and customers would not have revealed the matters alleged about Fry’s, A Singh or ACMER. There was no evidence that BMS had dealt with or known of these entities. It had dealt with ATEC and Rapheals, and they were not defaulting traders. 

(9) The defendant had also explained why goods had been delivered directly. This did not represent an issue, but was part of the successful business model. Whilst it was accepted that HMRC had provided notice 726 to BMS, that was stated to be referable to specific goods in which BMS had not traded. Moreover, it was clear that the defendant had been concerned with the issue of due diligence. He had employed DDE Limited over and above the checks which he himself had carried out. He had also asked HMRC for advice and comment about due diligence. He had explained the due diligence which he had carried out. It was submitted that those had been sufficient checks on BMS’s suppliers and, as previously submitted, no amount of due diligence could have revealed issues in relation to the transactions in question. As a result, there was no reason to infer that BMS or the defendant had known or ought to have known of any connection with fraud in relation to them.

(10) It was also said to be important to note the chronology in relation to BMS being made aware of issues with the transactions in question. This had been done by way of three letters, one dated 14 November 2011 and two dated 30 April 2012. The latest of the 43 transactions in question had occurred on 21 October 2011, i.e. before BMS had received any indication that anything was being alleged as being untoward at all.

(11) The defendant had also explained the involvement of his brother in BMS. It was said to be clear that there had been no attempt at obfuscation as alleged by the claimant. The defendant had been quite open with HMRC from the beginning about his role at BMS and he had been HMRC’s main point of contact.

24.	Mr Vinson submitted that the defendant had provided explanations for the matters raised, he had co-operated with HMRC and with the claimant from the outset, and that there was nothing which should lead to the conclusion that BMS had known, or ought to have known, of any connection with fraud in relation to the transactions in question. Whilst the phraseology used in Mobilx was not an alteration to the substance of the question, it was said to be a useful touchstone. This was said to be far from a case where “the only reasonable explanation for the transaction in which [the trader] was involved” was that there was a connection with fraud. The very fact that so many other legitimate transactions had been entered into by BMS in the same manner was the simple answer to that point. Those had reasonable explanations other than fraud. As a result, such potential explanations were just as applicable to the 43 transactions in question. Even beyond that point, there was a reasonable explanation for BMS’s transactions. It had been operating as a legitimate business. The defendant had worked very hard during BMS’s lifetime to make it a success. Legitimate goods had been sold to legitimate businesses. As a result, Mr Vinson submitted that, objectively considered, the evidence did not establish that BMS had known, or ought to have known, that the transactions in question had a connection to fraud. The consequence was that the defendant was not unfit to be a director or to be involved in the management of a company, and the claim fell to be dismissed.

Discussion and conclusion

25.	Those were the submissions, to which I have paid full regard.  The starting point must be my assessment of the defendant as a witness. I had the benefit of observing him in the witness box for a little under seven hours during which he was subjected to a probing and strenuous cross-examination by Mr Shields. Whilst making all due allowances for the defendant’s unfamiliarity with the forensic process in general, and the rigours of cross-examination in particular, I found the defendant to be an unsatisfactory witness and his evidence to be unconvincing. I reject Mr Vinson’s assessment of the defendant’s attitude, evidence and demeanour in the witness box and I prefer Mr Shields’s characterisation of the defendant’s performance as a witness. Having all due regard to inherent probabilities, and whilst recognising the seriousness of the consequences to him, I simply cannot accept the defendant’s evidence. I find that he did know, or (which amounts to the same thing) that he wilfully shut his eyes to the fact, that all 43 of the transactions upon which the claimant relies in this case were connected with the fraudulent evasion of VAT. I am satisfied that the defendant knew, or at the very least that he wilfully shut his eyes to the fact, that the relevant supply trains were tainted and that VAT fraud had occurred or would occur at some point in the chains of transaction to which BMS’s deals were connected. I reach this conclusion for the reasons advanced by Mr Shields, and I reject the conflicting submissions of Mr Vinson.

26.	During the course of a sustained and assertive challenge to the defendant’s business model and practices, in my judgment only one of Mr Shields’s criticisms failed to strike home. Given the brand of wines in which BMS was dealing (J P Chenet) I do not consider that there was any substance in Mr Shields’s criticism that there was a lack of detail in the description of the wines (as to grape variety and vintage) that BMS was buying from ATEC and selling on to Ruby in the specimen transaction to which the defendant was taken. But in my judgment all of Mr Shields’s other arrows reached their target. I am satisfied to the requisite civil standard of proof that the defendant displayed a lack of candour and honesty both in his dealings with HMRC and in his evidence to this court. It would be enough to for me to say that I did not believe the defendant’s evidence in any material respect; and that, in the light of that assessment, the points made, and the factors identified, by Mr Shields (as summarised above) far outweigh the countervailing submissions advanced by Mr Vinson (who could not have said more on behalf of his client). Without in any way derogating from the force of the other points made by Mr Shields, it is sufficient for me to identify three over-arching matters that have led me to my conclusion about the defendant’s knowing involvement in VAT fraud.

27.	First, there is the role of Mr Stuart Rosenblatt in BMS. I am entirely satisfied that the defendant set up BMS to give the false impression that it was his brother who was in charge of the company when in fact the company was the brainchild of the defendant and the vehicle for his own business activities. I am satisfied that the defendant deliberately kept his head below the parapet during BMS’s first year of trading and that he only broke cover as regards HMRC because his brother was no longer prepared to act as a front for BMS’s business activities. During its first year of trading the defendant took over £74,000 (gross: nearly £67,000 net) by way of dividends when he was not even a registered shareholder whilst his brother (who was) took nothing by way of dividend (merely receiving £500 a month from an unidentified third party source). In the following year’s trading the defendant received £99,999 (gross: £90,000 net) by way of dividends. This was the defendant’s reward for BMS’s trading. I am satisfied that the defendant lied to the court about his responsibility for the deliberately false estimate provided to HMRC of BMS’s turnover (£190,000 in the first year against over £1.2m in the first quarter). I am also satisfied that the defendant was still deliberately seeking to maintain the charade on 24 June 2011 when he told HMRC officers that his brother was still a shareholder in the company when he had in fact transferred his one remaining share to the defendant on 28 January 2011, a transaction overseen by the defendant. I am satisfied that the defendant’s evidence on these issues (on the morning of Day 2 and when Mr Shields returned to the topic after the luncheon adjournment) was deeply unsatisfactory, unconvincing and dishonest. The reality is that from the outset Mr Stuart’s apparent involvement in BMS was a sham deliberately designed by the defendant to conceal his true involvement and role. I am satisfied that this was because, from the outset, the defendant appreciated that BMS would be assisting in, and facilitating, VAT fraud. 

28.	Secondly, there is the matter of BMS’s lack of satisfactory due diligence on both its suppliers and its customers and its casual attitude to their commercial standing and probity. I simply cannot accept that an honest trader who had previously found it “very stressful” when his former company, ARC, had experienced a bad debt from a customer should have taken such a casual attitude towards the credit-worthiness of his company’s customers. I simply cannot accept that an honest trader who had been told the reasons for a former supplier’s (Shotts Limited’s) deregistration in January 2010 (that it “had gone missing leaving a substantial VAT debt unpaid and, as such, that [BMS] were part of tax loss supply chains”) would thereafter have (1) adopted such a casual attitude towards due diligence on its suppliers, (2) failed to make any inquiries about the reasons for the deregistration of its successor supplier (Fox’s Limited) or (3) continued to deal with ATEC without undertaking the most stringent due diligence given the controlling role in both companies of Mr Marc Brown. I am entirely satisfied that the due diligence that was undertaken was pitiful and was undertaken by the defendant purely as “window-dressing”.

29.	Thirdly, I cannot reconcile the specimen transaction (deal No 4) to which the defendant was taken in cross-examination with the business model as described by the defendant. Ignoring the discrepancy in the quantities (for which was there a later credit note from ATEC to BMS) ATEC placed a purchase order with Fry’s for JP Chenet wine on 25 March 2011 for delivery to BMS at the defendant’s father’s home address. That is acknowledged by an invoice from Fry’s on the same day. ATEC invoiced BMS on 4 April 2011 (with terms Net 00 and a due date of 4 April 2011). No delivery address was stated in that invoice. Yet it was not until 5 April 2011 that Ruby submitted a purchase order to BMS. On the same day Ruby issued a delivery note for delivery to JTF Wholesale Limited on an industrial estate near Newark and BMS issued its invoice to Ruby. There is no purchase order from BMS to ATEC in evidence. However, the crucial feature is that ATEC clearly envisaged that BMS would be taking delivery of the shipment of wine almost 2 weeks before BMS received any purchase order from Ruby. This is contrary to the business model described by the defendant whereby the deals would be effected virtually simultaneously. The defendant had no satisfactory explanation for this discrepancy. There was no suggestion in the evidence that this was a “one-off” transaction. It indicates that it was pre-ordained that BMS would be involved in the deal chain. In my judgment, that is a powerful indication of a tainted supply chain.

30.	There is no evidence before me that any of BMS’s other transaction were connected with VAT fraud and I make no finding that they were. However, given the evidence that is before the court, and my assessment of the defendant as a witness, I do not accept Mr Vinson’s submission that the many other transactions in which BMS was involved should be treated as legitimate in the absence of satisfactory evidence from the claimant that they were connected with fraud. I accept Mr Shields’s submission that HMRC cannot be expected to have traced every transaction through the relevant supply chain. So far as the thousand or so other transactions into which BMS entered are concerned, their legitimacy has simply not been established one way or the other. The lack of any evidence on that matter is simply one of the matters to which I have had regard in arriving at my conclusion as to the defendant’s knowledge that the 43 index transactions were tainted by VAT fraud.

31.	In the light of my findings as to the claimant’s factual allegation of unfitness, I have no hesitation in finding that they are sufficiently serious to merit disqualification. I therefore turn to the period of disqualification.     
                 
Period of disqualification
32.	On the appropriate period of disqualification, Mr Shields pointed out that, pursuant to the CDDA 1986, the period of disqualification was between 2 and 15 years. In Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 the Court of Appeal had approved breaking that period down by reference to three brackets. The top bracket, of 10 years and above, was to be reserved for particularly serious cases. The minimum bracket, of 2 to 5 years, was to be applied to cases where, although the disqualification was mandatory, the case was relatively not very serious. The middle bracket, of 6 to 10 years, was for serious cases that did not merit the top bracket. I considered the appropriate period in the context of MTIC fraud in Warry where I expressed the view that any case involving a director who had a knowing involvement, and had played a significant role, in VAT fraud transactions should warrant a top bracket disqualification. Mr Shields submitted that this was the correct approach and that the present case did warrant a top bracket disqualification. 
33.	In his section 16 letters dated 30 October 2014 the claimant had initially proposed that a disqualification period of 11 years for both the defendant and his brother would be appropriate on the basis (1) of the information then known to the claimant and (2) that the unfitness then alleged was the failure to ensure that BMS had conducted adequate due diligence so as to prevent the company participating in transaction chains connected with VAT fraud. By the time of the trial, the claimant’s position was that in using the company as a vehicle for tax fraud, the defendant had abused his status as a director.  It was submitted that a top bracket period of disqualification should be the inevitable consequence of what was said to be the defendant’s use of BMS to take part in a systematic criminal attack on the VAT system from which the defendant had anticipated benefitting substantially. In closing, Mr Shields acknowledged that a longer period of disqualification than 11 years might be appropriate in the light of the evidence as it had come out at trial. He submitted that the court need not attach too much weight to the period for which Mr Stuart Rosenblatt had undertaken not to act as a company director because it appeared that he had simply washed his hands of the litigation from the very beginning, although it did form part of the background. 
34.	Mr Vinson submitted that the period of disqualification would depend upon the findings made by the court. In accordance with the guidance set out in Warry at [51] and [52], if knowledge of a connection to fraud was made out, then a disqualification within the top bracket (over 10 years) would be appropriate, whilst if such knowledge was not made out, but such a connection should have been known, then disqualification within the top-half of the middle bracket (5-10 years) was the guideline. In closing Mr Vinson accepted that the period of disqualification was a matter for the court, which could impose a longer period than that asked for by the claimant. Mr Stuart Rosenblatt had given a disqualification undertaking at the earliest opportunity as the easiest means of moving on with his life rather than engaging with the allegation of unfitness. One might have expected him to have sought to negotiate down the period of 11 years suggested in the section 16 letter but he had not done so. The defendant, on the other hand, had contested the case throughout. The period of 11 years accepted by Mr Stuart Rosenblatt ought not to be treated as a touchstone for determining the appropriate period of disqualification for his brother. The court must consider all of the relevant factors, including the allegation of actual knowledge of connection to VAT fraud now advanced by the claimant. Mr Vinson submitted that a longer period of disqualification should not be imposed on the defendant simply because he had chosen to contest the allegations of unfitness.

35.	At paragraph 50 of Warry I said that a period of disqualification in the top bracket (of over 10 years) should be imposed where a director had been knowingly involved, and had played a significant role, in MTIC fraud, including in cases where a director had wilfully closed his eyes to MTIC fraud. At paragraph 54 I stated that a 12 year disqualification period was appropriate to conduct of the kind acknowledged by the first defendant in that case provided that the director had wilfully closed his eyes to such matters. In my judgment, such observations are applicable to cases of missing trader VAT fraud in an entirely domestic context. I accept that I should not regard the 11 year period accepted by Mr Stuart Rosenblatt as determinative of the appropriate period of disqualification to apply to the defendant given the circumstances in which, and the basis upon which, the disqualification undertaking was given. I accept Mr Vinson’s submission that I should not impose a longer period of disqualification upon a director merely because he has contested the allegations of unfitness. But the fact that a director has persisted in denying the matters alleged to constitute unfitness is of relevance to an assessment of the potential threat and danger that he may represent to members of the public in his management of a company. In the present case, the defendant has fought the allegations to their bitter end (despite a reminder from the court at the conclusion of the evidence that it was still open to the parties to attempt to reach some form of accommodation over this disqualification claim). At the beginning of his cross-examination the defendant indicated that it troubled him that he had been a part of this VAT fraud but he nevertheless persisted in his denial of any knowledge that he had been a “buffer”. In my judgment, such a lack of recognition of his part in facilitating VAT missing trader fraud augurs ill for the future. Taking all the circumstances into account, I consider that the appropriate period of disqualification is 13 years, which will take the defendant to just past his 60th birthday.