MTIC Fraud – appeal failed due to findings of fact at first instance.
[ JD Group Ltd in liquidation (“JD Group”)  EWHC 775 (Ch)]
This was an appeal against a judgement against a director of J D Group where a Missing Trader Intra Community (“MTIC”) VAT fraud had taken place. The director had been ordered to pay £2.6m, being the greater of the claims under S212 and S213 Insolvency Act 1986. He appealed on the basis that the assessment of his state of mind was flawed and so a dishonesty assessment was flawed, as well as appealing the basis on which the damages were calculated. The appeal failed in all respects. Findings of fact were tested and were found to have been appropriate. The Judge was entitled to base the damages on the greater of the two bases. A minor adjustment was made to the calculation of the damages as the Court found that there was some confusion over one element of the calculation, however that was not a key factor for the judge and did not give rise to any basis for an appeal.
What are the practical implications of this case?
When investigating MTIC frauds it is enough that the proposed respondent was aware of the fraud even if they did not know, or it is challenging to prove that they new, the details of the fraud.
Where claims can be framed under either S212 (misfeasance) or S213 (fraudulent trading) Insolvency Act 1986 it may be worth calculating the damages under both heads and identifying which provides the greater claim. That the greater sum may potentially be awarded can be used in settlement negotiations as well as in framing the particulars of claim and eventually at trial.
What was the background?
The director had run a successful business dealing in childrens’ clothing and footwear before deciding to become involved in the import and export of mobile ‘phones. HMRC had served him with a standard notice (HMRC Notice 726) explaining how the director may be made liable for VAT for being involved in an MTIC fraud and the reasonable steps he should take to mitigate against that risk. Trading continued and when a VAT return identified a large VAT refund due to J D Group HMRC investigated and disallowed a large part of the VAT reclaim. J D Group appealed and the appeal was eventually struck out resulting in HMRC being a material creditor of J D Group which was then placed into liquidation. The liquidator of J D Group investigated numerous transactions involving mobile phones which had resulted, after HMRC disallowed much of the VAT reclaimed, in material amounts of unpaid VAT. He concluded that he had claims under S213 (fraudulent trading) and S212 (misfeasance) Insolvency Act 1986.
Proceedings were issued by the liquidator of J D Group and at first instance judgement was obtained against the director for £2.6m, being the greater of the two claims under S213 and S214 Insolvency Act 1986. The Judge found that the trade arrangements were uncommercial for a number of reasons set out in the judgement. An MTIC fraud had been taking place. The Judgement concluded that the director had actual knowledge of the MTIC fraud.
What did the appeal court decide?
The Court dismissed the appeal on the grounds that the Judge at first instance had made findings of fact and, after a detailed analysis of the issues at stake, the appeal Court decided that the Judge had been entitled to arrive at those findings.
In particular the Court cited the decision in Morris v Bank of India  EWHC 528 (Ch), which decided that it was sufficient that the respondent must have known of the fraud but did not need to have known every detail. A finding here that the respondent was participating in a VAT fraud was sufficient – the Court does not need to identify the details they were aware of. The findings of the Judge were within the parameters set by case law. The Court also decided that even if the findings were consistent with negligence they were capable of supporting an allegation of dishonesty.
The director also argued that as collusion was not found there must be innocent trading. The Court decided that the case did not depend on collusion being proven, that dishonest intent was shown was sufficient.
As for quantum, there was some confusion over insurance but that was not a key factor for the judge and the confusion did not give rise to any basis for an appeal.
At first instance the Court decided to award the greater of the two claims (S212 or S213 Insolvency Act 1986). Damages under S213 were based on the loss suffered by HMRC (unpaid tax and penalties as a result of the fraud) and damages under S212 were based on the loss to J D Group (irrecoverable VAT paid net of profits made on the deals plus penalties suffered). In this case the damages calculated under S212 were awarded. The appeal Court agreed, but commented that the question of whether the S213 claim is an alternative claim or a separately sustainable claim (ie there could be an additional sum claimed) is something which may require attention in another case, but the Judge was not satisfied that they are necessarily alternatives.
- Court: Chancery Division
- Judge: Sir Anthony Mann (sitting as a High Court judge)
- Date of judgment: 03/4/2023
20-22 Wenlock Road, London, N1 7GU
+44 (0) 208 012 7944