QEB Metallics Ltd (By Its Joint Liquidators, David Ingram & Kevin Murphy) v (1) Aslam Peerzada (2) Adnan Mohammad Khan (Aka Eddy Khan) (3) Nouman Hafiz

Facts

The liquidators (L) of the claimant company (Q) claimed damages against the first defendant (P) and the third defendant (H).

Q had traded in precious metals. P was a director of Q. H was never officially a director and maintained that his sole involvement with Q was in supplying "limited back office logistics support including nominee services" for a limited period. Q was allegedly involved in a variation of a missing trader intra-community fraud scheme. Seventy transactions were identified whereby Q had sold precious metals to a German company which gave rise to a VAT liability. Q should have made four VAT returns over the relevant period of assessment; however, only three were filed showing a nil return, and no VAT return was filed for the last quarter. Consequently, no VAT had been accounted for and paid and, pursuant to a petition by Revenue and Customs, Q was placed into compulsory liquidation and L were appointed.

L argued that P, as director, and H, as a shadow or de facto director of Q, owed fiduciary duties of loyalty, honesty and good faith and were guilty of breaches of those duties, misfeasance, or an unlawful conspiracy to injure Q by failing to account for VAT on the transactions, and were also liable under the Insolvency Act 1986 s.212 and s.213. L submitted that the defendants were liable to compensate Q for the amount of the VAT foregone.

Held

HELD: (1) Looking at the totality of the evidence, H was the controlling mind behind Q and was at the epicentre. He was more than a mere manager and controlled Q and its activities and had the real influence in Q's corporate affairs. He was sufficiently implicated in the fraud carried on by Q to make him accountable in equity, Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 A.C. 366 considered. It was more probable than not that he had full knowledge of the attempt to cheat and defraud Revenue and Customs and knew it was a dishonest plan and was morally and culpably responsible for it. Although never formally appointed director of Q, H acted as such throughout the material period of its trading activities. Accordingly, since the action was brought by L as liquidators, H's activities fell within s.212 and s.213. So far as s.212 was concerned, H was the management and as such owed fiduciary duties to Q. With regard to s.213, H knew the activities of Q were carried on with intent to defraud Revenue and Customs. The effective result was that whether by the statutory provisions in the Act or in equity or at common law, H was liable. P was also part of the conspiracy; he was a director and was implicated in the fraudulent activities that were carried on. He was liable in the same way as H. (2) With regard to damages, the appropriate amount through the s.212 to s.213 route was what the court determined was just. In equity, liability to account would be for such amount as was just in all the circumstances, the aim being to restore to the rightful owner, Q, what had been lost by the inequitable conduct, Target Holdings Ltd v Redferns [1996] A.C. 421 applied. There would be judgment against P and H for the amount of the VAT foregone, with H also paying simple interest.

Judgment for claimant.

Comment

Where a company involved in a variation of a missing trader intra-community fraud scheme had been placed into compulsory liquidation, pursuant to a petition by Revenue and Customs for failure to account for VAT on certain transactions, an individual who was never formally a director, but was the controlling mind behind the company, was liable to compensate the company for the full loss of the VAT.

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