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In the Matter of Sed Essex Ltd (2013)

Summary

It was appropriate to maintain the appointment of provisional liquidators pending the hearing of a winding-up petition. The petition, founded on alleged indebtedness arising from assessments for VAT denying a company's claims to recover input tax on the basis that they were connected with the fraudulent evasion of VAT, was likely to succeed and it would not be safe or sensible to return the company to the control of its own management in the interim.

Facts

The applicant company (S) applied to discharge an order appointing provisional liquidators.

The respondent commissioners had presented a petition for S's compulsory winding-up. The petition was founded on S's alleged indebtedness of over £3 million arising from VAT assessments, the commissioners having denied S's claims to recover input tax in respect of purchases made from six suppliers on the basis that they were connected with the fraudulent evasion of VAT by missing trader fraud. On the commissioners' application, the judge made a without notice order appointing provisional liquidators, but giving S the opportunity to apply to discharge that order by a specified date, which it took.

Held

(1) A judge dealing with an application for the appointment or maintenance of provisional liquidators had to consider whether the petitioner and applicant had demonstrated that it was likely to obtain a winding-up order on the hearing of the petition and, if so, whether it was right that a provisional liquidator should be appointed or maintained in office pending the hearing of the petition. The factors to consider in deciding whether to appoint or maintain provisional liquidators included (a) questions as to the integrity of the company's management and/or accounting and record keeping function; (b) whether there was any real risk of dissipation of the company's assets and/or any real need to take steps to preserve them; (c) whether there was any real risk that the company's books and records would be destroyed and/or any real need for steps to be taken to ensure that they were properly preserved and maintained; (d) whether there was any real need for steps to be taken to facilitate immediate inquiries into the conduct of the company's management and affairs and/or to investigate possible claims against directors for fraudulent or wrongful trading; (e) whether or not the company had a realistic prospect of obtaining a validation order under the Insolvency Act 1986 s.127, because if not, it might not be able to trade in any event; (f) generally, which course seemed likely to cause the least irremediable prejudice to one party or the other, Revenue and Customs Commissioners v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116, [2012] S.T.C. 186 followed (see paras 11, 16 of judgment). (2) The commissioners had to demonstrate that it was likely that they would be able to satisfy the court at the hearing of the petition both that S's purchases were connected with the fraudulent evasion of VAT and that S, in the person of its sole director, either knew that its purchases were so connected or should have known that the only reasonable explanation for the circumstances in which they took place was that they were so connected, or had ignored obvious inferences to that effect from the facts and circumstances in which it had been trading. On the evidence, the commissioners were able to meet those requirements. S and its suppliers' pattern of trading raised a powerful inference that fraudulent evasion of VAT had occurred in actual or purported supplies, which S's director had been aware of. There was no realistic prospect that S might succeed in explaining away all the indications of likely VAT fraud as a series of unfortunate coincidences (paras 14, 34, 37, 40, 50). (3) The provisional liquidators held £139,000 in cash and there were real grounds for doubt as to whether that sum would remain available for S and its creditors if a winding-up order was made, but control of S and its assets had been returned to its own management in the meantime. There were also real grounds for doubt as to whether any renewed trading would be accurately and reliably documented. The court was unlikely to accede to an application for a s.127 order prospectively validating trading transactions entered into before the hearing of the petition. Returning S to the control of its own management for the next few weeks would not be safe or sensible, and the court therefore exercised its discretion so as to maintain the provisional liquidators in office (paras 59-61, 64-65).

Application refused

Chancery Division
John Randall QC
Judgment date
14 June 2013
References

LTL 17/6/2013 : [2013] EWHC 1583 (Ch)