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High court refuses application for permission to appeal a previous order of Deputy Master Nurse, who previously refused to set aside £4.3m judgment in default obtained by Manolete Partners Plc in suppressed sales case.

Mr Justice Birss, sitting in the Business and Property Courts, has refused the defendant’s application for (a) permission to appeal and (b) a stay of execution against the previous Order of Deputy Master Nurse. The previous order refused to set aside a judgment obtained by Manolete Partners PLC holding that the defendant, the director of a restaurant business on the Edgware Road, had no reasonable prospects of defending the claim. Further details and a copy of the judgment may be found here.

The facts of the dispute

The Defendant was a director of the Company which operated as a restaurant and Shisha bar. The Company was investigated in respect of suspected suppression of sales. It’s bank accounts record that no cash had been banked for a substantial period. The focus of the case was on five grounds on which HMRC’s assessment was made. They were:

  1. a very high number of ”no sales” which HMRC concluded was consistent with the execution of sales which were not recorded;
  2. an increase in voids or corrections which happened when the point about no sales was raised by HMRC
  3. out of hours trading
  4. certain sales wrongly zero rated; and
  5. a large number of negative sales.

HMRC ultimately assessed the Company for tax and penalties, being a mixture of corporation tax and VAT in sum of £3,316,318. It also considered that £4,186,848 which it calculated as the suppressed sales should be allocated to the directors’ loan account of the Company for the Defendant. The Company went into creditors voluntary liquidation on 21 December 2017 and Miles Needham of FRP Advisory was appointed liquidator.

With no assets in the estate the liquidator assigned the claim to Manolete. Manolete issued proceedings on 22 May 2019 and obtained judgment in default of an acknowledgment of service on 17 June 2019. The Defendant applied to set aside the judgment on 30 July 2019 and his application was heard by Deputy Master Nurse on 18 November 2019.

Deputy Master Nurse refused the Defendant’s application to set aside judgment. Please see the below link to our previous article in relation to this case which sets out the background, Deputy Master Nurse’s decision and analysis.

The Defendant thereafter issued an application for (a) permission to Appeal and (b) a stay of execution of the Order of Deputy Master Nurse on the following grounds:

  1. The first ground was that the Deputy Master erred in law in concluding that notwithstanding there were factual disputes about the undisclosed sales, the Deputy Master was wrong to conclude that the draft defence was fanciful and had no real prospect of success. In particular he was said to have erred in wrongly requiring sample evidence to be provided, in wrongly failing to consider what evidence might be available at trial, and in applying a test which would have required a mini trial, which is the wrong approach. This first ground of appeal related to the first three HMRC grounds.
  2. The second ground related to a point on the third and fourth HMRC grounds (zero rated products and negative sales). The Defendant relied on professional advice and the error of the Deputy Master was said to be that he wrongly held he was entitled to conclude, without a full factual investigation, that the Defendant could not rely on that advice as a defence to the claim.
  3. The third ground was that the Deputy Master accordingly erred in concluding that the draft Defence of the Defendant had no real prospect of success.

The Decision

Birss J refused the application for permission to appeal and a stay of execution for the following reasons:

  1. The first ground has no real prospect of success:
  • As the Deputy Master explained, and was entitled to take into account, the explanations for (a) no sales (b) voids/corrections and (c) out of hours trading had not been given to HMRC at the time of the investigation. Moreover, afterwards and when the Defendant was sole director the Company took no steps to appeal the HMRC assessments.
  • Another point noted by the Deputy Master was that HMRC’s report shows that the Company did not appear to bank any cash at all. The explanation given for that was that staff would be paid in cash but no evidence to corroborate that was provided.
  • In paragraph 35 of his judgment the Deputy Master had acknowledged that the first three HMRC grounds turned on questions of fact and considered whether evidence might be available at trial. The Deputy Master concluded that there was nothing in the material before him to suggest that evidence would be available at trial, noting that the Defendant had not produced any sample of evidence from a member of staff or employee. The Defendant contended this is an error of law. Birss J held t is not. The law does not require the judge to accept such assertions without considering all the circumstances. It is a finding open to the Deputy Master in the circumstances in this case.
  1. The Defendant relied on professional advice and the error of the Deputy Master is said to be that he wrongly held he was entitled to conclude, without a full factual investigation, that the Defendant could not rely on that advice as a defence to the claim. Given the circumstances the Deputy Master was entitled to conclude that the Defendant’s defence was fanciful. This ground has no real prospect of success.
  2. The third ground is that the Deputy Master accordingly erred in concluding that the draft Defence of the Defendant had no real prospect of success. It was held that there was nothing added by the third ground.

Analysis

The above is a stark reminder to parties of the discretion available to judges. It is again also a useful reminder to applicants in general seeking to set aside judgments that the burden of doing so rests on them to produce evidence to support a defence that it more than merely fanciful. Practitioners should be wary of relying on a draft pleading unsupported by evidence in an application to set aside judgment given the burden is on the applicant to show that there is a reasonable prospect of success.

The case also highlights why directors of insolvent companies ought to take informed legal advice at an early stage and continue to do so post insolvency. This is particularly important in cases where there is a significant and disputed creditor liability, particularly in the case of disputed tax debts.

The assignment of the claim to Manolete has enabled a substantial judgment to be obtained in circumstances where there were no monies in the insolvent estate to cover legal costs, a state of affairs resulting from the actions of the defendant as former director. Manolete finance ensures that lack of funds will not be an obstacle to obtaining redress from former directors.

Manolete was represented by Debenhams Ottaway LLP Partner Luke Harrison and Senior Associate Alexander Neale who instructed Joe Curl of 9 Stone Buildings.

 

 

 

 

 

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.