In the recent case of Re JD Group Ltd in liquidation; Bhatia v Purkiss (as liquidator of JD Group Ltd) a company director appealed a decision that he was liable for VAT fraud.

Background

Mr Bhatia was the sole director of a company trading in mobile phones. He was sent a HMRC notice explaining the risks of mobile phone trading and liability for involvement in VAT fraud. 

A large VAT refund claimed by the company was disallowed by HMRC and the company entered liquidation with the liquidator commencing proceedings against Mr Bhatia for fraudulent breach of duty and fraudulent trading. 

The first judge found Mr Bhatia liable for both claims. He had actual knowledge of the VAT fraud, relying on his awareness of the risks of mobile phone trading and the lack of due diligence.

Appeal 

Mr Bhatia complained that the Judge did not establish a dishonest state of mind - claiming that Mr Bhatia's actual state of knowledge or belief in respect of all matters had to be established.

Decision 

The court disagreed: to be dishonest a party must have known about the fraud, but need not know every detail of it.

Key takeaways 

• A party does not need to know every detail of a VAT fraud to be found liable.
• Where claims are available for both breach of duty and fraudulent trading, the officeholder should calculate damages under both to identify the higher value claim.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.