HMRC v SED Essex Limited

In HMRC v SED Essex Limited [2013] EWHC 1583(Ch) the High Court has confirmed that the Court will, in appropriate cases, uphold the appointment of provisional liquidators where the petition debt is based on allegations of fraud. The case sets out the court’s approach to disputed debts, VAT assessments, and provisional liquidation in order to preserve evidence as well as assets and the application of the guidance from the Court of Appeal in Rochdale Drinks.

What the case decided and why it matters

HMRC v SED Essex Limited decided the following points:

  • The Court can appoint provisional liquidators to preserve evidence as well as assets.
  • The Court can find that the company’s director knew or should have known that the company was involved in fraud based on written evidence alone and without cross-examination.
  • Even if there is a separate appeal to challenge the petition debt, a company can be wound up if the appeal is shown to be without substance, again on written evidence alone.
  • Inconsistent evidence from the director and questionable conduct after the appointment of provisional liquidators is itself relevant to whether the provisional liquidators are left in office or not.

The power to appoint provisional liquidators

The Court has the power to appoint provisional liquidators at any time after a winding up petition is presented against a company (Insolvency Act 1986, section 135). In HMRC v Rochdale Drinks Distributors Ltd (2011) the Court of Appeal set out a two stage test:

  1. First, the applicant must show that a winding up order is likely to be made when the petition is heard.
  2. If so, the Court must then consider whether it is right to make the appointment.

Disputed debts and allegations of fraud

The Court will not make a winding up order where the debt is disputed in good faith and on substantial grounds. The Court will also be careful before making an adverse finding about a person’s honesty or state of knowledge without giving that person the opportunity to be cross-examined.

HMRC v SED Essex involved a company accused of involvement in "missing trader" fraud, where the petition debt was based on VAT assessments served by HMRC on the basis that the company, through its sole director, knew or should have known that it was involved in supply chains which were connected with the fraudulent evasion of VAT. The Court concluded that HMRC’s written case alone was sufficient to allow it to find that the assessments were likely to be upheld, and that a winding up order was likely to be made, without the need to cross-examine the director.

VAT assessments The Court rejected the Company’s argument that because the VAT assessments were subject to an outstanding appeal, the issue should be decided by the First Tier Tribunal and the petition should be dismissed.

The Court found that HMRC had to raise a serious enough doubt about the company’s trading to shift the evidential burden to it to justify its behaviour. Having done that, it is then up to the company to make out a sufficiently strong case to negate the likelihood of the assessments being upheld. The company failed to do this.

The Court’s discretion: preservation of assets and preservation of evidence

In HMRC v SED Essex, the provisional liquidation had the effect of securing cash of some £139,000 together with a substantial quantity of hard copy and electronic records. The Court agreed that preservation of records was itself a good reason to exercise the discretion to appoint provisional liquidators or to confirm their appointment. The Court’s power is not limited solely to cases where cash or other valuable assets are at risk.

The Court’s discretion: inconsistent evidence and questionable conduct by the director

Another relevant factor in the Court’s decision to confirm the appointment of the provisional liquidators was the inconsistent evidence given by the director. She made statements about matters relating to the company’s trading which were contradicted by contemporaneous documents such as bank statements and purchase orders. The director was also accused of transferring money from the company’s bank account immediately after being told that provisional liquidators had been appointed earlier that day. While the Judge was not prepared to find that she had deliberately breached the order (as she had not been cross-examined), the unanswered questions about her behaviour were still relevant.

This allowed the Judge to conclude that it would not be "safe or sensible" to return the company to the director’s control.