Payless Cash & Carry Limited v Patel and Others 
The decision of Mr Justice Mann in the High Court in Payless Cash & Carry Limited v Patel and Others  exemplifies the detailed investigation which can be carried out by the appointment of a provisional liquidator or a liquidator in cases of suspected fraud. It also contains some useful comments on the extent of the liquidator’s evidential burden in such cases.
The case involved the purchase of supplies from various companies by Payless Cash and Carry Limited (“Payless”), which operated as a cash and carry for liquor and tobacco. A large part of its trade was accepted by the liquidator as being genuine. However, HMRC and the liquidator claimed that trade with 10 entities did not exist, but was fabricated in order to be able to reclaim input VAT from HMRC. The claim was against a director of Payless, Mr Patel, for both wrongful and fraudulent trading in respect of the liability incurred to HMRC in respect of the input tax.
It was pointed out that this case was not one of classic missing trader (or carousel) fraud in that it did not involve a sequence of sales and purchases. However, the case displays many of the characteristics of missing trader fraud and indeed the ten traders were referred to in the case as “missing traders”.
Some of the factors arising from the liquidator’s investigation which assisted the court in finding that the case against Mr Patel was made out include:
Books which purported to record cash payments to the suppliers, and about which Mr Patel “stressed the centrality and importance” were “not true records of what they purport to record, at least so far as payments to the missing traders are concerned”. A large part of the judgment is given over to an analysis of these books. Some of the factors considered include:
- It was apparent that these books were not written up every day, but sometimes every few days, yet it was not apparent where the details of the sales were written down in the meantime.
- Many of the entries had been altered with Tippex.
- Mr Justice Mann found that some of the entries had been added at some point after the original entries were made.
- There was an unexplained overlap between the end of one cash book and the start of the other, but the parallel entries were not the same in content.
- A number of pages had been torn out of the front of one of the books.
- There were a number of entries relating to payments where the payee was left blank.
- There were inconsistencies between the Sage accounts (from which Payee’s tax returns were created) and the cash books. The Sage records themselves contained “unaccounted for deletions”.
- The trading patterns with a number of the missing traders were irregular. Large sums were left outstanding for periods which were long compared with the other companies with which Payee traded. The numbering of invoices in respect of some of the traders was consecutive which would only make sense if Payee was the traders’ only customer.
- Ultimately the judge found that “invoices and Sage records were generated in order to be able to make a claim for input tax and without there being underlying trades corresponding to what those invoices and records purported to reflect”.
- There are enhanced requirements concerning the burden of proof where fraud is alleged. However, it is a common misconception that the burden of proof in a civil case where fraud is in question is something other than the balance of probabilities. Mr Justice Mann referred to In Re H , in which it was said that a serious event such as fraud is less likely to have occurred than, for example, negligence, and so stronger evidence is required to establish the allegation on the balance of probabilities. This is what is meant by enhanced requirement.
- The judge pointed out that it will often assist in proving a fraud to establish the reason or commercial context of the fraud, and indeed on the facts of many cases this will be essential. However, this is not an absolute requirement and on the facts of this case it was not to be necessary because the evidence was strong enough to show that the purported trades were not genuine.
- Mr Patel had failed to call a number of important witnesses, including the bookkeeper responsible for entering transactions onto Payless’ computer system, one of the people responsible for writing up the cash books and representatives from many of the missing traders. The judge decided that the court was entitled to draw adverse inferences from the failure to call important witnesses without justifiable explanation.
- In cases of suspected fraud, regard should be had to the “enhanced requirements” in respect of evidence. In many cases it may be difficult to meet these requirements without understanding the commercial context and motivation behind the fraud. However, if other evidence of the fraud is sufficiently strong then there is no need to explain why the fraud has occurred.
- Regard should be had to what the defence is not saying. For example, why is it that particular witnesses are unavailable or unable to give evidence? A court can be invited to draw adverse inferences from the failure to call important witnesses.
- Insolvency practitioners are reminded of their obligations to make the required reports in acting as such under the Proceeds of Crime Act 2002 where they suspect someone is dealing in, or has possession of, criminal property. This will almost certainly be the case in suspected fraud cases.