Defendants receive custodial sentences for contempt of court in VAT case

In the recent case of HMRC v Munir & Others[1], HMRC successfully applied to the Court for committal of three company officers for contempt of court where an order appointing a provisional liquidator was knowingly breached.

Background

On 18 March 2014, the High Court appointed Mr Wilson as provisional liquidator of Parkwell Investments Limited ("Parkwell") to take possession of the assets of the company and to collect and protect such assets, including any third party monies held in the possession of or under the control of Parkwell. This appointment followed the presentation of a petition by HMRC who claimed a sum in excess of £7.7million in respect of unpaid VAT. The order appointing Mr Wilson as provisional liquidator made it clear that he had been appointed as an officer of the court and that it was a contempt of court for any person to prevent or impede the liquidator in the carrying out his duties, and anyone so doing could be held to be in contempt of court and liable to be imprisoned, fined, or to have their assets seized.

At 10.40 on 19 March 2014 (the day after his appointment), Mr Wilson, accompanied by an independent solicitor and a process server attended at Parkwell's premises. The process server served various documents, including the appointment of the provisional liquidator, on Mr Munir, one of Parkwell's directors. This was done in the presence of Mr Chaudhry, who was the company secretary.  At some point hereafter, Mr Chaudhry left the room in order to call Mr Kinsella, Parkwell's tax advisor. In the absence of Mr Chaudhry, the independent solicitor explained the meaning and impact of the order appointing the provisional liquidator to Mr Munir.

At 11.07 a payment of US$293,000 was made out of Parkwell's bank account with Nat West to a company based in Dubai called Echo Calls. This was done on the instructions of Mr Farooq, another director of Parkwell, who had not been present at the earlier meeting with Mr Wilson, the solicitor and process server.

Shortly after 11.00, Mr Kinsella, arrived at Parkwell's premises. He explained to Mr Munir and Mr Chaudhry that the only option was to co-operate with the provisional liquidator and that in effect Parkwell would be shut down for a week. However, at 14.53 a further payment of US$23,322 was made to Echo Calls, again on the instructions of Mr Farooq.

On 20 March 2014, a further payment of US$308,303 was, on the instruction of Mr Chaudhry, transferred to Echo Calls. This transfer had the effect of clearing out the cash assets of Parkwell.

HMRC applied to the High Court contending that each of the above payments was made in contempt of court.

Decision of the High Court

The respondents initially denied that they were in contempt of court. However, at the door of the court and having received advice from their legal representatives, they admitted knowingly breaching the court order. Each contended that the motive for their acts was a desire to preserve the trading position of Parkwell, it being their hope that they would subsequently resume control of the company.

Mr Justice Norris had to decide what was the appropriate sanction in such circumstances. The judge said that the contempt was not a wrong done to the other party to the litigation but rather it was an affront to the rule of law and to the Court itself. In this instance the object of imposing a penalty could not be to seek to ensure compliance with the court order since it was clear to the judge that there was no prospect of recovery of the monies received by the Dubai company. What each of the respondents had done was to misappropriate significant sums of money and they had therefore deprived the general body of creditors of assets which were rightfully theirs. Their conduct was a serious and deliberate breach of a court order and each respondent knew that it would deprive the order of effect. The court said that where a position of trust was abused to deprive others of sizeable sums, a custodial sentence was all but inevitable in criminal proceedings and the same was true in contempt cases. In sentencing the respondents the judge commented:

"… where officers of a company seek to thwart a liquidator in the performance of his office a clear message must be sent to the commercial community that such conduct has very serious consequences. In this aspect of the case it does not matter that you were paying a supplier. You were usurping the function of the liquidator by disposing of money that did not belong to you … You were doing so in part with an eye on benefit for yourselves in case you could forestall full liquidation and recover control of the company".  

The judge took as his starting point a sentence of nine months' imprisonment. After taking into account mitigating factors, including the respondents' admissions, sentences of six months imprisonment were imposed on each respondent (they were informed by the judge that they would serve three).

Comment

In passing sentence, the judge said that the fact that the respondents had not procured Parkwell to make the payments for their own benefit was an important factor reducing what would otherwise have been a two year starting point. It is clear from this case that in contempt proceedings, where a position of trust has been abused to deprive others of sizeable sums, a custodial sentence is all but inevitable. Mr Justice Norris has sent a clear message that the consequences for anyone who intentionally thwarts the purpose of a court order are likely to be serious.

The Court's judgment can be found here.

[1] [2015] EWHC 1366 (Ch).