Poor but honest

KEY POINTS

• VAT fraud discovered by employee who informs a solicitor
• HMRC fail to take action to stop the perpetrators
• The company goes into liquidation owing money
• The liquidator tries to obtain redress from the whistleblower

'It's the same the whole world over,
'It's the poor what gets the blame,
'It's the rich what gets the pleasure.
'Ain't it all a bloomin' shame?'

She Was Poor, But She Was Honest (also known as It's the Same the Whole World Over), English music hall, Billy Bennett, 1930

The story I am about to relate is about as far from a music hall joke as one is likely to get. It is about a man who was almost very poor and (the judge had no difficulty in finding) was honest.

It is about a man who tried his best to bring a VAT fraud to the attention of HMRC and, when they took no action, and the company was put into liquidation because of the fraud, was then sued by the liquidator of the company to recover the money lost.

And who was one of the major creditors of the company likely to benefit from the liquidator's action?

Yes, it was HMRC.

The case in question is the case of Green v Walkling [2007] EWHC 2046 (Ch). It is not a tax case and so may not readily come to the attention of many readers. However, it contains some important lessons when it comes to what action to take when discovering fraud.

Unexpected call

The defendant (one of four) was Mr Walkling. He had been a salesman all his life, for what the judge described as 'modest reward'. From 1997 to 2001 he was responsible for the sales at a company called Mobility Now Ltd which specialised in bathing products for people with mobility problems.

In 2001 he was contacted out of the blue by Mr Moate who had purchased the assets of Mobility Now from the administrator and he asked Mr Walkling if he would run the business through a company called Ortega Ltd. The shares of Ortega were owned by an American company.

In August 2002 Mr Moate told Mr Walkling that the demands of his American business were taking a toll on his time and he asked Mr Walkling if he would become a director of Ortega.

The new position came with no increased income, but Mr Walkling accepted. In fact the reason he had been asked to become a director was because Mr Moate had been disqualified from being so for seven years.

Towards the end of 2003 Mr Walkling became suspicious that Ortega might be involved in a VAT fraud. So he investigated and discovered that Mr Moate was involved in a dishonest scheme.

Ortega was substantially inflating the inputs on the company's VAT return so that claims for repayment of VAT were being presented for some £30,000 to £80,000 a quarter, instead of the normal level which was in region of only £6,000 to £9,000 a quarter.

The repayments received were credited directly to Ortega's bank account; however, as soon as the credit appeared in Ortega's bank account the amount of the credit was withdrawn by cheque. The bank statements then were 'doctored' to conceal both transactions, by folding over the relevant two entries, and taking photocopies of them.

These were kept in place of the originals. Mr Walkling estimated that the total amount of money obtained in this way was in the region of £1.3 million.

Solicitor's advice

Although Mr Walkling's immediate instinct was to confront Mr Moate, he did not; instead he consulted a solicitor. The solicitor advised on the money laundering implications and recommended that he, the solicitor, report it. On 13 January HMRC were informed.

Two officers went to Ortega's offices the following day and took copies of documents. As the judge said, the consequence of this was:

'Mr Walkling felt that a great weight had been lifted from his shoulders and awaited the early date when the HMRC would — like the cavalry — doubtless arrive, arrest and carry away the dishonest Mr Moate and enable the recovery of the stolen money.'

However, as the judge continued:

'As Mr Walkling put it in his statement, “I could hardly have been more wrong” — despite repeated approaches the cavalry never did arrive. Despite being reminded of the increasing urgency of an intervention by them, it became apparent in March that no one at HMRC had yet read the file and the matter was being transferred to Ipswich; in late March it was reported that someone had read the file and was now “very interested”; and in May that the HMRC “wanted to make an arrest, but would like to do it in a subtle manner”. By June they indicated that they were “under resourced” and there was some doubt whether they would in fact undertake an arrest but wanted to meet Mr Walkling. Although Mr Walkling agreed to a meeting it seems that HMRC did not commit to a date for the meeting. In the result, HMRC never managed to take any active step at all and Mr Moate and his wife took the opportunity to disappear along with the whole of the proceeds of the fraud.'

Impossible position

The urgency referred to was because Mr Moate had arranged to sell the assets of Ortega to a third party, Arrow. Arrow required warranties to be given by Mr Walkling which, because of his knowledge of the fraud, he knew to be untrue.

Mr Walkling was in a very difficult position. Under the Proceeds of Crime Act 2002 he was under a continuing obligation not to 'tip off' the fraudster. He was afraid that if he said anything to the purchaser this would alert Mr Moate and he, Mr Walkling, would be guilty of tipping off.

Completion of the sale was set for 5 March 2003 and HMRC were nowhere to be seen. He continually consulted his solicitor who advised that he had to carry on with the sale. The solicitor's file note read:

'Peter is in London; they are negotiating the sale of the business. Peter feels very awkward indeed, he has met the new owner and he thinks he is an honest and sincere chap but he cannot tip him off for fear of breaching the regulations. Feels that Customs & Excise are taking too long ... He is very concerned because he has met [Ortega's solicitors] he has told them his view with regard to the payment of the outstanding amount owed to the creditors, he thinks the creditors should be paid out of proceeds and he has demanded it. [Ortega's solicitors] have ignored his view; in fact they have belittled him and trying to marginalise him both in terms of the meeting and subsequent to the meeting. It has become clear to Peter that [Ortega's solicitor] and Moate are going to ignore the client [Ortega]. Peter has resigned as director as part of the overall agreement, he doesn't want anything to do with being director of anything. He has found the whole thing far too stressful.'

As the file note records, Mr Walkling had demanded that the company's creditors be paid out of the proceeds of sale. What in fact happened was that £443,000 was paid to Ortega's solicitor on completion, from the solicitor's client account to the US parent company and then the money disappeared.

Ortega failed to pay its creditors and went into liquidation. Mr Walkling was made redundant and was out of work for two-and-a-half years, finally securing a job that paid him £19,000 a year. The total deficiency in Ortega's liquidation was some £1,035,673; of this HMRC was owed some £795,945.

Whose responsibility?

The liquidator brought proceedings against four defendants of which Mr Walkling was the first. The others were Mr Moate, his wife and their American company. Orders were made against all of them on 8 December 2006 but as the case records, the orders against the other three defendants were unenforceable.

The case against Mr Walkling was that he had failed in his duty as a director and allowed the misappropriation of the £443,000. In the High Court the question was whether he had failed in that duty; he was held not to have failed. But the judge went on to answer a second question: faced with these circumstances and acting the way he did, should the judge absolve him from responsibility even if he had failed?

His answer to this question is unequivocal:

'I have not the slightest doubt that I should. The relevant facts are as follows: Mr Moate became involved in a substantial VAT fraud against both Ortega and HMRC involving in the region of £1.3 million which he extracted from them for his own personal benefit and, one assumes, that of his wife Mrs Edwards. Mr Walkling had been duped into his first directorship, and for assuming that burden he was paid not an extra penny; he discovered the fraud and decided he would not stand by but reported it to his solicitor who reported it to the HMRC.

'The latter had the whole case put to them on a plate together with all relevant documentary proof by Mr Walkling; they could have arrived and arrested the villain with minimal additional investigation and, had they done so, probably would have recovered a substantial amount of the money of which they had been defrauded. Had they arrived in good time prior to completion of the sale of Ortega's business, Mr Moate would also have been prevented from misappropriating the sum of £443,000, the subject of this litigation. Instead, he and his wife have been allowed to evade justice and live comfortably probably in another jurisdiction on the proceeds of their crime.

'Mr Walkling got not a penny piece by way of advantage out of the affair and never expected to. Instead he suffered the anguish of waiting in vain, while the problems unfolded and developed, for the arrival of the HMRC who never came; he has also suffered ill health, redundancy and unemployment, much of which might have been avoided, had there been an earlier intervention; he has also, as a result of these proceedings hanging over him, suffered the worry over the last couple of years at the potential prospect of financial ruin.

'If an order were made against him, the most likely financial consequence is that he would enter into retirement with the loss of his home. On the other hand, were an order to be made against him, there would be substantial financial benefit to the creditors — the most substantial of whom, I note, is the self-same HMRC whose default made a highly significant contribution to the adverse consequences set out above.

'I will not make an order which would permit such a grossly unjust result to occur. The application by the liquidator herein must therefore fail.'

Mr Walkling was found not to have breached his fiduciary duty to Ortega because at all times he took advice from a solicitor. Presumably he had to pay for that advice and at the end of the day it appears it was money well spent.

But the fact remains that, as the judge found, HMRC had this case 'handed to them on a plate'. They had all the evidence but, by taking no action, they placed Mr Walkling in an impossible position. In the end he faced possible financial ruin for being honest and trying to do his best.

Who paid?

But out of all of this there is still one nagging question. Who was funding the liquidator? Ortega was in deficit to the tune of some £1 million. HMRC were owed some £800,000. So which of the company's creditors was likely to have the resources to fund a High Court action? Perhaps I am wrong. Perhaps we should now return to the music hall.

Now here's a funny story. Did you hear the one about the Government department that did not have the resources to catch a crook presented on a plate, but did have the resources to fund an action against three people who couldn't be caught and... an honest man?

Sadly, I fail to see the funny side of that one.

Philip Ridgway is a barrister practising from Temple Tax Chambers, email pridgway@templetax.com, www.templetax.com/pridgway, tel 020 7353 7884.

Categories: Comment & Analysis , VAT