April 23rd 2020
A Shisha Bar, a Liquidator, an HMRC Claim and a Video Hearing: Time to call Manolete!
On 8 April 2020, in the matter of Manolete Partners Plc v Ismael Siza, Mr Justice Zacaroli refused the Defendant’s application for (a) permission to appeal and (b) a stay of execution against the previous Order of Deputy Master Nurse. The previous Order refused to set aside a judgment obtained by Manolete holding that the Defendant, the Director of a restaurant business on London’s Edgware Road, had no reasonable prospects of defending the claim.
This has been an ongoing case on claims assigned to Manolete by the liquidator of Palms Palace Limited (the Company) against the former sole Director of the Company, Mr Ismael Siza (the Defendant).
The Company operated as a restaurant and Shisha bar. The Company was investigated in respect of suspected suppression of sales. Its bank accounts record no cash had been banked for a substantial period. The focus of the case was on five grounds on which HMRC’s assessment was made. They were:
I. a very high number of ”no sales” which HMRC concluded was consistent with the execution of sales which were not recorded;
II. an increase in voids or corrections which happened when the point about no sales was raised by HMRC;
III. out of hours trading;
IV. certain sales wrongly zero-rated; and
V. a large number of negative sales.
HMRC ultimately assessed the Company for tax and penalties, being a mixture of corporation tax and VAT in sum of £3,316,318. It also considered that £4,186,848, which it calculated as the suppressed sales, should be allocated to the Directors’ loan account of the Company for the Defendant. The Company went into Creditors’ Voluntary Liquidation on 21 December 2017 and Miles Needham of FRP Advisory was appointed liquidator.
The liquidator identified claims, but there were no monies in the Estate to support legal action. To enable the claims to be brought, the liquidator assigned the claims to Manolete on 5 February 2019. Following pre action correspondence, Manolete issued proceedings on 22 May 2019 and obtained judgment in default of an acknowledgment of service on 17 June 2019. The Defendant applied to set aside the judgment on 30 July 2019 and his application was heard by Deputy Master Nurse on 18 November 2019.
Deputy Master Nurse refused the Defendant’s application to set aside judgment.
Upon appeal, the application was put before Mr Justice Birss on paper. The Defendant issued an application for (a) permission to appeal and (b) a stay of execution of the Order of Deputy Master Nurse. Mr Justice Birss refused the application.
The Defendant issued an application for the same request, to be heard at an oral hearing before a High Court Judge, based on the following grounds:
- The first ground was that the Deputy Master erred in law in concluding, notwithstanding there were factual disputes about the undisclosed sales, the Deputy Master was wrong to conclude the draft defence was fanciful and had no real prospect of success. In particular, he was said to have erred in wrongly requiring sample evidence to be provided, in wrongly failing to consider what evidence might be available at trial and in applying a test which would have required a mini trial, which is the wrong approach. This first ground of appeal related to the first three HMRC grounds.
- The second ground related to a point on the third and fourth HMRC grounds (zero-rated products and negative sales). The Defendant relied on professional advice and the error of the Deputy Master was said to be that he wrongly held he was entitled to conclude, without a full factual investigation, the Defendant could not rely on that advice as a defence to the claim.
- The third ground was that the Deputy Master accordingly erred in concluding the draft Defence of the Defendant had no real prospect of success.
The video hearing took place on 8 April 2020, before Mr Justice Zacaroli, who refused to grant permission to appeal for the following reasons:
1. The first ground had no real prospect of success:
a. The explanations for (a) no sales (b) voids/corrections and (c) out of hours trading had not been given to HMRC at the time of the investigation. Moreover, afterwards and when the Defendant was sole Director, the Company took no steps to appeal the HMRC assessments. It was wrongly suggested during the hearing an appeal was made against this, however, the only appeal was in relation to the Defendant personally and not on behalf of the Company.
b. The HMRC report shows the Company did not appear to bank any cash at all. The explanation given was that staff would be paid in cash but no evidence to corroborate that was provided.
c. Mr Justice Zacaroli agreed the Deputy Master lacked material before him to suggest evidence would be available at trial, noting the Defendant had not produced any sample of evidence from a member of staff or employee. The Defendant contended this is an error of law. However, the law does not require the judge to accept such assertions without considering all the circumstances. The sort of evidence missing is precisely what needed to be available now and not at trial.
2. The Defendant relied on professional advice and the error of the Deputy Master is said to be that he wrongly held that he was entitled to conclude, without a full factual investigation, the Defendant could not rely on that advice as a defence to the claim. Given the circumstances, the Deputy Master was entitled to conclude the Defendant’s defence was fanciful. The ground had no real prospect of success.
3. The third ground was that the Deputy Master accordingly erred in concluding the draft defence of the Defendant had no real prospect of success. The third ground added nothing to the first two.
Since permission was refused, a stay of execution was also refused.
This case illustrates how Manolete support enables claims, which would otherwise have been stifled due to lack of funds, to be pursued expeditiously through the Courts. Typically, claims are against the former Directors whose actions have left the Estate without a fighting fund. Manolete finance redresses the balance and delinquent Directors are brought to account.
Head of Legal