Re Courtside Recycling: Fraudulent Trading and Lack of Company Records

Dominik Thiel-Czerwinke and Jamie Taylor v Nicholas Crabb [2024] EWHC 337 (Ch) (Re Courtside Recycling Limited)

ICC Judge Prentis has recently handed down judgment in Re Courtside Recycling Limited in favour of the liquidators pursuing the former director for fraudulent trading and/or breach of duty. The case is interesting for the approach of the Court on the question of application of undeclared cash withdrawn from the company.

Background
The company processed non-ferrous scrap metal that could be used for musical instruments and in the jewellery trade. HMRC wound up the company following an investigation for non-declaration of sales resulting in an underpayment of VAT by £754,995 based on a real turnover of over £5 million (nine times its declared figure). Of the undeclared sales, there included some £2.5 million of cash withdrawals.

The director, Mr Crabb, purported to run the company on both a standard and a special VAT scheme available to certain trades which requires that VAT is not charged separately. However, Mr Crabb produced no evidence of any special scheme being applied and, in any case, it did not explain the discrepancies between the declared and undeclared VAT.

Lack of evidence
On Mr Crabb’s own admission, he had destroyed most of the company documents and failed to maintain any records, unless kept by a third party. The Judge commented [para 110] “Despite being under an obligation as director of Courtside to maintain its records showing its transactions at any one time, those documents have been destroyed, in my view deliberately (to the extent they ever existed)... There is simply no record of the use of any pound of this large cash figure; put another away, there is no record of the use of any of it for the benefit of Courtside. The cash was, of course, always in the hands of Mr Crabb.”

Fraudulent trading
The claim faced by Mr Crabb was for fraudulent trading under section 213 of the Insolvency Act 1986 where the business has been carried on with intent to defraud creditors of the company. ICC Judge Prentis found that Mr Crabb had deliberately concealed two bank accounts from the company’s accountants, employees and HMRC [para 54] “That allowed his extraction from them of millions of pounds in cash, which if it was ever documented is no longer so, as on Mr Crabb's admission the documents have been destroyed deliberately.”

While the Judge conceded that some of the cash withdrawals may have been used for the company, allegedly to make material purchases (despite the Scrap Metal Dealers Act 2013 making that an offence), he added: “But it is impossible to rationalise from that that he used all the cash in that way… Indeed that they were hidden by Mr Crabb indicates they would be more likely to be exploited illegitimately.” [para 118].

Fraudulent trading requires a higher burden on the office holder to demonstrate a fraudulent intention which can be very fact specific. In this case, the finding of deliberate concealment led to the Court finding that all the cash withdrawn from the company had been to defraud HMRC as creditor and ordered Mr Crabb to pay the whole £2.5 million.

This case contrasts with Brown v Bashir [2021] EWHC 337 (Ch), where a restaurant underdeclared its sales and cash was diverted from the company. In that case the Court found against the director for breach of duty but declined to order repayment until an account could be taken to ascertain how much the director personally received due to a lack of records. However, fraudulent trading was not pleaded in that case.

At Manolete we often pursue cases where there are few or no records kept by the director. For breach of duty, the evidential burden falls on the director to prove that any cash paid out was for a legitimate purpose and the Court can draw adverse inferences from a failure to maintain the books and records.

Charlotte May
Associate Director, South West and Wales

Q&A

Tanya Barrett
Associate Director, London

Legal journey in the UK
I qualified as a solicitor in 2010 into what was then Moon Beever’s insolvency practice, specialising in contentious insolvency law mainly acting for Insolvency Practitioners. I was initially supposed to join the property team however my training contract started in September 2008, just when the property market slowed following the market crash. One day I was roped into assisting the insolvency team by faxing multiple banks on the back of a freezing injunction and there began my journey into the world of insolvency.

How long have you been at Manolete?
I joined Manolete in July 2018 working alongside the London team. At the time there were six lawyers in the company, we have tripled in size since! I will be returning to work at the start of April following maternity leave.

Initial impressions?
One aspect that stands out to me is everyone’s willingness to share ideas and support each other, despite any geographic distance. The Manolete Board is also incredibly approachable whether it is offering guidance and technical advice on new case reviews, strategy or settlement decisions.

Beyond the professional realm, I've enjoyed the team's social activities outside of office hours, which are always well-attended, good fun and often involve late nights. It has been great to collaborate with other solicitors who may have once been opponents but are now valued clients and to continue the relationships in the industry that I have built throughout my career as well as develop new ones.

Career highlights?
A few months after joining Manolete, I had the opportunity to attend the London Stock Exchange market open ceremony on the day when the company was listed on the AIM market. It allowed me to gain insight into what really happens on the day a private company becomes publicly listed. As our team stood on a balcony, we witnessed the event unfold on a massive screen amid a backdrop of futuristic music. It was an exciting moment.

I once participated in a mediation which settled by lunchtime. The first offer was made before 10am and counter-offers followed in quick succession. Not all mediations settle so quickly but it is always gratifying when opponents are well advised and decide to contain the risk and put the matter behind them, rather than incur the financial and emotional implications associated with prolonged litigation.

And personal life?
One of my greatest passions is traveling and immersing myself in different cultures, cuisines and landscapes. I try to visit at least one new place each year in between regular visits to Italy to visit my in-laws. I enjoy collecting unique items and crafts and fashion from around the world and incorporating them into my home décor and wardrobe. Some my favourites include a hand-woven basket made from telephone wire made in a village in Durban, South Africa, a pair of wooden carved turtles from Cape Verde and a hand embroidered kaftan dress from the Amalfi coast.
I enjoy live music, especially performed outdoors. There is something special about enjoying a live band under the open sky.
The recent addition to the family, my seven month-old son, has brought a whole new dimension and I am excited to experience these activities through his eyes as he grows.

Stephen Baister writes
On Witness Statements

Among the many egregious matters that have emerged from the inquiry into the conduct of the litigation between the Post Office and a group of its former postmasters, I mention just one that will resonate with civil litigation lawyers everywhere: it is the admission by Stephen Bradshaw, a senior Post Office employee, that he signed a witness statement in 2012 which he had not written and in which he had given evidence to the court of his “absolute confidence” in the Horizon IT system, despite not being “technically minded.” The witness statement had been drafted by lawyers and edited by the Post Office’s head of PR. “In hindsight … there probably should have been another line stating: ‘These are not my words’,” Bradshaw admitted.

A witness statement should always use the witness’s own words. Paragraph 18.1 of Practice Statement 32 - Evidence provides, among other things, that “[A] witness statement must, if practicable, be in the intended witness’s own words and must in any event be drafted in their own language…” That has now been reinforced by Practice Direction 57AC – Trial Witness Statements in the Business and Property Courts, which mandates that the content of any trial witness statement should be in the witness’s own words so far as practicable and no one should suggest to any witness what factual account they should or might wish to give (or not give) in a statement.

Of course, lawyers will assist in deciding what should go in or be left out of a statement and ensure that it complies with the many rules applicable to it; but they must avoid making it their own. A good lawyer will know how to reconcile those two things to achieve the right result. Of course, witnesses themselves need to be satisfied that they believe that what they sign is true: that is what the statement of truth says.

Case study
The Manolete Model in Action

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