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In the case of Thiel-Czerwinke & Anor v Crabb (Courtside Recycling Ltd, Re) [2024] EWHC 337 (Ch) the Liquidators showed that a failure to keep company records does not shield a director from the Liquidators’ claims or keep out the ‘prying eyes of outsiders:

The deliberate non-maintenance of records was also an aspect of his fraud. It shields the actual use of the monies from outsiders’ prying eyes.

The Liquidators of Courtside Recycling Limited which went into Compulsory Liquidation obtained a sumptuous sized order of over £2.5million, the lion’s share of which related to fraudulent trading or misfeasance against the sole director and shareholder.

The respondent director, Mr Crabb said the cash withdrawn of £2,547,370 was used to buy stock. The Court was not readily accepting of that position. It seems the record keeping did not assist the Director’s defence to the Liquidators’ claims.

Failure To Keep Company Records Does Not Shield A Director From The Liquidators’ Claims

Destruction Of Records

A key issue for the respondent Nicholas Crabb was a failure to keep proper or sufficient company accounting records to explain the monies he had received. Indeed the judge notably devoted eighteen paragraphs in the judgment to matters of document destruction. Within those paragraphs was reference to statements made by Mr Crabbs about the inadvertent destruction of records. However, the judge concluded destruction was deliberate to “mask its real trading position”. Seemingly this was a position ascertained by the judge in part due to inconsistencies about what happened to company records.

A classic rejection of the position of a Director was in evidence here; who says to the Court: ‘Sorry judge I cannot prove what I am saying because there are no records to refer to’.

That argument faces an uphill struggle because of the director’s duty to keep records. The well known Mumtaz Properties case predictably got a mention in the judgment:

In Re Mumtaz Properties Ltd [2011] EWCA Civ 610, having observed at [14] that “contemporaneous written documentation is of the very greatest importance in assessing credibility… It can also be significant if written documentation is absent”, Arden LJ said this at [17]:

“…it was not open to the respondent to the proceedings in the circumstances of this case to escape liability by asserting that, if the books and papers or other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator”.

 The judge was unimpressed by the records situation:

Mr Crabb plainly knew every detail of his business and of the case, and had thought carefully about his explanations. Seriously put as they were, picked apart and set against such documents as have been retained by others (Mr Crabb accepting that latterly he maintained a policy of destruction of Courtside’s own records), they are simply a Potemkin façade. To take the most prominent example, Mr Crabb says that he had no intention of causing Courtside to file what were false VAT returns: as he had told ESW, it was operating a margin scheme for VAT alongside standard VAT: he had given ESW such figures, which for reasons of which he was unaware they had not included in the returns; but actually he now recognised that the figures he had provided ESW were themselves mis-calculated such that they did not comply with any margin scheme and actually presented a standard-VAT position. Thus there is not a single document which supports operation of any scheme; and documents which go against. The most likely conclusion is therefore that there was no scheme in operation. Further, the account of the scheme does not itself explain why these supplementary figures, scheme or otherwise, were left off each VAT return; nor why Mr Crabb never told ESW about the Lloyds and Barclays bank accounts through which the scheme purportedly operated; indeed, as we shall see, upon direct request of HMRC Mr Crabb still only disclosed the former account.

These facts point inexorably to Mr Crabb having deliberately caused Courtside to carry out its business in a manner intended to defraud HMRC through deliberate mis-declarations of VAT throughout Courtside’s existence; achieved through keeping secret its trading accounts; and permitting his unrestrained and undocumented use of the monies in those accounts. He was also therefore manifestly in breach of his duties under in particular s.171 and s.172.

Facts Unsupported By Contemporary Records

The judge highlighted the issue for the director in presenting facts with inconsistencies and an absence of documents from the time concerned:

This is not a case in which the court can carry out a deep factual analysis based on a plethora of documents, because we have only fragmentary documentary evidence; and that is because on his own admission from about October 2017 Mr Crabb destroyed those documents which still existed following their accidental destruction by others at some date from April 2016 (like many of his others, the date is fluid); and thereafter he ensured that there was maintained no documentary record of Courtside’s trade, beyond those kept by third parties such as its banks. As he told the Official Receiver in interview on 11 April 2019, “I have no way of verifying what the true position of the company is in regards to its income, expenditure, VAT liabilities and day-to-day trading activities as the records have been lost”.

In contrast, it is a case in which a witness, Mr Crabb, has deluged the court with facts unsupported by anyone else, or by documents, through accounts which have been seriously presented but which have in every matter of substance been internally inconsistent and at odds with such documents as there are.

Notably, the judge seems to have taken a dim view of the records situation suggesting this was done deliberately:

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), but in his view deliberately only for those from about April 2016. 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….The deliberate non-maintenance of records was also an aspect of his fraud. It shields the actual use of the monies from outsiders’ prying eyes. Even without the overlay of his fiduciary duties, he cannot pray in aid of his exoneration for these monies his own decision to conceal their use. Mr Crabb’s fraudulent scheme has enabled him to have unhindered use of Courtside’s cash, which in the event has left insufficient funds for payment of the target of the fraud, HMRC. It has been a matter for him what evidence was retained which would explain its use.

Oliver Elliot Comment

Oliver Elliot Comment !

The reason a Director has to keep company records is not only to enable their conduct to be independently investigated when a company goes into liquidation or insolvency but also for their own benefit. 

Whilst an investigation by a Liquidator (or the Insolvency Service such as for director disqualification considerations) might be unwelcome, the director takes a real risk (it is a criminal offence to fail to keep adequate company records) if they destroy records required as a matter of law under Section 386 of the Companies Act 2006. The court may make adverse inferences from the same.

In particular, any director who receives company money has the burden to show that its receipt was proper. Leaving aside the breach of law itself a director is conceivably shooting themselves in the foot if they cause or permit a company to keep inadequate records or if they destroy them. This case highlights the problem.

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Author: Elliot Green
Last Updated: May 20, 2024

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Disclaimer: Failure To Keep Company Records Does Not Shield A Director From The Liquidators’ Claims Or Keep Out ‘Prying Eyes’

This page is not legal advice and is not to be relied upon as such. This article Failure To Keep Company Records Does Not Shield A Director From The Liquidators’ Claims Or Keep Out ‘Prying Eyes’ is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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