Large award of damages and/or equitable compensation ordered against the perpetrators of a labour supply fraud (Umbrella Care Ltd v Nisa and ors)

Dispute Resolution analysis: A large award of damages and/or equitable compensation has been made against the directors and connected companies of a company which was used to perpetrate a large scale labour supply fraud against HMRC.

Umbrella Care Ltd v Nisa and ors [2022] EWHC 3139 (Ch)

What are the practical implications of this case?

This is an interesting decision, not least given the very large sums ordered to be paid by way of damages and/or equitable compensation in a breach of duty claim. It also offers guidance on the appropriate methodology for the calculation of damages and/or equitable compensation in such claims. The methodology involved holding that the compensation should equal the insolvent company’s liability to HMRC as proved, but that credit should be given for any realisable assets of the company. This is likely to be important in many ongoing cases in which, for example through the use of EBT-based tax schemes, directors are exposing their companies to the risk of substantial claims from HMRC or other similar creditors.

What was the background?

Umbrella Care Limited, a company in liquidation (the “Company”) was alleged by its liquidators to have been used to operate a large labour supply fraud. The fraud involved PAYE and NIC being deducted from the wages of employees and the receipt of VAT from customers but with little or no accounting to HMRC in respect of those taxes. The liquidators caused the Company to issue claims against the husband and wife who acted as directors of the Company (“Mrs Nisa and Mr Raja”), as well as another individual who acted as a director for a short period (“Mr Cervenak”) and then various companies who received funds paid out of the Company which should have been paid to HMRC. The Company was able to trace only some of the payments made pursuant to this alleged fraud. At the hearing of an application for summary judgment, the Court found that Mrs Nisa and Mr Raja were both in breach of their duties as directors of the Company, in causing or permitting the removal of funds from the Company which should have been used to satisfy its liability to HMRC. Judgment was entered for damages and/or equitable compensation against Mrs Nisa and Mr Raja, with the amount of such damages and/or equitable compensation to be assessed. Other companies, known as Dynamic, Universal Real and Universal Total were held liable as knowing recipients, with the amount of equitable compensation payable by those companies to be assessed. Various properties purchased using Company funds which should have been paid to HMRC were held on constructive trust for the benefit of the Company. The Company had previously been placed into provisional liquidation at the petition of HMRC. At that stage, HMRC petitioned in the sum of £5,200,810. After the Company entered liquidation, HMRC lodged an updated proof in the sum of £35,170,471.98, made up of a PAYE debt of £21,812,923.35 and a VAT debt of £13,357,548.63. This judgment followed a hearing aimed at the assessment of the damages and/or equitable compensation ordered at the conclusion of the main hearing in the summary judgment application.

What did the court decide?

In October 2022, Mrs Nisa was made bankrupt. Accordingly, the Company sought and was granted a stay of the action against her pursuant to section 285(1) of the Insolvency Act 1986. Mr Raja was held liable to pay equitable compensation and/or damages in the sum of £21,811,583.93. Mr Cervenak was held liable to pay equitable compensation and/or damages in the sum of £8,900,823.28. Dynamic was held liable to pay equitable compensation in the sum of £17,403,626.74. Universal Real was held liable to pay equitable compensation in the sum of £491,332.88. Universal Total was held liable to pay equitable compensation in the sum of £808,988.35. In respect of Mr Raja, the Court held that the Company was entitled to be paid, by way of equitable compensation and or damages, the amount of the Company’s liability to HMRC. That loss was calculated at £35,170,471.98, being the sum in the proof of debt lodged by HMRC and accepted by the Company. Credit was given, however, for the sum of £13,358,938, acquired by the Company through realisations. The same methodology was applied to the quantum of the claim against Mr Cervenak. The Company incurred liabilities to HMRC in the sum of £9,931,823.28 during the period he was a director. During that same period, an asset worth £1,541,000 was acquired by the Company. Credit was to be given for the value of that asset.

Case details

• Court: High Court of Justice, Business and Property Courts, Insolvency and Companies Court
• Judge: Mr Justice Edwin Johnson
• Date of judgment: 8 December 2022

Article by Phillip Patterson -first published by LexisNexis