Turning A Blind Eye Won’t Wash: Director Disqualified After Carousel Fraud

Company directors must be fit to lead and manage a company, and if their conduct demonstrates they are unfit to do so – they risk being disqualified.  A director in a UK company has been disqualified after being involved in a carousel fraud.

If you need expert advice on directors’ duties and conduct issues, consult the award-winning corporate lawyers at ParrisWhittaker. They have a wealth of experience advising companies and directors in The Bahamas and the surrounding region.

Directors’ duties

Company directors owe several duties under companies law, ranging from the requirement to act in the best interests of shareholders and to exercise due skill, care and diligence.

Where a director breaches their statutory duties, they could risk potential disqualification as a director as well as financial penalty.

What happened in this case?

The UK’s Official Receiver (a court officer responsible for the initial stages of the winding up of a company) asked the court for a disqualification order against Mr Andrew Kelly.  He had been the sole director/shareholder of a company concerned with the wholesale of mobiles phones and cameras.

Under the Company Directors Disqualification Act 1986 in England, a disqualification order can be made where the court is satisfied that the individual is, or has been a director of a company which has at any time become insolvent; and their conduct as a director of the company makes them unfit to be concerned in the management of a company. Similar provisions exist in The Bahamas under the Companies Act 1992.

The company was eventually wound up in 2017, but not before Mr Kelly had been warned of his trading activities. For instance, in January 2003 the UK tax authority, HM Revenue & Customs (HMRC), had warned him of the high level of risks associated with his trading activities.

The Official Receiver relied on a raft of evidence that Mr Kelly’s conduct as director related to the fraudulent evasion of VAT via a ‘missing trader intra-community’ (MTIC) fraud – also known as carousel fraud. The value of the fraud reached almost £1,749,000 (more than $2,258,000).

Taken together, the evidential background facts and circumstances were highly inconsistent with normal commercial trading. The court agreed, disqualifying Mr Kelly for 12 years – a substantial term reflecting (in part) his refusal to accept the error of his ways.

The director’s conduct

The judge made clear that the court was entitled to take into account the fact that a director cannot simply fail to involve themselves in company affairs and/or fail to monitor, supervise or keep informed of its affairs. Mr Kelly was demonstrably aware – or at the very least, turned a blind eye to the fact – that certain transactions were connected with fraudulent tax evasion.

The judge also rejected Mr Kelly’s assertion that he was the target of a vendetta or witch-hunt by HMRC. He knew not only about the MTIC fraud, but also how it operated and its hallmarks, and what HMRC suggested by way of due diligence to minimise the company’s risks of involvement in the fraud.

What does this mean?

This was undoubtedly a clear case of conduct showing the individual was unfit to be concerned in the management of a company. But it’s important to note that even ‘turning a blind eye’ to certain activities could be sufficient ‘conduct’ justifying a disqualification period.

A director concerned about a potential investigation or legal claim; or any company who has concerns about the conduct of a director or other officer should take specialist legal advice as early as possible.  Contact the experienced company and commercial lawyers at ParrisWhittaker on info@parriswhittaker.com or +1.242.352.6112