Secretary of State for Trade and Industry v Gee & Anor [2007] EWHC 350 (Ch)

[2007] EWHC 350 (Ch)Case No 78 OF 2004
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 27/02/2007
IN THE MATTER OF CITY TRUCK GROUP LIMITED
And
IN THE MATTER OF CITY LOGISTICS LIMITED
And
IN THE MATTER OF CITY TRUCK RENTAL LIMITED
And
IN THE MATTER OF CITY TRUCKS LIMITED
And
IN THE MATTER OF CITY TRUCK GROUP SERVICES LIMITED
AND
IN THE MATTER OF THE COMPANY DIRECTORS DISQUALIFICATION ACT 1986
Before
MR JUSTICE MANN
Between
THE SECRETARY OF STATE FOR TRADE AND INDUSTRYClaimantDAVID NEASHAM GEEDefendantsKEVIN SMEDLEYDefendant
MR. L. ASHWORTH Q.C. and MS. R. JORDAN (instructed by Wragge & Co LLP) for Claimant.The Defendants appeared in person. for in personHearing Hearing dates: 3 rd, 6 th, 7 th, 8 th& 29 th November 2006
Judgment
[1]This is an application under the Company Directors Disqualification Act 1986 to disqualify David Neasham Gee and Kevin Smedley from acting as directors. The application arises out of their directorships of various companies in a group which I shall call the City Truck Group. Those companies are City Truck Group Limited (“Group”), City Logistics Limited (“Logistics”), City Truck Rental Limited (“Rental”), City Trucks Limited (“Trucks”) and City Truck Group Services Limited (“Services”). The activities relied on are a fraud said to have been perpetrated by or with the knowledge of those gentlemen against GE Commercial Finance Ltd (“GE”), a company with which three of the City Group companies have a debt financing arrangement, and a failure to pay Crown debts. Cases against other directors have been dealt with without a trial.

Previous proceedings

[2]Many of the matters raised before me have been litigated already. On 28th September 2005, Tugendhat J found that Mr Gee and Mr Smedley had defrauded GE and awarded GE a sum of over £16m as damages against each of them. The fraud that Tugendhat J found in that case is one of the two principal bases on which disqualification is sought in the proceedings before me. However, nothing that happened in that action gives rise to a finding which binds any party to these proceedings, and on the authorities it is not an abuse of process for Mr Gee and Mr Smedley to defend the present proceedings and, apparently, to run the same defences as they ran there – see Secretary of State for Trade & Industry v Bairstow [2003] 1 BCLC 696. The Secretary of State, who was represented before me by Mr Lance Ashworth Q.C., made it plain that he accepted that he had to prove the case against the directors in the present proceedings by properly adduced evidence, and there were no short cuts arising out of any findings by Tugendhat J.

The scope and conduct of the present proceedings

[3]There are two heads under which the Secretary Of State argues that Mr Smedley and Mr Gee should be disqualified: i) The first is the fraud perpetrated against GE. That case has two elements. The first element is notification by Logistics, Trucks and Rental of false debts under a debt financing arrangement in order to obtain more finance (lending) than they were entitled to. The second is a cross-firing exercise carried out by paying cheques drawn on Services’ bankers into a GE account and taking advantage of the time-lag between the immediate right to withdraw from that account and the date of debiting of Services’ account with its bankers. The main activities around which this part of the application turned took place between February and December 2001. ii) The second limb of the disqualification claim is causing or permitting Logistics, Trucks and Rentals to fail to make VAT returns, and a wilful and deliberate failure to pay PAYE payments, NIC and VAT which was in fact due to the Revenue and Customs & Excise, so as to be able to use the cash (which would otherwise have to be paid to the Crown) to satisfy other liabilities of the Group.[4]The evidence originally filed in support of this application was evidence from an expert accountant (a Mr Kerr), evidence from 2 members of the Insolvency Service’s Disqualification Unit from his officers, a witness statement from an employee of Logistics (Mrs Hogan) and, indirectly, evidence from another employee (Mr Murphy). A certain amount of documentation was available to him. Once the GE trial was over a very large body of additional evidence became available and was deployed. The documentation available in that trial became available in this action. In addition, most of GE’s witnesses in that action agreed to testify in this action. That included evidence from GE’s employees, and from a significant number of employees of the City Trucks Group. These included a Mr Ritchie, who was a defendant in the GE action. All that evidence was introduced by each witness swearing an affidavit which exhibited his or her witness statement from the GE action, and the transcript of his or her oral evidence in that action. Their respective affidavits deposed to the truth of that earlier evidence. They were admitted pursuant to an order of the Registrar. Mr Smedley has complained that what has happened has amounted to “cutting and pasting” from the GE trial. The metaphor may be an adequate one to describe the process, but so far as it imports some sort of pejorative overtones then I reject that suggestion. What the Secretary of State did was something entirely proper.[5]As the trial approached, it seemed that Mr Smedley and Mr Gee were going to mount a full, or reasonably full, defence. They had each filed affidavits. Neither accepts that there was a fraud, and both say that if there was one then they were not responsible for, party to, or cognisant of it. The day before the first day of this hearing I received an email from Mr Gee which expressed his view that he considered himself to be in a dilemma in being faced, as he was, with very substantial proceedings which, as a litigant in person, he felt great difficulty in being able to cope with. That email did not go quite so far as to suggest that he would not turn up at the hearing, but when the matter was opened before me he did not in fact appear. Mr Smedley, who did appear, told me that he had spoken to Mr Gee and his understanding was that Mr Gee would not be attending. As things turned out, Mr Gee did not attend at any part of the main hearing but he did put in written final submissions. Like Mr Smedley, he was provided with a daily transcript of the proceedings.[6]Mr Smedley for his part adopted a slightly greater, but still very limited, role. He attended at the opening of the trial and told me that he denied the case against him, but did not intend either to cross-examine the Secretary of State’s witnesses or to give or call evidence himself. I carefully explained to him the consequences of his adopting that position, but he was adamant that that was the course he wished to adopt. Having made his position clear, he asked if he might withdraw for the rest of the opening, so that he could write a document which would amount to his own opening statement. He duly did so. Mr Ashworth QC for the Secretary of State thereafter opened the case in the absence of either defendant.[7]Faced with that attitude on the part of the defendants, the question became one of whether the Secretary of State had proved his case on evidence which had become unchallenged (though some of the exhibited cross-examination contained challenges). That evidence was by now voluminous. The effect of the introduction of the GE trial material was that I had before me a very large part of the evidence that Tugendhat J had (I am told that I had roughly 80% of GE’s oral evidence), making it even more striking (to me) that I could not rely on anything that he found at his trial (which took many weeks). After the opening by Mr Ashworth, during which he took me through various of the documents which showed how he made his case, at that point on a sampling basis, I then rose and spent several days reading what had by now become uncontested evidence from almost 30 witnesses.The matter then resumed for final speeches on 29th November.[8]Both Mr Smedley and Mr Gee put in written final submissions but did not attend. Mr Smedley’s submissions in particular contained a great deal of material which was not submissions but which was an attempt to make statements of fact which should have been the subject of properly proved evidence. I had previously made it clear to Mr Smedley that I would not allow him to introduce evidential matters via submissions, and I make it clear now that I have not relied on any of Mr Smedley’s (or Mr Gee’s) material which seeks to do that. Since neither of the men sought to put in any formal evidence, the effect of this is that I have had no evidence from them, and in particular no evidential explanation of their part in the facts relevant to this case. I have, however, taken into account those parts of their submissions which are proper submissions.[9]There is one specific point I should mention. Both gentlemen, in their own ways, repeated their points about the difficulties of dealing with a case of this size. They said it was unfair and oppressive for them to be expected to cope with a claim and trial of the evidential size of this one without any assistance from lawyers. They said that they could not afford to employ solicitors and counsel (each has been bankrupted on the GE judgment). I sympathise with the difficulties that they faced, but reject their submissions that this is somehow unfairly oppressive. The evidence was indeed voluminous – 6 large volumes of witness evidence from the GE trial, 19 volumes of chronological bundles and 6 volumes of exhibits to an expert’s report – and the factual detail was not straightforward. However, the Secretary of State is entitled to seek to make his case, and if an alleged fraud is complex then it is inevitable that the evidence may well be complex. It cannot be a bar to the prosecution of a proper case that it is too complex for a layman to cope with without assistance and the defendant cannot afford that assistance. Had Mr Smedley and Mr Gee chosen to exercise their right to participate, various steps could and would have been taken to make sure that they were not unfairly disadvantaged. As it was, they chose not to participate, and must take the consequences of that decision.[10]There was a postscript to the trial hearing. Mr Smedley and Mr Gee were both prosecuted in relation to the fraud matters which are the subject of the application before me and which were before Tugendhat J. The criminal trial was due in the first half of 2007, and was pending during the trial before me. On October 4th 2006 Cooke J had rejected applications by Mr Smedley and Mr Gee for a stay pending the hearing of the criminal prosecution. However, in mid-December 2006 the CPS indicated that it intended to abandon the prosecution, and at a short hearing in the Crown Court it duly did so. Once that had happened Mr Smedley and Mr Gee applied to me to stay this application, or even strike it out, pending an investigation into certain evidential weaknesses which were said (by them) to underlie the abandonment of the prosecution. They both appeared before me on 21st December to argue that case. For the reasons I gave at the time, I refused their applications.

The outline history of the matter

[11]The City Group operated in the field of logistics, that is to say it provided transport, distribution and storage services. Group was the holding company. The directors of Group were Mr Smedley, Mr Gee, Mr Frank Andrew and Mr King (the latter two being non-executive directors). 80% of Group’s shares were owned by Mr Gee (who was managing director) and the remaining 20% were owned by 3i Group plc. Mr Smedley was treated as the group’s financial director. As will appear below his function was to control the finances and administration of the group.[12]The remaining four companies with which I am concerned were its four principal trading subsidiaries. Their functions were, in outline, as follows: i) Logistics provided logistics and distribution services, including primary and multi-user distribution, managed logistics, driving and recruitment resources, worldwide freight management, and warehousing and storage management. It accounted for more than 50% of the group’s annual turnover. Its directors were Mr Gee, Mr Smedley, Mr Richard Griffiths, Mr Noonan, Mr Colin Rust, Mr Tony Ware, Mr Philip Constable and Mr Richard Griffiths. ii) Trucks provided workshop facilities, maintenance and repair of trucks. It provided these facilities to both the group companies and to third parties. Its directors included Mr Smedley and Mr Gee. iii) Rental operated the rental of trucks to customers. Its directors included Mr Smedley and Mr Gee. iv) Services operated as a service company to the rest of the group. It owned the trucks of the group and paid HP payments on the trucks. Apart from about 20 trucks, all other trucks were used by Logistics or Rental in exchange for a weekly charge. Mr Gee and Mr Smedley were among the directors of this company too.[13]In 1999 the City Group entered into a debt financing arrangement with the Royal Bank of Scotland. I was not informed of the full terms of that arrangement, but in essence it was similar in nature to that which was subsequently entered into with GE (see below). At the end of 2000 there were negotiations with GE to switch the finance to it, culminating in agreements between Logistics, Rental and Trucks on the one hand and GE on the other. Mr Smedley played an important part in negotiating these facilities. The essence of the practical and legal arrangements between the parties was as follows: i) GE agreed to advance funds against the trading debts of those three companies. ii) The amount of the facility was £25m. iii) The group company in question would bring debts within the arrangement by notifying GE of the amount of invoices issued from time to time, whereupon the debts notified would be assigned to GE. The companies were to be the undisclosed agents of GE for the purposes of collection. The arrangement and assignment were not in fact notified to the group’s debtors. iv) Notification could be done daily. Most of the notifications seem to have been done over the internet. I have seen a few forms of paper notification. They provided on their face for the aggregate amount of notified debts to be written in, and provided a box for the invoices to be identified by invoice numbers, assuming a consecutively numbered run of invoices. Some of the paper applications I have seen had only the amount filled in; the invoices were not identified. This whole facility operated mainly with there being no particular identification of what invoices were notified on any specified occasion, though on odd occasions lists of invoices were supplied. v) When the debts were notified, they would be credited to an Assets Account kept in the books of GE. The documentation provided for the debt to be assigned to GE at the price equivalent to the amount collected in respect of that debt less certain finance and administration charges. When a debt was collected, the amount thus collected was debited to the Assets Account. This account therefore kept a running tally of the outstanding notified debt and therefore of the amount of outstanding assigned invoices. Records exist of the amounts notified and credited to this account on each occasion of notification vi) The participating companies were entitled to draw up to 85% of the amount for the time being shown in the Assets Account (subject, of course, to the overall limit of £25m). These drawings would be debited to a current account for each company. vii) GE had a right to certain information. At the end of each month it was entitled to receive, and by and large did receive, aged debt summaries showing the state of indebtedness and the age of the debt. Any debt over 90 days would be deemed to be non-collectable and would be taken out of the picture – this amount would be debited from the Assets Account. GE was also entitled to management accounts and also had the right to carry out audits. viii) GE opened accounts with Barclays Bank at 54 Lombard Street in London, one for each of the three companies, into which receipts in respect of notified debts were to be paid. These are called the trust accounts in the narrative below.[14]That is a summary of the arrangements. The formal documents in which they were incorporated were 3 Financing Agreements in identical terms (one for each company) dated 1st February 2001 and signed for the companies by Mr Smedley and Mr Gee. They incorporated a Definitions and Interpretation Module, signed by Mr Smedley and a Mr Jamieson. By and large it is not necessary to set out all the relevant terms verbatim; a summary will sometimes suffice. The terms were as follows: i) On or after the commencement date (1 February 2001) Trucks, Rental and Logistics each agreed to offer to GE all outstanding debts and associated rights, and GE would "only accept such offer by crediting its Notified Value to the Asset Account" (cl. 3.1). ii) Trucks, Rental and Logistics were obliged to include all Notifiable Debts coming into existence after the commencement date on a Notification sent to GE immediately each Contract of Sale (i.e. as between Trucks, Rental and Logistics on the one hand, and their customers on the other hand) had been completely performed (cl. 3.3). iii) From the moment that Trucks, Rental or Logistics received any Remittance (defined as cash, cheques and any other form of payment towards discharge of a debt) they were to hold it absolutely on trust for GE (cl.11.1). iv) “5.1 By the close of business on the next Working Day following receipt of each Notification, we shall credit the Notified Value of all properly Notified Debts included therein to an account kept by us known as the Asset Account. At the same time we shall debit the aggregate Notified Value of Debts to an account in our books known as the "Sales Ledger Control Account". However we may refuse to make such credits or reverse any previous credit if any information required to be sent with your Notification or Offer is found to be unsatisfactory or missing …” v) In a letter of 23 January 2001 to Mr Steel (a director of Services) GE had confirmed that notwithstanding the terms of clause 5.1 quoted above, Notified Debts would usually be applied the same day as Debts Notified on the online “GE Link” system and were available within the hour. vi) “5.4 If you comply with the terms of this Agreement, you may ... take payments from your Current Account even if it then goes into debit. However the debit balance must not exceed the lesser of either your Availability or the Current Account Limit. We will not make Advances in respect of unapproved Debts. Should an Outstanding Debt become an unapproved Debt, your Availability will immediately be affected ...” vii) “5.6 When we receive any Remittance, which we identify as relating to you, we will debit its amount to the Asset Account and credit it to your Current Account with us. We will also credit the same amount to the Sales Ledger Control Account. The balance on the Current Account will reflect the Purchase Price of Debts and any other sums credited by us to you; less5.6.1 payments taken by you; and5.6.2 any other sums, including fees, Discount and charges, debited by us" viii) Provision was made for the notification of credit notes thus:
"14.3 If you receive or are advised of a claim to which the Debtor is entitled you must promptly raise a credit note. Unless we advise you otherwise, you must immediately deliver such credit note to the Debtor and include it on a Notification Schedule delivered to us together with a copy of the credit note. The amount of every credit note will be debited to the Asset Account and credited to the "
Sales Ledger Control Account". ix) The companies warranted that "each Debt refers to an actual and bona fide sale and delivery of Goods to the Debtor or services completely performed for the Debtor" (cl. 13.1.2). x) Trucks, Rental and Logistics were required, amongst other things, to provide GE with various documents detailing the financial position of the business (A16 and cl. 16.1-6). These included: a) audited accounts within 6 months of each year end; b) monthly management accounts (including both profit and loss account and balance sheet) within 21 days of each month end; c) "an annotated open item aged debt analysis (in a form acceptable to [GE]) and a reconciliation, agreed back to the Asset Account statement, within 10 working days of each month end"; d) copies of purchase ledgers within 21 days of each month end. xi) It was provided that "the aged debt analysis ... must be on the basis that from the date of each invoice the amounts due must be separately identified and by reference to each Debtor and must break down each Debtor's balances as follows: (i) Total; (ii) up to 30 days old; (iii) 31-60 days old; (iv) 61-90 days old; (v) over 90 days old; (vi) any unallocated cash" (A17). xii) Notification of debts to GE was carried out using an internet module known as GE Link. Use of GE Link was governed by the terms of an agreement known as the Internet Module. This contained the following provisions: (a) That any Data provided by Trucks, Rental or Logistics which contained a Notification of Debts should be treated as containing a notice to GE from Trucks, Rental or Logistics in the following terms:
"We hereby guarantee that in relation to the debts referred to herein the warranties contained in the Agreement for the purchase of debts have been complied with and in particular the goods and/or services have been delivered and/or fully performed prior to the date hereof" (clause IN6 of the Internet Module). (b) Undertakings by Trucks, Rental and Logistics to GE to: i) "ensure that all Data provided by [Trucks / Rental / Logistics] is correct, complete, duly authorized by [Trucks / Rental / Logistics] and not misleading in any respect"; and ii) "notify us forthwith if you learn or suspect that there has occurred any ... error or fraud in or affecting the provision of any Data ..."
[15]Once the arrangement was put into effect roughly £16m was drawn down. Within 3 months the debt had gone up to £21m. It hit its ceiling of £25m in July/August 2001.[16]The alleged fraudulent activity had various aspects. They were as follows: i) Over-declaring notifications. The regime operated on the basis of trust. No detailed particulars of debts notified seemed to have been insisted on. As a matter of practicality, it was open to the City Group company in question to notify amounts in excess of debts which were actually collectable from time to time, and that is what is said to have happened. The group notified amounts in excess of amounts which were actually invoiced from time to time. This enabled the group to drawn down 85% of an inflated amount. ii) That required some covering up in the records of, or produced by, the company. In order to cover up what was going on and to prevent GE from detecting it, the end of the month aged debt reports, to which GE was entitled, had to be falsified. This is said to have been done, and in the course of doing it the sales ledgers of the three group companies involved (Trucks, Rental and Logistics) had false entries put on them. iii) GE were also entitled to periodic management accounts. It is alleged that in order to cover up the false notifications the management accounts provided to GE were altered so as to inflate sales and turnover. iv) Under the arrangements with GE, sums paid by creditors ought to have been paid into a GE trust account at Barclays. Instead, some such sums were paid into the account of Services at RBS. v) Sums were paid from Services’ account at RBS to the GE trust accounts as if they were sums paid in respect of invoices raised by one of the three borrowing companies and wrongly noted as such on their respective sales ledgers. This is said to have amounted to cross-firing which created headroom against which there could then be further drawings. The arrangements with GE allowed immediate, or almost immediate, drawing against the apparent undrawn balance even though the incoming cheque had not cleared. The borrowing companies took advantage of this by drawing cheques on Services which would then be available for immediate drawdown from the GE current account but would still take 3 or so clearing days before they were debited to Services’ own account (cross-firing). The group thereby acquired 3 free days credit. This activity was ultimately funded by further drawings against the current account, and was covered up by further false entries in the books of the relevant companies. vi) Some customers were “self-billing” customers. They submitted their own invoices. In respect of these customers the group maintained a normal sales ledger, but Logistics also maintained a ledger for each called a “ZZ account”. These were additional sales ledgers. Amounts said to be owed but uninvoiced were debited to these ledgers. Uninvoiced amounts said to be due from these customers were also treated as if invoiced for the purposes of notifying GE and drawing against them. GE had no objection to notifying something which was in effect work in progress (so far as it actually was work in progress), but there would be an objection to notifying the real invoices when they came in if steps were not taken to ensure that there was no double-notification of both the ZZ account amounts and the invoice, because otherwise there would be double counting. This double counting was allowed to occur, because the real invoices were notified without there being any crediting entries in respect of the ZZ account amounts.[17]Mr Smedley and Mr Gee are said to have known of these matters, and indeed in the case of Mr Smedley it is said that he actually gave instructions for the various matters. In particular he is said to have provided the false figures for declarations, the alterations of the ledgers and the cross-firing cheques.[18]The matters came to light in the following circumstances. A Mrs Hogan was a financial controller of Logistics. For some considerable time prior to January 2002 she had been concerned about the state of the company, and in particular what she saw as fictitious debt appearing in the books of the company. She expressed her concerns to Mr Anthony Noonan, her former employer who was a director of Logistics (having sold his business to Logistics). She also expressed concerns about cashflow. Another employee, Mr Gracey, also expressed concerns to Mr Noonan. Mr Noonan himself became concerned and approached an accountant who told him to wait until he knew something more definite. He then approached another accountant acquaintance, (a Mr Cowgill) whom he knew had a connection with GE and met him in December 2001. He said he feared there might be a fraud going on. Mr Cowgill approached GE, and at the end of December GE decided to act. It assembled a team to carry out a proper audit and checks and it arrived at the group’s premises on 2nd January 2002. Over the next few days an audit was carried out. Mr Smedley was suspended during this process. By 10th January it had become apparent there were very serious problems and all five of the above companies were placed into administration. Each is heavily insolvent. There is a consolidated deficiency of over £83m. Excluding contingent liabilities to vehicle finance companies, at the date of the commencement of these proceedings the individual deficiencies as regards creditors of each of the companies was as follows: i) Group – £27,658,000 ii) Logistics - £54,031,000 iii) Trucks - £33,186,000 iv) Services - £27,963,000 v) Rental – £29,135,000

Dramatis personae

[19]The following were the most significant people in the narrative that appears below. Mr David Gee. The first defendant. He established City Truck Group in 1979. He is described in the accounts as Group Executive Chairman and he was the Managing Director of all of the City Companies. He had an 80% shareholding in Group. He was based in Northampton. Kevin Smedley. The second defendant. Kevin Smedley is described in the accounts as Group Finance Director. He is a Chartered Accountant and was, from 1991, the finance director and company secretary of each City Truck Group company. In a questionnaire he described himself as the “Accountant” and stated that his duties were the management of the financial and administrative functions of the group. He was based in Newport Pagnell. Kevin Ritchie. Hejoined City Group in 1989 and worked within City Group until January 2002. He describes himself in his witness statement as assistant to Mr Smedley. In cross-examination in the GE action, he approved a copy of his CV showing his progression from Financial Controller to Divisional Controller to Group Accountant. He was not a qualified accountant. Whilst his precise responsibilities were unclear at the time to other members of staff, it is clear that he was influential in financial matters across the group. It was he who had the responsibility for making notifications to GE under the facility. He was based in Newport Pagnell. Mr Andrew. He was a non-executive director of Group and described himself as chairman of Trucks. Paul Murphy. He was employed by Services from 1991 to January 2002. He was made an Accounts Controller to Services in 1998, reporting thereafter, firstly, to Angela Bramham and, later, to Mr Ritchie. He was based in Newport Pagnell. Kim Hogan. She is a Chartered Certified Accountant. She worked for Noonan Warehousing and Freight Services Limited from 1987 to 1996, when it was sold to Group, becoming City Freight, a division of Logistics. She was employed by Logistics, firstly, until around 1999, in charge of City Freight's accounts and then, until August 2002, as Financial Controller (of Logistics). She was based in Birch (which is near Manchester). Norman Gracey. He is a Chartered Accountant. He began to work for Trucks in September 1995 as a Financial Controller. In or around 1998 or 1999, he was appointed the Management Accountant for Logistics and continued in that role until April 2002. He was based in Northampton. Julie Cartwright. She joined Trucks as a Credit Control Manager in November 2000 and continued in that role until February 2002. From July 2001, Ms Cartwright directed Credit Control for the whole of City Group out of Newport Pagnell, under Mr Steel's overall control. John Steel. He was a director of Services with primary responsibility for arranging truck financing. From October 2001, he was based in Newport Pagnell, assuming responsibility for Ms Cartwright's Credit Control team. Anthony Noonan. He set up Noonan Ltd in 1983, which was sold in 1996 to Group. He continued to operate his business, under the name City Freight, within Logistics. He became a director of Logistics shortly after the sale of Noonan Warehousing. He was based in Birch. The fraud – evidence and detail[20]The Secretary of State’s case in relation to much of this alleged fraud has to be pieced together from a number of sources. In particular, the case for the declaration of fictitious invoices, or of amounts not justified by true invoices and true debts, is not proved by showing a large number of declarations of purported invoices which can be shown to be non-genuine. As I have pointed out, the way in which the system was operated did not require that clear particulars of invoices be provided for each notification. The notifications were by and large of figures, not of identified invoices, and many paper notifications are missing anyway, so there is no body of information from the actual declarations which can be checked for accuracy or falsity. While there are some instances of what is said to be a false notification of particularised invoices, the main part of the case on this point starts from an apparent excess of the amount of notifications over what appear on the companies’ ledgers to be the correct amounts, which is then amplified by a careful study of how the notifications took place and how the ledgers were adjusted to bring them into line with notifications. This evidence is spread out throughout the documents and across many deponents. From this evidence I am invited to find that there were excessive notifications, and that Mr Smedley and Mr Gee were parties to this, or knew of it. I say at this stage that I accept the evidence referred to below save where the contrary appears.[21]A convenient starting point for considering the evidence is a report of Mr Robert Kerr, a partner in Grant Thornton. He produced a report shortly before these proceedings were initiated. He did so by analysing the records and information then available. That did not include a lot of the information on the GE side of the transaction. He found the following: i) He started with the results of a debtor circularisation carried out by experts who had investigated on behalf of GE. Debtors had been asked whether their own records coincided with records of invoices and credits on the sales ledgers of Logistics. He took two of those debtors (Bulmers and Cheshire Recycling) and considered the transactions that those two companies did not accept as being transactions that they recognised as having taken place between them and Logistics. Those transactions, as they appeared on Logistics’ sales ledger, had common characteristics – invoices were larger than the accepted invoices, the transactions had different references, they had a different numerical sequence from the accepted transactions, many were identical in value, and they cleared by credit notes shortly after the invoice date. Within them there was also was a series of large invoices or large ADRs (debit entries on the ledger) ostensibly cleared by cash at the same time as the invoice/ADR. These patterns were unusual and did not seem to be attributable to mistaken entries. ii) The cash purportedly received from these customers had apparently been received from Services, and not from the customers. There seemed to be no good reason for that. No VAT was recorded as having been received in respect of this cash. iii) He noted transactions on other customers’ ledgers which demonstrated a similar pattern. iv) He carried out his own circularisation of Logistics’ debtors to get confirmation, or non-confirmation, of entries on their ledgers. He received replies from 10 of them. Their replies revealed a large number of transactions appearing on the Logistics sales ledger but which were unknown to the customers. They revealed a similar pattern to the non-recognised transactions on the Bulmers and Cheshire Recycling ledgers. They also revealed other patterns. These included common prefixes for the disputed invoices and various credit notes – WH, WHO, CLPM, PMCL. v) There was the previously noted pattern of cash being apparently cleared by invoices or ADRs (bearing the CLPM or PMCL prefix) which did not include VAT. The cash apparently emanated from Services. There is no apparent reason why those customers should not have paid VAT. He concluded that that process was part of a cross-firing scheme. vi) He concluded that the invoices falling within this pattern were fictitious. vii) Having established what he considered to be a pattern of fictitious invoices across 12 customers, he used that pattern (prefixes and the absence of VAT) to analyse the rest of the sales ledger of Logistics (limiting his survey to invoices over £100,000 in the case of no-VAT transactions). That revealed a large number of entries on the ledgers falling within that pattern. viii) It also revealed some postings of “fictitious” invoices to a balance sheet account (BCTGS001) which would have the effect of their not showing up as turnover in the company’s financial statements. This he regarded as highly suspicious. ix) A comparison of the amount of invoices less credit notes appearing on the ledgers with the amounts notified to GE across the period 1st February 2001 to 31st December 2001 reveals a discrepancy of almost £7m (the notifications exceeding the recorded net sales by that amount). He concludes that that was a prima facie indication “that the fictitious invoices were discounted to GE”. That conclusion is said to be reinforced by a practice of paying Services’ cheques into the GE trust accounts – there was no reason why that should have taken place if the matching invoice had not been notified and discounted. x) He found a spreadsheet which appeared to be a list of invoices raised in September 2001 and, apart from 2 entries, all the amounts could be matched to declarations recorded in GE’s asset account. None of them were posted to the relevant customer accounts in Logistics’ sales ledger, from which he concludes that the invoices listed in the spreadsheet were notified but non-genuine. xi) From these matters, and others which I have not set out above, he concludes that Logistics defrauded GE by posting fictitious invoices to its sales ledger and then discounting them to GE. The fraud was hidden by the generation of spurious aged debt listings. He calculates the amount of fraudulent notifications by Logistics as being £96.7m, but in opening the case Mr Ashworth pointed out that that contained an element of double counting, and the figure properly calculated was £71.6m. xii) A similar exercise carried on Rental’s ledgers and records revealed a similar pattern of no-VAT invoices or ADRs and cash credits on 2 ledgers, from which he concludes that the invoices or ADRs were similarly fictitious. xiii) The total of invoices and credit notes recorded in GE’s asset account as having been notified by Rental was £18.2m. The net sales recorded in Rental’s ledgers was £15.7m. He considers that this might reflect notification of matters not reflected in the ledger. In the case of Rental some copy notifications were available, and some of them had lists of invoices (but not copy invoices) physically annexed. Several had discrepancies. One notification notified £312,151.31, whereas the attached list totalled £12,151.31; another notified £263,081.33, whereas the listing totalled £163,081.33; a third notified £360,697.76 while the listing totalled £10,697.76; and a fourth listing is available totalling £127,737.75, which corresponds to an amount shown on the Assets account as having been notified, but the listed invoices do not seem to appear anywhere in the ledgers. He says these discrepancies might account for some of the differences between the overall amount notified and the amount appearing on the books, and he suggests that the first three items represent a deliberate inflation of amounts notified. xiv) He has found evidence of falsified aged debt reports on Rental. xv) He concludes that something like £5.8m of fictitious transactions were entered and notified for Rental. Turnover in management accounts could have been overstated by as much as £2.6m. xvi) His investigations of Trucks revealed 5 no-VAT invoices and ADRs over £100,000, all input by Mr Murphy or Mr Ritchie. 3 are traceable to payments made by Services to Trucks. One was posted to the account of an entity called Lidl, who have said that they did not have an account with Trucks. His investigations also revealed the posting of some invoices to a balance sheet account which would not be reflected in turnover, which he regards as suspicious. xvii) Invoices which bore some of the hallmarks of the fictitious invoices of Logistics were found in MAN’s and Renault’s sales registers of Trucks. These totalled £11.1m. Again, some of these were posted to a balance sheet account in the nominal ledger, which is irregular and suspicious. xviii) As a result he regarded Trucks turnover as being potentially overstated by £7.7m. xix) He has found approximately £6m worth of notifications by Trucks to GE that do not seem to be reflected in Trucks’ sales ledger. xx) In Services, he found £71.2m of payments made by Services to Logistics, Trucks and Rental in the year ended 31st December 2001 against sales invoices that those companies had posted to the sales ledger accounts of independent third parties (essentially customers). These payments were at a relatively low level (in terms of numbers) until July, when they took off steeply. He has seen 99 of the cheques which gave rise to this; they were all signed by either Mr Ritchie or Mr Smedley. There is no apparent good reason why Services, which was the company which supplied services to the other companies in the group, should be paying money to those companies. Services’ cash received journal showed that most of the cash it received during this period came from Rental, which was the company through which the GE drawdowns were channelled.[22]It will be noted that one of the conclusions drawn by Mr Kerr at the relatively early stage at which he was preparing his report was that invoices were entered on the sales ledgers and then notified. He tends to suggest that that was the way round in which things happened. That is no longer the Secretary of State’s case on this point, at least for the period until July or August 2001. His case is now that, during that earlier period, there were notifications of amounts not necessarily related to specific entries on the ledgers. The entries on the ledgers came later, to bring them into line with notifications, rather than the other way round. This emerges from the other evidence that I have described in general terms above. I can now turn to its content.

Invoicing, notification and aged debt reports

[23]Mrs Hogan gave evidence as to how the invoicing and recording systems worked within Logistics. Each business unit around the country raised invoices, and the invoices had a reference which incorporated a code identifying which unit or depot had raised it. When raised locally, most of the invoices were then automatically posted to the sales ledger. However, some invoices required manual entry, and until July 2001 these were done by her team at Birch. They included invoices for warehousing charges, and those for managed contracts. Managed contracts were arrangements made with certain big customers under which Logistics undertook the conduct and management of a large part of the logistics operation of those big customers, sometimes even to the extent of having a manager full time on the customer’s site. Those customers would have a fixed weekly or monthly charge, and it was Mr Gracey’s job to raise invoices for that charge. In some cases there would be adjustments to reflect actual work done under those contracts, and where that was the case a further invoice or credit note was raised to reflect that adjustment. These invoices on the managed contracts would be entered by the Birch team on the basis of information supplied by Mr Gracey.[24]There was also manual entry of invoices relating to the self-billing customers. I have described these customers above. The actual invoices would be posted by the Birch team when provided by the customers themselves. The ostensible work in progress would be posted to the ZZ accounts in the sales ledger by staff at Milton Keynes on the instruction first of Angela Bramham, and then of Mr Ritchie. When the invoice was submitted by the customer that would be posted to the sales ledger of the customer. A corresponding amount ought to have been credited out of the ZZ account by Angela Bramham or Kevin Ritchie; those two (but ultimately mainly Mr Ritchie) were in charge of the ZZ accounts.[25]During 2000 Mrs Hogan had concerns about the genuineness of a number of entries on the sales ledger of Logistics. From time to time she identified entries which did not seem to her to reflect trade realities. It is unnecessary to go into the detail of those. So far as the GE period is concerned Mrs Hogan noticed what she considered to be an increasing number of irregular transactions from a couple of months after the facility started. What she noticed was invoices with the reference WH, WHO, PMCL and CLPM, referred to above, and similar invoices with a KR designation. They were not posted by her team. Looking at the records as at the date of the administration, she has calculated that between February and August 2001 the number of invoices with a WH reference and which were not subject to credit notes was almost £9.5m.[26]Mr Ritchie described how this came about. He describes how he worked his way up from being a school leaver employed by the group to becoming in essence Mr Smedley’s assistant. He had a number of functions, including signing cheques on Mr Smedley’s instructions, and also including the notification of debt to RBS under its facility and then the notification to GE under the later one. By the summer of 2001 he spent a large part of his time inputting data, including the adding of what he called “work in progress provisions” on to the ledger and making entries on to the ZZ accounts. He produced month end reconciliations of aged debtors. He discussed the information with Mr Smedley who told him what to put on to the relevant ledgers in respect of alleged work in progress.[27]Mr Ritchie did most of the notifications to GE. He did so principally over the internet. He had the computer with the relevant security software on it, though others had access to his password and when he was away Mr Murphy might do the notifications (according to Mr Murphy). He said he kept a record of what it was he notified, but it became apparent that at the date of the administration the records were not complete. His evidence was that he would notify sums after inquiring as to what invoices had been issued, but he also notified other sums which Mr Smedley told him to notify. There is a suggestion in an e-mail from him to Mr Smedley dated 6th July that he was declaring invoices by reference to what was needed “to clear the bank” rather than by reference to real invoices, though he denied that intention in his cross-examination.[28]Mr Ritchie’s evidence confirmed what happened at a month’s end. An aged debt report had to be prepared for submission to GE. Mr Ritchie’s evidence was that when an aged debt report was to be prepared Mr Smedley would give him a list of sums which had to be added to the figures of various identified customers shown in the sales ledgers, with the effect that the sums apparently due from the customers would apparently be greater when an aged debt report was run. In cross-examination in the previous trial Mr Ritchie was taken through various examples of how the exercise worked, and he confirmed its effect. His evidence in chief confirmed that Mr Smedley gave him the additional figures, and he thought that they were work in progress (WIP); in cross-examination he confirmed that he understood he was posting “provisions” for that purpose. The instructions for this exercise always came from Mr Smedley and from no-one else.[29]By way of example, on 18th June 2001 he was told by Mr Smedley to add the sum of £104,575 to the balances apparently due from Black and Decker for the purposes of creating an aged debt report for GE for the previous month (ended 31st May). He did so (or rather, on this occasion he procured that Mr Murphy did so). The ledgers reflect the sum being added on that date. We have the aged debt report which was run by Mrs Hogan before that event. It did not, of course, reflect that sum. There is an aged debt report which was run immediately after it, and that report reflects it. That second aged debt report having been run, and having been sent to GE on 19th June, Mr Ritchie entered a credit note in the sales ledger in a matching sum restoring the sales ledger balance to its proper level. Similar entries, with the same effect, can be seen for other customers in the sales ledger, all the entries having been made on the same two dates as part of the same process, and all of which are reflected in the aged debt report sent to GE. One of the additions relates to a company known as HDL which was not a customer of Logistics. All those sums were required to be added by Mr Smedley. The additional sums added to individual accounts in many cases exceed £100,000 per account and in some cases it exceeded £200,000. The overall difference is very striking. Mrs Hogan’s total (adjusted to make a relevant comparison) was £13.1m. Mr Ritchie’s total was £18.03m. In other words, sums were added to the figures for debts ostensibly due which inflated the debt by over £5m. The invoices and credit notes thus introduced were those bearing WH or LWH prefixes (two of the prefixes noted by Mr Kerr). Mr Ritchie said that he understood that these sums were put on as “provisions” for work in progress. He kept a record on a spreadsheet of what he had thus put on and then taken off.[30]This pattern of debiting and then crediting for the purpose of aged debt reports was repeated for several months and, according to the evidence of Mr Kerr (which I accept) amounted in aggregate to some £31m. This is not the amount of the false notification, but it demonstrates the level of spurious activity going on in the books of the company. The false notifications covered by these entries was probably in the region of £6.67m, according to figures extracted by Mr Stern (who gave expert evidence in the GE trial; a limited part of his figures were relied on by the Secretary of State in these proceedings). In evidence Mr Ritchie said that he did not know there was anything untoward about this, and was basically obeying the instructions of his superior. However, Mr McMillan’s evidence was that when the matter was being investigated in January 2002 Mr Ritchie admitted that he had known that what he was doing was wrong, and that he was making entries which he knew to be fictitious. The aged debt report thus generated was produced to GE. Its effect, together with an accompanying reconciliation, was to bring debts shown on the aged debt report into line with the sums that had been notified to GE under the financing arrangements and against which drawdown had taken place.[31]A similar process of addition and removal was done on 25th June, when GE attempted its third audit. When the auditors arrived they were kept waiting for 2 hours. During this time Mr Ritchie and Mr Murphy were adding back on to the sales ledger files those entries that had been added and reversed a few days before for the aged debt summary exercise. This was done on the instructions of Mr Smedley, and Mr Ritchie admitted that he did not tell the auditors what he was doing. An internal report of the auditors at the time recorded that they were told it was not possible to run an aged debt report for a couple of hours because other users had to be locked out first and it took time for that to be done. Mr Ritchie denied telling them that. The same thing happened at the next audit on 28th and 29th August – again acting on Mr Smedley’s instructions, there was a delay while Mr Ritchie (and perhaps Mr Murphy, but that does not matter) put the “provisions” back on the ledger prior to printing another aged debt report. According to Mr Ritchie:
“Kevin [Smedley] would not let us give the GE auditors a sales ledger print without the provisions being on them.”
On each occasion, after the audit, the added invoices were reversed by credit notes.[32]So far as reporting debts to GE was concerned, Mr Murphy confirmed that he notified on occasions when Mr Ritchie was away. He gave similar evidence about the entry and removal of items in the sales ledger. He describes that it was the case that at the end of each month it was necessary to close down the system so that month end sales figures could be generated before it was re-opened to allow the next month’s entries to be made. Normally this happened shortly after the month end. He then described how it was that in May 2001 Mr Ritchie, as his superior, gave him a sheet of paper with some additional debts to be added to the sales ledger. In his cross-examination he said that on this occasion he was told by Mr Ritchie that the invoice system had failed and these were invoices that were due and had to be put through and raised manually. On subsequent occasions he presumed it was the same problem. He thought nothing of this although it would usually have been for lowlier members of staff to do such things. Within a day or so Mr Ritchie came to his office and told him that he had now closed the previous month and that the entries that he had just entered should be credited out. He did not dispute that he did this in ensuing months.[33]Mr Kerr’s investigations showed that the entries that he had identified as questionable had been put on by Mr Ritchie or Mr Murphy. He observed that it was odd for such senior personnel to be inputting genuine invoices and credit notes on to the sales ledger. In a supplemental report he also observes that, while it would be common for work in progress to be reflected as an accrual in the books of he company, it would normally be done as a journal entry, and not on the sales ledgers.[34]Mrs Hogan had noticed the entries put on to the sales ledger by Mr Ritchie and Mr Murphy. In June 2001 she received an e-mail request from Mr Ritchie to run her month end reports (for May) but not to close the ledger because he had to make some adjustments before it was closed. She regarded this as highly irregular. This was against a background, of which she gave evidence, of events in 2000 which had led her to believe that fictitious invoices were being put on to the ledgers. She was not familiar with the WH coding of invoices, and when she queried them she was told by another employee (Tamlyn Roberts) that they would be taken off soon.[35]Mr Ritchie said that GE was never told that this exercise of adding in debts (and then taking them back out again) was taking place.[36]Other than the statement that Mr Ritchie was told that the additions he made were work in progress, there is no evidence at all which substantiates that the figures added by him were for that purpose. Since Mr Smedley has chosen not to give evidence, I have no account from him of the purpose of this ostensibly odd exercise. No-one ever explained to Mrs Hogan or to Mr Gracey why it was being done. There is no evidence before me as to how this WIP (if that is what it was) was calculated. No good reason has been stated as to why Mr Smedley would go about doing it in the way he did – always asking the same relatively senior person or persons to do the exercise when it could equally easily be done by other staff. And it is apparent from a study of the other unimpeachable transactions on the sales ledger that the supposed WIP provision does not bear any particularly logical relationship to those unimpeachable transactions. Prima facie the amounts added tend to be much greater than one would expect as work in progress on those accounts. Furthermore, the sums added immediately before the audits were the same as the previous month end sums. If they had been genuine work in progress provisions then one would have expected some difference in the figures to reflect actual collections or invoices in the meanwhile. On some of the ledgers the amount added is done by way of 4 or so equal amounts, which are then credited in one bulk amount. Mr Ritchie suggests that this was because the WIP was intended to be reflect weekly amounts, but that is pointless since they were all given the same month end transaction date. And if they really were amounts which reflected weekly accruals, then one would have expected a different amount to be put back on before the audit to reflect invoicing or collections in the meanwhile, as I have already suggested; yet no such difference appears. No explanation has been given as to why the sums were added into the ledgers in this way, so that they could appear in the body of an aged debt report, as opposed to GE being provided with the figures from the ledgers as they stood with any WIP being shown on a reconciliation statement. Nor does it explain why there are ledger entries for two companies with which Logistics did not trade – Rexam Envelopes, which exists but which did not trade with Logistics, and HDL, which did not exist as a company at this time.[37]I have mentioned the fact that no explanation was given to Mr Gracey or Mrs Hogan as to what these figures were supposed to be for. They frequently complained in emails about these matters, and plainly were concerned about them. They even went so far as to identify them to Mr Ritchie as non-bona fide invoices. There was a particularly striking incident on 26th June 2001, when Mr Ritchie and Mr Murphy hastily put “invoices” back on the system for the purposes of the audit, and when Tamlyn Roberts found them asked Mr Gracey what they were. Mr Gracey did not know and asked Mr Ritchie, and Mr Ritchie did not tell him but said that they would be off the ledgers again “in a minute”. Neither Mr Smedley nor Mr Ritchie explained what they were for and how they were supposed to operate. This was despite the fact that on occasions the figures caused unexpected difficulty. For the period during which the figures were on the ledger there was a risk that the overall indebtedness figure which they created would be acted upon as genuine invoiced figures. On one occasion in February 2001, when an apparently similar practice was being operated, Mr Gracey complained that Mr Ritchie had used one of the former’s invoice numbers on a transaction which surfaced on a statement seen by the customer (Douwe Egbert). The customer had asked for a copy of the invoice (which was not one which the customer was intended to have). This led to unintended difficulties on that occasion. There was also a risk that the added entries would create temporary balances which would, unjustifiably, trigger a credit control limit with the risk that a customer would unintentionally, and unjustifiably, be put on stop. It is likely that this happened in relation to a customer called LDH, and another called Silver Spoon. In December 2001 the latter company had, ostensibly, exceeded its credit limits, and Mr Gracey attributed this to PMCL invoices (ie invoices which did not seem to reflect genuine transactions). There were 2 entries for ostensible invoices totalling over £472,000, a sum which was enormously out of line with its normal invoice levels of £15-30,000 (which, it can be observed, makes it highly unlikely that these amounts could be genuine work in progress provisions). Julie Cartwright, who worked in credit control, saw these entries and thought they were suspicious. She was never given an explanation for them other than that they related to inter-company transfers, work in progress or adjustments. She got the impression that she was being fobbed off. The overall impression from the evidence is that the reasons for the exercise of putting invoices on the ledger and then crediting them out almost immediately thereafter were never explained to other members of staff, with the effect that an air of suspicion was created. It was, I find, an exercise which those conducting it were not willing to explain to other members of staff.[38]The exercise of creating fictitious credits and debits in this way continued throughout 2001. Until about July it was done by manipulating the main sales ledgers. However, from about August or September onwards it was done on a backup copy. The main ledgers were mirrored for backup purposes in group premises in Bletchley. Mr Ritchie explained that because the exercise of putting on his “provisions” and taking them off again caused disruption because others had to be excluded from the system while that was going on, he started to use a copy of the ledgers derived from the backup server at Bletchley for this purpose. By this time one can see, and infer, a different purpose for these entries. By this time the group was at its maximum drawing limit - £25m. If there had previously been notification of excessive amounts in order to improve drawdown then there was not so much point now. There was therefore less need to bring the aged debt into line with the level of drawdown. However, the Secretary of State says that another factor now came into play. Some of the fictitious debts which had hitherto appeared on the aged debt analyses as submitted to GE were coming up to being 90 days old – they had not been shown as having been repaid (and, if they were fictitious debts, they cannot have actually been repaid). Once a debt became over 90 days old it fell to be deducted from the notified amounts, thus reducing the amounts against which drawings could be made under the GE arrangement. Mr Ashworth submitted that from September onwards the aged debt analyses were contrived so that, first, they continued to show a level of aged debt which reflected over-notification in the past, but in the breakdown as between periods the amount of current month debts was increased and the amount of old debt was correspondingly decreased. He demonstrated by sampling how this was done on a number of accounts by comparing the aged debt analysis submitted to GE in October with a copy of an aged debt analysis which corresponded to the sales ledgers. That comparison showed marked decreases in some old debts and corresponding increases in current debts. That is not reflected by entries on the sales ledgers, because (said Mr Ashworth) the relevant entries made on versions of the ledger in order to produce an aged debt report fit for production to GE were made on the copy at Bletchley, and not on the main sales ledger. He also demonstrated that the “moved” amounts corresponded to the amounts of certain debts which are said to be the previous fictitious entries, or some of them. In relation to November 2001 Mr Ashworth demonstrated that the sales ledger balances for a number of customers as appearing on the sales ledger did not correspond (by a very large margin) with the figures shown in the aged debt report submitted to GE. The latter were greater than the former. In each case the difference is the amount of the fictitious debts which it is said were notified. All this is said to be part of the cover-up of the earlier excessive notifications.[39]While it is not generally possible to identify specific fictitious notifications made on specific occasions, there is some evidence which has this quality: i) I have referred above to a spreadsheet found by Mr Kerr which lists apparent specific notifications, which could not be traced through to any sales ledger entries. There are 43 invoices listed on that spreadsheet in various “batches”. Mr Kerr’s evidence is that the amounts of all but two of the batches (which actually means all but two of the listed invoices) can be matched with the amounts of notifications. The apparent invoices on this spreadsheet all have account numbers and dates allocated to them, together with amounts and dates. The notified invoices total £2,331.280. This would appear to be part of the carousel phase of Mr Smedley’s activities (see below). ii) On 2nd July 2001 Mr Ritchie sent a fax to Pauline Elliott of GE apparently providing details of certain invoices. It is likely that this was sent pursuant to a request for information about them. The fax reads:
“Please find attached coy invoices for Batchas [sic] per amount withheld on Friday”
. What was attached was not in fact copy invoices but was a list entitled “City Logistics Current Batch Report” listing 7 invoices, 5 from identifiable customers of Logistics, one from a customer called “DHL” (which was never an actual customer) and one from someone identified as “self-bill”. The invoices are numbered in a sequence 0207KR001 to 0207KR007. They total £1.704m. It is alleged that those attributed to the five identifiable customers are not to be found in their ledgers, there is no customer called DHL and the self-bill customer is not identified. This is said to amount to positive evidence of identifiable mis-notifications. The evidence before me supports this in part. Some of these invoices were put to Mr Ritchie in his cross-examination in the GE proceedings. He accepted that 3 of the invoices attributed to customers could not be found in those customers’ ledgers. He suggested that DHL was a mistaken reference to an actual customer called LDH, which was an actual customer. He suggested that the self-bill customer might be Cadburys but could not explain why it was not identified as such if it really were intended to be Cadburys. Counsel in those proceedings stated that Mr Stern (GE’s expert) had not been able to trace any of these payments into the ledgers but that evidence is not formally before me. However, based on the evidence that is, I can and do find that at least three of those entries (totalling almost £963,000) reflected invoices that did not exist. It is also apparent from a proper reading of Mr Ritchie’s evidence that it was Mr Smedley who required these figures to be submitted, and that he provided them for Mr Ritchie.[40]I accept the unchallenged evidence of the Secretary of State referred to above and in the other material that I have read. Based on it I find: i) From February 2001 to December 2001 Mr Ritchie frequently, and Mr Murphy on occasions, made notifications to GE of amounts that were not reflected in any invoice, or legitimate invoice, or even legitimate debt, contrary to the terms of the agreement. They did so on the basis of figures given to them by Mr Smedley, and essentially on the instructions of Mr Smedley. Mr Smedley knew, intended and procured that excessive amounts be notified. He did so in order to increase the amount against which GE could draw beyond that which it was actually entitled to draw. ii) This was covered up by falsifying aged debt reports provided to GE. These reports were manufactured by adding fictitious invoices into the sales ledgers relating to various customers, and then crediting out those entries once the aged debt reports had been run. Again, this was procured by Mr Smedley, and done to mislead GE into believing that the notifications had been justified and proper, and latterly to bring about a “renewal” of aging debts. iii) The ledgers were falsified for the purposes of producing aged debt reports for audits, again at the behest of Mr Smedley. iv) Mr Smedley organised and orchestrated the system for adding invoices to the ledgers and then crediting them out, in order to facilitate the exercise at (ii) and (iii). v) The detailed evidence recited above relates in the main to Logistics. However, on a lesser financial scale similar activities went on in relation to Trucks and Rental. There was notification of non-existent debts in those companies, and that notification was covered up by subsequent entries in sales ledgers and adjustments of the ledgers for the purposes of audits, all at the behest of Mr Smedley.

The ZZ accounts

[41]The nature of the ZZ accounts is set out above. The origin of the information which led to these accounts lay in software called TDP. This software was run locally at the group’s various centres and recorded work done on each contract. In relation to normal invoices, this information was fed through automatically to the centre dealing with invoices and invoices were drawn up and entered with a large degree of automation. However, the self-billing customers were dealt with differently. These customers created their own invoices themselves, and then paid them. It was these invoices that were entered on the Access sales ledgers for the customers, first at Birch and then, from July 2001, at Newport Pagnell. Mr Ritchie’s evidence was that these invoices were notified to GE under the financing arrangement. There is nothing wrong with that by itself.[42]However, there were additional notifications in respect of these customers. In addition to the invoices provided by the customers, Mr Ritchie notified amounts in respect of work in progress in respect of these customers. According to him, he notified them “in small bits during the month”. At least by the time with which these proceedings are concerned, the amounts thus notified were recorded in separate sales ledger accounts for the relevant self-bill customers, called the ZZ accounts (so called because the account numbers bore the prefix “ZZ”). They were viewed, at least by some, as an accrual for work in progress, although Mr Gracey did not approve of doing it this way. Ms Cartwright in credit control said that she was told that the accounts should not be chased and that they were purely for internal work in progress purposes. It is not clear how Mr Ritchie calculated these notifications, but that does not matter. Amounts were put on the ZZ account sales ledger periodically to reflect the sums notified. The amounts were not put on as they were notified – they seem to have appeared some time later, as large sums, probably monthly, as part of month end reconciliations. Mr Ritchie was responsible for maintaining the ZZ account ledgers, and he actually made most of the entries himself. These ledgers were not maintained by the usual invoicing or ledger staff.[43]So far there is nothing wrong with that in principle. I am told that GE had no objection in principle to the notification of work in progress as such, and the Secretary of State does not take any point on that being done. However, the way in which the matter was operated inevitably led to there being double counting. Mr Ritchie admitted that both the actual invoice and the work in progress were notified. That means that the same debt was notified (and therefore drawn against) twice. What ought to have happened is that the amount of the actual invoices should have been credited to the ZZ accounts, and that such credits should have been notified to GE, thus making sure that the assets account at GE was not overstated. That never happened. Mr Ritchie said that Mr Smedley told him that he would receive some form of notification from Mr Gracey to credit out the invoices in the ZZ accounts but he never got them. Nor, apparently, did he ever ask for them, and Mr Gracey did not expect to have to provide them. Instead, after a while Mr Smedley gave an instruction to Mr Ritchie to credit amounts off the ZZ register once they were 60 days old.[44]A measure of the extent to which the ZZ accounts got out of kilter with financial reality appears from material emanating from Mr Gracey. His evidence was that the amounts on the ZZ accounts should have corresponded with the amount of work in progress shown on the TDP system. The latter correctly recorded the work as done, and it was the information on which Mr Ritchie drew (or should have drawn) if he was conscientiously notifying work in progress to GE. However, since proper invoices were never credited against the ZZ accounts there arose a marked discrepancy between true work in progress and the amounts shown on the ZZ account ledgers. On 9th November 2001 Mr Gracey sent an e-mail to Mr Gee pointing out that uninvoiced turnover for Logistics was £1.67m. The amount shown on the ZZ accounts as being due was £5.4m. Since the uninvoiced turnover was based on the TCP system entries it was more likely to be accurate. If anything it may have been overstated because earlier in the year Mr Gracey had complained that the work in progress was not being cleared sufficiently promptly from that system when the real invoices came in. But be that as it may, what this shows is that the ZZ accounts were overstated by almost £4m.[45]It was submitted to me that the ZZ ledgers contained not only WIP figures which were not credited out, but they also contained excessive amounts which cannot have been assessments of WIP. In this connection Mr Ashworth directed my attention to the aged debt report submitted to GE for the month ended 31st August 2001 in mid-September 2001. That report shows £1.04m due on the ZZ accounts in respect of a customer called British Gypsum (in addition to £545,000 shown as invoiced). (All sums in this paragraph are in round terms.) The £1.04m is supposed to represent uninvoiced WIP as at 31st August. It was arrived at as a result of entering a credit of over £428,500 and debit of £515,000, against the then outstanding balance, to arrive at the total of £1.04m. On the aged debt report that total was split roughly equally between the current month (August) and the previous month in terms of age. Mr Ashworth sought to demonstrate that the amounts subsequently entered or received in respect of the relevant period were nothing like the sums shown on the aged debt reports, and that that demonstrated that not only were ZZ accounts badly maintained WIP records, they recorded what must have been over-notifications in any event. I confess to not being satisfied on this particular evidential exercise.[46]The way in which the ZZ accounts were operated meant that they appeared as significant overstatements of outstanding debts on the aged debt reports submitted to GE. Each of the ZZ accounts was identified in terms on those reports. As the British Gypsum figures demonstrate, their size was very significant. There was therefore a very significant overstatement to GE every month as to what money was due from customers, and there had been a drawdown of sums against those excessive notifications.[47]That evidence means that Logistics’ accounting records were wrong, that there was double-claiming from GE and that GE were misinformed about the level of aged debt. That of itself does not amount to deliberate fraud of the kind alleged by the Secretary of State. It would only be deliberate fraud on the part of Mr Smedley if he knew of the inaccuracies and intended to exploit them. He has not appeared at this trial to defend or explain himself in relation to these matters. I consider that the evidence shows that he must have known what was happening. He obviously kept a close eye on the finances. He must have been aware of the overstatement on the ZZ accounts, and that claims were being made to GE without dealing with the ZZ amounts properly. His instruction to clear the ZZ debts when they were 60 days old demonstrates that he must have known they were not being cleared in accordance with principle when the invoices were received from the customers. A conscientious and honest man would have made sure that the system was operated properly. He was actually warned by Mr Gracey about double counting in an e-mail of 16th August 2001, though it is highly unlikely that he had not appreciated this before. The only apparent reason for clearing them after 60 days was to make sure that they did not get too old for aged debt purposes, and the only significance of that was that if they had got too old the amounts of those debts would have been taken out of the amounts against which drawings at GE could be made (see the 90 day period referred to above). He obviously wished the debts to remain in the aged debt listing until then. Mr Gracey gave evidence to the effect that the self-billing customers paid weekly or monthly. That being the case, one would have supposed that any given debt ought to have been cleared from the ZZ accounts long before 60 days of its entry on the ledger. I find that Mr Smedley knew about the double claiming, knew about the inadequacies of the recording of these matters, wanted them to continue, and procured or allowed them to do so.[48]In relation to the ZZ accounts I find as follows: i) Amounts were notified to GE by Logistics from time to time in anticipation of their being invoiced to self-bill customers. ii) They were recorded after the event by entries on the ZZ accounts. iii) The ZZ accounts were not maintained properly. They ought to have contained credits (and credits ought to have been notified) when invoices were provided and notified. They were not. The only adjustments were to write the entries off after 60 days. That was probably to prevent the debts from becoming too old for continued notification. iv) Both the “on account” amounts and the actual invoices were notified to GE for the purposes of the facility. v) Mr Smedley orchestrated, organised and required the implementation of this system. He did so in order to gain credit from GE to which Logistics was not entitled.

The “carousel” fraud

[49]This is the title given by Mr Ashworth to what he claims was happening from August or September 2001 onwards.[50]The records of the group show that from mid-May onwards there are a number of cheques written by Services on its account at RBS in favour of one or other of Logistics, Rental and Trucks and which were paid into the trust account of the recipient company at GE. There were relatively few at first, but the number picked up in July and then ran at a high level between then and the end of the year. On Logistics alone the amounts ran at almost £8m in July, £4m in June, £9m in September, almost £8m in October and £8m in November. They were therefore very significant. The high usage corresponds to the time at which the facility limit with GE (£25m) was reached. Paying in slips denote the accounts to which the cheques were paid. Emails demonstrate that Mr Murphy and Mr Ritchie were insistent that these cheques from Services should be accompanied by paying in slips indicating that the payments actually emanated from a customer.[51]As I have noted above, Mr Kerr concluded that these cheques were part of a cross-firing exercise. He said that the cross-firing was, in his view, to cover up the previous fictitious invoicing. However, in his report, while he concluded that there had been a fraud based on fictitious invoices, he said that he did not have enough information to be able to determine the details of how the fraud worked. The details of the carousel aspect of what is said to have been fraud has now emerged, principally in the evidence from the GE trial that is now before me.[52]The evidence comes from Mr Ritchie and Mr Murphy. Neither takes the story back as far as May, but they take it up in September 2001. Mr Ritchie says that he and Mr Murphy were instructed by Mr Smedley to pay sums from the Services bank account with RBS into a GE trust account in advance of a customer paying an invoice. He says that this was in anticipation of an invoice due to be paid by that customer within the next couple of days. When Mr Murphy asked why they were being asked to do that, Mr Ritchie said that he did not know and suggested that they ask Mr Smedley. Mr Smedley’s response was that it was to ease a short term cash flow advantage by using the delay in the bank clearing system. Thereafter Mr Ritchie did as Mr Smedley asked in respect of such transactions. It started with one cheque a day, but increased to 3 or 4 cheques per day. On each occasion Mr Smedley told Mr Murphy and Mr Ritchie what amount was to be written on the cheque, and Mr Ritchie usually signed it.[53]He amplified what happened in his cross-examination. On each occasion that a cheque payment was made into a GE trust account, a matching debit entry or entries was or were made in one or more of the group company’s ledgers. In the case of all or most of these transactions that debit entry was not an invoice. It was an ADR – an adjustment entry. If it was not an ADR it was an invoice, but no invoice was actually rendered. That ADR and the payment were matched against each other, so that the money was treated as paying off the ADR. Mr Smedley told Mr Ritchie to do this matching exercise. None of these ADRs had VAT on them, again on the instructions of Mr Smedley. Normally, transactions with the relevant customers would have carried VAT. The absence of VAT must have been to make sure the company’s systems did not throw up a potential liability for VAT. The ADR which thus appeared on the sales ledger was itself notified to GE. Mr Ritchie viewed these cheques, at least at first, as anticipating money which would come in from the customer and which would be paid into the RBS account to repay the earlier pre-payment by Services. He was aware that on a GE audit one of the things that the auditors would look at would be the paying in book. The practice got more frequent, and at its height it reached cheques to the value of £1m per day.[54]Mr Murphy recalls the process starting with a request from Mr Ritchie or Mr Smedley to pay a customer cheque into Services’ bank account. This was, of course, a breach of the terms of the GE facility – all customer cheques should have been paid into the trust account. Within a couple of days he was asked by Mr Ritchie or Mr Smedley to make out a cheque for the same amount, drawn on Services’ account at RBS, and pay it into a GE trust account. He held a Services cheque book but was not a signatory, so he made out the cheque and passed it to Mr Ritchie or Mr Smedley for signature. He gave the cheque to the credit control department to pay into the GE account, and provided a paying in slip identifying the customer who was allegedly the source of the payment. Within a short time he was regularly asked to draw Services cheques for payment of sums into a trust account without these cheques apparently being related to payments already received from customers. This process gathered in frequency as the calendar year end approached. On each occasion that a cheque was drawn, a matching entry was made on the Access account of the customer to whom the payment was allocated, but (on the instructions of Mr Ritchie, who said he was passing on Mr Smedley’s instructions) without any VAT being added. The entry was an ADR or invoice entry. He explained that normally an ADR would only be used as an adjusting or reconciling entry. This ADR would record that it had been “paid” by the amount paid into the trust account. He agreed with Mr Smedley in cross-examination that these payments were posted to the BSCTGS (which stood for Balance Sheet City Truck Group Services) account in the nominal ledger. Mr Kerr had identified that account – see above. In December 2001, when Mr Ritchie was away, Mr Murphy reported to Mr Smedley the debts that were due to be notified to GE (according to the Access records), and on occasions Mr Smedley would tell him that that was not enough and that a further amount had to be notified (which Mr Murphy did). In other words, Mr Smedley was by this point giving instructions to notify amounts by reference to the companies’ requirements, not by reference to what they were entitled to notify.[55]These accounts are corroborated by the documentary evidence. As Mr Kerr found, the sales ledgers contain a large number of matched payments and ADRs or invoices across this period. E-mails record instructions to pay money and contain the identification of customers against whom “invoices” were to be raised. The BSCTGS account contains comparable entries. The records of GE show that amounts corresponding to the ADRs or invoices used to cancel these payments out were in fact notified to them. Mrs Hogan was not told about any of this. Nor, apparently, was Mr Gracey.[56]There is clear evidence that the group was under financial and cashflow strain at this time. I refer to some of the manifestations of this below in the context of the Crown debts point. This doubtless explains why it was felt necessary to try to get the sort of benefits afforded by this cross-firing scheme.[57]In relation to this carousel aspect of the fraud relied on by the Secretary of State I find as follows: i) I accept the evidence of Mr Ritchie and Mr Murphy as to the genesis and operation of what they described. ii) I find that Mr Smedley was the author and orchestrator of the whole operation. iii) Mr Smedley was doing it in order to gain further credit from GE. At the GE trial he admitted to the trial judge that he was doing this. The facility was at its limit. He could not notify additional debts to get additional credit. However, there was a need to extract as much credit as possible. Accordingly, he first procured the payment of some cheques into RBS accounts when they should have been banked with GE, and then required the subsequent payment of equivalent amounts to GE, and shortly thereafter devised and orchestrated a cross-firing scheme pursuant to which Services cheques were paid into GE trust accounts so that they could be drawn down on immediately, gaining the benefit of cashflow for the period that it took for the cheques to be cleared at RBS. In my view he must have known that this was not a proper use of the facility. iv) He required that the payments be matched with an invoice or ADR to cancel them out for ledger purposes, and I find that he required that the ADRs or invoices be still notified to GE. I do not think that Mr Ritchie would have notified them otherwise. Mr Smedley must have known that the notification was improper. v) It was Mr Smedley who required that amounts be credited to the BSCGTS account. No other person would ever have done this on their own initiative. This had the effect of preventing the ADRs from appearing as turnover. In one sense that was correct, but the fact that that device had to be used shows that the ADRs themselves were not proper.

Management accounts

[58]The changes to the sales ledgers caused problems with the basic data used to produce management information. Mrs Hogan and Mr Gracey produced management information. Mr Gracey produced what he called management accounts by obtaining information about sales and costs from local employees. He compare these to budgeted figures. Mrs Hogan produced what she called financial accounts, reflecting turnover, costs and profit, from the Access ledgers. Because of the extra spurious activity on the Access ledgers she had frequent difficulty in reconciling what she was producing with what Mr Gracey was producing. She frequently complained about this. She was in no doubt that this was because of what she had identified as fictitious entries. That made for internal problems.[59]That was a matter of internal management. However, the systems operated by the company and which I have referred to above meant that these book-keeping points had ramifications in relation to information provided to GE. I have referred above to adjustments carried out to aged debt reports. GE were entitled to monthly management accounts as well. There is evidence (and I find) that it was provided with accounts for January to March 2001 at about the beginning of May, the April 2001 accounts were provided by the end of May, draft consolidated accounts were provided at the beginning of July, and management accounts were provided for August to October.[60]Differences can be seen when comparing the management accounts made available for the benefit of the company and its directors and the management accounts made available for GE. On 23rd August the board of Group (Mr Gee, Mr Smedley, Mr Andrew and Mr King) met to consider various matters. They had management accounts for the various group companies for the 6 months ended June 2001. For Trucks those accounts showed turnover of £14,810,035 and cost of sales at £12,849,332. I was not shown the provision of those particular separate accounts to GE, but on 12th November 2001 GE were sent management accounts for Trucks up to the end of July. It included monthly figures, from which one can see what figures were being reported for Trucks for June. The turnover figures reported to GE were £17,427,823; cost of sales was £15,467,124. Those figures exceeded those appearing in the internally provided accounts by just over £2.618m. The difference in gross and net profits was just £1. It is therefore apparent that GE were being given much larger figures for turnover and cost of sales than those provided internally. If there had been excessive notification of debt (and I have found that there was) then that would have been necessary in order that GE be not alerted by discrepancies in the figures. Looking at the figures for Logistics, there was apparently an even more marked difference in turnover reported to GE over that reported to the board (some £10m). At the beginning of December Mr Gracey prepared figures for Mr Gee and Mr Smedley, using material which was not infected by false invoicing. They showed a cumulative turnover for Logistics for the period up to August 2001 of £41,386,918. Figures for the same period sent to GE in November showed a turnover of £51,466,950 for the same period – again a difference of £10m. I find that excessive figures were reported to GE as part of the cover up of the false invoicing. No-one other than Mr Smedley can have been responsible for this. E-mail traffic between himself and Mr Ritchie in November 2001, immediately before the submission of figures to GE, shows Mr Smedley passing the figures to Mr Ritchie to consider, check and to pass on to GE. I find that Mr Smedley was the originator of the figures thus passed on to GE.

Audits

[61]As appears above, GE had the right to carry out audits, and it sought to do so monthly. Those audits, if effectively carried out without obstruction, might have detected the fraud – or at least there was a risk of that. They were not effective, and I find that to a very material extent that was because of obstacles put in the way of an effective audit. The evidence from the various individuals who attended to carry out audits shows the following facts and matters, which I find as fact.[62]Mr Dallison and Mr Lusk of GE were tasked with carrying out the first audit by GE of City Group, at Newport Pagnell on 19 and 20 April 2001. Mr Smedley was on holiday so they were met by Mr Ritchie. However, City Truck Group had not prepared for the audit so it was postponed until 9 and 10 May 2001.[63]The May audit was preceded by a meeting on 4th May between Mr Broomhead and Mr Lyall for GE and Mr Smedley and Mr Steel of City group. By this relatively early stage GE was worried about the level of usage of the facility, which was several million pounds higher than had been projected. Its representatives stressed the need for accurate forecasts and for information in the form that GE required. The May audit took place 5 days later, on 9th and 10th May. Mr Lusk and Mr Dallison attended at Newport Pagnall. Notwithstanding a prior letter of 21st April setting out the documentation required, it was not available. Mr Ritchie said he had been ill and as a result had not been able to prepare for the audit properly. During the day Mr Ritchie took considerable time to produce the information required. Towards the end of the second day Mr Smedley arrived and assured the auditors that the information would be provided. He produced management accounts, but not in the form required. The audit was unsatisfactory.[64]The June audit took place on 25th and 26th June. Mr Richards attended at Northampton on 25th June. The auditors were kept waiting for 2 hours. Mr Ritchie told them that he could only print a copy of the sales ledger (which they had asked for) after he had shut out the other users, and that that was the reason for the delay in providing it. In fact the delay was because he and Mr Murphy were complying with Mr Smedley’s instructions to put back on the sales ledger those entries that had been put on and taken off a couple of weeks before for the purpose of generating the aged debt report. Mr Ritchie lied to the auditors about that. Mr Smedley (I find, based on evidence of what was said subsequently to a Mr Kidd) had said to him that on no account were GE to be given up to date debtor lists – they were to be given the debtor list provided for reconciliation purposes at the previous month end. The day was unproductive because of delays in providing information. Documents necessary to verify the sales ledger were said to be kept elsewhere. Mr Richards did not manage to complete a single test. Mr Broomhead joined Mr Richards for the second day. The day was taken up with their being given tours and lunch. No tests were completed.[65]The August audit was carried out on 28th and 29th August by Mr Dallison. On the first day Mr Dallison carried out tests on the processes and systems, and concluded they were excellent. (The mechanisms for covering up the fraud to which I have referred above probably means that this was an undeserved accolade.) On the second day he attempted a detailed review of the accounts, which he could not complete for lack of time. Certain documentation (particularly bank statements) was unavailable. There was no time to carry out debtor verification. The paperwork for large self-billing accounts was checked but he did not check whether self-billing invoices were cancelled out on the ZZ accounts.[66]The next audit was on 9th October. Mr Dallison and Mr Hanlan attended the Northampton depot and were shown round by Mr Gee. Some useful work seems to have been done, but it took 4 hours to provide the telephone numbers of customers whose debts the auditors wished to verify. Mr Hanlon said that normally he would not expect the provision of those numbers to take more than 15 minutes. It is likely that this delay was deliberately contrived. None of the debts of Trucks, Rentals or Logistics were verified as a result, apart from a debt said to be due from Coca Cola, which was verified as a result of Mr Smedley ringing and putting Mr Hanlon of GE through to an individual who verified, or purported to verify, the debt ostensibly due from Coca Cola. Bank statements were again not produced – they were said to have been in Manchester. Other relevant information was not provided. The audit was not satisfactorily completed.[67]The next audit that was carried out was in January 2002, after the tip-off referred to above. A large team attended at Newport Pagnell. Little notice had been given. Mr Steel met them and was very obstructive. The team was kept waiting for a couple of hours in the boardroom, before some basic information (in the wrong format) was provided. It is unnecessary to go into the detail of this audit. It started to unearth the fraud that is alleged in these proceedings. At some point it was revealed that Mr Smedley had been suspended. Proper co-operation was eventually provided and the investigation extended over a large number of days.[68]What emerges from this evidence is that it was never possible to conduct a proper audit. The papers made available during the audits carried out in 2001 would not have been sufficient to enable the auditors to spot what was happening. The absence of bank statements made it less likely that the carousel fraud would have been discovered in October. The auditors were lied to about the reasons for the delay in providing an aged debt report in June. In his witness statement Mr McMillan says that during the course of the January audit the GE staff were told that Mr Smedley had told staff not to co-operate with the auditors on previous audits, and that Mr Ritchie had been told to be as difficult as possible in these audits. I think it likely that the failure to provide information to allow audits to be more effective was in large part deliberate, once again procured and orchestrated by Mr Smedley.

Conclusions on the alleged fraudulent conduct

[69]I have made some findings above in relation to the manner in which the alleged fraud in this case was said to have been carried on. It will be useful to draw some factual strands together at this point. I find the following to have been proved: i) The system operated by GE in relation to the debt financing arrangement clearly depended on trust and honesty for its proper implementation. ii) In the period from February 2001 to the end of December 2001 Logistics, Trucks and Rental notified a large amount of genuine debt which was properly within the arrangement. iii) However, within the same period, those three companies notified a large amount of purported debt that was not genuine and that was known not to be genuine debt. iv) For the first 6 months or so this was done in order that additional amounts could be drawn on the GE facility. v) The excessive notifications were procured or done by Mr Smedley. They were done with his knowledge and at his instigation. vi) This was covered up by means of misrepresentations made to GE by falsifying aged debt reports (which was in turn done by adding fictitious entries to the sales ledger and then removing them), by presenting GE with management accounts with false figures on them, and by re-introducing the false figures on to sales ledgers at the time of audits. The conduct of audits was partially obstructed. vii) The activities referred to in the preceding paragraph were procured and orchestrated by Mr Smedley, who himself provided the figures to be added for aged debt rigging purposes. viii) There was also excessive notification by means of notifying work in progress for self-bill customers, and then notifying the invoices which covered the same work. The relevant credit entries were not passed, so debts were doubly notified. Mr Smedley procured and knew about this. The ZZ accounts were not maintained properly, and Mr Smedley knew about that. The only step which Mr Smedley took to cut down the ZZ accounts was to require Mr Ritchie to credit out debts which were more than 60 days old, but that was a step designed to cover up what had happened, not to bring the ZZ accounts and the underlying notifications into line with where they should have been. ix) When the credit limits on the GE accounts were reached Mr Smedley orchestrated a system under which there was cross-firing from Services’ account in order to get the credit advantage of being able to draw against the credits immediately. Any honest man would have known this was an abuse of the system. x) The cross-firing had to be covered up, and was covered up, at the instigation of Mr Smedley, by the making of purported allocations to customer accounts and crediting customers on the ledgers. They were matched by ADRs or invoices, thus making two false entries on the sales ledgers for each false allocation. The ADRs and invoices were themselves then notified to GE in order to keep the asset account at an appropriately high level, notwithstanding that they in no way represented a genuine invoice raised against a customer. xi) The wrongful entries were covered up in part by the crediting of entries to balance sheet accounts, thereby preventing some of them from inflating turnover. Again, this was done at the instigation of Mr Smedley. xii) Certain historical false debts on the sales ledgers were rejuvenated for aged debt presentation purposes by entries made on a parallel set of electronic books at Bletchley. This, too, was done at the instigation and with the knowledge of Mr Smedley.

The scope of the false notification

[70]In the GE action what was sought was damages. GE therefore had to establish a level of loss. The Secretary of State does not have to establish loss or damage. Nevertheless it is necessary to form a view as to the extent of the fraud which I have found. All frauds are serious, but the more extensive the fraud the more serious it is for the purposes of deciding on disqualification and on any term of disqualification period. Since detailed loss is not an issue, this point can be dealt with at a greater level of generality.[71]Mr Kerr expressed a view as to the aggregate amount of false notification that went on. His figure for what he described as the amount of false invoicing recorded on the ledgers of Logistics and notified by Logistics alone was (when properly adjusted) just over £96.7m. There is, however, a flaw in his figure so far as it purports to be a figure for notification. It is an aggregate of all the false entries on the sales ledger that he managed to identify. First, within that aggregate is a large amount of double counting, because a lot of the entries put on the sales ledger were to reinstate previous removed entries (for example, on an audit). When properly adjusted, the aggregate in fact comes down to just over £70m. That is the figure that Mr Kerr’s report suggests was wrongly notified to GE in respect of Logistics alone. That may be an understatement because in searching the ledgers for relevant “no VAT” transactions he looked only for transactions exceeding £100,000. He identified a further £3.8m of false invoices that were notified but never entered on the ledgers. In Rental he identified at least £5.8m of false invoicing, ADRs and other fictitious notification, and in Trucks he has identified £18.9m of fictitious invoices and notifications.[72]Second, that aggregate was not actually notified. A lot of those figures represent false book-keeping to cover up the fraud. It is more a measure of the false book-keeping than a measure of the fraud. Thus where a fictitious invoice is entered at a month end, credited out, re-entered at an audit, credited out and re-entered at the next month end, Mr Kerr’s calculation would count the sum three times, because he was measuring the invoices appearing on the ledgers, not necessarily the amount of preceding notification. Thus these figures of Mr Kerr cannot be treated as the extent of the over-notification. A more accurate impression of the financial effects of the fraud can be gleaned from an exercise conducted by Mr Ritchie himself, for the benefit of the administrators, shortly after the administration commenced. His exercise reconciled the asset account (the amounts notified) as at 10th January with the amounts shown properly due to Logistics, Trucks and Rental as at that date. This exercise showed that in aggregate £19,799,889 debts were the subject of an effective assignment; the amount notified was £34,767,459. The difference is almost £15m. Mr King, an accountant with the administrator’s firm, provided figures for recoveries as at 10th December 2004. The administrators continued to trade after their appointment, and to use the GE facility. They therefore collected pre- and post-appointment book debts. Mr King’s figures indicated that £7,978,000 was collected for pre-administration book debts. The amount due to GE on the current account was £24,028,000. After crediting some matters other than debts, and allowing £2m for costs of the administration, the shortfall to GE was estimated at between £16.2m and £16.044m. That, of course, is a measure of the loss to GE, rather than the level of fraudulent activity. However, what all those figures show is that this was a very significant fraud indeed in financial terms and in its scope, and they give a very strong indication of the level of fraudulent notification.

The destruction of documents and computer records

[73]There was some evidence that when GE went into the group’s offices in January 2002 some of Mr Smedley’s files, and his emails, were missing. Mr Ritchie noticed that some of the files that he used, and that were in a shared area of the computers accessible only by him, Mr Murphy and Mr Smedley, were missing. Later, he found that other files relating to VAT returns and notifications were missing, and paper files of financial information which had been put in a secure room by Mr Ritchie were also found to be missing. At some point it became apparent that a lot Mr Smedley’s emails had been deleted.[74]Mr Ashworth invited me to infer that these documents and emails were destroyed and deleted by Mr Smedley and Mr Gee, and then operate the presumption arising from The Ophelia [1916] 2 AC 207 @ 229 against them:
“If any one by a deliberate act destroys a document which, according to what its contents may have been, would have told strongly either for him or against him, the strongest possible presumption arises that if it had been produced it would have told against him …”
His argument on this had an element of the bootstrap about it. He invited me to find that Mr Smedley and Mr Gee had an incentive to do this because of the previous false representations. So in order to find that they did it I first have to find the fraud. Were I to make that finding first there would then be no room for the operation of the Ophelia principle because I would have already found that which the principle is designed to prove. That is a pointless and illogical exercise. I do not find it necessary to make any finding about who, if anyone, was responsible for any destruction or deletion, and do not do so.

The knowledge and participation of Mr Smedley and Mr Gee

[75]It is mainly on this point that the real issues in this case turn. The Secretary of State claims that Mr Smedley and Mr Gee knew of and participated in the activities in this case to an extent which makes them dishonest. In considering this point, and indeed in considering all my findings of fact, I have well in mind the higher standard of proof (albeit still on a balance of probabilities) applicable to such serious allegations.[76]The disqualification sought by the Secretary of State is based not merely on the fact that fraud was committed on GE by the City Group companies, but by virtue of the participation in and/or knowledge of the relevant matters on the part of Mr Smedley and Mr Gee. I have made certain express findings about Mr Smedley and his participation above. In arriving at that conclusion I have relied on the evidence to which I have referred, and principally on the evidence of Mr Ritchie and Mr Smedley. The facts that I have found showed that the instructions for all the acts constituting and covering up the over-notification came from Mr Smedley.[77]That much appears from the direct evidence of Mr Ritchie and, to a certain extent, Mr Murphy. There is further material which supports the conclusion that Mr Smedley was the person who procured the fraud and dictated its operation: i) Mr Smedley’s role in the company puts him at the heart of the financial function. ii) Given that it is clear what was done in relation to the ledgers, it is highly unlikely that employees of the level of Mr Ritchie and Mr Murphy would have done what they did without direction from a senior person within the group. iii) That Mr Smedley knew that what he was doing was improper is demonstrated by the relative secrecy with which he required the exercise to be conducted. He did not require the relevant steps to be taken by normal book-keeping staff. He had them carried out by Mr Ritchie and Mr Murphy only. He did not inform other employees of what was happening and why; nor did he tell GE. This is despite the fact that aspects of the exercise were from time to time raised with him by Mrs Hogan and Mr Gracey. In particular, he required re-posting of “dummy invoices” immediately prior to audits rather than presenting the ledgers in their then state together with a reconciliation. iv) In these proceedings he has not sought to challenge the facts led by the Secretary of State, or to explain himself. He has an illness which would make litigation tiring, and he claims to have had to devote time and attention to his forthcoming criminal trial; and he complains about the complexity of this matter. However, even allowing for all that, an honest man with an honest explanation would make some attempt to explain himself and the history at the trial. He has not done so. v) Evidence was given by an employee (Mr Garnett) that on 3rd January 2002 Mr Smedley called him in and said that auditors were coming in and that they might discover financial irregularities. He thereby demonstrated an awareness of trouble to come. He also told Mr Andrew that the auditors would find financial irregularities in relation to the discounting arrangements. When matters tending to demonstrate the wrongful activities that had occurred started to emerge during the audit process he seemed calm and unsurprised. All this is consistent with, and only with, an awareness of what had gone on hitherto. vi) As part of the audit team’s activities in January 2002, Mr McMillan asked Mr Smedley for bank statements. Mr Smedley said he would get them and said that the group did not have on line banking arrangements. He gave the impression that the team would have to wait for paper statements to be delivered. In fact it very soon became apparent that the group had an on-line facility – Mr Ritchie was discovered using it. Mr Smedley had apparently lied about that. When the statements were printed off they revealed the payments passing from Services into the trust accounts, which Mr Smedley was presumably trying to conceal.[78]Mr Gee, on the other hand, was not directly involved in any of the activities described above, and the Secretary of State does not allege that he was. It is, however, alleged that he knew of it or at the very least had “turning a blind eye” knowledge. In support of this submission the Secretary of State relies on the following evidence: i) Several witnesses spoke of Mr Gee’s good business abilities, his general shrewdness and his general grasp of the City Trucks business and its finances – Mr Gracey, Mr Ware (a general manager), Mr Noonan (a co-director and from whom part of the City Trucks business was acquired), Mrs Hogan and Mr Garnett all gave evidence to this effect. Mr McMillan got the impression that Mr Gee had a detailed knowledge of how the business operated, and of his keen interest in it, by the time he and other GE employees spoke to Mr Gee about the newly discovered fraud on 4th January 2002. ii) There was a lot of evidence from witnesses and from the documents themselves evidencing Mr Gee’s desire (and requirements) to be kept informed of various financial aspects of the business, including its aged debt position from time to time. He was not someone who sat back and waited to receive such reports as his managers submitted. He plainly pursued his own lines of inquiry and positively required to be kept informed. He regularly asked Mr Gracey about daily bankings and was frequently fed, and required, financial details at quite a detailed level. He plainly wished to be kept closely informed of the financial performance of his companies. So far as this evidence appears in emails and other communications, they are too numerous to be particularised here. They were fully identified and set out in Mr Ashworth’s written final submissions. iii) He met frequently with Mr Smedley, and they seemed to various witnesses to be close to each other. Historically speaking they had been to university together, though there had been a considerable gap in their contact until they met up again in the 1990’s. iv) The ZZ accounts had been established by the time the GE facility was entered into. They had existed in 2000. In spring 2001 Mr Gee looked at an aged debt report and remarked to Mr Gracey that British Gypsum seemed to owe Logistics a lot of money. Mr Gracey responded that that was not the case – “that is what Mr Smedley is doing with the work in progress on the ZZ accounts”. Mr Gee made no further remark or comment or query. From this it can be inferred that he knew about these accounts, and knew that they overstated the work in progress. v) In early 2001 Mr Gracey remarked to Mr Gee that Mr Smedley seemed to be banking factored debts into the company bank accounts. Mr Gee asked why he would do that, and Mr Gracey said that it gave Mr Smedley money to play with and kept old debts live. Mr Gee did not seem concerned about this, and Mr Gracey’s impression was that Mr Gee was feigning ignorance rather than making a genuine inquiry. vi) Mr Gracey gave evidence about a conversation in which Mr Gee made it clear that he knew the ZZ accounts were being used for notification purposes. It is said that Mr Gee’s failure to follow up discrepancies between those accounts and genuine work in progress demonstrates knowledge of how the accounts were being operated. vii) In mid-2001 a customer was erroneously chased on the basis of one of the fictitious invoices. Mr Gee became personally involved and Mrs Cartwright, a credit controller who knew of the existence of these invoices, told Mr Gee that it was “one of those entries”. She did not explain further and Mr Gee apparently did not require an explanation from her. From this I am invited to infer that he knew of the entries and of their real purpose. viii) Another customer (Hays) queried fictitious invoices when they saw a reference to them on their account. Mr Gee got involved. An e-mail records that Mr Gee asked Mr Smedley to sort it out. I am invited to infer from this that it is likely that Mr Gee either knew already about these invoices or must have been told about them by Mr Smedley. ix) Mr Gracey gave evidence to the effect that on an occasion in mid-2001 Mr Gee said to him “Every invoice you raise is one less that Kevin Ritchie has to make up.” x) An e-mail from Mr Gracey to Mr Gee of 2nd July 2001, about debtors and work in progress, contained some detail of debts and made reference to self-bill customers. It ended by saying that “total debtors on the Report come to £12.998m or effectively £7.203m of collectable debtors.” Mr Gee made no response to this. It is said that his failure to respond indicates that he knew how the systems were being operated; otherwise he would have demanded an explanation. xi) In July 2001 Mr Gracey told Mr Gee that Mrs Hogan was not happy with the fictitious entries on the register. Mr Gee responded angrily and obscenely. I am invited to infer that her questions were unwelcome because he knew what underlay the entries. xii) On an occasion in July 2001 Mr Gracey asked when accounts would be dealt with properly without entries being made up. Mr Gee responded by saying:
“If Smedley is lifting GE’s leg by one or two million, then that is OK by me”. xiii) When Mr Gracey told Mr Gee that Mr Smedley had been paying customer money into the RBS account rather than the GE trust account, Mr Gee observed that he would be expecting Mr Smedley to be doing that. When Mr Wilkinson (a contract manager with the group) raised a similar point and further complained about the pressure he was under to produce invoices earlier and earlier, he was told firmly by Mr Gee to do what Mr Smedley said without question, and Mr Wilkinson got the impression that the matter was closed and that further discussion on it would not take place. xiv) In October 2001 Mr Gracey e-mailed Mr Gee to report that a cheque payment was recorded for a customer that paid via BACS. He forwarded an e-mail from Tamlyn Roberts (an invoice administrator and then a credit controller) which referred to the money as concerning “dummy invoices”
. Mr Gracey pointed out that the amount involved was about 80% larger than the normal trade with that customer. This payment was part of the carousel fraud. Mr Gee did not respond. I am invited to find that this demonstrates that Mr Gee knew what was going on and in that context to contrast it with another incident where Mr Gee had actively involved himself in invoice problems. This was followed by another e-mail in which Mr Gracey referred to “funny cash” which was “creating unsubstantiated receipts to allocate off against invoices and credit notes”. Mr Gee did not respond to that either. xv) On 5th November 2001 Mr Gracey sent to Mr Gee (and Mr Smedley) management accounts for Logistics, prepared by Mr Gracey, for the period ended 31st October 2001. It shows monthly turnover for the year to that date. If one adds the monthly turnover to the end of September it comes to just over £48m; one has to do the adding exercise – the number does not appear on the relevant spreadsheet. The covering e-mail annualises the turnover at £61.5m. The annualised turnover figure was repeated in an e-mail to (inter alia) Mr Gee 2 days later. On 23rd November there was a meeting of the board attended by Mr Gee, Mr Smedley and the 2 non-executive directors (Mr Andrew and Mr King). The board considered management figures, but not those sent by Mr Gracey. Instead it considered a different set. This set reported the turnover to 30th September as being £63.7m. This is a very different figure from that reported by Mr Gracey. It is more in line with the figures being reported to GE. It is said that the discrepancy would have been obvious to Mr Gee, and the fact that he apparently allowed the board to receive figures which are (on my findings) inflated, with no questions raised as to why there was a discrepancy, shows that Mr Gee was aware of the discrepancy and the reasons for it, and indeed actively misled the board by permitting it to receive false figures. Mr King’s evidence is that the quarterly figures that the board saw were circulated by Mr Smedley, but Mr Gee confirmed that they were broadly similar to the management accounts prepared by Mr Gracey. That was apparently untrue, at least on this occasion. It is said by Mr Ashworth that Mr Gee was prepared to mislead the board about these figures because he knew that if he provided the true figures he would have to alert the board to the fraud being perpetrated by Mr Smedley. I confess that it is not clear to me why this would be so, but this is material which tends to show that Mr Gee was prepared to allow the board to be misled on the figures. xvi) In December 2001 Mrs Hogan was so concerned that she asked to speak with Mr Gee. She told him about the high level of irregular invoices, and is confident that she mentioned the cross-firing of cheques. She also mentioned what she called the “dummy” invoices. She was surprised at what she regarded as his complacent attitude and his lack of surprise. He merely commented that he left all of that side of the business to Mr Smedley. Since Mr Gee had frequently demonstrated his keen interest in all aspects of the business, this attitude is more consistent with his knowing already about what Mrs Hogan was referring to. xvii) Other material is relied on as demonstrating that Mr Gee knew of the overstatement on the ZZ accounts but did not react, and that Mr Gracey was reporting much lower turnover figures than those previously reported to directors. xviii) Mrs Hogan’s evidence was that when she tried to raise concerns about irregular invoices on Logistics’ account and cross-firing Mr Gee’s reaction was one of complacency. xix) By 4th January the audit team sent in by GE had begun to find transactions which turned out to be part of the misconduct referred to above. Some of the payments from Services to GE had been identified, and it had been established that a large part of the ZZ accounts did not in fact constitute recoverable debt. Some banking of customer moneys into the RBS account had also been identified. On that day (4th January) Mr Gee was told what had hitherto been discovered. He was also told that Mr Andrew had said that Mr Smedley had “confessed to wrong doings”. Mr MacMillan, the member of the GE team who reported these matters to Mr Gee, gave evidence of Mr Gee’s reaction, both in his (Mr MacMillan’s) witness statement and in his cross-examination in the GE action. His evidence suggests that Mr Gee was told that there seemed to have been a fraud, but Mr Gee’s reaction was not that which one would expect from the owner of a company who was being told of such things. The previous day he had suspended Mr Smedley. He did not ask for further details of what had apparently happened. Instead he wanted to talk about the previous and future success of his business. This reaction is said to be more consistent with a man who actually knows what has actually been happening rather than that of a man who is taken by surprise by it. xx) Mr Gracey says that a couple of months later Mr Gee observed that “they won’t find fingerprints of mine on anything. If anyone asks me, I am going to say I didn’t know anything.”[79]At this point I remind myself of what the allegation against Mr Gee is in relation to the frauds described above. The allegation is that he “caused or permitted” Logistics, Trucks and Rental to defraud GE by the notification of false or duplicate invoices, and that he “caused or permitted” Services to make payments to other group companies to enable the other three named companies to defraud GE (the carousel fraud). These allegations appear in the principal supporting affidavit of Ms Karol Sanderson of the Disqualification Unit of the Insolvency Service. Elsewhere she indicates that the case is that Mr Gee knew or ought to have known of the matters. The case is therefore put at two levels, one of which involves dishonesty and the other of which probably does not. However, Mr Ashworth’s primary case was that the evidence showed that Mr Gee knew of the fraud, or at least had “blind eye” knowledge of it, and was therefore dishonest.[80]Mr Gee has not appeared to challenge any of the evidence set out above. I find that all the evidence which I have recited or referred to represents what actually happened. As a body of evidence it certainly demonstrates that Mr Gee was, at the very least, in receipt of sufficient information to alert him to the fact that something very seriously wrong was going on. Mr Gracey was alerting him to discrepancies between the ZZ accounts and truly recoverable debts; Mrs Hogan and others were notifying of strange entries on ledgers; he was receiving one set of management figures from Mr Gracey but putting forward, or allowing Mr Smedley to put forward, another set of figures to the board of Logistics. Those, and other, matters would have alerted a conscientious director to problems.[81]However, I consider that the evidence establishes more than that. While there is no direct evidence that he participated in false notifications, or gave instructions for them, or participated in the carousel fraud, there is evidence that he knew what was going on. He had been told about false invoices, and he had been told about direct payments to RBS accounts of moneys that ought to have gone to GE accounts, yet was complacent about them to an extent that indicates that he knew about them anyway. That does not, by itself, demonstrate knowledge that those matters were part of the fraud alleged, but unless he had that knowledge it is not possible to see why he would not take those matters up with company personnel. Yet he did not. The fact that he knew that the ZZ accounts were overstated does not demonstrate that he knew that there was an overstatement of the underlying debts to GE, but it is highly unlikely that he would have just let matters lie (as he apparently did) if he did not know the full picture. However, most telling is his apparent complacency and equanimity when told about the fraud in January 2002, his anger at Mrs Hogan’s raising points about dummy invoices, his reference to “lifting GE’s leg” and his requirement that Mr Smedley’s instructions be followed (in the context of direct banking of customer moneys). All these strongly reinforce the unlikelihood that the fraud could have been going on undetected by him for practically the whole of 2001 and demonstrate that he knew what was happening. I so find.[82]In reaching that conclusion I take into account the fact that Mr Gee, like Mr Smedley, has not attended to dispute the claim against him. I consider that an honest man would seek to do so. The reasons that he gave in writing for non-attendance (the complexity of the litigation, the need to work to support his family, and his desire to fight in the criminal arena to clear his name) are not particularly compelling reasons for absenting himself completely when faced with allegations as serious as those made against him.[83]Accordingly I find that Mr Gee knew of, and approved of, what Mr Smedley had arranged and orchestrated in relation to the fraud as set out above. At the very least he turned a blind eye to it, but in truth he actually knew what was going on even if he did not know the details of its implementation.

Events pre-February 2001

[84]My account of the main events is confined to the period from February 2001 onwards. The evidence of the Secretary of State went beyond that. There was evidence (principally from Mr Gracey and from Mrs Hogan) that the practice of false entries on ledgers (or false invoicing) and running ZZ accounts had gone on in the preceding year, while the RBIF facility was in operation. During that period Mr Gracey and Mrs Hogan were raising similar concerns to those identified above, and their evidence presents the activities of 2001 as being a continuation of what had happened in 2000. I am prepared to accept their evidence, as historic evidence, as being accurate. However, I am not prepared to accept that it amounted to an earlier fraud. Mr Ashworth sought to persuade me that he was entitled to rely on that earlier activity as demonstrating a fraud if I was in doubt as to whether there was a fraud in 2001, on a similar fact basis, while at the same time expressly disclaiming reliance on any such earlier fraud as a ground for seeking disqualification. In fact there was no allegation in the present proceedings that there was a prior fraud and no investigation before me of what it was. All that was proved was some of the mechanisms which were part of the fraud in the present case existed in the prior period. I therefore make no finding of fraud in relation to that earlier period.

The non-payment of Crown debts

[85]The principal affidavit in support of the Secretary of State’s application points out that by the date of the administration an aggregate sum of £9,610,212 was due from Group, Logistics, Trucks and Rental in respect of unpaid VAT, PAYE and National Insurance Contribution (NIC) arrears. There is also a reference to a shortfall of £2,710,418 in respect of PAYE and NIC from Services. However, the “Summary of matters determining unfitness” at the end of the affidavit relies only on sums due from Logistics, Trucks and Rental, and Mr Ashworth’s submissions on the point related only to those companies. I shall therefore deal only with the liabilities of those three companies.

Logistics

[86]Employers are required to submit monthly returns for PAYE and NIC, within 14 days of the month end. Payment has to accompany the return. The evidence shows that Logistics was seriously in breach of this requirement.[87]Logistics’ combined PAYE/NIC liability for the tax year 2000/2001 was £4,161,651. It made payments during the year, but insufficient to discharge its liabilities. By the end of the year it was £1,543,145 in arrears. That sum remained unpaid at the date of the administration. Two court actions were commenced in relation to part of the liability, and there was an attempt at distraint. In the following tax year the returns recorded liabilities of £2,052,119 but payments of only £873,951 were made. Cheques for £87,362 and £118,428 were dishonoured in September 2001. There was a shortfall for that year of £2,670,826. Apparently on one occasion in about August 2001 Mr Smedley told a distraint officer that a payment was late because it eased the company situation.[88]VAT returns are required quarterly. In the period from August 2000 Logistics filed only one VAT return. That is despite the fact that printouts which have been obtained from Logistics’ records, and which I have seen, calculate VAT payable for the four quarters to November 2001. The figures shown are very much lower than the sums said by HM Customs and Excise to be due, but they do amount to implicit acknowledgements of substantial debts which were not paid. Mr Andrew’s evidence was that after Mr Smedley’s suspension in January 2002 he went through Mr Smedley’s desk and found he had kept various demands for payments made by HM Customs and Excise, and various demands for payments, that he had not dealt with either by paying them, drawing them to the attention of the board or entering them into the accounting system. In November 2001 Mr Smedley wrote a letter to HM Customs & Excise, acknowledging a VAT liability of £1.75m and offering to pay in instalments. He enclosed a cheque for £250,000, and offered to pay four more fortnightly instalments of £375,000. The first of those instalments was paid. The rest were not (the last one was overtaken by the administration).[89]In the absence of returns, HMCE submitted assessments between August 2000 and November 2001. The net amount due across this period, including penalties and interest, is £2,166,493. Of this sum, £601,324 is owing in respect of an assessment in November 2000, £731,651 from February 2001 and £133,066 from an assessment in May 2001, so it can be seen that there was a very considerable default in payment.

Trucks

[90]At the date of the administration Trucks owed a combined total of £1,625,165 in respect of PAYE and NIC for the two tax years 2000/01 and 2001/02. Of this £836,504 related to the earlier year. There were payments in each year, but nothing like enough to satisfy the accruing liabilities. One of Trucks’ own internal documents reflects arrears arising month by month during the first 6 months of the earlier of those years. The document is not dated but it stops entries as at October 2000, so it looks as though it dates from that time or shortly thereafter. It reflects someone’s awareness of the gathering liability.[91]At the date of the administration Trucks had an outstanding VAT liability of £1,338,893. With one exception, Trucks had failed to submit returns since September 2000, and the liability was based on assessments and penalties relating back to that month. The exception was a return for September 2001 showing a liability of £52,196, but which was unaccompanied by a payment.[92]Mr Garnett, Trucks’ financial controller from February 2001 to December 2001, provided evidence that he would prepare VAT returns for Trucks and forward them to Mr Ritchie unsigned. He said that Mr Ritchie would sign and send them on. Obviously Mr Ritchie did that only once, but what this evidence shows is that someone must have taken a decision not to submit returns that were already prepared. In my view that must have been Mr Smedley.

Rental

[93]At the date of the administration there were VAT arrears of £93,613.97 due from this company. The bulk of it related to an assessment of over £83,500 issued in November 2001. Ms Sanderson’s affidavit suggests that this was in respect of the period ended July 2001, but it is not clear to me where she gets this information from. The reasons for, and the responsibility of Mr Smedley and Mr Gee for, the non-payment of Crown liabilities[94]The failure to pay such substantial sums over such a considerable period must have been deliberate. So must the failure to submit VAT returns, particularly when they have actually been prepared, as they were for Trucks in 2001. The reason for it was, I find, because the group had cashflow difficulties across the period and gave other creditors priority. As early as November 2000 Mrs Hogan was reporting her concerns about Logistics’ cashflow position. On 9th July 2001 Mrs Hogan sent an e-mail to Mr Smedley and others about suppliers chasing for payment. She observes that some suppliers were chasing for their March accounts, and the e-mail reflects the fact that some sort of control was being exercised over who got paid and when in a way which suggests serious cashflow difficulties. Many suppliers threatened action on their October and November bills, probably as a result of that instruction. That demonstrates an acute cash crisis at that time. In the second half of 2001 Trucks defaulted on some payments to fuel suppliers, and had to be chased. On one occasion Mr Ritchie acknowledged to Mr Cummins (a logistics manager) that he had “sat on” a direct debit. The failure of a group like the City Trucks Group to pay people as important as fuel suppliers is a sure sign of serious cashflow problems. The fuel suppliers were paid when they pressed sufficiently. On 8th November 2001 Mr Smedley told another employee that he did not want any cheque runs to take place between then and Christmas without his prior approval. There are other e-mails at the time which reflect an acute cash shortage by now.[95]I infer from this evidence that the group was under increasing cashflow difficulties from the second half of 2000 onwards. In those circumstances it was easier to pay trade creditors, who would not wait, than the pay the Inland Revenue and HMCE, who were easier to put off. I find that Mr Smedley took that decision. Bearing in mind his role, and his attention to detail, he must have known that liabilities were not being paid, and he must have decided not to pay them. The presence of unattended to VAT documents at his desk reflects this. It is inconceivable that he did not know what was not being paid (especially since there were court proceedings and an attempt at distraint) and he must have taken the decisions to underpay and not to pay.[96]I also find it inconceivable that Mr Gee did not know what was happening, and why it was happening, either. While it is theoretically possible that Mr Smedley kept from Mr Gee the non-payment of VAT, PAYE and NIC, their close relationship makes it unlikely that that happened. It is more likely that Mr Smedley reported to him that he was making the tax authorities wait in order to ease the cashflow difficulties. There is no direct evidence of this, but I find that to be more probable. But if I am wrong about that, then Mr Gee was seriously at fault for not ascertaining the true position and acting on it. As I have already pointed out, he busied himself about other aspects of the companies’ affairs, and he ought to have found out that there were serious tax liabilities outstanding. I have no evidence that he was positively misled by anyone about that.[97]It follows that the failure to pay the tax and NIC liabilities on time, and permitting arrears to grow, was a calculated act of Mr Smedley which was at the least acquiesced in by Mr Gee. The amounts involved were very significant.

Findings of unfitness

[98]I therefore find the underlying factual basis of the Secretary of State’s case to have been proved. Mr Smedley orchestrated and carried out a substantial fraud on GE, and he also deliberately procured the non-payment of Crown debts in a deliberate and calculated manner, for a considerable period of time and to a considerable extent. He knew of, and brought about, the failure to submit returns. So far as Services is concerned, the formal allegation put in relation to Services is that he caused and permitted Services to make payments of at least £68m to other Group companies in order to enable Logistics, Trucks and Rentals to defraud GE. That is the cross-firing allegation. I find it proved. Mr Gee knew of and approved of those activities or, in relation to the tax matters, at the very least culpably failed to find out and note that they were going on. Those matters make each of them unfit to be concerned in the management of a company within the meaning of section 6 of the Company Directors Disqualification Act 1986.[99]I am therefore required to make a disqualification order. The maximum period of disqualification is 15 years. The period of disqualification must be related to the seriousness of the conduct. In In re Sevenoaks Stationers Ltd [1991] Ch 161 the Court of Appeal propounded the now well-known three bands into which cases might be thought to fall. Into which band any given case falls is as much a matter of judgment as a matter of reasoning, and in my view in the case of Mr Smedley this is clearly a top band case. His conduct in relation to the fraud was a deliberate one which involved misrepresentations about the amount of invoices being notified, further misrepresentations in the presentation of aged debt reports and management accounts and the deliberate falsification of records. His fraud was not a single event fraud either – it was repeated month on month. It also involved cross-firing of cheques (accompanied by its own false notification). This took place in the context of a relationship based on commercial trust, and that trust was abused. The failure to procure the payment of Crown debts does not involve misrepresentation, but it was a calculated act or acts designed to further the interests of the company at the expense of the Crown. Together these events require a top band disqualification. In the circumstances I order that Mr Smedley be disqualified for 12 years.[100]Mr Gee did not orchestrate the fraud. However, on my findings he did know about it and consent to it. As the effective beneficial owner of the company, it was being done for his ultimate benefit, and he doubtless appreciated that. I take the view that someone in his position who has behaved as he behaved is not to be distinguished from the person who actually gives the instructions for the necessary steps and essentially implements it. Nor do I think that he should be treated as any less responsible than Mr Smedley in respect of the non-payment of the Crown debts. I therefore consider that he should be disqualified for the same period as Mr Smedley, namely 12 years.

Cited in 1 later judgment