Secretary of State for Business Energy and Industrial Strategy v Murphy [2019] EWHC 459 (Ch)

Secretary of State for Business Energy and Industrial Strategy v Murphy [2019] EWHC 459 (Ch) concerned an application for a disqualification order under section 6 of the Company Directors Disqualification Act 1986 against Mr Raymond St John Murphy, sole director of St John Law Limited, a solicitors’ practice that entered administration on 9 October 2014. ICC Judge Mullen disqualified Mr Murphy for eight years.

St John had commenced trading in May 2012. By the date of administration the company owed £582,330 to HMRC, comprising £196,255 in VAT (none of which had ever been paid), £386,074 in PAYE, NIC, corporation tax and stamp duty (against which only £50,189 had been paid), plus interest and penalties. Other creditors were owed £404,341, of which £94,466 was owed to the Redundancy Payment Service. Over the same trading period Mr Murphy had received repayments totalling £241,003 against his director’s loan account and the company had made payments totalling £75,818 to his daughter-in-law, who was not a director, shareholder, employee or creditor. The company’s turnover had been approximately £650,000 in 2012, £1.3 million in 2013 and £1.2 million in the period to administration.

HMRC had been in contact with Mr Murphy from May 2013 onwards about outstanding returns and liabilities. From early in those exchanges Mr Murphy had represented that a costs order made in his favour in about November 2010 following the withdrawal of criminal proceedings against him would provide funds to discharge the tax debt. He told HMRC in May 2013 that he expected payment within two weeks, repeated similar assurances over subsequent months, and in July 2013 agreed a time-to-pay arrangement for monthly payments of £15,000 commencing 1 August 2013. No instalments were ever paid. In January 2014 Mr Murphy wrote to HMRC claiming that the company was not indebted to HMRC because HM Treasury owed him substantially more than the tax claim and that the company had a good defence by way of set-off until that sum was paid. He asserted that the company was not insolvent and that presentation of a winding-up petition would be an abuse of process. HMRC presented a petition on 27 June 2014. On 29 August 2014 the company obtained a validation order under section 127 of the Insolvency Act 1986 validating specified payments out of its office account. In his witness statement in support, Mr Murphy stated at paragraph 10.3 that the company had a counterclaim in respect of the petition debt. Between 27 June and 9 October 2014 the company made payments totalling £370,481, of which £24,400 went to Mr Murphy personally and a further sum (the judge found at least £10,557) represented payments of company liabilities not covered by the validation order.

The Secretary of State alleged that Mr Murphy had caused the company to trade to the detriment of HMRC by failing to file returns and pay taxes when due, treating HMRC unfavourably compared with other creditors, and that he had caused payments to be made outside the scope of the validation order to the detriment of creditors when he knew the company to be insolvent.

Mr Murphy opposed the application. He contended that he could not receive a fair trial because the company’s electronic records, maintained on a cloud-based system called Osprey, had been deleted in about July 2015, six months after the subscription lapsed during the administration. He said those records would have demonstrated that the company maintained proper accounts, that arrangements had been made to discharge tax liabilities, that there was an offset in respect of monies due by the company to him, and that he did not appropriate company money for personal benefit. He advanced three principal defences to the HMRC allegation: first, that the costs order (which he said amounted to over £400,000 after deducting payments on account) would have been sufficient to discharge the tax liabilities (the Costs Order Defence); secondly, that the company’s fee income from unbilled work and conditional fee cases would have enabled it to meet its liabilities and that it was therefore not insolvent (the Work in Progress Defence); and thirdly, that payments shown as credits to his director’s loan account were proper and represented modest remuneration (the Proper Payments Defence). In relation to the validation order he contended that the payments made after presentation were proper liabilities and that many were payments of client monies held on trust and did not amount to dispositions of the company’s property.

ICC Judge Mullen first addressed the question whether Mr Murphy could receive a fair trial. That issue had already been determined by Deputy ICC Judge Baister on 15 June 2018 when he dismissed Mr Murphy’s strike-out application. The deputy judge had concluded that while the absence of the Osprey records might affect the weight of evidence, Mr Murphy could have a fair trial. He had noted that the records might enable Mr Murphy to make good his allegation that work in progress and the costs order would enable HMRC to be paid so the company was balance-sheet solvent, but this did not address the specifics of the allegation that HMRC were unpaid or treated unfavourably, which at best went to unfitness or mitigation. Similarly, it was open to Mr Murphy to identify which payments were of trust monies and which were company monies, and the deputy judge had given him the opportunity to file further evidence by 16 July 2018. Mr Murphy did not do so. ICC Judge Mullen held that the matter could not be reopened and that he respectfully agreed with the deputy judge’s conclusion. The judge noted that Mr Murphy had chosen to give his detailed explanations of payments in the witness box rather than in a further witness statement.

On the HMRC allegation the judge held that the principles to be applied were those summarised in Secretary of State for Business, Energy and Industrial Strategy v Sahar Khan [2017] EWHC 288 (Ch). The court must establish a discriminatory practice of paying other creditors with the result that the company traded at the expense of HMRC. Such a practice can be inferred from conduct, for example withholding payment for a significant period while paying others. If a deliberate policy of non-payment is established, the court asks whether the defendant has fallen below the standards of probity and competence appropriate for directors. A policy involves some decision, which may be conscious or subconscious. Mr Murphy did not challenge the sums due to HMRC or that there was a systematic failure to pay. He accepted in cross-examination that the reason was that the company was not able to pay, that he was well aware of the sums owed, and that he decided who was to be paid. He said his primary duty was to ensure access to justice and he put clients’ interests first. He accepted there was a decision to use income and resources to continue trading rather than pay tax.

The judge considered each of Mr Murphy’s defences in turn. On the Costs Order Defence, he noted that there was no evidence that Mr Murphy’s representations to HMRC that payment was imminent had any foundation. Mr Murphy had provided no evidence of efforts to obtain payment and had withheld details of the proceedings, waiting until trial to claim that the paying party had been the Department for Business, Energy and Industrial Strategy, thus denying the claimant a sufficient opportunity to check its records. He had been asked by the Insolvency Service in February 2016 to provide details but did not do so. The only evidence of payment obtained by the Secretary of State was a payment of £96,234.28 on 19 November 2014 from HM Courts and Tribunals Service, plainly insufficient to discharge the tax liabilities. The judge found that the costs order was used to stave off action by HMRC, first as a source of funds and secondly as a purported defence. Mr Murphy’s statement that the company had a good defence by way of set-off was untrue. Mr Murphy was an experienced solicitor who understood the difference between money owed to him personally and money owed to his company. He had himself acknowledged in his second witness statement in support of the administration application that the costs order was owed to him personally. The letter of 20 January 2014 could only be read as a distortion to stay HMRC’s hand. The same distortion was relied upon in the validation order application. Mr Murphy had not offered any submission as to how a payment due to him could operate as a set-off in favour of the company. The correspondence did not show a bona fide intention to discharge the liabilities; on the contrary it showed that Mr Murphy was prepared to mislead HMRC to prevent it taking action and gain more time. This provided no defence and no mitigation.

On the Work in Progress Defence, the judge held that at best this provided mitigation, not a defence. Tax was not being paid in order that the company could continue to operate. The further difficulty was that the work in progress was conducted on a conditional fee, no-win no-fee basis. This was clear from paragraphs 36 to 39 of Mr Murphy’s first statement, where he stated that work would be conducted on a success basis and fees recovered from the opposing party on a conditional fee basis, with potential recovery unexpectedly delayed. During cross-examination Mr Murphy said for the first time that a fee was recoverable whether or not the cases were successful and would be paid by a legal expenses insurer. The judge rejected that evidence. Mr Murphy was an experienced litigation solicitor and if the cases had been conducted on a basis that fees would be payable whether won or lost he would have said so. He made it clear they were cases where payment was dependent upon success. The joint administrators’ proposals dated 2 December 2014 stated that deferred income work in progress was difficult to quantify in the absence of a practice management system but the director had informed them it was in the region of £1.5 million. One matter due to be decided might lead to a payment of £500,000 if successful; the remainder was speculative. Unbilled work was estimated to realise £74,589. By the progress report of 30 September 2015 invoices of £78,216 had been sent and £22,365 plus VAT received. By November 2016 the liquidators had realised £40,000 from a former client’s estate and no other recoveries were likely.

Mr Murphy maintained that details of work in progress and time recorded by fee-earners was on Osprey and would vindicate his account of its value. The evidence of Mr Bucknall and Mr Ho was that time-recording was not maintained electronically on a practice management system. This was consistent with the evidence of Ms Kaplan, a solicitor employed by Pinsent Masons, appointed as solicitor managers, who stated the company did not use a central practice management system. Mr Murphy adduced no evidence from fee-earners to the contrary. The judge noted that Mr Murphy’s evidence about Osprey had been inconsistent. He asserted with particularity the nature and extent of records on the system and his responsibilities as financial compliance officer, and similarly asserted that all his personal records concerning the costs order were on Osprey, yet he also stated twice in cross-examination that he did not know what Osprey was until the administration. The judge was not satisfied that Mr Murphy’s account of the records kept on Osprey was accurate. Mr Murphy’s evidence gave no cause to doubt the administrators’ approach to valuation. He received the proposals and progress reports and made no contemporaneous challenge. The first of the two CFA cases was lost; the second was also lost. While Mr Murphy asserted that a successor practice realised £400,000 from insurance in one case, no evidence was provided and this was at odds with his evidence that these were no-win no-fee cases. Even if correct, it would not follow that the company would have been entitled to that sum. The case was of long standing and entitlement would need to be apportioned between the company and Merriman White. Whatever the value of work in progress under CFAs, it was speculative, depending first on success and secondly on the ability to recover from the losing party or the client. At best, Mr Murphy was gambling that cases would come good and enable him to pay some or all of the HMRC liabilities.

The judge dealt shortly with the suggestion that the value of work in progress meant the company was solvent. Whatever its value, the company was unable to pay debts as they fell due. This was expressly stated at paragraph 2.2 of Mr Murphy’s second witness statement in support of the administration application: the company was unable to pay its debts and was insolvent on a cashflow basis. It was reflected in his evidence that the company was simply unable to pay tax. His evidence relied on the administrators’ opinion that it was not reasonably practicable to rescue the company as a going concern. Mr Murphy’s contention that the company was in fact solvent was unsustainable and his willingness to change his evidence was troubling. The Work in Progress Defence offered neither defence nor mitigation.

On the Proper Payments Defence, the judge noted that Mr Murphy expressed bemusement at the figures in the Foxley Kingham schedules and said in oral evidence that most entries were nothing to do with him. He did not understand why payments to Santander mortgage were shown as a debit to his loan account. Later in cross-examination he disclosed that the payments were in respect of his ex-wife’s mortgage. He suggested that payments totalling £75,818 to L. Murphy or Lucie Murphy between February 2012 and March 2013 were sums due to his son Dominic for work done for the company, paid to Lucie because Dominic was bankrupt. He later changed his evidence and stated payments were made because his son, although discharged, did not have a bank account. The schedules were exhibited to Mr Shiels’s first affirmation dated 5 October 2016. In his affidavit in answer Mr Murphy stated that payments for the benefit of himself or his former wife were not improper and were paid from remuneration or living expenses he was entitled to withdraw. In his second statement he said he did not make any wrongful withdrawals and all payments were either remuneration or reimbursement of expenditure on behalf of clients. There was no evidence that Mr Murphy was entitled to a salary, nor was he entitled to a dividend. He produced nothing to show any expenditure on behalf of clients. While he continued to rely upon the Osprey records, he could have adduced evidence from his own financial records or bank statements to show the expenditure he said was being reimbursed. Mr Murphy was taken to the draft accounts for the year ending 30 November 2013 in which sums due in respect of his director’s loan account were shown. The figures were consistent with those in the Foxley Kingham schedules. Mr Murphy said these were only draft accounts and he could not remember seeing them, but they were relied upon by him in his second witness statement in support of the administration application and he did not suggest they were inaccurate at the time. The judge saw no reason to consider that the schedules were other than substantially correct. They showed payments to Mr Murphy, his daughter-in-law, his ex-wife, his ex-wife’s mortgagee, barristers’ chambers with reference to his son Dominic, and doctors with reference to his son. While some entries might have been mis-categorised, the judge was satisfied on the balance of probabilities that the schedules,

LLC v Sequana SA [2019] EWCA Civ 112
Re Grayan [1995] Ch 241
Industrial Strategy v Sahar Khan [2017] EWHC 288
Re Structural Concrete Ltd [2001] BCC 578
Industry v Reynard [2002] B.C.C. 813