HM Revenue & Custom (HMRC) faces an inquiry to establish how much in damages it owes the former directors of a London warehousing firm it abruptly shut down over false claims of tax evasion, a debacle that led to one of the directors suffering a mental breakdown and attempting suicide.
The tax office has been in the eye of political storm this week accused of doing cosy deals with the super-rich who, according to a leak of documents from HSBC's Swiss operation, had hidden money from the tax collector for years.
Paul Bloomfeld, a multi-millionare property developer, was not prosecuted by HMRC despite evading tax in the UK for 20 years.
Bloomfeld's name has emerged in a tranche of account information leaked from HSBC's private bank in Switzerland, where the super-rich hid their assets from tax authorities the world over.
HMRC had been investigating Bloomfeld and held several meetings with him to discuss his finances, but he was never brought to court. He is the subject of a BBC Panorama investigation, from where the claims have emerged.
The scandal embellished HMRC's reputation for buckling in the face of powerful interests and perceived lenience towards massive corporate tax avoiders – such as the so-called "sweetheart deals" with the likes of Goldman Sachs – but aggressive pursuit of smaller companies and everyday people who it thinks owe money.
High Court judge Justice David Richards was highly critical of HMRC and its doomed pursuit of Abbey Forwarding, describing it as a "worrying case". He dismissed HMRC's arguments against a damages inquiry and ordered one to take place. The courts will now decide what HMRC owes.
Justice Richards cited an earlier judgment attacking HMRC for making "no attempt whatsoever to recognise the consequences of their ill-judged litigation" until two years after its initial claim, that Abbey had committed tax fraud, had been thrown out of the courts because it could not be substantiated.
"I am concerned that HMRC remain reluctant to recognise those consequences," Justice Richards said in his judgment.
"It has already cost HMRC some £2.5m and it seems to me that, if this has not already been done, their position should be considered at a very high level within HMRC."
Unpaid excise duty
HMRC believed in 2009 after investigations that Abbey Forwarding had been dodging customs duty on alcohol it had been storing in its warehouses and arranging to transport to mainland Europe.
Its assessments concluded that Abbey owed over £5.9m in unpaid excise duty. HMRC presented a petition to wind up the firm and brought in a liquidator to sell off Abbey's assets and recoup what it thought was tax owed.
This happened in a single day at a private "ex-parte" hearing without Abbey's four directors. All of the 23 staff had, overnight, lost their jobs.
Insolvency practitioner Louise Brittain, who was working for Baker Tilly at the time, was brought in as liquidator.
The judge said Brittain was brought in by HMRC not just to secure the firm's assets, but also to "end what it believed to be the fraudulent business of Abbey".
He added that Brittain had little choice but to shutter the warehouse because HMRC had imposed conditions and restrictions "which made it in practice impossible to operate as an authorised warehouse".
She relied on a 110 page affidavit sworn by an HMRC official – which alleged large-scale fraud by Abbey – in order to bring misfeasance proceedings against the directors on top of HMRC's winding-up petition for Abbey.
Brittain successfully applied for a worldwide freezing order on three of the directors, meaning they could not access the assets of the company unless the liquidator gave them permission, such as to pay for legal or living costs.
She and her solicitors had come in for criticism before over the way in which they policed the frozen funds, giving the directors seriously restricted access to Abbey's cash.
In a previous hearing at the Court of Appeal, a judge had noted that they had taken "wholly unjustifiable approaches to the questions of living expenses and legal costs" and that the liquidator's conduct was "at times inexcusable and the adverse effects of the injunction were far reaching and life-changing" for the directors.
The directors fought off claims that they had evaded excise duty by producing evidence to show their innocence, namely that deliveries of alcohol to a French warehouse had been made and that the cargo had not made its way onto the black market instead.
As a result, they went on to win their 2010 misfeasance trial because HMRC had not been able to substantiate its claim that they had acted fraudulently.
According to the directors, the proceedings caused them great suffering. In 2009 at the height of HMRC and the liquidator's actions against Abbey, Rick Hone, one of the directors, was sectioned under the Mental Health Act after trying to take his own life.
Hone told the court that he had done it "out of despair at what had happened, the overwhelming sense of injustice I felt and the effects on me of seeing the distress of my family".
After HMRC and the liquidator's cases against its directors fell apart, the firm was re-established in 2012 as Purland House and back successfully trading again with many of the same staff and from the same premises. However, the directors say that the ordeal continues to take its toll.
There has been some dispute between HMRC and Brittain over the handling of the misfeasance proceedings, which could, if successful, have bankrupted the directors. HMRC's lawyers suggest that Brittain acted differently to how they would have, something she contests.
Moon Beever, Brittain's solicitor, said in a letter to the court: "There were significant difficulties in obtaining information and resource from HMRC ... However any suggestions made by HMRC (as alleged by Banks Kelly) that HMRC would have run the litigation differently were also news to us given that HMRC were indemnifying, providing witness evidence and reviewing pleadings as a condition of continuing the indemnity."
Justice Richards said: "I am not satisfied on the evidence before me that Ms Brittain did anything other than, as required by her duties as a provisional liquidator, decide for herself that it was appropriate to bring these proceedings.
"It is, however, clear that those proceedings and the application for a freezing order were co-ordinated with HMRC and could not have been brought without the evidence and financial support of HMRC."
A spokesman for HMRC said: "We are carefully considering the judge's detailed findings and will make a decision in due course as to how HMRC should proceed."