Bell Davies Trading Ltd & Anor v Secretary of State for Trade & Industry

Bell Davies Trading Ltd (“BDT”) and KTA Ltd (“KTA”) were established to exploit import licences granted for imports of footwear and ceramics from the People’s Republic of China. The directors of BDT, who were in partnership as the Bell Davies Partnership (“the Partnership”), devised a scheme whereby licence applications could be made by numerous companies (“Quota Companies”) owned by persons, who were recruited by or on behalf of BDT and KTA.

The Secretary of State for Trade and Industry (“the Secretary of State”) formed the view that the method of exploitation was in breach of EC Regulations, which allowed only single applications by operators who were deemed to be “related persons.” The Secretary of State presented winding up petitions against BDT and KTA (together “the Companies”) under section 124A of the Insolvency Act 1986 alleging that BDT was operating and that KTA was participating in, and assisting with, the operation of, an unlawful scheme (described as “quota theft” “which should be stopped as soon as possible in the public interest” and involving “wholesale abuse of the Import Licensing Scheme operated by the DTI”), which breached EC Regulations in relation to the import of footwear and ceramics from China and that the Companies should be wound up in the public interest. The crucial issue between the Secretary of State and the Companies and their advisers, both in correspondence and at meetings before the petitions were presented and during the winding up proceedings themselves, was whether the Quota Companies, which applied to the DTI and other importing licensing authorities within the EC, were “related persons” under the control of the Companies within Article 2.3(b) of EC Commission Regulation 1394/2001 and its successors and Article 143 of EC Commission Regulation 2454/93.

Section 124A empowers the Secretary of State to present a petition for a company to be wound up if the court thinks it just and equitable for it to be so, where it appears to the Secretary of State from (inter alia) any report made or information obtained under Part XIV of the Companies Act 1985 that it is expedient in the public interest that a company should be wound up. Section 447 of the Companies Act 1985 (which is a provision appearing in Part XIV) permits the Secretary of State to give directions to a company to produce documents, and to provide an explanation of any of them.

These are appeals by the Companies, brought with the permission of the judge, from two decisions of David Richards J. In the first judgment, given on December 19, 2003, the judge accepted the Secretary of State’s contention that the Quota Companies were “related persons” and were under the control of the Companies within the meaning of the relevant EC Commission Regulations. The scheme operated by the Companies was therefore unlawful. He decided, however, that the Companies should not be wound up under section 124A, provided that certain undertakings were given by them and their directors. The undertakings were given, as the Companies did not wish to be wound up. The winding up petitions presented by the Secretary of State on 13 October 2003 were dismissed. The Secretary of State makes no complaint about the dismissal of the petitions presented by her. She is content with the undertakings given in compliance with the condition set by the judge for the dismissal of the petitions. The Companies do complain about the undertakings, contending that they were wrongly extracted from them in winding up proceedings, which should never have been brought against them. It was wrong for them to have to litigate the control issue, which turned on the meaning and application of the EC Commission Regulations, with the threat of a winding up order hanging over them, if they were held to be wrong. They seek an order releasing them from the undertakings or setting the undertakings aside on the ground that it was inappropriate for the Secretary of State to have invoked the winding up jurisdiction at all. They argue that the judge exercised his discretion in an unreasonable and unfair way by making dismissal of the petitions conditional on the undertakings. The correct course would have been to dismiss the petitions unconditionally, leaving the Secretary of State to seek declaratory or injunctive relief in other proceedings.

The Companies also appeal from the judge’s order that they should pay 75% of the Secretary of State’s costs. They contend that he ought to have ordered the Secretary of State to pay all or some of their costs, or at least made no order as to costs, as the Companies had repeatedly pointed out that winding up proceedings were inappropriate and that declaratory proceedings ought to be pursued instead. It is contended that a substantial part of the costs were spent on matters relating to winding up, including an application by the Secretary of State for the appointment of a provisional liquidator, which was not pursued, and by the Companies themselves making other applications to restrain advertisement and for s127 relief, which in the event it was not necessary to pursue.

In his second decision, given on January 16, 2004, the judge refused to make a declaration that a course of action proposed by the Companies for licence applications in 2004 would not be in breach of the undertakings in the order of December 19.

The Partnership was set up in October 1994 and operates as a consultancy providing clients with advice on aspects of international trade relating to Customs and Excise, such as classification, valuation, duty, reliefs, origin, preference, warehousing, etc.

The founding partners were Alun Davies, Paul Ness and John Carlin. Mr Davies had been employed by HM Customs and Excise in its Policy Division in London. Mr Davies subsequently became a customs duty consultant with KPMG, and later became the principal in charge of the UK customs duty practice of Touche Ross. Mr Ness and Mr Carlin worked for Mr Davies at Touche Ross. Mr Ness had, like Mr Davies, been employed by HM Customs and Excise, in its Investigation Division.

In October 2000, the Partnership established BDT to manage import licences in circumstances detailed later in this judgment. Mr Davies, Mr Ness and Mr Carlin are its directors, and Mr Carlin is company secretary.

KTA was incorporated in July 2001, and changed its name to its present name in March 2002. Its sole shareholder and director is Mrs Kirsten Lawson. Her husband, Mr Timothy Lawson, is the company secretary. Each of them had worked for BDT since April 2001. Mr Lawson had previously been a tax and customs consultant with Scandinavian Airlines, and subsequently with Price Waterhouse. KTA provides services to BDT, including the recruitment of individuals to the scheme and dealing with the paperwork generated by the Quota Companies.

The Secretary of State for Trade and Industry is the respondent to the appeal because she presented the winding up petitions on the public interest ground and her department, the Department of Trade and Industry (the “DTI”), through its Company Law and Investigations Directorate, is responsible for the exercise of the powers of the Secretary of State under section 124A.

The DTI Import Licensing Branch is also the competent national authority for the purposes of the administration of European Community import quotas.

Prior to the adoption of Council Regulation (EC) 519/94, there were over 6000 national restrictions on imports of certain products from the People’s Republic of China to the European Community. There was also a small number of Community-wide restrictions. The United Kingdom had a large number of restrictions on products imported from China. These encompassed a wide range of goods and affected relatively small quantities of imports. This had the result that products were imported by other Member States and then transported to the United Kingdom to avoid the restrictions.

Council Regulation (EC) 519/94 was introduced to promote Community-wide uniformity to help create a single market. This put an end to national import restrictions and imposed quantitative quotas on the import of 14 types of products from China, including footwear and ceramics. Since 1994, seven of the non-textile quotas have been removed. Of the seven restrictions which remain, five relate to footwear and two to ceramics. The remaining restrictions will cease to apply at the end of 2004 following the accession of China to the World Trade Organisation.

The quota system applies across the European Community, and there is no separate quota for each Member State. Applications for import licences could be made to any Member State, and were made to and processed by the competent national authority in each Member State.

Council Regulation (EC) 520/94 established a Community procedure for administering quantitative quotas in relation to imports of footwear and ceramics from China. It recited that “the administrative procedure must ensure that all applicants have fair access to quotas, and..... the documents issued must be such that they can be used throughout the Community” (recital 6).

By Article 3 of that Regulation:

“The Commission shall publish a notice announcing the opening of quotas in the Official Journal of the European Communities, setting out the allocation method chosen, the conditions to be met by licence applications, time limits for submitting them and a list of the competent national authorities to which they must be sent.”

By Article 4:

“1.All Community importers and exporters, no matter where they are established in the Community, may submit a single licence application for each quota or tranche of a quota to the competent authority of the Member State of their choice, drawn up in the official language or languages of the Member State concerned. Where a quota is limited to one or several regions of the Community, the application shall be made to the competent authorities in the Member State(s) of the region(s) in question.

2.

Applications for licences shall be submitted in accordance with the arrangements determined following the procedure laid down in Article 23”.

Council Regulation 520/94 allowed the Commission to choose whether to allocate the quotas: (a) based on traditional trade flows (Articles 6 to 11); or (b) in the order in which applications were submitted (Article 12); or (c) in proportion to the quantities requested (Article 13). The Commission favoured the first method because “certain characteristics of China’s economy, the seasonal nature of some of the products and the time needed for transport mean that orders for products subject to quota are generally placed before the beginning of the quota year” (Recital 3, Council Regulation 1355/2000). This method remained the same for subsequent years: Commission Regulations 1394/2001 (2002 quota), 1498/2002 (2003 quota), 1351/2003 (first tranche of 2004 quota), 2044/2003 (second tranche of 2004 quota).

Under the traditional trade flow method, two types of applicant could apply for import quotas under Article 6(1) of Council Regulation 520/94: traditional and non-traditional importers. By Article 6(1):

“Where quota allocation takes account of traditional trade flows, one portion of the quota shall be reserved for traditional importers or exporters while the other shall be set aside for other importers or exporters.”

By Article 6(2):

“Importers or exporters deemed to be traditional are those able to demonstrate that in the course of the previous period, to be known as ‘the reference period’ they have imported into the Community or exported from it the product or products covered by the quota.”

If an applicant was non-traditional, Article 10 applied in relation to the allocation method: “The portion of the quota set aside for non-traditional importers or exporters shall be allocated in accordance with Article 12.” Thus non-traditional quota was initially allocated on a first-come, first-served basis.

The importer could then submit an application for the following quota year under Article 4(1):

“All Community importers and exporters, no matter where they are established in the Community, may submit a single licence application for each quota or tranche of a quota to the competent authority of the Member State of their choice, drawn up in the official language or languages of the Member State concerned.”

An importer could therefore submit applications for each of the seven groups of products covered by the Regulations.

The Commission was then under an obligation by Article 5 to “ensure that the licences to be issued are for economically significant quantities, having regard to the nature of the product covered by the quota”.

Commission Regulation (EC) 738/94 laid down procedural rules for the implementation of Council Regulation 520/94, “in particular as regards false statements on licence applications” (recital 6). By Article 3(2) the licence application had to state (inter alia) that the information given is correct and is given in good faith, that the applicant was established in the European Community, and that the application was the only one made by him or on his behalf for the quota in question. The wording of the declaration was set out in Article 3(2)(g).

From 1994 onwards, the number of non-traditional applicants for non-textile quota increased, which led to a corresponding decrease in the amount of allocations to those applicants awarded non-traditional quota licences contrary to the policy of Article 5 of Council Regulation 520/94 that the Commission would ensure that licences were issued for economically significant quantities.

Consequently in 1999 the Commission altered the ratio between the amount of quota allocated to traditional and non-traditional applicants. Initially, 25% of the quota was reserved for non-traditional applicants, and this figure was increased to 30% in 2000 for applications in 2001.

But the problem persisted, largely because of non-traditional applications from the United Kingdom, which comprised about 52% of the Community-wide non-traditional non-textile quota in 2000. By 2001, the figure was about 75%.

The reason for the high proportion of companies applying for non-traditional quota, both initially and as rollover, from the United Kingdom was a small number of United Kingdom importers (including the members of the Partnership) setting up numerous new companies, which applied for separate import licences.

In 2000 and 2001 there were discussions between the Directorate-General for Trade of the European Commission and the Import Policy Directorate of the DTI. The correspondence before the court shows that the Commission was concerned at the problems caused in the administration of the quotas by the very large number of applications made by non-traditional importers in the United Kingdom through the incorporation of large numbers of companies for the purpose of applying for non-traditional quota. The Commission’s legal service had advised that this might be allowed on a strict reading of Council Regulation 519/94, but went against its spirit and objective. The DTI suggested that the problem would have to be addressed by amending the Regulation.

One of the steps taken by the Commission to deal with the problem was to introduce a new condition in Commission Regulation (EC) 1394/2001 with regard to applications for 2002, whereby applications by “related persons” were forbidden.

The recitals to Commission Regulation 1394/2001 stated that the year 2000 had been characterised by certain distortions, in particular a more than twofold increase of applications from one Member State, which resulted in substantially reduced individual quota allocations to all non-traditional importers in all Member States. The years 1998 or 1999 were therefore the most recent years representative of the normal trade flows in the products in question. Traditional importers had therefore to prove that they had imported products originating in China and covered by the quotas in question in the years 1998 or 1999. According to recital 8:

“It has been found that the unusual increase of applications lodged for the portion of the quota set aside for non-traditional importers is due to multiple licence applications from companies who do not effectively operate as separate importers, but which have been established as separate legal entities only for the purpose of being able to submit additional applications. Regulation (EC) No 520/94, in particular recital 5 and Article 5 thereof, requires the Commission to ensure fair access to quotas and that import licences be issued for economically significant quantities. To allocate the non-traditional quota in line with these principles, the administrative procedures should be amended. The Commission considers it necessary that operators applying as non-traditional importers and falling under the definition of related persons within the meaning of Article 143 of Commission Regulation (EC) No 2454/93, as last amended by Regulation (EC) No 993/2001, may only submit a single licence application for each line of the quota set aside for non-traditional importers. In order to exclude speculative applications, the amount that any non-traditional importer may request should be restricted to a set volume.”

By Article 2.3:

“(a)

The portion set aside for non-traditional importers shall be apportioned using the method based on allocation in proportion to quantities requested; the volume requested by each applicant may not exceed that shown in Annex II.

(b)

Operators that are deemed to be related persons as defined by Article 143 of Regulation (EEC) No 2454/93 laying down provisions for the implementation of Council Regulation (EC) No 2913/92 establishing the Community Customs Code may only submit single licence application for the portion of the quota set aside for non-traditional importers regarding the goods described in the application. In addition to the statement required by Article 3(2)(g) of Regulation (EC) No 738/94, the licence application for the non-traditional quota shall state that the applicant is not related to any other operator applying for the non-traditional quota line in question.”

Commission Regulation (EC) 2454/93 (which derives from the US Customs Code and the GATT Customs Valuation Code) lays down provisions for the implementation of Council Regulation 2913/92 establishing the Community Customs Code.By Article 143(1) of Commission Regulation 2454/93 (as amended), for the purposes of Title II, Chapter 3 of the Code and of Title V (which relate to valuation of goods for customs purposes)

“persons shall be deemed to be related only if:

By Article 141(1) of Commission Regulation 2454/93 the interpretative notes are to be applied to any provision specified in Annex 23. Against Article 143(1)(e) is set out the following interpretative note: “One person shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter.”

The DTI notice to importers draws to the attention of importers that Article 4 of the Import of Goods (Control) Order 1954 (SI 1954 No 23) provides that it is a criminal offence for any person to make any statement which to his knowledge is false in a material particular, or recklessly to make any statement which is false in a material particular, and that any licence which may have been granted in connection with the application for which the false statement was made shall be void as from the time when the licence was granted. The combined effect of Commission Regulation 738/94 and Commission Regulation 1394/2001 (and the equivalent Regulations for subsequent years) was that an applicant was required to state that it was not related to any other operator applying for the non-traditional quota.

The related persons conditions were also included in Commission Regulations (EC) 1498/2002, 1351/2003 and 2044/2003 for applications for 2003 and the first and second tranches for 2004 respectively. They also provided that the proportions of the quantities reserved for non-traditional importers and not allocated would be added to the quantities reserved for traditional importers. The applications for the first and second tranches of 2004 quotas were to be lodged by September 19, 2003 and December 31, 2003 respectively. Any applicant applying for rollover in 2004 must have used up 80% of its main quota allocation in 2003: Commission Regulation (EC) 308/2004.

As part of China’s accession to the World Trade Organisation it was agreed that the European Union would ultimately remove all import restrictions. In anticipation of the complete liberalisation on 1 January 2005, it was decided that quota levels should be increased between 2001 and 2004.

In order to facilitate this change, Council Regulation 427/2003 was introduced retrospectively increasing quota. The mechanism for the allocation of the additional quota was set out in CommissionRegulation 428/2003. Importers who had a licence between 2002 and 2003 are entitled to additional quota based on the percentage of the licence during that period according to a table set out in Commission Regulation 428/2003.

The use of non-traditional quota has been particularly important in the United Kingdom, but because the non-traditional quota available to each importer is very small in the light of the demands of large UK retailers, methods have been found of aggregating the imports into larger commercially significant quantities. It is the concern at the legality of the methods used by BDT to achieve this objective which is at the heart of this case. The essence of the scheme was that members of the public would be recruited to own companies, which would be entirely administered by BDT or KTA, and which would apply for licences in one or more Member States, and would buy and re-sell the goods on back-to-back terms without any profit or loss.

BDT’s business, for present purposes, can be described as accumulating or aggregating quota, which can be accessed by its retail clients, such as Littlewoods, British Home Stores and Matalan. Between May 1997 and September 1998, the Partnership set up 65 companies with the purpose of applying for quota for footwear and ceramics from China for the 1999 quota year. Those companies are “traditional” importers.

Before the introduction of the “related persons” amendment to the system, Messrs Davies, Ness and Carlin had incorporated about 1,600 companies to apply for “non-traditional” quota.

In October 2000, the Partnership established BDT to manage the import licences obtained by the companies which had been incorporated.

As from July 2001, Commission Regulation (EC) 1394/2001 introduced the related persons rule. As a result, the companies, which had been incorporated by BDT’s directors and which had successfully applied for 2001 quota, were excluded from making applications for the 2002 quota year, because they were all owned by BDT’s directors and were under the control of BDT.

In June 2001, shortly before the introduction of the related persons test by Commission Regulation 1394/2001, the Partnership sought advice from Mr Hugh Mercer of counsel on (inter alia) a scheme whereby a company which was bought by a person with no connections under Article 143 “instructs Bell Davies to use their expertise on his/her behalf in the quota market.” The director of the company would be free to negotiate charges for the transaction, and would provide written approval or confirmation of the transaction with a party selling footwear to buy back the footwear when within the Community. There would be no common directors and no common shareholding in excess of 5%. BDT would provide services for a fee.

On June 19, 2001 Mr Mercer advised that the issue of control was a question of fact. BDT would have to ensure that it did not have a real influence over the companies. It was essential that any services provided by it were only professional, whilst leaving the judgment element to the company. There was a good prospect of the new arrangements not falling foul of the related persons test.

After the change was introduced BDT implemented a scheme whereby individuals were recruited to set up their own companies- the Quota Companies-to obtain quota licences, but the scheme underwent some development after the discussions with Mr Mercer.

For the 2002 quota year, BDT recruited individuals using its own contacts and outlets. In the following year, BDT employed KTA to recruit more individuals. In addition, BDT used 53 “recruitment contacts” to find more individuals interested in the scheme. The introducers (other than KTA) were paid between £400 for 5 recruits and £15,000 for 100 recruits.

The contractual arrangements between BDT and KTA are contained in letters dated April 15, 2002 and December 18, 2002. KTA was to recruit clients, form the quota companies, and administer the quota companies, in return for 10% of BDT’s gross operating profit up to a limit of £250,000, and a monthly administration fee (£2,500 until March 31, 2003).

For the 2003 quota scheme, the pack issued to those who had been recruited to own quota companies included two documents: a template letter dated May 21, 2002 and an information or marketing pack.

The template letter enclosed the information pack, and a company formation document, which the recipient was asked to fill in and sign, together with the appointed company secretary, who could be a family member or someone else they wish to appoint. The letter suggested that the surname of the recipient was used as the name of the company. The information pack stated that, for the 2002 quota scheme, 99% of clients were paid at an agreed profit share of £500 by Christmas 2001. The few clients who chose not to operate under the upfront payment arrangements had not yet received payment, but BDT expected to pay them a similar figure before the end of 2002. The step-by-step procedure indicated that, if the recipient wished to agree the upfront profit payment, then, upon receipt of instructions, BDT would send a cheque for the amount which was yet to be agreed for 2003, which represented a dividend payment, most probably in December 2002. The company’s accounts would be prepared by BDT’s accountants, Creaseys.

Once an individual filled in the various forms and returned them to BDT, Mr Lawson checked the forms and then telephoned the applicant to ensure that he or she understood the commitment. He also checked to see whether the company name could be used, and whether the applicant had made any previous applications or might be related to someone else on the database. Once incorporated, the applicant was sent the certificate of incorporation for his or her quota company together with the share certificates.

KTA would then send out six quota application forms to the director of each of the companies, which were largely completed by KTA. Once finalised, the forms were then sent to the relevant licensing authority of a Member State.

While the licence applications were being processed, a follow up letter was then sent out giving the quota licence-holder two options. Under Option 1, a licence-holder could wait until a potential trading opportunity arose, but was informed that there was no guarantee that such a trading opportunity would arise during the quota year. Under Option 2, an applicant could instruct BDT to deal with the licence. Under this option, £500 was pre-paid to the licence-holder generally within six weeks of the licences being handed over to BDT. The letter also indicated the need for the quota company to appoint accountants and be registered for VAT. Under Option 1, a quota licence-holder had a choice of whether to use BDT’s recommended accountant. Under Option 2, BDT’s recommended accountant had to be used. The recommended accountant was Ash Tree Accounting Ltd, the director of which (Mrs Helen Barham) was a former employee of Creaseys.

When licences had been issued, KTA sent out addressed envelopes to the quota companies to encourage them to send the licences. If they opted for Option 2, then they would be sent £500 within about six weeks. The £500 was described as a dividend. Mrs Barham prepared accounting entries for each quota company showing, in the typical case, £500 as profits available for distribution.

The evidence was that, for a typical application, the costs incurred were £500, the licence holder made £500, and BDT’s profit was £2,000. It is likely that BDT’s turnover was more than £1 million.

For the quota year 2003, there were 491 traditional licence-holders and 1,190 non-traditional licence-holders. 216 quota companies applied for licences in the United Kingdom, and the remainder in other Member States, including the Republic of Ireland, to which 300 quota companies made applications.

From October 2002 there were discussions between the Companies Investigation Branch (which is part of the DTI Company Law and Investigations Directorate) and the Import Licensing Branch of the DTI following an investigation of a company called Kanmar Trustees Ltd, against which a public interest petition was presented at some time prior to March 2003. In that month there was a further meeting, when the Companies Investigation Branch informed the Import Licensing Branch that its investigation was being expanded to look at other companies which might be abusing the quota scheme, including BDT. The Import Licensing Branch then gave the Companies Investigation Branch details of some of the quota companies managed by BDT.

On April 1, 2003 the Companies Investigation Branch was given authority to make document requests from BDT under section 447 of the Companies Act 1985, and the authorisation was served on April 8, 2003. A similar authorisation in respect of KTA was granted on April 24, 2003 and served on April 30, 2003.

Meanwhile (and unconnected with the investigations by the Companies Investigation Branch) on April 4, 2003 BDT wrote to the Import Licensing Branch, and said that BDT managed quota licenses for non-related traditional and non-traditional companies. It said that it had taken legal advice on what was possible when the related party provision was introduced and that it was always concerned to ensure that it acted at all times within the applicable legal requirements. The purpose of the letter was to obtain the agreement of the DTI that its management of quota licences owned by non-related companies did not cause the DTI any concerns with regard to the related party requirement, to which its attention had been drawn. The letter of April 1, 2003 to which this is a reply is not among the papers, but from DTI letters to quota companies of the same date it appears to have been a letter drawing attention, in connection with rollover allocation for 2003, to the additional statement in the application that the applicant is not related to any other non-traditional applicants.

On April 30, 2003 Mr Ness and Mr Davieswrote on behalf of BDT a full letter to Mr Fenton of the Companies Investigation Branchabout the business activities of BDT. It said that, after a careful study of Commission Regulation 1394/2001, and after taking legal advice, it was able to identify an opportunity by which it could continue to assist its clients, by which it would act as a service provider to individuals who had formed their own companies and had applied for non-traditional quotas. BDT concluded:

“We would argue that any investigation is left only with non-factual allegations e.g. BDTL controls its licence holder clients. From the facts we have supplied and the legal advice we have taken, we remain of the opinion that our procedures mean we do not control any licence holder clients. Neither would we agree that sale/buy back contracts are a sham. They provide legal effect to the terms of trade required by those businesses operating within the market of goods covered by quota. The sale/buy-back arrangements are very widespread throughout the EU and without the service provided by companies such as BDTL there would be virtual collapse of some 20% of trade in the products concerned. The impact upon the UK economy if it were to act independently of other Member States would certainly be severe. Indeed trade would be driven to other EU countries who seem to have no problems with these arrangements.

We hope this detail as requested will provide you with a fuller insight into the BDTL business. If you have any further questions then please let us know and we will gladly provide more clarification as necessary.”

On April 30, 2003 Messrs LeBoeuf, Lamb, Greene & MacRae wrote on behalf of BDT to Mr Fenton with reference to BDT’s letter to him of the same date. They said that they were aware that the DTI had in the past taken action against other companies, including Kanmar Trustees Ltd/ t/a Northern Leather Goods and a number of quota companies. They said that the circumstances, dealing and governance of BDT, and the non-traditional companies for whom it managed quota, were substantially dissimilar to those relating to Kanmar Trustees Ltd and its Quota Companies. Accordingly a winding up petition would be entirely inappropriate. They said:

“The only appropriate ways forward for the Department, should you believe that any such step is necessary, would be by way of either an application for a declaration or an application to the European Court for clarification of the Regulations. We believe the latter would be the most appropriate”.

On May 1, 2003 the DTI (through Mr Fenton of the Company Investigation Branch) replied to Messrs LeBoeuf, Lamb, Greene & MacRae’s letter to say that the contents of their letter were noted, and that he was authorised on behalf of the Secretary of State under Section 447 of the Companies Act 1985 to require BDT to produce company documents and provide explanations. His enquiries were continuing and their clients would be required to produce such documents and explanations as were necessary to assist his enquiry.

There was further correspondence between BDT and the Companies Investigation Branch, from which it appears that the DTI requested further information arising out of BDT’s letter of April 30, including details of the legal advice referred to in that letter. On May 29, 2003 BDT replied to say that the advice was not disclosable, since it was not obtained by BDT itself, and was not therefore part of BDT’s records. The opinion of Mr Hugh Mercer was not produced by BDT until November 25, 2003, the day before the hearing of the petitions.

Nothing material happened until August 1, 2003, when the Import Licensing Branch wrote to 216 Quota Companies to say that they were breaching the related persons rule, and that licences not used were revoked, and indicating that, in respect of Quota Companies which had used their licences, they would not be entitled to benefit from the 2003 quota uplift.

In August 2003, several of the Quota Companies wrote to the Import Licensing Branch questioning the decision to revoke or invoking the appeals procedure. In correspondence in August and September the DTI maintained its position and upheld the decisions to revoke.

The winding up petitions were presented on October 15, 2003. According to the petition in respect of BDT:

“56.

In the course of applying for the licences the Company is procuring that the Quota Companies lie to and mislead the DTI (and if the application is made elsewhere in Europe, the relevant authorities there) by stating that they are not related to other applicants.

57.

The transactions in which the Quota Companies take part whereby the goods are purportedly bought and sold by them are artificial transactions set up solely to enable goods to be brought into the Community by someone who does not hold the necessary import licences. The whole transaction is prearranged so far as the Quota Company is concerned, hence it runs no risk of loss or of being left with the goods it has ostensibly imported. On any footing this is a breach of the terms of the licences as they are in effect being transferred or loaned to persons other than the licence holder, as the licence holder has no intention or desire itself of importing goods for its own benefit.

58.

Although it was claimed that the Company had taken legal advice before setting up the scheme, such legal advice was not produced despite request, on the grounds that it had not been obtained by or for the companies subject to the Section 447 inquiries.

59.

Notwithstanding the revocation of the licences for 216 of the Quota Companies, the Company continues to use them or cause them to be used and will continue to do so unless prevented.”

It was alleged that in the circumstances BDT was operating an unlawful scheme, and its affairs were run with a lack of commercial probity. Accordingly it was just and equitable that it be wound up.

In relation to KTA, the allegation was that it had no independent existence from BDT and its business, and it had knowingly participated in, and assisted with, the operating of an unlawful scheme to obtain import licences, in breach of EC Regulations, and its affairs had been conducted with a lack of commercial probity.

At the same time as the petitions were presented, an application was made for the appointment of a provisional liquidator for each of the Companies. The application for the appointment of the Official Receiver as provisional liquidator was on the basis that there was a serious risk that the remaining time before the hearing of the petitions would be used by the Companies to utilise the revoked import licences, or pass them on to others for use. The appointment of a provisional liquidator was required in order to take control of the Companies, and put an end to their exploitation of the revoked licences (including licences obtained in other Community countries), and of the Quota Companies. It was subsequently accepted by the DTI that in all cases but one the goods had entered into free circulation before the licences were revoked.

On October 21, 2003 Park J ordered that the application for the appointment of a provisional liquidator be stayed, that the Companies serve and file evidence in answer to the petitions by November 4, 2003, with reply evidence by November 11, 2003, and that the hearing of the petitions be fixed not before November 18, 2003. This was upon an undertaking by the Companies and their directors as follows:

“not to manage, allocate, pass on, handle, process, use or otherwise deal with or control in any way whatsoever (whether on behalf of themselves or any of them or on behalf of any person for whom they or any of them manage quota or licences) any ‘non-traditional’ import licences for the quota year 2004, issued by the relevant U.K. import licensing authority to ‘Quota Companies’ (meaning companies that the Secretary of State alleges that Bell Davies Trading Limited and/or KTA Limited have arranged to be formed for the purpose of acquiring ‘non-traditional’ licences) and not to cause or permit any of those things to be done.”

On October 30, 2003 Messrs LeBoeuf, Lamb, Greene & MacRae wrote to the Treasury Solicitor offering to continue until December 31, 2004 the undertakings given in the order of October 21, 2003. They reiterated their proposal that the Regulation questions should be determined by means of declaratory proceedings.

On October 30, 2003 Mr Buttrill, of the Treasury Solicitor’s office, acknowledged the letter and said that his client was out of the office for the remainder of the week and he would not be in a position to take instructions and respond substantively until November 3, 2003. On November 18, 2003 Mr Fenton of the Companies Investigation Branch swore an affidavit in which he said in paragraph 6:

“Following receipt of this letter the decision was taken to defer any response until after there had been an opportunity to consider the Defendants’ evidence. It is now clear that the Secretary of State is not in a position to accept BDT’s suggestion that the current proceedings be put on hold whilst a separate application is made for a declaration as to the interpretation of the related person rule and, in particular, the meaning of ‘connected’ in Regulation 143. To the extent that this question arises, it can be determined by the Companies Court on the hearing of the current petitions. In view of the fact that the scheme operated by BDT is illegal, steps need to be taken sooner rather than later to deal with this issue. The undertaking offered in respect of the small number of applications that are made to the UK licensing authority does not address the Secretary of State’s concerns.”

On December 19, 2003 David Richards J gave judgment on the hearing of the petitions. His judgment may be summarised as follows. Article 143 of Commission Regulation 2454/93 had to be given a purposive construction. The practical problem to which it was addressed was stated in recital 8 of CommissionRegulation 1394/2001, to deal with the problem of multiple licence applications from companies which did not effectively operate as separate importers, but which had been established as separate legal entities only for the purpose of being able to submit additional applications. If the language in Article 143 could properly be interpreted in a way which met the problem so stated, then that interpretation should be adopted.

The principal submission for the Companies on the meaning of paragraph (f) of Article 143 was that control connoted control of all aspects of the company. It was not sufficient to have control of, for example, the business of the company, even if that was its only business. There had to be control over all the functions of the company including, for example, the payment of dividends or a decision to wind up. For the Secretary of State it was submitted that control of the business of the company was sufficient, even though the company had two or more businesses. Accordingly, it was enough if the business of applying for and using import licenses was under the control of another.

The judge said that, on the view of the facts which he took, it was not necessary to resolve those differences of interpretation. It was certainly not necessary to decide what the position would be if the Quota Company had more than one business, as virtually none of them did. On his view of the facts, no serious issue of interpretation of control as appearing in Article 143 arose. The facts demonstrated that control of the Quota Companies was vested in BDT.

He relied on the following matters in particular:

Virtually none of the shareholders had any interest in the companies or the licences beyond receiving their fee of £500. The Quota Companies were simply part of the paperwork. It did not matter that a shareholder could at any time exercise his legal right to take control of the company. As the interpretative notes made clear, control need not be legally enforceable but might exist in fact or, as the notes put it, operationally. As a matter of fact it was BDT which exercised control.

The judge rejected the argument that, until the shareholder made his choice between Option 1 and Option 2, it could not be said that BDT controlled the Quota Company. BDT fully expected that almost all Quota Companies would opt for Option 2, and only people with experience of the import business or a desire to gain such experience would elect for Option 1. Given the way the scheme was marketed, the offer of a choice between the Options was at best an opportunity for a shareholder to elect to exercise his control over his Quota Company. Unless unexpectedly he did so, the position remained unchanged that control in fact rested with BDT.

The conclusion therefore was that all the Quota Companies established for clients by BDT or KTA were controlled by BDT at all times, except that, in the case of a handful of such Quota Companies which chose Option 1, it is at least seriously arguable that such choice either demonstrated that the shareholder in fact had control of the company or was exercising his right to take control.

He rejected the argument for the Secretary of State that the scheme breached the regulations because the sale of the goods by BDT to the Quota Company and their purchase by BDT were shams in the sense of the classic description by Diplock LJ in Snook v London and West Riding Investment Ltd, [1967] 2 QB 786, 802. The scheme could not work unless the Quota Company owned the goods in question at the time of importation. That purpose made it essential that there should be a contract for sale in favour of the Quota Company, to be followed later by the corresponding contract of repurchase. As BDT had complete control of the import of the goods and the use of the licences, and authority to act on behalf of the Quota Company in all relevant respects, BDT’s intentions as to the contracts were properly attributed also to the Quota Company. The result was that both parties to the contract had the same substantial reason for acquiring genuine contracts of sale and repurchase. It followed that the contracts reflected in the invoices were not shams.

On the exercise of the discretion the judge said that the following points made on behalf of the Companies did not carry any weight. The first was that there was no deception of the public. But that was not a necessary part of a public interest winding up. The second was that the scheme had had no adverse effects in the United Kingdom or elsewhere in the European Community. But in fact it had the effect of diluting the quantity of goods for each licence granted. The third was that the DTI was the only national licensing authority concerned to enforce the related persons provisions. But there was no evidence that other national authorities were aware of the way in which the scheme was organised, and it was legitimate for the Secretary of State to take the view that, as the scheme was organised by an English company operating from within the United Kingdom, it was for its authorities and courts to address the issue. The fourth was that interference with BDT’s scheme would have an adverse effect on the business of large and reputable companies, which had a real need for non-traditional quota. But economic loss to those who benefit, even innocently, from an illegal scheme, was not a ground for permitting the illegal activity to continue. The fifth was that the petitions were academic, because the quota system would cease at the end of 2004, and BDT had undertaken not to deal with the 2004 licences issued by the United Kingdom authorities. But that did not address the problem of 2004 licences issued by other Member States, which would be managed by BDT.

The judge concluded:

“68.

On the other hand, there are, as I have indicated, some significant factors against the winding up order. First, I am not satisfied that BDT’s activities involve deliberate wrongdoing on its part. Secondly, if operation of the scheme which I have held to be illegal now ceases, it is no longer necessary to wind up the companies in order to achieve the purpose of the petitions. Thirdly, and this is closely linked to the first and second points, the evidence shows that BDT has a substantial amount of business which is not related to the quota companies. This is not true of KTA, which has only little other business, but it would be perverse to wind up KTA if a winding up of BDT was inappropriate, and, in any event, the first two factors are applicable to KTA.

69.

Provided therefore that undertakings are given by BDT and its directors in terms which ensure that the scheme involving the use of quota companies and their licences, whether in the UK or elsewhere in the EC, cease to function, it would not, in my judgment, be just and equitable to wind up BDT or KTA.

70.

There is one aspect of the procedure adopted in this case which has caused me concern. Following the exercise of powers under s.447, and in the light of the DTI’s obvious concerns that the scheme breached the relevant regulations, BDT and its solicitors wrote to the Department agreeing to be bound by the results of proceedings for declaratory relief aimed at resolving these issues. Assuming that the court would have had jurisdiction to entertain such proceedings, and no significant argument was advanced for the Secretary of State that it would not, this would seem a more appropriate way of resolving the underlying issue in this case. A refusal to follow the court’s ruling would have justified an application to wind up the companies.

71.

The submissions that (1) the existence of one legal route for determination of the issue is no bar to using another, and (2) a winding up petition is the usual application to which the exercise of power under s.447 leads, do not seem to me to be adequate grounds for invoking the winding up jurisdiction of the court in the particular circumstances of this case if a viable alternative is available. The suggestion made on behalf of the DTI [sic! read as BDT] deserved more consideration than it appears to have received.”

The undertakings ultimately reflected in the order and upon which the petitions were dismissed, were as follows:

“BDT, John Carlin, Paul Ness, Alun Davies, KTA, Kirsten Lawson and Timothy Lawson (in the case of the individuals by the Companies’ counsel being their counsel for this purpose) jointly and severally UNDERTAKING not to manage, allocate, pass on, handle, process, use or otherwise deal with or control in any way whatsoever (whether on behalf of themselves or any of them or on behalf of any person for whom they or any of them manage quota licences) ‘non-traditional’ import licences for the quota year 2004, issued by any EU import licensing authority to ‘Quota Companies’ (meaning companies that BDT and/or KTA control or controlled at the time of application for 2004 licences), and not to cause or permit those things to be done. For the purposes of this undertaking ‘control’ means ‘control’ as defined by Article 143.1(f) of Regulation (EEC) No. 2454/1993.”

In his judgment of January 16, 2004 (section VII below) the judge said that he had “required” the undertaking.

In early December 2003, prior to the time for lodging the second round applications, BDT wrote to all existing Quota Companies to send them the completed application forms for signature, but also said that the way in which BDT might be able to manage the licences in 2004 had not been the subject of a management offer.

Following the first judgment of David Richards J, BDT wrote on January 5, 2004 to the Companies Investigation Branchsetting out the proposed operating procedure for 2004. The proposal was that BDT would approach the Quota Companies on a trade-by- trade basis, and would invite the Quota Companies to bid for the trade in question:

“… BDT intends to proceed as follows:-

1.

BDT will establish with retail clients their quota requirement for a particular contract and the price the retail client is prepared to pay to obtain access to the required level of quota.

2.

Against that background, BDT will approach the quota companies on a trade-by-trade basis. BDT will invite the quota companies to bid for the trade in question. BDT will describe the trade with reference to the range of acceptable prices appropriate to the goods concerned.”

On January 8, 2004 the Treasury Solicitor replied to the letter to say that the Secretary of State was not able to agree.

On January 12, 2004 BDT made an application in the petition proceedings for a declaration that it was not or would not be in breach of the undertakings in the order of December 19, 2003 by carrying on business in respect of 2004 quota licences as contemplated in the letter of January 5, 2004.

The affidavit of Mr Ness of BDT in support of the application stated that there were 1,061 Quota Companies which had applied for 2004 quota licences, which had also received quota licences in 2002 and 2003, and there were 1,063 Quota Companies which had applied for 2004 quota licences, but which had not applied for quota licences before. BDT and KTA relied on the absence of any letter such as that sent in 2002 offering a choice between Option 1 and Option 2.

In his judgment of January 16, 2004 the judge rejected this argument on the ground that there was “no reason to suppose that the people behind those companies did anything other than to continue to participate in the scheme in the same way as before.” The position in respect of the 1,063 new Quota Companies was different, but there was a paucity of evidence as to how and on what basis they were recruited. BDT sought to rely on a letter prepared for prospective clients, but there was no evidence that copies of this letter were sent to more than two or three prospective clients. There was an entirely inadequate evidential basis on which to make findings that the new quota companies were not controlled by BDT. Insofar as reliance could be placed on the standard form letter, it would suggest as in previous years that participants would have only a minimal involvement. The evidence indicated that as in previous years the new Quota Companies were, from the point of view of the individual participants, simply part of the paperwork. The critical issue was whether, as a matter of fact, the Quota Companies were or were not controlled by BDT at the time of the applications for the 2004 licences. That issue could not be affected by consideration of the terms of a draft proposal, which might in the future be sent to the Quota Companies as to the management of their 2004 licences.

BDT and KTA appeal from the first judgment on the grounds that (1) the judge was wrong to hold that the Quota Companies were, for the purposes of Commission Regulation 1394/2001, Article 2(3)(b) and Commission Regulation 2454/93, Article 143, related persons and were under the control of BDT and/or KTA; (2) the judge was wrong to make dismissal of the petitions conditional on the giving of undertakings by BDT and KTA; (3) the judge was wrong to order BDT and/or KTA to pay 75% of the Secretary of State’s costs. By respondent’s notice the Secretary of State says that the judgment should be upheld on the additional ground that, even if a Quota Company chose Option 1, it was still under the control of BDT for the purposes of Article 143(1) of Commission Regulation 2454/93.

BDT and KTA appeal from the second judgment on the grounds that: (1) the judge was wrong to conclude that the undertaking had to be cast in the terms that it was, because the Companies had made a decision not to put in any evidence on the hearing of the petitions as to their proposed methods of operation in 2004: the evidence would not have been relevant to the issues, and the judge should have stood over the finalisation of the terms of the undertaking until the Companies had had a proper opportunity to consider his judgment and to put in evidence about what the Companies proposed to do in 2004 in the light of his judgment; (2) he was wrong to proceed on the basis of a presumption that, unless the Companies could prove positively that circumstances had changed, those Quota Companies which had applied for 2003 licences while under the control of the Companies should be similarly treated for the purposes of the 2004 applications; (3) the evidence of the correspondence with the Quota Companies in late 2003 showed that they were no longer under the Companies’ control; (4) he was not entitled on the evidence to infer that the new Quota Companies were controlled; (5) he failed to consider whether the proposed modus operandi in the letter of January 5, 2004 infringed the undertakings.

The Companies no longer contend that, for the purposes of Article 143(1)(e) and (f), “control” means corporate control in the sense of a state of affairs of control over the company’s corporate life or over all its affairs. The argument is that, at the relevant time, the submission of the licence applications, all that had happened was that the Companies had presented a business plan to the interested persons, assisted them in setting up companies, and sent partially completed licence application forms for signature, and sent the licence applications to the competent authorities. None of these activities constituted control. The Quota Companies had freedom whether or not to pursue the business opportunity, whether or not to sign and return the licence application form, whether or not to exploit the licence, whether to exploit it through BDT, and which option to choose. The judge wrongly equated the expectation of future control with control at the only relevant time, the submission of the licence application. The second decision was in any event wrong, because the existing and new Quota Companies were not offered Option 2 or anything equivalent to it in relation to 2004 quota.

We are satisfied that the judge’s conclusion on the control issue is correct and that the Companies’ arguments ignore the realities. The question whether the Quota Companies were controlled by the Companies for the purposes of Article 143(1) of Commission Regulation 2454/93 is a question of fact and degree. As a result of the interpretative note, control may be found to exist if (but not only if) the Companies were operationally in a position to exercise direction over the Quota Companies. The essence of the scheme was that individuals were paid £500 to lend their names to forming Quota Companies to apply for licences for the Companies. The directors of the Quota Companies made no decisions. The Quota Companies had no business apart from obtaining the licences. It is wholly contrary to the realities of the situation to suggest that BDT and/or KTA were simply managing the licences.

We do not consider that the potential choice between Option 1 and Option 2 would make any difference to the conclusion. Even under Option 1, the licences would go to BDT; BDT would decide if and when the Quota Company would be offered a trade; BDT would decide the price; and the Quota Company would have no contact with the real importer.

Nor (if it were necessary to decide the question) do we consider that the judge’s second decision can be criticised on the control issue. The letter sent to the existing Quota Companies in December 2003 said nothing, except that no offer had been made for the 2004 licences. Again, the Companies were to complete the licence application forms and lodge them with licensing authorities in Member States of their choice. The judge was right to hold that, as before, the new Quota Companies were simply part of the paperwork. The proposal that the Quota Companies would bid for use of the licences was wholly artificial. They would have no alternative but to bid for the lowest price. The whole process was under the control of the Companies.

We accordingly find for the Secretary of State on the crucial issue of control. It was not disputed that, if the applications made by Quota Companies for licences were made by “related persons “ within Article 143, as we hold they were, the scheme operated by the Companies was unlawful.

As the Companies have lost the appeal on the central issue of control, the normal order would be to dismiss the appeal with costs. This is not, however, an entirely straightforward case. As indicated earlier, points have been taken as to whether the Companies should be released from their undertakings on the basis that (a) the presentation of the petitions was an abuse of process and (b) the judge was wrong to require the Companies to give the undertakings as a condition of not making winding up orders.

The Companies contend that the Secretary of State ought never to have presented the winding up petitions against them. It was the inappropriate vehicle for deciding the control point, which was the real issue between them. The judge would have been wrong to make a winding up order on the petitions. He ought never have “extracted” the undertakings from the Companies as a condition of not making winding up orders, as it would not have been just and equitable to make such orders. The Companies therefore wish to be released from the undertakings and they want their appeals to be allowed, even though they have lost on the central issue of control.

It is necessary to consider the circumstances in which the Secretary of State decided to present the petitions and in which the Companies gave the undertakings. These are not mere academic procedural questions. They could have real practical consequences in this case, as they relate to whether the Companies should be released from the undertakings, what order should be made on the appeal, whether the orders for costs below should be reversed or varied and what orders for costs should be made on the appeal. The procedure to be followed in similar cases in the future may also be affected.

At the outset of the appeal the court raised with counsel the question whether it could entertain an appeal by the Companies against the undertakings given to the court.

In general, if a party gives an undertaking to the court, he is not entitled to appeal against the undertaking. As in the case of a consent order, an undertaking is a voluntary litigation act analogous to entering into an agreement with the other party. It is a voluntary promise made to the court, not a coercive order made by the court. A typical case is an undertaking to the court by a defendant on an application for an interim injunction, in order to avoid the making of an injunction or other order against him. An undertaking is voluntary, even when it is given under the threat of an order in the same terms or of a more drastic order. If the party subsequently wishes to be released from the undertaking or to have it varied, an appeal does not usually lie against the undertaking, for the defendant would be appealing against a litigation decision that he, and not the judge, had made. The normal procedure would be for the party, who had given the undertaking, to apply to the court, to which he had given the undertaking, on a specific ground, usually changed circumstances making the continuation of the undertaking unnecessary, oppressive or unjust.

This is not, however, a typical case. Mr Ritchie, appearing for the Secretary of State, did not raise any procedural objection to the Companies’ appeal against the undertakings. It is clear from the transcript of the post-judgment discussions that both sides and the judge himself, who saw fit to grant permission to appeal, saw no procedural difficulty in the way of the Companies appealing to this court against the undertakings.

We agree with Mr Siberry QC, appearing for the Companies, that this case is different from the undertaking volunteered by a defendant on an application for an interim injunction. Although in form the Companies are appealing against undertakings which they gave to the court, in substance their appeal is against the decision of the judge that the dismissal of the winding up petitions should be conditional on the Companies giving undertakings to the court. The undertakings were also acceptable to the Secretary of State. In those circumstances the Secretary of State does not appeal from the order dismissing the petitions, but does contend that the Companies should not, in those circumstances, be released from the undertakings.

The Companies go further than simply challenging the judge’s decision to require them to give the undertakings. They also submit that the Secretary of State ought never to have invoked the s124A jurisdiction of the court, as the disputed question of the construction and application of the EC Commission Regulations relevant to the control issue was more appropriately justiciable in declaratory or injunctive proceedings. It would have been wrong for the judge to make winding up orders on petitions, which should never have been presented to the court at all. It was neither just and equitable nor in the public interest to do so. In short, it was wrong of the judge to require the Companies to give undertakings, as a condition of not making the winding up orders, which, in any event, it would have been wrong for him to make.

After considerable hesitation we are satisfied that this is a case in which the court should entertain an appeal against undertakings. It is true that the Companies were legally entitled to decline to give the undertakings. If they had done so, the judge would have made winding up orders, which the Companies could then have appealed on much the same grounds as those on which they have appealed against the undertakings. It is, however, unrealistic to expect solvent companies, who were strongly contending that there was nothing unlawful in the conduct of their businesses, to have done anything other than give the undertakings required in order to avoid the making of the winding up orders. They were given under the threat of orders, which, on their case, the judge would have been wrong to make.

We shall accordingly deal with the merits of the appeal against the undertakings given by the Companies

A valuable review of the authorities on the proper approach of the court to s124A public interest petitions, in general, and to the practice relating to the acceptance of undertakings, in particular, was carried out by the Vice-Chancellor in his judgment in Re Supporting Link [2004] EWHC 523 (Ch). The judge has a discretion whether or not to make a winding up order. As for undertakings, the court has a discretion whether or not to accept them if they are proferred and whether or not to make the giving of them a condition of dismissing the petition. In considering the exercise of his discretion the willingness or otherwise of the Secretary of State to accept undertakings, which have to be policed by the DTI, is an important factor.

Thus, in the exercise of the discretion, the judge is entitled (a) to dismiss the petition on undertakings if, for example, he is satisfied that the offending business has ceased or if the undertakings are acceptable to the Secretary of State; or (b) to dismiss the petition on undertakings, even if that course is opposed by the Secretary of State, although that will be unusual; or (c) to refuse to accept undertakings and to wind the company up, if, for example, he is not satisfied that those giving the undertakings can be trusted.

In our judgment David Richards J followed the correct approach in this case. There is no error in the exercise of his discretion to order that the dismissal of the petitions was conditional on undertakings.

We see no ground for interfering with the judge’s exercise of his discretion on costs in his first judgment.

Both appeals are dismissed.