Bhanderi v Customs and Excise

Turnstem Ltd (“Turnstem”) was incorporated in England and Wales and carried on business in England trading in alcohol in bond. At all relevant times its sole director and shareholder has been Mr Harish Bhanderi (“Mr Bhanderi”). On January 13, 2004 Turnstem submitted to a compulsory winding up order. This judgment is given following an application that the winding up order be rescinded.

On August 14, 2002 Mr Bhanderi was arrested, the Turnstem premises raided, a large amount of its stock and those of its subsidiary Dimestore Ltd (a company with a number of retail outlets trading from leasehold premises (“Dimestore”)) and its documents seized, and the provisional liquidator, Mr Timothy Bramston, was appointed by Lightman J. The winding up petition, based on VAT and excise duty assessments totalling £2,708,900, was presented on the same date.

The fraudulent diversion of duty suspended alcohol into the market without payment of duty and VAT is estimated to cost the exchequer some £450 million p.a. Alcoholic goods can lawfully be manufactured, sold, held or moved by the owner without payment of duty, provided that they remain in bond. Fraudulent diversion occurs by the creation of false administrative documents ("AADs") which permit the release of the duty suspended products from a bonded warehouse. Goods kept in such a warehouse can move from one such warehouse to another without the payment of tax provided the necessary documentation accompanies the goods showing that they are going to another bonded warehouse (both within the United Kingdom and also other EU countries).

There is widespread evasion of these controls by alcohol being unlawfully diverted onto the UK home market through the use of AADs being returned with false stamps evidencing receipt of the goods by the supposed warehouse of destination. The false documents achieve a release of the goods from a bonded warehouse, supposedly to be passed to another such warehouse, but in fact the goods never arrive, and instead they are fed into the home market (or “slaughtered”), where they are sold at a reduced price, usually for cash, because duty and VAT have not been paid.

The relevant provisions governing movements of duty suspended goods and the liability for excise duty on them are contained in the Excise Duty Points (Duty Suspended Movements of Excise Goods) Regulations 2001 (the “DSMEG Regulations”).

The DSMEG Regulations were enacted in part to implement the provisions of Council Directive 92/12/EEC on the general arrangements for products subject to excise duty and on the holding, movement and monitoring of such products, as amended ("the Directive").

In cases of diversion it is often very difficult, or impossible, to determine the moment or place of the diversion. Accordingly Article 20(3) of the Directive provides that where it is not possible to determine where the offence or irregularity was committed, the offence or irregularity is deemed to be committed in the Member State of departure.

Under DSMEG Regulation 3 a charge to duty arises in the UK in relation to a duty-suspended movement that started in the UK or in relation to an importation into the UK under a duty suspended movement, where an irregularity occurs in the UK or an irregularity is detected in the UK and it is not possible to establish where the irregularity occurred:

“(2)

Where the Commissioners are satisfied that the irregularity occurred in the United Kingdom, the excise duty point shall be the time of the occurrence of the irregularity or, where it is not possible to establish when the irregularity occurred, the time when the irregularity first comes to the attention of the Commissioners.

(3)

Where it is not possible to establish in which Member State the irregularity occurred, the excise duty point shall be the time of the detection of the irregularity or, where it is not possible to establish when the irregularity was detected, the time when the irregularity first comes to the attention of the Commissioners.”

DSMEG Regulation 7 provides for liability:

“7(1) Subject to paragraph (2) below, where there is an excise duty point as prescribed by regulation 3 or 4 above, the person liable to pay the excise duty on the occurrence of that excise duty point shall be the person shown as the consignor on the accompanying administrative document or, if someone other than the consignor is shown in Box 10 of that document as having arranged for the guarantee, that other person.

(2)

Any other person who causes or has caused the occurrence of an excise duty point as prescribed by regulation 3 or 4 above, shall be jointly and severally liable to pay the duty with the person specified in paragraph (1) above.”

Regulation 7(2) is not reflected by any provision of the Directive and is a purely national provision which imposes in respect of duty which becomes chargeable in the UK an additional liability (jointly and severally with the person liable under 7(1)) upon those who caused the duty point to arise.

There have been three recent cases on excise duty evasion, and the dates are significant for the purposes of this application. The first was my decision in Re Anglo-German Breweries Ltd [2002] EWHC 2458 (Ch), decided on November 29, 2002. In that case I decided that the debt becomes due on assessment, but if there is a pending appeal to the Tribunal which raises arguable issues as to the validity of the assessments, then that is an important factor in the exercise of the discretion whether to wind up a company. The second was my decision in Re The Arena Corporation Ltd [2004] EWHC 3032 (Ch), [2004] BPIR 375, decided on December 12, 2003. In that decision I rejected an argument that Regulation 7(2) was ultra vires the Finance Act (No 2) 1992. The third was the decision of Lindsay J in Jack Baars Wholesale v Commissioners of Customs & Excise [2004] EWHC 18 (Ch) [2004] BPIR 543. That case was decided on January 16, 2004, a few days after the winding up order in this matter. In BaarsLindsay J took the view that it was arguable that Regulation 7(2) was inconsistent with the Directive, and there was an issue as to its validity which should be decided in the Tribunal rather than on a winding up petition.

In the appeal in Re The ArenaCorporation Ltd [2004] EWCA Civ 371, [2004] BPIR 415 (decided on March 25, 2004) the Court of Appeal rejected the contention that DSMEG Regulation 7(2) was invalid as being so inconsistent with as to be prohibited by the Directive. The Court of Appeal also took the opportunity to confirm that if there was a real doubt as to the propriety of the assessments then the issues should be resolved by the Tribunal, not only because the Tribunal is the forum prescribed by Parliament, but also because it is not the function of the Companies Court in the exercise of its winding up jurisdiction to adjudicate in respect of a genuinely disputed debt. Sir Andrew Morritt said (at para 91): “….I am concerned lest the procedure adopted in this case is extended to others less clear than this. It is not the function of the Companies Court to adjudicate in respect of a genuinely disputed debt, particularly where it involves the rejection of sworn evidence ..”

The petition in this case was based on DSMEG Regulation 7(2) assessments by Customs against Turnstem in relation to 27 consignments of spirits and beer which between 5 October 2001 and 26 February 2002 Turnstem acquired in bond in England and purported to sell and ship duty-free:

Customs’ case was that instead of being delivered to those bonds, the consignments were diverted as part of an excise diversion fraud; that there had been an irregularity for the purposes of the DSMEG Regulations; and that the role played by Turnstem (acting by Mr Bhanderi) was such that it can be said to have caused the irregularity for the purposes of DSMEG 7(2).

On September 13, 2002 Turnstem commenced proceedings in the Chancery Division against Mr Bhanderi for misfeasance (“the misfeasance proceedings”). The claim form was issued by Turnstem’s provisional liquidator. The essence of the claim is that by his participation in the excise duty and VAT fraud Mr Bhanderi has caused Turnstem to be subject to the assessments. On the same date a worldwide freezing injunction was granted by Patten J in the misfeasance proceedings. Since that time Mr Bhanderi and the solicitors and agents acting for him have been subject to funding restrictions.

The petition was opposed by Mr Bhanderi on behalf of Turnstem. On December 9, 2002 he filed a short witness statement in opposition to the petition indicating that Turnstem disputed the assessments and the allegations contained in Customs’ evidence. Following an application on January 20, 2003 by Customs that Turnstem file any further evidence within 28 days, on February 10, 2003 Registrar Rawson ordered that unless Turnstem file its evidence in opposition to the petition by March 24, 2003 it be debarred from adducing further evidence in the petition. No further evidence was served; and on March 24, 2003 application was made for a further extension, which was refused by the Registrar on April 23, 2003.

Mr Bhanderi also instructed Mr Vincent Curley, the managing partner of Vincent Curley & Co, a firm specialising in VAT, excise duty and customs duties appeals, to appeal the assessments to the VAT and Duties Tribunal (“the Tribunal”) both in Turnstem’s name (August 21, 2002) and in Mr Bhanderi’s name (October 27, 2002). Various grounds of appeal were advanced including grounds that Turnstem reasonably believed that the relevant consignments were despatched to tax warehouses in other member states, and that consignments were moved through independent agents and hauliers and that, if offences had been caused, then the offence or irregularity was committed in another member state.

Customs and the provisional liquidator took the position that only the provisional liquidator had the power to prosecute (and if necessary) withdraw the appeals.

On February 25, 2003 at a hearing before the Tribunal (Mr Stephen Oliver QC) counsel for the provisional liquidator (supported by counsel for Customs) contended that (a) the terms of the appointment of the provisional liquidator ousted the power of the directors to appeal against the assessments, and only the provisional liquidator had power to prosecute the appeals; (b) in so far as the appeals lodged on August 21, 2002 and October 27, 2002 were effective, the provisional liquidator withdrew them.

Mr Andrew Young (counsel instructed by Santers) and Mr Curley contended that Mr Bhanderi had free-standing rights of appeal, and had the right to require the appeals to proceed to a hearing, while conceding (1) that any action on Mr Bhanderi’s part to pursue the appeals as Turnstem would be bound to fail, and (2) that Mr Bhanderi could not prevent the provisional liquidator from withdrawing the appeals. The decision of the Tribunal was that it did not accept Mr Bhanderi’s contention that, since the appointment of the provisional liquidator, he had the right to lodge and pursue appeals on behalf of Turnstem: that right had been held exclusively by the provisional liquidator, and the right to withdraw any appeal purportedly made on Turnstem’s behalf lay with the provisional liquidator. Accordingly it was directed that the appeals be treated as withdrawn forthwith.

On March 4, 2003 Mr Curley lodged a further appeal (“the third appeal”) on behalf of Mr Bhanderi, as a director and shareholder and a person with a direct and immediate concern, and applied for the appeal to be entertained out of time. One of the grounds for the extension of time for appeal was that Mr Bhanderi had formerly appealed in the name of Turnstem and the “issue of locus standi where provisional liquidators are concerned is not free from doubt, some provisional liquidators agreeing locus and others not” and that the provisional liquidator through counsel had indicated to the tribunal that he had no objection to Mr Bhanderi entering an appeal in his own name.

On June 5, 2003 Customs made an application to strike out the third appeal on the ground that, following the direction of the Tribunal on February 25, 2003, Mr Bhanderi had no right to lodge an appeal in relation to Turnstem, and he could not pursue an appeal in his own name because the notices of assessment were not issued to him, and he was not a taxable person.

On August 20, 2003 the Tribunal notified Mr Curley that there would be a directions hearing in the third appeal on October 2, 2003. On that date, Mr Young appeared for Mr Bhanderi, when the Tribunal directed that the application to strike out should be listed for a one to one and a half day hearing as soon as possible after November 24, 2003, and on October 17, 2003 Mr Curley wrote to say that he understood that it would be possible to list the hearing in December, and indicated 11 days which were inconvenient. On January 26, 2004 the Tribunal notified April 7, 2004 as the date for the hearing. That date was subsequently adjourned to July 8, 2004 following an application by Customs.

On October 11, 2002 Mr Bhanderi passed a resolution as shareholder to put Turnstem into members’ voluntary liquidation pursuant to Section 91 of the Insolvency Act 1986 and to appoint joint liquidators Mr Geoffrey Stuart Kinlan and Mr Anthony Sanderson of BDO Stoy Hayward. As director, Mr Bhanderi made a declaration of solvency on October 8, 2002 expressing the opinion that Turnstem would be able to pay its debts with interest at the official rate within 12 months and attaching a statement of assets and liabilities which suggested there would be a surplus of £157,547 in the winding up even after allowing for Customs’ debt.

The provisional liquidator and his solicitors made clear that he would not defer any power or authority to the voluntary liquidators and continued to exercise full responsibility and control for Turnstem’s affairs. Customs also continued with the prosecution of their winding up petition.

The declaration of solvency made when Turnstem went into members voluntary liquidation on October 11, 2002 was on the basis that the investment in Dimestore was worth £2,893,000, and that accordingly the assets exceeded the liabilities (even including the duty and VAT assessments), with a surplus of £157,547.

Mr Chatfield, who was requested in August 2002 by the provisional liquidator of Turnstem to act as his nominee in the management of Dimestore swore on September 13, 2002 an affidavit in which he said that two major creditors of Dimestore were still owed approximately £854,000. In a witness statement dated October 18, 2002 (in support of an administration order in respect of Dimestore) he said that the company was unable to pay its debts or likely to become unable to pay its debts. The accounts computer showed that Dimestore owed its creditors more than £8,000,000, and he estimated that the liabilities of the company were between £2.1 million and £8.1 million. He estimated the value of the shops as a going concern with goodwill at £600,000, and the assignment of leases could generate income of approximately £100,000. The estimated assets were therefore £2.3 million.

HH Judge Weeks Q.C. made an administration order on November 11, 2002. He said that on a balance sheet basis the finances of Dimestore seemed to be shrouded in mystery. A computer print out showed outstanding debts of £8 million but the investigation of the director included that the figure was more likely to be just over £3 million. It was impossible to form a concluded view on the state of affairs on the balance sheet on the limited evidence and he accepted that he could not be satisfied on the unsatisfactory evidence that Dimestore was insolvent on a balance sheet basis. The matter was plain beyond doubt on the other basis. There was a petitioning creditor in the sum of £64,768 and there were other creditors totalling £3 million. To pay the debts which were admittedly due, Dimestore had only £60,000 in its bank account, which in itself was insufficient for trading.

The liquidator of Turnstem considers that Turnstem, based upon its own records, was at that time (and is) insolvent even if Customs’ debt is not included as a liability. In any case Turnstem’s debts had not been paid in full by October 11, 2003 but no steps appear to have been taken as required by section 95 of the Insolvency Act 1986 to convert the winding up into a creditors voluntary liquidation.

Notwithstanding the barring order, the petition compulsorily to wind up continued to be opposed and was set for a 2 to 3 day trial from January 13, 2004, together with the application for summary judgment by the provisional liquidator in the misfeasance proceedings.

On January 12, 2004 Mr Reza and Mr Pennington Legh, counsel for Turnstem, wrote to me enclosing a skeleton argument, giving reasons why the petition would not be opposed. Their covering letter said that formal instructions not to oppose the winding up petition had not been received until the afternoon of January 9, 2004, and Customs and the court were then informed as quickly as possible. I shall set out the reasons given in the skeleton argument later in this judgment.

Accordingly, on January 13, 2004, I treated the hearing of the petition as unopposed and made an order winding up Turnstem, and gave directions in the application for summary judgment in the misfeasance proceedings.

By the Insolvency Rules 1986, rule 7.47(1) “Every court having jurisdiction under the Act to wind up companies may review, rescind or vary an order made by it in the exercise of that jurisdiction.” The effect of the decisions on this rule (and the equivalent provision in Insolvency Act 1986, section 375(1), for bankruptcy) is that the power is a discretionary one, which should be exercised in normal circumstances only either on the basis of a change of circumstances since the order was made or, more rarely, on the discovery of further evidence which could not be adduced on appeal: Fitch v Official Receiver [1996] 1 WLR 242 at 246 per Millett LJ; Re RS&M Engineering,Mond v Hammond Suddards [2000] Ch 40 at 49-50 per Chadwick LJ; In re a Debtor [1993] 1 WLR 314 at 318 per Millett J; Re Thirty Eight Building Ltd (in liquidation) [2000] 1 BCLC 201 at 206 per Hazel Williamson QC.

The application to rescind was made by notice dated January 30, 2004. At a case management conference on June 15, 2004 I ordered Customs, in response to an argument by counsel for Mr Bhanderi, to produce further evidence, since I wanted to ensure that the matter was dealt with by Customs on a cards on the table basis. My order was that Customs should file and serve by June 22, 2004 a witness statement confirming that: (1) none of the consignments the subject of the assessments on which the petition was based, or the lorries carrying them, were followed or otherwise subject to surveillance by Customs; and (2) Customs did not know or have evidence as to what happened to the consignments, and in particular whether those consignments went abroad. As a result, witness statements by Mr Parsons and Mr Braham were produced.

The evidence of Mr Parsons was as follows: (a) Customs had no surveillance or other observational material which identified that any relevant lorry went abroad; (b) they had information from ferry records which suggested that two lorries supposedly carrying assessed loads were weighed and crossed the channel empty; (c) in two other cases, lorries supposedly carrying assessed loads appear from the running sheet prepared by the driver to have travelled to another part of the United Kingdom when they should have gone abroad; (d) they had conducted some examination of tachograph records, even though they might not in fact enable one reliably to deduce the destination of the lorry concerned; (e) based on the tachographs, some lorries possibly carrying assessed loads may have travelled abroad, but to countries other than those to which the assessed loads were supposed to be delivered; (f) two lorries, possibly carrying two of the assessed consignments destined for TIN may have visited the Nieuwpoort area of Belgium; (g) there was nothing to indicate any of the other 25 assessed consignments may have reached the supposed destinations.

Mr Braham’s evidence was that 5 Turnstem consignments were the subject of surveillance, but none of these was among the 27 consignments which were the subject of the assessments in the present case. The 5 consignments were observed being “slaughtered” in London or Essex.

The relevant paragraphs of Mr Santer’s statement in support of the application are as follows:

“7.

The reasons and basis upon which Mr Bhanderi withdrew his opposition were set out in the skeleton argument produced by his Counsel for the hearing in 13^th January 2004 … I also exhibit a copy of the (unreported) decision of Anglo German Breweries and Commissioners of Customs & Excise [2002] EWHC 2458, 29^th November 2002.I draw this court’s attention in particular to paragraphs 7 to 8 of that skeleton. Specifically, it was said that ‘it is not open to Mr Bhanderi to dispute the Petitioner’s reliance on the amounts sought in the assessments as a debt that is due and unpaid’ as there had been no appeal or outstanding appeal against the assessments (paragraph 7. (b)). As a result of this undisputed petition debt, there was no evidence that Turnstem was anything other than insolvent (paragraph 7. (c)). As was also made clear in that skeleton Mr Bhanderi disputed and continued to dispute all the allegations of fraud made against him and Turnstem.

8.

Mr Justice Lawrence Collins, on 13^th January 2004, accordingly treated the hearing of the petition as unopposed and made an order winding up Turnstem. He also briefly dealt with the costs position. The Judge heard no argument on the merits of Customs (or Turnstem’s) case and made no findings on them. The Judge then gave directions in the Chancery Action in connection with the application for summary Judgment brought by the Provisional Liquidator, and adjourned that application, which is now due to be heard (over one and a half to two days) in a window commencing 16^th March 2004, also by Mr Justice Lawrence Collins.

9.

I am aware that after 13^th January 2004 there had been considerable correspondence passing between Counsel and Mr Justice Lawrence Collins, as there was disagreement as to the precise order made, primarily in connection with costs. I am not yet aware of the outcome of that correspondence or how the Judge has resolved matters. For that reason I do not know if the order in the winding up proceedings has yet to be drawn up and the precise terms of the order …

10.

On the afternoon of Tuesday 27^th January 2004 Counsel for Mr Bhanderi and myself saw for the first time copies of the very recent, and as yet unreported, decision of Mr Justice Lindsay in the case of HM Customs & Excise v Jack Baars Wholesale and others, Neutral Citation [2004] EWHC 18 (Ch), 16^th January 2004 … At about the same time a letter from Counsel was sent to Mr Justice Lawrence Collins together with a copy of the Baarsdecision. The first opportunity available to discuss the effect and implications of this decision with Counsel was not until the afternoon of the following day, Wednesday 28^th January 2004. It was only possible to discuss matters with Mr Bhanderi thereafter and take instructions from him and following advice given to him.

11.

The Baars decision appears to be highly relevant to Mr Bhanderi’s position and directly affects both the basis upon which Mr Bhanderi withdrew his opposition to the petition and the order of 13^th January 2004 itself. Its particular significance appears to be as follows:

a.

By February 2003 Mr Bhanderi with the assistance of separate specialist advisors,solicitors (Vincent Curley & Co) and Counsel, instructed before my firm’s involvement, attempted to cause Turnstem to appeal against the assessments raised by Customs and sought to have both the legal basis and the “merits” of the assessments determined by the VAT and Duties Tribunal. However Turnstem was not able to. On 25^th February 2003 the Provisional Liquidator, acting by his Counsel Mr David Alexander, intervened in the appeals against the assessments brought by Mr Bhanderi on behalf of Turnstem, persuaded the Tribunal that only the Provisional Liquidator had status to appeal the assessments and upon that argument being accepted, then promptly withdrew the appeals against the assessments which had been advanced by Mr Bhanderi on behalf of Turnstem. Turnstem and as a result Mr Bhanderiwere thereby denied any chance or opportunity of challenging the assessments both as to their legal basis and on the ‘merits’ even though that is both what they wanted and attempted to do. I refer to the bundle of documents marked Exhibit MHS7. This contains Notices of Appeal, the Provisional Liquidator’s Statement of Case and the decision of the Tribunal on the assessment appeals. I would remind this court that as of 25^th February 2003 the Provisional Liquidator had already brought proceedings against Mr Bhanderi in the Chancery Action relying on the assessments and which he had verified by a Statement of Truth. Counsel for the Provisional Liquidator at the time was instructed by the same solicitors who were acting for Customs both in the Petition and in the Chancery Action.

b.

As this court can see from paragraph 14 of the Baarscase it seems to have been accepted that the Provisional Liquidator’s actions in February 2003 were not right and a contrary position or concession was made. In the Baars case the Provisional Liquidator withdrew his argument that he was the only person with standing to mount the appealsboth on behalf of Mr and Mrs Baars and the company ‘JBW’. The solicitors for Customs in the Baars case were also Moon Beever. The solicitors for the special manager (not the Provisional Liquidator) were Isadore Goldman. As far as I can see the contrary position or concession made clear to Mr Justice Lindsay in the Baars case was known by solicitors for Customs and the Provisional Liquidator but was never drawn to the attention of Mr Justice Lawrence Collins on 13^th January 2004.

c.

At paragraphs 29 to 35 of the Baars case, Mr Justice Lindsay also found that it was arguable that Regulations 3, 4 and 7(2) of the Excise Duty Points (Duty Suspended Movement of Excise Goods) Regulations 2001 were in breach of Community Law and also unenforceable. The petition debt in this case is based on the same Regulations and as a consequence may be unenforceable. Therefore there may be no legitimate petition debt for that reason also.

12.

On 29^th January 2004, and whilst preparing this statement, I made further enquiries with Mr Bhanderi and with Vincent Curley & Co. In fact an appeal against the assessments was lodged by Vincent Curley & Co on behalf of Mr Bhanderi (not Turnstem) in the VAT and Duties Tribunal within seven days of the hearing of 25^th February 2003. Counsel instructed on behalf of Mr Bhanderi were not aware of this outstanding appeal until the 30^th January 2004. The solicitors for both Customs and the Provisional Liquidator appear to have known about this outstanding appeal. I understand that a locus hearing is due to take place in April 2004.

13.

The existence of this appeal was never drawn to the attention of Mr Justice Lawrence Collins on 13^th January 2004 nor did the Notice of Appeal form part of the 4000 odd pages of documents in the bundles prepared by Moon Beever for that hearing and which were considered by Counsel for Mr Bhanderi. I was present in court on 13^th January 2004. I have no recollection that the Provisional Liquidator, acting by his Counsel Mr David Alexander, brought to the Court’s attention that any appeal against the Tribunal’s decision had been made either. According to an unapproved transcript of the hearing which took place on 13^th January 2004, obtained by my firm, Mr Alexander referred to the VAT and Duties Tribunal events in the following way: “So, what happened was that it was effectively accepted in front of the Tribunal that Mr Bhandari could not conduct that appeal and so that appeal effectively went bye the bye” (page 19).

14.

I believe that Mr Bhanderi, amongst others, had been under a misunderstanding as to the potential importance and significance of the appeal in the VAT and Duties Tribunal and that he was advised and then withdrew his opposition to the petition on a false basis. My firm will continue to investigate the reasons for this misunderstanding, the reason why the appeal was not brought to the attention of the Court on 13^th January 2004 and the matters in general, although at present we are subject to funding difficulties, as described more fully below. However, what now seems to be the case is that opposition to the winding up petition was withdrawn by Mr Bhanderi on grounds which have subsequently been shown tobe erroneous and which may have resulted in an injustice.”

The second witness statement (which was made in connection with the misfeasance proceedings) was by Mr Patel, an accountant and a partner in the firm of King & King (auditors and accountants to Turnstem), in which he says that Turnstem was solvent as of August, 14 2002. He calculated the value of Dimestore Ltd, its principal asset, as at August 14, 2002 as £1,977,008. He valued Dimestore by valuing the leaseholds of its shops at £305,000 and its stock at £542,000. The balance was goodwill which had been arrived at by taking into consideration the gross weekly takings of each unit, and taking a multiple of 10 times, which he said was standard in the industry. The value of the leaseholds was a subjective one and was therefore based on the location, local competition and the length of the remaining lease on each unit.

In addition on this application Mr Bhanderi sought to rely on a witness statement dated March 1, 2004 made in opposition to the application for judgment in the misfeasance proceedings.

The application was presented to me on the following basis. First, Mr Bhanderi relied on the fact that, in the evidence of Mr Parsons, Customs have revealed the existence of tachograph evidence which is direct evidence which shows that consignments may have crossed the Channel, and were not diverted in the United Kingdom, contrary to the position taken by Customs and supported by the provisional liquidator, with the consequence that (a) important evidence was not disclosed to the Tribunal before February 25, 2003, when the Tribunal allowed the provisional liquidator to withdraw the appeals, or to the court before January 13, 2004; and (b) the evidence has undermined the fraud case. The evidence now revealed by Mr Parsons goes to the existence of the petition debt and undermines the bona fides of the petition presented and pursued by Customs since August 2002.

Secondly, he says that an obvious injustice will be suffered by Turnstem and Mr Bhanderi were the winding up order to remain. In particular it would be unjust in circumstances where the court was not told on January 13, 2004 of the tachograph evidence, or the existence of the third appeal, and the fact that the provisional liquidator knew that his decision on February 25, 2003 to stop Turnstem conducting the appeals was highly questionable in view of the contrary position taken by the provisional liquidator in the Baars case. The court should have been told of these matters, even though the Mr Bhanderi had withdrawn his opposition to the petition.

Third, on February 25, 2003 Turnstem and Mr Bhanderi were wrongly denied the opportunity of challenging the substantive case brought against them and having the merits of the fraud allegations considered in the correct venue. That fraud case was the basis behind the assessments for VAT and duty, and thereby the alleged petition debt in the winding up petition before me heard 11 months later.

The petition debt is properly and genuinely disputed on substantial grounds. Alternatively and at the minimum, Mr Bhanderi has demonstrated a real prospect of success on the merits.

There is material to support the position that there was surveillance of the consignments by Customs, and no effective or admissible evidence to refute it. Mr Parsons’ witness statement amounts to an admission (a) that Customs have and (at the material times) had in their possession direct evidence that shows consignments may have crossed the channel for export and were not diverted in the UK for “slaughter” in the UK; (b) that such evidence would never have been revealed by Customs voluntarily and absent my order of June 15, 2004; (c) that Customs knew the case they had advanced from first to last, that none of the goods the subject of the 27 consignments left the UK, may have been incorrect; (d) that Customs knew that the provisional liquidator’s conclusion that he was satisfied that none of the goods which were the subject of the 27 consignments ever left the United Kingdom (expressed in the report filed by the provisional liquidator to support the petition) was unreliable. Customs also knew that the conclusion expressed by the provisional liquidator in his report that in his view the goods must have been misappropriated within the United Kingdom was also unreliable.

Accordingly, the court should approach the application to rescind on the basis that important evidence that went to the existence and extent of the petition debt itself, in the possession of Customs, and which only Customs knew about, was not disclosed to the Tribunal before February 25, 2003, the Court, the provisional liquidator or Mr Bhanderi on January 13, 2004, before the Court made the winding up order. The evidence kept from the Court on January 13, 2004 undermined, or may have undermined, the petition, the fraud case alleged against Turnstem and Mr Bhanderi (in which it is said he was complicit) and the appropriateness of any winding up order at all.

Direct evidence that consignments actually crossed the channel means there is a proper issue whether Mr Bhanderi could have been complicit in any fraud at all, or caused the irregularity. The evidence indicates that Turnstem’s and therefore Mr Bhanderi’s instructions to export goods were actually complied with. If there was an excise fraud, evidence that consignments actually crossed the channel shows that the Court may not be concerned with an outward diversion fraud at all, but rather an inward diversion fraud. There is no allegation, and no evidence, that Turnstem or Mr Bhanderi were complicit in an inward diversion fraud. Direct evidence that consignments crossed the channel is relevant to where the “irregularity” actually occurred and where it may have been detected: Arenaat paragraphs 48 to 50 and 77 and 78. This issue plays a crucial part in determining the jurisdiction in which VAT and duty (or their European equivalents) are payable, and hence the validity of the petition debt. Arenahasraised considerable doubts as to the propriety of the procedures followed by Customs and the provisional liquidator against Mr Bhanderi since February 2003 and made clear that the provisional liquidator should not have prevented Mr Bhanderi from appealing against the assessments and having the merits of the fraud case examined. The Court of Appeal emphasised that the appropriate forum to resolve disputed questions of fact in connection with this type of fraud was the Tribunal.

Mr Bhanderi says that it was widespread throughout the drinks industry for payments to be made and received in cash; Customs had prior knowledge of the way Turnstem carried out its business, its use of cash and had approved of the use of Seabrook; Seabrook selected the hauliers to transport the goods; Turnstem and or Mr Bhanderi only rarely selected the haulier and only when Seabrook were busy; in none of the 27 consignments were the hauliers selected by Mr Bhanderi or Turnstem; there is incontrovertible evidence that, despite the provisional liquidator’s view to the contrary, Rose Water existed as a genuine purchaser of goods in bond; and Celers were both a genuine vendor of goods in bond and had an account at the TIN bond in Belgium.

The argument for Customs is this. None of the grounds advanced by Mr Bhanderi brings the case within the discretionary jurisdiction to rescind:

The making of the winding up order on January 13, 2004 was unopposed, and the reasons for that stance are of fundamental importance on this application. Four points in particular are now made by Mr Bhanderi. The first is that the withdrawal of opposition to the petition was based on the fact that there was no outstanding appeal to the Tribunal. The second is that Mr Bhanderi’s advisers on the hearing of the petition were unaware of the pending appeal in the Tribunal, and that if they had known that would have made a difference to their position. The third is that they were unaware until the decision in the Baars case that the provisional liquidator’s position that Mr Bhanderi had no standing to pursue an appeal on behalf of Turnstem was inconsistent with the views of the provisional liquidator in the Baars case. The fourth is that Customs and the provisional liquidator were at fault in not drawing the existence of the appeal to the attention of the court, and in not drawing to the attention of the Tribunal the stance taken by other provisional liquidators.

In order to consider whether any of these points is sustainable requires detailed consideration of the submissions and the evidence.

I can deal with one point shortly, and that is the criticism that the provisional liquidator must have known that the decision taken by him on February 25, 2003 to stop Turnstem appealing the assessments in the Tribunal was highly questionable, because the contrary position had been taken by the provisional liquidator in the Baars case, and that counsel for Customs and the provisional liquidator did not draw this to my attention on January 13, 2004, even though the same solicitors were involved.

On February 10, 2003, Mr Bhanderi instructed solicitors, Santers, to represent him in the winding up and misfeasance proceedings, and on February 17, 2003 Santers wrote to Customs’ solicitors:

“ … we of course appreciate that you have taken the view previously on behalf of Customs and Excise that our client has not got the right to represent the company. As you know that view has always been opposed and more particularly in a public hearing heard on the 29^th January 2003 in the matter of Anglo German Brewery Customs and Excise did not take any point concerning the Directors representing the company despite it being in provisional liquidation and indeed the provisional liquidator agreed that this would be correct. It seems strange therefore that at one public hearing your client did not seek to oppose such a proposition but in our clients case you seek to do so. Could you please let us have an explanation.”

Consequently, Mr Santer was well aware, when he instructed counsel (Mr Young) to appear for Mr Bhanderi on February 25, 2003, that in Anglo German Breweries the provisional liquidator had taken the same position as the provisional liquidator in Baars. For reasons I shall develop later, the question of locus standi in the Tribunal was not a relevant matter on the hearing of the petition on January 13, 2004, and there is therefore nothing in the criticism that the provisional liquidator did not draw this to my attention on the hearing of the petition. If it had been of significance Mr Bhanderi’s advisers could have drawn it to my attention, since at least Mr Santer was well aware of the position. I should also add here that in the third appeal to the Tribunal dated March 3, 2003 it had been said by Mr Curley: “The issue of Locus Standi where provisional liquidators are concerned is not free from doubt, some provisional liquidators agreeing locus and others not.” I shall revert to this document below.

Then it was said in the skeleton argument on this application that Mr Bhanderi and his advisers “in this court” were under the erroneous belief that they were not able to challenge the assessments dated August 2002 on which the petition debt was based because they wrongly believed there was no outstanding appeal or pending appeal against the assessments. It was said that on January 13, 2004, I was not apprised of the correct position, namely that there was then in fact an outstanding appeal against the assessments brought by Vincent Curley & Co on behalf of Mr Bhanderi, which had not yet been determined, and this appeal was not brought to the attention of the Court on January 13, 2004 and did not form part of the 4000 odd pages of documents in the bundles prepared by Moon Beever, solicitors for Customs. Then it was said that Mr David Alexander, counsel for the provisional liquidator (who also appeared for the provisional liquidator before the Tribunal on February 25, 2003) informed me: “So, what happened was that it was effectively accepted in front of the Tribunal that Mr Bhanderi could not conduct that appeal and so that appeal effectively went bye the bye.” That explanation was not accurate nor did the provisional liquidator draw the court’s attention to the existence of the outstanding appeal on January 13, 2004 or the actual issues being raised on behalf of Mr Bhanderi.

It is important to test these arguments against the evidence which was put in. Mr Bhanderi relied on Mr Santer’s witness statement, the skeleton argument for January 13, 2004, and Mr Curley’s witness statement.

The relevant paragraphs of Mr Santer’s statement are as follows:

“7.

I draw this court’s attention in particular to paragraphs 7 to 8 of that skeleton [The skeleton explaining the reasons for the withdrawal of opposition]. Specifically, it was said that ‘it is not open to Mr Bhanderi to dispute the Petitioner’s reliance on the amounts sought in the assessments as a debt that is due and unpaid’ as there had been no appeal or outstanding appeal against the assessments (paragraph 7. (b)). As a result of this undisputed petition debt, there was no evidence that Turnstem was anything other than insolvent (paragraph 7. (c)) …

…

12.

On 29^th January 2004, and whilst preparing this statement, I made further enquiries with Mr Bhanderi and with Vincent Curley & Co. In fact an appeal against the assessments was lodged by Vincent Curley & Co on behalf of Mr Bhanderi (not Turnstem) in the VAT and Duties Tribunal within seven days of the hearing of 25^th February 2003. Counsel instructed on behalf of Mr Bhanderi were not aware of this outstanding appeal until the 30^th January 2004. The solicitors for both Customs and the Provisional Liquidator appear to have known about this outstanding appeal. I understand that a locus hearing is due to take place in April 2004.

13.

The existence of this appeal was never drawn to the attention of Mr Justice Lawrence Collins on 13^th January 2004 nor did the Notice of Appeal form part of the 4000 odd pages of documents in the bundles prepared by Moon Beever for that hearing and which were considered by Counsel for Mr Bhanderi. I was present in court on 13^th January 2004. I have no recollection that the Provisional Liquidator, acting by his Counsel Mr David Alexander, brought to the Court’s attention that any appeal against the Tribunal’s decision had been made either. According to an unapproved transcript of the hearing which took place on 13^th January 2004, obtained by my firm, Mr Alexander referred to the VAT and Duties Tribunal events in the following way: “So, what happened was that it was effectively accepted in front of the Tribunal that Mr Bhandari could not conduct that appeal and so that appeal effectively went bye the bye” (page 19).

14.

I believe that Mr Bhanderi, amongst others, had been under a misunderstanding as to the potential importance and significance of the appeal in the VAT and Duties Tribunal and that he was advised and then withdrew his opposition to the petition on a false basis. My firm will continue to investigate the reasons for this misunderstanding, the reason why the appeal was not brought to the attention of the Court on 13^th January 2004 and the matters in general, although at present we are subject to funding difficulties, as described more fully below. However, what now seems to be the case is that opposition to the winding up petition was withdrawn by Mr Bhanderi on grounds which have subsequently been shown tobe erroneous and which may have resulted in an injustice.”

There are two points to be made at this stage about this witness statement. First, in paragraph 7, Mr Santer says:

“Specifically, it was said [in the skeleton produced for the January 13, 2004 hearing] that ‘it is not open to Mr Bhanderi to dispute the Petitioner’s reliance on the amounts sought in the assessments as a debt that is due and unpaid’ as there had been no appeal or outstanding appeal against the assessments (paragraph 7. (b)).”

This is designed to give the impression that the skeleton relied on the fact that there was no outstanding appeal. The relevant paragraph of the skeleton reads as follows:

“it is not open to Mr Bhanderi to dispute the Petitioner’s reliance on the amounts sought in the assessments as a debt that is due and unpaid…”

and it then goes on to cite Anglo German Breweries, paras 42, 43, and 93. In that case an appeal was pending in the Tribunal, and the effect of these paragraphs is that the debt is due even if there is a pending appeal.

The second point is that the quoted paragraphs of Mr Santer’s statement are designed to give the impression that Mr Santer did not know about the third appeal, but without actually saying so in terms. Why he followed that course is apparent from Mr Curley’s evidence.

The relevant parts of his evidence were as follows:

“9.

… At a hearing before the Tribunal on 25^th February 2003 the provisional liquidator, acting by his Counsel, persuaded the Tribunal that Turnstem did not have status to bring the appeals. The provisional liquidator then, without giving any prior notice to Turnstem or it representatives, withdrew the appeals on behalf of Turnstem … As a result the merits of Turnstem’s appeal have not been determined.

10.

My firm then submitted an appeal to the Tribunal in the name of Mr Bhanderi. Customs subsequently applied to the Tribunal to strike out that appeal. There was a directions hearing in the Tribunal on 2 October 2003. At that hearing the Tribunal issued directions for Customs’ application to be listed for a full hearing which is due to take place in April 2004. My firm attempted to have the hearing listed in December 2003 so that the decision by the Tribunal would be available before the winding up proceedings in the High Court in January 2004 but the Tribunal were unable to list the matter until April … It is still the case that the merits of Turnstem’s appeal have not been determined. If Customs are successful in April 2004, the merits will never have been considered by the Tribunal.

11.

I can confirm that the current appeal in the Tribunal was issued on 4^th March 2003, shortly after the hearing of 25^th February 2003. The issues and procedure that have arisen in these appeals in the Tribunal are extremely complicated and as far as I am aware without precedent. The situation that Mr Bhanderi is in, in relation to the appeals, has never occurred before. I have been told by Martyn Santer and I believe that the winding up petition in the case of Turnstem was unopposed by reason of the fact that there was no ongoing appeal in the Tribunal. This basis is of course erroneous. I can only assume that there has been a misunderstanding as to the actual state of affairs. I also believe that Mr Bhanderi will suffer an injustice if his application to rescind the winding up order was refused. For the reasons set out in paragraphs 8 and 9 of this statement the issue of whether a company has the status to appeal against an assessment, after the appointment of a provisional liquidator, has not been consistently or fairly applied. I also refer to the contrary position or concession made by the provisional liquidator in the case of HM Customs and Excise –and- 1. Jack Baars Wholesale, 2. Jack Baars and 3. Ann Carol Baars [2004] EWHC 18 (Ch), when judgment was delivered on 16^th January 2004.”

What Mr Curley is saying here is that he was instructed to lodge the third appeal, and that he endeavoured to have the Tribunal hearing on the application by Customs to strike out listed in December 2003 so that the decision by the Tribunal would be available before the winding up proceedings in the High Court in January 2004, but that the winding up petition was unopposed because there was no continuing appeal in the Tribunal.

In the course of argument I pointed out to Mr Reza, counsel for Mr Bhanderi, that it was almost inconceivable that Mr Curley would have sought to arrange dates for the Tribunal hearing in the third appeal by reference to the date for the hearing of the petition solely after discussing it with Mr Bhanderi, and without any reference to Mr Bhanderi’s legal advisers. The tactical relationship of the Tribunal hearing with the hearing of a winding up petition is evidently a matter to be discussed between advisers.

After taking instructions, Mr Reza told me that Mr Curley had informed Mr Bhanderi’s team that Mr Santer did know of the third appeal. All that Mr Reza was able to say on instructions (and without evidence) about Mr Santer’s knowledge was that the position was confused. He was not able to say that Mr Bhanderi did not know of the appeal. Mr Bhanderi was not waiving privilege on the communications between Mr Curley and Mr Santer. Mr Reza accepted that the position was unsatisfactory.

I cannot of course draw any inference from the failure to waive privilege. But it seems absolutely clear to me (a) from the guarded way the position is put in Mr Santer’s witness statement, (b) from the nature of the procedural steps Mr Curley was taking in the Tribunal, and (c) from Mr Curley’s confirmation that Mr Santer knew of the appeal, that Mr Santer must have known of the third appeal when he sat with Mr Bhanderi in court on January 13, 2004.

The real reasons appear from the skeleton argument lodged for the hearing on January 13, 2004. The skeleton argument gave the reasons as follows:

In argument on this application Mr Reza said that the statement that it was not open to Mr Bhanderi to dispute Customs’ reliance on the assessed amounts as a debt reflected the understanding of his lawyers that there was no appeal pending in the Tribunal. As I have said, the context on which the point was put in the skeleton, and the references to Anglo German Breweries (where an appeal was pending in the Tribunal when the winding up order was made) show that what Mr Reza said must be incorrect. In my judgment, the skeleton has to be read in the context of (a) Mr Bhanderi not being entitled to adduce any further evidence on the winding up, because of the barring order; and (b) his desire to leave for another day the real battle, which was not whether Turnstem should be wound up (since, on his then case, it was insolvent), but whether he should be personally liable in the misfeasance proceedings.

Mr Bhanderi and at least some of his advisers were well aware of the third appeal. The reason they did not mention it to me was that it was irrelevant. There is therefore nothing in the criticism that counsel and solicitors for the provisional liquidator did not draw the third appeal to my attention.

I consider that the inescapable conclusion is that opposition to the petition must have been withdrawn because opposition was hopeless, and continued opposition might have led to summary judgment on the misfeasance claim, as it did in the Arena case.

I accept counsels’ assurance that they did not know of the third appeal, from which it follows that Mr Santer and Mr Bhanderi were prepared to allow them to put forward on this application a wholly bogus reason for the submission to the winding up order. I am therefore satisfied that the argument that Mr Bhanderi and his advisers were unaware of, or unaware of the significance of, the appeal in the Tribunal is simply an afterthought for the purposes of this application.

As I have said, there is a discretion to rescind a winding up order. The discretion is not fettered, although normally it will be exercised only where there has been a change in circumstances, or more rarely on the discovery of fresh evidence. I also accept that there may be other exceptional circumstances where justice demands that the order be rescinded.

In this case, the application has been presented in a misleading way, and that in itself would be a ground for not exercising the discretion in favour of the application. But I have not had any evidence from Mr Santer (although he did have an opportunity to deal with the point that he knew about the third appeal, when the importance of the point emerged at the hearing), and the primary function of the court is not to punish but to decide matters in controversy. I therefore prefer to base my decision on the merits of the application.

In my judgment the application should be dismissed on the basis of settled principles. First, there has been no change in relevant circumstances. One of the matters originally relied on, namely the holding in Baars that there was a serious issue on the validity of DSMEG Regulation 7(2), has gone since the decision of the Court of Appeal in Arena.

Second, the evidence of the report of the provisional liquidator is that Turnstem is hopelessly insolvent, even apart from the petition debt. It has no assets apart from its holding in Dimestore, which is itself insolvent, and has creditors in excess of £1.5 million. The evidence of Mr Patel that as at August 2002 Dimestore was solvent is wholly unconvincing and in any event irrelevant.

Third, there is no fresh evidence which would alter the basis on which the winding up order was made. Mr Bhanderi had been debarred from adducing any evidence following his failure to serve evidence in answer by March 24, 2003. In any event, there is no such fresh evidence. There is nothing in the witness statement of Mr Bhanderi in the misfeasance proceedings which amounts to new evidence. The evidence of Mr Parsons on the tachographs goes no further than suggesting that some of the lorries may have gone to continental Europe. That is not new evidence of a kind which could justify rescission. There is no reason to doubt the evidence of Mr Braham and Mr Parsons that there was no surveillance of the 27 consignments: I do not consider that the e-mails between the provisional liquidator’s staff and his solicitors cast any doubt on the evidence. I do not, for the purposes of this application, take into account the evidence of surveillance of the 5 consignments which were apparently “slaughtered.”

Fourth, I consider whether there are exceptional circumstances which would justify rescission on the basis that justice required it. If the allegations of partiality and conflict of interest of the provisional liquidator and his solicitors come under this head, I consider that there is nothing in them. The underlying merits of the appeal might come under this head. Mr Paul Girolami QC, for Customs, concentrated on the arguments in relation to the Sarl Rose Water (“Rose Water”) consignments. Mr Reza says that this should not of itself be decisive because the assessments are for a comparatively small sum (about £83,000). But in my judgment, if there is a very strong case in relation to the 4 consignments involved, that would shed considerable light on the strength of Customs’ case as a whole.

Mr Girolami QC’s account of the evidence on the Rose Water consignments was this. The duty and VAT attributable to the four assessed loads purportedly purchased by Rose Water and shipped to the bonded warehouse MT Manut in Calais amount to £83,274.61 in total. There is strong evidence the 4 Rose Water consignments did not arrive at MT Manut. Mr Bhanderi says that the total value of goods purchased by Rose Water was £234,268; although knowing virtually nothing about Rose Water and never having dealt with them before, credit was given from the outset and in the full amount of the trade that was done with Rose Water: all the goods were shipped before any payment at all was received.

Two payments were made by Rose Water each being a round payment of £100,000, one on February 27, 2002 and the other on March 8, 2002. £100,000 bears no relation to any invoice sum or combination of invoice sums. No payments were ever made by Rose Water into Turnstem’s Calais account. The two £100,000 payments were delivered to 31 River Road but not banked either into Turnstem’s or Dimestore’s account but sent on straightaway to a supplier, Ellbrook Cash and Carry. In fact the 4 consignments did (or may not have) arrived and a dispute arose with Seabrook & Smith about the non-delivery. As a result of that dispute Rose Water withheld payment of £34,268, which was part of the last invoice.

It is not for me to decide whether this account is true for the purposes of the present application, and indeed it would be wrong for me to pre-judge the application for summary judgment in the misfeasance proceedings. But having considered carefully the comments of Mr Bhanderi’s counsel on Customs’ submission, I am satisfied that Customs have a strong case that Mr Bhanderi’s version of the giving of credit to Rose Water and the manner and amounts of the payments made by Rose Water are utterly implausible if this is supposed to be genuine commercial trade. The withholding of part of the last invoice by reason of the alleged dispute makes no sense. The last invoice does not relate to the four assessed loads. The last invoice is in the sum of £42,718. The price invoiced in respect of the four assessed loads was £56,534. The reference to the “dispute” with Seabrook is scant in the extreme and cries out for elaboration. No explanation is attempted as to why only the sum of £34,268 rather than the full sum was withheld. There is no mention of any police involvement or insurance claim in respect of the consignments such as one would expect if the goods had been lost (the combined value of the goods was £56,534).

The overall justice of the case is that Mr Bhanderi took, on advice, a deliberate course by which he abandoned resistance to the winding up of an insolvent company in order to concentrate on defending himself against summary judgment in the misfeasance proceedings. He has not satisfied me that the winding up order should be rescinded because he has changed his mind.

The application will therefore be dismissed.