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

On 19 December 2003 I gave judgment in two winding-up petitions presented by the Secretary of State against Bell Davies Trading Limited ("BDT") and KTA Limited ("KTA"). It was alleged that these companies had promoted and operated a scheme to circumvent the EC regulations imposing quotas on the import of ceramics and footwear from China. It was the Secretary of State’s case that the scheme, which involved applications for import licences by a large number of companies established for the purpose, was illegal because the applicant companies ("quota companies") were all controlled by BDT and were therefore related persons for the purpose of the relevant regulations. Those regulations prohibit related persons from making between them more than one application for each category of import licence.

On the grounds set out in my judgment, I found that the quota companies were controlled by BDT and that the scheme therefore involved unlawful applications for licences and the subsequent operation of licences which had been unlawfully obtained. I reached the conclusion that it would not be just and equitable to wind up BDT and KTA provided that the unlawful activity ceased and an undertaking was given to that effect.

I invited the parties to consider the terms of an appropriate undertaking. I was informed by Counsel for BDT and KTA that the methods used in the course of 2003 to recruit quota companies and to co-ordinate applications for import licences had been different from those used in 2001 and 2002 and that as a result of these different methods the quota companies had not been controlled by BDT during 2003. BDT and KTA submitted that therefore the licences obtained for 2004 as a result of applications made in 2003 were not unlawfully obtained. The applications for 2004 licences were not made to the UK licensing authority, which is the Department of Trade and Industry, but were made to the licensing authorities in other Member States.

This was the first time that the court or, so far as I know, the Secretary of State had been told that the operations of BDT and KTA were different in relation to 2004 licences from their operations in relation to licences for the previous two years. There was no evidence before the Court dealing with their operations as regards 2004 licences, although BDT and KTA could have course have put forward such evidence as part of their defence of the petitions.

BDT and KTA were not prepared, or were very reluctant, to give an undertaking not to operate any licences obtained by quota companies as a result of applications made in 2003. The only alternative was an undertaking not to operate any licences obtained by quota companies which were "controlled" by BDT within the meaning of the relevant regulation (Art.143.1 (f) of Regulation 2454/1993). This would not normally be satisfactory because it left open the question whether any particular quota company was in fact controlled by BDT and therefore exposed BDT and KTA to the risk of inadvertent breach of the undertaking. However, as it seemed to me, this was the result of their own decision not to put in evidence for the trial of the petitions their methods of operation in 2004 and, on the basis that I required an undertaking to be given, this was the undertaking which they were prepared to give. In view of the circumstances in which this issue had arisen, I gave permission to both parties to apply in respect of the terms of the undertaking.

The undertaking given by BDT and KTA is in the following terms:

By ordinary applications issued on 9 January 2004 BDT and KTA have sought declarations that they are not, or would not be, in breach of the undertaking given by them "by carrying on non-traditional quota business in respect of 2004 quota licences as contemplated in BDT’s letter to the Treasury Solicitor dated 5 January 2004."

BDT and KTA made clear in that letter, and it was reiterated by their counsel, that they have no intention of acting in breach of the undertaking. It was also made clear to me that they do not seek to vary the terms of the undertaking given by them.

The applications are supported by an affidavit of Paul Ness, a director of BDT, and are opposed by the Secretary of State who filed a witness statement of Anne Simpson, the Operations Manager of the DTI’s Import Licensing Branch.

Counsel for BDT and KTA submitted that two issues arise on these applications. The first is whether BDT can do anything with respect to managing the 2004 licences issued to the quota companies. This depends on whether the quota companies were controlled by BDT on the dates of the applications for the licences. If they were, they should not have applied for the licences and the licences in fact issued were unlawfully obtained. The second issue is whether the proposed method of dealing with the licences set out in BDT’s letter of 5 January 2004 is substantially different from Option 2 in the scheme used in 2001 and 2002, so that it negatives any control of the quota companies by BDT.

Determination of the issue of control of the quota companies requires consideration of all the facts relating to those companies. In concluding that the quota companies were controlled by BDT in 2001 and 2002 when they applied for licences, I took into account all the facts relating to those companies as appearing from the evidence, including but not limited to the means by which it was proposed that their licences be managed and the choice given between Option 1 and Option 2. Similarly, in relation to the quota companies applying for 2004 licences in 2003 it is necessary to look at all the facts as appearing from the evidence.

Mr Ness’s Affidavit discloses that a total of 2,124 quota companies established as part of BDT’s scheme applied for 2004 licences in 2003. Of those companies, 1,061 had also received licences for 2002 and 2003 which were managed by BDT ("existing quota companies") and the remaining 1,063 companies applied for the first time in 2003 ("new quota companies"). There were two rounds of licence applications, in September and December 2003.

As regarding the existing quota company clients, licence application forms for the September application round were sent to them by BDT or KTA. As in previous years, the application forms had been completed by BDT, with a blank left for a director’s signature. The forms were sent out without any accompanying letter. They were sent to those quota companies which had indicated that they wished to apply for 2004 licences. BDT did not directly prompt existing quota companies to request the form but it appears likely that some or all of them were approached by agents acting for BDT or KTA. There is no evidence before the Court as to what may have been said to them. As in previous years the signed application forms were returned to BDT which both chose the licensing authorities to whom the applications were to be made and lodged the forms with those authorities.

I have already found that all these quota companies (with the possible exception of any which elected for Option 1 and there were only a handful of them in total) were controlled by BDT when they applied for their licences in 2001 and 2002. There is no basis in the evidence for suggesting that there was any change to this position at any time before their licence applications were made in September 2003. The only inference can be that the clients for whom those quota companies had been formed assumed that matters would proceed in much the same way as before and that in due course they would receive a cheque for £400 or £500 and that they would have no other substantial involvement. Counsel for BDT and KTA submitted that the issue of control of existing quota companies clients should be looked at separately for each year, without regard to the facts existing in the proceeding year. This cannot in my judgment be right. In considering whether an existing quota company client was controlled by BDT in September 2003 it is relevant to consider whether there has been any change in the facts as they existed before then. On the evidence before me there was no material change.

In early December 2003, prior to lodging the second round applications, BDT sent a letter to all existing quota company clients in the following terms:

BDT and KTA rely on the terms of the letter as showing that, whatever the position before the letter, the existing quota company clients were not from early December controlled by BDT. In making this submission, they rely on the absence of any letter such as that sent in 2002 offering a choice between Option 1 and Option 2. However, all that the letter sent in December 2003 does is to tell the existing quota company clients that the method of managing 2004 licences has yet to be decided and reminding them that they have an opportunity of withdrawing their licences from the BDT scheme. There is 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. That is to say, they anticipated signing documents as and when required and in due course receiving their fee of £400 or so.

Accordingly I am not prepared to hold, as invited by BDT and KTA, that the existing quota company clients were not controlled by BDT at the time of the licence applications made in September or December 2003. On the basis of the evidence on the hearing of the petition and the additional evidence now before the Court, it seems to me that those companies were controlled by BDT.

The position of the 1,063 new company clients is of course different because they did not receive any of the documents sent out in 2001 and 2002. There is a paucity of evidence as to how and on what basis they were recruited. Mr Ness exhibits a copy of a letter prepared for prospective 2004 clients who had not previously dealt with BDT. However, he says that only 2 or 3 copies were given by KTA by its contacts. There is no evidence as to whether copies of this letter were given to any prospective clients or of what else, if anything, was said or sent to those clients. All that is known for certain is that 1,063 quota companies were formed for new clients and that licence applications were made by those companies in September and December 2003. As I made clear to Counsel for BDT and KTA during his submissions, I regard this as an entirely inadequate evidential basis on which to make findings that those companies were not controlled by BDT.

In any event, insofar as reliance can be placed on the standard form letter exhibited by Mr Ness, it would suggest as in previous years that participants will have only a minimal involvement. The letter explains that BDT arranges all aspects of the scheme and that participants in the 2002 scheme were paid an average of £400 in February 2003. It continues:

I conclude therefore that BDT and KTA do not make good their case that quota companies, both new and existing, which applied for 2004 licences were not controlled by BDT, and indeed the evidence either shows or suggests that they were controlled by BDT. The undertaking given to the Court on 19 December 2003 was to effect that BDT, KTA and their directors would not manage or deal with any 2004 non-traditional import licences issued to "Quota Companies" meaning "companies that BDT and/or KTA control or controlled at the time of application for 2004 licences". I am not therefore prepared to make the declarations sought by BDT and KTA.

As I see it, that concludes the applications. The critical issue is whether, as a matter of fact, the quota companies were or were not controlled by BDT at the time of applications for the 2004 licences. This reflects the requirement under EC Regulation No. 1394/2001 Art.2.3 (b) that operators deemed to be related persons may only submit a single licence application for each category of goods. That issue cannot be affected by consideration of the terms of a draft proposal which may in the future be sent to the quota companies as to the management of their 2004 licences. No indication of its content has been given to the participants in the scheme for 2004 licences and I do not see that any purpose would be served in examining its terms and effect.

Accordingly, I dismiss the applications.