Silversafe Ltd & Anor v Hood & Ors

In this matter I heard 3 applications:-

The first and second items are of course inter-related. The application to strike out has attracted a fresh application on the part of the Claimants to re-amend the Particulars of Claim. The Second Defendant contended that the proposed re-amendments were not satisfactory either.

The third application only arises if the Claimants’ action as against the Second Defendant survives.

At the conclusion of the hearing I indicated that I would grant permission to re-amend and would give reasons at a later stage. I directed that the third application should be considered when I hand down judgment in the event that the parties were unable to agree terms as to future conduct of this action.

This case is an instance of alleged Missing Trader Inter Community (“MTIC”) VAT fraud. In this case the Company Silversafe Ltd (“Silversafe”or “the Company”) was an importer of goods principally mobile phones and computer chips from various suppliers in the EU. Its principal suppliers were two companies GMR World Trade SRL (“GMR”) and Nuovo Suono SRL (“Nuovo Suono”). Both companies are Italian and therefore have the benefit of being able to supply a UK company at a zero rate for VAT purposes.

Silversafe’s pattern of trading was immediately to sell on the goods to various UK purchasers, principally two UK companies Leapfrog Solutions Ltd (“Leapfrog”) and Rascal Management Ltd (“Rascal”). Those sales were subject to VAT.

Over a six week period (4th May – 24th June 2004) the company sold goods:-

In each instance the Company gave instructions to Leapfrog and Rascal that, save for a small sum to be paid to it the entirety of the sale price (including the VAT) was to be paid to third parties, and not to the Company. The third party recipients were overseas companies and payments were made (predominantly) to overseas bank accounts. Neither GMRor Nuovo Suono were recipients of the payments.

The effect of the transactions and payments was that the Company incurred a massive VAT liability in that it made Vatable sales to Leapfrog and Rascal when it had no input VAT to offset against those sales and having directed Leapfrog and Rascal to pay almost the entirety of the purchase price (including the VAT element) to third parties, it rendered itself insolvent and unable to pay its debts.

In respect of two of its transactions the Company directed its purchasers to make payments to the Second Defendant Tattershall Inversiones SL (“Tattershall”) a Spanish company with whom the Company had never dealt and who was not a supplier from whom the Company had purchased goods.

In one of the two transactions, the Company sold 1,090 mobile phones to Rascal for a total price of £324,478 (inclusive of VAT). Of that sum on 28th May 2004 it directed that £288,850 be paid to Tattershall’s account at Online FX Ltd held at National Westminster Bank Bayswater.

In the other transaction, on 19th May 2004 the Company sold to Leapfrog 2,800 European computer driving license software packages for a total price of £585,620. Of that sum it gave instructions for the payment of £434,736 to be paid to Tattershall’s above mentioned account.

Both those sums (total £723,586) were paid as directed.

On 30th June 2004 HMRC raised a VAT assessment against the Company in the sum of £1,623,282.50. On 2nd July 2004 a winding up petition was issued by HMRC in respect of the assessed debt. On the same day:-

On 18th August 2004 the Company was compulsory wound up and Mr Bramston was appointed Liquidator by the Secretary of State.

This particular form of fraud involves fraudulently diverting large amounts of VAT. The basic procedure is that set out above although there are many variants. The opportunities for fraud were summarised by Jacob LJ in R (on the application of the Federation of Technological Industries) v Customs and Excise Commissioners [2004] EWCA Civ 1020 (paragraphs 17-21) and by Blackburne J in Regalway v Shillingford [2005] EWHC 261 (Chancery) paragraphs 10-11.

As set out above the Company was the apparent importer of goods from GMR and Nuovo Suono which it sold on to the two English companies Leapfrog and Rascal. Instructions were given by the First Defendant (Mr Hood) the sole director of the Company to divert the overwhelming bulk of the money due from Leapfrog and Rascal to overseas companies. The effect of those payment instructions was to render the Company insolvent and unable to discharge its substantial VAT liabilities (in excess of £7,000,000 on those trades). It will be contended by the Claimants that it would have been self evident at the time the payments were made that the company would be rendered insolvent although the payments were made, although made in advance of the VAT assessment.

The instructions were provided by the First Defendant and the Claimant accordingly contend that was a breach of his fiduciary duties to the Company.

In the original Particulars of Claim dated 30th July 2004 the Claimants contended that Mr Hood as director was liable to account for his breach of fiduciary duty and Tattershall was liable to the Company on the basis that the Company had (1) a proprietary constructive trust claim to trace the monies received by the Second Defendant from Leapfrog and Rascal, (2) a personal claim against the Second Defendant that it was liable to account as constructive trustee for knowingly receiving the property in breach of trust, (3) a claim for monies had and received and (4) a claim that Tattershall and Mr Hood were liable for conspiracy. Those original Particulars of Claim were amended pursuant to an Order of Master Bowles on 21 April 2005. As a consequence of that amendment an additional conspiracy claim was made against Tattershall’s director, Ms Paula Burnett.

Between March 2005 and 22nd September 2005 various procedural wrangles took place leading to a hearing of a CMC on that date by Deputy Master Hoffman. He gave a reasoned judgment and struck out paragraph 25 of the Amended Particulars of Claim (money had and received as against Tattershall), and struck out the conspiracy claim against Tattershall and Ms Burnett. However he did not strike out the trust claims against Tattershall but required distinction between the proprietary trust claim and the personal trust claim based on knowing receipt to be pleaded more clearly. He did not consider that voluntary particulars of the Amended Particulars of Claim which had previously been served on 3 August 2005 had any status.

A resumed CMC took place before Deputy Master Hoffman on 1st March 2006. Pursuant to the Deputy Master’s indication draft Re-Amended Particulars of Claim had been prepared and served. These (i) incorporated the amendments to paragraph 24 concerning the trust claims - seeking to draw out the distinction between the proprietary and personal claims, (ii) struck out those passages relating to the struck out causes of action against Tattershall and Ms Burnett and (iii) included the Particulars that had previously been set out as voluntary particulars. At that hearing the Deputy Master made an order to transfer the proceedings to the Companies Court and made various costs orders in respect of the previous hearing.

There has been no appeal against any of the decisions of Deputy Master Hoffman. That left the Claimant’s application to re-amend and any other directions to be dealt with by the Companies Court. On 5th May 2006 Registrar Simmonds directed that the outstanding application be stood over to the Judge.

The Claims as against the Second Defendant are now set out in the proposed paragraphs 24-34. Those pleadings are attached to this judgment.

The amendments in paragraph 24 reflected a distinction between the proprietary trust claim and the personal liability to account. I see no problem about that proposed amendment. In paragraph 25 the Claimants will seek to infer that Tattershall’s system of trading is indicative of, and therefore it was a party knowingly to MTIC fraud. It also asserts that Tattershall’s system of trading is not in whole or in part bona fide commercial trading. Reliance is placed upon paragraphs 26 – 34 of the proposed Re-Amended Particulars of Claim.

These introduce other transactions (unconnected to the Company) but in respect of which Tattershall was involved.

The Claimants’ case is that these amount to similar fact evidence showing that, by their participation (albeit in a different role) in these questionable transactions, the Court can infer that the Second Defendant participated in those transactions knowing they were fraudulent.

At the moment the Claimants’ case is based on inference. They invite the Court to infer that knowing participation (for example) from the large substantial transactions over a short period, the receipt of payments from Leapfrog and Rascal without any apparent basis for such payments and other similar arrangements which operate in a similar way.

Finally they rely upon reports from the Andalucian Special Regional Tax Office dated 2nd June 2004 and 10th November 2004 which suggest (it is contended) that Tattershall is not engaged in a bona fide commercial activity.

The first objection is that the allegations do not comply with the requirements to plead a proper allegation of fraud so that permission to re-amend ought not to be granted. CPR 16 PD 8.2 (i) requires specific setting out of matters of fraud. It is suggested that paragraph 25 and the supporting paragraphs 26-34 do not set the matter out in sufficiently precise a manner and are plainly embarrassing.

I do not agree. It seems to me clear what is alleged against Tattershall. It is alleged that its business is operated wholesale in VAT fraud. That is the case that they have to meet. The particulars are the specified transactions and the other transactions (I will deal with this further below).

It is objected that the requirement is oppressive and disproportionate. As to whether or not the requirement is oppressive because it requires Tattershall to review all of its trading transactions, that will depend on the extent of its trading transactions. It may well be oppressive, but I do not accept that it is disproportionate. The Claimant has assumed the mantle of challenging the entirety of the transactions that Tattershall has participated in. I accept that will require extensive disclosure.

What will happen is that Tattershall will have to provide disclosure of its business transactions. Equally of course the Claimants will have to provide disclosure of all the material they have concerning the items they wish to deploy. That will extend to such evidence as HM Revenue and Customs has. Although such material is not in the possession of the Claimant I indicated at the hearing plainly that, one way or another, the material would be obtainable at the behest of Tattershall if it wished. A point of note is that the Andalucian reports referred to appear to have eight pages missing (the numbering jumps from 1-10 without pages 2-8). This is unfortunate. However it is demonstrative of the way in which Tattershall has approached this that they have been aware of that since service of the original documents on them in August last year. Despite that they have not sought fit to ask for the extra pages. If the Claimant does not have them, then one way or another (see for example CPR 31.17) they and other documentation can clearly be obtained from HMRC. As I stressed during the hearing the disclosure will be a two way affair.

After disclosure has taken place, in my view the Claimant ought then to re visit the Re-Amended Particulars of Claim. At that stage the Claimants may be required to plead with more specificity in the light of the material they obtain. The examples set out in the Re-Amended Particulars of Claim will then be examined in the light of the disclosure that has taken place and the Court will doubtless review those allegations at that stage.

Claims like this regularly change as and when the case proceeds. There is nothing novel about this see the observations of Hoffmann J (as he then was) in Arab Monetary Fund v Hashim & Ors (No 2) [1990] 1 All ER 673 at page 679:-

“It seems to me that, subject to particularisation, the pleading is adequate to support an allegation of accountability as a constructive trustee. The facts on which the knowledge allegations are based are matters which entirely concern the Hashims. The bank can obtain such information only by investigation and discovery. I do not accept that the bank has already had so much information about what happened to the money after it left Switzerland that there is nothing more to be found on discovery. It is accepted that a fair amount of information about the movements of the money has not yet been disclosed and no doubt the production of further bank documents will raise more questions. This is, in my view, a case in which the fund is entitled to plead in general terms and to defer particularisation of its case until after discovery: see e.g. Leitch v Abbott (1886) 31 Ch D 374. Of course, by the time the case comes to trial Mrs Hashim will be entitled to full particulars of the detailed allegations on which the fund will rely. But the absence of such particulars is not, in my judgment, a ground striking the claim out now.”

This is precisely the position now in my opinion. I do not see how the Claimants can plead the case in any other way at this stage. They have quite clearly identified other matters which they wish to rely upon in advance of the trial.

The reference to other transactions not involving the Company is challenged by Tattershall. First, it is said that the case advanced in paragraph 28 is materially identical to an analysis which, when advanced before the VAT tribunal, was dismissed as “wholly improbable” see Deluni Mobile Ltd (decision no 19301) released 24th October 2005. I do not with respect see how a decision of a VAT tribunal in a different case, albeit superficially the same factually, has any impact on the present case. It is a matter in my view for the trial.

Equally in my view it would not be appropriate to strike out the similar fact evidence at this stage. The question of its probative value is really a matter for the trial Judge. It is always dangerous to make a pre-emptive decision as to the admissibility or probative value of any evidence in advance of trial when the full picture is not presented. For my part however the evidence arguably satisfies the test set out in O’Brien v Chief Constable of South Wales [2005] 2 AC 534. It arguably has a probative value and I do not believe that reliance on the similar fact evidence is disproportionately oppressive and will lengthen the trial. I should stress that I do not rule out a fresh application by the Defendants when the full picture is known. By that I mean that any application in respect of these matters ought to take place after the Claimants have provided disclosure, Tattershall has provided disclosure and the overall structure of the Claims is re-evaluated in the light of all material then available. At this stage however I think to remove it from the Claimants might cause an injustice to the Claimant which is wholly disproportionate compared with the inconvenience Tattershall might suffer in dealing with these items. One must balance not only the injustice caused to people against whom claims are brought but also decisions made that might affect the ability of a party to bring a claim.

I should say in this context for completeness that I was referred to the Court of Appeal decision in JP Morgan Chase Bank & Ors v Springwell Navigation Corporation [2005] EWCA Civ 1602. That too concerned an attempt to use similar fact evidence. I do not derive any assistance from that case. Like the decision before me it was a case management issue. I do not see how a decision of one case on case management issues can have any significance on a completely different, separate case considering its own case management issues.

Finally I should observe that Tattershall has adduced no evidence to show that the pleading will be oppressive; it merely asserts it relying on these unconnected instances as shown by the JP Morgan case.

I do not regard the similar fact matters sought to be introduced by the Claimants as creating disproportionate side issues.

It follows therefore that in my view there is nothing in Tattershall’s objections of a substantive or procedural nature to the proposed amendments.

There is a final objection and that is a contention that the Claimants have obtained the evidence illegally and the Court ought not to sanction its use. This aspect is the Second Defendant’s most technical objection. It is suggested (correctly) that the Claimants rely upon information provided by HMRC and it in turn relied upon information provided by the Spanish competent authority.

It is suggested that the use of that material in a private law action is a breach of EC regulation 1798/2003.

Mr Patchett-Joyce who appears for Tattershall first contends that the provision of the information to the Claimant that was obtained from the Andalucian Tax Authorities is contrary to that regulation. He submits that Article 1 demonstrates the purpose of the regulation is to ensure compliance with the laws and the provision of correct assessments for VAT. It is not concerned he submits with recovery of sums due under those regulations. In any event he says that, even if it is concerned with the recovery of such sums, then it is limited to recovery by the taxing authorities and not by the Claimant in the present action which is a private action. This he draws from article 1 (1) and article 41. The latter article in sub paragraph (5) refers to article 13 (1) of Directive 95/46/EC. That provides that member states may adopt the legislative measures to restrict the scope of the obligations and rights when such a restriction constitutes necessary measures to safeguard (e) an important economical financial interest of a member state of the European Union including monetary budget and taxation matters.

Accordingly Mr Patchett-Joyce submits that none of these provisions is capable of applying to a private law claim. Further he submits no legislative measure has been adopted by the UK restricting the scope of the obligations and rights provided under article 11 (1) of Directive 94/46/EC.

I am not persuaded that the articles are as restricted as he suggests. It seems to me that arguably they were plainly intended to cover the recovery of duty as well as the formalities of the correct filling in of returns. It would be absurd that the members of the EC collaborate for form filling but do not for the purposes of the real issue namely the recovery of the duties.

Further I do not think it is right to categorise the present action as merely “a private claim”. That in my view is to ignore the reality. When the Company was due to receive payments for the sales of its goods those monies included VAT. It would know that it would be under a duty to account for that VAT in due course less any inputs that it could deduct. In this case of course the inputs are virtually non existent because the goods have allegedly been imported from another EC country. When it directed those monies to be paid to a third party it could not do that on any proper basis unless, at the time the monies are so directed to be paid away, there would be sufficient funds to meet the oncoming VAT liability. That is not to say of course that the money “belongs” to HMRC, nor that there is any trust in its favour. It is simply that from a solvency point of view the monies cannot be paid away to a third party (especially if the third party has no claim against the Company) without thereby committing potentially fraudulent or wrongful trading or misfeasance or preference. There of course may be explanations but regard has to be had to the looming VAT liability. The monies paid away include the VAT element. The present action is to recover assets that belong to the Company. Those assets will then be used to discharge, applying the statutory insolvency regime the claims of the creditors. The overwhelming creditor is HMRC for the VAT. Thus if there is a successful restoration to the Company those funds will then be used to discharge wholly or in part the VAT liability which would have been proven in the liquidation. On that true analysis the present claim is to recover indirectly the VAT that is due to HMRC which the Company received but failed to account for. I regard that as a method of enforcement of the sums due under the regimes.

In any event in my view UK legislation has been passed in accordance with article 41 to enable it to be used by HMRC to assist the present litigation.

Mr Patchett-Joyce referred me to section 182 Finance Act 1989 which contains a general prohibition on disclosure by tax authorities of relevant information (amongst other things) without lawful authority. Lawful authority includes, amongst other situations, where disclosure is made in accordance with official duty of a Crown servant.

Section 18 of the Commissioners of Revenue and Customs Act 2005 (“CRCA 2005”) enables disclosure of information which is made for the purpose of a function of the Revenue and Customs and does not contravene any other restrictions and is made for the purposes of civil proceedings (whether within or no within the United Kingdom) relating to matters in which the Revenue and Customs have functions. Finally section 241 Enterprise Act 2002 enables a public authority which holds information to which section 237 applies to disclose that information for the purpose of facilitating the exercise by the authority of any function it has under or by virtue of the Act. The information disclosed plainly falls in section 237. Section 241 (3) enables the public authority to disclose that information to any other person for the purpose of facilitating the exercise by that person of any function he has under or by virtue of (inter alia) an enactment specified in schedule 15. The Insolvency Act 1986 is within schedule 15.

Accordingly Mr Davis-White QC submits on behalf of the Claimants that taking of all those statutory provisions together, everything that has been disclosed has been disclosed lawfully. I agree.

Even if it were not, Mr Patchett-Joyce accepts there is a discretion. Prior to CPR there was no discretion to exclude unlawfully obtained evidence see Arab Monetary Fund above at page 681. The Court now has a discretion. I refer to Phipson on Evidence paragraph 38/39 and CPR 32.1. The Court is given general power to control evidence including the excluding of evidence which would be otherwise admissible. That is a procedural code to deal with cases justly. Justice is of course applicable both to Claimants and Defendants. I asked Mr Patchett-Joyce upon what basis I should exclude the matter and in reality the essence of his submission was that it would not be fair to the Second Defendant given that it had been obtained illegally. Against that the evidence is clearly of vital assistance in prosecuting the Claimants’ case. The allegations are serious as against Tattershall and others. Finally the evidence can be obtained in any event by the Liquidator under section 236 Insolvency Act 1986. I should say in that context I made clear that the Defendants are in a position to ensure that all relevant documentation is obtained from HMRC (rather than those selectively required by the Claimants) by the simple resort to CPR 31.17 if full disclosure of the information of HMRC is not provided. Mr Davis-White QC readily acknowledged this position.

Given all those factors in my view if I had been driven to this stage I would have overwhelmingly considered it appropriate to exercise my discretion not to exclude it. In my view the factors are overwhelmingly in favour of allowing the Claimants to rely upon the evidence provided full disclosure of the material is obtained, even if it was obtained unlawfully (which I do not accept).

For all of those reasons I grant the Claimants permission to re-amend the Particulars of Claim in the form of the draft.

I will consider the timetable in the light of that primary decision.