Zargaran & Anor v Fairfax Gerard Holdilngs Ltd

The claimants were, prior to and during 2001, in partnership as importers and sellers of carpets from premises at Staples Corner in London. During 1999 and again in 2001 they had liquidity problems and sought to borrow significant amounts of money to fund their business. They were introduced to the defendant, a company in business as a provider of trade finance. The loan which they raised in 1999 was in due course repaid on time. There was a problem about the incidence of value added tax, which I will mention later, which left the claimants out of pocket. However, no claim was brought by the claimants at the time and the present proceedings make mention of the 1999 loan primarily as a matter of history.

These proceedings arise out of a loan which the claimants raised in 2001; the loan was not repaid and the claimants contend that the transaction was so structured as to cause them an unexpected loss of the sum of £21,193, arising from the incidence of value added taxation (“VAT”), which they seek to recover in these proceedings plus interest on that sum from 2001.

The case was argued before me over two days on 19 and 20 November 2007. It was not a straightforward trial. The claimants were represented by Mr Zargaran, in person, and the defendant by its managing director, Mr Ross. Each had been represented by a firm of solicitors during the preparations for trial but thought it would be cheaper if they conducted the rest of their dispute without representation.

The case as presented was not in good order in a number of significant respects. First, there was not an agreed trial bundle and each side produced its own. I decided I would still hear the claim because it was apparent that the case had been in and out of the list for trial since at least 2005. It was a claim of comparatively small value and not document heavy. Because in particular the costs of litigation had escalated substantially since 2005 and because another adjournment to get the case in order would be unlikely to achieve its desired objective, it seemed to me that the preferable option was to get on with resolving the dispute, despite the obvious difficulties.

Then during the trial it became apparent that, despite the extensive delays, there had not been full disclosure of all relevant and some quite important documents. It was claimed by each party that some of the relevant documents were lost and/or recorded only on a computer which had crashed and since been replaced. The fact that each of the parties had computers which had crashed at broadly the same time, and had taken with them the only copies of the more relevant documents covering approximately the same period of time, seemed to me to be a coincidence whose occurrence was worthy of note.

I did during the trial have the opportunity of hearing important oral evidence, but the benefit was diminished a little by the fact that Mr Zargaran and Mr Ross were old adversaries with a long history of duelling before the courts (in most of which encounters Mr Ross was proud to say that he had been the winner). Each, therefore, in cross-examining the other, was almost as keen to make statements and score points, many of them of relevance only to past duels, as to extract evidence relevant to the matters in issue before me.

The case also presented a point relating to the incidence of VAT which is by no means straightforward. The point originally appeared to be central to the issues and one on which expert evidence would have greatly assisted me. There was no provision in the directions for expert evidence but that did not prevent the parties attempting to provide it, although they denied expertise and plainly did not have any. As it turns out, on the findings of fact to which I was driven on the evidence, it seems to me that the VAT issue does not arise.

As regards credibility, I rather felt that the antagonism between Mr Zargaran and Mr Ross got in the way of truth, relevance and accuracy. In my judgment Mr Ross told the truth most of the time and Mr Zargaran for less of the time. Each party knew when the other was being evasive and in his turn was himself evasive when matters reached the point critical for his case. I found that the poorly explained absence of documentary evidence was a fairly reliable prognosticator of when the parties were in turn going to become evasive in evidence.

Mr Zargaran also called as a witness Mr Charles Nearan(?), who had been his accountant at the material time. Although I thought that he gave evidence in a slightly partial manner, overall I accept the truth of his evidence.

By a letter dated 17 January 2001 the defendant wrote to the claimants setting out the terms on which it had offered to lend them the sum of £50,000 for a period up to three months. I quote:

“In summary, the proposition is as follows:

(1)

You have rugs, carpets and stock to a value of between £500,000 and £700,000. These are stored in your warehouse and have been paid for in the main by you, excluding the funds you owe to your German supplier of approximately £30,000.

(2)

You have receivables in your sales ledger totalling approximately £300,000 of which £120,000 is due from South American Concerns.

(3)

For the sum of £50,000 including VAT we shall buy stock that you own and which cost you at least £100,000 plus VAT. Under the facility we shall buy stock that you have paid for from you at your cost and resell it to you under reservation of title.

(4)

The stock shall be identified and listed by you. It shall be held separately from your other stock and labelled as ‘The property of Fairfax Gerard International Limited (FGI)’ in order to secure us against any diminution of the value of our stock, for items of stock that you invoice to us at £100,000 plus VAT, we shall pay you the £50,000, for which title for the stock shall pass to us and hold the remainder on account. In other words, you shall sell FGI stock with a cost to you of £100,000 plus VAT. FGI shall issue a VAT invoice to our subsidiary, Fairfax Gerard Traders Limited (FGT) and FGT shall invoice you with the same value, with reservation of title. This shall be VAT neutral in both of our group books if you repay us what you owe.

(5)

If you wish to sell any such stock you must replace it with other equivalent stock and you shall send us details of this substitution.

(6)

It is your intention to pay us sums on account as you become able to do so, such sums shall be credited to your account to reduce the interest charge. It is a condition of this agreement that you contact us after four weeks, and each 14 days thereafter, and give us a forecast of your cashflow in the next two weeks and how much and when you propose to pay to us. You are obliged to buy back the stock on or before the date, 90 days after the date we buy it from you.

(7)

We (FGT) hold your cheque limited to £56,000 with a presentation date of 11 April 2001 and with the authority from you to present it on time that the remaining sum due to FGT entered covering both our payment to you under Clause 3 above and charges in accordance with this letter. Once you have paid FGT all sums due you shall obtain good title to the stock and all sums shall be treated as paid.” [Quotation unchecked]

There is an eighth term which is not of central relevance.

Later in the letter it states:

“The following are also conditions of this agreement:

(1)

It is only in the event that we are not repaid within 14 days of schedule repayment that we shall seek any form of other recompense. However, if we are not paid within those 14 days we would have the right to recover our funds from the various forms of securities that we hold.

(2)

The stock shall be invoiced by you to our subsidiary, Fairfax Gerard International Limited, and back to you with reservation of title by our subsidiary, Fairfax Gerard Traders Limited.

(3)

We shall retain title to all of the identified stock until we have been repaid in full and you do not have authority to pass a good title unless you replace such stock and notify us.” [Quotation unchecked]

The defendant’s charges were an administration fee of £1500 plus VAT and interest was to be at three per cent per month or pro rata plus a right to make a “refinancing charge” of one per cent per month on any amount outstanding.

Pursuant to this agreement the claimants invoiced FGI for carpets in the sum of £121,105 plus VAT of £21,193 and they placed the carpets, which were listed and identified in the invoice, separate and apart in a corner of the upper floor of their warehouse. In exchange FGI supplied to the claimants the VAT inclusive advance in the sum of £50,000 exactly.

It is worth pausing here to reflect on the mechanics of the transaction for VAT purposes: so far as the claimants are concerned, they, having issued what purported to be a VAT invoice for the sale of the carpets, would be required to include the invoice within their next VAT return and account to Her Majesty’s Customs & Excise (hereinafter “the customs & excise”) for the VAT which appeared on the face of their invoice to have been received. Since the defendant had agreed to pay only the sum of £50,000 inclusive of VAT, the due compliance by the claimants with their VAT obligations would on the face of it mean that the net benefit of the transaction to the claimants would be only in the sum of £50,000 less the £21,193 which would have to be accounted to the customs & excise, if this leg of the transaction were taken on its own.

However, the scheme as represented to the claimants contemplated that FGT would resell the property to the claimants “with reservation of title” and issue a counter-invoice from itself to the claimants, in the same sum as the original invoice issued by the claimants to FGI, that is to say the sum of £142,298. Armed with this invoice, the claimants would be entitled to set off the FGT invoice as an input against their liability to account to the customs & excise for the original output, effectively making the incidence of VAT on the two transactions entirely neutral.

In order to accomplish this, it is clear, both from the terms of the agreement and what I heard in evidence, that it was the stated intention of FGI to transfer the property at face value from itself to its associated trading entity, FGT, and that FGT would declare the invoice in its own VAT records as an input and, once it had issued the counter-invoice as an output, declared the counter-sale which would neutralise the vat effect in its own books.

If however a counter-invoice were not issued, it would leave the possibility open to FGI/FGT to make a recovery from the customs & excise of the VAT input tax of £21,193 shown on the purchase invoice it received from the claimants, which tax the claimants had supposedly paid.

The problem in this case, as identified and alleged by the claimants, is that the FGT counter-invoice was never issued and the claimants contend that they are out of pocket in the sum of £21,193 which they were required to account to the customs & excise in their next VAT Return. The claim was pleaded in misrepresentation and negligent misstatement.

When he opened his case it became apparent that Mr Zargaran relied on Section 2 of the Misrepresentation Act 1957. The particulars of falsity were the express or implied representation that the underlying transaction was one which attracted VAT when in truth the transaction was a transaction completely outside the ambit of VAT and none should have been charged at all. This is the VAT legal issue of complexity to which I was referring in paragraph 7 above.

It became apparent from the perusal of some of the underlying correspondence that it had always been Mr Zargaran’s fundamental complaint that the defendant had been guilty of misrepresenting the financing scheme itself, that is to say that it had represented that FGT would issue the counter-invoice upon the completion of the loan when it was not its procedure to issue it at that stage and indeed had not done so.

With the consent of Mr Ross, who felt overall that it would be better if this allegation were put to the test, I allowed Mr Zargaran to amend the claim in order to plead this further allegation.

Dealing with this allegation first of all, it seems to me quite evident that there was a representation which I am satisfied induced the contract (and which was also incorporated as a term of the contract) that the defendant would issue a counter-invoice with reservation of title immediately after the claimants had issued their invoice and been paid the advance. This was to ensure that the transaction was VAT neutral.

I am quite sure that FGT did not issue such an invoice, contrary to the suggestion and evidence of Mr Ross. As managing director, he would not have been the person to issue invoices at all. That would have been done by Mr Jason Heath whom he chose not to call to give evidence and no other evidence of it was produced.

Neither an original nor copy counter-invoice was produced. A counter-invoice would not have come into existence without an internal transaction between FGI and FGT whereby the property in the carpets was transferred from the former to the latter, a transaction which I would have expected to see recorded somewhere. Again, there was no such record.

The reason the property in the carpets was not transferred to FGT and a counter-invoice supplied to the claimants was, I believe, because the defendant wished as a matter of policy to retain the invoice on its own books, so that the potential for an administratively quick rebate of the £21,193 VAT shown on the invoice could stand as a quasi partial security against the loan - which would reduce any losses by that amount in the event of a failure by the borrower to repay the loan.

Support for the conclusion that there was not any counter-invoice comes from three sources. First, Mr Zargaran told me of an occasion in April 2002 when he visited the defendant’s premises with his solicitor. He complained on that occasion about the non-receipt of an invoice. Mr Ross sent one of his assistants to go and find it, but the latter came back saying that it could not be found. A replacement was issued, described as a copy, that day. It was not handed over by Mr Ross because he said that he was afraid that if it was given to Mr Zargaran the latter would attempt to recover VAT on what the defendants had already declared was a bad debt. I accept this evidence.

The second piece of evidence in support is the content of a letter from Miss Ford, of the customs & excise, raising a query as to the Zargaran transaction. She was looking to see whether FGI had managed to effect a sale in relation to the purchase invoice for the transaction. Since it did not have such an invoice it is clear that, at the date of the enquiry in 2003, there had been no internal transaction between FGI and FGT, which would have been necessary before FGT was in a position to issue a counter-invoice to the claimants.

Thirdly, there is the similar fact evidence arising from the 1999 transaction where the counter-invoice was not issued and the claimants genuinely seem to have suffered a loss of VAT.

For all these reasons, as well as on credibility grounds, I reject the contention of Mr Ross that the counter-invoice was issued to the claimants but that the electronic copy kept by him was lost when the defendant’s computer crashed. I find that there was no counter-invoice issued to the claimants at any stage.

In response to the claim, Mr Ross says that what the defendant had represented in the letter, 17 January 2001, was that the transaction would be VAT neutral if the loan was repaid. It is clear to me that the representation would have become true had the condition of repayment been fulfilled. However, in my judgment the representation should have been true from the start, that is to say, by the issue of the counter-notice at the same time as the original sale invoice. Were it not so, the borrowers might be faced with the need to pay substantial VAT to the customs & excise co-inciding with the date when they needed to make a substantial repayment of their loan to the defendant, possibly with insufficient money to do both. But even in that event, it is not easy to see the borrower suffering any significant loss – provided that in due course the borrower does receive the counter-invoice and is able to recover the VAT shown on it as an input.

In the present case, if the borrower were to have received a counter-invoice but did not make repayment of the loan, FGT would be entitled after 6 months to make application to the customs & excise for bad debt relief, whereby the effect of the counter-invoice would be reversed, FGT would be able to recover the VAT shown on the unpaid invoice and would be entitled to serve a notice on the borrower requiring him to restore to the customs & excise any claim he had made to re-payment of the VAT shown on the same invoice. In the result, it remains that the reason why the claimants have suffered loss, if they have done, in the present case is not because the representation was untrue but because the condition as to repayment of the loan was not fulfilled. For this reason the case of misrepresentation must fail.

As regards the breach of contract, the position is the same. Mr Ross says that had the counter-invoice been issued so that the claimants could have reclaimed the VAT on the property, if the invoice was not paid in accordance with the contract within a period of six months from the date of issue of the invoice, FGT would similarly have been entitled to claim bad debt relief and recover the VAT on the counter-invoice and issue a notice to the claimant whereupon the claimants would be liable to repay the customs & excise any VAT which they had managed to reclaim on the unpaid counter-invoice.

The consequence of this is that the maximum recovery which the claimants would be entitled to make against the defendant by way of damages for breach of contract is the amount of interest they would have been able to earn on the sum of £21,193 between the date when they should have received from the customs & excise a rebate of their inputs on the counter-invoice and the date when they would have to have repaid it after it had been declared to be a bad debt – a period of about six months.

The question then raised is whether the claimants have suffered any loss. It is alleged in the Particulars of Claim that the claimants were liable to account to the Customs & Excise in the sum of £21,193 and have so accounted. By its defence served on 4 May 2005 the defendant did not admit that such a payment had been made and asserted that the claimants had supplied no evidence of this payment and required the claimants to give clear proof of it.

By a request for further information the defendant requested the claimants to provide copies of their VAT returns covering the years 1999 to 2005. By their response, the claimants indicated that a copy of the returns had been requested from their accountants but it would take several weeks to recover the documents and that copies would be provided to the defendant at the earliest opportunity. They were not.

In a statement dated 5 May 2006 Mr Zargaran stated that despite appropriate searches the documents had not been found. On application to the Customs & Excise he was informed that the Zargaran company VAT number was now redundant, since it had ceased to function as a partnership in 2002 and became a limited company, therefore no records were available to be disclosed.

In his witness statement, dated 16 May 2006, Mr Ross asserted that he did not believe that Mr and Mrs Zargaran had ever accounted to Customs & Excise in the sum of £21,193 or at all and therefore he did not believe that the Zargaran partnership had suffered any loss.

In a witness statement dated 4 November he disputed payment and stated that his solicitor had acknowledge that neither they nor the Customs & Excise have any records which show that the claimants accounted for VAT on the invoice either in early 2001 or at any other time.

In his opening submission for this hearing Mr Ross repeatedly asserted that Mr and Mrs Zargaran had produced not a shred of evidence from bank statements, VAT returns or anywhere that he had made any relevant payment leading to any loss.

Mr Nearan, the claimants’ accountant, confirmed that it was his firm which prepared the VAT accounts for all relevant VAT periods from 1997 until 2003. His firm provided a book-keeper called Elaine Heisman who attended at Mr Zargaran’s premises for the purposes of collecting information and invoices, and preparing the VAT returns.

Mr Nearan, however, did not keep copies of those returns. That was because the VAT return and accounts on which it was based were prepared at the claimants’ own commercial premises and the original and any copy documents would be kept there. It is only where documents and accounts were prepared in Mr Nearan’s own offices that he would keep a copy of any document which was produced by the firm. He was asked if he would very kindly overnight carry out as full a further search as he could of the documents and files at his premises to see if there was any return which would confirm the payment of the VAT to the Customs & Excise. However, the following day passed without any further information from him, and indeed there has been no suggestion that any such document has come to light since that time.

In the result there was indeed not a shred of independent documentary evidence to confirm that Mr Zargaran had accounted to the Customs & Excise for the VAT due on the invoice. I am not prepared to accept without such documentary evidence that Mr and Mrs Zargaran did account for the VAT due. It seems to me to be highly likely that Mr Zargaran did not have the spare money available from which he might be able to make such a payment, especially where, as here, he could not and did not repay the loan within that three month period, a loan which he would have regarded as the more pressing of the obligations and whose discharge he was unable to achieve.

Accounting to the Customs & Excise for the sum of £21,193, which he would then have been entitled to recover from the Customs & Excise when he had received the counter-invoice or repaid the loan would, in my judgment, have been a low priority for him compared with the need to repay the loan.

As a matter of probability I have come to the conclusion that the sum of £21,193 was neither paid, nor accounted, to the Customs & Excise and in that case Mr and Mrs Zargaran simply have failed to establish a loss.

As regards the claimants’ main claim that the transaction was outside the scope of the VAT legislation and there was a misrepresentation that it was within it, I have not been able to find in the legislation an answer and have had no assistance in finding any. My instincts, however, suggest to me that it might well be that there was something of a sham about the transaction; that its real purpose was not to provide for a sale of goods, but to provide security for a loan. The invoice and counter-invoice bore no relation to the money or indeed the value of property apparently changing hands. The invoice value of the goods was over £121,000, net of VAT, but the true consideration coming from the defendant was some £38,000 only, net of VAT; nor was there ever an intention that the balance of the invoice was to be payable either way, that is to say either by the defendant under any circumstances or by the claimant under any circumstances.

In the light of the fact that I have not received any legal or expert assistance on this complex VAT issue, I am unable to make a definitive ruling that the transaction was not a transaction by way of sale of goods but by way of security as a purported transaction. If however I were so to rule, I could easily see that there may well have been merit in the contention of the claimants that there was an implied representation that the transaction was within the VAT system and that this representation was untrue.

However, as under the previous head of claim, I have concluded on the balance of probabilities that Mr and Mrs Zargaran did not in any event account to the Customs & Excise for the VAT apparently due on the transaction. In these circumstances, even if I were to hold that there was a misrepresentation proved under this head of claim, there was no loss which has been proved to my satisfaction. Without proof of loss this claim also must fail.

Accordingly, the claim must be dismissed.