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Apollo Communications Centre Ltd (In Liquidation) & Ors v Rahmann & Ors

[2007] EWHC 3467 (Ch)

No. HC06C03020
Neutral Citation Number: [2007] EWHC 3467 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice

Thursday, 14 th June 2007

Before:

MR. JUSTICE WARREN

B E T W E E N :

APOLLO COMMUNICATIONS CENTRE LTD (In Liquidation) & Ors.

Claimants / Respondents

- and -

RAHMANN & Ors.

Defendants /

Applicant

Transcribed by BEVERLEY F. NUNNERY & CO

Official Shorthand Writers and Tape Transcribers

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Mr. C. Parker (instructed by Brooke North, Leeds) appeared on behalf of the Applicant/Ninth Defendant.

Mr. P. Shaw (instructed by Boyes Turner, Reading) appeared on behalf of the Respondents/Claimants.

J U D G M E N T

MR. JUSTICE WARREN:

1 This is an application made by the ninth defendant to strike out the particulars of claim as against him. The application is dated the 6 th December 2006 and is very short, seeking to strike out because the statement of case discloses no reasonable causes for bringing the claim and/or is an abuse of the court process. No evidence is sought to be relied on, which is not surprising given that this simply a strike out application, nor are any grounds to be relied on set out in it. Grounds are set out in a letter dated 16 th February from the ninth defendant’s solicitors to the claimants’ solicitors.

2 The case concerns VAT fraud of a type known as Missing Trader Intra Community (“MTIC”) Vat fraud, or something of that nature. The nature of two common MTIC frauds is set out by Jacob LJ in the Federation of Technological Industries case. I do not need to set out the now quite well known passages again.

3 The judge identifies the simplest form of abuse which is what he called “acquisition frauds”. This is where the acquiring importer sells goods to real customers in the UK market, who pay a purchase price including VAT. The seller then disappears without accounting for the VAT. The disadvantage of this type of fraud for the fraudster, is that real purchasers have to be found.

4 The second type of abuse considered by Jacob LJ is what is called “carousel” fraud. The judge refers to the buffers along the chain of supply which he calls “customers” in inverted commas to indicate no doubt that these customers are involved in the fraud and to put a question mark over the nature of the transaction. He then referred to the last buffer who sells back into another

EU member state very often to the original seller.

5 Other reported cases dealing with VAT frauds of this type or similar are Regal Way v. Chinford , Blackburne J. at paras.10-11, Regina v. Hashash and Total Networks . Hashash contains a description of carousel missing trader fraud at para.15, taken from the judgment of Henriques J. below, basing himself largely on Optigen in the ECJ to which I will come in due course. The essence of the fraud described in Hashash was that the goods went back to their starting point, but that is not necessary and a conventional carousel fraud can result in goods being exported to some third party in another EU state. Regal Way was a case where the payment was made to offshore third parties and appears to have involved an ultimate sale to a Hong Kong company. Total Networks is also a conventional carousel fraud, with the goods finding their way back to the original supplier, Total. It can be seen therefore that if a person refers to a carousel fraud, he is likely to be referring to a case where the goods are exported at the end of the chain, either to the original supplier or some offshore third party. But MTIC fraud does not need to involve export. A simple fraud of acquisition fraud is nonetheless an MTIC fraud. I am sure also that if there were a number of buffers after the original importing purchaser with the last buffer disappearing having disposed of the products to UK purchasers but without accounting for VAT, that would equally be called an MTIC fraud.

6 In the present case there appears to have been a VAT fraud. Mr. Shaw, for the claimant, says that it is an acquisition fraud. Mr. Parker, for the ninth defendant says that his side had interpreted the particulars of claim as describing a carousel fraud and that the pleading must be approached in that way. To resolve that it is necessary to look at the pleading, but before I do so

I should explain the background briefly.

7 The second and third claimants are the liquidators of the first claimant. The first claimant was the importer from another EU state of a significant quantity of electronic goods. The first defendant was the sole director, at least according to the particulars of claim of the first claimant. The importation was the first step, according to the claimants, of a VAT fraud. The products had been sold along a chain of purchasers. The eighth defendant was a purchaser along the chain of some of the products. The ninth defendant was the eighth defendant’s only shareholder and director.

8 The vendor to the eighth defendant was Gara Technologies Ltd, the second defendant. It does not appear from the material before me to whom, if anyone, the eighth defendant in turn sold what it had acquired, nor is any allegation made in relation to onward sales in the particulars of claim. In particular, there is no allegation that the products were exported.

9 The particulars of claim were served sometime on or after the 28 th June 2006. The ninth defendant served his defence on the 17 th November and made his application for the strike out on the 6 th December 2006. Sometime after that a request for further information was made, replies being given on the

26 th March of this year.

10 I now need to turn to the particulars of claim in some detail. For the purpose of the present application the facts set out in the particulars of claim are assumed to be true.

The Parties

“1 The First Claimant (‘Apollo/the Company’) is a company incorporated in England and Wales on 11 February 2004 under the Companies Act 1985 and was at all material times a registered trader under the Value Added Tax Act 1994. On 15 May 2006 it went into creditors voluntary liquidation. The 2 nd and 3 rd Claimants are the joint liquidators of the Company. The First Defendant (‘Mr. Rahmann’) at all material times been the sole director of the Company.

“2 The 2 nd Defendant (‘Gara’) is a company incorporated in England and Wales on 24 September 1998 under the Companies Act 1985 and was at all material times a registered trader under the Value Added Tax Act 1994. At all material times the 3 rd Defendant (‘Mr. Atroshi’) was Gara’s sole director.

“3 The 4 th Defendant (‘Reems’) is a company incorporated in England and Wales on 1 October 2003 under the Companies Act 1985 and was at all material times a registered trader under the Value Added Tax Act 1994. At all material times the 5 th Defendant (‘Mr. Khan’) was Reems’ sole director.

“4 The 6 th Defendant (‘Excell’) is a company incorporated in England and Wales on 9 May 2003 under the Companies Act 1985 and was at all material times a registered trader under the Value Added Tax 1994. At all material times the 7 th Defendant (‘Mr. Hanif’) was Excell’s sole director.

“5 The 8 th Defendant (‘Wetherby’) is a company incorporated in England and Wales on 5 October 1970 under the Companies Act 1985 and was at all material times a registered trader under the Value Added Tax Act 1994. At all material times the 9 th Defendant (‘Mr. Simon Bhullar’) was a director of Wetherby.

The Transactions

“6 Between 7 April – 24 April 2006, in 414 transactions the Company acquired mobile telephones and miscellaneous electrical products from various suppliers in the European Union. The sales to the Company, being from companies registered for VAT in European Union member states other than the United Kingdom were zero rated for VAT purposes.

“7 In respect of each of the 414 purchase transactions referred to at paragraph 6 above the Company sold the purchased goods back to back (‘the Sales’) to the 2 nd Defendant and to Park Supplies Limited (‘Park’) and AC Electrical EU Limited (‘AC’). Each of Sales, being a supply by the Company (as a trader registered for VAT in the United Kingdom) to a purchaser, also registered for VAT in the United Kingdom, was subject to VAT at 17.5%.

“8 The Company orally directed the 2 nd Defendant, Park to pay almost the entirety of the sale price to named third party payees. In each case the said payment instructions directed that save for a relatively small sum payable to the Company itself, all of the sale price (including the VAT element thereof) was directed to be made to 3 rd parties other than the Company, and being paid substantially to overseas parties and/or overseas bank accounts.

“9 The sales of the European Union suppliers to the Company being effectively free of VAT, the effect of the foregoing arrangements was that

“9.1 in its return for the relevant VAT accounting period, the Company was obliged to account to HMRC for the full output tax on the sales in the Sales;

“9.2 having been charged no VAT on its purchases, the Company had no VAT input tax to set off against its output tax liability.

“9.3 in directing the 2 nd defendant and Park to pay almost the entirety of the purchase price of an invoice (including that element attributable to VAT) to parties other than the Company, the 1 st Defendant as the directing will and mind of the Company was depriving it of funds with which to discharge its liabilities, including its VAT liability in relation to the Sales.

“10 Of the Sales, the total invoice value of the Company’s sales to the 2 nd Defendants was £152,293,475.38 including VAT of £22,882,007.08.

“11 The 2 nd Defendant and Park immediately sold all of the goods acquired from the Company to a number of purchasers including Reems, Excell and Wetherby. In each of their onward sales the

2 nd Defendant and Park repeated the payment instructions they had received from the Company (and added a small mark up). Reems, Excell and Wetherby acted on the payment instructions provided by the 2 nd Defendant and Park and paid substantially all of the invoiced sums (including VAT) to 3 rd parties other than the 2 nd Defendant, Park or the Company.”

There is no express allegation so far that any of the transactions referred to were in the course of business of any of the companies concerned. It might be thought to be implicit that it is so. However, for reasons which appear,

Mr. Parker says the pleading is hopelessly confused. The facts as pleaded in these particulars of claim and in the further information actually lead, he says, to the conclusion that there were no transactions in the course of business at all and thus no VAT triggering event.

11 Paragraph 12 reads:

“The arrangements set out above amounted to a fraudulent scheme, the design and effect of which was to render the Company [that is Apollo, the first claimant] insolvent and unable to discharge its VAT liability. Further the company’s business was thereby being carried on with intent to defraud its creditors or alternatively for a fraudulent purpose (namely the avoidance of its liability to HMRC for VAT) pursuant to section 213 Insolvency Act 1986.”

So there is a pleading under which it is alleged, or so it seems to me, that the effect of the arrangement was to render Apollo insolvent. It may be a pleading which demands an answer to the question: why does this render Apollo insolvent? But as a matter of pleading the allegation is that the alleged transactions do have that effect. I will need to return to this in a moment in the light of the claimant’s replies to a request for further information.

12 It is then pleaded against Mr. Rahmann that he owed, as director, fiduciary duties to the company and the duties are set out in 13.1 to 13.3, to act honestly in good faith, to act bona fide in the company’s best interests and to act for a proper purpose. It is also alleged in para.14 that he owed the company a duty to exercise reasonable skill and care in the management of its affairs. It is then said that Mr. Rahmann acted in breach of those duties because he conducted Apollo’s affairs in the manner set out in paras.4 to 12 of the particulars of claim.

13 Then it is said that the effect of the trading arrangements was as set out in para.15.1 to 15.3. Firstly, the company incurred VAT liabilities in respect of the sales in the sum of £35 million-odd. Secondly, having directed its purchase to pay the third parties the entirety of the book debts owed to the company, the company was rendered insolvent and was inevitably without funds to discharge its VAT liability or its other creditors. It had no resources with which to discharge those liabilities; and, thirdly, the book debts due to the company totalling some £237 million were paid to third parties.

14 Paragraph 15.1 is important because it expressly alleges that Apollo incurred VAT on the sales. It could only have done so if for VAT purposes the sales were in the course of Apollo’s economic activities, within the language of the Sixth Directive, or in the course of furtherance of its business within the language of the VAT Act, 1994. Paragraphs 15.2 and 15.3 are perhaps other allegations which invite clarification. It may be that a sum equal, or roughly equal, to book debts including VAT was paid to third parties, but if the debts were not discharged for some reason, for instance, based on the alleged frauds, then it is not clear what this pleading means other than that sums of money were paid purportedly in satisfaction of book debts. As will be seen, the claimants’ case is that the debts were not in fact discharged.

15 Paragraphs 16 and 17 read as follows:

“Mr. Rahmann conducted the Company’s affairs knowing and intending that it would be rendered insolvent and would be unable to meet or had no reasonable prospect of paying its liabilities (including its VAT liabilities) and was (alternatively would become as a consequence of the above transactions) insolvent.

“Mr. Rahmann is liable to compensate the Company for breach of fiduciary duty and/or breach of trust or alternatively to pay damages for negligent breach of his duty of care to the Company.”

There is I think clearly an allegation of breach of duty or trust with an alternative allegation in negligence. This is not a pleading which leaves the recipient in doubt about whether a case based on breach of duty or case based on negligence is made. It is not like an allegation such as one finds in Armitage v. Nurse to the effect that a person knew or ought to have known certain facts when the recipient would not know whether the allegation was really that he knew rather than that he ought to have known.

16 Paragraph 18 contains a further alternative case that Mr. Rahmann is liable to contribute to the company’s assets on the application of the liquidators for fraudulent trading pursuant to s.213 in carrying out the company’s business with intent to defraud creditors or, alternatively, for a fraudulent purpose, namely, the avoidance of its liability to HMRC for VAT.

17 Pausing there, the pleading so far makes perfectly good sense. Mr. Rahmann has conducted Apollo’s affairs in a way which amounts to breach of duty and/or fraudulent trading because he has done so in a way which incurs a VAT liability which he has deliberately engineered would not be met. Of course, this is so only if a VAT liability has in fact been incurred, a matter I will need to consider in a moment . I should note, however, that the pleading stops at the stage of sales to the eighth defendant and the other buffers in the same position. There is no allegation that the transactions would complete the carousel if indeed they did take place. It is no part of the claimants’ case that such sales did in fact take place and they do not seek to rely on such sales. Indeed, if the sales by Apollo did give rise to VAT, it is said that it is irrelevant whether there was a true carousel fraud or not. Whether there was or not a carousel fraud, the VAT liability of Apollo as a result of the sales by it has not been met and according to the pleading cannot be met because it has been deliberately rendered insolvent by Mr. Rahmann. One can refer back, again, to para.16 of the particulars of claim in that context, asserting that he conducted the company’s affairs knowing and intending that it would be rendered insolvent.

18 Paragraph 19.1 contains particulars of the conduct relied on, these include the oral payment instructions from the company to its purchasers concerning the payment away from the company to third parties for the credit of overseas companies.

19 Paragraph 19.2 pleads that the amount paid to the company’s suppliers was greater than the amounts which the company was obliged to pay to its suppliers. That pleading is explained by reason of the fact that the VAT element was paid away as well, whereas that would not have been included in the amount that the company was obliged to pay to its own supplier.

20 Paragraph 19.3 pleads that the transactions in which the company was involved, involved no apparent commercial negotiations and was on terms as to indicate no genuine commercial bargain.

21 Paragraph 19.4 pleads that the company did not insure the goods.

22 So paras.19.1 and 19.2 relate to the price plus the VAT and manifestly the payment of the entire amount including VAT means, first, that Apollo is worse off than it would otherwise be, assuming the sales to be valid, although I suppose this would not be so if the debt was not discharged by payment to the third party and, secondly, that the debtor remained liable to meet the debt. Even so, one can imagine difficulties in establishing both of those conditions and in effecting actual recovery perhaps following litigation, although those matters are not pleaded. Even if the claimant does discharge the debt, the fact is that the whole debt, including VAT has gone to the third party. Let it be assumed that that does discharge Apollo’s debt to its own supplier, it leaves the difference between the debt and the total paid as a reduction in Apollo’s net assets, which would otherwise have been made available to meet its own VAT liability. These paragraphs do, however, go to the evil of the alleged fraud, which is that VAT has been evaded assuming that the sales gave rise to VAT.

23 Paragraphs 19.3 and 19.4 do not go to the VAT element. They go to show that the underlying sales were not such as one would expect to see between parties genuinely at arms length. Mr. Shaw says that he relies on these paragraphs simply to show that the purpose or objective of the chain of transactions was that of evading VAT. Mr. Parker says that they show that the underlying transactions were all void and, for reasons I will come to, that no VAT is therefore payable, or at least that the pleaded case is confused and unclear.

24 Paragraph 20 introduces for the first time a reference to MTIC fraud and refers to HMRC letters and materials sent to Apollo warning it of and of consequences of such fraud. Reference was made to s.77A of the VAT Act 1992. I should spend a moment on that section. The section applies to certain sorts of goods which are involved in the present case. It says in sub-section (2):

“Where –

“(a) a taxable supply of goods to which this section applies has been made to a taxable person, and

“(b) at the time of the supply the person knew or had reasonable grounds to suspect that some or all of the VAT payable in respect of that supply, or on any previous or subsequent supply of those goods, would go unpaid.

“(3) The effect of a notice under this section is that –

“(a) the person served with the notice, and

“(b) the person liable, apart from this section, for the amount specified in the notice,

“are jointly and severally liable to [HMRC for the VAT].”

It is only other taxable persons in the supply chain to which this provision is

relevant. Neither Mr. Rahmann nor the ninth defendant can be made personally liable under the section.

25 It is also to be noted that the type of transaction to which the section is directed is described in sub section (2) which I have read. It covers the two types of MTIC fraud which I have already described and would clearly also cover the present case on the facts alleged by the claimants, assuming, again, a VAT liability in the first place even if such facts are not properly understood as within the concept of MTIC fraud as a term of art. Apollo was supplied with a copy of Notice 726 which explains these provisions. It refers to MTIC fraud describing the simplest type, that is to say, what I have already described as an acquisition fraud. It seems impossible to me to regard the generic description of MTIC fraud as restricted to simplest type of acquisition fraud and a full carousel fraud in the full sense, but nothing else.

26 Section 77A clearly covers the present case. In my judgment Notice 726 applies too. Mr. Parker says that the present case is not a simple acquisition fraud. I agree in the sense that Apollo appears to have sold on to a buffer rather than to a genuine customer which would account for the price and VAT direct to Apollo. The ninth defendant and his advisors therefore take the pleading to mean that there is a full carousel fraud since, according to

Mr. Parker, there would not be an MTIC fraud as conventionally understood and it is MTIC fraud which the pleading alleges. It will be obvious from what I have just said that I reject that approach.

27 It can be seen, therefore, that since no carousel fraud is alleged, let alone that HMRC has made a payment to the exporter, the claimants’ claim is in no way based on such claims, if any, as HMRC might have against Apollo for recovery of the payment which HMRC would, on this hypothesis, have paid to the exporter.

28 Paragraphs 21 to 27 deal with claims against Gara and its director. Again, reference is made to the payment instructions which were given by Apollo and to the uncommercial nature of dealings leading up to the contract. It is pleaded that notwithstanding receipt of HMRC guidance notes, Gara continued to participate in the system of passing on third party payments in trading as set out in para.23. Paragraph 27 provides:

“Further or in the alternative, save for minimal sums paid to the Company, no payments have been made by or on behalf of Gara to the Company in satisfaction of Gara’s contractual liability to pay for goods sold and delivered to it. Gara remains indebted to the Company in the sum of £152 million. Credit will be given for such sums as have been received by the Company in respect of its sales to Gara.”

It is not pleaded at this stage that Gara is unable to pay this debt, although it would not come as a surprise to find that it did not have assets of over

£153 million available.

29 Paragraphs 40 to 45 deal with the claims against the eighth and ninth defendants. Paragraph 40 alleges that:

“The 8 th and 9 th Defendants are liable to account to the Company in equity for dishonestly assisting Mr. Rahmann’s breach of trust/fiduciary duty in respect of the Company’s affairs. They knowingly and dishonestly assisted in the diversion of book debts due to the Company or alternatively the VAT element thereof away from it as apart of a scheme to render the Company insolvent and to disable it from discharging its VAT liabilities.”

30 The diversion of book debts gives rise to a question of what is meant by this. The pleading does not expressly allege any assignment of book debts by Apollo or any other company in the chain, although I have already noted the payment instructions. It is clear enough, I consider, that the pleading in para.40 in the context of paras.6 to 12 explaining the transactions amounts to this: debts were owing by each company in the chain to the company next up the chain, for instance, by the eighth defendant to Gara, Gara to Apollo. Apollo directed Gara to pay its debts to an offshore third party and Gara directed the eighth defendant to pay its debts to the same third party. By being involved in this chain with what I may call guilty knowledge, that is to say, of an improper scheme, even if not its details, the eighth and ninth defendants in fact assisted Mr. Rahmann by diverting what was owed to Apollo to the third party in the sense that actual money which would otherwise have passed up the chain from the eighth defendant to Apollo actually went to the third party leaving Apollo with insufficient assets to meet its liabilities.

31 It is irrelevant to that pleading, I consider, whether the eighth defendant’s debt to Gara, or Gara’s debt to Apollo, are therefore discharged. If Company A owes money to B and X, a director of B, directs A to pay it to C in circumstances where B knows that to do so would be to give effect to X’s breach of duty to A, it is a perfectly sensible and proper use of language to say that A’s book debt has been diverted to C, notwithstanding that B may not get a good discharge, the more so if B on the facts has no other sufficient assets out of which to meet the debt. However, what one does not find in para.40 is any particulars of how the eighth and ninth defendants knew that they were assisting in the diversion of book debts owed to Apollo. This is an aspect I will return to in a moment when considering the request for further information and the replies to it.

32 Paragraph 41 is a further allegation that the eighth and ninth defendants are liable under s.213 for knowingly being a party to the carrying on business of the company with intent to defraud creditors. The creditors are not identified, indeed, they do not need to be since all of the creditors would, on the claimants’ case, be prejudiced because Apollo’s assets have been depleted by the payment to the third party assuming (a) that the VAT was due in the first place and (b) that Gara has insufficient assets to meet its debts. In this context, and on those assumptions, HMRC is clearly a creditor for a very large amount. Here, then, is an allegation that the ninth defendant was a party to carrying on a business with Apollo with intent to defraud. One might think that that allegation included the proposition that the ninth defendant knew enough about Apollo to know that the transaction in which the eighth defendant was entering into were at the very least related in some way to the affairs of Apollo. However, as will become apparent later, that is not the case which is being made, since it is not asserted that the ninth defendant knew of the identity of Apollo when allowing the eighth defendant to enter into these transactions.

33 Paragraph 42 sets out various matters which the claimants rely on to identify the guilty knowledge of the eighth and ninth defendants and to show that they knew what they were participating in was a fraudulent scheme of some sort. But it is fair to say that none of those paragraphs give any particulars at all about why the ninth defendant would have had the slightest idea that Apollo was involved in all of this.

34 Some clarification comes from para.45.

“At the time of purchasing goods from Gara (which had purchased from the Company), the 8th and 9th defendants knew or alternatively turned a blind eye to the fact that the making of payments to 3rd parties would lead to Gara or some other company in the supply chain being unable to discharge its VAT liability. The Claimants rely on the following particulars:

“45.1 the 8th and 9th Defendants were well aware of the fraudulent evasion of VAT in the mobile phone trading industry and that the making of third party payments was a part of such a fraudulent scheme;

45.2 if (which is not admitted) the 8 th and 9th Defendants believed that the overseas payees were suppliers of either of Gara or some other UK party in the chain of supply, then it would have been obvious that Gara or such other company was the importer and that it would have been liable for full output VAT on its sales.”

Paragraph 41 is a general proposition. I suppose that what follows, although this is a matter for argument, is that the ninth defendant was on notice that what he was permitting the eighth defendant to do fell precisely within the sort of transactions which HMRC had identified as occurring when there was fraud and that, therefore, he was on notice, even if he did not actually appreciate that the eighth defendant was involved in the scheme for the fraudulent evasion of VAT.

35 The reference to companies in the supply chain is unclear. It is not clear to me, reading this pleading alone, whether it is referring to the actual supply chain, which for present purposes starts with the supplier to Apollo and passes through Apollo to Gara to the eighth defendant and then on to whatever entity it was that the eighth defendant supplied to; or whether it is referring to some chain unknown to the ninth defendant, save that he would have known that his supplier was Gara and would have known also the eighth defendant’s own purchaser’s identity. The particulars given and the way the case has been presented to me show that it is the latter. Thus, paragraph 45.2 recognises the possibility without admitting it that the overseas payees were suppliers of Gara or some other UK party in the chain.

36 So it appears to me that para.45 is saying that here is a supply chain in relation to which it is not admitted that the overseas payer was a participant. The eighth and ninth defendants knew that there was a VAT fraud being perpetrated because of the nature of its own relations with Gara and its own purchaser and because of receipt of HMRC notices; or, if they did not know, they turned a blind eye, that is to say they were reckless.

37 So the case appears to be that the ninth defendant knew he was assisting a scheme for the fraudulent evasion of VAT, in the course of which some party would be liable for, but would not meet his, her or its liability and the ninth defendant is liable to that party whether or not he knew the identity of the party concerned. It may be thought to be a big leap from that factor alone to make the ninth defendant liable to the unknown defrauded party for dishonest assistance and a breach of fiduciary by a director of that unknown person.

38 The ninth defendant’s defence is short. It starts by stating it to be without prejudice to his contention that the particulars of claim disclose no reasonable ground for bringing the claim, otherwise it consists of non admissions or denials and contains no positive allegation, save to assert that for each transaction between Gara and the eighth defendant, Gara was required to provide a declaration that it had no reasonable ground to suspect that relevant VAT on the goods had not been paid by its supplier. That is, we now know, although not known by the ninth defendant at the time, Apollo.

39 Before launching his strike out application, the ninth defendant sought to clarify the claimants’ claim and to tie them down to some more specific allegations. I should mention some requests and replies. The first relates to para.7 of the particulars of claim and question 6 asked:

“Is it the Claimants’ case that the sales were in the course of or in furtherance of the Company’s business?”

In other words, the ninth defendant sought to understand why the sales to Gara were subject to VAT in the first place because if they were not in the course of furtherance of Apollo’s business they would not be taxable supplies. In this context, one must be careful to recognise the meaning of “in the course or furtherance of business” in the VAT Act. It is to be given the same meaning in effect as economic activity in the Sixth Directive. The response was that the sales were in the course of business. It is worth noting at this stage that the stance of HMRC in other cases appears to be that similar transactions were improper, but there is no discussion in the reported cases at least of the fundamental question whether VAT is actually payable on the sales within the UK. I mention at this stage that HMRC has in fact issued an assessment on Apollo in the sum of about £23 million in respect of the sales to Gara on the basis that they are taxable supplies. There has been no appeal from those assessments.

40 Question 7 relates also to para.7 and starts:

“If so, if it is the Claimants’ case that the sales were in the course of business, explain how that is said to be consistent with the allegation that in causing the Company to enter into these transactions

Mr. Rahmann was not acting honestly and in good faith, was not acting bona fide in the Company’s interests and was not acting for proper purpose and that the transactions were intended to defraud creditors or were for a fraudulent purpose and were part of the scheme intentionally to render the Company insolvent and that the transactions were not bona fide commercial trade.”

Here the ground is being laid for a submission that there cannot have been any taxable supply. The case, it will be remembered at this stage, and ignoring any proposed amendments to the particulars of claim, was that the sales were subject to VAT. No reliance was placed on the assessment itself.

41 The response, I summarise, was to say that what was dishonest and lacking good faith pursuant to the scheme was the arrangements whereby by the company instructed its purchasers to pay the price and the VAT to a third party offshore.

42 That response perhaps does not answer directly the question which was asked, but it does show that the pleader, notwithstanding the answer to question 6, considered that there was, nonetheless, a supply and he sought in support of that to explain that what made the transaction fraudulent were the payment directions. It is implicit in that, it seems to me, that the underlying transaction, although part of a fraudulent scheme, was nonetheless regarded by the pleader as a supply in the course of business.

43 The next relevant question comes in relation to para.8. Question 18 asks:

“Is it the Claimants’ case that the Company did not owe the third party payees the sums directed to be paid to them? If it is ….”

and there are some subsidiary questions. The response is:

“It is not possible on the presently available information for the Claimants to identify in respect of each of the 414 transactions whether the 3 rd party payee was the Company’s supplier. In those transactions in which the 3rd party payee was not the supplier, the Company did not owe those payees any money. In those transactions in which the 3rd party payee was the supplier it was by reason of its receipt of almost entirety of the book debt due to the Company being paid greater sums than it was than it (as 3rd party payee) was due.”

In response to the specific paragraphs:

“(a) is it the Claimants’ case that Mr. Rahmann knew that?”

The answer is yes. And then:

“(b)/(c) is it the Claimants’ case that Gara/Wetherby [that is D8 and D9] knew that?”

To which it was responded:

“It is not the Claimants’ case that in respect of each transaction, Gara, and/or the 8th and/or the 9th Defendants knew the state of

indebtedness ….”

But it is said that those defendants were well aware of the system of fraudulent evasion of VAT in the mobile phone trading industry and the making of third party payments was part of such a fraudulent scheme.

44 I do not think that these requests and responses take the strike out application much further, but the reply does open up an argument for the ninth defendant if he can say that he genuinely believed that Apollo might owe the third party overseas money.

45 Then we come to para.12 of the particulars of claim where a request is made to identify the creditors of the company’s business said to have been defrauded, to identify all facts and matters relied on and a request:

“Is it alleged that the 9th Defendant knew of this intent?”

The creditor is identified as HMRC.

“The effect of the fraudulent scheme was to deprive the Company of funds. Whilst HMRC were an obvious intended victim of such fraud any other creditors of the Company would also have been potential victims.”

Those were the responses, paras.47 and 48. Then response para.49:

“In participating in the system of making 3 rd party payments, the 8 th and 9 th Defendants were reckless or alternatively turned a blind eye to the fact that either Gara and/or its UK supplier were being deprived of funds and were liable to be rendered insolvent thereby.”

46 The next relevant request is under para.15.2 and there are four questions:

“52. Is the Claimants’ case that the third parties were entitled as against the Company to the monies they received?

“53. If not, explain why such monies were not held by the third parties for the Company.

“54. Is it the Claimants’ case that the Company has no right to recover the monies paid to the third parties?

“55. If it is not, provide particulars of the efforts made to recover these monies, or explain why no such efforts had been made.”

There are rather short replies. The first refers to a previous reply; the second, the request is not understood; the third request is irrelevant; and the fourth, the request is irrelevant. These requests seem to be laying the ground for two related assertions, firstly, that the recipient third party hold the payments on trust for Apollo and, secondly, that Apollo has a right to recover equivalent amounts.

47 It does not seem to me to be necessary for the claimants to plead that such monies are held on trust, or that an equivalent amount can be recovered. That goes, or so it seems to me, only to the measure of compensation or damage against the ninth defendant and questions of mitigation.

48 The next relevant request is under para.20. The pleading, it will be remembered, is that the company were written to on a number of occasions by HMRC and warned about the risks of MTIC fraud. Question 63:

“Is it alleged that Mr. Rahmann was engaged in a MTIC fraud?

“64. Please identify the nature of the MTIC fraud ….

“65. In particular, is it alleged that the transaction culminated in export sales for which a trader or traders made a repayment claim …?”

The responses were: “Yes”, Mr. Rahmann was involved in MTIC fraud.

64, it is said that that was sufficiently pleaded in the particulars of claim which I have already referred to the relevant parts; and in relation to 65:

“The transactions probably culminated in export sales. It is not however specifically alleged that they did.”

The request seems, again, to be laying the ground for an argument that there is a carousel fraud in the full sense and that the whole carousel is of no VAT effect whatever. For reasons which will become apparent, Mr. Parker says that the case against the ninth defendant will be completely different depending on whether or not there a carousel fraud but the goods returning offshore and whether HMRC has in fact made a repayment.

49 Jumping ahead he says that the evil of the fraud only crystallised when HMRC makes a repayment. If they have not done so, there is no loss to the fisc, nor would they be able to recover VAT from Apollo. If they had made repayment the fraud is not in Apollo avoiding VAT, but in the repayment claim succeeding. It may or may not be that there then remains a case against the ninth defendant, but if there is it is not pleaded. I will return to this central argument in due course.

50 Next comes para.27. Request 67:

“Is it alleged that Gara is unable to pay the sums alleged to be owed? If it is, state all facts and matters relied on for the allegation.”

Request 69:

“Is the Claimants’ case that Wetherby [that is D8] has paid Gara for the goods or that it has not paid Gara for the goods?”

To which the responses are it is not specifically alleged that Gara is unable to pay and that:

“Whilst it is not a necessary component of the Claimants’ claims against the 8 th and 9 th Defendants, the effect of the payments made by the

8 th Defendant is not to discharge its debt to Gara.”

Thus, to repeat, it is not specifically alleged that Gara is unable to pay.

51 In Apollo’s liquidation, Apollo’s supplier has, although this is not pleaded, apparently not submitted any proof. That is not entirely surprising if the whole scheme is a fraud. The fraud will have been successful by extracting money from HMRC, if it has been. Again, the question seems to be laying the ground that there is no loss to Apollo and therefore Apollo perhaps is not insolvent. Matters on this aspect have moved on in the course of the hearing. Mr. Shaw recognises that at trial he would have had to prove Apollo’s loss. There would be no loss if Gara could pay and if judgment could be obtained and enforced. In practical terms, further, he will probably most easily prove the loss by showing that Gara cannot pay, as to which it might be surprising that it could, given the figures involved. He seeks to amend the particulars of claim by making the allegation that Gara cannot pay. Mr. Parker makes no objection to that particular amendment, although it does not, he says, cure the overall deficiency in the pleading which should nonetheless be struck out. But if he is wrong on that, this particular amendment is not objected to.

52 Question 69 and the reply really relate to the same point and do not take matters any further.

53 Then comes a request in relation to para.40. Question 73:

“Is it alleged that the 9 th Defendant knew that a director of Apollo was acting in the manner alleged against Mr. Rahmann? If it is, provide full particulars for this allegation of knowledge. If not, what is it that the

9 th Defendant is alleged to have known and provide full particulars for the allegation.”

To which the response is:

“It is not alleged that the 9 th Defendant knew of the precise identity of Apollo (i.e it is not alleged that he knew the identity of Gara’s supplier). As to the 3rd sentence, the particulars of knowledge are sufficiently set out in the Particulars of Claim.”

54 So what para.40 comes to is this, in the light of those particulars, the first sentence is really a conclusion. The ninth defendant is liable for dishonestly assisting Mr. Rahmann’s breach of trust. Why? Because according to the second sentence they knowingly and dishonestly assisted in the diversion of Apollo’s debts away from it as part of a scheme to render it insolvent and disable it from discharging its VAT liabilities. But, at the same time, the eighth defendant did not know the identity of Apollo or Mr. Rahmann. On that basis he could not have known, although he might have suspected, that Gara’s supplier was a company rather than an individual, nor that if it was corporate, it was an English registered company in relation to which directors owe fiduciary duties. So the pleaded case is an allegation that the ninth defendant is liable for dishonest assistance and a breach of duty by a director when, if the allegation is established, he knew there was a VAT fraud involved. He did not know that it was by Apollo or that it was even necessarily have involved a breach of duty and he is liable because in fact a fraud did assist in such a breach of duty. That may or may not, see Barlow Clowes v. Eurotrust International Ltd. , raise interesting questions for trial, but strike out is not sought on that basis.

55 I have looked at some length, however, at all this because it is important to understand what the claimants’ case actually is in the light of the strike out application actually made.

56 The next relevant request relates to para.41, but the request and the response really do not add anything to what I have already dealt with.

57 A request is made in relation to para.45.2. The request is given that the eighth defendant was paying its debt as directed by Gara and that the circumstances are related to be such that it was obvious that Gara or some other company would not be paying output VAT on its sales:

“…. explain why the 8 th and 9 th Defendants should have thought that Gara or that [any] other company would be more likely to pay the output VAT if Wetherby [D8] had insisted on making the payment to Gara.”

The response was “Not entitled”. However, in the requests under para.45 it seems that the ninth defendant is laying the ground for saying that there is no loss because if the eighth defendant had paid Gara there would still have been a VAT fraud because I image it will be said that Gara itself would have observed the payment direction from Apollo. The fact is that the eighth defendant did not pay Gara direct. The claimants’ pleading is that the eighth defendant paid the offshore third party and thus assisted in the fraud. If that is met with the defence that that caused no loss because the fraud would have happened anyway by virtue of Gara itself paying offshore, it would then be open to the claimants to reply that there was nonetheless assistance by the ninth defendants and Mr. Rahmann in his fraudulent breach of duty. That might raise some difficulties for the claimants but we have not yet reached that stage of the pleadings.

58 Having looked at the pleadings I turn to some aspects of the law. The first relates to the VAT legislation and case law and the second relates to the effect of breach of duties by a director and the extent to which his actions bind the company of which he is a director. VAT is charged on supplies of goods. In terms of the Sixth Directive, there must be economic activity. In the case of domestic legislation there must be a supply in the course of or furtherance of a business. The language of the Act does not arrive at any different result from the language of the directive.

59 In the context of the present application there are four cases I need to look at, Optigen , Halifax , Axel Kittel and Total Network . Optigen was a decision of the European Court of Justice given on the 12 th January 2006. This was a carousel fraud case where an innocent trader in the chain had been refused the deduction of input tax by the Commissioners. It was held, consistently with the case law of the ECJ, that the participants in such a fraud had no genuine business motive with the result that all of the transactions in the chain were devoid of economic substance. That is not part of any economic activity and so outside the VAT regime. That was Customs’ argument. It was held (reading from the headnote):

“… the definitions in the Sixth Directive of ‘taxable person acting as such’, ‘economic activity’ and ‘supply of goods’ were objective in nature and applied without regard to the results of the transactions in question or the intentions of the taxable person or of another trader in the same chain of supply, and irrespective of the possible fraudulent nature of another transaction the chain of which the taxable person had no knowledge or means of knowledge; that each transaction in the chain was to be regarded on its own merits and its character could not be altered by earlier or subsequent events; and that, accordingly, transactions such as those at issue, which were not themselves vitiated by VAT fraud, constituted supplies of goods or services effected by a taxable person acting as such and an economic activity if they have fulfilled the objective criteria on which the definition of those terms in the Directive were based, and the right of a trader carrying out such a transaction to deduct input VAT could not be affected by the fact that a previous or subsequent transaction in the chain was vitiated by VAT fraud of which the trader had no knowledge or means of knowing ….”

The position is set out by the Advocate General at para.35 of his opinion.

“That case law acknowledges that tax authorities may require ‘objective evidence in support of a person’s declared intention to pursue an economic activity which will give rise to taxable transactions, and in the absence of such evidence may refuse the right to deduct’: opinion of

Mr. Advocate General Jacobs in I/S Fini H v. Skatteministeriet

(Case C-32/03) [2005] ECR 1-1599, 1605, para. 21. That issue is not relevant in the present case. First, it is not asserted either that the claimants applied for a VAT deduction on the basis of false declarations made by them or that they did not intend to pursue economic activities. Secondly, a clear distinction should be drawn between the intention to engage in economic activities and the intended purpose of the economic activities themselves. (A comparison between the following two situations may clarify this point. Situation I: X declares he will open a restaurant and acquires the (provisional) status of taxable person. He buys chairs, tables and other equipment and applies for a VAT deduction. However, he never opens the restaurant. Section II: Y opens a restaurant and uses it to operate a swindle. He provides restaurant services and charges VAT to his customers, but then suppresses the recorded takings in an attempt to deceive the tax-authorities and retain part of the VAT received. Situation I casts a shadow of doubt on X’s status as a taxable person. The tax authorities may require objective evidence in support of X’s declared intention and assess whether X did in fact intend to pursue restaurant activities: see e.g. Inzo [1996] ECR 1-8 57; Belgian Grundstückgemeinschaft Schloβstraβ GbR v. Finanzamt Paderborn (Case C-396/98 [2000] ECR I-4279. Conversely, situation II does not affect Y’s status as a taxable person, because Y does carry out an economic activity: he provides restaurant services. It follows from article 4(1) of the Sixth Directive that the purpose or result of that activity does not affect his status as a taxable person.)”

In particular, this distinction can, I think, clearly be shown by considering the case of the trader who is an individual who sells goods to an innocent "purchaser who pays VAT, but where the trader has always had the intention of suppressing his sale and to fail to enter it on his VAT return there remains an economic activity in respect of VAT notwithstanding the fraudulent intention of the trader.

“38 As regards, first, the term ‘supply of goods’, article 5(1) of the Sixth Directive provides that the transfer of the right to dispose of tangible property as owner is to constitute such a supply.

“39 According to the case law of the Court of Justice, the term covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property: see, inter alia, Staatssecretaris van Financiën v. Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1990] ECR I-285, 3003, para.7, and Finanzamt Bergisch Gladbach v. HE (Case C-25/03) [2005] ECR I-3123, 3170, para.64.

“40 Then, according to article 4(1) of the Sixth Directive, any person who independently carries out in any place any economic activity is considered to be a taxable person, whatever the purpose or results of that activity.

“41 The term ‘economic activities’ is defined in article 4(2) of the Sixth Directive as covering ‘all’ activities of producers, traders and persons supplying services and, according to the case law, it comprises all stages of production, distribution and the provision of services: see, inter alia, van Tiem v. Staatssecretaris van Financiën (Case C-186/89) [1990]

I-4363, 4386, para.17, and MKG-Kraftfahrzeuge-Factoring[2003] ECR I-6729, 6758, para.42.

“42 Finally, as regards the expression ‘taxable person acting as such’, according to the case law, a taxable person acts in that capacity where he carries out transactions in the course of his taxable activity: see, to that effect, Finanzamt Uelsen v. Armbrecht (Case C-291/92) [1995] ECR

I-2775, 2815, para.17, and Empresa de Desenvolvimento Mineiro SGPS SA (EDM) v. Fazenda Pública (Case C-77.01) [2004] ECR I-4295, 4343, para.66.

“43 As the court held in Commission of the European Communities v. Hellenic Republic (Case C-260/98) [2000] ECR I-6537, 6572, para.26, an analysis of the definitions of taxable person and economic activities shows that the scope of the term economic activities is very wide, and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or results: see also Commission of the European Communities v. Kingdom of the Netherlands (Case 235/85) [1987] ECR 1471, 1487. para.8, and, to that effect, inter alia Rompelman v. Minister van Financiën (Case 268/83) [1985] ECR 655, 664, para.19, and Zita Modes SARL v. Administration de l’enregistement et des domains (Case C-497/01) [2003] ECR I-14393, para.38.

“44 In fact, that analysis and that of the definitions of ‘supply of goods’ and ‘taxable person acting as such’ show that those terms, which define taxable transactions under the Sixth Directive, are all objective in nature and apply without regard to the purpose or results of the transactions concerned.”

60 In this context para.45 is also important because it explains that if the position were otherwise, the tax authorities would need to carry out inquiries as to the intention of taxable persons which would be contrary to the principle of ensuring legal certainty save in exceptional circumstances and those exceptional circumstances are transactions of the sort such as the supply of narcotics which are inherently affected by different public policy considerations and which do not apply in the present case.

61 The character of each transaction in the chain cannot therefore be altered by earlier or later events. Mr. Parker relies on para.46. He says that the case concerned an innocent person caught up in the fraud and the VAT effective a transaction with such a trader. Thus, the last sentence at para.46 refers to a taxable person who has no knowledge or means of knowledge of the fraud, but I note that the example given in that paragraph is said to be an a fortiori example.

62 At para.51, which I will read now:

“It follows that transactions such as those at issue, which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of articles 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subject to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.”

Accordingly the amount purportedly paid as input tax by Optigen was properly to be treated as input tax notwithstanding the transaction was part of a fraudulent scheme, so that at least for that purpose the supply to Optigen was treated as part of the economic activity of Optigen . Nonetheless, the transaction in issue, that is to say the acquisition, was one which was not vitiated by fraud. So it might be said that nothing in para.51 is concerned with the position where the very transaction at issue is one which is known by the parties to it to be fraudulent.

63 Halifax concerned a tax scheme involving no improper or illegal elements. The question was whether the non-commercial steps in a scheme designed to avoid VAT could be ignored, the taxable supply being those taking place as a result of the scheme as a whole.

“48 It must be remembered first of all that the Sixth Directive establishes a common system of VAT based, inter alia, on a uniform definition of taxable transactions: see, in particular, Finanzamt Groβ-Gerau v. MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01) [2003] ECR 1-6729, para.38.

“49 In that regard, under the Sixth Directive the scope of VAT is very wide in that article 2 thereof, which concerns taxable transactions, refers not only to imports of goods but also to the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such.

“50 As regards, first, the term ‘supply of goods’, article 5(1) of the Sixth Directive states that any transfer of the right to dispose of tangible property as owner constitutes such a supply.

“51 It is clear from the case law of the court that that term covers any transfer of tangible property by one party who empowers the other party actually to dispose of it as if he were the owner of the property: see, in particular, Staatssecretaris van Financiën v. Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1990] ECR I-285, para.7, and Finanzamt Bergisch Gladbach v. HE (Case C-25/03) [2005] ECR I-3123, para.64.

“52 As regards the term ‘supply of services’, it is clear from article 6(1) that it covers all transactions not constituting a supply of goods within the meaning of article 5.

“53 Next, according to article 4(1), any person who independently carries out any economic activity, whatever the purpose or results of that activity, is regarded as a taxable person.

“54 Finally, the term ‘economic activity’ is defined in article 4(2) as comprising ‘all’ activities of producers, traders and persons supplying services, and, according to the case law, it includes all stages of production, distribution and the provision of services: see, in particular Van Tiem v. Staatssecretaris van Financiën (Case C-186/89) [1990] ECR I-4363, para.17, and MGK [2003] ECR I-6729, para.42.

“55 As the court held in para.26 of its judgment in Commissioners of the European Communities v. Hellenic Republic (Case C-260/98) [2000] ECR I-6537, an analysis of the definitions of taxable person and economic activities shows that the scope of the term economic activities is very wide, and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or results (see also Commission of the European Communities v. Kingdom of the Netherlands (Case 235/85) [1987] ECR 1471, para.8, and, to that effect, in particular Rompelman v. Minister van Financiën (Case 268/83) [1985] ECR 655, para.19, and Zita Modes SARL v. Administration de l’enregistement et des domains (Case C-497/01) [2003] ECR I-14393, para.38).

“56 That analysis and that of the terms ‘supply of goods’ and ‘supply of services’ show that those terms, which define taxable transactions under the Sixth Directive, are all objective in nature and apply without regard to the purpose or results of the transactions concerned: see, to that effect, Optigen Ltd. v. Customs and Excise Comrs. (Joined Cases C-354, 355 and 484/03) [2006] 2 WLR 456, para.44.

“57 As the court held in para.24 of its judgment in BLP Group plc

v. Customs and Excise Comrs. (Case C-4/94) [1996] 1 WLR 174, an obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating the application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question.

“58 It follows that transactions of this kind at issue are supplies of goods or services and an economic activity within the meaning of articles 2(1), 4(1)(2), 5(1) and 6(1) of the Sixth Directive, provided that they satisfy the objective criteria on which those concepts are based.

“59. It is true that those criteria are not satisfied where tax is evaded [the objective criteria by which one identifies economic activity] for example by means of untruthful tax returns or the issue of improper invoices [there are two examples there]. The fact nevertheless remains that the question whether a given transaction is carried out for the sole purpose of obtaining a tax advantage is entirely irrelevant in determining whether it constitutes a supply of goods or services and an economic activity.

“60 It follows that the answer to question 1(a) must be that transactions of the kind at issue in the main proceedings constitute supplies of goods or services and an economic activity within the meaning of articles 2(1), 4(1)(2), 5(1) and 6(1) of the Sixth Directive, provided that they satisfy the objective criteria on which those concepts are based, even if they are carried out with the sole aim of obtaining a tax advantage, without any other economic objective.”

64 I need to say something about para.59. This is clearly not saying that a transaction which objectively constitutes economic activity and is taxable ceases to be one simply because there is an intention to evade tax, for instance, by creating fraudulent inputs or creating untruthful tax returns. That would be an absurd conclusion. It seems to me that paragraph 59 is saying something rather different. I think that it is focusing on a fictitious transaction or on the actual transaction which is stated to be something different from what it actually is. The objective criteria which such fictitious or inaccurate reported transaction purports to record are not in fact satisfied. For example, trader A creates a fictitious purchase and claims input tax. The objective criteria, the actual purpose, are not satisfied in relation to the “transaction” in relation to which the input tax is claimed.

65 The final decision of the ECJ is that in Axel Kittel . This was another carousel fraud case. It establishes that a rule of domestic law which renders a contract void does not mean that the supply pursuant to the void contract is not a supply which amounts to economic activities for VAT purposes. The questions are set out at para.25 of the judgment:

“(1) Where the recipient of a supply of goods is a taxable person who has entered into a contract in good faith without knowledge of a fraud committed by the seller, does the principle of fiscal neutrality in respect of [VAT] mean that the fact that the contract of sale is void - by reason of a rule in domestic civil law which renders the contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller - cannot cause that taxable person to lose the right to deduct that tax?

“(2) Is the answer different where the contract is incurably void for fraudulent evasion of [VAT] itself?

“(3) Is the answer different where the unlawful basis of the contract of sale which renders it incurably void under domestic law is a fraudulent evasion of [VAT] known to both parties to the contract?”

66 Paragraph 52 deals with the first question, which is the innocent party and records a conclusion from the paragraphs earlier in the judgment:

“It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to a seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.”

67 Then paragraph 53 says:

“By contrast, the objective criteria which formed the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’ are not met where tax is evaded by the taxable person himself .…”

Reference is then made to para.59 of Halifax which I have already considered and explained what in my view it means. I do not think that the court in para.53 of Kittel is saying anything different.

68 In para.55 it is said:

“Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively…. It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends ….”

Then the answers (which I will not read out) are found in paras.60 and 61 of the judgment.

69 The questions here related to the right to deduct, so the fraud for VAT purposes does not, it seems, vitiate the transaction altogether but simply allows the state to deny the right to deduct. There must on that analysis remain economic activity for the purpose of the Sixth Directive. In particular, it cannot, I consider, possibly be said that what would otherwise be a supply and subject to VAT ceases to be such simply because the trader intends to put himself in a position so as to be unable to pay the VAT to HMRC. This is so whether or not the purchaser knew of that fact or not.

It is worth remarking that the ECJ does not analyse the position, where both parties to a transaction know of the fraud, as one where there is no economic activity; rather it says that preventing tax evasion and abuse is an objective recognised and encouraged by the Sixth Directive. Community law cannot be relied on for abusive or fraudulent ends, so that where a right to deduct has been exercised fraudulently the deductions cannot be recovered retrospectively.

70 I now turn to some English authorities and the first is Hashash .

“The defendant was charged with being knowingly concerned in the fraudulent evasion of VAT, contrary to s.72(1) of the Value Added Tax Act 1994. The prosecution case was that the defendant had been involved in a missing trader fraud, involving the sale and purchase of computers and computer parts between companies in different member states of the European Union. The defendant was convicted and, in due course, he applied for leave to appeal against his conviction on the basis, as conceded by the prosecution, that counts alleging contravention of s.72(1) of the 1994 Act should not have been charged. However, the Court of Appeal held that there would be no injustice in the circumstances in letting the conviction stand. Subsequently, the prosecution pursued confiscation proceedings under s.71 of the Criminal Justice Act 1988, in which the defendant contended that the court either could not or should not proceed with the proceedings on the basis that he could not have benefited from the offence of which he had been convicted, once it had been conceded that he had not in fact committed any offence. The judge rejected those submissions and imposed a confiscation order in the sum of £177,453.33. The defendant appealed.

“He submitted that the judge had erred in his ruling. The prosecution submitted that in the light of recent authority from the Court of Justice of the European Community, the charge under s.72(1) of the 1994 Act had been good in law and that, accordingly, there had been a proper basis for the subsequent confiscation proceedings.

“Issues arose as to the proper construction of the Sixth Council Directive (EEC) 77/388 on the harmonisation of the laws of member states relating to turnover taxes and the applicability of the term ‘economic activity’ in art.4(1) of the directive.

“The appeal would be dismissed.

“ The principles which emerged from the authorities included that

(a) the scope of the incidence of VAT was very wide and that activities which might constitute ‘economic activities’ for the purposes of art.4 of the directive were broadly defined, to be viewed objectively, and applied without regard to the purpose or results of the transactions concerned; (b) the subjective intention of the party carrying out the transaction or chain of transactions was, in most cases, irrelevant; and (c) transactions which were not themselves vitiated by VAT fraud constituted supplies of goods effected by a taxable person acting as such and an economic activity within the meaning of the directive. Applying the reasoning in the authorities, if the relevant trade was itself lawful, there was economic activity irrespective of whether any particular trader was acting fraudulently or not.

“A wide interpretation had to be given to the criteria for economic activity. If the criteria were satisfied, then the purpose behind the activity was not relevant, save in respect of whether the trader had the right to deduct input tax. The fact that the Revenue would be entitled to withhold a repayment where fraud could be proved against the taxable person did not mean that the fraudulent economic activity was not subject to the VAT regime.

“In the instant case, there was evidence of the sale and transfer of title in goods which were traded legitimately. Moreover, money transfers had been made as part of the sale and purchase transactions. Viewed objectively, the transactions to which the defendant and his company had been parties constituted supplies of goods by taxable persons acting as such and economic activities within the meaning of the directive, and were therefore subject to VAT. It followed that the defendant had been rightly convicted of the offence of being knowingly concerned in the fraudulent evasion of VAT contrary to s.72 of the 1994 Act and that the concession made by the prosecution had been wrongly made. Whilst it was not proper for a prosecutor to go behind the factual case argued in the Crown Court so as to advance a different case for the purpose of confiscation issues, the prosecution in the instant case was not changing the nature of the factual case, but rather was reverting to the original charge as a matter of proper legal analysis and with a view to upholding the original basis of a conviction. It followed that there had been a proper basis for the confiscation proceedings.”

After considering Optigen and Halifax the court summarised the decisions at para.25 at subpara.(4):

“Some transactions fall outside the scope of VAT; but these are transactions in relation to products or services which by their nature cannot be marketed.”

That is the example I gave of narcotics.

“In such cases competition between a lawful and unlawful economic sector is precluded.”

That is the narcotics case again.

“The fact that the transaction is unlawful or constitutes an offence does not prevent it being subject to VAT.

What I have just read from the headnote refers to the non-excluded category of narcotics, etc.

71 In para.26 it is said that:

“In Optigen... the Third Chamber was concerned with cases where it was accepted that the companies concerned had no knowledge of fraud and were not complicit in any fraud. The question arises whether a distinction must be drawn where, as in the present case, one is concerned with the trading of a series of companies which were either knowingly partaking in fraud or were VAT entities of no substance whatsoever.”

They then deal in para.27 with parts of the reasoning in Optigen and we come to para.28 which begins:

“However, it appears that the reasoning of the Third Chamber has a wider import which supports the conclusion that so long as the trade itself is lawful, there is economic activity irrespective of whether any particular trader is acting fraudulently or otherwise.”

And they list a number of reasons in support of that view.

72 Coming to para.32 they say:

“In the present case there were invoices and delivery notes which were evidence of the sale and of the transfer of title in goods (computers and computer parts) which are traded legitimately. Further, money transfers were made as part of these sale and purchase transactions. Viewed objectively, the transactions to which the Appellant and his company were parties constituted supplies of goods by a taxable person acting as such and economic activities within the meaning of the Sixth Directive, and were therefore subject to VAT.”

So notwithstanding that the transactions in question were part of a fraud and known by the parties to the transaction to be such there were, nonetheless, economic activities within the meaning of the Sixth Directive, reliance being placed on the matters referred to. There does not appear to have been any argument, however, that the transactions were not economic activities because they were void, having been purportedly entered into by a director acting without the authority of his company, even though to the knowledge of the counterparty.

73 Total Networks was an appeal in respect of a preliminary issue under which there were assumed facts. The issue was whether HMRC had a claim in conspiracy against two other networks, a Spanish company which was the original supplier in a carousel fraud. In addressing what they called the third issue at paras.80 and following of the judgment, the Court of Appeal reflected Mr. Flint’s argument on behalf of Total Networks that there had been no fraudulent misrepresentation. They did so on the basis that on the facts assumed for the purpose of the preliminary issue, including the fact that Alldech, the exporter at the end of the chain did not carry out the relevant transactions in the course of its business. The facts assumed were those set out in the proposed amended particulars of claim. One finds that set out at para.8 of the judgment. I will not set them out again. At para. 82 of the judgment they say this:

“For the reasons given earlier in this judgment we are of the opinion that on the assumed facts the statement that the goods were supplied in the course of Alldech’s business was not true.”

The relevance of that for present purposes meant that Mr. Flint’s suggestion that the transactions were carried out in the course of business and therefore there was no misrepresentation, could not be sustained. Unfortunately I have been unable to find any reasons in the earlier parts of the judgment where the court explains why they are of the opinion which they express in para.82. One sees an analysis of the law and one sees the assumed facts, but one does not see anything that falls within the rubric “for the reasons given earlier in this judgment”.

74 There seems to be some tension between the conclusions of Hashash and Total Networks . Hashash considers that the transactions within the chain in that case were economic activities, notwithstanding the fraudulent purpose of the scheme, whereas Total Networks considers that the export transaction was not in the course of furtherance of the exporter’s business, although the goods went back to the original supplier. It seems to me that cases of this nature must be heavily fact dependant and it may be significant that the transaction formed part of a true carousel fraud in the full sense. I confess to finding Total Networks not easy to reconcile with Optigen especially in the light of Hashash .

75 It is also necessary in resolving the present application to consider the effect of a purported contract of a breach of the directors’ duties. Putting aside cases where a director purports to bind the company to a transaction which is truly outside the capacity of the company to enter into, the fact that a director acts outside his actual authority does not necessarily mean that the transaction is void or voidable. Where a contract is entered into for a purpose not authorised by the company’s memorandum and where the counterparty knows of that fact, the contract confers no right on the counterparty, see Rolled Steel . More recently the position has again been considered in the context of the payment of money.

76 I refer now to Clark v. Cutland.

Held , allowing the appeal, that because the payments of the pension contributions were made without the authority of the company in general meeting the full legal and equitable ownership did not pass to the pension fund; that since the directors were not entitled to any remuneration unless it was authorised by the company in general meeting, the pension contributions were void and without legal effect rather than merely voidable; that the proprietary remedy of tracing the payments into the pension fund assets was therefore appropriate and open to the court to impose; that, whether the contributions were void or merely voidable, a constructive trust arose where payments were made in breach of a fiduciary duty and the recipient had notice of the claim; and that, accordingly, the company was entitled to a charge over the assets of the pension fund and the unauthorised pension payments made for the defendant’s benefit were to be set against the debt owed by the company to the trustees.”

Reliance was placed by counsel for the fraudulent shareholder in that case on Westdeutsche and I should just draw attention to what Arden LJ says at paras.22 and 23 of her judgment. A reference had been made to the well known passage of Lord Browne-Wilkinson in Westdeutsche where he says:

“A person solely entitled to the full beneficial ownership of money or property, both at law and in equity, does not enjoy an equitable interest in that property. The legal title carries with it all rights. Unless and until there is a separation of the legal and equitable estates, there is no separate equitable title. Therefore, to talk about the bank ‘retaining’ its equitable interest is meaningless. The only question is whether the circumstances under which the money was paid were such as, in equity, to impose a trust on the local authority. If so, an equitable interest arose for the first time under that trust.”

Lady Justice Arden then says in para.23:

“In my judgment, this passage does not apply in the present situation. The payment made to the local authority was intended to be made by the bank when it was made. By contrast in this case, there was no organ of the company which was duly authorised to form any intention about making the payments.”

I have to point out that Clark v. Cutland was a case where remuneration under the Articles had to be approved by the general meeting. There was no such approval and therefore the pension contributions were void and no simply voidable or, as Lord Templeman put it in Guinesss v. Saunders the contract was non-existent.

77 Then in para.27 Arden LJ. says this:

“If those payments had merely been made by Mr. Cutland in breach of his duty to the company, and he had not also made them without the authority of the company, Mr. Stockill’s submission that the payments were voidable would have been correct. However, where an agent carries out a transaction without authority, the consequence is (as I have stated) that the transaction is without legal effect This consequence is more serious in law than that which attaches to a transaction which is voidable since the right to rescind a voidable transaction can be lost. Because the sanction attaching to an unauthorised transaction is more serious, it must supersede the sanction of voidability that would otherwise attach in the present case.”

78 I turn then to the submission made to me. Mr. Shaw raises a preliminary point which is that I should not deal with the application to strike out the particulars of claim at all until the ninth defendant has pleaded a proper defence to the claim as pleaded. Having put in a defence and asked for further information the objection should be articulated, he says, in a proper pleading. He complains that the application notice does not indicate the grounds on which his application is made except in the entirely unhelpful general sense of saying that there is no reasonable basis for the claim. Indeed, it was only on exchange of skeleton arguments that some of the points became apparent. However, most of the points were identified in the letter which I have referred to and Mr. Shaw did not suggest that he was unable to deal with the points raised in it or in Mr. Parker’s skeleton in time.

79 I thought it appropriate to hear full argument and having done so I will decide this application. There is some force in the submission that the grounds ought to be identified as part of the application, either in its body or set out in a witness statement or at least fully in a contemporaneous letter. That was not done in this case, but if any sanction at all is appropriate, it should be a costs sanction and not a blanket refusal to hear the application.

80 As part of his submissions Mr. Parker identified five matters where, according to him, Mr. Shaw’s skeleton departs from, or enlarges on, the pleaded case. He does not say that a case cannot be pleaded against the ninth defendant. What he says is that the case as pleaded fails to satisfy the requirement to plead fraud and the facts and matters relied on clearly. The pleading is confused and inconsistent, an aspect highlighted by the differences between the skeleton and the pleading. The particulars of claim ought, therefore, to be struck out as against the ninth defendant.

81 The five areas are these: the skeleton argument says that it is not the claimants’ case that the acquisition of the products and their onward sale was a breach of duty by Mr. Rahmann. It is now said that the transactions were valid and all that is said to be a breach of duty are the payment directions. In contrast, Mr. Parker says that the pleaded case necessarily entails that the transactions were not in the course or furtherance of Apollo’s business.

82 Secondly, the skeleton argument relies on the fact that Gara is incapable of discharging its debts, whereas the further information clearly says that it is not part of the case that Gara could not pay its debt. Apart from any costs implications, this is now a non-point, since the claimants seek permission to amend to plead the point and Mr. Parker does not object.

83 Thirdly, the particulars of claim lead to the inevitable conclusion that the transactions by Apollo are, according to Mr. Parker, wholly void. This is on the basis that on the pleaded case Mr. Rahmann had no actual authority to enter into the transaction because they were part of a fraudulent scheme. In order to remove any suggestion that Mr. Rahmann, as sole shareholder, had authorised the transaction, a request for further information was made seeking information about whether any special facts were relied on, but the answer was there were none.

84 Fourthly, the skeleton arguments suggest that products were delivered but there is no pleading to that effect.

85 Fifthly, the skeleton argument refer to the unappealed assessment, but the pleaded case is that VAT was due on the transaction, not that an assessment had been made, which may be different things.

86 As to the first of these, it must be noted that the further information pleads clearly that the sales were in the course of furtherance of Apollo’s business and that dishonesty is identified in the payment instructions. Mr. Parker submits that this pleading is either incoherent or inconsistent with the particulars of claim themselves. It is, he says, a necessary consequence of the allegations in the particular of claim that the sales to Apollo were themselves breaches of duty. It is artificial and unrealistic to separate the two aspects of the case. I have a great deal of sympathy with that view as a matter of domestic law. However, this is not a case where it is alleged that the sole purpose of the transaction was to effect a VAT fraud. Apollo was to make a small profit and Gara might, in theory, have declined to pay the payment instruction. As a matter of pure pleading it is not illogical to separate the sale itself from the dishonest payment direction. I consider that that is what the pleading seeks to do, however unattractive the result might be. The attempt at hive off may, in the ultimate analysis, be answered, first of all, on the facts.

87 But that is not to my mind the end of this point. The real question is whether the sales to Gara, ignoring the authority points to which I will come, are economic activities for the purposes of VAT or, in the language of the Act, supplies in the course or furtherance of the business carried on by Apollo. Indeed, in using those words the further information must surely be saying that the sales do constitute economic activities. As a matter of pleading I see nothing extraordinary about the suggestion that the sales were in the course or furtherance of business in that sense and there being dishonesty in relation to the payment directions. In other words, there can be economic activity within the VAT regime, notwithstanding that the transaction forms part of the scheme the purpose of which is to evade VAT. Thus, had there been an individual, rather than a corporate, importer, the onward sale by that individual to Gara would, I consider, amount to economic activity within the scope of VAT. Again, ignoring the authority points, the fact that the importer was a corporate body, Apollo, and the fact, if it be a fact, that the actual sales were transactions which were effected in breach of duty by Mr. Rahmann, is not a reason for saying that there is no economic activity. The objective criteria point in my judgment in the direction of such activity existing, notwithstanding the matters pleaded in particular in para.23 of the particulars of claim.

88 Accordingly, even if the pleading is to be read, particularly in the light of para.23, as alleging that the entering into the contracts between Apollo and Gara were breaches of duty on the part of Mr. Rahmann, I am not persuaded that there will be no economic activities. Applying the objective approach described in the case law of the ECJ and taking my guidance from Hashash ,

I conclude in the absence of any factual material to be relied on in the defence, the sales amounted to economic activity notwithstanding the non commercial aspects pleaded at para.23. I do not think that Total Networks requires me to adopt a different approach.

89 As to the second point, as I have said, the issue is now to be pleaded by amendment.

90 I take the third and fourth together. It is the third which gives rise to difficult arguments. Mr. Parker’s submission is that the pleading alleges breaches of duty on the part of Mr. Rahmann which lead to the inevitable conclusion that he had no authority to enter into the sale agreements with Gara, something, which on the pleading, was known to Gara. In consequence the sales were entered into by Mr. Rahmann on behalf of Apollo without its authority. In the result, the purported sales in accordance with the authorities I have mentioned are as a matter of domestic law of no effect. It is not so much that they are void, but rather having been entered into with no authority, they are simply nullities; they are of no effect.

91 It seems to me, again, that the real question is not whether the purported sales, contract and delivery, if they took place, were void, but whether they amount to economic activities. I can see Mr. Parker’s arguments that the sales were effected without authority, but I should not be taken in saying that in deciding that a contract entered into in breach of duty is necessarily one made without authority. Let it be assumed that the sales were effected without authority. That is a different question from whether they amount to economic activities by Apollo. The starting point in addressing that issue is that there was an acquisition by Apollo of the goods. That is clearly pleaded. The jurisprudence of the ECJ tells us that the fact that domestic law may render a contract absolutely void, does not prevent there being economic activity. The objective criteria must be applied to see whether there is such activity and the intention behind the action is irrelevant. There is to be no need for the taxing authorities to carry out inquiries to determine the intention of the taxable person and that would be contrary to the objective of the common system of VAT, in relation to which see para.45 of Optigen .

92 This is the case where the contract is void. Is the position any different where there is no contract at all because of the lack of authority? In my judgment the position is no different in a case where the objective criteria would lead to the conclusion that there is economic activity. Accordingly, where one sees a sale transaction apparently entered into and effected by a company apparently acting through a person who would be expected to have authority in the apparent conduct of the trade, there is in my judgment economic activity for the purposes of the Sixth Directive. It is, or may, be wrong to focus only on the contract in any event. I can well see that if the goods were still in the possession and under the control of Apollo that the objective criteria would indicate that there had been no supply. If all that one has in the absence of a contract, applying domestic laws of agency and company law and no parting with possession of the goods, it is not so much there has been no economic activity, but there has been no supply. That is not the case on the facts as pleaded. Apollo acquired the goods. If, as one assumes to be the case it no longer has the goods, then that fact, coupled with the existing pleading concerning the payment direction and payment pleaded in para.11 of the particulars of claim, is enough to establish the relevant economic activity on the facts pleaded and in the absence of any factual allegations in defence .

93 As to the fourth point it is true that no delivery of the goods is expressly pleaded. So far as Apollo is concerned, there is a pleading that it acquired, not simply that it contracted to acquire, the goods (see para.6 of the particulars of claim). In the context of the pleading, I think that it is implicit in the allegations that the goods were sold back-to-back to Gara and that the payment directions were effected by the eighth defendant, that the goods are no longer in the possession and control of Apollo; some things are obvious. But since the point is taken on it, I think it would be preferable for that point to be expressly pleaded.

94 If an application is made to allege either that fact and/or delivery to Gara or at its direction, I would be minded, subject to anything Mr. Parker wishes to say, to allow it. It is not necessary for me to decide, and I express no view on, the question whether the facts pleaded necessarily amount to a breach of duty by Mr. Rahmann in allowing Apollo to enter into sales and, if so, whether he necessarily lacked authority to bind Apollo to the sales.

95 On the pleading, the unappealed assessment is irrelevant, save that the fact of the assessment indicates that HMRC considered that there was a taxable supply and therefore economic activity. The view of HMRC, of course, is not in any way conclusive. Mr. Shaw has sought to add the fact of the assessment to the particulars of claim, but even if that amendment is allowed, the assertion will to some extent, as Mr. Parker puts it, be left hanging in the air. The amendment is not followed through elsewhere in the pleading to show why it is relevant. For instance, there is no allegation that even if the transaction were not subject to VAT, the assessment somehow gives rise to a claim against Mr. Rahmann for breach of duty with an onward claim against the ninth defendant.

96 Mr. Shaw’s point, however, is that this amendment is not really needed and that the pleaded case is adequate. I think he is correct in that, but if he seeks to rely on the assessment it must surely be, I would have thought, that his case would have to be something along these lines: Mr. Rahmann has allowed Apollo to enter into transactions as a result of which HMRC have raised assessments. An appeal of those assessments, even if they are invalid, would be difficult and expensive to pursue. Unless and until successfully appealed Apollo is subject to a liability which has been incurred only because of the improper activities of Mr. Rahmann and the question then becomes one of mitigation. But, as I say, none of that is pleaded.

97 In the light of this analysis I think Mr. Parker’s points concerning VAT fall away. Firstly, the essential point is this, that the pleading adequately pleads economic activity on the part of Apollo subject to adding a plea of absence of possession of control of the goods for VAT purposes. It is pleaded that economic activity has given rise to VAT payable by Apollo. It has not been paid and, Apollo, as a result of the payment direction has no assets to pay it. Apollo should have assets to pay it, but does not do so as a result of Mr. Rahmann’s activities.

98 Secondly, if the ninth defendant wishes to raise points about the sales to Gara being of themselves breaches of duty and points about agency with the result that in domestic law the transactions are void or nullities, it is open to him to do so. He can of course adduce evidence of additional factual material to show that there has been in fact no economic activity, juts as the claimants will have to adduce evidence in support of their pleaded case, but this does not warrant a strike out.

99 Thirdly, Mr. Parker has made submissions in the context of a true carousel fraud, that the loss to HMRC only crystallises when a repayment claim is met. Perhaps that is one way in which the case could be put, but that is not the way Mr. Shaw does put it. He does not even allege that there is a carousel fraud in the full sense, although recognises that that might be so. The fact that in a carousel fraud the loss only crystallises at the stage of repayment does not alter the fact on the pleaded case that Apollo incurred VAT which it is not able to pay and that it, Apollo, has been deprived of assets as a result of a fraud. It may well be that if HMRC has not made any repayment to the exporter it would be unable both to continue to refuse repayment and also to seek to recover the VAT which has been assessed on Apollo, but if it has made repayment there would be no element of double recovery by allowing Apollo to recover compensation from Mr. Rahmann and from the ninth defendant to enable it to meet its own VAT liability. These are aspects which can be raised in a defence and any further pleadings but they are not aspects which warrant a strike out.

100 Mr. Parker has an argument based on Armitage v. Nurse . He takes out of its context a statement by Millett J. that fraud must be distinctly alleged when he says that if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud. I do not think that there is anything in this point. In the first place, fraud and dishonesty are pleaded and the dishonest element, or at least the one relied on, is the payment direction. It is true that in a reply to the request for further information the claimants accept that the matters on which they rely against Mr. Rahmann are consistent with his having negligently breached his duty of care, but the breach of duty of care is an alternative pleading to the breach of fiduciary duty and/or breach of trust which one finds in para.17 of the particulars of claim. In terms of a duty of care a negligent breach might be thought to be one which includes any breach which was fraudulent. Be that as it may, the case is nothing like Armitage

v. Nurse where the pleading was that the defendant knew, or ought to have known. That is not a clear allegation of fraud and is not to be taken as alternative allegations, as Millett J. explains and, as he acknowledged, alternative allegations are different from the sort of allegation one saw in Armitage v. Nurse .

101 I would add at this point that I do not consider that there are any other valid reasons for saying that the pleading does not adequately and clearly plead fraud; any deficiency has been cured by the further information which is to be treated as part of the particulars of claim.

102 Mr. Parker says that there are sorts of points he would wish to raise in defence but there is no pleading to which he can respond. For my part

I would have thought on the contrary, that he can take all the points that he wishes in a defence to the existing pleading. For instance, if he says that there was a full carousel fraud with a consequence that the whole scheme is circular, and there is either no loss at all to anyone, including HMRC, or no loss to Apollo, which is what is relevant to the claimants’ claim, it is open to him to do so. The fact is that it is not part of the claimant’s case and it is for the ninth defendant to make his own defences. Similarly, it is open to him to plead that contrary to the claimants’ assertions there was no economic activity setting out the facts on which he relies.

103 That is the end of my judgment on the strike out application. Clearly in the light of that I am not going to strike out the claim. I need then to deal with the application to amend.

L A T E R :

104 In the light of my judgment and following the amendments which I am about to deal with, the strike out application is dismissed.

105 In relation to the amendments, I allow the amendment in relation to para.7.

106 I allow the amendment in para.10 which has been suggested as we have gone along.

107 I am going to allow the whole of the proposed amendment under para.12. The final sentence is uncontentious. Mr. Parker resisted the first amendment, saying that to plead the sum of £23 million simply as an assessed amount is not good enough and if a new case is going to be made on it, it needs to be pleaded much more fully. I consider as a factual allegation it is perfectly proper to make this allegation. It may be that further particularisation of it following a request for further information might elucidate whether there is some other factual material which is relied on but which is not pleaded at the moment. It seems to me that it would be difficult for Mr. Shaw or possibly impossible to make an entirely new case based on this allegation, but if the ninth defendant comes back with a pleading that says in this response to this new pleading that the whole of the transactions are totally void, it may require a different case to be made by Mr. Shaw in relation to this aspect. But I do not see any reason at the moment why that amendment should not be allowed.

108 Paragraph 12A, it should be 13A, is not disputed and I therefore allow that.

109 Paragraph 20A with the deletion of the words “or alternatively” at the beginning can also go in.

110 Paragraph 27 amendments are consented to. I allow the amendments to that extent.

MR. SHAW: My Lord, I am sorry to interrupt, but para.15.

MR. JUSTICE WARREN: Yes, of course, para.15. That is an important one.

111 The addition in para.15 after the first sentence of what is effectively paras.20 and 21of Mr. Shaw’s skeleton argument. I do not hold him to the precise wording. I am sure he will draft something that accurately reflects the skeleton. If there is any opposition to that, Mr. Parker can raise it. I would suggest that you did it initially in correspondence, but I hope there will not be any problem.

112 So far as the costs are concerned, this is not entirely straight forward; with the exception of the debt point, with respect, I do not think there is anything in Mr. Parker’s submissions that would deter me from making an order which reflects the result of the application, that it has been dismissed. The debt point, however, does cause me more concern. It is the case that the pleading as it originally stood could have been read either way. It might have been indeed said it is implicit in that pleading in the context of the whole thing that Gara cannot pay, but the claimants in their reply to a request for further information said that it is not part of the case that Gara cannot pay. If Gara could pay, then Apollo would not be insolvent, or may well not be insolvent, and that that could have been paid. It is, I am afraid, something they have brought partly on their own heads by the pleading.

113 I think that the appropriate way of dealing with this is to make an order for costs in favour of the claimants, but to disallow part of the costs to reflect the preferable manner in which the debt point could have been taken. I do not believe for a moment that if that particular amendment had been made before this application came to court, that the application would have been abandoned; all sorts of other serious points that Mr. Parker took, rightly or wrongly, I have decided against him on them.

114 What I propose to do is to just spend a minute looking at the assessment. (After a pause): It is not really possible to be scientific about this because

I can take a view of the sort of amount of time that was spent each way on the different issues. I am going to assess these costs at £14,000 plus VAT.

L A T E R :

115 Having corrected my own mental arithmetic and taken account of what

Mr. Parker has said, although I think that £14,000 is about the right figure, it should be a VAT inclusive figure. I would like to arrive at a round figure for costs on which you add VAT.

MR. SHAW: With respect to your Lordship, it might be simpler just to express it as the VAT inclusive figure.

MR. JUSTICE WARREN: Then the figure I said should be inclusive of VAT and not exclusive. I am sorry, Mr. Parker, you have only saved 17.5%.

MR. PARKER: My friend’s mathematics ability is obviously more agile than

mine if he thinks he is better off £14,000 including VAT.

MR. JUSTICE WARREN: No, I was going to get a figure plus VAT equals £14,000.

MR. PARKER: I assume my learned friend preferred £14,000 including VAT on the basis he thought he would be better off.

MR. SHAW: No, on the basis it would be simpler.

MR. JUSTICE WARREN: There we are, that is what I will do, £14,000 including your VAT.

Apollo Communications Centre Ltd (In Liquidation) & Ors v Rahmann & Ors

[2007] EWHC 3467 (Ch)

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