Europeans Ltd v Revenue and Customs

This is an application by HMRC under s. 51 of the Senior Courts Act 1951 for a third party costs order against Mr Tarik Meghrabi in relation to the costs of an unsuccessful appeal to the High Court against a decision of the London VAT and Duties Tribunal.

HMRC claim costs of some £18,000 from Mr Meghrabi, a sum which is smaller than the amount of costs they have expended on making and pursuing this application. I am told that the case has significance for HMRC as the first case where such an order has been sought following a finding of Missing Trader Intra Community (“MTIC”) fraud by a Tribunal. It is therefore something of a test case for HMRC.

The application is only in relation to the appeal costs ordered by Mann J on 8^th May 2009. Although he made no concessions (the point was not argued) Mr Cox for HMRC suggested that there might be jurisdictional difficulties as to whether a third party costs order could be made in respect of the costs of the Tribunal below. Since Mr Meghrabi’s appeal, tax appeals now lie to the Upper Tribunal rather than to the High Court. The First-tier and Upper Tribunals have their own code of rules about costs: see r. 10 (esp. r. 10 (1) (a)) of the Tribunal Procedure (Upper Tribunal) Rules 2008 (2008 No 2698) and r. 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (2009) No 273. The jurisdiction to order costs is now conferred by s. 29 of the Tribunal Courts Enforcement Act 2007.

Whatever may be the position under that Act and the new rules, future cases are of no interest to Mr Meghrabi.

In November 2008 the London VAT Tribunal handed down its decision in the case of Europeans Ltd v. The Commissioners for Her Majesty’s Revenue and Customs. The hearing had taken place on 15^th-19^th and 22^nd-24^th September 2008. The Tribunal rejected the company’s appeal against HMRC’s decision to disallow its claim for £1.25m input tax on mobile phones sold to a Luxembourg trader. The company’s business started as a chauffeur driven luxury car hire business from October 2001. In November 2002 the company informed HMRC that it was also moving into the business of trading in mobile phones.

After hearing a substantial amount of evidence, including evidence from Mr Meghrabi, the Tribunal held that the company’s claim was rightly disallowed. The Tribunal dealt with the facts in some detail in a 170 paragraph statement of reasons. The basis of the decision was that when entering into the five transactions analysed by the Tribunal the company knew that it was part of a fraudulent chain. Knowledge was attributed to the company on the basis of findings that Mr Meghrabi had actual knowledge of the relevant matters. Mr Meghrabi’s evidence on the central issues was rejected as untruthful. It is true, as Counsel for Mr Meghrabi asserted, that the Tribunal was also critical of HMRC’s handling of the matter but those criticisms were taken into account in the Tribunal’s decision. They fell far short of, and did not derogate from, the findings that Mr Meghrabi had knowledge of fraud.

On 21^st January 2009 the company, by BDO Stoy Hayward LLP (“Stoy Hayward”), lodged a notice of appeal to the High Court. The Grounds of Appeal were failure to apply the correct law, and an appeal against findings of fact. The former was wholly unparticularised. The latter was particularised to a limited extent but it was not suggested that the appeal on the facts was brought on an Edwards v. Bairstow basis, as it would have to be since under s.11(1) of the Tribunals Courts and Enforcement Act 2007 an appeal only lay in point of law. No skeleton argument was ever filed.

On 29^th April 2009 HMRC applied to strike out the appeal or, alternatively, for security for costs of the appeal. A directions hearing was scheduled for 8^th May 2009 but at a late hour on the preceding day Mr Meghrabi sought to withdraw the appeal on the company’s behalf. The company wrote to HMRC’s solicitors stating that it would not be continuing with the appeal “because of financial difficulties”. The reply was to the effect that HMRC would nevertheless be attending the hearing and would seek an order for costs against the company.

At the hearing on 8^th May 2009, which was attended by counsel for HMRC but was not attended by the company, Mr Meghrabi or any representative on its behalf, Mann J dismissed the appeal and made a costs order against the company. He summarily assessed the costs of the appeal and ordered detailed assessment of the costs below, making an interim costs order. Nothing was said about any third party costs order.

On 14^th May 2009 the company entered voluntary liquidation. The company had no assets and a deficiency to creditors of £676,800. On 1^st July 2009 HMRC’s solicitors wrote to Mr Meghrabi requiring him to pay the costs of the appeal, failing which a third party costs order would be sought.

On 12 November 2010 HMRC applied for orders (i) joining Mr Meghrabi to the proceedings for the purposes of costs only and (ii) requiring him to pay HMRC’s costs of the company’s appeal to the High Court, assessed in the sum of £18,400. The order is sought under s. 51 of the Senior Courts Act 1981. On 1^st December 2010 Vos J gave case management directions. This is the substantive hearing of the application.

It is common ground that Mr Meghrabi was (i) the managing director and the only active director of the company and (ii) its sole shareholder. It was, in essence, a one man company. It is also common ground that he caused the company to make the appeal. However he resists the third party costs order on two grounds. First that he caused the company to make the appeal in good faith and in its best interests and, secondly, that notice of HMRC’s intention to seek an order against him personally was given too late.

Jurisdiction to make a non-party costs order derives from the Senior Courts Act 1981 s. 51(3) and CPR 48.2(1).

In Symphony Group plc v. Hodgson [1994] QB 179 Balcombe LJ laid down guidelines for the court in exercising the discretion to make a third party costs order. Those guidelines have since been explained in a number of cases, and I have been referred in particular to Re North West Holdings plc (in liquidation) (Costs) [2001] EWCA Civ 67, Dymocks Franchise Systems (NSW) Pty Ltd v. Todd and others (Associated Industrial Finance Pty Ltd, Third Party) [2004] 1 WLR 2807, Goodwood Recoveries Ltd v. Breen [2006] 1 WLR 2723, and Petromec Inc v. Petroleo Brasiliero SA Petrobras (No 4) [2006] EWCA Civ 1038.

The overarching test is whether in all the relevant circumstances it is just to order a non-party to pay costs. A non-party costs order will always be exceptional, and the judge must treat an application for such an order with considerable caution. However, a finding of exceptional circumstances is not a pre-condition. Exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. Each case must be examined on its own facts.

The categories of case in which a non-party costs order may be made include (see Symphony at p.191-192) cases where the non-party had management of the action, cases where the non-party maintained or financed the action and cases where the non-party caused the action. It is clear from Petromec however that funding is not a pre-requisite to the exercise of the court’s discretion.

Where the non-party is a director of a company which is primarily liable for the costs the general principle is that it would be an unlawful inroad into the principle of limited liability to make him pay the costs: see Taylor v. Pace Developments Ltd [1991] BCC 406 per Lloyd LJ at 409, Metalloy Supplies Ltd v. MA (UK) Ltd [1997] 1 WLR 1613

The questions in such circumstances are whether or not the director had a bona fide belief that the case was a proper one and that it was in the interests of the company to run it (North West Holdings at [34] per Aldous LJ) and whether the real party was the director, seeking to control or fund the litigation for his personal benefit (Goodwood at [44]-[59] per Rix LJ). It is not necessary to show that the director acted with impropriety: the pursuit of speculative litigation will be enough in cases where the director has caused the costs to be incurred solely or substantially for his own benefit. On the other hand where the director acts in good faith he ought to be free to litigate for the benefit of the company notwithstanding any risk of insolvency.

In this case Mr Meghrabi had a close personal association with the litigation. He was the sole director and shareholder of the company and the sole witness for it in the Tribunal. He alone gave the instructions to Stoy Hayward in connection with the appeal and in connection with its withdrawal. The Tribunal found that his evidence was dishonest and that he had actual knowledge of the chain of fraudulent transactions. Those findings impacted directly on his personal reputation. He had a clear incentive of his own to clear his name by reversing the effect of the Tribunal’s findings that he had masterminded a serious VAT fraud. In all the circumstances I accept Mr Cox’s submission that there was in reality no separate interest of the company in bringing the appeal and that in any event there is nothing, other than his bare assertion, to suggest that Mr Meghrabi gave any consideration to any such interest.

The Notice of Appeal is on the face of it insubstantial and speculative. Although signed by Stoy Hayward Mr Meghrabi’s own evidence is that Stoy Hayward acted in a non-advisory capacity. To use Briggs J’s formulation in Calltel Telecom Ltd v. HMRC [2008] EWHC 2107 (Ch) it is hard to escape the conclusion that the appeal was brought on a speculative “heads I win, tails the Revenue get no cost recovery” basis.

Mr Meghrabi may not have directly funded the appeal as distinct from the proceedings before the Tribunal. However it is common ground that he provided funds to the company from his personal resources to enable cheques to Stoy Hayward to be honoured. It is a fair inference that Stoy Hayward provided services in relation to the appeal in the expectation of some payment from Mr Meghrabi.

Mr Meghrabi contends that the company was solvent at the time of the appeal because it allegedly still owned three luxury cars worth £250,000. I cannot accept his evidence about this. There is abundant evidence that Mr Meghrabi’s personal expenditure and that of the company was intertwined. Company cars were registered in his name; he incurred personal expenses on the company’s credit cards. The joint liquidators were unable to obtain proper management accounts or details of the whereabouts of assets or the proceeds of their disposal. I agree with Mr Lilly that the issue of the company’s solvency does not have the direct relevance that it would on an application for security for costs. However it has relevance as a factor to be taken into account in deciding whether Mr Meghrabi was acting in the interests of the company or only in his own interests in launching the appeal.

The company’s last filed accounts to December 2005 show large current liabilities. The company had large creditors and no assets by the date of winding up. There can have been no trading after January 2009 and no improvement in the balance sheet. Mr Meghrabi’s signed director’s trading history states that the three cars on which he relies were sold in late 2008 or early 2009 and their sale proceeds used to settle the outstanding hire purchase balances owing on them.

By the nature of the VAT input claim, HMRC were unable to join Mr Meghrabi to the substantive proceedings before the Tribunal. MTIC cases always involve allegations of serious fraud. I accept that in refusing to pay fraudulent VAT claims HMRC is in a relevant sense acting in the public interest: see Secretary of State v. Aurum Marketing Ltd [2002] BCC 31 at 35H, considered in North West Holdings at [47]-[57].

In summary it is plain that Mr Meghrabi viewed and treated the company as (to use the expression of Mance LJ in North West Holdings at [43]) his “cypher”. Its business (whether the mobile phone business comprising the fraudulent transactions or the car hire business) was carried on for his personal benefit. Mr Meghrabi lied in evidence to the Tribunal and failed to cooperate with either HMRC or the joint liquidators of the company. There is no evidence to support Mr Meghrabi’s bald assertion that he had an honest belief that he was bringing the appeal, which lies in point of law only, on proper grounds in the interests of the company. This is not the ordinary case of the director of a one-man company considered by the Court of Appeal in Taylor v. Pace.

There is in my judgment one matter alone which seriously weighs in Mr Meghrabi’s favour on this application and that is that HMRC did not warn him at the first possible opportunity of their intention to seek a third party costs order against him.

On 8^th May 2009 HMRC had expressly said that they would seek a costs order against the company. The first time Mr Meghrabi was told of an intention to pursue him personally was on 1^st July 2009, over a month after the appeal had been dismissed and over a month after the voluntary liquidation of the company. The delay was compounded by the fact that no application for a third party costs order was in fact made for a further 16 months. At the time of the appeal HMRC knew that Mr Meghrabi was the sole shareholder and sole effective director of the company, it knew of the Tribunal’s findings of fact and it knew of the company’s financial difficulties. Mr Cox did not give any convincing explanation for the delay save perhaps that it was only after the joint liquidators had reported that HMRC realised the extent of the opacity of the company’s affairs.

The requirement for a warning at the earliest opportunity was clearly enunciated in the Symphony case, in which Balcombe LJ said (at 193):

“Even if the applicant can provide a good reason for not joining the non-party against whom he has a valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. At the very least this will give the non-party an opportunity to apply to be joined as a party to the action.”

The importance of this requirement appears also from the decisions of Lewison J in Brampton Manor (Leisure) Ltd v. MacLean (No 2) [2009] BCC 30, of David Richards J in i-Remit Incorporated v. Far East Remittance Ltd [2008] EWHC 939 (Ch) and of Andrew Smith J in Equitas Ltd v. Horace Holman and Co Ltd [2008] EWHC 2287.

However, failure to give an early warning is not a stand-alone requirement which will operate conclusively against the applicant. It is no more than a material consideration, albeit a highly material consideration. It is only one of the factors which the court must take into account in the exercise of its discretion in considering the overall justice of the case.

That is evident from the North West case in which the Court of Appeal upheld the Judge’s third party costs order although the Secretary of State had failed to give an early warning. In Dymocks at [31]-[32], Lord Brown of Eaton-Under-Heywood (giving the judgment of the Privy Council) said:

“First, Mr Dale relies upon Dymocks’ failure to warn Associated of their intention to make this application [for costs in the Privy Council and in the New Zealand Court of Appeal below] until after the Board’s decision on the substantive appeal. The authorities establish, however, that this is no more than a material consideration in the case (see, for example, the Knight and Kebaro cases [Knight v. FP Special Assets Ltd (1992) 174 CLR 178 and Kebaro Pty Ltd v. Saunders [2003] FCAFC 5]) and their Lordships are unable to see how an earlier warning could have made any difference to the course of the proceedings here. It is not suggested that Associated would have acted differently in the event of an earlier warning. Nor could they sensibly have been made a party to the litigation at any earlier stage. There is some force, moreover, in Dymocks’ submission that, until the appeal hearings were completed, they were unclear whether or not Associated would stand behind the Todds [the defendants in the action against whom the primary costs orders were made] so as to avoid their bankruptcy.

Associated’s second and related argument is that, even after Dymocks notified their intention to seek a costs order, they delayed for a further year or more before submitting their costs petition. The Board is satisfied, however, that no possible prejudice was occasioned to Associated by this delay…”

In the present case Mr Lilly submitted that Mr Meghrabi might have taken advice and then pursued a different course in relation to the appeal if he had received adequate warning that he might be personally liable for the costs. That is however easy to say. It is hard to see what Mr Meghrabi would have done differently bearing in mind that the appeal was withdrawn at the last minute and on the face of it had little or no merit in any event.

Nevertheless HMRC’s delay is a matter which has given me pause and I have weighed it in the balance as a serious concern about whether it is fair to visit costs on Mr Meghrabi.

I also take into account the costs that have been incurred in chasing the comparatively small amount of appeal costs. However the underlying findings of the Tribunal were of fraud, and there was no reasoned appeal which could attach to the findings of fact giving rise to that finding. In such circumstances it seems to me that proportionality is less important than it would otherwise be.

A great deal of authority has been cited to me. I heed the warning in Petromec (at [11] and [19]) that I should not allow the exercise of this jurisdiction to be over-complicated by reference to authority. I have to look at the matter in the round and determine it on the basis of the overall fairness of making a third party costs order in the circumstances of this case. Taking all the matters to which I have adverted into account, it is my view that the absence of an early warning is insufficient to deny HMRC a third party costs order to which they would otherwise plainly be entitled.

In so far as HMRC regard this as a test case I should however add that they must not take this judgment as carte blanche to give late warnings in the future.