Approved Judgment | HMRC and another v. Ben Nevis (Holdings) Ltd and another |
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Manchester CJC
1 Bridge Street West
Manchester M60 9DJ
Draft Circulation Date:12/07/2012
Hand Down Date: 20/07/2012
Before:
HIS HONOUR JUDGE PELLING QC
SITTING AS A JUDGE OF THE HIGH COURT
Between:
(1) COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (2) COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE | Claimants |
- and - | |
(1) BEN NEVIS (HOLDINGS) LIMITED (2) METLIKA TRADING LIMITED (3) HSBC TRUSTEE (GUERNSEY) LIMITED | Defendants |
Mr James Ayliffe QC and Mr Mark Fell (instructed by HMRC Solicitors Office) for the Claimants (Respondents)
Mr Timothy Howe QC Mr Philip Baker QC and Mr Rupert Allen (instructed by Stephenson Harwood) for the Defendants (Applicants)
Hearing dates: 20 and 21 June 2012 (RCJ); and 20 July 2012 (Manchester CJC)
Judgment
HH Judge Pelling QC:
Introduction
The First Claimant (“HMRC”) is the competent authority within the United Kingdom (“UK”) for the collection and management of tax revenue. The Second Claimant (“SARS”) is the competent authority for the collection and management of tax revenue within the Republic of South Africa (“RSA”). The First Defendant (“Ben Nevis”) is a company incorporated in accordance with the laws of the British Virgin Islands (“BVI”). Its corporate director is incorporated in accordance with the laws of Guernsey. Its sole registered shareholder is the Third Defendant (“HSBCT”), also a company incorporated in accordance with the laws of Guernsey. HSBCT holds the shares as trustee for the Glencoe Investments Trust (“GIT”), an offshore discretionary trust established in accordance with the laws of Guernsey for a class of beneficiaries that include Mr David King (a UK Citizen but a long time resident in RSA), his wife and children. Although disputed by the Defendants, the Claimants’ case is that although Mr King is theoretically merely one of a class of beneficiaries of GIT, in practice he controls the structure to which I have so far referred. The issue has not been argued before me and I make no findings concerning it.
Ben Nevis is liable to SARS for taxes for the 1998, 1999 and 2000 years of assessment in the total sum (inclusive of various penalties and interest) of Rand 2.6 billion (approximately £222 million) following the final determination of a tax appeal in October 2010. On 4th March 2011, judgment was entered against it in proceedings in RSA for these sums.
The Claimants’ case is that Mr King learned that SARS was investigating Ben Nevis’s tax affairs and that as a result he procured the transfer of Ben Nevis’s assets to the Second Defendant (“MTL”). MTL is also a company incorporated in accordance with the laws of the BVI, its corporate director is incorporated in accordance with the laws of Guernsey and its sole registered shareholder is HSBCT who holds the shares on trust as trustee of GIT. SARS became aware that as a result of these activities a fund of approximately £7.8 million had been credited to a bank account with a London bank in the name of MTL (“the Bank Deposit”).
These proceedings were commenced on 22nd February 2012 and consist of two claims. The first (“the Tax Recovery Claim”) is a claim by HMRC against Ben Nevis for the sum that Ben Nevis has been held to owe SARS in taxes penalties and interest and is purportedly brought pursuant to the mutual assistance provisions contained in Article 25A of a Double Tax Convention (“DTC”) entered into between the UK and the RSA (“the 2002 Convention”), which became part of English law by the Double Taxation Relief (Taxes on Income) (South Africa) Order 2002, as amended by the Double Taxation Relief and International Tax Enforcement (South Africa) Order 2011 which gave effect to a protocol entered into by the Governments of the RSA and the UK in 2010 by which various amendments to the 2002 Convention were agreed (“the 2010 Protocol”). The second claim (“the IA Claim”) is a claim by both Claimants against all the Defendants brought pursuant to, and seeking relief under, Section 423 of the Insolvency Act 1986 (“IA”). The purpose of the IA claim is to enable the Bank Deposit to become available in partial satisfaction of any judgment obtained in the Tax Recovery Claim.
On 22nd February 2012, the Claimants sought and obtained a freezing order against all the Defendants. The purpose of this order was to preserve the Bank Deposit until after resolution of these proceedings. The initial hearing before Mann J, was in private and took place without notice to any of the Defendants. Mann J made the order sought (“the Freezing Order”) and fixed a return date hearing to take place on 29th February 2012. That hearing took place before Floyd J who continued the Freezing Order expressly without prejudice to challenges by the Defendants both to jurisdiction and to the grant or continuation of the Freezing Order.
This is the hearing of applications by the Defendants to (a) set aside the Order made by Mann J on 22nd February 2012 by which he gave the Claimants permission to serve the Claim Form in these proceedings on the Defendants out of the jurisdiction; and (b) for an Order dismissing the Claim (together “the Jurisdiction Challenge”); alternatively (c) to discharge the Freezing Order (“the Freezing Order Challenge”). The Claimants have issued an application for summary judgment. However it is common ground that the summary judgment application cannot be heard at this stage. I will consider what further directions ought to be given concerning that application at the hand down of this judgment.
The only other matter that I need mention by way of introduction concerns some criminal proceedings that are pending against Mr King in the RSA. They are relevant for one limited purpose to which I refer in Paragraph 11 below.
In 2005, Mr King was charged with criminal offences involving alleged tax evasion and breaches of exchange control regulations in relation to the activities that gave rise to the charges to tax that are the subject of the Tax Recovery Claim (“the 2005 Charges”). In May 2010, Mr King was charged with further offences concerning alleged fraudulent market abuse (“the 2010 Charges”). The current expectation is that the 2010 Charges will be tried before the 2005 Charges in early 2013.
Following the charging of Mr King with the 2005 Charges, an application was made in the Crown Court at Southwark for a restraint order pursuant to the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005. His Honour Judge Wadsworth QC granted that order (“the Restraint Order”) on 31st May 2006. It is common ground that the Restraint Order applied to and prevented further dealing with the Bank Deposit.
As a result of the delays in the RSA to the progress of the criminal proceedings, an application was made to the Crown Court for the discharge of the Restraint Order. That application was itself the subject of a series of somewhat startling delays. The discharge application was issued in November 2009. It was heard initially on 26-27 May 2010 when it was adjourned part heard and resumed on the 20-22 February 2012. On 22nd February 2012 (the date when the Claimants applied for and were granted the Freezing Order), it was again adjourned part heard and has been relisted to resume on 4th February 2013 – in excess of 3 years following the making of the discharge application.
These events are said to be material only to the application to discharge the Freezing Order because it is submitted on behalf of the Defendants that the continued existence of the Restraint Order meant that there was no real risk of dissipation of the Bank Deposit, which is the only asset against which the Freezing Order was and is effective.
The Issues
The Defendants maintain that the Tax Recovery Claim is unsustainable and misconceived because on its true construction Article 25A of the 2002 Convention does not apply to the enforcement in the UK of RSA taxes arising in any year of assessment prior to the coming into effect of the 2002 Convention by operation of Article 27 of the 2002 Convention, or if it does, then because the amendment took effect by operation of Section 173 of the Finance Act 2006 (“FA 06”) it is ultra vires and void to the extent that it purports to have any effect earlier than the date of commencement of that Act. If neither of these points is correct, then it is submitted that the effect contended for is incompatible with Ben Nevis’s rights under Article 1 of the First Protocol of the European Convention on Human Rights (“A1P1”). It is submitted therefore that there is no serious issue to be tried and that the permission to serve out granted by Mann J should be set aside and the Tax Recovery Claim dismissed. It is common ground that if this is the outcome then the IA Claim cannot be pursued and so must also be dismissed, and in consequence the Freezing Order will cease to have effect.
Even if all that is not correct, the Defendants maintain that in any event:
SARS has no locus to bring or continue these proceedings and thus the claim as brought by it should be dismissed; and/or
HSBCT is not properly joined as a Defendant because it is merely the registered shareholder of Ben Nevis and MTL and thus neither Claimant has any cause of action against it
Leave to serve the IA Claim should not have been granted and/or ought to be set aside on the grounds that:
There is no sufficient connection with this jurisdiction to justify the making of the Order; and/or
The forum conveniens for such a claim is Guernsey not England
The Freezing Order ought to be discharged on the grounds that:
There is not and never was any real risk of dissipation because the Bank Deposit comes within the scope of the Restraint Order made by the Crown Court; and/or
The Order was obtained from Mann J as a result of material non-disclosure both as to (1) the likelihood of the Restraint Order being discharged by the Crown Court and (2) the Defendant’s likely defences to the Tax Recovery Claim; and/or
The Claimants ought to have given notice to the Defendants of the making of the application.
The Claimants maintain that as long as Article VI of the 2010 Protocol is complied with there is no limit on the years in respect of which enforcement action can be taken pursuant to Article 25A other than to the extent provided for by the relevant (in this case RSA’s) law of limitation; and that the date of commencement of s.173 FA 06 is immaterial to any issue in these proceedings as is A1P1. They maintain that the Freezing Order was properly obtained and ought to be continued, SARS is properly a party to the IA Claim and HSBCT is properly a party to these proceedings because (a) allegations have been made of tortious wrong doing against a corporate predecessor of HSBCT for whose acts and omissions it is responsible as a matter of Guernsey law and (b) it is necessary in order to give effect to the Freezing Order and/or for effective disclosure to take place.
It is clearly convenient that I consider the jurisdictional challenge to the Tax Recovery Claim first since all parties agree that if the Defendants’ submissions are accepted then all the other points I have mentioned become academic. It follows that I consider the issues between the parties in the order that I have outlined them above.
The Jurisdictional Challenge to the Tax Recovery Claim
The Legal Background and Principles
In common with many other jurisdictions, English law generally does not permit either the direct or indirect enforcement of foreign revenue laws – see Re Visser [1928] Ch 877 per Tomlin J at 884, Government of India v. Taylor [1955] AC 491; Rossano v. Manufacturers Life Insurance Co. [1963] 2 QB 352 and QRS 1ApS v. Frandson [1999] 1 WLR 2169. It follows that the revenue services of foreign governments are unable to collect or otherwise enforce foreign taxes in England save and except to the extent that the general rule is disapplied by either primary legislation or secondary legislation that is not ultra vires. This rule is known universally as “the Revenue Rule” and is so referred to in this judgment.
Historically, DTCs have been concerned with the mitigation of double taxation of taxpayers who might otherwise be chargeable to tax in two jurisdictions in respect of the same taxable gain or income by allocating taxation rights between the convention parties. DTCs have operated between RSA and the UK since at least 1962 – see Article 27(3) and (4) of the Convention signed in November 1968 (“the 1968 Convention”). The 1962 Convention was first amended by a protocol agreed in 1967 and then replaced by the 1968 Convention, which in turn was replaced by the 2002 Convention. A common feature of each of these treaties was that none provided for mutual assistance by abrogation of the Revenue Rule until the insertion of such a power into the 2002 Convention by the 2010 Protocol.
The legislative route by which such conventions become part of English law has varied over time. Section 788 of the Income and Corporation Taxes Act 1988 (“ICTA”) provided for effect to be given to such arrangements by an Order in Council. This was the mechanism by which legal effect was given to the 2002 Convention within England and Wales.
As originally drafted, and in so far as is material for present purposes, the 2002 Convention provided as follows:
“Preamble
The Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of South Africa desiring to promote and strengthen the economic relations between the two countries by the conclusion of a new Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains,
Have agreed as follows:
….
Persons Covered
ARTICLE 1
This Convention shall apply to persons who are residents of one or both of the Contracting States.
Taxes Covered
ARTICLE 2
(1) This Convention shall apply to taxes on income and on capital gains imposed on behalf of a Contracting State or of its political subdivisions, irrespective of the manner in which they are levied.
(2) There shall be regarded as taxes on income and on capital gains all taxes imposed on total income, or on elements of income, including taxes on gains from the alienation of movable or immovable property.
(3) The existing taxes to which this Convention shall apply are in particular:
(a) in the case of South Africa:
(i) the normal tax;
(ii) the secondary tax on companies; and
(iii) the withholding tax on royalties;
(hereinafter referred to as “South African tax”);
(b) in the case of the United Kingdom:
(i) the income tax;
(ii) the corporation tax; and
(iii) the capital gains tax;
(hereinafter referred to as “United Kingdom tax”).
(4) This Convention shall also apply to any identical or substantially similar taxes that are imposed by either Contracting State after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their respective taxation laws.
ARTICLE 3
(1) For the purposes of this Convention, unless the context otherwise requires:
….
(c) the terms “a Contracting State” and “the other Contracting State” mean South Africa or the United Kingdom, as the context require
…
Elimination of Double Taxation
ARTICLE 21
(1) Subject to the provisions of the law of South Africa regarding the deduction from tax payable in South Africa of tax payable in any country other than South Africa, United Kingdom tax paid by residents of South Africa in respect of income taxable in the United Kingdom, in accordance with the provisions of this Convention, shall be deducted from the taxes due according to South African fiscal law. Such deduction shall not, however, exceed an amount which bears to the total South African tax payable the same ratio as the income concerned bears to the total income.
(2) Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):
(a) South African tax payable under the laws of South Africa and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within South Africa (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the South African tax is computed;
(b) in the case of a dividend paid by a company which is a resident of South Africa to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent. of the voting power in the company paying the dividend, the credit shall take into account (in addition to any South African tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph) the South African tax payable by the company in respect of the profits out of which such dividend is paid.
(3) For the purposes of paragraph (2) of this Article, profits, income and capital gains owned by a resident of the United Kingdom which may be taxed in South Africa in accordance with this Convention shall be deemed to arise from sources in South Africa.
…
Entry into Force
ARTICLE 27
(1) Each of the Contracting States shall notify to the other, through the diplomatic channel, the completion of the procedures required by its law for the bringing into force of this Convention. This Convention shall enter into force on the date of receipt of the later of these notifications and shall thereupon have effect:
(a) in South Africa:
(i) with regards to taxes withheld at source, in respect of amounts paid or credited on or after 1st January next following the date upon which this Convention enters into force; and
(ii) with regard to other taxes, in respect of taxable years beginning on or after 1st January next following the date upon which this Convention enters into force;
(b) in the United Kingdom:
(i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6th April in the calendar year next following that in which this Convention enters into force;
(ii) in respect of corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which this Convention enters into force.
(2) The Convention between the Government of the Republic of South Africa and the Government of the United Kingdom of Great Britain and Northern Ireland signed at London on 21st November, 1968, shall be terminated and shall cease to have effect in respect of the taxes to which this Convention applies in accordance with the provisions of paragraph (1) of this Article.”
There was a provision concerning the sharing of information, the detailed terms of which do not matter for present purposes. There was no provision for reciprocal assistance in the collection of taxes.
Article 27 made obvious sense in the context in which it was used originally. Double tax relief as it applied between RSA and the UK was governed by the 1968 Convention save in respect of taxes identified in Article 2 of the 2002 Convention in respect of which the provisions set out in Article 21 of the 2002 Convention were to apply in relation to the tax years identified in relation to RSA in Article 27(1)(a) and in relation to the UK in Article 27(1)(b). Liability for prior year taxes would continue to be governed by the 1968 Convention if double taxation relief was available at all – see Article 27(2). This made obvious sense not least because it eliminated any need to re-open prior tax year assessments and avoided any adverse effects from the new arrangements being imposed in relation to tax years prior to the entry into force of the 2002 Convention. It was for this reason that Article 27 applied in RSA in relation to the years of assessment running from dates relevant to the RSA tax regime (where the years of account run from 1st January in each year) and in the UK in relation to the years of assessment running from dates relevant to the UK tax regime (where tax years run from 6th April in each year). The references to income tax, corporation tax and capital gains tax in Article 27(1)(b) are to those taxes as levied in the UK. The references to withholding and other taxes in Article 27(1)(a) are to taxes levied in RSA.
On 19th July 2006, s.173 of the Finance Act 2006 (“FA 06”) came into force. In so far as is material, it provides:
“173 International tax enforcement arrangements
(1) If Her Majesty by Order in Council declares that–
(a) arrangements relating to international tax enforcement which are specified in the Order have been made in relation to any territory or territories outside the United Kingdom, and
(b) it is expedient that those arrangements have effect,
those arrangements have effect (and do so in spite of anything in any enactment or instrument).
(2) For the purposes of subsection (1) arrangements relate to international tax enforcement if they relate to any or all of the following–
(a) the exchange of information foreseeably relevant to the administration, enforcement or recovery of any UK tax or foreign tax;
(b) the recovery of debts relating to any UK tax or foreign tax;
(c) the service of documents relating to any UK tax or foreign tax.
(3) In this section–
“UK tax” means any tax or duty imposed under the domestic law of the United Kingdom, and
“foreign tax” means any tax or duty imposed under the law of the territory, or any of the territories, in relation to which the arrangements have been made.
…
(7) An Order under this section is not to be submitted to Her Majesty in Council unless a draft of the Order has been laid before and approved by a resolution of the House of Commons.”
It was pursuant to this provision that effect was given in English law to the 2010 Protocol.
In so far as is material, the 2010 Protocol provides:
“The Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of South Africa; Desiring to conclude a Protocol to amend the Convention between the Contracting Governments for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, signed at London on 4 July 2002 (hereinafter referred to as “the Convention”);
Have agreed as follows:
….
ARTICLE IV
The following new Article shall be inserted immediately after Article 25 of the Convention:
“Article 25A
Assistance in the Collection Taxes
1. The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Articles 1 and 2 of this Convention. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article.
2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.
3. When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the Contracting State. That revenue claim shall be collected by that other State in accordance with the provision of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.
4. When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State. That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that other State even if, at the time when such measures are applied, the revenue claim is not enforceable in the first-mentioned State or is owed by a person who has a right to prevent its collection.
5. Notwithstanding the provisions of paragraphs 3 and 4 of this Article, a revenue claim accepted by a Contracting State for purposes of paragraphs 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to a revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in the State, have any priority applicable to that revenue claim under the laws of the other Contracting State.
6. Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall not be brought before the courts or administrative bodies of the other Contracting State.
7. Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 of this Article and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be:
(a) in the case of a request under paragraph 3, a revenue claim of the first-mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or
(b) in the case of a request under paragraph 4, a revenue claim of the first-mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection
the competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request.
8. In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation:
(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
(b) to carry out measures which would be contrary to public policy;
(c) to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice;
(d) to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State;
(e) to provide assistance if that State considers that the taxes with respect to which assistance is requested are imposed contrary to generally accepted taxation principles.”
...
ARTICLE VI
Each of the Contracting States shall notify to the other, through the diplomatic channel, the completion of the procedures required by its law for the bringing into force of this Protocol. This Protocol shall enter into force on the date of the later of these notifications and shall thereupon have effect in both Contracting States:
(a) in relation to Article II of this Protocol, in respect of amounts paid or credited on or after the date of the introduction in South Africa of the system of taxation at shareholder level of dividends declared;
(b) in relation to the information referred to in Article III of this Protocol, in respect of such information that is requested or exchanged on or after the date of entry into force of this Protocol;
(c) in relation to revenue claims referred to in Article IV of this Protocol, in respect of requests for assistance made on or after the date of entry into force of this Protocol.
ARTICLE VII
This Protocol shall remain in force as long as the Convention remains in force.”
Defendants’ Case Concerning the Applicability of Article 25A
The Defendants’ primary contention is that on a proper construction of Article 25A of the Convention, it does not apply to tax debts owing to SARS that relate to years of assessment commencing prior to 1st January 2003. In so far as it is necessary for them to do so, the Defendants assert that Article 25A is to be construed strictly since it involves a departure from the Revenue Rule. Their alternative submission is that if and to the extent that Article 25A does apply to tax years commencing prior to 1st January 2003, it is either to be construed as applying in the UK only in respect of tax debts arising on or after 19th July 2006 (being the date when FA 06 came into force) and/or the Order in Council by which effect was given to the 2010 Protocol is ultra vires in so far as it purports to apply to earlier tax debts. This submission is advanced by reference to the strong general presumption against the retrospective application of statutes in the absence of clear express provision. There is a dispute between the parties as to the true scope and effect of that principle that I will have to consider when turning to the Defendants’ secondary case.
Construction – the Applicable principles
It was submitted on behalf of the Claimants that “… the starting point …”for the construction of Article 25A, and the 2002 Convention and the 2010 Protocol generally, are the rules of construction set out in Articles 28, 31-32 of the Vienna Convention on the Law of Treaties (“VCLT”). The Articles that it is submitted are relevant for present purposes are to the following effect:
“SECTION 2. APPLICATION OF TREATIES
Article 28
Non-retroactivity of treaties
Unless a different intention appears from the treaty or is otherwise established, its provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the date of the entry into force of the treaty with respect to that party.
…
SECTION 3. INTERPRETATION OF TREATIES
Article 31
General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended.
Article 32
Supplementary means of interpretation
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable”
I am not able to accept that submission. The UK has ratified the VCLT but the RSA has not – see Paragraph 41 of the Claimants’ written submissions. Article 4 of the VCLT provides that it is to have effect only to “… treaties which are concluded by states after entry into force of the present Convention with regard to such states”. In my judgment the effect of Article 4 of the VCLT is that for the VCLT to apply all the States that are parties to the treaty to be construed must have ratified the VCLT. This is the only sensible outcome in relation to a system of law intended to have cross-frontier effects.
In my judgment the applicable principles are those identified by Mummery J, as he then was, in IRC v. Commerzbank AG [1990] STC 285. Although this statement of the relevant principles was derived in part at least from statements of principle set out in the opinions in the earlier decision of the House of Lords in Fothergill v. Monarch Airlines Limited [1981] AC 251 it is unnecessary that I refer to that case in detail because Mummery J’s summary was approved by the Court of Appeal in Memec v IRC [1998] STC 754 as a correct statement of the law. The applicable principles were summarised by Mummery J at pages 297H-298H in the following terms:
“(1) It is necessary to look first for a clear meaning of the words used in the relevant article of the convention, bearing in mind that consideration of the purpose of an enactment is always a legitimate part of the process of interpretation': per Lord Wilberforce (at 272) and Lord Scarman (at 294). A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at 285) and Lord Scarman (at 290). A literal interpretation may be obviously inconsistent with the purposes of the particular article or of the treaty as a whole. If the provisions of a particular article are ambiguous, it may be possible to resolve that ambiguity by giving a purposive construction to the convention looking at it as a whole by reference to its language as set out in the relevant United Kingdom legislative instrument: per Lord Diplock (at 279).
(2) The process of interpretation should take account of the fact that—
‘The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament which deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited, [1987] AC 141 at 152, "unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation': per Lord Diplock (at 281–282) and Lord Scarman (at 293).’
(3) Among those principles is the general principle of international law, now embodied in article 31(1) of the Vienna Convention on the Law of Treaties, that 'a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose'. A similar principle is expressed in slightly different terms in McNair's The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is 'the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances'. It is also stated in that work (p 366) that references to the primary necessity of giving effect to 'the plain terms' of a treaty or construing words according to their 'general and ordinary meaning' or their 'natural signification' are to be a starting point or prima facie guide and 'cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them'.
(4) If the adoption of this approach to the article leaves the meaning of the relevant provision unclear or ambiguous or leads to a result which is manifestly absurd or unreasonable recourse may be had to 'supplementary means of interpretation' including travaux préparatoires: per Lord Diplock (at 282) referring to article 32 of the Vienna Convention, which came into force after the conclusion of this double taxation convention, but codified an already existing principle of public international law. See also Lord Fraser (at 287) and Lord Scarman (at 294).
(5) Subsequent commentaries on a convention or treaty have persuasive value only, depending on the cogency of their reasoning. Similarly, decisions of foreign courts on the interpretation of a convention or treaty text depend for their authority on the reputation and status of the court in question: per Lord Diplock (at 283–284) and per Lord Scarman (at 295).
(6) Aids to the interpretation of a treaty such as travaux préparatoires, international case law and the writings of jurists are not a substitute for study of the terms of the convention. Their use is discretionary, not mandatory, depending, for example, on the relevance of such material and the weight to be attached to it: per Lord Scarman (at 294).”
Both parties have developed elaborate detailed submissions by reference to a significant amount of supplementary material, but it is necessary to be clear as to the circumstances in which it is appropriate to resort to such material. The first stage will always be to look for a clear meaning of the words used in the relevant article of the convention, bearing in mind the purpose of the provisions to be construed as a legitimate part of the process. It is only if that approach leaves the meaning of the relevant provision unclear or ambiguous or leads to an outcome that is absurd or obviously unreasonable that consideration of secondary material becomes necessary or permissible. The only exception to this approach may be in relation to the OECD Model (on which Article 25A is based) and the Commentary thereon. The importance of this material as a source has been recognised in cases decided by the appellate courts after IRC v. Commerzbank AG (ante), which explains why there is not mention of it in Mummery J’s judgment in that case.
Defendants’ Primary Case
The Defendants’ case is in essence a simple one. Article 25A has been inserted into the 2002 Convention by amendment. It follows, it is submitted, that it can only take effect in accordance with Article 27 of the 2002 Convention. Article 27 provides that the 2002 Convention has effect only upon the completion “…of the procedures required … for the bringing into force of this Convention …”. It is common ground that the 2002 Convention came into force on 17th December 2002. It is submitted therefore that the 2002 Convention is capable of applying only to taxes imposed by the RSA only for taxable years on and after 1st January 2003. It is submitted that since the Tax Recovery Claim is in respect of taxes assessed in years prior to that it follows that the mutual assistance provisions contained in Article 25A can be of no application and thus the attempt to recover the taxes owed by Ben Nevis to the RSA tax authorities violates the Revenue Rule.
The Defendants were disposed to rely if necessary on the fact that the 1968 Convention continued to have some relevance to double tax relief for years of assessment prior to those to which the 2002 Convention applied by operation of Article 27 and thus the fact that there was no amendment to that Convention supported the view that the parties to the 2010 Protocol did not intend Article 25A to have any application other than in relation to tax assessed in the years of assessment to which the 2002 Convention applied. In my judgment this point does not assist in resolving the issue I am now considering. It is a circular argument that assumes as correct the conclusion for which the Defendants contend. The fact that there was no amendment to the earlier convention is at least equally well explained by an intention that Article 25A would apply irrespective of the years of assessment applicable to the tax in respect of which reciprocal collection was sought.
In resisting the Defendants’ case concerning the temporal scope of Article 25A, the Claimants rely on the fact that there is nothing within the terms of Article 25A itself that suggests it was intended that the temporal scope of the article should be qualified in any way. Article 25A(1) provides for the lending of assistance by each contracting state to the other “…in the collection of revenue claims …”. That term is defined in wide terms by Article 25A(2) but without any temporal qualification. In my judgment this point too, of itself, does not assist in the resolution of the issue I am now considering. The fact of silence as to temporal scope is immaterial if the Defendants are correct in their submission that Article 25A is to be construed as governed by Article 27 of the 2002 Convention.
Potentially more important to the issue I am now considering is Article 25A(3). It provides that that one contracting state is entitled to request the assistance of the other in relation to any revenue claim that “… is enforceable under the laws of … [the requesting] State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection …”. It is this provision that brings about the qualification I alluded to earlier concerning the effect of the law of limitation (or, in the RSA, Prescription) of the requesting state by rendering uncollectible any sum not enforceable on that ground in the requesting state. This provision provides some support for the Claimants’ position because it contemplates the collectability of revenue claims that have accrued prior to the coming into force of the 2010 Protocol by applying the limitation qualification from the very moment when the Protocol took effect. Again however, this point of itself does not assist in the resolution of the issue I am now considering because if the Defendants are right any revenue claim otherwise collectable applying Article 25A(3) would nonetheless not be collectible if Article 27 has the effect contended for.
Notwithstanding the points I have so far considered, in my judgment the Defendants’ case as to the construction of Article 25A is to be rejected applying the principles of construction to which I have referred above, and when the 2002 Convention and the 2010 Protocol are each read as a whole and together in context. My detailed reasons for reaching that conclusion are as follows.
Paragraph 2 of the 2011 Order states in terms that one of the purposes of the 2010 Protocol was “… for the purpose of assisting international tax enforcement …”. This expression of purpose does not suggest any logical or policy reason for imposing, or an intention to impose, a temporal limitation on the scope of Article 25A of the sort contended for by the Defendants – that is that the Article has retrospective effect but not to tax years arising earlier than the coming into effect of the 2002 Convention. There is nothing in the 2010 Protocol itself that addresses purpose expressly beyond the implication to be derived from the terms of Article 25A itself. The Defendants accept that as a matter of construction Article 25A has retrospective effect at least to the extent provided for by Article 27 but subject to their second, ultra vires, case. The Defendants have not asserted, and the evidence does not establish, any policy or other reason for distinguishing between revenue claims by the RSA for years of account before the coming into effect of the 2002 Convention. This suggests a probable intention that the only relevant qualification to the applicability of Article 25A should be that concerning bars to collectability imposed by the laws of the assessing state.
The effect of Article 27 is not in any event as the Defendants contend. The text of the article is set out above and I do not intend to repeat it here. As is apparent from a perusal of the text, it does not provide that it will have effect in the UK from the date when the Convention enters into force in accordance with its terms. The operative provisions of the Article are Paragraphs (a) and (b). The effect of Article 27(1)(b) is that the Convention is to have effect in the UK in respect of income tax, corporation tax and capital gains tax (that is the taxes of that type levied in the UK) for any year of assessment after the tax year beginning on the 6th April in the year that follows the entry into force of the Convention. Thus if Article 27 has effect in relation to Article 25A then Article 25A would be of no effect at all since the only force given to the 2002 Convention in relation to the UK is in respect of the identified UK taxes referred to in Article 27(1)(b). Even if that difficulty could be avoided, the effect of Article 27 on Article 25A would be that it would take effect in the UK by reference to the date on which UK, not RSA tax years commence. This is illogical since if there is anything at all in the complaint that mutual assistance for tax years prior to those identified by Article 27 is objectionable it could only be by reference to the position of Ben Nevis as a tax payer in the RSA not by reference to the position it would have been in had it been (hypothetically) a UK tax payer. Indeed it is the illogicality of this position that explains why collectability is defined by reference to limitation in the assessing state – see Article 25A(3) - rather than the collecting state – see Article 25A(5).
None of the textual points I have so far considered creates any difficulty as long as Article 27 is confined in its effect to the provisions within the 2002 Convention as originally drafted (including to the information sharing provisions contained in the original 2002 Convention both because of the nature of that provision and because the earlier Conventions contained information sharing provisions). However it makes no obvious sense when applied to a mutual assistance provision that has been agreed for the first time and is being inserted into an earlier convention by amendment. These points suggest that to construe Article 25A as having effect subject to Article 27 of the 2002 Convention is a construction that gives rise to obvious absurdity or is manifestly unreasonable as well as defeating at least in part the purpose for which Article 25A was agreed in the first place.
In my judgment the true intention of the parties is apparent from Article VI of the 2010 Protocol, a provision which the Defendants’ submission as to the true construction of Article 25A in effect ignores. Although not headed “Entry into Force” this article is an entry into force provision as is apparent from the express words of the second sentence of the Article. The Article provides that the Protocol shall have effect from the date when the last of the two contracting states notifies the other of the completion of the processes required for bringing the Protocol into effect. Once that has happened then sub paragraphs (a) to (c) make separate provision for entry into effect of Articles II, III and IV respectively.
In relation to Article 25A it provides that the Protocol is to have effect “… in relation to revenue claims referred to in Article IV of this Protocol …”. That means that it has effect in relation to any revenue claim as defined in Article 25A(2) that is enforceable under the laws of the state requesting assistance and is owed by a person who cannot prevent collection according to the laws of the requesting state at the date when the request for assistance is made, subject to the proviso that Article IV is of no effect other than in respect of “… requests for assistance made on or after the date of entry into force of this Protocol”. However, the proviso is not material for present purposes since on any view the request for assistance on which HMRC is acting was made after the entry into force of the 2010 Protocol.
In my judgment therefore the true effect of Article 25A when construed in context and in light of its purpose is that once the 2010 Protocol entered into force, Article 25A thereupon applied to all revenue claims as defined subject only to the qualifications referred to within Article 25A itself and subject to the proviso that the request for assistance was made on or after the date when the 2010 Protocol entered into force. Such an approach is consistent with and gives full effect to the purpose of Article 25A – that is mutual bilateral cross frontier tax enforcement - and is consistent with, and gives full effect to, the whole of the 2010 Protocol and in particular Article VI and all the provisions within Article 25A itself. To regard Article 25A as qualified by Article 27 of the 2002 Convention would at least in part defeat the purpose for which Article 25A was agreed between the contracting states because it would exclude at least some revenue claims that would otherwise be included and would do so for no discernible rational or logical reason. That the 1968 Convention was not amended so as to insert Article 25A into that Convention as well is in my judgment entirely consistent with the intention of the parties being as I have described. In those circumstances I conclude that the Defendants’ primary case concerning the effect of Article 25A is to be rejected.
In those circumstances I do not consider it necessary or permissible to refer to the supplementary materials that were canvassed before me. The only exception to this may be the OECD Model Tax Convention on Income and Capital (“the Model Convention”) and the Commentary (“Commentary”) thereon. It is common ground that the Model Convention and the Commentary that goes with it are admissible in relation to construction issues in relation to Conventions based on the Model Convention. If and to the extent that it is necessary or appropriate that I refer to this material my judgment is that it confirms the view that I have come to concerning the true effect of Article 25A.
Article 27 of the Model Convention is the model on which Article 25A is based as a comparison of the language used in the Model with that of Article 25A shows. The key relevant provision for present purposes is Paragraph 14 of the Commentary on Article 27 of the Model Convention which is to following effect:
“Nothing in the convention prevents the application of the provision to revenue claims that arise before the Convention enters into force, as long as assistance with respect to these claims is provided after the treaty has entered into force and the provisions of the Article have become effective. Contracting states may find it useful, however, to clarify the extent to which the provisions of the Article are applicable to such revenue claims, in particular when the provisions concerning the entry into force of their convention provide that the provisions of that convention will have effect with respect to taxes arising or levied from a certain time. States wishing to restrict the application of the Article to claims arising after the convention enters into force are also free to do so in the course of bilateral negotiations. ”
The opening sentence of the Commentary (which I have highlighted for identification purposes only) is entirely consistent with the conclusion that I have reached. I consider that the second sentence (which I have underlined for identification purposes only) either does not arise because of the effect of Article VI of the 2010 Protocol in relation to the entry into force of Article 25A or because the clarification contemplated has been provided by Article VI. The final sentence does not on any view arise. The reliance placed by the Defendants on Sasseville: Temporal Aspects of Tax Treaties is misplaced. Even accepting the premise that the temporal effect of Articles such as Article 25A do not depend upon the terms of the article itself, but on the terms of the entry into effect provisions that apply to it, the Defendants’ case can only succeed if the operative entry into effect provision is treated as being Article 27 of the 2002 Convention rather than Article VI of the 2010 Protocol. I regard that approach as clearly mistaken for the reasons that I have set out above.
As I have said it is unnecessary that I take up time considering the remaining supplementary materials relied on by the parties. I should however mention albeit briefly the following categories of such material so as to make clear my views concerning the material concerned had it been necessary in principle to have recourse to supplementary material.
The Defendants rely on Article 28 of the VCLT. This approach is mistaken on two accounts. First VCLT is of no application to the Convention for the reasons already set out but even assuming that this is wrong, Article 28 does not assist in resolving the question I am now considering. Article 28 provides for a default position “…unless a different intention appears from the treaty or is otherwise established …”. I have concluded that a different intention has been established for the reasons set out above.
I do not consider that the opinion evidence of either Dr Avery Jones or Professor Grau Ruiz is admissible. Indeed adducing such material has simply increased the costs of, and extended the time necessary to determine, the application. Quite simply this material is not admissible because questions of construction are for the court – see Phipson on Evidence (17th Ed.) Paragraph 33.83- 33.85. Even in relation to documents that are to be construed in accordance with laws other than the laws of England and Wales expert evidence is admissible only for the limited purpose of identifying the relevant principles of construction not for the purpose of expressing an opinion as to true construction applying those principles – see the authorities summarised by Waller LJ at Paragraphs 66-68 of his judgment in King v. Brandywine Reinsurance Company (UK) Limited [2005] EWCA Civ 235.
Some reliance was placed by the Claimants on the terms of a Memorandum of Understanding (“MoU”) between the Claimants concerning the carrying into effect of Article 25A. There is a dispute between the parties as to whether the Claimants are entitled to rely on the terms of this document. It is not necessary for me to resolve that issue because the terms of the document do not assist. I accept that the document records a qualification on the assistance to be provided in relation to revenue claims that are more than 5 years old at the date of the request for assistance, and thus is consistent with a joint intention on the part of the competent authorities of the States concerned that Article 25A would have some retrospective effect. However the MOU does not assist because it is common ground that Article 25A has some retrospective effect. The issue between the parties is whether as a matter of construction it has retrospective effect beyond the dates referred to in Article 27 of the 2002 Convention. On that issue the MoU does not provide at any rate express assistance.
Defendants’ Secondary Case
I turn next to the Defendants’ alternative submission that Article 25A is to be construed as applying in the UK only in respect of tax debts arising on or after 19th July 2006 (being the date when FA 06 came into force) and/or the Order in Council by which effect was given to the 2010 Protocol is ultra vires in so far as it purports to apply to earlier tax debts. The premise on which the Defendants’ submission depends is that Article 25A offends against the presumption against restrospectivity unless it is so construed. Thus it is necessary that I attempt to identify the scope and effect of the presumption.
It is common ground that absent express wording to the contrary, it is to be presumed that, a statute was not intended by the legislature to have retrospective effect or, where it would appear that some retrospective effect was intended, that such effect was intended to be limited to the minimum necessary to achieve the relevant legislative purpose. However, there are limits to the scope of that presumption. As Mr. Francis Bennion put it in Bennion on Statutory Interpretation (5th Ed) p.317:
“It is important to grasp the true nature of objectionable retrospectivity, which is that the legal effect of an act or omission is retroactively altered by a later change in the law. However, the mere fact that a change is operative with regard to past events does not mean that it is objectively retrospective. Changes relating to the past are objectionable only if they alter the legal nature of a past act or omission in itself. A change in the law is not objectionable merely because it takes note that a past event has happened and bases new legal consequences upon it. ”
or as Dickson J put in when giving the majority opinion in the Supreme Court of Canada in Gustavson Drilling (1964) Ltd v. Minister of National Revenue [1977] 1 SCR 271 at 282: “… No one has a vested right to the continuance of the law as it stood in the past …”. As Mr Stephen Richards (as he then was) held in R v. Southwark LBC ex parte Bediako (1997) 30 HLR 22 when rejecting the contention that applicants for housing assistance under Part III of the Housing Act 1985 were entitled to have their pending applications determined by reference to those provisions rather than Part VII of the Housing Act 1996 which replaced Part III of the 1985 Act between the date when they applied for assistance and the date of decision by the local authorities: “The fact that [Section 9(2)] bites on existing applications does not make it retrospective in effect. It bites on those applications only in so far as future stages of the process are concerned …”. This clear distinction is apparent from the formulation adopted by Willes J in Phillips v. Eyre (1870) LR 6 QB 1 at 23, the authority relied on by the Defendants in Paragraph 64 of their written submissions, for he identified the true principle as being that “…legislation … ought not to change the character of past transactions carried on upon the faith of the then existing law …”.
Against that background I turn to the Defendants’ secondary case, which I reject for the following reasons. As I have explained already the Revenue Rule precludes the enforcement in England of taxes assessed by a foreign tax authority. Thus as long as that rule applies, persons in the position of Ben Nevis are entitled to resist any attempt by a foreign tax authority such as SARS to collect tax from it in England. However, an entitlement to resist collection as long as that rule applies does not give rise to an expectation that in relation to such liabilities the law that presently precludes collection in England will never be changed. If the rule is changed then as Mr Richards might have put it, it bites only as to the future enforcement of the existing debt. The fact that the debt was incurred prior to the change in the law is immaterial so long as the taxpayer cannot under the laws of the assessing state prevent its collection. The presumption against retrospectivity would preclude the rearrangement of tax liabilities for prior years of assessment (which is no doubt the, or a, reason why Article 27 is formulated in the terms it was and included in the original of the 2002 Convention) but I see no reason for concluding that it precludes the collection in the future of debts that happen to have fallen due prior to the coming into effect of FA 06. Such a conclusion does not in any relevant sense involve changing “ … the character of past transactions carried on upon the faith of the then existing law …” or the retrospective alteration of the legal effect of an act or omission by a later change in the law.
Defendants’ case Concerning the Impact of A1P1
A1P1 provides that:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of the state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
The Defendants submit that if Article 25A has the effect for which the Claimants contend and is not ultra vires then it is nonetheless to be treated as retrospective for the purposes of A1P1 and is not to be permitted to have effect because it fails to strike a fair balance between the rights of Ben Nevis and the general interest of the community – see James v. UK (1986) 8 EHRR 123, MA v. Finland (2003) 37 EHRR 210 and R(HMRC) v. Huitson [2010] EWHC 97 (Admin) [2011] QB 174 per Kenneth Parker J at Paragraph 75(ii) and (v). I do not accept that Article 25A has retrospective effect in any objectionable sense and thus I do not accept the premise on which this submission is advanced. This is the fundamental distinction between Huitson and this case. That case was concerned with the effect of Section 58 of the Finance Act 2008 which amended previous fiscal legislation with retrospective effect so as to impose on the claimant in that case an obligation to pay UK Income tax on trust income received since 2001. It was not concerned with mutual assistance between states in the collection of tax due in those states. Once it is accepted as I accept that there is no objectionable retrospective element that arises, there is not a tenable basis for challenging the enforceability of Article 25A, by reference to A1P1 particularly when it is remembered that the state enjoys a wide margin of appreciation in framing and implementing policies in the area of taxation.
The Challenge To The Order Permitting Service Out of the Jurisdiction
CPR Rule 6.36 and Practice Direction 6B permits service out of the jurisdiction by order on any of the various grounds identified in Paragraph 3 of the Practice Direction. Paragraph 3(17) permits service out of the jurisdiction to be ordered in respect of claims by HMRC relating to duties or taxes against a Defendant not domiciled in Scotland or Northern Ireland. Given my conclusions so far, there was and is on any view a serious issue to be tried as between HMRC and Ben Nevis. There is no forum conveniens challenge in relation to the Tax Debt Claim. Thus the grant of permission to serve these proceedings out of the jurisdiction was and is justified, and the jurisdiction challenge is to be dismissed, in so far as it relates to the Tax Recovery Claim.
The Jurisdictional Challenge to the IA Claim
Overview
The Defendants’ case in relation to the IA Claim is that permission to serve the claim form on the Defendants out of the jurisdiction should be set aside and that part of the claim dismissed because (a) SARS has no standing to bring the claim for the purpose of recovering either directly or indirectly taxes owed under the laws of RSA; (b) there is no supportable basis for bringing the claim against HSBCT because its sole role is as registered shareholder of Ben Nevis and MTL; (c) because in any event there is no sufficient connection with this jurisdiction to justify the Court granting relief to HMRC under IA s.423 and (d) Guernsey is an available forum that is clearly and distinctly more suitable for determining any alleged transaction avoidance claims as between MTL and Ben Nevis. It is to be presumed for the purposes of this application that the Claimants will be able to demonstrate ultimately their factual case concerning the transfer of assets including the Bank Deposit from Ben Nevis to MTL at an under value within the meaning of IA s.423(1).
In so far as is material, IA s.423-425 provide:
“423 Transactions defrauding creditors.
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or
(c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—
(a) restoring the position to what it would have been if the transaction had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
(4) In this section “the court” means the High Court or—
(a) if the person entering into the transaction is an individual, any other court which would have jurisdiction in relation to a bankruptcy petition relating to him;
(b) if that person is a body capable of being wound up under Part IV or V of this Act, any other court having jurisdiction to wind it up.
(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as “the debtor”.
424 Those who may apply for an order under s. 423.
(1) An application for an order under section 423 shall not be made in relation to a transaction except—
(a) in a case where the debtor has been adjudged bankrupt or is a body corporate which is being wound up or is in administration, by the official receiver, by the trustee of the bankrupt’s estate or the liquidator or adminstrator of the body corporate or (with the leave of the court) by a victim of the transaction;
(b) in a case where a victim of the transaction is bound by a voluntary arrangement approved under Part I or Part VIII of this Act, by the supervisor of the voluntary arrangement or by any person who (whether or not so bound) is such a victim; or
(c) in any other case, by a victim of the transaction.
(2) An application made under any of the paragraphs of subsection (1) is to be treated as made on behalf of every victim of the transaction.
425 Provision which may be made by order under s. 423.
(1) Without prejudice to the generality of section 423, an order made under that section with respect to a transaction may (subject as follows)—
(a) require any property transferred as part of the transaction to be vested in any person, either absolutely or for the benefit of all the persons on whose behalf the application for the order is treated as made;
(b) require any property to be so vested if it represents, in any person’s hands, the application either of the proceeds of sale of property so transferred or of the money so transferred;
(c) release or discharge (in whole or in part) any security given by the debtor;
(d) require any person to pay to any other person in respect of benefit received from the debtor such sums as the court may direct;
(e) provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction to be under such new or revived obligations as the court thinks appropriate;
(f) provide for security to be provided for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property and for such security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction.
(2) An order under section 423 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the debtor entered into the transaction; but such an order—
(a) shall not prejudice any interest in property which was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and
(b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.
(3) For the purposes of this section the relevant circumstances in relation to a transaction are the circumstances by virtue of which an order under section 423 may be made in respect of the transaction.
(4) In this section “security” means any mortgage, charge, lien or other security.”
The Claim By SARS
The short point that arises here is as follows. The Defendants submit that the Revenue Rule remains good law in England and Wales save to the extent that it has been abrogated by primary or secondary legislation. I agree with this submission. Secondly, it is submitted (without prejudice to the various submissions I have so far considered and rejected) that the Revenue Rule has only been abrogated in relation to RSA revenue claims to the extent set out in Article 25A of the 2002 Convention as amended. Again I agree. The Defendants then refer to Article 25A(3) which in so far as is material for present purposes provides that where the assessing State wishes the collecting State to collect a revenue claim due in the assessing State then at the request of the competent authority of the assessing State (in this case SARS), the revenue claim is to be accepted for purposes of collection by the competent authority of the collecting State (in this case HMRC). The obligation of the competent authority of the collecting State (here HMRC) is then to collect that revenue claim in accordance with the collecting State’s laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of the collecting State. The Defendants submit that this provision is the sole and exclusive means by which a revenue claim otherwise uncollectible in England by operation of the Revenue Rule can be collected in England.
The Claimants dispute that analysis. They submit that Article 25A abrogates the Revenue Rule so that it can no longer be said that there is a public policy that prevents the collection of revenue debts due to SARS as the competent authority for the assessment and collection of tax in RSA. It is submitted that in consequence there is now no reason why a state to whom the tax is due cannot take enforcement action under IA s.423.
In my judgment the suggestion that there is no longer any public policy objection that would preclude SARS from taking action under IA s.423 is misplaced. The Revenue Rule was and is one of the widest scope. It is not suggested that the statement of the rule by McNair J in Rossano (ante) is inaccurate or too wide. As he put it, the well settled principle was that: “… the English court will not recognise or enforce directly or indirectly a foreign revenue law or claim …”. The policy consideration that underpins the Revenue Rule (or one of them at any rate) is that identified by Lord Keith in Government of India v. Taylor (ante) at page 511 namely that “… an assertion of sovereign authority by one state within the territory of another … is (treaty or convention apart) contrary to all concepts of independent sovereignties”. In my judgment it is precisely this consideration which led to the formulation of mutual assistance provisions in the terms that have been adopted in Article 25A. Mutual assistance is provided within each convention State by the relevant organs of the collecting State. Had the convention States intended to proceed as the Claimants submit then there would have been no point whatsoever in drafting Article 25A(3) in the terms that have been adopted. Collection by the competent authority of the collecting state is not a permissive provision. It is the sole basis on which a departure from the Revenue Rule is permitted. The only basis on which SARS would be entitled to rely on IA S.423 as against MTL is if it could persuade a court that it was a “victim” in relation to the transfer to MTL by Ben Nevis of the Bank Deposit – see IA s.424(1)(c). A “victim” is defined for these purposes by IA S.423(5) as being “ … a person who is or is capable of being prejudiced by …” the transaction at an under value – that is in this case the transfer of the Bank Deposit from Ben Nevis to MTL. The only factual basis on which SARS is able to suggest that it has been prejudiced by the transaction is to the extent that it (or HMRC on its behalf) is thereby unable to collect in part the tax due from Ben Nevis in RSA.
There is of course a real potential difficulty not formally grappled with as yet, which is whether HMRC comes within the definition of a “victim” for the purposes of IA s.423(5). Counsel for the Defendants was at pains to point out that he was not seeking to argue that point before me on these applications. I make it clear therefore that nothing in this judgment is to be regarded as relevant to that issue which will be for another court on another day. However, since it was submitted on behalf of the Defendants that I ought to set aside the permission granted to SARS to serve these proceedings on the Defendants and to dismiss this claim, I have given some consideration to whether I ought to take some less drastic action such as perhaps simply staying the claim by SARS against the Defendants. I have not heard argument as yet on this point and will do so at the hand down of this judgment. Provisionally however I think such a course would be inappropriate. Even if a court on another occasion concludes that HMRC is not to be treated as a “victim’ for the purposes of IA s.423, that cannot have any impact on whether SARS is capable of being treated as a “victim”. The other factor that militates against an approach such as that I am now considering is that there may be other methods by which the same outcome can be achieved. On the facts as alleged by HMRC, Ben Nevis would at least arguably be a “victim” and thus may be capable of asserting rights under IA s.423 at the suit of an interim receiver or provisional liquidator.
In those circumstances, I conclude that SARS has no arguable basis for maintaining the IA claim it has brought against any of the Defendants and therefore permission to serve the proceedings out of the jurisdiction granted to SARS must be set aside. I will hear further argument as to whether on that basis the claim by SARS should be dismissed or merely stayed.
The Claim by HMRC Against HSBCT
As I have explained at the outset of this judgment, the only basis on which HSBCT has any connection with this litigation is because it is the registered shareholder of Ben Nevis and MTL, in each case as trustee for GIT. It is right to say that in the body of the Particulars of Claim there are pleaded a number of allegations made against a predecessor of HSBCT which amount to an allegation that its employees conspired with Mr King to transfer away Ben Nevis’s assets for the purpose of defeating SARS’s claims. It is alleged by the Claimants that HSBCT is liable for the acts and omissions of its predecessor as a matter of Guernsey law. These proceedings however relate only to the Bank Deposit, no substantive relief is sought by the Claimants against HSBCT in relation to the transfer of the Bank Deposit, and no other claims of a substantive nature have been made against HSBCT.
All the various reasons that are advanced as a basis for maintaining these proceedings as against HSBCT are in my judgment unsustainable. First the fact that HSBCT is the trustee of GIT is neither here nor there. No claim has been brought against GIT nor have the Claimants identified any tenable claim against GIT. These proceedings are or should be concerned exclusively with a claim by HMRC as competent authority against Ben Nevis to recover tax due from that company to SARS as the competent authority for the assessment and collection of tax in RSA. Allied to that HMRC plead an entitlement to maintain a claim against MTL under IA s.423. HSBCT is not a necessary or proper party to either claim whether as registered shareholder or as trustee of GIT. The assertion that joinder can be justified by reason of the fact that its predecessors were directly involved in implementation of the transfer does not assist either at any rate as long as these proceedings are constituted as they are.
The remaining two reasons advanced at the hearing before me as justifying the commencement and continuation of these proceedings against HSBCT were (a) because such is necessary in order to ensure that the orders made against Ben Nevis and /or MTL will be effective and (b) because HSBCT may have documentation regarding the purpose or circumstances surrounding the transfer of the Bank Deposit from Ben Nevis to MTL. Neither of these bases can even arguably give rise to an entitlement to join HSBCT as a defendant to these proceedings as they are presently structured. As to the first of these points, it is to be noted that none of the Defendants has any presence within England and Wales. The sole connection with England and Wales is the presence of the Bank Deposit that is held at a bank in London. On that basis the manner in which any interim relief in relation to the Bank Deposit is to be enforced is by serving the bank or giving the bank notice of the making of the Freezing Order. It might justify an application for the appointment of an interim receiver. What it does not do is justify the commencement of proceedings against a party not in this jurisdiction against whom no tenable cause of action has been pleaded. It is said that IA s.423 does not impose any limit on the persons against whom relief may be granted. The scope of the relief that can be obtained is defined in IA s.425(2). That is relief which if it is to be ordered at all will be ordered against MTL not its shareholders. If MTL’s controlling minds fail to give effect to such an Order then that can be addressed at that stage in the light of the circumstances then prevailing.
As to the second alternative, I do not see any basis on which it could be proper to join a foreign entity to a claim in England against whom no tenable cause of action has been identified simply for the purpose of obtaining disclosure. The only proper basis on which a claim for disclosure could be made is by invoking the Norwich Pharmacal jurisdiction. However that has not been pleaded out in the Particulars of Claim nor was that the basis on which permission to serve proceedings out of the jurisdiction was sought or obtained. I am not saying that permission could not be sought on that basis (the issue was not argued before me) merely that it has not been.
In those circumstances I conclude that HMRC has failed to demonstrate that it has an arguable basis for seeking permission to serve these proceedings out of the jurisdiction on HSBCT. It follows that permission to serve these proceedings on HSBCT out of the jurisdiction must be set aside. I will hear further submissions as to whether in consequence these proceedings should be dismissed as against HSBCT.
The IA Claim by HMRC Against Ben Nevis and MTL – (a) Serious Issue To Be Tried and (b) Forum Conveniens.
The Defendants submit that there is no sufficient territorial connection between the claim under IA s.423 and England to justify the continuation of this claim. It is submitted that the only appropriate jurisdiction in which any such claim ought to be brought is in Guernsey largely I think because that is the geographical location of the corporate directors of Ben Nevis and MTL and the location of its corporate registered shareholder. The Claimants contend that this argument should be rejected because there is sufficient connection with this jurisdiction established by the availability of a collection claim against Ben Nevis under Article 25A and the presence within the jurisdiction of the Bank Deposit.
There is no doubt that the jurisdiction under IA s.423 is extra territorial in its scope – see Jyske Bank (Gibraltar) Ltd. V. Spjeldnaes [2000] BCC 16, where Evans Lombe J directed the transfer of land in Ireland from one Irish registered company to another. To similar effect is the decision of Tomlinson J (as he then was) in Dornoch Limited v. Westminster International BV [2009] CLC 226 where the transaction that was set aside was the transfer of a ship out of the jurisdiction between two companies each of which was incorporated in a foreign jurisdiction. In deciding that case Tomlinson J said of the jurisdiction:
“I fully recognise the special need for care when exercising an extra territorial discretionary power – see Banco Nacional de Cuba v. Cosmos [2000] BCC 910. In the context of winding up, the subject matter of that case, one is concerned not just with the connection with this jurisdiction of the company which it is sought to wind up, but also with the connection of potential beneficiaries – see per Knox J in Re Real Estate Development Co … what one is concerned to find is a sufficient connection to justify the court setting in motion procedures over a body which prima facie is beyond the limits of territoriality – see again per Knox J …
In re Paramount [1993] Ch 223, 239-240 Sir Donald Nicholls V-C said that the court will need to be satisfied that, in respect of the relief sought against him, the defendant is sufficiently connected with England for it to be just and proper to make the order against him despite the foreign element. He went on, at 240, to discuss how that connection might be shown:
“ … in considering whether there is a sufficient connection with this country the court will look at all the circumstances, including the residence and place of business of the defendant, his connection with the insolvent, the nature and purpose of the transaction being impugned, the nature and locality of the property in question, whether the defendant acted in good faith, and whether under any relevant foreign law, the Defendant acquired an unimpeachable title free from any claims even if the insolvent had been adjudged bankrupt or wound up locally. The importance to be attached to these factors will vary from case to case. By taking into account and weighing these and any other relevant circumstances, the court will ensure that it does not seek to exercise oppressively or unreasonably the very wide jurisdiction conferred by the section.” ”
The Defendants place significant reliance on the judgment of Lightman J in Re Banco Nacional de Cuba [2001] 1 WLR 2039. However, it is important to bear in mind the point made by Sir Donald Nicholls V-C in the extract from his judgment in Paramount set out above: each case is likely to be highly fact sensitive and thus the task in each case will be to consider all the relevant factors in the context of the particular case being considered. That case was concerned with the sale, allegedly at an undervalue, of shares held by the first defendant in a subsidiary bank incorporated in the UK. The vendor of the shares sought a declaration that the court would not grant permission for the service of proceedings under IA s.423 on that party out of the jurisdiction. The declaration was granted but expressly on the basis that there was no evidence that the transaction impugned was for the purpose of prejudicing the position of existing or future claimants in relation to their claims and because in any event any judgment would be fruitless since it would not be enforceable in the UK by operation of s.14 of the State Immunity Act 1978. Thus the conclusion that the only appropriate forum was Cuba so that permission would have been refused even if a triable issue could have been demonstrated was obiter. In relation to this last point, Lightman J noted that the only connection with the UK was the presence in the UK of the shares being shares in a UK company only because the share register was in the UK – see Judgment, Paragraph 14. In paragraph 41, Lightman J described this connection as being “… tenuous and … fortuitous …”. The point that exercised the Judge in that case was that what was being sought on the facts of that case was the exercise of the s.423 jurisdiction in respect of a state entity that was formally a central bank and in relation to Cuba’s sovereign debt which he described as being “… invasive of the sovereign affairs of Cuba …”. In such circumstances, it is hardly surprising that the Judge considered there to be no sufficient connection to justify permission to serve out being granted. It is noteworthy however that the Judge acknowledged that the relevant test to be applied was the fact sensitive sufficient connection test identified in Paramount.
In my judgment on the facts of this case as they are presently known there is a sufficient connection with the English jurisdiction to justify granting permission for the service out of the s.423 proceedings in this case. First, a clear connection has been established between Ben Nevis and MTL. Secondly, the evidence establishes a strong prima facie case that (a) the transfer of the Bank Deposit was for no consideration and (b) the conditions set out in IA s423(3) will be made out. There is no issue between the parties at present at least that HMRC is capable of being a “victim” for the purposes of IA s.423(5). Thirdly, the fund that is or represents the proceeds of the impugned transaction is present in the form of a debt owed by a London based bank to MTL. Fourthly there is undoubted jurisdiction enabling HMRC to pursue Ben Nevis for the taxes, penalties and interest that are due from it to SARS. All this establishes a sufficient connection with this jurisdiction to establish a serious issue to be tried.
Finally it is necessary for the Claimants to establish that England is clearly the most appropriate forum in which to bring the claim – see Spiliada Maritime Corp v. Cansulex Limited [1987] AC 460. On this issue the Defendants submit that Guernsey is both an available and the most appropriate forum. That assertion is largely based on the factors that I have identified above – that is that although Ben Nevis and MTL are incorporated in accordance with the laws of the BVI, the corporate director of each is a Guernsey registered company that is managed from Guernsey and the registered shareholder is likewise registered and managed from Guernsey. The Claimants assert that this is unreal because SARS through HMRC have an undoubted right to enforce Ben Nevis’s tax liabilities through the English courts pursuant to Article 25A of the 2002 Convention as amended that is not challenged on forum conveniens grounds. It is submitted that in such circumstances it is unreal to assert that enforcement procedures available in England in relation to assets located here should be ignored in favour of Guernsey, particularly as there is no cause of action available to the Claimants or either Claimant against MTL in Guernsey. The Defendants now at least implicitly acknowledge this last point. Although Guernsey law recognises a customary law action by which transfers in fraud of creditors can be set aside – as to which see the unreported decision of the Royal Court of Guernsey in Flightlease Holdings Guernsey Limited v. International Lease Finance Corporation - any attempt by either Claimant in these proceedings to rely on that cause of action in the circumstances of this case would fall foul of the Revenue Rule as applied by the Courts of Guernsey.
In my judgment this last point is in the circumstances of this case sufficient to tip the balance in favour of England. This is so either on the basis that because of this factor the courts of Guernsey are not available for the trial of a claim between the Claimants or either Claimant and MTL or on the alternative basis that the Court will refuse a stay notwithstanding the availability of the courts of another jurisdiction where the interests of justice require it. Whilst Lord Goff recognised in Spiliada (ante) that the existence of a legitimate personal or juridical advantage could not be decisive – see his Opinion at 475G and 482B – 484E – there are limits to that point. Lord Goff regarded such issues as ones that ought not to deter the court from staying English proceedings in favour of an otherwise more convenient jurisdiction but that was so only “ … provided that the court was satisfied that substantial justice will be done in the available appropriate forum” (482F). As he explained by reference to a distinction between conscious choice of a forum with a generous limitation period the issue is one of practical justice.
Whilst I accept that practical convenience may arguably be said to point in favour of Guernsey – although the travelling distances are not great and the transmission of documents to London from St Peter Port can hardly be more burdensome than transmitting them from Manchester or Leeds or Plymouth to London, the real connection is with England by reason of the inter-connection between the Tax Recovery Claim and the IA Claim in combination with the presence of the relevant asset in England and that further dealings with it can be controlled with relative ease by the English Court. If that assessment was wrong, it would be necessary next to consider the second question identified by Lord Goff (478C-E) namely whether there are circumstances by reason of which justice requires that a stay should not be granted. In my judgment, the fact that a judgment can be obtained here but its practical value defeated by deciding that any claim to set aside the transfer of the Bank Deposit with a London bank should be heard in Guernsey is a powerful consideration in resolving this second question.
In those circumstances and for those reasons I reject the Defendants’ submission that permission to serve the IA Claim out of the jurisdiction should be set aside other than to the extent indicated earlier in this judgment in relation to the claim by SARS and against HSBCT.
The Freezing Order Challenge
I now turn to the application to discharge the freezing order. A distinction is to be drawn between freezing orders granted in aid of a claimant advancing a personal claim and orders granted in support of proprietary or quasi-proprietary claims. In relation to the former types of order, the applicable principles are well settled, and have been for a number of years. In summary, they are:
To succeed in an application for a freezing order the claimant must establish that:
It has a good arguable case as to the substance of its claim;
There is a real risk that the judgment will go unsatisfied by reason of the disposal by the defendant of its assets, and
In the round it is just and convenient to grant a freezing order
- see Thane Investments v. Tomlinson [2003] EWCA (Civ) 1272 per Peter Gibson L.J. at para. 21;
Before a court can conclude that there is a real risk of dissipation, that risk has to be established by solid evidence: see Thane Investments (ante) per Peter Gibson L.J. at para. 21;
When applying for without notice relief, there is a duty to make full and fair disclosure of all the material facts - that is all facts that reasonably could or would be taken into account by the judge in deciding whether or not to grant an application – and identify any likely defences - see Siporex Trade SA v. Comdel Commodities Ltd. [1986] 2 Lloyd's Rep. 428 at 437;
The applicant must make proper enquiries and thus the duty of disclosure applies not only to facts known to the claimant but facts that would have been known to him had he made proper enquiries, though what is a proper enquiry will depend on the circumstances of the case - see Brink's-Mat Ltd v. Elcombe [1988] 1 WLR 1350 per Ralph Gibson L.J. at 1358, paras. 3 and 4;
The court, not the applicant, decides the material facts so that it is no excuse to leave out facts because the applicant or his lawyers did not consider them to be material - Brink's-Mat (ante) per Ralph Gibson L.J. at 1358, para. 2;
If a court concludes that there has been a disclosure failure at a without notice hearing, the court may either (a) continue the order or (b) discharge it or (c) discharge and re-grant it, and which option is to be adopted is a matter for the discretion of the court which will be exercised by reference to the court's view of the degree and extent of culpability for non-disclosure and on the importance of the fact not disclosed to the issues to be decided by the judge on the application - see Brink's-Mat (ante) per Ralph Gibson at 1358, paras. 5 and 6; Fitzgerald v. Williams [1996] QB 657, per Sir Thomas Bingham MR, 668B-C and Re OJSC Ank Yugraneft [2009] 1 BCLC 298, per Christopher Clarke J. at para. 103. As Christopher Clarke J. said at paras. 104 to 106 of his judgment in OJSC Ank Yugraneft (ante):
“[104] The court will look at what has happened and examine whether, and if so, to what extent, it was not fully informed, and why, in order to decide what sanction to impose in consequence. The obligation of full disclosure, an obligation owed to the court itself, exists in order to secure the integrity of the court's process and to protect the interests of those potentially affected by whatever order the court is invited to make. The court's ability to set its order aside, and to refuse to renew it, is the sanction by which the obligation is enforced and others are deterred from breaking it. Such is the importance of the duty that, in the event of any substantial breach, the court strongly inclines towards setting its order aside and not renewing it, so as to deprive the defaulting party of any advantage that the order may have given him. This is particularly so in the case of freezing and seizure orders.
[105] As to the future, the court may well be faced with a situation in which, in the light of all the material to hand after the non-disclosure has become apparent, there remains a case, possibly a strong case, for continuing or re-granting the relief sought. Whilst a strong case can never justify non-disclosure, the court will not be blind to the fact that a refusal to continue or renew an order may work a real injustice, which it may wish to avoid.
[106] As with all discretionary considerations, much depends on the facts. The more serious or culpable the non-disclosure, the more likely the court is to set its order aside and not renew it, however prejudicial the consequences. The stronger the case for the order sought and the less serious or culpable the non-disclosure, the more likely it is that the court may be persuaded to continue or re-grant the order originally obtained. In complicated cases it may be just to allow some margin of error. It is often easier to spot what should have been disclosed in retrospect, and after argument from those alleging non-disclosure, than it was at the time when the question of disclosure first arose."
The principles set out above all apply with equal force to injunctions granted in aid of proprietary and quasi-proprietary claims save and except that the requirement to demonstrate a risk of dissipation of assets is modified. The Defendants accept this to be so, at least implicitly. The dispute between the parties is as to whether the order made by Mann J and continued by Floyd J can be regarded as such an order. Although the Defendants maintain that this is a point taken by the Claimants after the event for the purpose of avoiding what the Defendants would characterise as a real difficulty concerning the risk of dissipation, in my judgment the point is one of substance which is open to be taken if justified at any stage. The notion that the right to assert that an injunction is in aid of a proprietary or quasi-proprietary claim is lost because it is not articulated or articulated clearly at the initial hearing is in my judgment mistaken.
In my judgment there is a distinction that is or should be drawn between the claims against Ben Nevis on the one hand and MTL on the other. The Tax Recovery Claim is a debt recovery claim and as such is plainly a personal claim. That is emphasised by the fact that the scope of the Injunction sought against Ben Nevis extended to all its assets if any. However, that point is relevant only to that claim and in relation to the Injunction sought and granted against Ben Nevis. The claim against MTL was one that could be and was advanced only by reference to the IA Claim. In relation to that claim, in my judgment the Claimants are correct to assert that different considerations apply – see Gee: Commercial Injunctions (5th Ed.) pp. 387-8, footnotes 10 and 15 where the following statement appears:
“An injunction limited to the property transferred or its proceeds (see Insolvency Act 1986, s.425(1)(b)) is available under the jurisdiction to grant relief over the subject matter of the proceedings, and is relief quia timet in support of a legal right of the claimant in respect of that property: Re Mouat [1899] 1 Ch 831 at 833; First Industry Corporation v. Goh [2002] WASC 111 … (where Mareva relief against the third party was refused because of a lack of risk of dissipation but an injunction was granted to preserve the property transferred). An injunction can be granted over the asset in the hands of the transferee because if it were to be disposed of to a bona fide purchaser for value without notice the claimant would have no remedy against the asset (Insolvency Act 1986, s.425(2)). If an injunction is sought in respect of assets belonging to the third party which are not the subject of a claim under the statute or their proceeds, then the relief sought is Mareva relief and a real risk of dissipation by the third party must be shown.”
Against that background, I turn to the submissions of the Defendants. They submit that the Freezing Order ought to be discharged on the following grounds:
There is no real risk of dissipation of assets because the Bank Deposit is and will for the foreseeable future continue to be the subject of the Restraint Order made by the Crown Court – see further paras. 8-10 above;
The Claimants failed to give any or any adequate explanation to Mann J as to the legal basis for the Tax Recovery Claim and in consequence there was a material non-disclosure in relation to the Defendants’ likely defences to that claim; and/or
Mann J was misled and/or there was material non-disclosure by the Claimants as to the likelihood of the Restraint Order being discharged.
The Risk of Dissipation
The underlying point made here is a very short one – it is that the Restraint Order precluded there being any risk of dissipation because, in relation to MTL, the only relevant asset was and is the Bank Deposit and that was subject to the Restraint Order. In my judgment this point is not maintainable as against MTL for the reasons already set out in Paragraphs 70-71 above. Even if I am wrong about that, and in any event in relation to Ben Nevis, I do not consider that the Restraint Order is something that can or should operate so as to preclude the grant of a freezing order. The key point is that the Restraint Order is an Order that was sought by the competent prosecuting authority in the UK in aid of the competent prosecuting authority in RSA. That authority is a different organisation to SARS, and neither SARS nor HMRC are parties to the Crown Court litigation. Thus they have no control over or interest in the outcome of those proceedings. The reality is that control of those proceedings rests in the hands of the prosecuting authorities I have referred to. I have drawn attention to the great delay that has occurred in relation to both the prosecutions in RSA and the application to discharge the Restraint Order here. It is entirely unpredictable what steps might be taken in relation to the Restraint Order in the future and by whom. Thus whilst in practice the Restraint Order precludes dissipation as long as it remains discharged, if and when it is discharged is something over which the Claimants have no control.
It is no doubt because of considerations such as those I have mentioned that the existence of a Restraint Order has been held not to be a bar to the grant of a Freezing Order – see by way of example Faya Limited (In Liquidation) v. Butt [2010] EWHC 3461 (Ch.) where Mann J rejected a submission that the existence of a Restraint Order precluded it being asserted that there was a continuing risk of dissipation. As Mann J said:
“ It is possible that the criminal Restraint Order will be abandoned. It is for the CPS to decide whether it wishes to maintain it … if it were to go, and there was nothing else in its place, then the claimant would not have any protection … in other words the criminal Restraint Order is in no way geared or intended to protect the interests of the claimant liquidator in the present proceedings. He has his own rights and his own interest in getting his own order which he controls … while as a matter of fact at this very moment in time there is not a risk of dissipation because of the criminal Restraint Order, that position may change. The liquidator is in my view entitled subject to his otherwise being entitled to the order, to his own order which he controls and to bring about a situation which is not vulnerable to a change of mind by a party to other proceedings … for these reasons I do not think that the existence of the criminal Restraint Order means that there is no risk of dissipation in this case.”
In those circumstances I reject the submission that the Freezing Order ought to be discharged because no risk of dissipation has been demonstrated. The Order as currently formulated may be too widely drawn as against MTL because there is no evidence that any of its assets other than the Bank Deposit have been transferred to it by Ben Nevis at an under value. I will hear further argument on this point at the handing down of this judgment.
Non-Disclosure: Defences to the Tax Recovery Claim
I accept that there is a heavy duty of utmost good faith that rests on the shoulders of any party applying for injunctive relief of any sort without notice to the respondent to the application. That is a principle that has applied for very many years and is one by which the court guards against the grant of orders that might turn out to be unlawful or exorbitant in their scope or effect or which otherwise ought not to be granted or not granted until after a full hearing can be arranged. However, there are limits to the scope of this obligation. The obligation is to disclose all material facts known to the applicant, or which the applicant might reasonably know following the making of proper enquiries. In relation to defences, there is a duty to disclose defences that are known to the applicant to be relied on or which can reasonably be anticipated to be relied on but bearing in mind the test (at any rate for the grant of a freezing order) that has to be satisfied in relation to the underlying claim namely that the applicant has a good arguable case as to the substance of its claim.
The defences to the Tax Recovery Claim are those that I have considered at some length above. In my judgment there is no substance to them for the reasons identified. However that conclusion does not lead to the conclusion that those defences should not have been identified to Mann J at the without notice hearing if they were known to the Claimants, or ought reasonably to have been known to them as likely to be relied on by Ben Nevis. It is clear that in fact the defences were not disclosed in terms to Mann J – see para. 111 of the Claimants’ skeleton submissions for this hearing. The fact that the materials from which the possible existence of such a defence might be identified are disclosed is not a sufficient compliance with the duty to which I have referred if otherwise it could reasonably be anticipated that the Defendants would rely on those defences. In the circumstances of this case I am not satisfied that the Claimants could reasonably be expected to anticipate the defences that in fact have been relied on, and in any event I am entirely satisfied that had the defences relied on been disclosed it would have made no difference to the outcome of the hearing before Mann J. Mann J would have been bound to conclude that HMRC had demonstrated at least a good arguable case as to the substance of its case on the Tax Recovery Claim. Had I concluded that the Claimants had failed in their duty, I would not have discharged the Freezing Order in any event, applying the principles identified above. There is no evidence that supports the suggestion of a deliberate failure to disclose the points relied on by the Defendants. To discharge the Freezing Order would be manifestly disproportionate in the circumstances, particularly having regard to the likely impact of the matters relied on by the Defendants on the application before Mann J.
Non-Disclosure: Likelihood of Discharge of the Restraint Order
The Defendants maintain that the Claimants failed fairly to present the possibility of discharge of the Restraint Order to Mann J when applying without notice for the Freezing Order. The only point that can be made by reference to this issue is that if the Defendants are correct then it is more likely that instead of entertaining the application without notice, the Judge would have directed instead that the application be renewed either on notice or after short notice to the Defendants.
I accept that the Claimants could probably have kept themselves informed as to the progress of the application to discharge the Restraint Order during the 21st and 22nd February 2012 and that had they done so, they would have been in a position to inform Mann J that even if the hearing was completed on the 22nd February, it was not likely that the Judge would be able to deliver a judgment for some time thereafter. However, there was nothing that could have been known to the Claimants that would have eliminated the possibility of an Order being made discharging the Restraint Order at the conclusion of the hearing with reasons to follow although I accept that such an outcome was an unlikely one. Thus I am prepared to accept that a fair presentation to Mann J would have been one that involved informing him that the hearing was running behind schedule, that it was possible that it might not be concluded by the end of the 22nd February and might in consequence have to be adjourned to a date in the future for completion. It would also have involved drawing Mann J’s attention to the information supplied to the parties to the application to discharge the Restraint Order that the Judge was not likely to be able to deliver a reserved judgment before Easter 2012. However, I consider that it is unlikely that this would have caused the Judge to decline to act as he did.
The decision to hear the application without notice rather than directing that it be heard on notice or short notice was one that involved a balancing exercise in which the following factors were likely to be relevant. First, the Judge would have been concerned that none of the information available about the hearing to discharge the Restraint Order could eliminate the possibility of a decision to discharge being made before an application could be brought before the Court on notice or short notice. Secondly he would have had to balance against the possibility that no practical risk of dissipation could arise as long as the Restraint Order was in place, the fact that in practical terms the grant of the Freezing Order could have no practical prejudicial effect on the Defendants as long as the Restraint Order remained in place, but that to refuse to grant it might expose the Claimants to the risk that the Bank Deposit would be further dealt with so as to make enforcement of a Judgment in the Tax Recovery Claim difficult or impossible. In those circumstances, even if the Judge had been supplied with the information that it is said he should have been supplied with, I do not consider it would have made any material difference to the outcome of the application before him since there remained a risk that if notice was given that might enable the Defendants to take steps that would defeat the purpose of applying for the Freezing Order.
If I am wrong in reaching the conclusions I have reached so far on the issue I am now considering, I would not in any event have considered it appropriate to discharge the Freezing Order by reference to this point. Had the position been that the Court could arguably have reached the conclusion that the Freezing Order should not be granted as long as the Restraint Order remained in place, then to discharge the Injunction by reference to the alleged non-disclosure might have been an appropriate response. However, there was no prospect of it being concluded that a Freezing Order ought not to be granted as long as the Restraint Order remained in place for the reasons outlined above and in Faya Limited (In Liquidation) v. Butt (ante). It is true to say that had the application for freezing relief been argued in full on notice it is unlikely that an Order would have been made against HSBCT but that would have been on the more fundamental basis that neither claimant had a cause of action against HSBCT. In any event, the order actually made as against HSBCT has had no evidenced prejudicial effect on that entity. Even if that is immaterial to the question I am now considering it would not make proportionate the discharge of the orders as against Ben Nevis or MTL. In those circumstances, even if I had concluded that in failing to describe the progress of the application to discharge the Restraint Order in the terms contended for by the Defendants the Claimants had acted in breach of their disclosure duty, I would not have discharged the Injunctions granted by Mann J on this ground.
Conclusions
For the reasons set out above:
I set aside permission to serve these proceedings out of the jurisdiction in so far as they have been brought by SARS. Subject to any further submissions that might be made on the hand down of this judgment, I consider it appropriate to dismiss these proceedings in so far as they have been brought by SARS;
I set aside permission to serve these proceedings on HSBCT and again subject to any further submissions to be made on the hand down of this judgment I consider it appropriate to dismiss these proceedings as against HSBCT;
Other than to the extent set out in (i) and (ii) above, I dismiss the Jurisdiction and Freezing Order Challenges. However, I will hear further argument as to the scope of the Freezing Order as against MTL.