Bramston v Murphy & Anor

This is an adjourned application for directions in an originating application made by the liquidator of DCC, formerly known as The Devon Cider Company Limited (ADCC@). Until 23 July 2007 DCC carried on the business of cider production and contract packing of liquids and beverages. It was a registered cider maker under the Cider and Perry Regulations, 1989 (Athe CPR@), which deals with the control and taxation of the production of bottled and bulk cider.

In 2006 DCC encountered financial difficulties and its bank withdrew support by April 2007. DCC sought advice from Smith & Williamson (ASW@). No third party purchaser for the business having been found, SW advised a pre-packaged scheme under which DCC would go into administration and sell the business and assets to a new company owned by the directors of DCC with funding obtained by them.

In accordance with this plan DCC went into administration on 23 July 2007, with the First Respondents - two insolvency practitioners from Smith & Williamson - being appointed as joint administrators (Athe administrators@). On the same day DCC, acting by the administrators, entered into an agreement for the sale of the business to a shelf company which then changed its name to The Devon Cider Company Limited (ANewco@) and continued the business from the same premises. Newco=s application for registration under the CPR was signed on 18 July 2007, received by HMRC on 25 July 2007 and effected on 10 August 2007.

On 19 September 2007 DCC went into creditors= voluntary liquidation at the instance of HMRC, its only substantial creditor.

The originating application concerns excise duty payable in respect of a substantial quantity of bottled and bulk cider held by DCC at 23 July 2007. The share of the sale consideration attributed by the agreement to this stock was ,375,000. The excise duty arising on the stock has been assessed by HMRC at ,1,625,395.40, a figure with which the liquidator agrees. Though the precise figure may not be accepted by the administrators, it is not, as I understand, in dispute that it is very substantial and many times the ,375,000 for which the cider was sold to Newco.

In essence, the originating application seeks to have determined what was the relevant excise duty point under the CPR and when it occurred.

At the time the application was issued on 29 May 2008, the battle lines were as follows. Relying on regulation 11(1)(ii) CPR, HMRC contended that the duty became payable when the stock was Asent out from the premises@, which it equated with the sale of stock to Newco. The liquidator concurred with this analysis. If correct, it would have made the liability for the duty an expense of the administration. The administrators disagreed, contending that the excise liability was triggered by DCC=s entry into administration, preceded the administration, and was therefore an unsecured claim. It is not suggested that this rival analysis had dictated the scheme advised by SW: indeed it appears that the question of duty had simply not been addressed. The contest between these two contentions was seen as affecting the proper conduct of the liquidation in a number of respects, including whether action should be brought against the administrators for negligence or breach of duty.

It was against this background that the liquidator issued his originating application. It sought the determination by the court as to whether the duty point was when ADCC entered into administration@ or alternatively when Athe Administrators sold the business (including the alcoholic stock)@ and Atherefore whether the duty is an expense of the administration and, if so, in what sum@.

Thereafter, however, the lines of battle changed. In a letter dated 12 August 2008, explaining the basis for its assessment of the same date against DCC in the sum of ,1,625,395. 40, HMRC switched its reliance to regulation 13, which fixes as a duty point the time when Athe business of making cider is discontinued at the cider premises having cider therein@, and confirmed this in its review decision by letter dated 6 November 2008. On this basis, though it is still contended that the duty became payable on 23 July 2007, this is now said to have occurred because DCC stopped making cider on that date.

The administrators effected an even more fundamental change of tack. Through their solicitors they argued in a letter of 22 October 2008 that (contrary to their previous position) the duty point was determined by regulation 11, but that the Asending out@ did not occur until the stock was subsequently sold and dispatched to customers by Newco. On this basis DCC would never have incurred any liability, and the excise duty would be payable by Newco. The liquidator concurs with HMRC=s revised analysis. Though he has lodged an appeal against the assessment to the VAT and Duties Tribunal (now absorbed into the new tribunal structure), he has done so only to protect his position as against the administrators. That is reflected in the grounds of appeal dated 18 November 2008 which state that:

Strangely, until I pointed it out at the end of the argument, no-one had apparently noticed that the relief claimed by the originating application no longer reflected the revised contentions of the parties. I gave permission for the liquidator to amend to rectify the position. Since the hearing, the application has been amended on 23 December 2008 to claim an order that the excise duty point Aoccurred during the administration of DCC@ and that Aif properly assessed, excise duty of ,2,111,018. 89 would be payable as an expense of the administration, alternatively that an excise duty point did not occur during the course of the administration of DCC@. (I observe that the inclusion of a figure for the excise duty goes beyond the permission to amend which I granted, the more so since the figure specified is significantly higher than the assessment under appeal.)

The change in the nature of the arguments is of considerable significance. Originally, all parties proceeded on the basis that DCC had a liability for duty on the stock, though differing as to whether the duty point had occurred before or during the administration. Though the revised relief still seeks the determination of whether the duty point occurred Aduring the administration of DCC@, that is a matter of pure form. Given that the dispute is no longer one of the timing of DCC’s accepted liability but whether DCC was ever liable, the originating application now effectively seeks a ruling as to whether or not the assessment is valid.

In addition, the impact of the dispute on the potential negligence claim by the liquidator against the administrators has become starker. If the liability to duty fell on Newco rather than DCC, the basis for any such claim would disappear.

The matter came before me not for determination of the point raised by the originating application but as an adjourned application for directions. The principal matter addressed was an objection by the administrators that it was not open to, or appropriate for, the court to adjudicate on this matter. For this purpose the administrators found on the principle that statute has created a separate route for the determination of tax liability which must be followed to the exclusion of litigation in the ordinary civil courts, relying in particular on the decision of the House of Lords in Vandervell Trustees v White, [1971] A.C. 912.

Why it should be in the interests of the administrators to raise this objection is not easy to understand. The dispute turns solely on the proper interpretation of regulations 11 to 13 of the CPR and the tribunal would be unlikely to be in any superior position to deal with the question as compared with a judge of the Chancery Division. Moreover, the administrators= stance might lead to them being deprived of any voice in the determination of this dispute. Though I was told that they would apply to the tribunal to be joined as a party, it is in my view far from certain that the tribunal would be prepared to accede to that request.

The obvious concern of the liquidator is that all three parties should bound by a single decision as to whether or not DCC has a liability for the excise duty. If liable, a sale for ,375,000 duty paid would appear to have been at a massive undervalue and may expose the administrators to a claim for negligence or other breach of duty. Absent a single tripartite decision, it would be open to the defendants in any such action to argue that the liquidator had not properly prosecuted the appeal against the assessment or deployed arguments to maximum effect. Indeed, the liquidator has already indicated that he agrees with the assessment, and in practice, if the present proceedings continue, he would take a neutral stance and the effective contest would be between HMRC and the administrators.

HMRC has no objection to the present proceedings. As the administrators stress, however, if the court is deprived of jurisdiction, it cannot be conferred by consent.

In Vandervell a question arose as to whether the trustees of a family settlement made by Mr Vandervell or the settlor were entitled to dividends received by the trustees on shares transferred to them. The Revenue assessed Mr Vandervell=s estate to surtax on those dividends on the alleged basis that he had not divested himself of the beneficial interest. His executors appealed that assessment and also began proceedings against the trustees for an order that the estate was entitled to the dividends. They later sought to join the Revenue as a party to those proceedings, to which the Revenue consented but the trustees objected.

It is to be noted that the action did not address the validity of the assessment as such: the executors simply sought payment by the trustees of the dividends which they had received, presumably in order to provide the funds with which to pay the surtax assessment if it was upheld on appeal. If, however, the trustees succeeded in their defence and the Revenue was joined as a party they would be unable to resist an assessment for the surtax: equally it would follow that the estate was not so liable.

All members of the House accepted, following substantial earlier authority, that whether a person was liable to tax could only be determined by an assessment and the validity and quantum of that assessment could only be challenged by an appeal to the commissioners. It was therefore not open to the parties even by consent to obtain a declaration from the court as to validity or quantum binding on the Revenue or the commissioners. In the view of Lord Diplock the same applied to questions of fact or law which underlay the determination of liability or quantum. Three of the Law Lords, Lords Reid, Dilhorne , and Wilberforce disagreed with this suggested extension of the exclusionary rule. There was in their view no jurisdictional obstacle to including the Revenue in an action which did not seek a ruling on tax liability, even if one of the issues was germane to that liability. As Lord Wilberforce pointed out, however, (at 939) in a passage of some relevance to the present case

Commenting on Vandervell and earlier cases in Glaxo Group v Inland Revenue [1995] STC 1075 at 1083-1084 Robert Walker J sought to summarize the position as follows:

Were a case similar to Vandervell to arise today it would therefore be a matter for the discretion of the court whether the proceedings should be permitted to continue: a recent example, though involving considerably more complex facts and issues, can be seen in the decision of Warren J in Stow v Stow (HC07C01249) dated 14/03/2008. The present case differs, however, from Vandervell in a particularly important way. In Vandervell the litigation concerned the effect of a private transaction, with the decision on that question affecting (and indeed being determinative of) the validity of the surtax assessment. The present case is the inverse: the litigation seeks (in all but form) the determination of whether or not DCC has a tax liability, in effect whether the tax assessment is valid, with a view to a civil claim against the administrators. To reprise the words of Robert Walker J, the relief sought in the present case Ais more or less co-extensive with adjudicating on an existing open assessment@. It therefore falls squarely within the absolute exclusionary rule.

It follows that the court cannot properly make a declaration in these proceedings binding upon HMRC, and the originating application should be stayed or dismissed as against HMRC

The position between the liquidator and the administrators is different. The issue raised by the originating application is one which lies at the heart of the potential negligence action and as between those two parties can realistically be regarded as in effect a preliminary issue in such an action. At some point, it will have to be determined. Even if that were to follow a dismissal of the tax appeal, the administrators could be expected to argue that this was due to a failure of the liquidator to prosecute or argue the appeal properly. That gives rise to the risk of divergent decisions.

This problem would not arise if the administrators were to succeed in an application to the tribunal to be joined as parties to the tax appeal, which would lead to their being bound by the result. As I observed earlier, however, such an order is far from certain.

An alternative would be for the liquidator to entrust the conduct of the appeal on behalf of DCC to the administrators against an undertaking to abide by the result. Given the present formulation of the grounds of appeal which I quoted earlier, it would appear a logical course. When I proposed it at the outset of the hearing in the hope of avoiding what appeared to me a sterile debate on jurisdiction, it met with no favour from the liquidator, but may in the light of this judgment receive a different reaction.

The risk of divergent decisions could also be avoided if both the tax appeal (as between the liquidator and HMRC) and the original application (as between the liquidator and the administrators) decided by the same individual sitting as a tribunal judge and in the Chancery Division. The new tribunal structure created by the Tribunal Courts and Enforcement Act, 2007, and which takes effect for tax and duty cases from April 2009 and will, I was told, apply to this tax appeal, appears to facilitate this possibility.

In these circumstances, subject to any submissions when this judgment is handed down, I am minded to adjourn the remainder of this application for directions to permit the parties to consider further this aspect of the matter and, if so advised, to make whatever applications to the tribunal and the Chancery Division may be necessary or appropriate. Depending on the outcome, further directions may prove unnecessary, but there would of course be liberty to restore.