Milk Supplies Ltd v Department for Environment Food & Rural Affairs

To the common lawyer, “abuse of rights” is a troublesome concept. Schooled on Hohfeld’s theory of legal reasoning (Wesley Newcomb Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning, Yale, 1946) common lawyers are apt to define a right as a legal entitlement to demand that another person shall perform a correlative duty. The civilian’s assertion that a right must not be abused is, to a common lawyer, a contradiction in terms: it amounts to saying that there is no right to act in the manner characterised as an abuse.

The present case demonstrates that it is not only lawyers who may be troubled by this philosophical (or linguistic) conundrum. A trader may be surprised, or even offended, if he is told although he has complied with the strict terms of Community legislation, he cannot require the competent Government department to discharge a correlative obligation. Once he has complied with the words in a statute, he expects the Government to do likewise.

The dispute between the parties in the present case concerns only the Counterclaim. The Claim is admitted.

The Claimant (the Defendant to the Counterclaim) is “MSL”: a company engaged in the business of exporting dairy products from the United Kingdom. It is the parent of seven subsidiary companies known as Milk Supplies (One) Limited, Milk Supplies (Two) Limited and so on, up to and including Milk Supplies (Seven) Limited.

The Defendant (the Counterclaimant) is “the Department”: a department of HM Government entrusted, through its executive agency, the Rural Payments Agency, with the administration of the European Community’s system of export refunds for agricultural products. In that respect it has succeeded to the functions of and of the Intervention Fund for Agricultural Produce.

The legislation governing the Community’s system of export refunds for agricultural products is contained in numerous items, as prolix as they are technical. For present purposes I need set out the principal features of only three Regulations (all of which have been subjected to amendment at frequent but irregular intervals).

Commission Regulation 800/1999 of 15 April 1999, OJ 1999 L102/11, lays down detailed rules for the application of a system of export refunds on agricultural products. It provides for the granting of refunds on the export from the Community of specified agricultural products, and products processed there from. The refunds are designed to make up the difference between the Community price for the products in question and the world price, so that goods whose price is maintained at a high level by Community’s intervention arrangements can be exported at prices competitive on the world market. Since the intervention price for agricultural products is liable to be changed daily (sometimes with greater frequency than that) the rate of export refund is altered with similar frequency. Regulation 800/1999 made provision not only for a general scheme of refunds, applied to large traders, but also for a subsidiary scheme for small exporters, the purpose of which was described as follows in the seventh recital in the preamble:

“Whereas, where exports involve frequent consignments of small quantities, provision should be made for a simplified procedure as regards the relevant day to be used for the determination of the rate of refunds.”

Article 51(1) of this Regulation makes provision for penalties and recovery of amounts over-paid. It provides:

“Where it is found that an exporter with a view to the grant of an export refund, has applied for a refund exceeding that applicable, the refund due for the relevant exportation shall be that applicable to the products actually exported, reduced by:

(a)

half the difference between the refund applied for and that applicable to the actual export;

(b)

twice the difference between the refund applied for and that applicable where the exporter intentionally provides false information.”

Article 51(4) provides that where the reduction provided for in points (a) and (b) of paragraph (1) results in a negative amount, the exporter shall “pay that negative amount”. Article 52 provides that the obligation to pay that negative amount shall be incumbent on the “beneficiary”.

Commission Regulation 800/1999 of 15 April 1999, OJ 1999 L102/118 varied the system of export refunds in view of the Agreement on Agriculture, one of the Multilateral Agreements on Trade in Goods annexed to GATT and concluded within the aegis of the World Trade Organization in the Uruguay Round. Export refunds are now allocated from a budget of Euro 415 million, a figure effectively capped by Article 9(1)(d) of the Agriculture Agreement, which provided for the progressive reduction of “subsidies to reduce the costs of marketing exports of agricultural products”. To ensure that payments do not exceed this cap the Commission requires exporters to apply in advance for Refund Certificates. A proportion of the available export refunds is reserved for small exporters who are not required to obtain certificates in advance. The third recital in the preamble explains why provision was made for the small exporters:

“Whereas the implementation of the Uruguay Round Agreement on Agriculture makes the grant of a refund subject, as a general rule, to the requirement of an export licence comprising the advance fixing of the refund; whereas, however, deliveries in the Community for international organizations and for the armed forces, deliveries for victualling and exports of small quantities are special cases and of minor economic importance; whereas, for those reasons, provision has been made for a special system without an export licence, in the interests of simplifying such export operations and avoiding an excessive administrative burden on economic operators and the competent authorities.”

Commission Regulation 1520/2000 of 13 July 2000, OJ 2000 L177/1, lays down further detailed rules for the application of the system of granting export refunds to goods processed from agricultural products. It recalls in the nineteenth recital in the preamble that refund certificates ensure compliance with the commitments into which the Community has entered within the World Trade Organization and it aspires to specify which general provisions are applicable to agricultural licences and certificates. Under the general scheme, refund certificates are issued in six tranches throughout the budget period and will be valid from the date of issue until the end of the fifth month following the month of lodging the application, or until 30 September if this is earlier. Different considerations apply to the small exporters’ scheme, pursuant to which refunds are paid on a “first come, first served” basis subject to a maximum payment of Euro 75,000 per trader.. Recital 17 states:

“Most exporters receive less than 50,000 [amended to read 75,000] euros a year in refunds. Taken together, these exporters account for only a small part of the total amount of the refunds granted on agricultural products exported in the form of goods. It should be possible to exempt such exporters from the requirement to present a certificate.”

Article 14 of the Regulation (as amended) provides that exports not covered by a certificate are eligible for export refunds “only if the applications previously lodged by the exporter in accordance with paragraph 2 of Section VI of Annex F during the budget year in question relate to total amount of less than Euro 75,000”.

Between 27 March and 8 July 2007 MSL or its subsidiaries made various exports of milk powder enriched with sugar by to Canada for use in the manufacture of ice cream. When MSL itself reached the limit of the export refunds available to it, it would ordinarily have to wait until the next tranche period to obtain a new certificate so as to be eligible to claim a further export refunds. Instead applications for export refunds were made by its subsidiaries, Milk Supplies (One) to Milk Supplies (Seven), all of which were registered with the Rural Payments Agency on 3 May 2001. The subsidiaries satisfied the formal requirements for grant of export refunds; but the Rural Payments Agency withheld those export refunds. The Agency claimed to be entitled to a reimbursement of payments of £618,287.76 that it had made in response to applications alleged to constitute abuses of right. The Department now maintains that the net indebtedness of MSL to the Department amounted to £140,951.62 plus interest.

The principle of abus de droit is well established as a general principle of European Community law. I need cite only two cases among many.

In Case C-110/99, Emsland Stärke v Hauptzollamt Hamburg-Jonas, [2000] ECR I-11569, paras 52-53 the Court of Justice stated:

“A finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved.

It requires, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it.”

In Case C-255/02, Halifax and Others v Commissioners of Customs and Excise, [2006] ECR I-1609 the Court of Justice stated at para 86:

“For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.”

There is, however, a degree of tension between this principle and the principle of legal certainty which is also acknowledged by the European Courts. Taking the two principles together we may infer that the general principle of abus de droit may not be applied in such a way that those concerned by the Community’s financial legislation are unable to know precisely the extent of the obligations imposed on them. This is implied by the words of the Court of First Instance in Case T-278/06, Commission v United Kingdom, 26^th November 2008, not yet reported, para 40 where it stated that:

“The requirement for legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them. Finally, the correction applied may be regarded as being of the same type as a penalty which, even if not criminal in nature, cannot be imposed unless it rests on a clear and unambiguous legal basis.”

Although the case-law governing the general principle of abus de droit assists us in understanding the scope and meaning of relevant Community legislation, the case for the Department does not depend on the general principle but on its specific application in Council Regulation 2988/95 of 18 December 1995 on the protection of the European Communities financial interests, OJ 1995 L312/1. Sub-paragraphs (3) and (4) of Article 4 of that Regulation read as follows:

“3.

Acts which are established to have as their purpose the obtaining of an advantage contrary to the objectives of the Community law applicable in the case by artificially creating the conditions required for obtaining that advantage shall result, as the case shall be, either in failure to obtain the advantage or in its withdrawal.

4.

The measures provided for in this Article shall not be regarded as penalties.”

Thus an advantage envisaged by Community law will be foregone or withdrawn where the act meeting the formal conditions for the grant of the advantage is shown to have had as its purpose the obtaining of that advantage contrary to the objectives of the applicable Community law by artificially creating the conditions required for obtaining that advantage. Although it is true that Article 4(3) must be read as a whole, it is convenient to consider two aspects in sequence. Firstly there must be some act having as its purpose the obtaining of an advantage contrary to the objectives of the applicable Community law. Secondly that act must aspire to achieve its purpose by artificially creating the conditions required for obtaining that advantage. The Court of Justice considered those two elements separately in Case C-110/99, Emsland Stärke v Hauptzollamt Hamburg-Jonas and in C-255/02, Halifax.

In contending that MSL’s actions amounted to an attempt to obtain an advantage contrary to the objectives of the applicable Community law, Miss Haynes, counsel for the Department, submitted that by diverting exports through its subsidiaries, MSL aimed to secure an advantage, contrary to the Community’s objective of reserving to small and medium enterprises part of the funds allotted to export refunds.

MSL is not a small exporter. It is a medium-sized company which, according to the evidence of a director, Robert Bamber, is the fifth largest exporter of agricultural products from the United Kingdom. It has made significant drawings on the export refund system, rising from £1.18 million in 2000-2001 to £6.88 million in 2002-3.

The pattern of MSL’s relevant trade was ordinarily as follows. It would purchase the product (anhydrous milk fat enriched with sugar) from a company called Roil Foods and sold it to MSL Trading, a company formed by Mr. Bamber and his wife in 1999. MSL Trading would then sell the product onwards to a company called Van Kam Trading. Van Kam would pay MSL Trading who would pay MSL. In the transactions forming the subject of the present dispute, the subsidiaries named Milk Supplies (One) Limited to Milk Supplies (Seven) Limited were interposed in the contracts. Those subsidiaries made the purchases from Roil Foods and sold the product to MSL Trading, which in turn sold it to Van Kam. No payments were made to Roil Foods from Milk Supplies (One) Limited or the other numbered subsidiaries. No payments were made to Roil Foods by those subsidiaries. The only money going to the numbered subsidiaries was the export refund. Substantially the whole of the export refunds were then paid by the numbered subsidiaries to MSL.

Two issues arise for the purpose of determining whether these arrangements constituted an attempt to obtain an advantage contrary to the objectives of the Community law. First, I must determine whether access to the small exporters’ scheme is a relevant advantage for the purposes of Article 4 of Council Regulation 2988/95. Second, I must determine whether on the facts of the case, arrangements designed to secure payment to the numbered subsidiaries of MSL must be taken to have been designed to secure an advantage for MSL itself.

 The answer to both of those questions must be affirmative. When Article 4 of Council Regulation 2988/95 speaks of an advantage obtained “contrary to the objectives of the Community law applicable in the case” it refers to the particular objective that is alleged to have been contravened. The Regulations governing export refunds on agricultural produce pursue numerous objectives, some of which have been identified in paragraphs 6 to 8 above. Article 4 of Council Regulation 2988/95 would be emasculated if it were confined to cases in which the trader has attempted to circumvent the overall aim of the legislation (which might, perhaps, be identified as the stabilisation of the Community’s agricultural sector). Moreover in circumstances in which substantially the whole of the export refunds obtained by the subsidiaries was paid by them to MSL, I conclude that the arrangements made by the MSL tended to secure an advantage for MSL itself. This is not a question of lifting the corporate veil, so as to attribute to the parent an advantage gained by the subsidiary, but a case of having regard to the whole of the transaction for the purpose of identifying the advantage that MSL actually obtained.

In speaking of the artificial creation of conditions for obtaining an advantage, Article 4(3) of Council Regulation 2988/95 draws on the words of the Court of Justice in Case C-110/99, Emsland Stärke v Hauptzollamt Hamburg-Jonas. By using the word “artificial” the Court must be taken to have meant engaging in transactions which have no commercial purpose other than the obtaining of the advantage in question (see Case C-206/06,  Essent Netwerk Noord BV v Nederlands Elektriciteit Administratiekantoor BV, 17 July 2008, not yet reported, para 73). In the present case it is admitted that the arrangements whereby the numbered subsidiaries would make the purchases from Roil Foods and sell the produce to MSL Trading, which in turn would sell it to Van Kam, had no purpose other than the obtaining of export refunds payable to the subsidiaries. The arrangements whereby those subsidiaries passed on substantially the whole of the payment to the parent had no purpose other than that of putting MSL in much the same position as that in which it would have been if it had been eligible to obtain, and had obtained, export refunds itself. The conditions artificially created by this course of conduct may be identified as eligibility for export refunds to be paid to MSL.

There is at this stage no suggestion that the exporter, or any officer of member of staff of MSL, intentionally provided false information or otherwise behaved dishonestly. There is no suggestion that the transactions were a sham. On the contrary, it is agreed that the exports were actually made. Indeed, in setting up the arrangements described in this judgment MSL was entitled to be fortified by the view an official of the Rural Payments Agency (now retired) who took the view that the arrangements were entirely proper; and by their researches into the activities of a major Dutch exporter, who appeared to at least one director of MSL to be claiming export refunds on the very basis on which the present claims were made. So there is no scope for the application of Article 51(1)(b) of Regulation 800/1999. Article 51(1)(a) is invoked. It will be recalled that this provides for refund of the amount applied for plus payment of half the difference between the refund applied for and that applicable to the actual export “where it is found that an exporter with a view to the grant of an export refund, has applied for a refund exceeding that applicable.” The imposition of the penalty is not contingent upon showing any form of deception, or even negligence. All that is required is that the refund for which application has been made exceeds the amount applicable. Although the phraseology of Article 51(1) is appropriate to the case in which a net refund remains payable, it is clear from Article 51(4) that the same principles are to apply where the net result is that the trader is due to pay a sum to the competent national authorities.

I have considered whether the application of the principle of abus de droit in the circumstances of the present case would entail breach of the principle of legal certainty. I do not think that it would. It cannot be said on behalf of MSL (nor was it submitted on its behalf) it was unable to know precisely the extent of its obligations. What was said was that “the doctrine of abuse of rights is insufficiently clear and precise to constitute an unambiguous legal basis for the imposition of a penalty, and that Article 51 did not clearly and unambiguously apply to a case where a refund was refused because of abuse of rights.” I was not persuaded by that submission. Leaving aside the development of abus de droit as a general principle to Community law, we have in this case the benefit of Article 4(3) of Council Regulation 2988/95 of 18 December 1995 which refers in express terms to acts having as their purpose the obtaining of an advantage contrary to the objectives of the Community law. Although the preambles to the relevant Regulations do not state in express terms that a substantial company obtains “an advantage contrary to the objectives of the Community law” when it secures access to a reserve maintained for small traders, it is sufficiently clear from the scheme of the Regulations (which I have described) that this is the case. For good measure I was shown several DEFRA publications that address the aim of equitable treatment as between small and large traders, but by mentioning them I do not suggest that the Regulations are to be construed in the light of them. The legislation, although technical, was not so inaccessible as to cause a competent trader to be unable to appreciate the extent of his obligations; and a substantial trader which obtained certificate-free export refunds by channelling its applications through subsidiaries ought to have appreciated that in consequence of its actions “the purpose of those rules has not been achieved.”

The Department’s Defence and Counterclaim in this case is based on the proposition that the MSL is a beneficiary of undue payments within the meaning of Article 52 of Commission Regulation 800/1999 (paragraph 6 above). It will be recalled that Articles 51 and 52 make provision for repayment of amounts overpaid and for penalties where an exporter has applied for a refund exceeding that applicable. In such a case the refund due is that applicable to the products actually exported, reduced by half the difference between the refund applied for and that applicable to the actual export; or twice the difference between the refund applied for and that applicable where the exporter intentionally provides false information.

It was submitted on behalf of the MSL that no refund is applicable under Article 52(1) because the MSL is not a “beneficiary” within the meaning of Article 52. In a submission made more impressive by its plausibility notwithstanding the paucity of the material to support it, Mr. Stanley submitted that the term “beneficiary”, when used in Article 52, does extend to a legal person such as the MSL. Mr. Stanley referred me to the final sub-paragraph of Article 52(1) which provides that:

“where the refund is paid to an assignee, he and the exporter shall be jointly and severally liable to reimbursement of the amounts over-paid, securities unduly released and interest relating to the exports concerned. The assignee’s liability shall however be limited to the amount paid to him, plus interest”

This may be understood together with Article 52(4)(b) which speaks of the “period which has passed between the day of the notification to the beneficiary of the final decision on the granting of the refund and that of the first information of the beneficiary by a national or Community authority concerning the undue nature of the payment”.

What the final subparagraph of Article 52(1) shows is simply that the word “beneficiary” is wide enough to encompass an assignee. It does not show that the word “beneficiary” embraces nothing but an assignee. The word is not defined in the Regulation; and inspection of the French and German versions of the text is uninformative. Those versions use words from the same root as “beneficiary” and the French and German words are as broad in their possible meaning as the English counterpart. I cannot construe the word “beneficiary” or its French and German equivalents, so as to exclude a company which derives a benefit in consequence of an amount over-paid to a related company. To interpret the word “beneficiary” as excluding a company that receives such a benefit would run counter to the object of Chapter 2 of the Regulation, which is to secure the recovery of amounts over-paid.

It was also submitted on behalf of the MSL that it had derived no benefit from the payments made to it by its subsidiaries because those payments constituted debts owed to the subsidiaries by the MSL and were recorded as such in the accounts of the companies concerned. No doubt that is true; but it is not sufficient to bring the MSL outside the scope of the word “beneficiary”. MSL benefited by receiving the cash that it would have received had it been eligible to apply for the appropriate export refunds itself. It would not otherwise have received that cash. This is the benefit received by Milk Supplies Limited. Whether it will be called upon to repay the debts it owes to its subsidiaries at all, let alone in currency equal in value to the refunds received, is a matter that remains to be seen.

For these reasons I have concluded that the counterclaim must fail and that the Department is entitled to be paid by MSL the sum of £140,951.62 plus interest.