Sita UK GROUP Holdings Ltd v Serruys & Ors

This is an application made in two actions that the claimants have permission pursuant to CPR 31.22 to disclose to Her Majesty’s Revenue & Customs documents and information obtained in the course of proceedings, and that they be released from undertakings given by them in relation to some of that information. The application was issued on 9 April 2009 and was heard on 22 April.

The history is as follows. On 1 May 2007 an agreement was made for the purchase by the first claimant, SITA UK Group Holdings Limited, ‘SITA’, of the issued shares in Easco Limited from SPC Norwich Limited, Mr Andre Serruys and Mr Richard Cubbitt. SPC Norwich was largely controlled by Mr Serruys. Easco had a number of subsidiaries, and carried on business in metal recycling under the control of Mr Serruys. The total consideration was £91.5 million. SITA allege that by reason of dishonest practices known to and encouraged by Mr Serruys the financial information provided to SITA prior to the sale was false. Those practices have been identified under the headings of skimming, cash payments and adulteration of metal sold. The skimming is alleged to have consisted of under-declaring the weight of metal received from suppliers, and so paying less than was due. Cash payments were allegedly made to employees and suppliers, which were not accounted for in the books or declared for tax. The alleged adulteration consisted of the inclusion with metal sold of material to increase the weight and therefore the price received. It is alleged that representations as to the financial information were made fraudulently. It is alleged that the shares in Easco were worthless. Mr Winstone was a director and the general manager of Easco Sheffield. It is alleged that he carried out various dishonest practices which resulted in the extraction of cash amounting to £4.8 million from Easco Sheffield, which he and Mr Serruys laundered. These allegations are made in what is called ‘the deceit action’, which was commenced on 23 April 2008 by SITA and SITA MR Sheffield Limited, as EASCO Sheffield had become. On that day I granted freezing orders against Mr Serruys, SPC (Norwich) Limited and Mr Winstone. SITA subsequently started a second action against Mr Serruys, SPC (Norwich) Limited and Mr Cubitt for breach of warranties contained in the sale agreement. This has been called ‘the warranty action’. The two actions are progressing in tandem and are due to be tried together commencing on 25 January 2010 with an estimate of 40 days. The claimants have instructed Moore Stephens as accountancy experts to provide a report in support of their allegations, which is due to be served by the end of July 2009. On 20 October 2008 I made an order on the application of SITA and SITA Sheffield, which provided for the seizure from Mr Winstone of certain documents. The order contained an undertaking by the applicants not without the permission of the court to use any information or documents obtained as a result of the order, nor to inform any one of the application and order except for the purposes of the two actions. The order was executed and various documents were seized. The claimants say that they demonstrate Mr Winstone’s dishonest conduct, and that of Mr Serruys. That is denied by them. The allegations and the denials are contained in the statements of case in the deceit action.

I will next set out the developing interest of HMRC. During a telephone conversation on 20 May 2008 Linda Pike, SITA’s group UK tax manager, told Annette Hughes of HMRC of the obtaining of the freezing order on the grounds of the three dishonest practices which I have outlined – skimming, cash payments and adulteration It was agreed that a meeting would be appropriate. In a later memorandum (at page 37 of divider 12) it was stated ‘on 20/05/08 the Tax Manager contacted the CRM to disclose major irregularities in relation to the Easco companies which significantly impact on Employment Taxes.’ The meeting took place on 10 July 2008. Copies of the affidavit on which the freezing order had been obtained and the particulars of claim in the two actions were given to HMRC. HMRC wanted to know whether systems were now in place so there could be no repeat. They were happy to wait for a report in due course – apparently from Moore Stephens, but wanted to be kept informed and to have a proposed timetable of actions. In early August HMRC were sent some documents by e-mail. There is then a gap, whether because nothing of significance had happened, or because the documents have not been produced, is unknown to me. On 9 January 2009 Ms J Marriott, an HMRC investigator, wrote to Mr Christopher Chapron, Finance Director of the SITA Group, saying that she had been passed responsibility for establishing the tax consequences of the alleged frauds. She said that the investigation would be carried out under Code of Practice 9, and supplied a copy. The object was to reach an agreed monetary settlement. She suggested that, in the unusual circumstances that SITA had not been responsible for the companies when the alleged frauds were occurring, it would be beneficial to have a meeting prior to the opening meeting described in Code of Practice 9. She stated that at this ‘pre-meeting’ she could be informed as to progress of the claims in court. She said that a director of SITA would be required to answer the questions annexed to the Code. She suggested that as Moore Stephens’ report would apparently form the basis of the disclosure to be made to HMRC it would be beneficial for Moore Stephens to attend.

The Code states:

“We will ask you to a meeting and invite you to make a full disclosure of all tax irregularities. This will be your only opportunity to secure the maximum benefit from making a full and complete disclosure of all irregularities in your tax affairs.

It is a matter for you to decide whether or not to attend and respond. If you do, we will ask you to explain the full facts and prepare a report detailing the nature, extent and reason for those tax irregularities, together with supporting evidence. We will then test that disclosure before seeking an agreement with you as to the amount of additional tax, interest and penalties and make arrangements with you for payment. You will be encouraged to make payments on account during the investigation. If you choose not to attend and respond, HMRC will conduct a thorough investigation of your tax affairs and will take into account your conduct during the course of the investigation in determining the level of any penalties due.”

It later states:

“If you tell us that there are matters that need to be disclosed, we will invite you to provide a disclosure report, the nature of which will depend on the individual circumstances of the case. Areas to be covered in the report should include

•

a brief business history

•

the nature of the irregularities and how they came about

•

the steps you have taken to verify amounts with supporting documents and any assumptions you have made

•

a detailed schedule of the irregularities for each period involved for each tax.

We will agree a timetable for producing this report at the meeting. In most cases we would expect the disclosure report to be submitted within six months of the opening meeting. The timetable will vary according to the complexity of the case and the volume of work required, for example, in more straight forward cases the report could be submitted considerably sooner.”

and:

“We will ask you for the information and documents that we need. We will give you a reasonable amount of time to provide any information.

You should tell us straightaway if you have difficulty obtaining the information we have requested and we will discuss with you how you might obtain it. You should also tell us if you think the information is not relevant to our investigation. We will discuss and try to agree the situation with you.

You should ensure that any information you provide and any answers you give are correct. If you are unsure about any matter you should say so. It is important that you give us all the relevant facts even if you are in doubt about the tax consequences of a particular matter.”

The Code also describes the reduction in penalties which cooperation may earn. It is as well to have in mind that the Code is primarily directed to the situation where executives of a company, who have been conducting tax evasion, meet with HMRC and confess their conduct. As HMRC pointed out, that is not the position of SITA.

The ‘pre-meeting’ was held on Thursday, 19 March 2009. It was attended by four representatives of SITA, two of Moore Stephens and three from HMRC Special Civil Investigations. The meeting itself was to be on Tuesday, 24 March. SITA were informed that the questions would need to be answered verbally and in writing. It was confirmed that Mr Chapron would be answering. Copies of the questions, which had been revised from those attached to the Code, were circulated. It was said that while yes or no answers were required, if Mr Chapron thought more was needed, he could provide it. The first question as to direct taxes was:

“Have any transactions been omitted from or incorrectly recorded in the books of any business with which you are or have been concerned as a director, to the best of your knowledge or belief?”

The second question was:

“Are the accounts sent to HM Revenue and customs for each and every business with which you are or have been concerned as a director, correct and complete to the best of your knowledge and belief?”

That is sufficient to give the style of the questions, and to show how they are capable of yes or no answers.

There was then a discussion of the difficulty for SITA in answering the questions relating to indirect tax on a company by company basis. This led to reference to the documents which had been seized from Mr Winstone under the order of 20 October 2008. It was suggested by HMRC that Mr Chapron could answer with words to the effect that further investigation was required. Moore Stephens said that there would be a complete overlap between their report and the disclosure to be made to HMRC. Ms Marriott wanted to know if full disclosure would be made by the end of September 2009 – which, it was wrongly thought at the meeting, was the date for the disclosure of Moore Stephens’ report. SITA said they would send the statements of case to HMRC. SITA asked if HMRC wanted to see the seized documents, and were told that they might want to see them later, but not at this stage. Discussion then moved to the meeting the next week, and the note records:

“JM explained that Tuesday would involve the formal meeting following the COP 9 at which disclosure would be invited which can be as detailed as SITA like at this state. There will be opportunity to ask questions. In the scoping meeting, HMRC will agree with Moore Stephens what the report for HMRC will cover, i.e. companies, timescale in which the report is prepared, the areas to be covered. JM said she would anticipate being in regular contact with Moore Stephens, although there would be minimal contact with SITA as the key contact is with Moore Stephens.”

On the next day, Friday, 20 March, Seymours, solicitors for SITA wrote by fax to Mills & Reeve and Wake Smith & Tofields, solicitors for Mr Serruys and Mr Winstone respectively, informing them that HMRC had commenced a fraud investigation. The letter stated that SITA had the day before been provided with questions which required answering at a meeting on 24 March, and that to answer properly SITA must refer to documentation and information provided by the defendants in the course of disclosure. Consent was sought pursuant to CPR 31.22(1). No reference was made to the undertaking in the order of 28 October 2008. Mills & Reeve replied the same day by e-mail asking to see the questions, and asking when SITA had first become aware of this. Wake Smith also replied the same day asking to see documents. Seymours replied saying that they could not supply documents relating to HMRC’s investigation.

During 20 March Seymours sent Mills & Reeve and Wake Smith & Tofields an unissued application which I understand was broadly in the form of that before me except that Seymours attached a somewhat broader draft order than the draft which accompanies the issued application. They were invited to consent to the draft order.

The e-mails continued into Saturday, 21 March, when among other matters Mills & Reeve raised paragraph 5 of Part D of Schedule 7 to the Sale Agreement. That requires the buyers to give the warrantors information and to procure the subject company to take action as the warrantors request in connection with a Tax Demand. Except in the case of an allegation of dishonesty or fraud the warrantors may take over the conduct of a Tax Demand. ‘Tax Demand’ is very widely defined and it is submitted for Mr Serruys that it includes the present situation.

On 23 March 2009 Mills & Reeve arranged for an accountant to attend the meeting on 24 March with a watching brief. They later stated that as SITA had not considered the position under Part D of Schedule 7, the meeting should be postponed. At 16.29 Mr Mark Thompson, the head of SITA’s legal department and its company secretary e-mailed HMRC for permission to provide the defendants with copies of the documents coming from HMRC to SITA, and whether the accountant could attend with a watching brief. Mills & Reeve then asked HMRC direct to postpone the meeting. At about 6 pm HMRC agreed to postpone the meeting, and I understand that its reinstatement awaits the outcome of the present application.

During 23 March 2009 Mr Thompson wrote to HMRC with draft answers to the questions which HMRC had posed. In his 6 page letter Mr Thompson explained the difficulty SITA was in because it did not control the Easco group when the irregularities were taking place. He referred to the undertakings which had been given to support the freezing order and the order of 20 October 2008. He said that the likely effect was to prevent SITA from using documents or information obtained as a result of the orders. He also referred to the limitation on the use of documents obtained through the ordinary course of disclosure in litigation. He was concerned that the statements of case revealed such information.

The draft answer to question 1 relating to direct taxes – which I have set out above, was:

“Other than issues that have already been notified to HMRC, in respect of SITA companies with which I am or have been concerned as a director, ‘No’. If, as I believe would be appropriate, the pro forma question is recast to ask: In respect of companies in the former Easco Group before 1 May 2007, have any transactions been omitted from or incorrectly recorded in the books of those companies to the best of your knowledge or belief? The answer is that to the best of my knowledge or belief it follows from the information which SITA Group has so far obtained that the transactions have been omitted from or incorrectly recorded in the books of those companies. Moore Stephens are investigating. It may well be that these defalcations continued from the time of completion until we discovered them and thereafter while we have sought to eradicate them.”

I understand that no answer, or at least no answer of substance, has been received from HMRC to Mr Thompson’s letter.

On 24 March Seymours sent Mills & Reeve correspondence with HMRC. They stated that because the investigation involved dishonest or fraudulent conduct Mr Serruys was not entitled to take over its conduct. That was denied in Mills & Reeve’s letter of 27 March.

On 30 March Seymours renewed their request for consent to the proposed order. Wake Smith replied that day saying that SITA were already in breach of their undertakings. Mills & Reeve wrote on 31 March saying that the need for disclosure was not demonstrated. The correspondence continued. But I think I have set out enough in summary to show how the present position has developed.

The application was issued on 9 April 2009. There were complaints that the hearing date was too soon and the time allowed was too short. It in effect asked for permission to disclose to HMRC all information and documents disclosed in the proceedings, and all inter parties documents coming into being for the purpose of the proceedings such as statements of case.

On the day before the hearing agreement was reached on behalf of SITA and Mr Serruys that SITA might disclose to HMRC the statements of case and further information supplied in relation thereto, and documents seized from Mr Winstone (‘the Winstone documents’) and those disclosed by him (‘the Winstone disclosure’). The balance of the application was adjourned to a date to be fixed. My understanding of this agreement is that it gave SITA what it needed for the present and it enabled Mr Serruys’ advisers to launch such application, probably under Part 8, as they required to determine the dispute under Part D of Schedule 7 to the Sale Agreement, which I have outlined. Mr Serruys was prepared to consent to the use of the Winstone documents and disclosure because it was not his and he had no interest in contesting that aspect but was happy to leave Mr Winstone to take his own course.

At the hearing of the application Mr Lance Ashworth QC representing Mr Winstone confirmed the agreement already given in correspondence that the statements of case and further information supplied as to the statements of case might be supplied to HMRC. I insert here that under CPR 5.4C a person who is not a party to proceedings may obtain from the court records copies of statements of case. So in that way they may enter the public domain. But Mr Ashworth resisted any further disclosure. He said in effect that the court is zealous to protect the confidentiality of disclosure, that special circumstances must be shown, and that no case for further disclosure to HMRC was made out.

Mr Alexander Hickey appearing for SITA submitted that in order to answer HMRC’s oral questions at the meeting SITA in the person of Mr Chapron in particular, would need to rely on information derived from the Winstone documents and disclosure. I should record that Mr Hickey readily accepted that he should not use anything which happened during the course of the hearing before me to assert that anything not previously public had become public.

There was some dispute as to what tax irregularity HMRC were investigating. Two areas are the alleged payment of cash to employees with the avoidance of income tax and national insurance contributions. Another area is the alleged removal of money from Easco Sheffield in cash.

It is convenient next to refer to the law. CPR 31.22 provides that a party to whom a document has been disclosed may use it only for the purpose of the proceedings in which it was disclosed except where it has been read to or by the court at a public hearing, or where the court gives permission or where there is consent. I was referred to the following cases, which I will take in chronological order.

Crest Holmes plc v Marks [1987] AC 829 involved breach of copyright. As a result of a seizure order in what was the second action between the parties, the claimants obtained documents which suggested that there had been breaches of undertakings given in the first action. They sought permission to use them in connection with contempt proceedings in the first action. The judge refused the application on the ground that it was premature because no contempt proceedings had been instituted, but he was over-turned by the Court of Appeal, which was upheld by the House of Lords. Lord Oliver stated at page 854:

“It has recently been held by Scott J. in Sybron Corporation v. Barclays Bank Plc. [1985] Ch. 299 – and this must, in my judgment, clearly be right – that the implied undertaking applies not merely to the documents discovered themselves but also to information derived from those documents whether it be embodied in a copy or stored in the mind. But the implied undertaking is one which is given to the court ordering discovery and it is clear and is not disputed by the appellants that it can, in appropriate circumstances, be released or modified by the court.”

He stated at page 860:

“I do not, for my part, think that it would be helpful to review these authorities for they are no more than examples and they illustrate no general principle beyond this, that the court will not release or modify the implied undertaking given on discovery save in special circumstances and where the release or modification will not occasion injustice to the person giving discovery.”

He held that the two actions were in substance a single set of proceedings, and that the court’s leave was required was a technicality, and the grant of leave would cause no injustice to the defendants nor ‘detract from the solemnity and importance of the implied undertaking.’

A v A, B v B [2000] 1 FLR 701 concerned the applications of two wives for financial relief against their husbands. The husbands had attempted to conceal their assets, but had later given up the attempt and made admissions. It appeared that there might have been tax fraud and the judge, Charles J, provided to the parties in draft a judgment determining that there should be disclosure to the Revenue. The husbands then undertook to make disclosure themselves. The judge decided that because the issues were of public importance, he should deliver the judgment. He held that whether there should be disclosure by the court and whether leave should be granted to a party to use disclosed documents for another purpose were to be decided in accordance with the same principles – page 711G. He stated that there was a strong public interest that all tax and Revenue penalties should be paid, and in serious cases evaders convicted – page 722C. He said: ‘A factor in this public interest is that taxpayers have a duty to inform the Revenue as to their affairs and cannot remain silent.’ He concluded in paragraph (15) on page 746:

“Indeed, while recognising the point that all the circumstances of each case should be taken into account, and thus the danger of generalisations, I would go further and state that when a court is satisfied that there has been illegal or unlawful conduct and it has no power similar to that of the criminal court, or relevant public authority, to deal with such conduct (and thus subject to the points and qualification made …. below), it should generally report the relevant material to the relevant public authority.”

In Marlwood Commercial Inc v Kozeny [2005] 1 WLR 104, [2004] EWCA Civ 798 the Court of Appeal had to consider whether leave should be given to the claimants to produce documents to the Serious Fraud Office, which had been disclosed by the defendants in actions brought under the court’s long arm jurisdiction concerning investments in Azerbaijan. The SFO had served a notice on the claimants’ solicitors requiring the production. In their defence the defendants had admitted illegality and bribery, and alleged that the claimants were complicit. Permission was granted to the claimants pursuant to CPR 31.22(1)(b). In the course of giving the judgment of the court Rix LJ stated in paragraph 52:

“In such circumstances, and in the absence of any other factors argued to constitute some injustice, it seems to us again that the public interest in the investigation or prosecution of a specific offence of serious or complex fraud should take precedence over the merely general concern of the courts to control the collateral use of compulsorily disclosed documents. If such an offence had been suspected of having been committed in this country, the public interest would be in seeing that it could be investigated here if this is where the relevant documents were. And if the offence had been committed abroad, the same interest in the comity of nations and the same respect which one sovereign has for another, which in the general context of long-arm jurisdiction might operate in favour of the foreign resident, in such a case operate against him. In such circumstances the public interest in proper disclosure in civil litigation does not require that documents necessary to the investigation or prosecution of serious fraud should be unavailable. Moreover, as Moore-Bick J reasoned below, the court’s exceptional permission for relaxing the rule against collateral use in cases of serious permission for relaxing the rule against collateral use in cases of serious fraud in the international context does not give cause for thinking that proper disclosure in the general run of cases will be undermined.”

Hellard & Goldfarb v Money & Robbins [2008] EWHC 2275 is a further example of the application of the principle stated in Crest Holmes v Marks that for permission to be given there must be special circumstances, and the release must not occasion injustice to the person giving the disclosure.

As I have stated the position of the claimants advanced by Mr Hickey is that the claimants must be free to refer to the disclosed or seized material in order to be able to answer such questions as HMRC put to them at the meeting (and thereafter), while Mr Ashworth submitted that no sufficient case was made out and the disclosure sought could result in injustice to Mr Winstone. With that in mind, the following features of the situation are of particular importance:

It is apparent from the cases which I have cited that the court should not give permission to use or disclose information or documents obtained from another party without a careful examination of the circumstances and need. In short, the disclosure must be properly justified. With that in mind I do not think that it is necessary at this stage to grant permission for the release of any documents to HMRC. HMRC are not requesting any at this point. When they ask, the request can be put to the defendants who can consider whether to consent to disclosure or require the claimants to seek the permission of the court.

However, I do not think that SITA, probably in the person of Mr Chapron, should be prevented from answering such questions as HMRC may put at this stage and to use such knowledge as they have, whether it is covered by the statements of case or it is to be found only in the Winstone disclosure or documents. I bear in mind that HMRC will ask questions which are relevant to tax. If some documents are irrelevant to tax, Mr Chapron will not be asked questions whose answers depend on them. That is the answer to Mr Ashworth’s point that the disclosure sought by Mr Hickey at the present hearing was too wide. So I do not think that there is any need to cut down on the documents which Mr Hickey sought to include in an order at this stage. In my judgment an order to this effect deals in a practical and economic way with the present situation. It will not do any harm to the general principle as to the confidentiality of disclosed documents. It will not do injustice to Mr Winstone. I have stated how Mr Ashworth put his case as to that. HMRC are aware that SITA’s actions are defended and that their allegations are denied. They will have Mr Winstone’s defence, where his case as to what occurred is set out. If HMRC decide that Mr Winstone should face an enquiry by HMRC, as Mr Ashworth in effect accepted, that is his misfortune, but it is not injustice.

Mr Hickey submitted in the alternative that some of the documents seized under the order of 20 October 2008 were in any event the property of SITA MR Sheffield Limited, and so no permission was required. It is the claimants’ case that these documents recorded improper transactions, whereas it is Mr Winstone’s case that they are records of proper transactions. The latter is consistent with their being the documents of the company, the former at least arguably not. This was raised in the evidence but was dealt with only briefly in submissions. I do not think that it would be appropriate at this point to make a finding as to the ownership of the documents.