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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Bilta (UK) Ltd v Royal Bank Of Scotland Plc & Anor [2017] EWHC 3535 (Ch) (20 December 2017) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2017/3535.html Cite as: [2018] WLR(D) 33, [2017] EWHC 3535 (Ch) |
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CHANCERY DIVISION
FINANCIAL LIST
Rolls Building Royal Courts of Justice |
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B e f o r e :
B E T W E E N :
____________________
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Claimants | |
- and - | ||
(1) ROYAL BANK OF SCOTLAND PLC (2) MERCURIA ENERGY EUROPE TRADING LIMITED |
Respondents | |
- and - |
____________________
MR JOHN WARDELL QC and MR MICHAEL RYAN (instructed by Pinsent Masons LLP) appeared on behalf of the Respondents.
____________________
Crown Copyright ©
SIR GEOFFREY VOS, CHANCELLOR OF THE HIGH COURT:
INTRODUCTION:
"The documents created after 29th March 2012 during the course of the investigation that led to the report by Pinsent Masons LLP on behalf of RBS to the Commissioners for Her Majesty's Revenue and Customs ['HMRC'] dated 28th January 2014 [the 'PM report'] and any documents created after 28th January 2014 that formed part of that investigation."
I shall call them the "documents." They include some 29 transcripts of interviews with key RBS employees and ex-employees which I shall call the "interviews."
"(a) litigation must be in progress or in contemplation;
(b) the communications must have been made for the sole or dominant purpose of conducting that litigation;
(c) the litigation must be adversarial, not investigative or inquisitorial."
FACTUAL BACKGROUND
"Further to our meeting ... where we discussed the extended verification of your transactions in relation to the spot trade of EUAs ... in 2009 ... [we] are writing to you to confirm the following; the amount of input tax that we currently estimate to be at risk is £89,531,539.56. This is not a criminal investigation and we are not presently alleging dishonesty, rather, we are seeking to establish any culpability in respect of all the parties in the supply chain. There is no predetermined outcome to these enquiries and any measures subsequently applied by HMRC to RBS will be dependent on the result. Please be aware that if appropriate, penalties could apply ..."
"Something to note for the open issues document – HMRC now estimate that we can expect a decision on disallowance of the Sempra emissions trading input tax around the start of September. Although HMRC don't rule out further questions or requests for documents, it would appear they think they have enough information to proceed ..."
"[We] have now completed the submission of the facts on Sempra Energy Europe's trade in carbon credit allowances. The submission will, first, be considered via HMRC's governance process. If that process confirms that there are grounds to deny any of the input tax claimed, then I will contact you again to confirm what those grounds are and to invite your comments before any decision is made ..."
"As you may remember, we represent a number of companies in connection with HMRC's MTIC investigations into EUA trading during 2009. We are now starting to see HMRC conclude their investigations and take formal steps to deny input tax. By 'formal' I mean that HMRC have issued an appealable decision and we are into the 'internal review'/tribunal appeal process ... would you find it useful to have a chat about your own case and where it is at the moment."
"Without telling me what the letter will say, Brian [Mr Goode] suggested it would be a good idea if a meeting could be arranged very quickly to discuss the letter and what is to happen next. He also spoke about HMRC running up against a deadline of October [2012] which I assume must be a reference to assessment time limits ..."
"The European Court of Justice stated that where a taxable person knew or should have known that it was participating in a transaction connected with fraudulent evasion of VAT, that taxable person's right to deduct income tax should be refused ..."
and various authorities applying the Kittel principle. The letter then analysed (over some eight pages) the information that RBS had gathered and provided to HMRC in the context of the Kittel principle, before concluding as follows:
"41. HMRC view: Following consideration of all the above points, HMRC's view is that we have sufficient grounds to deny RBS £86,247,876 of input tax on the basis that they knew or should have known that their transactions were connected with fraud. This represents the input tax claimed on purchases from 08.06.09 onwards. This is from when RBS SEE knew specifically of VAT fraud in the carbon credit market ...
"43. If a decision to deny is made at a later date, HMRC will, due to the periods concerned, have to consider the matter of penalties for inaccuracies as set out in Schedule 24 of the Finance Act 2007. However, we wish to receive your views on whether input tax should be denied before the issue of penalties is considered (if appropriate).
"44. [We] would welcome your reply to this letter. Please include any further information that you wish [us] to consider ... If you wish to meet and discuss the issues raised above, please contact [us] to arrange a mutually convenient date.
"45. If HMRC remain of the view that any input tax should be denied following any reply and/or meeting with RBS, you will receive a further letter giving an appealable decision and you would have 30 days to request a review or appeal this."
"It never rains but it pours! HMRC are accusing Sempra of knowingly or otherwise assisting third parties with VAT fraud back in 2009 in connection with trading in carbon credits. Given that this goes outside my usual tax dispute, I would appreciate some assistance from Group Litigation."
"Any penalty is based on the taxable person's conduct so we cannot determine this until (a) we have made a decision to assess and (b) decided whether the behaviour giving rise to the assessment falls into the category of deliberate or careless ..."
"HMRC will need to raise an assessment to protect its position in late September 2012 ... the assessment will be made solely to protect HMRC's position. This will in no way close the door on further discussions and we wish to give full consideration to your written response to our letter of 29th March 2012 (the HMRC letter)."
"The purpose of this document is to set out the progress made in the investigation of matters surrounding certain carbon credit transactions entered into by RBS Sempra in the period 8 June 2009 to 31 July 2009. This document is a status update on the progress of the investigation ... the investigation started in April 2012 and the Bank's final report will be issued in January 2014. The purpose of the investigation is to gather and review the available evidence in order to analyse whether, based on the information available to the business at the time, the business should have concluded that the only reasonable explanation for the circumstances of individual trades was their connection with actual fraud (not a risk of fraud) and to prepare a report in response to HMRC's letter dated 29 March 2012 [the HMRC letter] ... the work product of investigation is privileged ..."
"Pinsent Masons ... have been instructed by [RBS] to assist with an investigation into the factual circumstances surrounding the onboarding of and trading relationship with ..." five emissions trading counterparties.
That section concluded by saying:
"[RBS] does not waive any legal professional privilege in providing this report to [HMRC]."
"In respect of the investigations undertaken by your client in relation to the [HMRC] investigation, please confirm the basis on which it was undertaken. In particular, was the process voluntary or was it subject to any duties or rules?"
"The investigation was undertaken in order to be able to provide HMRC with a full detailed account of the relevant facts. VAT is a self-assessed tax and tax payers are under a general obligation to provide accurate information to the HMRC in respect of it. Further, the investigation was undertaken with litigation (by way of an appeal to the tax chamber of the First Tier Tribunal) in contemplation and, as such, was undertaken in such a manner so as to ensure that our client would be in a position to meet the disclosure obligations ..."
"(1) Within 14 days of the order, RBS file and serve a supplemental disclosure statement listing individually the documents within CPR 31.6 created after 29th March 2012 during the course of the investigation that led to the PM report and any documents created after the PM report that formed part of the same investigation.
"(2) Within 14 days of the order, RBS provide to the claimants copies of the documents listed in its supplemental disclosure statement.
"(3) RBS pay the claimants' costs of the application summarily assessed."
THE EVIDENCE ON THIS APPLICATION
"I had no doubt, having read the HMRC letter, that HMRC would not be dissuaded from their view that [RBS] should be denied its entitlement to input tax recovery on the transactions at issue."
"...by way of update, HMRC are seeking to recover approximately £86 million of input tax (VAT) plus interest claimed by RBS in respect of carbon credits' trading carried out by RBS Sempra in 2009. It is alleged that RBS Sempra knew of widespread VAT (missing trader) fraud in the carbon credit market and specifically had knowledge that various counterparties it traded with were involved in VAT fraud. HMRC also wish to impose penalties upon RBS which could amount to 100 per cent of the amount recovered. We are in the process of appointing external legal counsel to advise the Bank on its position with regard to the claim by HMRC. We shall update you further once we have their initial views."
Mr Shah has exhibited a schedule of the types of what he claims to be privileged documents that are concerned.
"It was my opinion that HMRC had already reached its decision to deny input tax recovery."
This opinion was based on his knowledge of HMRC's investigations into other participants in the EUA market, upon his experience that HMRC would not make such a serious accusation against a publicly owned bank unless it thought there was sufficient evidence to support it and upon his experience that formal representations by the tax payer only rarely dissuade HMRC from issuing a decision based on its original view.
RBS'S CODES OF PRACTICE
(1) At p.1 under the heading "Risks addressed by the standard" as follows:
"Reputational risk: the group's reputation with authorities, customers or the wider public is damaged by activities that lead to incorrect payment or receipt of taxation."
(2) At p.4 the standard said it applied to:
"All tax teams in every part of the business and every part of the group, all people with any role in transactions for the group or for customers in every part of the group, all people involved in recording or maintaining the group's financial data in every part of our business in every part of the group."
(3) At p.3 the standard said this under the heading "Controls":
"Tax risk management ... all communications with tax authorities must be conducted on the basis of openness, transparency and full disclosure. Contact with tax authorities must only be via the relevant tax team in the group except where external consultants are used rather than in-house tax staff."
(4) At p.3 the standard stated:
"UK business areas must refer to the UK tax procedures mandatory requirements paper for further guidance."
"Principles: the group will comply with the spirit as well as the letter of tax law discerning and following the intentions of Parliament. This will be achieved by ... maintaining a transparent relationship with the tax authorities ... relationships with tax authorities should be transparent and constructive based on mutual trust wherever possible and should include the following:
- Engaging in a cooperative, supportive and professional manner in all interactions.
- Working collaboratively to achieve early resolution and hence certainty."
THE LAW AS TO WHETHER DOCUMENTS ARE CREATED FOR THE SOLE OR DOMINANT PURPOSE OF CONDUCTING LITIGATION
"Dual Purpose Documents: Where a communication has been made for two or more purposes it is necessary to identify the dominant purpose. It is not sufficient if the relevant litigation purposes are merely secondary or even an equal purpose. When faced with the difficulty of deciding between two apparent purposes courts have sometimes concluded that two apparent purposes are merely inseparable parts of a single purpose and then just examined that overarching purpose ... at base the question of dominant purpose is one of fact, hence previous decisions are not particularly helpful except as exemplifying various techniques of analysis ..."
"What, then, was the purpose of the reports? The learned judge found a duality of purpose because, he said, the insurers wanted not only to obtain the advice of their solicitors, but also wanted to ascertain the cause of the fire. Now, for my part, I find these two quite inseparable. The insurers were not seeking the cause of the fire as a matter of academic interest in spontaneous combustion. Their purpose in instigating the enquiries can only be determined by asking why they needed to find out the cause of the fire. And the only reason that can be ascribed to them is that of ascertaining whether, as they suspected, it had been fraudulently started by the insured. It was entirely clear that, if the claim was persisted in and if it was resisted, litigation would inevitably follow. The claim had been made and there was no indication that it was not going to be pressed, particularly after Mr MR's acquittal. It is, as it seems to me, entirely unrealistic to attribute to the insurers an intention to make up their minds independently of the advice, which they received from their solicitors, that the claim should or should not be resisted. Whether they paid or not depended on the legal advice which they received, and the reports were prepared in order to enable that advice to be given. The advice given would necessarily determine their decision and would also necessarily determine whether the anticipated litigation would or would not take place.
... [The judge] seems ... to have been of the opinion that [Waugh v British Railways Board [1980] AC 520] established that it was only if the documents were brought into existence for the dominant purpose.
The learned judge (I have already quoted this passage from his judgment) said ([1983] BCLC 137 at 148):
'In my view, the reports were commissioned for two purposes: (a) to enable Phoenix to make up its mind about whether to resist the insurance claim on the ground that the fire was or was probably caused by the insured and (b) to place evidence of the cause of the fire in the hands of the solicitors if the reports should suggest with some probability that the fire was caused by the insured.'
He seems here, as I read his judgment, at this point to have been of the opinion that Waugh's case established that it was only if the documents were brought into existence for the dominant purpose of actually being used as evidence in the anticipated proceedings that privilege could attach and that the purpose of taking advice on whether or not to litigate (which is, in substance, what the decision to resist the claim amounted to) was some separate purpose which did not qualify for privilege. That, in my judgment, is to confine litigation privilege within too narrow bounds and it reproduces what I believe to be the fallacy inherent in the note in the Supreme Court Practice to which I have referred. No doubt the purpose was 'dual' in the sense that the documents might well serve both to inform the solicitors and as proofs of evidence if proceedings materialised. But, in my judgment, the learned judge failed to appreciate that the former purpose was itself one which would cause the privilege to attach."
"It is possible to distil the following propositions from the authorities on challenges to claims to privilege:-
(1) The burden of proof is on the party claiming privilege to establish it: see Matthews & Malek on Disclosure (2007) 11-46, and paragraph [50] above. A claim for privilege is an unusual claim in the sense that the party claiming privilege and that party's legal advisers are, subject to the power of the court to inspect the documents, the judges in their or their own client's cause. Because of this, the court must be particularly careful to consider how the claim for privilege is made out and affidavits should be as specific as possible without making disclosure of the very matters that the claim for privilege is designed to protect: Bank Austria Akt v Price Waterhouse; Sumitomo Corp v Credit Lyonnais Rouse Ltd (per Andrew Smith J).
(2) An assertion of privilege and a statement of the purpose of the communication over which privilege is claimed in an affidavit are not determinative and are evidence of a fact which may require to be independently proved: Re Highgrade Traders Ltd; National Westminster Bank plc v Rabobank Nederland.
(3) It is, however, difficult to go behind an affidavit of documents at an interlocutory stage of proceedings. The affidavit is conclusive unless it is reasonably certain from:
(a) the statements of the party making it that he has erroneously represented or has misconceived the character of the documents in respect of which privilege is claimed: Frankenstein v Gavin's House to House Cycle Cleaning and Insurance Co, per Lord Esher MR and Chitty LJ; Lask v Gloucester Health Authority.
(b) the evidence of the person who or entity which directed the creation of the communications or documents over which privilege is claimed that the affidavit is incorrect: Neilson v Laugharane (the Chief Constable's letter), Lask v Gloucester HA (the NHS Circular), and see Frankenstein v Gavin's House to House Cycle Cleaning and Insurance Co, per A L Smith LJ.
(c) the other evidence before the court that the affidavit is incorrect or incomplete on the material points: Jones v Montivedeo Gas Co; Birmingham and Midland Motor Omnibus Co v London and North West Railway Co; National Westminster Bank plc v Rabobank Nederland.
(4) Where the court is not satisfied on the basis of the affidavit and the other evidence before it that the right to withhold inspection is established, there are four options open to it [including the documents or ordering further affidavits or cross-examination]."
"59. In this context, I was ... to a helpful decision of the Federal Court of Australia, Bailey v Beagle Management Pty [2001] FCA 185, in which the court distinguished between communications that were made 'without prejudice' and communications subject to litigation privilege. The judge, Goldberg J ... made these observations at [11]:
'... Properly characterised, it is not correct to say that a document is brought into existence for the purpose of conduct of litigation, and so is privileged from production, if it is brought into existence, albeit to try and settle the litigation, but for the purpose of being shown to the other side,'
60. I respectfully agree with and adopt that analysis, which must apply with equal force in a situation such as this, where litigation has not commenced. …
61. However, I reject ENRC's submission that by parity of reasoning, litigation privilege extends to third party documents created in order to obtain legal advice as to how best to avoid contemplated litigation (even if that entails seeking to settle the dispute before proceedings are issued). There is no authority cited in support of that proposition, and it self-evidently contradicts the underlying rationale for the privilege. Equipping yourself with evidence to enable you to conduct your defence free from the risk that your opponent will discover how you are preparing yourself, and to decide what evidence you are planning to call if the case goes to court, and what tactics to employ, is something entirely different from equipping yourself with evidence that you hope may enable you (or your legal advisers) to persuade him not to commence proceedings against you in the first place. …
170. Moreover, documents created with the specific purpose or intention of showing them to the potential adversary in litigation are not subject to litigation privilege. It does not matter whether the reason why they are going to be shown to the adversary is to persuade him to settle, or not to bring proceedings in the first place. The justification for the privilege does not exist in such circumstances and the Court must take care not to widen its boundaries beyond what is permissible. There is a distinction between that scenario, and creating privileged documents for the dominant purpose of defending oneself and obtaining advice pertaining to the defence to anticipated legal proceedings, whilst also having it in mind that you might waive privilege over those documents in future either generically or for a limited purpose. That was not this case, despite the attempt by ENRC to characterise it as such at a late stage of its dialogue with the SFO.
171. The information generated in respect of the African investigation, and all but a fraction of the information generated in respect of the pre-existing Kazakh investigation, was something that ENRC intended to be shared with the SFO before and at the time when the relevant documents were created, and the dominant purpose for which those documents were created was to enable reports to be prepared to show to the SFO and presentations to be made to the SFO, at a time when the relationship was collaborative rather than adversarial. The contemporaneous documentary evidence in this regard is overwhelming. The commitment to transparency and sharing of information was made in the knowledge and expectation that the SFO would want to satisfy itself that the reports were accurate and thorough, and carry out its own audit. If the SFO called for the underlying material as part of the audit, ENRC and its advisers knew that ENRC could not refuse. Therefore, no legitimate distinction can be drawn between the reports and the underlying materials in terms of the purpose for which they were created."
THE ARGUMENTS ADVANCED BY THE PARTIES:
WERE THE DOCUMENTS AND/OR INTERVIEWS CREATED FOR THE SOLE OR DOMINANT PURPOSE OF CONDUCTING LITIGATION?
(After a short time)
Transcribed by Opus 2 International Ltd. (Incorporating Beverley F. Nunnery & Co.) Official Court Reporters and Audio Transcribers 5 New Street Square, London EC4A 3BF Tel: 020 7831 5627 Fax: 020 7831 7737 civil@opus2.digital __________ This transcript has been approved by the Judge |