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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2015/29.html
Cite as: [2015] STC 931, [2015] WLR 3911, [2015] 2 BCLC 586, [2015] 1 WLR 3911, [2015] WLR(D) 33, [2015] BCC 317, [2015] BPIR 327, [2015] STI 248, [2015] EWCA Civ 29, [2015] BVC 8

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Neutral Citation Number: [2015] EWCA Civ 29
Case No: A2/2014/1191

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR DAVID DONALDSON QC SITTING AS A DEPUTY JUDGE OF THE HIGH COURT
No. 4093 of 2013

Royal Courts of Justice
Strand, London, WC2A 2LL
28th January 2015

B e f o r e :

LORD JUSTICE LONGMORE
LORD JUSTICE PATTEN
and
LORD JUSTICE VOS

____________________

Between:
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
Petitioners/
Appellants
- and -
CHANGTEL SOLUTIONS UK LIMITED (formerly ENTA TECHNOLOGIES LIMITED)
Respondent/
Respondent

____________________


(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Ms Sarah Harman (instructed by the Solicitor to HMRC) for HMRC
Ms Tina Kyriakides (instructed by Dass Solicitors) for the Respondent
Hearing date: 16th December 2014

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lord Justice Vos:

  1. This appeal raises a simple but important point, which is of particular significance to the Commissioners for Her Majesty's Revenue and Customs ("HMRC"), since they frequently seek to enforce tax assessments by using the winding-up procedure. The point is whether, when there is both (i) an appeal against a VAT assessment pending in the tax tribunal, and (ii) a winding-up petition pending in the Companies court, the tax tribunal or the Companies court is the appropriate forum to determine whether the petition debt is disputed in good faith on substantial grounds, or, in other words, whether the appeal has a real as opposed to a fanciful or frivolous prospect of success. The judge relied upon the introduction in April 2009 of Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009/273 ("rule 8(3)(c)") which gives the tax tribunal an express power to strike out an appeal where "the Tribunal considers that there is no reasonable prospect of the appellant's case, or part of it, succeeding". On the basis of rule 8(3)(c), he decided that the Companies court should defer to the tax tribunal to decide whether the petition debt was disputed in good faith on substantial grounds.
  2. This question arises in the context of a petition presented by HMRC against Enta Technologies Limited (which has recently changed its name to Changtel Solutions UK Limited ("Enta" or the "company")) in respect of 15 VAT assessments relating to some £15.5 million including interest. HMRC issued a total of 36 VAT assessments against the company between 4th February 2010 and 11th March 2013, all but two of which are unpaid and under appeal to the First-tier Tribunal (Tax and Chancery Chamber) (the "FTT" or the "tax tribunal").
  3. If the judge was wrong to defer to the tax tribunal, the question arises as to whether he was right to conclude that "in common with the tribunal judge [who allowed an application to extend time for appealing the VAT assessments] I did not form the view that any of the non-MTIC appeals had no real prospect of success". The judge referred to "non-MTIC" appeals, because it was accepted for the purposes of the hearing before him that the company had a reasonable prospect of success in relation to its ongoing appeals against the 24 VAT assessments that related to an alleged Missing Trader Intra-Community ("MTIC") fraud of which the company is said to have known (7 of which were included in the petition).
  4. This appeal has focussed on 6 VAT assessments that were comprised in the petition in respect of sums totalling £2,537,172. These 6 assessments related to a similar set of factual circumstances as the MTIC assessments, but were put by HMRC on a different basis. HMRC raised these assessments for each of the six months between July and December 2012 on the basis that certain goods allegedly exported by the company had not in fact left the UK as had been claimed by the company. I shall refer to these 6 assessments as the "dispatch assessments". It was common ground for the purposes of this appeal that HMRC could only succeed if it could show that its petition was well-founded in respect of the dispatch assessments.
  5. In essence, HMRC contend that the company has engaged in a pattern of activity since 2006 whereby it has purportedly entered into a small number of extraordinary high value export transactions each month just sufficient to reduce to a minimal level what would otherwise have been a substantial VAT liability to HMRC arising from its normal trading. In reality, however, HMRC contends that these export transactions never took place, and were the essential element in a fraud perpetrated by the company on HMRC. HMRC submits that this fraud was obvious on the material already available to the Companies court and should have resulted in the company being wound up notwithstanding the pending appeals in the tax tribunal against the dispatch assessments.
  6. The company's position was that the judge was right to defer to the decision of the tax tribunal. But, even if he was wrong on that point, the judge was entitled, as a matter of discretion, to take into account that the tax tribunal had decided to extend time for the appeal from the dispatch assessments, which involved a finding that those appeals were "not hopeless". On the facts, the company submits that it has a reasonable prospect of success on the appeals, so that the winding-up court was right to decide that the debts represented by the dispatch assessments were disputed in good faith on substantial grounds.
  7. Chronological background

  8. The company was incorporated as MS 136 Limited on 27th July 1990. Until the events that have led to these proceedings, the company traded as part of the Enta group of companies as a distributor of IT components and services; it had a significant business with a turnover of over £100 million per annum and some 125 employees. As will appear, that has all now changed dramatically.
  9. On 11th August 2012, HMRC wrote to the company in relation to its July and August 2012 VAT returns reclaiming VAT for purported export transactions, which later became the subject of the first and second of the 6 dispatch assessments. The letter queried specific aspects of the documentation that the company had provided in respect of these export transactions. HMRC contend that this letter put the company on notice that (i) they did not accept that a purported warehouse at Unit 16, Curran Building, Curran Business Park, Cardiff (the "Cardiff warehouse") from which the goods had allegedly been dispatched was a valid existing address; (ii) the Valencia address of Bodegas International Logistics International SL (to which the August 2012 export had allegedly taken place) (the "Valencia warehouse") also did not exist on information received from the Spanish tax authorities; (iii) HMRC required copies of ferry/channel tunnel tickets for the vehicles used to deliver the goods; and (iv) HMRC would not accept any subsequent CMRs including the addresses of the Cardiff or Valencia warehouses.
  10. On 14th August 2012, Ms Dragita Price, the stock controller of "Entatech" (a company related to Enta) emailed certain documents to HMRC, saying that "there are no ferry tickets as goods were already in Europe".
  11. By a letter dated 17th September 2012 (but probably sent on 17th August 2012), the company sent HMRC a further copy of a CMR dated 3rd August 2012 relating to the export sale in respect of which VAT was reclaimed in the company's July 2012 return. On 26th August 2012, HMRC replied to the company reiterating what they had previously said.
  12. On 16th October 2012, HMRC wrote again to the company this time in relation to its VAT returns for the monthly periods between July and October 2012. HMRC reiterated that they would not accept the Valencia warehouse as a receiving address, and pointed out that that address had once more appeared in the company's evidence supporting its October 2012 return. They also pointed to a number of other discrepancies in the documentation that had been provided including that (a) the registration numbers for the vehicles supposedly making the export deliveries in fact related to cars that were too small to carry the goods; (b) the timings of the journeys across the channel did not leave enough time for the vehicles to have reached and returned from the alleged destinations, and (c) the alleged freight forwarder, BIL SARL, and its alleged director, Zavier Pascal Blanc did not exist in France. HMRC said they would not accept future transactions using these parameters.
  13. On 25th March 2013, HMRC wrote to the company warning that if payment were not made in respect of 15 VAT assessments and interest in the sum of £15,589,167.65 (including the 6 dispatch assessments), they would commence legal proceedings that might result in a petition to wind up the company.
  14. On 28th March 2013, the company issued a notice of appeal against VAT assessments including the dispatch assessments seeking an extension of time in which to lodge the appeal. This was not its first notice of appeal against VAT assessments, but the earlier ones are not directly relevant to the issues before us.
  15. On 18th April 2013, HMRC presented their first petition to wind up the company in respect of the debts mentioned in their letter dated 25th March 2013 (including the dispatch assessments). As the judge recorded, section 73(9) of the Value Added Tax Act 1994 ("VATA") makes the amount of an assessment a debt due unless it is cancelled or reduced on appeal by the tax tribunal.
  16. On 6th June 2013, HMRC's first petition was struck out by Birss J on the grounds that its continuation was an abuse of the process of the court, since HMRC had advertised it in breach of the parties' agreement not to do so.
  17. On 7th June 2013, HMRC presented their second winding-up petition (the "petition") against the company in respect of the debts mentioned in their letter dated 25th March 2013 (including the dispatch assessments). This is the petition which is the subject of this appeal. On 19th June 2013, the company issued an application to restrain advertisement of and/or to strike out this petition.
  18. On 20th June 2013, the company paid an assessment dated May 2012 for £485,178 and an assessment dated June 2012 for £469,368 and its appeal in respect of these assessments was later withdrawn. These assessments were not comprised in the dispatch assessments which still remain outstanding.
  19. On 22nd July 2013, Mr John Jarvis QC, sitting as a deputy judge of the High Court, adjourned the company's application until after the decision of the FTT on the company's application to extend time for appealing the assessments, saying that if the application were granted, the parties should have liberty to restore the company's application and the petition for hearing.
  20. On 20th August 2013 Tribunal Judge Kevin Poole undertook a one-day hearing in the FTT to consider the company's application to extend time to appeal the outstanding VAT assessments in respect of which the petition had been presented. HMRC filed evidence and submitted that the company's appeal had no real prospect of success. Judge Poole indicated orally that he would grant permission to appeal out of time saying "I am not persuaded that the appeals are hopeless and it is only if I were so [persuaded] that I would refuse an extension of time on that basis".
  21. On 12th September 2013, Judge Poole released the FTT's decision granting Enta permission to appeal out of time under section 83G(6) of VATA against the outstanding VAT assessments in respect of which the petition had been presented. This decision was not appealed by HMRC. Judge Poole ordered that 7 of the assessments with which he was concerned amounting to some £8.28 million relating to the alleged MTIC fraud should be stayed until the final determination of the company's earlier appeal. That appeal has now been heard by the FTT, though judgment has been reserved and is not expected for some months (the exact likely timing is disputed between the parties). Judge Poole also gave directions for further hearing of the appeals against the dispatch assessments and made a separate directions order released on 12th September 2013 under appeal number TC/2013/03344. The parties also disagree as to when those appeals are likely to be resolved. The company submits that they will be heard in the FTT by April 2015, but HMRC submits it may not be for a year.
  22. On 10th January 2014, the company changed its name from Enta to Changtel Solutions UK Limited. On 23rd, 24th and 27th January 2014, the hearing of both the company's application and the petition took place in the Companies court before Mr David Donaldson QC.
  23. On 19th February 2014, HMRC's counsel wrote to the judge, copied to the company's lawyers, saying that the hearing might have proceeded on a false premise as to the company's present activities and position, in that HMRC had become aware after the hearing of a news report dated 7th February 2014 saying that the company had become dormant several months before and its business had been hived off, with the company's remaining business having been sold on 10th January 2014.
  24. On 21st March 2014, the judge granted the company an injunction restraining advertisement of HMRC's petition, dismissed the petition and ordered HMRC to pay the company's costs of the application and the petition (both subject to a stay until after any judgment on any appeal). The judge granted HMRC permission to appeal only on the question of deference to the tax tribunal (referred to in paragraphs 1-14 of his judgment).
  25. The parties were agreed before us that new evidence should be admitted. For HMRC, that evidence was contained in the 4th statement of Mr David Hancox dated 11th April 2014. In the briefest of outline, Mr Hancox alleged that the company had misled the tax tribunal and the judge into thinking that the company was solvent and in a substantial way of business, when in fact it had been running down its business since mid-2013 and when, by the date of the hearing before the judge, the company's business had been hived off and its shares had been sold. Mr Hancox also made a 5th statement to which no reference was made.
  26. On 31st July 2014, Rimer LJ granted permission to appeal on the remaining grounds refused by the judge, and ordered that the appeal should be expedited.
  27. Mr Jason Tsai, the company's director, made two statements in response to Mr Hancox's new evidence. They were dated 19th September 2014 and 14th November 2014. In essence, Mr Tsai accepted that a series of statements made to the judge about the substantial nature of the company's business in January 2014 were false. He apologised. He also accepted that he had not told the judge that the company had sold its assets on 24th December 2013, and had itself been sold on 10th January 2014. He apologised that "at the [h]earing, financial information was presented regarding projected figures which were not accurate". He maintained that the company was not dormant and was solvent, and had turned over amounts ranging from zero to £174,890 per month between January and August 2014. We were taken to the company's unaudited management accounts for 2013 exhibited to Mr Tsai's second statement, which purported to show net assets of some £1.9 million as at December 2013, but I formed the view that these accounts raised many more questions than they answered.
  28. The judge's decision

  29. The judge's reserved judgment was concise, probably because he regarded his own first point, which he mentioned to the parties at the start of the argument and ended up as his central thesis, as conclusive. He dealt with it at paragraphs 10-14 of his judgment, where he began by saying that it was well-established that the winding-up jurisdiction was not to be used to resolve genuine and real disputes as to the existence of a debt, so that a petition should be dismissed as an abuse of process and its advertisement restrained by injunction if the debt relied upon by the petitioner is bona fide disputed on substantial grounds. He referred to Re The Arena Corporation Ltd [2004] BIPR 415 at paragraph 53, where Sir Andrew Morritt V-C had expressed the view that this test was, for all practical purposes, synonymous with a test of whether there was a real as opposed to a frivolous chance of success on appeal.
  30. The judge commented that in tax cases the picture was complicated by the fact that the mere existence of the assessment created a statutory debt. He said that courts have recognised that, only in an exceptional case, could they reject sworn oral evidence on behalf of the company untested by cross-examination (Arena supra at paragraphs 88 and 91).
  31. The judge then considered the introduction in April 2009 of the new power for the tax tribunal to strike out an appeal as possessing no arguable merit, before expressing the view that "[n]ow that it has been invested with this power, the appropriate forum to determine whether the appeal has real prospects of success must be the tribunal itself". He said that the winding-up court should refuse itself to adjudicate on the prospective merits of the appeal and leave that question to be dealt with by the tax tribunal. He gave the following two reasons:-
  32. i) Adjudication on the correctness of the tax assessment has been entrusted by Parliament to the specialist tribunal (cf Autologic Holdings plc v. IRC [2006] 1 AC 118); and

    ii) The evaluation of the appeal's merits involves a prognosis as to the possible outcome of the tax tribunal's adjudication.

  33. The judge thought that it would be wrong for a petitioner even to present, let alone advertise, a petition, before applying to the tribunal to strike out an existing appeal under rule 8(3)(c) or staying it in the meantime. Whilst he saw no reason why this would lead to serious delay to the petition, he suggested that the power of the winding-up court to proceed differently in a truly exceptional case should not be ruled out.
  34. The judge said that the need for deference by the winding-up court was compounded in the present case, where the tribunal had already ruled that the appeals were not "hopeless", or, in other words, not devoid of reasonable or real prospects of success, and where the tribunal judge had made clear that, absent such prospects, he would not have granted the extension of time. Any attempt to revisit the tax judge's ruling should be done by an application to the tribunal, rather than by asking the winding-up court to second-guess its decision.
  35. For these reasons alone, the judge decided that the petition should be dismissed as an abuse of process and/or as a matter of discretion and the advertisement restrained.
  36. Thereafter, the judge recorded how he had suggested that it was, in effect, a waste of time to examine the evidence underlying the assessments and the tax appeals, but that course had been resisted by HMRC. He dealt briefly at paragraph 19 with the dispatch assessments, which are the only ones that now remain in issue for the purposes of this appeal. Having set out the competing positions of the parties he made two points as follows:-
  37. i) "Enta is entitled to stress that [the non-documentary material] is untested … by cross-examination, but in its totality the HMRC evidence on this point might well be regarded by the tribunal as prima facie formidable".

    ii) The Court of Justice of the European Union (CJEU) had decided in R (Teleos plc) v. Customs & Excise Commissioners (Case C-409/04) [2008] QB 600 that a tax authority could not require a supplier who acted in good faith and submitted evidence establishing at first sight a right to be exempted from output tax on an intra-Community sale of goods to account for such tax where that evidence was found to be false without the supplier's involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the supply he was effecting did not lead to his participation in such evasion. In this case, it was open to debate as to what more could properly have been expected of Enta beyond obtaining a copy of an apparently genuine CMR carriage note.

  38. The judge then concluded that, given his primary decision, it was not appropriate to analyse the competing evidence, but that he did not take the view that any of the non-MTIC appeals (including those in respect of the dispatch assessments) had no real prospect of success.
  39. HMRC's grounds of appeal

  40. There are essentially 3 grounds of appeal pursued by HMRC as follows:-
  41. i) The judge was wrong to hold that, after the introduction of rule 8(3)(c), the Companies court should defer to the tax tribunal in cases where the winding-up petition is based on a VAT assessment.

    ii) The judge ought to have decided that the debt in respect of the dispatch assessments on which the petition was based was not disputed in good faith on substantial grounds, or, in other words, that the appeal against the dispatch assessments had no real, as opposed to a frivolous or fanciful, chance of success.

    iii) The hearing was unfair to HMRC in that the judge interrupted too frequently and prevented counsel for HMRC from coherently presenting her submissions.

    Issue 1: Should the Companies court defer to the tax tribunal?

  42. The existing law is unsurprisingly not much in dispute between the parties. Both sides refer to a series of cases that endorse the long-established principle that there is a well-settled rule of practice that a winding-up petition based on a debt that is wholly disputed in good faith on substantial grounds will ordinarily be dismissed (see Mann v. Goldstein [1986] 1 WLR 1091 per Ungoed-Thomas J at pages 1098-9, Arena supra at paragraph 53, HMRC v. Rochdale Drinks Distributors Limited [2011] EWCA Civ 1116 at paragraphs 79-80 per Rimer LJ, and Re SED Essex Limited [2013] EWHC 1583 (Ch) at paragraph 4 per John Randall QC). The question of whether a winding-up order should be made or the petition should, in a particular case, be dismissed, is a matter for the discretion of the Companies court (see section 125(1) of the Insolvency Act 1986 and, for example, Lord Brightman in the Privy Council in Brinds Limited v. Offshore Oil N.L. [1986] 2 BCC 98,916 at page 98,921, and Lord Hoffmann in the Privy Council in Parmalat Capital Finance Limited v. Food Holdings Limited [2009] 1 BCLC 274 at paragraphs 9-11) .
  43. Ms Sarah Harman, counsel for HMRC, submits that the judge's approach was wrong in principle because the decisions for the Companies court and the tax tribunal are different. She also submits that depriving HMRC of the right to petition in respect of tax assessments would have a significant adverse effect on HMRC's ability, in the public interest, to bring to an end the activities of traders intent on defrauding honest taxpayers.
  44. Ms Tina Kyriakides, counsel for the company, relies heavily on the wide discretion in the Companies court to justify the judge's approach. She seeks to distinguish between the discretion that the judge exercised on the one hand, and the guidance that he gave in relation to deferring to the tax tribunal on the other hand. She submits that the judge's decision as to the exercise of his undoubted discretion was neither obviously wrong nor one that no reasonable judge could have reached. She points to the decision of Judge Poole, which she submits was, in substance, almost the same as the issue that faced the judge. Ms Kyriakides then seeks to support the guidance that the judge gave by referring to the House of Lords decision in Autologic supra (per Lord Nicholls at paragraphs 11-15, with whom Lords Steyn and Millett agreed) to the effect that it is an abuse of process to make a claim in court as an indirect way of achieving the same result as could be achieved by appealing to the tax tribunal, which is the route laid down by a statutory scheme. Now that the FTT has the case management powers in rule 8(3)(c), the HMRC should not, submits the company, be entitled or encouraged to by-pass those procedures laid down by Parliament so as to clog up the Companies court.
  45. In my judgment, Ms Kyriakides is right to distinguish between the discretion that the judge exercised and the guidance that he gave. It is sensible, however, to start with the guidance, because if that was wrong, it may have affected the legal premise on which he exercised his discretion.
  46. I have no doubt that the judge was wrong in the guidance that he gave. It is true, as the judge said, that the adjudication on the correctness of a tax assessment has been entrusted by Parliament to a specialist tax tribunal. But that does not mean that the question that the Companies court has to decide is the same, or even substantially the same, as the one that faces the tax tribunal. The presentation of a petition to wind up a trader, which has appealed against a tax assessment, is not an indirect way of winning the appeal. The appeal will remain extant even if the trader is wound up. It is simply that there will be a process of collective execution in place that will allow the liquidator rather than the company's directors to decide whether to pursue the tax appeal. For that reason, the House of Lords' decision in Autologic is not applicable here.
  47. As Ms Kyriakides correctly stressed, the decision for the Companies court both on the company's application to dismiss the petition (and restrain advertisement) and on the petition itself is discretionary. The words used in section 122(1) ("a company may be wound up by the court if …") and in section 125(1) ("[o]n hearing a winding-up petition the court may dismiss it …") make this clear. These discretions, as the parties acknowledge, must be exercised on well-established principles. Those principles concern the appropriateness of making a winding-up order at the particular time in respect of the particular company. They are not always related only to the particular debt upon which a particular petition may be based; they may involve issues as to the solvency of the company generally, and other factors as well.
  48. In dealing with a petition based on a company's inability to pay its debts under section 122(1)(f), the Companies court will, of course, normally focus in England and Wales on the question of whether or not one of the circumstances set out in sub-sections 123(1)(a)(b) and (e) and/or 123(2) has been established so as to deem the company unable to pay its debts. These circumstances are non-payment of a statutory demand, an unsatisfied process of execution, proof of inability to pay debts as they fall due, and proof that the value of a company's assets is less than the amount of its liabilities. But this focus does not mean that the ultimate discretion of the Companies court as to whether or not to dismiss the petition or make a winding-up order is abrogated.
  49. I accept that the substance of the decisions to be reached by the Companies court and the tax tribunal may, in many cases, be similar, but they are not identical because of the difference between the essential nature of the underlying questions at issue. In this case, HMRC sought to rely on the unsatisfactory accounts of the company's trading and of its accounts in support of its petition and the discretion to be exercised in respect of its winding-up.
  50. All that said, I should not be taken as encouraging those that claim to be creditors to present petitions based on disputed debts. This applies as much to petitions in respect of disputed trade debts as it does to those based on tax assessments. It has been repeatedly said in the cases to which I have already referred that the winding-up procedure is not ordinarily the forum in which to determine issues relating to disputed debts, always provided that those debts are disputed in good faith on substantial grounds. Winding-up petitions are not to be used to put improper pressure on alleged debtors.
  51. The judge took the view that the introduction of rule 8(3)(c) in 2009 made all the difference, since it allowed the tax tribunal to strike out an appeal against an assessment on the ground that that there is no reasonable prospect of it succeeding. I do not agree. It seems to me that rule 8(3)(c) is merely a procedural mechanism to allow the tax tribunal to short-cut its previously somewhat lengthy processes. It does not change the substantive jurisdiction of the tax tribunal to decide on the validity of assessments, nor does it change in any way the substantive jurisdiction of the Companies court to decide on whether or not a company should be wound up in the particular circumstances of each case.
  52. The judge was also influenced in what he said by his strong reliance on the fact that Judge Poole had already decided that the appeals against the assessments were not "hopeless". He was, of course, quite right to have regard to that decision, but it does not seem to me that its existence meant that, in a proper case, HMRC could not present a petition. Of course, HMRC had to assume the burden, as it sought to do before the judge and before us, of persuading the court that, in fact, the debts underlying the dispatch assessments were not disputed in good faith on substantial grounds.
  53. In this case, whilst Judge Poole seems to have considered the merits of the appeals, he did not have before him the same evidence as was before the judge. Moreover, he was not considering whether the appeals should be struck out under rule 8(3)(c), but only whether time should be extended for those appeals to be brought. Whilst the judge was right that Judge Poole did consider the likelihood of success, he only reached the global conclusion that the appeals were not "hopeless". He did not give reasons, and it appears that that he was not addressed, as the judge was and as we have been, on the detail of the transactions that were in issue. Thus, in this case in my judgment, the decision that Judge Poole reached was relevant but not conclusive on the two questions of whether (a) the company was unable to pay its debts, and (b) whether as a matter of discretion the petition should be dismissed or the company should be wound up.
  54. Finally, Ms Kyriakides referred in this connection to the very recent decision of the Court of Appeal in Salford Estates (No.2) Limited v. Altomart Limited [2014] EWCA 1575 Civ, where the Chancellor (with whom Longmore and Kitchin LJJ agreed) upheld HH Judge Bird's decision to stay (or dismiss) a petition where the debt on which it was based arose under a contract subject to an arbitration clause, and sections 9(1) and (4) of the Arbitration Act 1996 required the court to stay legal proceedings "in respect of a matter which under the agreement is to be referred to arbitration". At paragraph 26, the Chancellor made clear that section 9 did not apply to a winding-up petition where what was in issue was whether a debt was outstanding and due. In that case, however, the debt fell within the wide ambit of the arbitration clause, and the Chancellor thought it was right as a matter of discretion for the court to stay or dismiss the petition so as to compel the parties to resolve their dispute as to whether, in effect, summary judgment on the debt was appropriate, by their chosen method of dispute resolution rather than requiring the court to investigate whether the debt was disputed in good faith on substantial grounds (paragraphs 40-1). In my judgment, Salford Estates supports the conclusion I have reached. Section 9 did not operate to deprive the Companies court of jurisdiction. But the fact that the parties had agreed an alternative method of dispute resolution was, as a matter of discretion, relevant to whether it was appropriate to allow the petitioner to proceed with a winding-up before having it determined that the debt was due by the method that it had agreed. Likewise, in this case as I have said, the existence of the tax appeal and the decision of Judge Poole were relevant, but not necessarily conclusive, to the judge's decision on the petition.
  55. I turn now to the exercise of the judge's discretion in this case. In my judgment, the view the judge took was significantly affected by his inappropriate view that it was incumbent on the Companies court to defer to the view taken by the tax tribunal. In these circumstances, his whole approach to the exercise of his discretion was flawed and cannot stand. His reluctance even to engage with the prospective merits of the application was dictated by his view that he was obliged to abdicate his discretion to the tax tribunal. It is, therefore, necessary for this court to reconsider whether or not the debt relied upon was disputed in good faith on substantial grounds. It is to that task that I now turn.
  56. HMRC's submissions on whether the debts based on the dispatch assessments were disputed in good faith on substantial grounds

  57. HMRC's central submission is that the transactions to which the dispatch assessments relate either never took place, so that the goods did not exist, or alternatively that goods, which did exist, never left the UK. HMRC submit that the company is obliged to satisfy HMRC that the transactions took place as claimed, and it has failed to do this.
  58. HMRC submit that these transactions took place outside the ordinary run of Enta's business in several particular respects:-
  59. i) They were wholesale transactions relating to large numbers of non-bulky components.

    ii) They were arranged separately by a small number of staff including Mr Tsai, Enta's director.

    iii) The scale of these transactions almost extinguished Enta's VAT liability on its ordinary sales month after month.

    iv) Enta did not buy many goods for its ordinary business from the single supplier (iForce) in relation to these transactions. That supplier was also the supplier for the MTIC assessment transactions.

    v) The transactions included two where the purchasers were unusual and involved in the MTIC transactions, and the sales were arranged back to back in matching amounts within a short time without insurance or the use of any of Enta's warehousing, shipping, export, or accounting structures.

    vi) Payment for the goods was made through intermediaries other than recognised banks.

  60. HMRC relied upon a number of allegedly suspicious features of the transactions which may be briefly summarised as follows:
  61. i) There was doubt as to whether the three dispatch warehouses used in Cardiff, Huddersfield, and Burton-on-Trent actually existed or were operating at the relevant times in late 2012.

    ii) There was doubt about whether the two freight forwarders used, namely Bienvenue International Logistics Sarl or BIL Sarl (a French company), and Camponi Handels UG (a German company), were genuinely engaged in the transactions.

    iii) There was doubt as to whether the Valencia warehouse actually existed, and about whether the other warehouse recipient (Transports Vanderoel NV in Kortenberg, Belgium) had any record of the transactions.

    iv) There was doubt as to whether the vehicles that allegedly carried the consignments could have done so: one was recorded in the police computer as a Skoda car, and one as a BMW X3 car belonging to an apparently unconnected company. Both were too small for the consignments in question. One of the vehicles is recorded in the police computer as an open-backed tipper truck belonging to a tarmac company in Shrewsbury, which its owner claims never to have left the UK.

  62. In oral argument, Ms Harman helpfully took us in detail through the documents relating to the transaction that formed the basis of the July 2012 dispatch assessment. I shall return to this exercise in due course. HMRC submit that Teleos supra does not assist the company because it was given notice that the information it was providing was not acceptable, and took no steps to remedy the position. Accordingly, it cannot say that it took all reasonable steps to avoid involvement in fraud.
  63. The company's submissions on whether the debts based on the dispatch assessments were disputed in good faith on substantial grounds

  64. The company submits that HMRC's approach is inappropriate because it is not the function of the winding-up court to try the dispute, where there is conflicting evidence, except in the most exceptional circumstances, where for example the company's evidence is wholly incredible. The evidence in this case required cross-examination before it could be decided where the truth lay. Ms Kyriakides submitted that this court should not interfere with the judge's discretion to dismiss the petition on the grounds that the debt was disputed in good faith on substantial grounds.
  65. The company says that it has provided HMRC with copy CMRs, which are internationally recognised transit documents, to prove that the goods left the UK. It disputes most, if not all, of HMRC's assertions as to the roles of the warehouses, vehicles and freight forwarders in the transactions. The company queries the quality of HMRC's evidence and says that it has adduced direct evidence which challenges the assertions made.
  66. Issue 2: Were the debts based on the dispatch assessments disputed in good faith on substantial grounds?

  67. I was initially much attracted by the company's argument that the evidence before the judge entitled him to reach the double-negative conclusion that he did, namely that he had "not [formed] the view that [the dispatch assessments] appeals had no real prospect of success". But ultimately, I am satisfied that the judge was wrong on this point. It appears from the transcripts and indeed from his judgment that he was very reluctant to engage with the facts. If he had done so, I think he too would most likely have reached the clear conclusion that the debts in this case that underlie the dispatch assessments are not disputed in good faith on substantial grounds.
  68. To put the matter shortly, the discrepancies that HMRC has highlighted in relation to the supposed export transactions are simply too numerous and too clear to admit of any conclusion other than that the export did not take place as the company contends. There is, moreover, no real issue as to whether the company is implicated in the fraud, because it is the company that has put forward the evidence that, in my judgment, must be regarded as false. The company cannot say it does not know that the goods were not exported in the manner that it claims they were, because it has promulgated documents and evidence that can be shown to be simply unsustainable. In that situation, the principles enunciated in Teleos supra upon which the judge relied cannot avail the company.
  69. In the peculiar and unusual circumstances of this case, it is not clear that Judge Poole had the same level of factual detail argued before him as we have had placed before us. It seems that his conclusion was simply based on the fact that there was conflicting factual evidence which needed to be tried. In normal cases that conclusion would be enough to allow the court to dismiss the petition, but here it is now clear that the purported export transactions did not take place as the company has contended.
  70. I will deal with the facts primarily by reference to the transaction represented by the July 2012 assessment that Ms Harman used as her primary example. The CMR dated 3rd August 2012 produced by the company for that transaction indicated that some 4,320 hard drives and 24,000 USB drives were exported by Enta to Profitrade in Belgium by "own transport", with BIL SARL of Meaux, Paris and of the Cardiff warehouse acting as freight forwarder. The company originally emailed HMRC saying that there were "no ferry tickets as goods were already in Europe" (as I have already said), but ultimately produced a Eurotunnel "confirmation of purchase" dated 6th August 2012 to evidence the export of the goods. This document related to a vehicle registration number PX03HLF, which turns out, according to the police computer (which it is not suggested is itself unreliable), to be a silver Skoda 4-door TDI saloon registered in July 2003 and kept by a Mr Gurpal Singh Singh of Rowley Regis B65 9QA. The Eurotunnel confirmation also shows that the vehicle arrived in Calais at 08.12 on 6th August 2012 and left Calais again at 16.20 the same day.
  71. The company's evidence is from Mr Xavier Pascal Blanc of BIL SARL and Ms Anna Uibo of Estonia, said to be employed by Profitrade. Mr Blanc says that he had informed Mr Tsai by letter dated 9th September 2013 that BIL SARL "had in its possession … vehicle registration number PX03HLF which was a 44 ton tractor unit DAF make 105-510 which was detachable from its trailer and which pulled a 13.6 meter trailer of curtain slide". Mr Blanc also produced a copy of the tenancy agreement for the Cardiff Warehouse, whose landlord was dissolved on 6th December 2011, though Mr Blanc claimed to be unaware of that fact. Mr Blanc's letter of 9th September 2013 said that the Belgium warehouse existed, but that when BIL SARL's vehicle arrived it was "ushered around the corner to a different warehouse and unloaded there".
  72. The report from the French tax authorities produced by Mr Hancox shows that BIL SARL is not entered in the Commercial and Company Register in France, and that Xavier Pascal Blanc was a 16 year old child. BIL SARL's address "occurred in a fraud network" "for the third time running". The report from the Belgium customs authorities to HMRC says that the address shown on the CMR for Profitrade's receiving warehouse in Belgium at Transports Vanderoel NV was that of a company administered by Mr Christian Roukaerts, who denies receiving any goods from or having heard of Enta, or having heard of Profitrade or any of the persons who gave evidence for the company to whom I shall shortly refer. Mr Roukaerts said that he did not know the receipt signature for the goods on the CMR.
  73. Mr John Gadd, an employee of Enta produced a statement dated 29th November 2013 saying that he had visited BIL SARL's Cardiff warehouse at the start of August 2012, where he saw Enta's stock "which, as I recall, consisted of 2 TB hard drives, 3 TB hard drives, 128 GB USB pen drives and 120 GB SSD drives". He found the "Cardiff warehouse to be proper warehouse facilities which were adequate for handling Enta's stock".
  74. Ms Anna Uibo also produced a witness statement in similar form to the others produced for the company giving an address in Estonia saying that she was employed by Profitrade OU and that she had been asked by Mr Tsai to confirm the contents of her letter to Mr Tsai in August 2013. Ms Uibo said that Profitrade regularly purchased goods from Enta, and that those referred to in her letter (which were "goods during the months of July-October 2012") were delivered by Enta's courier BIL SARL to the Belgium warehouse and that "[t]his was the address at which the Company's customer wanted the goods delivered to". The company also relied on a further witness statement, again in very similar form to the others, by a Mr Rene Munch of Denmark, who said he was a director of Munch Marketing APS, concerning goods delivered to the Valencia warehouse. It is a reasonable inference from the language employed that all these four statements were drafted by the same person. The two letters from Mr Blanc and Ms Uibo also have marked similarities.
  75. I do not think that these facts could possibly lead to the conclusion that the July 2012 dispatch assessment was disputed in good faith on substantial grounds. I say this for the following reasons:-
  76. i) It is necessary first to consider Mr Tsai's admission that he misled the court. This is a serious matter, because it was done deliberately in respect of matters that were crucial to the company's solvency. It means that Mr Tsai's evidence and the evidence that he has procured for submission to the court must be regarded with circumspection.

    ii) The evidence from the police computer as to the Skoda car is not really capable of challenge. It is not good enough for the company simply to rely on Mr Blanc's statement saying that BIL SARL operated a 44 ton DAF tractor unit with the same English registration number. There is no reliable evidence of that fact, even though there could have been if there were a real mix-up of registration numbers. But that seems unlikely bearing in mind that the other vehicles used by BIL SARL also apparently bear numbers used by other UK vehicles which cannot possibly have transported the goods in question.

    iii) Whilst the company challenges HMRC's evidence as to the warehouses and the addresses, it is hard to see that there is any real substance to these challenges. The evidence emanates from HMRC officers and from customs authorities in EU member states. Moreover, the evidence as to the non-existence of the lynch pin of Enta's case, Mr Blanc, could easily have been rebutted by asking Mr Blanc to produce his French carte d'identité or passport.

    iv) The fact that the company initially said that "there are no ferry tickets as goods were already in Europe", and then produced supposed evidence of ferry transportation, points powerfully towards the non-existence of a genuine export. That taken together with the doubts as to the warehouses and freight forwarders makes the whole story put forward by the company incredible.

    v) The pattern of trading over many years relied upon by HMRC was never explained by the company adequately – or really at all. In my judgment, the points made by Ms Harman as to the monthly extinction of the company's VAT liability are powerful evidence supporting the proposition that these transactions were not shown to be genuine exports.

  77. I do not intend to recite in detail the facts of the other supposed export transactions, but there are the same or even more glaring discrepancies in relation to each. It seems to me that it is inescapable that the CMRs and the information contained in them are fabricated, and that Mr Tsai and Enta were fully aware that that was the case. There is simply no plausible evidence that the goods in question were exported from the UK by the means or at the times suggested by the company.
  78. Ms Kyriakides urges on us that it is necessary for the evidence of HMRC and the company to be tested by cross examination before it is safe to reach these conclusions. I do not agree. The evidence the company has produced is simply incredible. The numerous discrepancies set out by Mr Hancox in his evidence and by Ms Harman in her submissions are overwhelming in all the transactions underlying the dispatch assessments. The Companies court is obliged to look at the matter in a common sense way, and on that basis, there is, in my judgment, no possibility that any court at a trial would believe that the goods in question had been proved to have been exported from the UK.
  79. I accept, as I have said, that it was appropriate for the judge to have regard to the finding of Judge Poole, but for the reasons I have given I do not think his determination can affect the conclusion that ought to have been reached on the petition. I think the position was the same before the judge, but I accept that the new evidence makes it even less likely that the company's case could be believed.
  80. The Teleos case does not, as I have said, inhibit these conclusions. That case applies where a supplier has acted in good faith and submitted evidence establishing at first sight its right to exemption from VAT in respect of an intra-Community supply of goods. In such a case, article 28c(A)(a) of the Sixth Directive (Council Directive 77/388/EEC as amended) prevents HMRC from requiring such a supplier to account for VAT on those goods where that evidence is found to be false. But that is subject to two conditions. First, that there is no evidence of involvement by the supplier in the tax evasion, and secondly that the supplier has taken every reasonable measure in his power to ensure that the supply that he was effecting would not lead to his participation in the evasion. In this case, there are 2 main reasons why Teleos does not protect Enta. First, there is no reason to suppose that Enta has acted in good faith – quite the reverse as I have indicated above; and secondly, Enta seems not merely to have been involved in the attempted tax evasion but to have been responsible for it.
  81. The judge described HMRC's case as "prima facie formidable". I agree. In my judgment, that should have led him to conclude that the dispatch assessments were not disputed in good faith on substantial grounds. Accordingly, he ought to have exercised his discretion to wind up the company.
  82. Issue 3: Was the hearing unfair to HMRC?

  83. In the light of the decision that I have reached, it is not necessary to deal with this ground of appeal. Suffice it to say, however, that I have reviewed the transcripts of the hearing and I am somewhat surprised by the scale of the judge's interruptions. He plainly felt strongly that he had suggested a sensible short cut to the proceedings that HMRC's counsel was unwilling to adopt. But, once it had become clear that HMRC wanted to argue the case it had come to court to present, the fact that the judge's own proposal had not been accepted was no justification for preventing HMRC presenting their case in a concise and coherent way as I am sure Ms Harman was attempting to do. To put the matter shortly, it would have been better, I think, if the judge had let her get on with it.
  84. Conclusions

  85. For the reasons I have tried shortly to express, I think the judge was wrong to say that the Companies court must defer to the tax tribunal in a case of this kind. That does not mean that the tax tribunal will not normally be the appropriate forum to determine whether an appeal against a VAT assessment has a real prospect of success. Moreover, when the tax tribunal has reached a conclusion on such an issue, that decision is normally likely to be a compelling factor in the Companies court's exercise of discretion. That discretion is not, however, completely abrogated by the jurisdiction of the tax tribunal. It need not defer to the tax tribunal in every case, though it may often choose to do so.
  86. Here, the facts are quite exceptional, and in my judgment, the judge ought, after a full consideration, to have concluded that they showed that the debts represented by the dispatch assessments were not disputed by the company in good faith and on substantial grounds.
  87. I would, therefore, allow this appeal and (i) discharge the order restraining the advertisement of the petition, (ii) dismiss the company's application to dismiss the petition and/or to restrain advertisement of the petition, (iii) dispense with the need for advertisement of the petition, and (iv) make an order for the compulsory winding-up of the company.
  88. Lord Justice Patten:

  89. I agree.
  90. Lord Justice Longmore:

  91. I also agree.


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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2015/29.html