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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Parkwell Investments Ltd v Wilson & Anor  EWHC 3381 (Ch) (16 October 2014)
Cite as:  EWHC 3381 (Ch),  BCC 721,  WLR(D) 432,  BPIR 74
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IN THE MATTER OF PARKWELL INVESTMENTS LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Strand, London, WC2A 2LL
B e f o r e :
| Parkwell Investments Limited
|- and -
(as Provisional Liquidator of Parkwell Investments Limited)
The Commissioners of Her Majesty's Revenue and Customs
Mark Cunningham QC and Christopher Brockman (instructed by Howes Percival LLP) for the Respondents
Clara Johnson (instructed by Dentons) for the Provisional Liquidator
Hearing dates: 23, 24, 25, 26 and 30 June 2014
Crown Copyright ©
Sir William Blackburne:
" Telecommunications depend on origination of the call, transmission of the call and termination of the call. The origination and the termination of the call will be under the control of the network providers. The transmission of the call (which is the movement of the data) will normally be the subject of agreement between large telecom providers. However, there is a multiplicity of small wholesale carriers of data who specialise in interrupted or less frequented routes. Here the movement of the data would move from the originator through a small wholesaler and perhaps a chain of wholesalers until it reached the terminal network provider. The movement of the data from the originator and from wholesaler to wholesaler and to the termination is controlled by means of switches. Each movement of data creates something called a "Call data record" or "CDR" which indicates the number of units consumed and from which, if a unit price is applied, a charge can be calculated, the charge being for the use of the carrier's owned or leased network.
 As Mr O'Hara explains in his affidavit at paragraph 26: 'The actual traffic, i.e. the data packets or minutes, must move through a switch every time that the data is moved between parties. At the point of every purchase and every sale the movement and direction of the data is decided by the switch. Calls must be transferred from trader A to trader B and so forth throughout a supply chain via a switch.'
 The switch will normally be programmed with a hierarchy of specified routes in order to secure that the call is transferred according to what is called a 'least cost routing plan'. Because of the intrinsic unreliability of networks it is normal for the 'least cost routing plan' to contain, as I have indicated, a hierarchy of alternative routes. A genuine carrier would be unlikely to trade without an LCR. A genuine carrier would be unlikely to trade with only one customer and to use only one supplier since this contemplates that there will never be a problem with the route selected."
The VAT assessments and the appeals against them
The legal background
"…The usual basis on which such an appointment is sought is because of a risk of jeopardy to the company's assets, namely the risk of their dissipation before the winding-up order is made, with the consequence that their collection and rateable distribution between the company's creditors will be frustrated. Such risk does not refer to (or only to) 'dissipation' in the sense in which that word is ordinarily used in the context of freezing orders, that is a deliberate making away with the assets so as to frustrate the enforcement of a future judgment; it includes any serious risk that the assets may not continue to be available to the company…
 The circumstances justifying the appointment of a provisional liquidator are not, however, confined to jeopardy of this particular nature. In cases in which there are real questions as to the integrity of the company's management and as to the quality of its accounting and record-keeping function, it will be an important part of a liquidator's function to ensure that he obtains control of its books and records so that he can engage in all necessary investigations of its transactions. These will or may include investigations of those who have been managing the company with a view to considering the bringing of claims against them; and the consideration of whether any of the company's directors ought to be the subject of a report to the Secretary of State to the effect that it appears to the liquidator that they were unfit to be concerned in the management of a company. Such a report might then lead to an application to the court for their disqualification. If there is any risk that, pending the hearing of the petition, records may be lost or destroyed, that will also found the basis for the appointment of a provisional liquidator, who will be able immediately to secure them and commence his own enquiries into the affairs of the company and the conduct of its management."
The jurisdiction argument
"…Now 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. This is not only because adjudication on the correctness of the tax assessment has been entrusted to that specialist tribunal (cf Autologic Holdings plc v IRC  1 AC 118) but also because the evaluation of the appeal's merits involves a prognosis as to the possible outcome of that adjudication. In such circumstances, the winding-up court should in my view now, post-2009, refuse itself to adjudicate on the prospective merits of the appeal and leave that question to be dealt with by the tribunal, either dismissing the petition or staying it in the meantime. It was suggested before me that this might lead to serious delay to the petition, but I can see, and was provided with no material to suggest the contrary, no reason why such an application to the tribunal should take significantly longer to determine than the same issue arising in the context of a contested winding-up petition."
" The fact, however, that the assessment raised by HMRC was one that could be the subject of an appeal by RDD (and it has now launched an appeal, although it had not done so at the time of the hearing before the judge) does not mean that the assessment could not found the basis for a petition for the winding up of RDD. Put another way, it was not open to RDD to challenge and defeat the petition merely on the basis that it had a statutory right of appeal against the assessment before another forum. The existence of a right of appeal says nothing as to whether any appeal will have merit; and it was open to HMRC, as they did, to present their petition against RDD on the basis that their claimed debt, or at least a material part of it, was not capable of serious dispute and so could properly found the basis for a winding up order. "
The threshold requirement
The supply basis of claim: the threshold requirement
The fraudulent evasion of VAT basis of claim: the threshold requirement
" If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.
 The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those 'who should have known'. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with the fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.
 The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion."
" …It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion…
. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.
 The questions posed in BSG… by the tribunal were important questions which may often need to be asked in relation to the issue of the trader's state of knowledge. I can do no better than repeat the words of Christopher Clarke J in Red 12 Trading Ltd v Revenue and Customs Comrs  EWHC 2563 (Ch) at -,  STC 589 at -:
' Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and "similar fact" evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.
 To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.
 Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.'"
"…The VAT 1 submitted electronically to HMRC describes the current business activity as Licensed Restaurant/Public House. As with [AKL] the Commissioners have not received any notification of a change in trading activity. Only the first period return was ever submitted. The remaining periods were centrally assessed. Trade was minimal whereas invoices produced by Parkwell for the supply suggest that substantial large value transactions had been carried out but not declared. As with [AKL], these deals were often back to back. Supplies were only made for a short period of time, accruing a large VAT liability with trade then ceasing. Omni have defaulted on their obligation to pay VAT."
The discretionary requirement
"…The usual basis on which an appointment is sought is because of a risk of jeopardy to the company's assets, namely the risk of their dissipation before the winding-up order is made, with the consequence that their collection and rateable distribution between the company's creditors will be frustrated. Such risk does not refer to (or only to) 'dissipation' in the sense in which that word is ordinarily used in the context of freezing orders, that is a deliberate making away with the assets so as to frustrate the enforcement of a future judgment; it includes any serious risk that the assets may not continue to be available to the company…
 The circumstances justifying the appointment of a provisional liquidator are not, however, confined to jeopardy of this particular nature. In cases in which there are real questions as to the integrity of the company's management and as to the quality of its accounting and record-keeping function, it will be an important part of a liquidator's function to ensure that he obtains control of its books and records so that he can engage in all necessary investigations of its transactions. These will or may include investigations of those who have been managing the company with a view to considering the bringing of claims against them; and the consideration of whether any of the company's directors ought to be the subject of a report to the Secretary of State to the effect that it appears to the liquidator that they were unfit to be concerned in the management of a company. Such a report might then lead to an application to the court for their disqualification. If there is any risk that, pending the hearing of the petition, records may be lost or destroyed, that will also found the basis for an appointment of a provisional liquidator, who will be able immediately to secure them and commence his own inquiries into the affairs of the company and the conduct of its management."
The undertaking in damages
"27. In In re Highfield Commodities Ltd  1 WLR 149 Sir Robert Megarry VC interpreted the Hoffmann-La Roche case  AC 295 as deciding that no cross-undertaking should be required of the Crown unless the defendant showed special circumstances justifying the requirement. In Attorney General v Wright  1 WLR 164 Hoffmann J regarded as undeniable (even if, to some eyes, not "particularly attractive") the "potency" of the principle "that Crown officials should not be inhibited from performing their duty to take action to enforce the law by the fear that public funds may be exposed to claims for compensation by people who have thereby caused [sic] loss": p 166C-D. On the facts, however, he required an undertaking to be given by the receiver of, and to be met out of the funds of, the charity for whose benefit the Attorney General was suing to recover property. Although the Attorney General was not suing to protect any proprietary or contractual right of the Crown, he was suing in the proprietary interests of the charity, which could be expected to give an undertaking. In Director General of Fair Trading v Tobyward Ltd  1 WLR 517, Hoffmann J said that, whatever one might say about the policy, it is well established that "the usual practice is that no cross undertaking is required" when the Crown is seeking an interim injunction to enforce the law: p 524E—H. In Securities and Investments Board B v Lloyd-Wright  All ER 210, Morritt J addressed the issues on the basis of defence counsel's concession that "it would not be appropriate that there should be a cross-undertaking of damages" in a law enforcement action (p 213H—J), and in Customs and Excise Comrs v Anchor Foods Ltd  1 WLR 1139, 1152C-D, Neuberger J said that "it would ordinarily not be right to require a cross-undertaking in damages from Customs", but ordered one because of the "unusual facts of this case", in which Customs was, to protect its right to VAT, seeking to halt a sale of business at an independent valuation to a new company. Finally, the Court of Appeal in United States Securities and Exchange Commission v Manterfield  1 WLR 172 applied the line of authority including the Kirklees case  AC 227, In re Highfield Commodities Ltd  1 WLR 149 and the Lloyd-Wright case  4 All ER 210 when endorsing the exercise of the judge's discretion to dispense with the giving of a cross-undertaking by the United States Securities and Exchange Commission. The commission was seeking a freezing order in aid of Massachusetts proceedings brought in the interest of investors generally to recover assets obtained by Manterfield in the course of a fraudulent investment scheme involving the sale of "limited partnership interests" in an unregistered fund."
"30. In any event, however, this particular criticism does not impinge on the general distinction drawn in the Hoffmann-La Roche case and subsequent cases between private litigation and public law enforcement action. In private litigation, a claimant acts in its own interests and has a choice whether to commit its assets and energies to doing so. If it seeks interim relief which may, if unjustified, cause loss or expense to the defendant, it is usually fair to require the claimant to be ready to accept responsibility for the loss or expense. Particularly in the commercial context in which freezing orders commonly originate, a claimant should be prepared to back its own interests with its own assets against the event that it obtains unjustifiably an injunction which harms another's interests.
31. Different considerations arise in relation to law enforcement action, where a public authority is seeking to enforce the law in the interests of the public generally, often in pursuance of a public duty to do so, and enjoys only the resources which have been assigned to it for its functions. Other than in cases of misfeasance in public office, which require malice, and cases of breach of the Convention rights within section 6(i) of the Human Rights Act 1998, it remains the case that English law does not confer a general remedy for loss suffered by administrative law action. That is so, even though it involves breach of a public law duty. In the present context, the fact that an injunction is discharged, or that the court concludes after hearing extended argument that it ought not in the first place to have been granted, by no means signifies that there was any breach of duty on the public authority's part in seeking it."
"For reasons indicated in para 31 above, there is in my view a more general distinction between public and private claims. Ultimately, there is a choice. Either the risk that public authorities might be deterred or burdened in the pursuit of claims in the public interest is accepted as a material consideration, or the authorities acting in the public interest must be expected generally to back their legal actions with the public funds with which they are entrusted to undertake their functions. That latter approach could not be adopted without departing from the Hoffmann-La Roche case, and the Hoffmann-La Roche case draws a distinction between public and private claims which depends upon accepting the former approach. The Hoffmann-La Roche case stands at least for the proposition that public authority claims brought in the public interest require separate consideration. Consistently with the speeches of Lord Reid and Lord Diplock (and probably also Lord Cross), it indicates that no cross-undertaking should be exacted as a matter of course, or without considering what is fair in the particular circumstances of the particular case. A starting point along these lines does not appear to me to differ significantly from the practice subsequently adopted at first instance: see para 27 above. I accept its general appropriateness."