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Cite as: [2014] EWHC 3381 (Ch), [2014] BCC 721, [2014] WLR(D) 432, [2015] BPIR 74

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Neutral Citation Number: [2014] EWHC 3381 (Ch)
Case No: 2102 OF 2014


Royal Courts of Justice
Strand, London, WC2A 2LL
16 October 2014

B e f o r e :


Parkwell Investments Limited
- and -

Mark Wilson
(as Provisional Liquidator of Parkwell Investments Limited)
The Commissioners of Her Majesty's Revenue and Customs



Donald Lilly (instructed by The Khan Partnership LLP) for the Applicant
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:

  1. On 18 March 2014 Hildyard J appointed Mark Wilson of Baker Tilly Restructuring & Recovery LLP ("Mr Wilson") as provisional liquidator of Parkwell Investments Limited ("Parkwell"). The appointment was made on the without-notice application of The Commissioners for Her Majesty's Revenue & Customs ("HMRC") who that day had presented a creditor's petition to wind up Parkwell. The petition alleged unpaid VAT (inclusive of interest to 31 July 2013) totalling £7,764,476.14 based on assessments raised on or about 30 October 2013 for three quarterly periods between 1 November 2012 and 31 July 2013. The petition also alleged that a further £2,167,261, by way of VAT for periods between 1 August 2013 and 31 December 2013 was contingently or prospectively due. The court appointed Mr Wilson provisional liquidator until the conclusion of the hearing of the petition or further order and conferred upon him the powers and functions usually given when these orders are made. The court also directed that the order and its continuation should be considered on 25 March, which was a week later. Among the undertakings given to the court by HMRC upon the making of the order was that "In the event that the court should later decide that [HMRC] ought, as a condition of the continued appointment of the provisional liquidator to provide an undertaking in damages, to consent to such undertaking having retrospective effect from [18 March (the date of the appointment)] and as if it had been contained in this [the court's original] order."
  2. The petition debt is put forward on alternative bases. The first, which relates to the taxable supplies allegedly made to it during the nine months to 31 July 2013, is that Parkwell has failed to produce documentary evidence to support the supplies, that is to say the supplies to it upon which it claims to have paid input tax and in respect of which it has claimed an offset against its liability to pay output tax as set out in its VAT returns for those periods. The alternative basis, which relates to those supplies and the further supplies to it said to have been made for the subsequent five months to 31 December 2013, is that, being a taxable entity, Parkwell knew or should have known that its transactions for those periods were connected with the fraudulent evasion of VAT with the result that HMRC was properly entitled to refuse to deduct input tax in respect of the transactions. In so contending HMRC relied on the ECJ ruling in Kittel v Belgium; Belgium v Recolta Recycling SPRL [2008] STC 1537 ("Kittel") as applied in this jurisdiction by the Court of Appeal in Mobilx (in administration) v Revenue and Customs Commissioners [2010] STC 1436 ("Mobilx"). On either basis it contended that there was a £ for £ increase in the amount of output tax due from Parkwell and therefore that the petition was well founded and a winding up order was likely when the petition came on for disposal.
  3. On 25 March 2014, the return date of the application, Nugee J, by consent, continued the earlier order. By consent, he also directed that any application by Parkwell to vary or discharge the earlier order should be issued and served with supporting evidence by 11 April following and, were that to happen, gave directions for the service of reply evidence and for the hearing of the application. On 11 April, Parkwell duly applied to discharge the earlier orders and terminate the provisional liquidation. In addition it sought the dismissal of HMRC's winding up petition, alternatively a stay of the petition pending resolution of its appeals against the petition debts by the First-Tier Tax Tribunal ("the FTT") to which it had appealed the VAT assessments. It also sought an order that HMRC be required to offer to it a retrospective undertaking in damages dating back to the original appointment.
  4. In support of its application Parkwell has relied on three matters. First, it has contended that the court had no jurisdiction to appoint a provisional liquidator, alternatively that the jurisprudence required the court to refuse the application ("the jurisdiction argument"). This was advanced on the footing that the appropriate tribunal to determine whether it had paid input tax on the supplies to it and whether it fell foul of the Kittel test in connection with the fraudulent evasion of VAT was the FTT (to which it had appealed the assessments on 27 January 2014 – some weeks before the winding up petition against it had been presented) and that it was inappropriate while the appeals against the assessments were still outstanding that this court should be permitted to abrogate or pre-empt that process by the appointment of a provisional liquidator or by the making of a winding up order, in each case in reliance upon the assessments. Second, it contended that on the evidence before the court it was not likely that the court would make a winding-up order when the petition came before it for disposal and therefore should not have made the appointment of a provisional liquidator ("the merits argument"). Third, it contended that even if a winding up order is likely to be made, the court ought not in the exercise of its discretion to have made the appointment ("the discretion argument"). Even if it failed on each of those arguments and the provisional liquidation were to continue, it contended that the court should now require HMRC to give to it an undertaking in damages and that such undertaking should be backdated to the date of Mr Wilson's appointment on 18 March.
  5. Parkwell's application came before me for effective hearing in late June. At the conclusion of the hearing I indicated that I was not willing to discharge the appointment and was not willing to require HMRC to offer an undertaking (whether or not backdated to the date of the original order). I said that I would set out my reasons in writing. This I now do.
  6. Mr Donald Lilly appeared for Parkwell, Mr Mark Cunningham QC and Mr Christopher Brockman appeared for HMRC and Ms Clara Johnson appeared for Mr Wilson, the provisional liquidator.
  7. VoIP Trading

  8. Parkwell claimed to be a Tier 3 provider of voice-over-IP (or VoIP) services. These are the wholesale trading of minutes relating to telephone communications over the internet rather than through conventional telephone lines. Mr Lilly accepted as accurate the following summary of what such business involves which is to be found in the judgment of Norris J in HMRC v Winnington Networks Ltd [2014] EWHC 1259 (Ch) ("Winnington") at [17] to [19] and which I gratefully adopt as being sufficient for present purposes:
  9. "[17] 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.
    [18] 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.'
    [19] 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."
  10. From this it is apparent that the CDR details of calls are the primary record of calls made via the supply chain and the only source from which a breakdown of traffic can be obtained. They are used to generate the invoices on which payments to the VoIP trader are based. Without them the trader cannot invoice its own customers, know whether it is being correctly invoiced or deal with any dispute that might arise. The trader might lease rather than own the switch through which the calls are routed: this would not affect the information available from the switch. The other point to note, as the evidence made abundantly clear, is that the information available from the switch can only realistically be provided in electronic format, such is the volume of information which the process generates.
  11. Parkwell

  12. According to the evidence before the court Parkwell was incorporated on 15 October 2007. Its annual return dated 13 June 2013 disclosed three shareholders, a Mr Amran Munir and a Mr Saif Chaudhry (each with a 25% holding) and a Mr Ali Sami Farooq (with a 50% holding) with Mr Farooq and Mr Munir as the only directors and Mr Chaudhry as the Company Secretary. On 9 March 2012, on an application dated 2 March 2012 which Mr Munir had submitted, Parkwell was allocated a VAT registration number. Mr Munir had given Parkwell's place of business as an address in Manchester, stated that its business activity would be "Telecom, airtime etc" and indicated that in the following 12 months the value of its taxable supplies would be £120,000.
  13. In fact, according to its VAT returns, turnover greatly exceeded £120,000. The figures are set out in paragraph 36 of the first affidavit of Beverley Mason ("Ms Mason") of HMRC (sworn in support of the application to Hildyard J for the appointment of a provisional liquidator) as corrected (but not as regards inputs and outputs) by her second affidavit. The position in short is that in the quarter to 30 April 2013 (one of the periods covered by the assessments) supplies to it are claimed to have risen to almost £23.5 million from a modest £59,042 for the equivalent quarter the previous year. In the following quarter supplies were said to have reached £21.1 million. They then fell to £10.5 million for the quarter to 30 October after which they rose again so that for the three months to 31 January 2014 they had risen to just over £20 million.
  14. The VAT assessments and the appeals against them

  15. The assessments were made in part in late October 2013 and in part in March 2014. Those dated 30 October 2013 or thereabouts were for £7,687,877 and related to the three quarterly periods between 1 November 2012 and 31 July 2013. Parkwell asked HMRC to review them. On review, they were upheld. As was its right Parkwell appealed that decision to the FTT. It did so by notice dated 27 January 2014. The appeal was still outstanding at the time of the hearing before me.
  16. The further assessment, dated 18 March 2014 or thereabouts, was for £2,167,261 and related to the quarterly period followed by two monthly periods, making five months in all, between 1 August and 31 December 2013. The petition included interest from the date of assessment in respect of the first. The second was for a slightly different figure (a difference of only £3,000 odd) from the amount specified in the petition which predated the assessment and was based on what was then calculated to be contingently or prospectively due. Nothing turns on this small difference. Each amount related to the input tax on supplies to it which Parkwell had claimed for the period to which it related.
  17. The legal background

  18. In HMRC v Rochdale Drinks Distributors Ltd [2011] STC 186 ("Rochdale") the Court of Appeal was concerned to lay down the correct approach to be followed when the court is asked to appoint a provisional liquidator to a trading company. Noting that such an appointment is "a most serious step for a court to make" as it is likely in many cases to have a terminal effect on the company's trading life, Rimer LJ (at [76]) confirmed the long-established two-fold approach, but with one small qualification, laid down by Plowman J in Re Union Accident Insurance Co Ltd [1972] 3 All ER 884 at 892-893, before the court would be willing to make the appointment, namely (1) that a good prima facie case existed for a winding up ("the threshold requirement") and (2) that in the circumstances of the case it was right that a provisional liquidator be appointed ("the discretionary requirement"). The small qualification was (at [77]) to prefer the phrase 'likely' to the somewhat elusive 'prima facie case' so that the threshold requirement was that the petitioner must demonstrate that he is likely to obtain a winding-up order on the hearing of the petition. Rimer LJ went on to refer (at [79]) to the well-settled rule of practice that a debt that is wholly disputed on substantial grounds cannot ordinarily found the basis for a winding up order and that where a petition debt is shown to be the subject of such a dispute the petition will ordinarily be dismissed. He then added (at [80]) that the rule of practice does not mean that the company, seeking to resist the petition, need do no more than assert that it disputes the debt in order to secure the dismissal of the petition. "It has" he said "to condescend to particulars by properly explaining the basis of the claimed dispute and showing that it is a substantial one" so that "[i]f, despite the company's protestations, the alleged dispute can be seen on the papers to be no dispute at all, or to be no dispute as to part of the debt, the petition will ordinarily be allowed to proceed." He added that "[i]f, however, the dispute is shown to be one of those whose resolution will require the sort of investigation that is normally within the province of a conventional trial, the settled practice is for the petition to be struck out or dismissed so that the parties can contest their differences before whichever other forum may be appropriate."
  19. Rimer LJ then examined, in the context of the appeal then before the court, the shifting nature of the burden of proof which can arise in the course of determining whether the petition debt was capable of serious dispute. As it happens the dispute before the court on that occasion concerned a contention by HMRC that the company had been engaged in the fraudulent evasion of VAT and therefore that its input tax repayment claims were not genuine (a contention that HMRC make in the instant case). He said this (at [86]): "There is no doubt that HMRC's evidence raised serious questions as to the genuineness of the invoices. If [the company] was to challenge the basis of the petition, and therefore the appointment of the provisional liquidator the burden was therefore upon it to show that it at least had a good arguable case that its claimed trade with all the disputed traders was genuine." He then considered whether the company had discharged that burden and (at [87]) continued: "…the real question before the judge on the 'missing traders' issue was whether [the company] had shown by its evidence that, upon the hearing of the petition, it was likely to be able to show that in relation to all the alleged trades it claimed to have carried out it had a good arguable case that they were genuine." He criticised the approach of the judge below which had been to have preferred the approach "that something might turn up and that [the company] should be given the benefit of the doubt." Rimer LJ then commented: "So it might, but on the inadequate evidence before him, and on his findings, I am of the view that he ought to have held that HMRC had established a likelihood that the court hearing the petition would hold that at least a very material part of the disputed supplies had not been shown to have taken place."
  20. In short, the task before the court is to decide whether on the evidence before it the petitioner demonstrates a likelihood that the court hearing the petition will find that, to the requisite extent, the petition debt is established. If the petitioner makes out a good arguable case that it is then, if the appointment of a provisional liquidator is to be avoided or the company seeks to have the petition stopped in its tracks, it is for the company, condescending to particulars rather than relying on bare denials or on hopes as to what might turn up at some later stage, to show that the debt is disputed on substantial grounds. The company must set out its case at the time of the hearing of its challenge; it must at that stage deploy its evidence, sufficient to displace the good arguable case that the petitioner has established, if it is to defeat the appointment or stop the petition proceeding. If the petitioner is able to cross that hurdle, the threshold requirement, the court then considers the discretion requirement, namely whether in the circumstances of the case before it, it is right that the appointment is made or, as is more likely where the appointment has been made at an earlier without-notice hearing and the company is subsequently challenging the appointment, whether pending judgment on the petition the provisional liquidator should be maintained in office. Rimer LJ dealt with that when he stated:
  21. "[99]…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…
    [100] 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

  22. Mr Lilly accepted, correctly, that notwithstanding any appeal to the FTT the debt arising from an assessment remains due and payable by the person assessed. He submitted nevertheless that as statute has entrusted the adjudication of VAT disputes, and in particular the correctness of tax assessments as in the current case, to the FTT (and to no other body) the proper venue to determine whether the debt arising from the assessments is disputed on substantial grounds is that tribunal and not this court (or the Companies Court). At the very least, he said, the court should be slow to undermine the jurisdiction of that tribunal by taking any step which might have the effect of circumventing it. He submitted that an invitation to this court to decide whether the debt constituted by the assessments is sufficiently well-founded to justify the retention of the provisional liquidator was a clear attempt by HMRC to achieve the same result as ought only to be available through the FTT. Where therefore there is an outstanding appeal to the FTT the proper tribunal to determine whether the appeal has any prospect of success is the FTT and not this court in the exercise of its winding-up jurisdiction. He submitted that, in truth, this was a matter of jurisdiction and not one of discretion. But even, he said, if it was not a question of jurisdiction, at the very least the court should decline to make any order which could have the effect of circumventing the jurisdiction of the FTT. Coming to the facts of this case, he submitted that if HMRC wanted to secure the appointment of a provisional liquidator the correct course was to present a public interest petition under section 124A of the Insolvency Act 1986 and not rely on the disputed assessments which were for the FTT to resolve. He submitted that there were good reasons why this court should not seek, however unintentionally, to circumvent the exclusive jurisdiction of the FTT in matters of the kind in issue here. This was because that tribunal was best equipped to adjudicate on matters concerned with Tier-3 providers of VoIP services, in particular how they are to be expected to establish their entitlement to VAT inputs and whether it was appropriate that they furnish CDRs to verify their trading. In any event, if HMRC thought there was no merit in Parkwell's appeal to the FTT they could apply to that tribunal to have the appeal struck out. This was not something they had sought to do. If they had concerns about Parkwell's activities in the meantime the correct course was to seek some remedy short of the appointment of a provisional liquidator, for example the removal of its VAT registration, the making of a freezing order, or the delivery up of books and records. Such remedies could be granted by this court pending the determination of the appeal to the FTT. No such attempt had been made.
  23. The submission finds its clearest expression in Enta Technologies Ltd v HMRC [2014] EWHC 548 (Ch) ("Enta") upon which Mr Lilly relied. In that case HMRC presented a petition against the company (Enta Technologies) based on the non-payment of VAT assessments. By then the company had appealed against the assessments to the FTT. The appeals, of which there two, were out of time but the company applied to the tribunal for, and in due course obtained, appropriate extensions. The tribunal judge indicated that he would not have granted the extensions if he had thought that the appeals were hopeless. In the meantime the company had applied to this court for an injunction to restrain the advertisement of the petition and for the petition's dismissal. David Donaldson QC, sitting as deputy judge of this court, acceded to the application: he dismissed the petition and restrained its advertisement. In his judgment he regarded as critical the existence since April 2009, which is when VAT appeals moved to the FTT, of a power in that tribunal to strike out an appeal to it if it considered that the appeal had no reasonable prospect of success. He then said this (at [11]):
  24. "…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 [2006] 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."
  25. In a footnote he stated that on the approach set out in the quoted passage "it would appear wrong to even present, let alone advertise, a petition before applying to the tribunal to strike out an existing appeal under rule 8(3)(c)." He took comfort from the fact that in granting the extension of time for the appeals the FTT had stated that they were not hopeless. For good measure he also stated that he would not in any event have found that the appeals lacked any real prospect of success.
  26. There is to my mind something highly artificial in the notion that this court has jurisdiction to entertain a winding-up petition brought by HMRC against a company founded on the non-payment of a VAT assessment (and, it must be assumed, grant interim relief in the process, for example, the appointment of a provisional liquidator) for so long as the company has taken no steps to appeal the assessment to the FTT (and, of course, the company may decide not to do so) only to find that that jurisdiction is lost the moment the company files its notice of appeal to the tribunal or, if not lost, is no longer exercisable, irrespective of the merits of the appeal. For it was not suggested that the FTT could, for example, appoint a provisional liquidator.
  27. I cannot think that this approach is right. Jurisdiction in this court cannot arise and disappear (or be exercisable and then suddenly cease to be) in this see-saw fashion. The true question, to my mind, is whether the appeal to the FTT, assuming one is launched, has any merit. If it has none the assessment, which so long as it remains stands as a debt due from the person assessed (see section 73(9) of the Value Added Tax, 1994), continues to constitute both a basis upon which HMRC may petition for the company's winding up and evidence of the company's insolvency. If the court, on a review of the evidence before it, considers that the company has a good arguable appeal which will lead either to the cancellation of the assessment or to its reduction to below the winding-up debt threshold, it will dismiss the petition. If the hearing of the appeal to the FTT is imminent it may choose simply to stay the petition pending that hearing and the FTT's decision on it. In this sense the position is no different from the case where the petition is founded on a regular judgment and the company has applied to set the judgment aside. The existence of a power in the FTT to strike out meritless appeals is no different from the court's power to strike out meritless applications to it, for example to set aside a judgment.
  28. I therefore find myself unable to accept the reasoning which led the deputy judge in Enta to reach his conclusion in that case, in so far as it was founded on the power or jurisdiction of this court where the company has launched an appeal to the FTT, and unable therefore to follow that decision. I am the more willing to reach this conclusion as it avoids one very undesirable consequence if the reasoning in Enta (and Mr Lilly's argument on this point) had been correct, namely the inability of the court to appoint anyone a provisional liquidator to a company where the company has an outstanding appeal against the assessment. Mr Lilly was not able to suggest that the power to do so (it is conferred by section 135 of the 1986 Act) would be exercisable by the FTT.
  29. My difference of approach from the judge in Enta does not stand alone. It is to be noted that the idea that an appeal by the company to the FTT might be relevant to the exercise by the court of its power to appoint a provisional liquidator was adverted to by Rimer LJ in Rochdale:
  30. "[85] 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. "
  31. Mr Lilly submitted that in Rochdale, as the passage just quoted makes clear, the appeal was only launched after the appointment had been made so that the facts there were distinguishable. That is true but the difference in my view is immaterial. As Rimer LJ observed in that passage, the existence of a right of appeal, or I would add, the fact that an appeal has been launched, says nothing as to whether any appeal has any merit. That, as I have mentioned, is the real question. It is also worth noting that Rochdale is not referred to in Enta. Perhaps if it had been the deputy judge would not have said what he did about jurisdiction.
  32. Nor is it right to say, as Mr Lilly contended, that if HMRC wanted to apply for the appointment of a provisional liquidator they should have presented a public interest petition under section 124A of 1986 Act. Under that provision it is the Secretary of Sate alone who has power to present the petition. The section does not extend to HMRC. In any event I do not see why the fact that under that provision it would be open to the court to appoint a provisional liquidator should be relevant to the existence of a power to do so where the petition is on some other basis. I should also add that Mr Lilly was not correct in finding support in Winnington, to which he also referred me, for this limb of his argument. There, for what the point is worth, the petitioner was HMRC; the petitions, of which there were two, were, as in the present case, founded on a combination of unpaid VAT assessments and contingent or prospective debts founded on assessments which had yet to be raised. In each case Norris J appointed provisional liquidators. He did so notwithstanding that in one at least of the two cases the assessments were under appeal.
  33. The threshold requirement

  34. There are two limbs to this. I summarised them at paragraph 2 above. The first is whether Parkwell has produced sufficient evidence to support the taxable supplies to it so as to establish its entitlement to offset input tax on those supplies against the output tax for which it is accountable. This is a challenge to the existence of the taxable supplies, or at any rate to the sums paid for them. The second is that Parkwell knew or should have known that its transactions were in connection with the fraudulent evasion of VAT and that as laid down by Kittel and Mobilx HMRC were properly entitled to refuse Parkwell's claims to be entitled to deduct the input tax in respect of them. This assumes that the supplies were ostensibly made – and for the sums said to have been paid for them – but challenges their propriety. For short I refer to the first as "the supply basis of claim" and to the second as "the fraudulent evasion of VAT basis of claim".
  35. The supply basis of claim: the threshold requirement

  36. Section 73(1) of the Value Added Tax Act 1994 provides that "Where a person has failed to make any returns required under this Act…or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him." The obligation is on the taxpayer to keep the documents needed to verify his returns. If he does not in respect of any supplies he says were made to him and on which he claims to have paid input tax he can expect to be assessed on the basis that the supplies were not made. It is the failure to supply this information which, HMRC say, lies at the heart of this basis of their petition.
  37. They maintain that despite many requests Parkwell has failed to supply the relevant CDRs which, they say, are the only reliable means of calculating and verifying the supplies to Parkwell which are the subject of its VAT input claims. These are the VoIP units which it claims to have purchased, being the number of minutes which have moved through the relevant switch (the mechanism which connects a call from one link in the supply chain to another) and the rate charged for them from which the overall figure for the cost of the supplies to it for the relevant period can be calculated. They point to what was said by Norris J (at [25]) in Winnington, namely that "it is not possible [in VoIP trading] to calculate the sums passing between the various traders in the absence of CDRs." They point to Mr Lilly's apparent acceptance (in paragraph 23.1 of his skeleton argument) that CDRs "are the very documents required to support [Parkwell's] claim for VAT input." Indeed, when the matter was before Hildyard J no CDRs of any kind had been produced. Their absence led Hildyard J to say that Parkwell had not provided the evidence needed to displace the assessments. And, as he further observed and as was repeated before me, their absence raised questions as to the genuineness of Parkwell's trading.
  38. Before me, Parkwell maintained that it had made good that deficiency and had produced such CDRs as it was able although it accepted that for about 10% of its trading it had been unable to do so. This admitted gap concerned trading conducted through two particular switches, one called "Sonus" and the other "FreeSwitch". At this point the evidence of a Mr Tariq Mehmood became relevant. Mr Mehmood, who supplied three witness statements, was a freelance consultant retained, he said, by Parkwell to manage its Network Operations Centre. As regards the Sonus switch Mr Mehmood stated that because, according to his enquiries of Parkwell's directors, Parkwell "was merely renting capacity on a partitioned switch used by very many other users, it will not be possible to retrieve the CDR data for this switch." He stated that the FreeSwitch CDR data (it was said to relate to the period prior to July 2013) ceased to be available to the person accessing it, a Mr Zulqarnain, because (according to Mr Mehmood) around July 2013 Mr Zulqarnain "changed the server that he used to archive the data and in the process of doing so inadvertently lost the historic data for the period January to July 2013." The FreeSwitch accounted, he said, for about 5% of the CDR data for 2013 and Sonus for the other 5%. On any view therefore Parkwell was unable to verify the supplies to it for 10% (or roughly £993,000 worth) of its VAT input claim. HMRC were simply asked to take that amount on trust.
  39. It is not as if Mr Wilson (the provisional liquidator) and his team did not make attempts to access the FreeSwitch data. To this end they wrote to Mr Mehmood in early June to request access to the data. (This was done at the invitation of Parkwell's directors as the directors did not themselves have access to it.) Mr Mehmood in turn suggested that they contact Mr Zulqarnain and supplied his telephone number (a number in Pakistan) and email address. This they did. On 20 June Mr Zulqarnain emailed back to Mr Wilson's office to say "I have discussed your email with my lawyer. Why should I give you access to my FreeSwitch? This switch is not the property of Parkwells. They used a partition of my FreeSwitch to run their traffic through with my permission…" The request for access to the Free Switch data was thus rebuffed. Late in the course of the hearing before me, Mr Zulqarnain sent an email to Mr Lilly's instructing solicitors in which he appeared to retract his refusal to co-operate. In it he stated that he would "get you the information as soon as possible." This message was forwarded to Mr Wilson's solicitors who immediately emailed Mr Zulqarnain setting out precisely what was needed (essentially the unprocessed CDR data) and how it should be supplied (by copying it on to a memory stick). The information had not been forthcoming by the conclusion of the hearing three days later.
  40. As for the remaining 90% the position appears to be that Parkwell has failed to supply to HMRC the actual CDRs generated by its trading – what Mr Cunningham described as the "raw data". The data in question was said to have passed through a so-called soft switch. This is a piece of software running on a general purpose server and is to be distinguished from a hard switch which is a purpose-built item of electronic hardware, although both fulfil the same function. The soft switch said to have been used by Parkwell was a VOS 3000 Soft Switch (the "Vos 3000"). Mr Mehmood said that it had been hosted on a server located in Maidenhead (near Reading) and that it was the same Mr Zulqarnain, based in Pakistan, who set up the arrangement. According to Mr Mehmood, Mr Zulqarnain started regularly to download the CDR data from the Vos 3000 (allegedly to speed throughput and improve call quality) which he then stored on a server in the USA. Mr Mehmood said that he did not have access to the data held on the server in the USA. He (and therefore Parkwell for whom he worked) depended on Mr Zulqarnain for access to the data held on it. "In the event" he said "that [Parkwell] needed access to the CDR data, I would liaise with Mr Zulqarnain who would access the server and provide me with whatever CDR data was needed." Other problems, he said, were encountered. One, it was maintained, was that the version of the Vos 3000 which Parkwell was using was "cracked" meaning, I was told, that it was unauthorised. Mr Mehmood stated that to put matters right Parkwell purchased an "authorised" version of the Vos 3000 switch which went live on 15 August 2013. This did not mean that the traffic which had passed through the cracked switch was inaccessible. It did mean, according to Mr Mehmood, that it took time – three to four months he said - to move all of Parkwell's customers from the cracked to the new Vos 3000 switch.
  41. Against that background, however, Parkwell's directors did not supply HMRC with copies of the raw data stored on the server whether in electronic form or otherwise. Instead, it seems, although asked by the directors to work with Mr Zulqarnain to transfer all of Parkwell's CDR data for 2013 on to a portable hard drive for use in the current proceedings, what in the event was forthcoming was something rather less. The data was apparently processed by Mr Zulqarnain and the processed data then loaded into a Dropbox account maintained by Parkwell's solicitors. The Dropbox account was then made available (as exhibit TM4) to the provisional liquidator and two named solicitors acting for HMRC via their email addresses. Mr Mehmood explained (at paragraph 18 of his second witness statement) that for various reasons Mr Zulqarnain took the view that it was necessary for him to "process the data to make it ready for inspection by a third party." According to Mehmood, the processing included the deletion of so-called failed calls, re-arranging the data from daily into weekly files and then dividing the data between different Parkwell customers so as to provide CDR data files for each customer for each week. It was then converted into a format to enable it to be accessed via the Dropbox account. The difficulty about all of this, according to a Mr Richard Williams, the technical consultant engaged by HMRC's solicitors, was that it was not possible for HMRC to confirm from the resulting CDR data and summaries supplied that the data was actually Parkwell's. He explained what should be done to remedy this. In his third witness statement Mr Mehmood accepted that this was so but sought to explain why the suggested remedial steps would not be possible.
  42. The result therefore is that HMRC have not been provided with the "raw" CDR data to enable them to verify the supplies to Parkwell from this key source of information, and nor has Mr Wilson. Moreover, what has been made available via the Dropbox account has not enabled HMRC to check the supplies to Parkwell. Ms Mason, the HMRC officer who has been involved in the conduct of this matter and whose first affidavit formed the main evidence before Hildyard J, stated in paragraph 16 of her reply evidence that the information supplied would not be sufficient to demonstrate that taxable supplies took place. In paragraph 17 she complained that the sample invoices which Parkwell had supplied related to sales by and not supplies to Parkwell, a criticism which was not answered by claiming (as Mr Munir did in paragraph 16 of his second witness statement) that "the CDR data of [Parkwell] will mirror the CDR data of both its supplier and customer for the calls in question – as the calls pass from one switch to another along the supply chain very similar (but not identical) CDR data will be created" and therefore that "the provision of [Parkwell's] CDR data…is in fact evidencing both a supply was made and…received." In short, HMRC were being asked to infer the supply to Parkwell from the provision of data indicating what was alleged to be the corresponding sale by it as part of the supply chain. Even if this had been permissible it failed to identify the supplier. This highlighted a further lacuna in Parkwell's evidence of supplies to it: the details of the customers whose names were provided were, so it was maintained by HMRC, all purchasers from Parkwell whereas it was the taxable supplies to Parkwell which were in point and, even if that was wrong and some of them were also suppliers to it, none was a UK supplier (who alone would charge VAT and thus provide Parkwell with the input tax to offset against its output tax).
  43. On the face of the available evidence it therefore appeared that Parkwell was by its own admission unable to provide any of the data needed to verify 10% of the taxable supplies to it and unable to provide the original CDR data relating to the other 90%, merely what was available in the Dropbox account which had resulted from the processing exercise supposedly carried out by Mr Zulqarnain.
  44. Nor was that all. Mr Williams, the technical expert engaged by HMRC's solicitors, was of the view that the information supplied by Parkwell, in particular what was made available through the Dropbox, "failed to corroborate or substantiate the business, or VoIP transactions, that have been provided by Parkwell." He thought that, as a result, Parkwell's business lacked "integrity, technical feasibility and commerciality." He gave reasons for this opinion. Those reasons were challenged and I am unable on an application of this nature to resolve those differences. But one of the reasons did seem to me to be without serious challenge in Parkwell's evidence. This was the absence of evidence confirming or describing the daily reconciliation of incoming minutes with outgoing minutes or any information allowing the business to calculate its profitability on any transaction. Later in his report Mr Williams explained his reasons for this by reference to the information which Parkwell had supplied. Among those reasons was his observation that the Vos 3000 has a facility which enables the operator to reconcile all of its traffic with both its customers and its suppliers but he had seen no evidence demonstrating that Parkwell had carried out this reconciliation. In paragraph 67 of his third affidavit Mr Mehmood referred to this and, as I followed his comment, as good as accepted that it was true when he stated: "We were trying to run a business rather than generate paperwork and did not produce written reports of the sort I think Mr Williams has in mind…"
  45. In many ways this admission goes to the heart of the way in which the petition debt, in so far as it relates to the period to 31 July 2013, is based: Parkwell's inability to produce the information – the CDR data lifted directly from the switches which generated them – needed to show precisely what its taxable inputs were which, when taken with the corresponding sales to third parties, demonstrated the chain of calls which are said to have constituted its business during the nine months in question. This inability was evident from an early stage. The attempt by HMRC to establish just what trading was being undertaken gave rise to a long course of communication with Parkwell dating back to April 2013. It had been prompted by a five-fold increase in Parkwell's sales and purchases for the quarter ended 31 January as compared with the previous quarter. On 26 April, following a visit to Parkwell's premises a few days earlier, Ms Mason wrote to Mr Munir to remind him that Parkwell should supply to HMRC within 10 days, inter alia, purchase and sales invoices covering the two most recent quarterly periods, a supplier and customer list, the due diligence undertaken on the companies so listed, CDRs, copies of bank statements covering those periods and details of bank accounts and banking platforms used by Parkwell. Following a reminder a month later, another meeting was fixed. On 4 June, not having received the items of information previously requested, HMRC issued a notice to produce them with a request that they be produced at the meeting fixed for 7 June or at the latest by 14 June. At the meeting Ms Mason and her colleague met Mr Munir, Mr Farooq and Mr Chaudhry. Parkwell's accountant, a Mr Cole, was also present. Ms Mason noted in her report of the visit that Mr Munir explained that the CDR data was "still not available" in the manner requested as "this would be too onerous and costly" on account of its volume. Instead, Mr Munir suggested that a representative sample be provided. Ms Mason agreed to this. She sent a confirmatory email setting out what Parkwell had been asked to supply, including the sample CDR data. She said that she intended to collect the outstanding paperwork for May 2013 on 27 June and asked that it be available that day, requesting that it be in "deal packs", meaning (as she explained) "the corresponding purchase invoice with the relevant sales invoice." She went on to explain in the email that "for valid input tax purposes there must be a clear audit trail kept by your business." She stated that, thus far, she was receiving the paperwork "in no order." Mr Munir duly promised to provide what Ms Mason was seeking. She followed this up with an email saying that she would attend at 10.30 am on 27 June to collect the sales and purchase invoices for May. Mr Chaudhry (who had been copied in to the exchanges) said that that was fine and that he expected to see her on 27 June at the appointed time. In the event the meeting was put back a few days.
  46. On 2 July 2013 she and one other duly met Mr Chaudhry at Parkwell's premises in Wilmslow. The requested information had not been provided. According to the note she made following the visit Ms Mason explained to Mr Chaudhry that she needed to see "a clear audit trail of the purchases and the corresponding sales invoices along with payments or debits from the appropriate bank account." She explained that over the preceding month or two she had been increasingly concerned over how the business was keeping its business records and how he, as the account manager, was able to reconcile the data that was extracted from the switch. She asked him to describe how, by reference to a particular purchase invoice, the systems would enable him to reconcile this with the correct sales invoice. She said that he could not. She said that she explained to him her concern over the lack of adequate record keeping and that as a reputable business Parkwell should be able to produce to HMRC business records that showed a clear audit trail and that currently this was not the case. She followed this up with an email later that day to Mr Chaudhry, copied to Mr Munir, in which she drew his attention to this need. On 8 July Ms Mason and her colleague paid another visit to Parkwell's premises. On this occasion they were presented with two large boxes which, it was explained to them, contained the sample CDR data requested at the previous meeting. It turned out however that, as Ms Mason pointed out in an email she sent to Mr Munir (with a copy to Mr Chaudhry) a few days later, the hard copy form in which the data had been supplied could not be analysed. She asked that for the future the data be supplied in electronic form either in disc format or on a memory stick. Selecting a particular series of supplier invoices, she questioned the adequacy of what it contained; it lacked, she said, any information to show where the traffic terminated with the result that, as she put it, "I am at a loss to know how you were able to generate billing in respect of [them]." She reminded Mr Munir that there was an outstanding notice to produce the data. Parkwell asked for more time. In due course information was supplied but in a form that HMRC could not access. They asked that it be downloaded on to a disc or memory stick and offered to attend Parkwell's premises with an analyst to download the data themselves.
  47. On 7 August HMRC were sent a letter by Parkwell's accountants in which, somewhat surprisingly, the claim was made that since January Parkwell had "cooperated with you in every way to provide you with the information that you have requested and in fact have gone out of their way to do so." HMRC were accused of harassing their client. A meeting took place, attended by Ms Mason (and a colleague) and the accountants, at which, among other matters, it was stated that Parkwell felt it was being targeted for racial reasons and that the request for the CDR data was "unreasonable" as being too costly to produce and "onerous for business." Ms Mason explained that she had been seeking the CDR data since April, that it had not yet been produced in an acceptable format and that HMRC had offered to visit Parkwell's premises to download the data themselves at no cost to Parkwell. She explained that without the CDR data, which she believed formed part of the company's statutory records, it was not possible to prove that calls were exchanged, estimate how long they lasted or bill the customers. She explained that bank statements were required as she needed to be able to confirm that there was consideration for a supply and that an actual supply took place. "Currently" she stated in the notes she made of the meeting "the non production of both bank statements and CDR data is putting this in doubt." Ms Mason followed up the meeting with a letter to the accountants summarising what had occurred at the meeting. The point was again made that "HMRC have made numerous requests for historical CDR data in order for us to verify that a taxable supply has taken place, and although your client has produced some data this has been in a format that cannot be analysed by our Audit team. I have requested the data be downloaded either onto CD or memory stick and if this is too costly or onerous, we have offered to attend your clients' business with an audit expert to download this ourselves. To date this offer has not been accepted."
  48. Parkwell's response was to give notice of appeal (dated 13 August 2013) against HMRC's request for the production of weekly listings of purchases and sales. (The appeal was eventually struck out but by then the matter had been overtaken by other events.) On 28 August Ms Mason and colleagues met the accountants to discuss the position. Ms Mason explained that as no evidence had been produced that a taxable supply had taken place and that there was consideration for it HMRC would be making assessments denying to the company any input tax reclaim for the previous three quarters. The point was again made that such CDR data as had been supplied could not be analysed, that data in electronic format was preferable and that it was impossible to reconcile invoices and trace each transaction chain. On 13 September HMRC issued a further notice to produce documents, this time for the sales and purchase invoices since 5 June 2013 and also for CDR data and bank statements. On 4 October a further request by HMRC for sales and purchase invoices, payment information and CDR data was sent to Parkwell. I do no more than summarise the position.
  49. Notwithstanding this and the reminders of what was needed, Parkwell remained unable or unwilling to supply what HMRC were asking and, as I have mentioned, in October 2013 assessments were made for the amount of the input tax which Parkwell had claimed on the supplies to it for the three quarters ending on 31 July. Parkwell was duly notified of this on 5 November. In due course, as earlier explained, it asked for a review of the decision but the decision was confirmed. The letter of decision (dated 12 December 2013) mentioned the existence of "significant gaps" in the information which Parkwell had supplied, particularly in relation to banking statements and CDR data. It emphasised the importance of the CDR data as being, in the sector in which Parkwell operated, "the record of what has been supplied, when, duration, costs and amongst which parties." This information, the letter continued, was such as Parkwell should hold "as a matter of routine." The letter acknowledged, contrary to previous assertions by HMRC, that CDR data was not a "statutory record" but stated that "where such records are created or kept the taxable person has a responsibility to provide them to HMRC" and that it was therefore to be expected that they would be produced.
  50. By notice of appeal dated 27 January 2014 Parkwell appealed to the FTT against the assessment. The correspondence continued with HMRC requesting bank statements and CDR data and with Parkwell refusing to oblige, essentially on the basis that it did not need to and that the information previously supplied was sufficient.
  51. The point made about all of this was that Parkwell had had ample opportunity to supply the CDR data that HMRC had been requesting. It could not be said that in the time available between the launch of the petition and the hearing before me it had not had an adequate chance to obtain and supply the data. It was not until 9 May 2014, which was over a year after the requests by HMRC to see the CDR data were first made, that Parkwell purported to supply the data - via the Dropbox – and then only in the processed form which I have described. In so far as the processed information went, it was incomplete as it only related (or purported to relate) to what had passed through the Vos 3000. Any actual CDR data generated by Parkwell's business had still not been supplied.
  52. Parkwell's response was to accept that it had failed to produce any data relating to either Free Switch or Sonus and that that related to 10% of turnover for the relevant period. It also accepted that it had failed, for the reasons explained, to provide the actual CDR data generated by the Vos 3000 switch, merely the material processed by Mr Zulqarnain.
  53. As to the Vos 3000 data, Mr Lilly submitted that the CDR data provided by Parkwell (admittedly in the form processed by Mr Zulqarnain) was evidence adequate in form and content to create a good arguable case that it was entitled to the input claims which, by the assessments made, HMRC had disallowed. The processed data, he said, identified Parkwell's customer (referred to in the print-out of the sample data downloaded from the Dropbox as the "calling gateway"), identified the supplier to Parkwell to enable the call in question to be transmitted (the "called gateway"), the duration of the call and other relevant information relating to it. The fact that the data had been processed by Mr Zulqarnain and was not the very data (the "raw data" as it was described) to be found on the switch was not a sufficient reason for disregarding it. In paragraph 18 of his second witness statement Mr Mehmood had explained why this process had been undertaken. The essence of the matter was that Mr Zulqarnain had downloaded the CDR data from the Vos 3000 on a weekly basis and stored it on a separate server for safekeeping. In order to make it available Mr Zulqarnain had had to transfer the data from the storage server to another server where, after checking its fidelity (made necessary by the problems encountered in the process of transfer) he could process it to make it ready for inspection by a third party. According to Mr Mehmood, the processing by Mr Zulqarnain involved deleting calls which had failed (such calls were not used for billing and were therefore irrelevant), thus reducing the data by roughly six-sevenths, re-arranging the remaining data into weekly files to correspond with Parkwell's billing cycle and, finally, dividing the weekly data between Parkwell's different customers so as to provide CDR data files for each customer per week. Once this time-consuming exercise had been completed the resulting data had been converted into CSV format and uploaded into the Dropbox account where it was made available for HMRC to study. In short, said Mr Lilly, it was the same data but in a different format. What is more, said Mr Lilly, Mr Mehmood had checked the resulting data and believed it to be Parkwell's CDR data for 2013. It was important, he submitted, to realise that once the CDR data had been exported from the Vos 3000 for storage it was no longer available on that switch. It would have been pointless to re-export the data to the Vos 3000 merely to enable it to be directly available to HMRC as "raw data" at that point. There was nothing sinister in the processes that had been followed. At the very least Parkwell had demonstrated that, as regards the Vos 3000 CDR data which constituted 90% of Parkwell's turnover for the relevant period, it had a good arguable defence to HMRC's claims.
  54. That left the other 10% of business processed though the Free Switch and Sonus switches. Mr Lilly asserted that there were just three customers with which Parkwell dealt via Free Switch. Of these, he said, two (Echo Calls and AT Technologies) were based in Dubai and therefore no supplies by them would attract VAT input tax in any event (so that these suppliers could not and did not count among those to which a VAT input tax claim could relate) and the third, InterX, was a purchaser from Parkwell and it had therefore paid, or was due to pay, output tax to Parkwell for which Parkwell was admittedly liable. Such liability, he said, was not in issue. Mr Lilly accepted that the transactions – both by way of supply to Parkwell and sale by Parkwell which passed through the Sonus switch - were not accounted for in the evidence. As to this, he submitted that it was not necessary in any event to produce the CDR data to establish a VAT input tax claim and that the supply of the relevant invoices coupled with evidence showing that the invoices were paid was sufficient. He submitted that if the court was satisfied that the remainder of Parkwell's business could be supported by the CDR data that is to be found in the Dropbox, albeit that it represents data processed by Mr Zulqarnain in the way and for the reasons explained in the evidence, the court would be entitled to conclude that actual supplies took place through the Sonus switch and rely on the invoices and payments which relate to them. In his fourth witness statement, furnished on the fifth and last day of the hearing for the purpose of responding to points made in the course of earlier argument and to deal with matters mentioned by Mr Wilson, Mr Munir said that all that Mr Wilson needed to do to obtain the CDR data for the Sonus switch was to contact a gentleman named Ilyah in the USA (contact details provided) and that as regards the Free Switch Mr Wilson needed to contact Mr Zulqarnain although "he is unlikely to give free access" to it. The difficulty with the former, aside from its extreme lateness, was that Mr Mehmood had earlier stated (in paragraph of his second witness statement) that Parkwell had already made enquiries regarding the CDR data on it and that "due to the fact that it was merely renting capacity on a partitioned switch used by very many other users, it will not be possible to retrieve the CDR data for this switch." If Parkwell was seeking to say that the data was after all available then it was for it to obtain the data and, if necessary, seek Mr Wilson's permission (as provisional liquidator) to do so. In the same witness statement Mr Mehmood stated that he understood from Mr Zulqarnain that the Free Switch data before July 2013 was no longer available. Again, if in his fourth witness statement Mr Munir was seeking to maintain that the data was after all available to any extent then it was for Parkwell to obtain it from Mr Zulqarnain, who was after all Parkwell's agent and with whom Mr Mehmood was apparently accustomed to deal.
  55. The difficulty with Parkwell's evidence concerning the CDR data derived from the Vos 3000 was that it was entirely dependent on what Mr Zulqarnain is reported to have said to Mr Mehmood. It was all hearsay: Mr Zulqarnain himself provided no direct evidence. As for Mr Mehmood, he was not an officer of Parkwell or even an employee, but worked as a freelance consultant to it. The fact remained, after all the explanations offered through the mouth of Mr Mehmood, that HMRC had not been provided by Parkwell with any direct information from its own records. All of the CDR data that had been supplied had been the product of a processing exercise undertaken by someone who is outside the jurisdiction and, being no more than an outside consultant (so HMRC were informed), wholly unaccountable to Parkwell.
  56. In my judgment Parkwell, despite being offered repeated opportunities to do so stretching back very many months, has failed to produce sufficient evidence to support the taxable supplies to it upon which the assessments for the three quarters to 31 July 2013 are based. It is undoubted that this is so as regards the 10% or so of the supplies said to have been made to it through Free Switch and Sonus. There is really no dispute at all that this is so. As regards the remaining 90% or so which is said to have passed through the Vos 3000 switch, in the absence of the actual CDR data I am unable to conclude that Parkwell's challenge to HMRC's refusal to allow the input tax claims that relate to it amounts to a dispute on substantial grounds: it has had the chance to produce the evidence; the best it can do is supply some processed data which it is quite unable to verify. Parkwell cannot therefore substantiate its input tax claim. Accordingly, HMRC satisfy me that, subject only to demonstrating insolvency, Parkwell is likely to be wound up on the effective hearing of the petition.
  57. This brings me to Mr Lilly's fall-back position, at any rate as regards the missing Sonus data (and, as I understood it, the missing Free Switch data in so far as its absence called into question any part of the tax input claim). This was that the court must be satisfied that Parkwell is insolvent, namely that on a winding up it is likely that it would be unable to discharge the undisputed part of the petition debt. He submitted that that was to be measured not as at the date of appointment of the provisional liquidator but as at the date that the court makes a winding-up order, assuming it does.
  58. What then of solvency? If and to the extent that the assessments stand and are unpaid, that fact is of itself evidence of Parkwell's insolvency. But, in any event, there was quite a body of evidence relating to Parkwell's assets. This was dealt with at some length in Mr Wilson's second witness statement the purport of which was to say that at most Parkwell had assets available to it with a value of no more than £102,000. In his third and fourth witness statements Mr Wilson went further into the assets available to Parkwell and in particular whether it was owed money in respect of sales by it. Although the CDR summaries supplied by Parkwell indicated outstanding sales of over $2.5 million, Mr Wilson felt unable to invoice the customers in question (and thereby become liable to pay the output tax which would be due in respect of sales to the four of them based in the UK) without the supporting CDR data to support the amounts to be invoiced. There was also, he said, evidence to suggest that there might be substantial offsets against the amounts apparently outstanding and issues concerning the recoverability of any amounts he might seek to pursue. In particular there was a suggestion, said Mr Wilson, that much the largest of these supposed debts, a sum of $1.87 million out of a total of $2.58 million said to be claimed by an entity called InterX, was not a debt owed to Parkwell and instead it was Parkwell which was indebted to InterX. In his fourth witness statement Mr Munir stated simply that he believed that InterX and another substantial "debtor" (TDL, for $433,000) were well able to pay what they owed and that a third entity, Echo Calls, was a debtor for $215,650. As against this the evidence of Mr Wilson, derived from his investigation of Parkwell's financial position, was that Parkwell was a debtor of Echo Calls (not the other way round) and that, from credit searches, InterX (which has been incorporated within the past three years) did not generate any credit rating at all and TDL's credit limit was very minimal. There was also a suggestion that InterX had been the subject of striking-off proceedings (subsequently discontinued) and that it had recently been the subject of an assessment by HMRC based on alleged MTIC trading.
  59. The result of all of this was that Mr Wilson was, on the available information, justified in his view that Parkwell was worth little more than £102,000. If Parkwell wanted to challenge this view of its financial position it needed rather more than what was to be found in the statements of Mr Munir. It meant that even if one attributed no more than 5% of the input tax claim to claims for which there was no CDR data to verify the position and one were to allow all of the rest, Parkwell was unlikely, indeed certain, not to be able to pay what it owed if it were to be wound up on the effective hearing of the present petition. The position was even clearer if and to the extent that any Free Switch trading were to be added and wholly beyond argument in so far as the trading said to have been conducted through the Vos 3000 fell to be included.
  60. In these circumstances I am satisfied that HMRC are likely to obtain a winding up order on the hearing of the petition in that Parkwell has failed to produce sufficient evidence to show that at the hearing of the petition it is likely to be able to demonstrate a good arguable case that the supplies to it which are said to support its input claims during the three periods to 31 July 2013 were indeed provided. This conclusion makes it unnecessary to consider the alternative way in which HMRC's claim is put, concerned with the fraudulent evasion of VAT, but, in case I am wrong about the supply basis of claim, I turn to how the alternative case is put.
  61. The fraudulent evasion of VAT basis of claim: the threshold requirement

  62. There is no need to refer to what was said by the ECJ in Kittel. The essential problem, with which Kittel dealt, was the extent to which a trader who was not directly involved in the fraudulent evasion of VAT might nevertheless find that because of what he knew or should have known about the connection of his purchase with the fraud he lost the right to deduct the input tax for which he was liable. In Mobilx the Court of Appeal set out to explain how the approach to this question, enunciated in the jurisprudence of the ECJ, was to be understood and applied. It is sufficient to go straight to the following passages from the judgment of Moses LJ (with whom the other members of the court agreed):
  63. "[52] 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.
    [58] 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.
    [59] 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."
  64. He later came to the question of proof:
  65. "[81] …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…
    [82]. 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.
    [83] 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 [2009] EWHC 2563 (Ch) at [109]-[111], [2010] STC 589 at [109]-[111]:
    '[109] 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.
    [110] 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.
    [111] 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.'"
  66. For present purposes, HMRC have to show that it is likely that they will be able to satisfy the court on the effective hearing of the winding-up petition that Parkwell's purchases were connected with the fraudulent evasion of VAT and either that Parkwell knew that they were so connected or that Parkwell should have known that the only reasonable explanation for the circumstances in which their purchases took place was that they were so connected. (See in this connection the very helpful judgment of John Randall QC (sitting as a deputy judge of this court) in HMRC v SED Essex Ltd [2013] EWHC 1583 (Ch) ("SED"), especially at [14]).
  67. The question then is whether HMRC are likely to be able to establish that the purchases entered by Parkwell which have given rise to its claims to deduct input tax were connected with the fraudulent evasion of VAT. Mr Lilly submitted, and I accept, that it is not sufficient simply to show that Parkwell's trading can be connected to tax losses further up the chains of supply to it but that those losses are linked to a fraud, in particular (in a case such as the present) to the fraudulent evasion of VAT. As to this, Mr Cunningham submitted that the evidence is clear and that the supplies to it in the 14 months to 31 December 2013 are so connected. The evidence of Ms Mason was that, during the period to 31 July 2013 Parkwell used seven UK suppliers, Alexander Khan Ltd ("AKL"), Omni Consumer Products Ltd ("Omni"), Southport Leisure Plc ("Southport"), Connect Trading Ltd ("Connect"), Maxteleco Ltd ("Maxteleco"), I Karim Business Service Ltd ("I Karim") and Black Stallion Traders Ltd ("Black Stallion"). The evidence was to the effect that all of the purchases made by Parkwell from these UK suppliers during this period were connected, either directly or indirectly, with VAT defaults save for two, Black Stallion and Maxteleco. She stated that there were over 100 deals involving 5 transaction chains in which tax loss has been established with Parkwell's UK suppliers. Her evidence further indicated that the transaction with Black Stallion (there was only one deal) was for a very limited supply of test minutes. As regards Maxteleco her evidence was that the supplies by it to Parkwell could not be verified as Maxteleco refused to co-operate with HMRC. (It was regarded by HMRC, in the jargon, as a "blocking trader".) It further appears that Maxteleco was dissolved at Companies House on 26 November 2013 and that that company's claims to deduct input tax were disallowed.
  68. AKL was both a defaulter (it had not paid the VAT it owed) and also a missing trader (HMRC were unable to trace it). It was wound up on the petition of the Secretary of State on 26 March 2013. Ms Mason's evidence set out in some detail the history of default by AKL, the efforts made by officers of HMRC to contact and interview the moving spirit behind the company, a Mr Alexander Khan, the paucity of the information elicited from Mr Khan or otherwise available about the company and its activities when contact with him (in July 2013) was finally made, the quite woeful absence of record keeping in connection with the company's supposed trading activity, his inability during that interview to answer the most basic questions concerning that activity and his subsequent failure to attend for further interview despite repeated efforts to contact him. The position regarding Omni was no different from AKL. This was scarcely surprising as Omni shared the same Manchester address as AKL and it was Mr Khan who controlled that company as well. I quote from Ms Mason's first affidavit concerning this company's activities and the lamentable state of affairs disclosed following its winding-up by the Secretary of State in June 2103:
  69. "…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."
  70. The trades with AKL were early January to late February 2013 and, according to Parkwell's records, totalled over £5.3m in value. Those with Omni were from the start of March to the middle of June 2013 and amounted to £14.5m in value. The obvious inference from all of this (it is set out in detail in paragraphs 287 to 308 of Ms Mason's first affidavit) is that the businesses of both AKL and Omni were conducted with a view to the fraudulent evasion of VAT. If Parkwell wanted to dispute any of this it was free to do so. It failed to adduce any countervailing evidence.
  71. The position regarding Southport is scarcely better. It too is a defaulter. It has wholly defaulted in the payment of the VAT assessment made against it (for £524,000 odd). Its trades with Parkwell were six in number, all of them in December 2012, for a value of just over £1.9m. It too shared a connection with AKL as "due diligence" produced in respect of this company showed (see paragraph 246 of Ms Mason's first affidavit) that "traffic" was to be through AKL's IP address. Mr Munir himself volunteered that he was introduced to that company by Mr Khan and that a Mr Raj (to use his shortened name) who was employed by Mr Khan in the running of AKL was a director of Southport. Indeed, the evidence suggests that AKL, Omni and Southport were connected with one another.
  72. Connect's supplies to Parkwell are shown to have been between 11 March and 18 July 2013 and amounted to £24.2m in value. According to Ms Mason, HMRC experienced a long history of failures by Connect to comply with requests for information. It was suspected of acting as a "buffer". It was de-registered on 18 July 2013. Tax losses amounting to £3.5m were identified with it (as I understood the evidence, in connection with defaults higher up the supply chain). It defaulted in the payment of tax due.
  73. In the case of I Karim the evidence established that it was a supplier to Parkwell in deal chains going back to tax losses involving, among others a company called Hamperhut Ltd. The evidence indicated that it was a Mr Adam Ali who dealt with Hamperhut's IT and electronic communication systems' business. Further enquiries gave Ms Mason good grounds for thinking that Mr Ali was none other than Mr Khan (of AKL and Omni). (See paragraphs 383 to 391 of her first affidavit.)
  74. As regards non-UK suppliers to Parkwell, HMRC were, in the absence of mutual assistance agreements with the relevant countries where those suppliers were located, without access to information which would indicate whether the transactions traced back to tax losses in those jurisdictions and, if so, what the reasons were for those losses.
  75. Ms Mason's evidence explores in some detail some of the supply chains in which Parkwell was a link and the losses associated with those chains. No useful purpose will be served by rehearsing all of that evidence. Taken together it is reasonably obvious, and sufficiently so for the purposes of the current application, that the losses in question have not arisen as a result of a sudden or unexpected downturn in trading fortune by the taxpayer in question but as a result of the deliberate manipulation of the regime for the payment of VAT.
  76. Although Parkwell made a concession in relation to the existence of the antecedent tax losses or the reasons for them none of Ms Mason's evidence about these matters was seriously challenged. Instead, Parkwell's approach was to challenge that either it knew that this was so or had the means of knowing that there was no other reasonable explanation for the losses. In the circumstances, therefore, I am satisfied and proceed on the basis that HMRC establish a likelihood that the transactions entered into by Parkwell with its UK suppliers (in respect of whom, alone, the claims to deduct input tax could arise) were connected with fraudulent tax loss transactions either in the conduct of its own suppliers or higher up the supply chain to it.
  77. What then of Parkwell's knowledge that its purchases were so connected? Is the connection of so many purchases to transactions which have caused tax losses to HMRC the result of innocent coincidence or does this fact betoken actual or deemed knowledge (in the sense explained in Mobilx) on Parkwell's part that its purchases were so connected? This brings me to the other matters on which HMRC relied and on Parkwell's responses to that evidence.
  78. HMRC point first to the Parkwell's failure, despite reminders going back many months, to produce the CDR data relating to the supplies to it. Instead it has had to rely on the processed information provided by Mr Zulqarnain. I have already dealt with this at some length.
  79. Next they point to what they describe as the wholly inadequate due diligence in respect of those with which it was dealing. As to this it is clear that Parkwell was warned, as early as July 2012, of the importance of carrying out enquiries into those with which it was dealing. Parkwell was referred to Notice 726 and "how to spot an MTIC fraud". A summary was provided of the kind of steps that should be taken. A further reminder was sent a year later by which time, as the reminder pointed out, HMRC were able to say (as they did in their letter to Parkwell of 4 July 2013) that 26 of the transactions in Parkwell's returns for the periods to 1 April 2013 and 1 July 2013, where the whole of the supply chain had been established, started with a defaulting trader. The letter gave details of the supplies to Parkwell. They all came from Omni (mentioned earlier). Parkwell was reminded of Notice 726 and a copy of the relevant section attached. Parkwell was reminded that it had the responsibility to satisfy itself that it had undertaken sufficient due diligence commensurate with the perceived risk to be satisfied as to the integrity of both its supplies and its customers and of the underlying supply chains.
  80. It is clear from the evidence to which I was taken either that no due diligence was undertaken in respect of the suppliers with which Parkwell dealt or that the diligence undertaken was at best perfunctory and in some cases carried out after the supplier in question had ceased trading. Take AKL by way of example. As I have mentioned, its trading with Parkwell was said to have amounted to over £5.3m during a short period, amounting to more than a few weeks, ending in late February 2013. Yet the only diligence in respect of this company undertaken by Parkwell was supplied and signed (both by Mr Khan of AKL and by Mr Munir of Parkwell) long after trading had started (and indeed ended) and, what is more, after the company had been wound up. Even then, the diligence was entirely of the self-certifying kind. No third party checks were apparently carried out. Nor perhaps, given the dates of the diligence relied upon, could any such third party checks have been undertaken or, if undertaken, honestly completed. As Mr Cunningham observed, what was relied on as due diligence was the very reverse of what one might have expected if the diligence had been genuinely and timeously conducted.
  81. There was a similar story as regards Omni, Mr Khan's other company. Although various checks were carried out into this company by Parkwell, none was independently verified and no credit check was undertaken. On 2 May 2013 the Official Receiver was appointed provisional liquidator of this company following the presentation of a winding-up petition presented to the court by the Secretary of State on 3 April 2013. It was wound up on 10 June 2013. Yet, if Parkwell's invoices were to be believed it continued to trade with Omni (and received supplies for which it was invoiced and made payment) not only after the Official Receiver had been appointed provisional liquidator but after even the company had been made the subject of a winding up order. The picture is the same with respect to suppliers called Southport, London Telecom Exchange Ltd (or "Ltex") and TLT Communications Ltd (two other entities with which Parkwell dealt).
  82. Next, my attention was drawn to the fact, as I am satisfied was the case, that the entities dealing with Parkwell were at times customers and at other times suppliers. Of itself this did not seem to me to amount to much of a point.
  83. Next is the fact that Parkwell experienced a quite remarkable increase in the volume of its trading. It did not start to trade until towards the end of 2011. By the end of October 2012 its outputs had risen from zero (as at the previous year end) to over £1.7m. In the succeeding 12 months its outputs shot up to over to over £50m. The increase in trading implied by these figures was huge. In his first witness statement Mr Munir sought to explain this by reference to what he described as "the expansion on the worldwide market" and Parkwell's "deliberate growth and expansion strategy". The increase was nevertheless striking and the overall volume quite staggering.
  84. Then there is the fact that Mr Munir was in any event familiar with the dangers of MTIC fraud. He had been a director of a company called AM Projects Ltd which was in the business of importing cars from Germany. This led in due course to the company trading in vouchers which unlocked phones from any mobile network operator. It seems that after various visits by HMRC the company was denied an input tax claim for £237,343 on the basis of the connection between the transactions in question with MTIC fraud and, instead, was assessed in the sum of just under £83,000. The allegation was that AM Projects Ltd was part of a trading cell of companies, called Cell 5, and that AM Projects knew or should have known that this was the case. In his first witness statement Mr Munir stated that he did not challenge the assessment, although he had been advised that he had grounds to do so, as he could not afford the cost. In due course, in December 2010 AM Projects was wound up on the petition of HMRC. The significance of this was Mr Munir's awareness, before Parkwell had started to trade, of issues concerned with MTIC fraud even if, as he claimed, his then company was innocent of any role in the chain which gave rise to the assessment and to the company's eventual winding-up.
  85. Next is the fact that, notwithstanding its very large volume of trading, Parkwell did not at any stage obtain credit insurance. It evidently felt that, despite its financial exposure to customers (there was reference in its evidence to the large sums owed to it by customers), such a precaution was unnecessary.
  86. Another matter mentioned was the fact that Parkwell used offshore banking platforms (operating online) through which to make and receive trading payments. Very limited paperwork relating to these platforms (and for the dollar and sterling accounts that Parkwell operated onshore through NatWest) was forthcoming. This meant, as Ms Mason explained, that she has been unable to reconcile the banking records which have been furnished with the invoices Parkwell produced to support its trading. She was unable to make them tally. Nor was it satisfactorily explained why Parkwell felt the need to conduct so much of its banking offshore.
  87. Next is Parkwell's keenness to continue its trading relationship with Connect. This company, as I have mentioned, was a supplier to Parkwell. On 4 July 2013 HMRC advised Parkwell that 18 transactions which Parkwell had conducted with Connect had been traced to a tax loss of over £2m. Parkwell seemed to think that it received HMRC's letter on about 10 July. By then, Parkwell had been trading with Connect for several months. Mr Munir said that he was "shocked and concerned" to receive HMRC's letter, so much so, he went on to say, that he immediately called Mr Ibrahim of Connect to ascertain the position. According to Mr Munir, Mr Ibrahim told him that Connect was not a defaulting or missing trader, that its suppliers were not either and that it was in dispute with HMRC. Mr Munir stated that, on the basis of Mr Ibrahim's assurances and a further assurance that Connect was already using alternative sources of supply, he felt "comfortable" with Parkwell continuing to trade with Connect. In the meantime, on 15 July 2013, Parkwell asked HMRC, through their Wigan verification service, for a VAT validation of Connect. It evidently felt the need for this assurance. Without waiting for a reply and despite the warning from HMRC, Parkwell continued to deal with Connect. It did so without troubling to carry out any independent due diligence in relation to the company, content simply to act on the word of Mr Ibrahim. Such further trading continued until 18 July when HMRC emailed Parkwell to say that Connect had been de-registered and that any VAT bill incurred by Parkwells from deals undertaken with it would not be reclaimable as input tax. Only then, when Parkwell faced the prospect of a disallowance of input tax, did the trading cease. The question, said Mr Cunningham, was whether this continued trading was the conduct of a prudent trader. If it was not, the question which arises is why Parkwell was willing nevertheless to continue to deal with the supplier in question.
  88. Similar to Connect is Parkwell's continued trading with another supplier, called I Karim Business Services. On 4 November 2013 Ms Mason emailed Mr Kinsella (Parkwell's tax advisers) to warn that Parkwell had traded with this supplier and that "those transactions have commenced with a defaulter..." Despite this warning Parkwell continued until January 2014 to trade with I Karim. One might have thought, if Parkwell was acting honestly and prudently, that its experience with Connect would have led it to adopt a more circumspect approach.
  89. Next, I was taken to evidence of what Mr Cunningham described as the diversion of funds. This was evidence concerned with the payment away of funds belonging to Parkwell after and notwithstanding service of the order appointing Mr Wilson provisional liquidator. What happened is dealt with in paragraphs 12 and following of the witness statement of Jane Wessel.
  90. Ms Wessel had been appointed as an independent supervising solicitor pursuant to paragraph 1 of schedule 2 to the order of Hildyard J of 18 March 2014. It was her role to accompany Mr Wilson and his representatives when they sought to gain access to Parkwell's premises following the making of the order and to act as an independent witness to events, offering to explain to those affected by it the terms and effect of the order and retaining for safekeeping any items of property found at the premises which contained information in electronic form which allegedly did not relate exclusively to Parkwell's business or assets.
  91. According to Ms Wessel's evidence, the order was served on Parkwell by no later than 10.48am on 19 March. By then, according to Ms Wessel, the order had also been served on Mr Munir and she had explained to him its meaning and impact and his duties under it. (It is to be noted that first in the list of functions and powers conferred upon the provisional liquidator by the order is the duty to take possession of, collect in and protect Parkwell's assets and not to distribute or part with them except as may be ordered or in pursuance of his functions and powers.) Ms Wessel went on to tell Mr Munir of his right to obtain independent legal advice. As this was happening Mr Chaudhry appeared. Shortly afterwards Mr Chaudhry said that he was going to ring someone called Kevin, who as Ms Wessel later learned, was Parkwell's accountant, Kevin Kinsella. According to Ms Wessel, at 11am Mr Munir received a call on his iPhone and a few minutes later Mr Kinsella turned up. Mr Chaudhry asked how quickly Parkwell could appeal against the order appointing Mr Wilson provisional liquidator. It was evident that he had understood what the order was about. At 11.20am Mr Munir, Mr Chaudhry and Mr Kinsella stepped out of the building to confer. They returned a few minutes later. At 11.35 am Mr Munir and Mr Chaudhry took Mr Wilson, Ms Wessel and the other who had accompanied them on a quick 5-minute tour of Parkwell's premises. There is no challenge to any of this in the evidence served on behalf of Parkwell.
  92. Mr Wilson later discovered that at 11.07am that same day, 19 March, Parkwell had given NatWest an 'urgent' instruction for the transfer of US$ 293,000 to Global Marketing Solutions Limited which I understand to be an offshore banking platform hosted by a Hong Kong Bank. Payment details furnished by NatWest indicated simply the name 'Echo' as the beneficial recipient. This is understood, without challenge, to be a reference to Echo Calls. It appears that Mr Farooq, Parkwell's principal shareholder, gave the payment instruction. It seems very unlikely that he was not informed of the making of the order when he gave the instruction. There has been no evidence on this application from Mr Farooq. It is not therefore known what his state of knowledge was when he gave the instruction. On any view the payment away of so large a sum so shortly after the order had been served and explained (at least to Mr Munir and Mr Chaudhry) was, to say the least, unfortunate.
  93. That was not the only payment made that day. At 8.47am that same day – before the order had been served – US$137,000 was transferred to Echo Calls through Parkwell's Vertecto Trading Platform. Later that day, at 14.53pm and therefore well after service of the order, a further payment was made, this time for US$28,322.24. It was through the same trading platform. It has been claimed that the payment was made on the instruction of Mr Farooq and that he was unaware of the order when he gave the instruction although it is admitted that at some stage that day he attended Parkwell's premises. Again, it would have been helpful to have heard from Mr Farooq but Parkwell has chosen not to rely on any evidence from him. These two further payments were both for the benefit of Echo Calls. Like the other payment they were, to say the least, unfortunate.
  94. The following day, by which time on any view Parkwell's officers were all fully aware of the order and its effect, a further payment was made. This was for US$308,303 and like the other three was for the benefit of Echo Calls. It was carried out on the instruction of Mr Chaudhry. An email from him to Pakistan Telecommunication Company Ltd ("PTCL"), timed at 13.02 and marked "High [importance]", reads: "Please could you transfer the Balance to Echo Calls with immediate effect." Mr Wilson was later informed that PTCL acted on that instruction and transferred $308,303. It was initially claimed on behalf of Parkwell that Mr Chaudhry had sent his email without the knowledge of Parkwell's two directors, namely Mr Munir and Mr Farooq, and that in any event it was at a time "when the legal implications of the Order were not fully understood by those associated with the Company…" But that is in conflict with the clear evidence of Ms Wessel. And, aside from the fact that neither Mr Chaudhry nor Mr Farooq has chosen to provide any evidence to explain their actions, Mr Munir, although he has filed copious evidence, has chosen to say nothing about what was happening at this time. In this connection it is of more than passing interest to note that the email instruction from Mr Chaudhry to make the payment was preceded by and was in response to an email from PTCL which was sent both to Mr Chaudhry and to Mr Munir. The emails strongly suggest that Mr Munir was fully aware of what was afoot. In his only comment on these matters, Mr Munir stated that he did not have access to his email on 20 March (although, as he went on to state, he was able to access them on his mobile phone) and claimed that Mr Chaudhry did not copy him into his email instruction to PTCL. But is it credible that Mr Chaudhry would have acted entirely on his own initiative and without the authority of either of the two directors who between them owned 75% of the shares in Parkwell?
  95. The strong impression left by the last at least of these payments – on a hearing of this kind it cannot be a definite finding of fact - is that Mr Chaudhry was acting in conscious defiance of the court's order and that Mr Munir and Mr Farooq were aware of and took no steps to prevent the breach. If that is correct it calls into question the honesty of those persons and is relevant also to whether I should exercise my discretion to return Parkwell to the control of its directors pending the hearing of the petition. This is a matter I return to later. As I have mentioned, no evidence has been filed by any of Parkwell's officers to explain their side of the story and seek to dispel the strong impression given by these events except to the limited extent referred to in the case of Mr Munir.
  96. Over the course of those two days Echo Calls had received over $766,000 from Parkwell. They were transfers to a recipient based outside the jurisdiction. Not surprisingly, Mr Wilson was keen to discover why Parkwell should have wanted to make these payments. He made enquiries and was told that Echo Calls' contact address was in Dubai. In the course of his enquiries he came into possession of an email dated 18 February 2014 (a month before the order was made) in which Mr Farooq asked PTCL to send him "a statement of account for all payments sent to you on behalf of Parkwells in the last 2 months." PTCL responded the following day with an email to both Mr Farooq and Mr Munir in which details of the "balance of traffic" up to 18 February were provided. But they were not confined to Parkwell; they included PTCL's balance with Echo Calls. The balances were stated to be "(after transfer of $800K to Echo Calls)" and "(after transfer of $800K from Parkwells)". In his third witness statement Mr Munir described the inclusion of the balance on PTCL's account with Echo Calls as "a mistake". I cannot decide whether it was a mistake. If it was, I was not shown any follow-up email from Parkwell at the time pointing this out. What is more, in the evidence was an email from Maxteleco to Parkwell, enclosing a Maxteleco invoice to Echo Calls, in which Parkwell is asked to arrange for payment of the invoiced sum. Mr Farooq then sent without comment a copy of the email to Mr Chaudhry. Why should Maxteleco be making this request? No explanation is offered in Parkwell's evidence. At the very least, the impression given is of a close and unexplained connection between Parkwell and Echo Calls. As I have mentioned, Echo Calls finds itself the recipient from Parkwells of US$766,000 within hours of the making of the order appointing Mr Wilson the provisional liquidator, leaving Parkwells poorer by that amount. It is, to say the least, a very unfortunate turn of events from the standpoint of Parkwell's creditors and a very happy one for those interested in Echo Calls.
  97. Mr Lilly said that, in the light of HMRC's evidence, Parkwell accepted that it had the burden of showing that the court could not be satisfied on the evidence currently before it that Parkwell's winding-up be would be likely when the petition came on for disposal. He referred me to what was said in Three Rivers DC v Bank of England (No 3) UKHL 16; [2003] 2 AC 1 about the need on a summary application (as in many ways this was) to explore simply whether the defences raised had a real, as distinct from a fanciful, prospect of success, to avoid a mini-trial or a lengthy and detailed examination of the facts, especially where they are complex, and about the danger of coming to conclusions without the benefit of disclosure, oral evidence (where a witness's credibility is at stake) and, where appropriate, expert evidence. He submitted that HMRC was seeking to subject Parkwell to too high a standard in this regard when, in truth, it had done sufficient to discharge the burden on it.
  98. He submitted that, even if – as I am satisfied that they can - HMRC are able to show that Parkwell's trading was connected to tax losses further up the chains of supply to it and that those tax losses were linked to a fraud, it was mere assertion that, at the time of the transactions which give rise to its input claim, Parkwell knew or had the means of knowing that this was so. It was not sufficient, he submitted, that there were oddities in Parkwell's behaviour or unanswered questions. It was not enough to criticise some omission on Parkwell's part unless it could be shown that the action Parkwell should have taken would have revealed to it information which would or could have uncovered fraud as the only reasonable explanation for the transactions in question.
  99. Coming to the particular matters on which HMRC relied he submitted that it was significant that, when told by HMRC that Connect had been de-registered for VAT purposes, Parkwell ceased to take further supplies from it. In the meantime it acted on assurances from Connect's director that all was well. It was entitled to do so. He submitted that Parkwell's due diligence was adequate in the circumstances in that it uncovered nothing which indicated that its transactions were linked to MTIC fraud and nothing had been suggested to indicate what steps it should have taken which would have uncovered the existence of fraud higher up the supply chain. Nor, he said, was there anything indicative of fraud in the fact that Parkwell's trading partners were both suppliers and customers. As to the sudden increase in the volume of Parkwell's trading this was attributable to a rapid expansion in the worldwide market in this field coupled with Parkwell's policy of growth. There was, he submitted, nothing sinister in this. He also pointed out that at the time this was happening Parkwell engaged the services of Mr Ali Radpour (mentioned below) who brought market experience and business contacts with him, all of which contributed to Parkwell's growth. The fact that Mr Munir had once owned and operated a company, AM Projects Ltd, which eventually failed because of its alleged connection with a supply chain where there were allegations of fraudulent tax losses, was no basis for inferring the existence of fraud higher up Parkwell's supply chain, much less that Parkwell knew or had the means of knowing this. Nor was it relevant that Parkwell had no credit insurance. Mr Munir's evidence was that Parkwell was unable to agree the terms and premium for such a policy. The reason why Parkwell made use of so-called offshore banking platforms was, as Mr Munir explained, simply the need to make rapid cross-border payments. The use of UK-based accounts would have been slower in achieving such payments. The fact that Parkwell had not been able, prior to the appointment of Mr Wilson as provisional liquidator, to supply the CDR data generated by the switches it used had been explained. There was no reason why HMRC should not now be content, at any rate for the purposes of the current application, with the data supplied through Mr Zulqarnain which covered 90% of the trading in question.
  100. Over and above those specific responses to the various pointers indicative of the existence of MTIC fraud upon which HMRC relied, Mr Lilly drew attention to a number of factors which, he submitted, were strong indicators against Parkwell's involvement in MTIC fraud. These were (1) the engagement as a consultant of Mr Radpour, a telecoms engineer with 15 years of experience in the industry and introduced to Parkwell by BT Wholesale, to help Parkwell overcome problems associated with poor call quality and help it to move from being a Tier 3 supplier to being a Tier 2 supplier; (2) the steps which, at the time of Mr Wilson's appointment, it was in the process of taking and which had involved the payment of a deposit of over 74,000 Euros in order to invest in a hard switch and thereby expand its business; (3) the steps it was taking with the assistance of Mr Radpour and a Mr Richard Lane of SS7 Consulting to obtain regulatory approval, through OFCOM, to enter into the Tier 2 market; (4) the payment of a US$ 500 fee to gain access to an exchange through which to contact industry members and thereby access market databases; (5) the purchase, at a cost of $2,600 per month, of a licence to enable Parkwell to use an authorised switch when it was discovered that the previous switch it had been using was "cracked", i.e. unauthorised; (6) attending industry conferences here and abroad; (7) the employment by Parkwell of six members of staff, resulting also in the payment of PAYE and NIC for them; and (8) the payment of a £20,000 deposit to BT Wholesale for the purchase by Parkwell of traffic from it as a step in the process of BT Wholesale becoming a customer of Parkwell. Mr Lilly said that there would have been no point in Parkwell taking these steps, especially the moves to register as a Tier 2 provider, if Parkwell's purpose was simply to engage in fraudulent activities.
  101. Forcefully though Mr Lilly had made his points I was satisfied at the conclusion of the argument that HMRC had adduced sufficient evidence to persuade me that, on this ground of attack as well as on the question of Parkwell's entitlement to the VAT inputs it claims (irrespective of MTIC fraud), it was likely that Parkwell would be wound up when the petition came on for disposal. Mindful of the dangers mentioned in Three Rivers and other authorities of reaching conclusions on what is essentially a summary hearing, I am persuaded, looking at the totality of the evidence, including what Parkwell did and, conversely, did not do but could have done, not only that Parkwell's dealings were connected to the fraudulent evasion of VAT, but also, and critically, that its directors either knew or had the means of knowing that this was the only reasonable explanation for the transactions in question, the overwhelming bulk of which (during the period Ms Mason was able to examine) are traceable directly or indirectly to transactions which have resulted in tax losses to HMRC. On the clear balance of the evidence I have been shown, I am satisfied that what little due diligence Parkwell undertook was at best perfunctory and fell far short of what an honest trader, anxious to ensure that he was dealing with reputable suppliers and others, would have carried out and that the circumstances in which, despite warnings, Parkwell continued to trade with Connect and with others without credit insurance merely gives strength to the impression that these were not the actions of an honest trader. The fact that Mr Alexander Khan was intimately connected with three of Parkwell's principal UK suppliers, the conduct of whose businesses together with their very considerable tax losses is so strongly suggestive of an intention to defraud the public revenue, adds powerfully to this impression. To be added to all of this are the extraordinary volume of trading, achieved over so short a time span, the use (for which no convincing explanation was given) of offshore banking platforms, Parkwell's persistent and inexplicable failure to supply any of the raw CDR data from the switches it used, its inability from what information was provided to show how the supplies to it were matched by its sales and to link all of this with its invoices and the payments it received and made and, not least, the unexplained circumstances in which the transfers to Echo Calls were made of large sums of Parkwell's money in the immediate aftermath of Mr Wilson's appointment, at least one of which appears very probably to have occurred with knowledge and in defiance of the court's order making that appointment. Without something rather more in the evidence from Parkwell than what I was shown, I am satisfied not only that HMRC have shown what they need to in order, without more, to obtain a winding up order on this basis when the petition comes on for disposal but also that Parkwell has failed to demonstrate by the evidence that it has chosen to deploy that it has a good arguable case either that its supplies were not connected to the fraudulent evasion of tax or that it lacked the necessary knowledge that this was so. As the references to what was said in Mobilx and SED show and as common sense would suggest, there comes a point when the accumulation of evidence, unless sufficiently answered, leads to the court to conclude that the trader in question either knew or had the means of knowing that the only reasonable explanation for the supplies to it which are in issue were connected to the fraudulent evasion of tax. That point was reached on the totality of the evidence before me.
  102. The fact, as I shall assume to be the case, that the eight steps were being taken which are listed at paragraph 86 above does not undermine this conclusion. The matters referred to are for the most part steps to enhance and streamline Parkwell's trading activity. There was no indication that they necessarily involved or would necessarily lead to any greater measure of independent scrutiny of Parkwell's trading activities. The involvement of Mr Radpour (he is referred to in two of the eight listed matters) scarcely helped: there was evidence that he had once been employed by a company which had been denied a claim for the repayment of input tax on the ground that it knew or should have known that its transactions were connected with fraud. Mr Munir stated that the tax in question related to a period some months before Mr Radpour joined the company although the denial of the claim was at a time when Mr Radpour was employed by it. At the very least, Mr Radpour's association with such a company was another unfortunate coincidence.
  103. The discretionary requirement

  104. The question here is whether, even though HMRC are likely to obtain a winding up order on the hearing of the petition, it is appropriate, pending that hearing, to maintain Mr Wilson (as provisional liquidator) in office. Should he be allowed to continue in office or should he be removed? Nothing is said against Mr Wilson personally; rather, the dispute is as to the continuance of the provisional liquidation. In SED Mr Randall QC asked (at [64]) whether, the company there having been in provisional liquidation for almost six months and with its trading having been terminated when the appointment was made, it was "safe or sensible" to return the company to the control of its own management for the few weeks between the hearing before him and the effective hearing of the petition to wind it up. That simple and practical approach seems eminently appropriate to this case.
  105. This brings into question the reasons why a court appoints a provisional liquidator in cases of this kind. As to that Rimer LJ pointed out in Rochdale (at [99] and [100]) that
  106. "[99]…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…
    [100] 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."
  107. Mr Lilly submitted that it was no longer appropriate, if ever it had been, to maintain Mr Wilson's appointment. He argued that it was too late for HMRC to voice concerns about whether, if Parkwell's management were to be returned to its directors, records might be altered, destroyed, or go missing. If, which he denied, that had to any extent been the directors' intention they had had ample opportunity to do these things before Mr Wilson had been appointed. In any event, he said, there was no longer anything to conceal. Nor, he submitted, repeating what he had said earlier in response to the allegation concerned with the fraudulent evasion of VAT, was there substance in the accusation that the directors, Mr Chaudhry in particular, had made payments away of Parkwell's monies in knowledge of and in defiance of Mr Wilson's appointment. Over and above responses to negative factors of that kind, he submitted that the court should give weight to the fact that Parkwell had been profitable, that there were strong pointers (summarised earlier) suggestive of Parkwell's good faith and that Parkwell was far more than a bare shell and, if allowed to continue trading under its previous management, could continue to operate as a profitable business.
  108. I was unpersuaded by any of this. In my judgment the remarks of Rimer LJ at [100] of Rochdale are precisely in point. At the very least 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. This assumes, in Parkwell's favour, that the company has carried on genuine trading and that the problem is simply one of proper accounting and record keeping. The CDR data has not been produced. The material before the court, going beyond those matters and indicating that the company has been used as a vehicle for the fraudulent evasion of VAT is considerable and, as yet, unanswered adds considerably to the need for some kind of court-controlled intervention. Then, despite protestations to the contrary by Mr Munir, there is the strong evidence that in the immediate aftermath of the service of the order appointing Mr Wilson provisional liquidator large amounts of money belonging to Parkwell were transferred in the circumstances which I have described. Nor is that all. There is evidence that after Mr Wilson was appointed provisional liquidator passwords were changed on two of Parkwell's email accounts and that two other email accounts were deleted. This happened without Mr Wilson's approval. Only someone with knowledge of the relevant passwords could have accessed the accounts. It is difficult to think who might have been responsible if not one of Parkwell's officers or former employees with access to the passwords. Mr Wilson and his staff have encountered other problems with Parkwell's email accounts, suggestive of outside interference, which I do not need to set out. In all of these circumstances, the company having long since ceased to trade, the case for continuing with the provisional liquidation until the effective hearing of the petition is amply made out. The overall balance of convenience plainly favours that course.
  109. The undertaking in damages

  110. Should then the court require HMRC to provide an undertaking in damages as a term of the continuation of the provisional liquidation? That is the final issue which fell for decision.
  111. In the present case, as I have explained, Hildyard J required, and HMRC undertook, that if HMRC were later required to give such an undertaking it would apply retrospectively to the date of his order, that is to the date of Mr Wilson's appointment as provisional liquidator. The judge clearly envisaged that a later court, after hearing argument or with the benefit of different evidence, might conclude that an undertaking should have been given, even though he had not thought it appropriate to require one. And if an undertaking should have been given it would ordinarily be important to backdate it to the date of the appointment in order to compensate the company fully if it should turn out later that the appointment should not have been made. The question therefore is in a sense twofold, namely (1) whether it was right, when the matter was before me, to require HMRC to offer one and (2), if it was, whether in the circumstances I considered that the undertaking should have been given when the order was first made. As I was of the view, at the conclusion of argument on the point, that the circumstances did not justify requiring HMRC to offer an undertaking and I was unable to see that, at the time the appointment of the provisional liquidator was made, it was appropriate to require one, I indicated that I was not willing to require an undertaking. What follows are my reasons for this conclusion.
  112. The court is naturally cautious about appointing a provisional liquidator to a trading company where the consequence is almost inevitably to bring the company's trading to an end. In some cases (for example, where the trading is believed to be in fraud of the public) this may be the object of the appointment, but the importance of treading warily is just the same. The need for caution was a matter to which in Rochdale Rimer LJ (at [76]) and Lewison LJ (at [109]) both referred. In cases where such an appointment is to be made, the court's inclination will be to want to provide the company with some kind of protection in the event that it turns out that the appointment should not have been made. Extracting from the petitioner an undertaking in damages to the company as a term of the appointment is the obvious step to take and, in my experience, the course usually followed. In other cases, especially where there is nothing to suggest dishonesty on the part of those who control the company, the court will explore whether some lesser remedy, for example a freezing injunction or an order for the production of documents, may suffice.
  113. At the heart of the argument before me was whether it was appropriate to require a public body, such as HMRC, to give such an undertaking. The general rule of practice followed by the courts is that where in support of proceedings brought by a public body to secure enforcement of the law or in pursuance of a public duty interim relief is granted against another, for example a freezing injunction, that body will not normally be required to provide an undertaking in damages. This stands in contrast to a private litigant pursuing his private interest where the almost invariable practice is to require such an undertaking. The rationale behind this is that whereas a private litigant has a choice (guided no doubt by what he regards as being in his own best interests) whether to litigate and if so whether to apply for interim relief, a public body, discharging a public function or duty, does not. This practice, which is not absolute, is well established in the authorities. But, as the authorities show, the rule of practice is not cut and dried. The question here is whether it should apply to HMRC acting as collectors of the public revenue, and even if it otherwise should whether it should apply where the interim relief claimed is likely to have (and has had) such a terminal effect on the company's trading. Mr Lilly submitted that the practice should not apply and that HMRC should be treated like any other creditor, not least when they could have resorted to what he described as "less intrusive mechanisms" to protect the interest they were seeking to serve, for example summary judgment in the VAT appeals or withdrawing Parkwell's VAT registration. Mr Cunningham submitted that the usual practice should be followed (as Hildyard J followed it) of not requiring an undertaking. He submitted that there was nothing unusual or special in the facts of the case to justify departure from that practice.
  114. The recent origins of the practice are to be found in the decision of the House of Lords in Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 as interpreted by Sir Robert Megarry V-C in In re Highfield Commodities Ltd [1985]1 WLR 149. It is sufficient to refer only to what was said in the recent decision of the Supreme Court in Financial Services Authority v Sinaloa Gold plc [2013] UKSC 11; [2013] 2 AC 28 ("Sinaloa") where these and other authorities were considered. After reviewing what was said in Hoffmann-La Roche and a later authority Lord Mance JSC, delivering the judgment of the court in Sinaloa, said this (at [27]):
  115. "27. In In re Highfield Commodities Ltd [1985] 1 WLR 149 Sir Robert Megarry VC interpreted the Hoffmann-La Roche case [1975] 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 [1988] 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 [1989] 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 [1993] 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 [1999] 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 [2010] 1 WLR 172 applied the line of authority including the Kirklees case [1993] AC 227, In re Highfield Commodities Ltd [1985] 1 WLR 149 and the Lloyd-Wright case [1994] 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."
  116. And (at [30] and [31]) he took up the contrast between private right and public duty:
  117. "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."
  118. These and other considerations led Lord Mance to reach the following conclusion (at [33]):
  119. "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."
  120. When appointing a provisional liquidator on 18 March Hildyard J did not consider the circumstances to justify departure from the usual practice and therefore declined to require an undertaking. As I have indicated, he qualified that in case a contrary view should be reached on a challenge to his order and there should be a wish that the undertaking capture events that had occurred since the appointment had been made. Despite having now heard from Mr Liily and been taken to rather more evidence than was before Hildyard J, I have reached the same conclusion as he did. In any event, the main thrust of the argument which Mr Lilly advanced was that HMRC should be treated like any private litigant petitioning for the winding-up of a company for non-payment of a debt and that other, lesser, interim remedies should have been considered. I do not accept that when petitioning to recover unpaid tax HMRC should be treated like any private litigant. When suing to enforce a claim for unpaid tax HMRC are exercising a public function; they are a public authority bringing a claim in the public interest. Any recovery is for the public benefit since it goes to increase the general revenue without which the modern state cannot function. Nor, for the reasons explained earlier, is it the case that lesser remedies would have sufficed.
  121. Result

  122. The application fails and Mr Wilson's appointment as provisional liquidator (and the terms on which he was appointed) will continue pending the effective hearing of the petition.

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