England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF HIS HONOUR JUDGE PLAYFORD QC

		Royal Courts of Justice Strand London WC2 Wednesday, 7th November 2001

1. MR JUSTICE BURTON: The Commissioners of Customs and Excise ("the respondents") have claims against two defendants, Mark Richard Sawyer, trading as www.Marky-boy.co.uk ("Sawyer"), and Power-Serve (UK) Ltd ("Power-Serve"), the sole director of which is Mr John Kaberry. Both these defendants dealt in micro-processors or computer chips ("chips") and did so in a manner which the respondents allege amounted to a substantial VAT fraud, described as a carousel fraud, resulting from the fact that the defendants purchased the chips without VAT but when they sold on they charged VAT to their customers and kept all or most of that tax rather than accounting for it to the respondents.
2. After the initiation of proceedings against the defendants, freezing orders were obtained by the respondents against them on 15th March 2001 which succeeded in freezing substantial amounts in the defendants' bank accounts: £3,295,425 in the case of the Sawyer accounts and £1,797,293.70 in the case of the Power-Serve accounts. At the time of the freezing orders the appellants, Valley Supplies Ltd ("VSL"), and Tradelink Distribution Ltd ("Tradelink"), interveners in the proceedings, who were purchasers of chips from the defendants, had paid moneys for supply of chips which had not been delivered, almost certainly as a result of the impact on the business of the defendants of the freezing orders. The appellant interveners, having paid over the moneys and not having received the chips for which they had paid, have claimed the return of those moneys, which claim has been framed in a number of different ways, as a proprietary claim and as a money claim, for the return of sums paid on the total failure of consideration or as damages. The defendants accept that the moneys are due to the appellants, and but for the freezing orders would have paid up.
3. After analysis of the state of the accounts between the defendants and the appellants, the respondents pointed out that there had been an earlier delivery of chips to VSL on 15th March, the day of the freezing order, which had not been paid for, no invoice having yet been rendered by Sawyer. VSL accept that that amount falls to be set off against its claim for repayment.
4. VSL's claim is thus, having been reduced from £1,136,460, for repayment of £743,070 against Sawyer. Tradelink's claim for repayment is for £665,650 against Sawyer and £210,787 against Power-Serve. It can be seen that if those sums are paid out the amount frozen by the order obtained by the respondents will be reduced in the case of Sawyer to approximately £1.9 million and in the case of Power-Serve to some £1.6 million.
5. The appellant interveners claim to be paid out notwithstanding or by way of variation of the freezing order, and they put it in two ways. First, that they were entitled to be paid out moneys owed in the ordinary course of business by reference to The Angel Bell [1981] 1 QB 65 and, second, if necessary, particularly as the respondents were opposing payment out on the first basis, that they had a proprietary claim to the moneys. A good deal of the time and concentration of both parties below was dedicated to the proprietary claim, which is not now pursued before us.
6. The first hearing of the appellant interveners' claim was before Mr Justice Mitting on 12th April 2001. At that time a skeleton argument served by the then counsel for the respondents raised a specific query about paragraph 10, namely:

"It is submitted that this evidence raises the clear possibility that there is more to these cases than meets the eye. In the circumstances, adopting the approach in SCF Finance Co v Masri [1985] 1 WLR 876 the interveners' claims for variations of the orders should not be accepted without further inquiry."

7. An order was made for the service by the appellant interveners of a consolidated Part 20 claim form with defence to follow from the respondents, and for substantial disclosure of documents by the appellants, which did occur. Provision was made for the possibility of oral evidence at the adjourned hearing. In the pleadings which followed, apart from detailed pleading in relation to the proprietary claim, there was a specific joinder of issue by the respondents on the question of the appellant's bona fides. A similar paragraph in each pleading relating to each intervener reads as follows:

"It is submitted that the payments were purportedly in connection with purchases of goods but the interveners are required to prove the bona fides of the purported purchasers in the light of the facts and matters relevant to the commercial arrangements between the interveners ..... and the defendants. By reason of those facts and matters the respondents are unable to admit the bona fides of the purported purchases and the interveners are required to prove the same."

8. In the substantial evidence served by both sides for the purpose of the adjourned hearing which took place before His Honour Judge Playford on 23rd July, queries were raised by the respondents relating to the transactions between the appellants and the defendants, and the possibility of something suspicious about the relationship between them. (See, for example, pages 91, 92, 156, 159, 167-168, 243-244, 281, 310-311, 377-378 of the bundle before the court.) However:

(i) There was no challenge to the existence or genuineness of documentation showing the transactions in question, the payments of the moneys and the fact that whereas chips had previously been delivered by the defendants to the appellants, in relation to the consignment in question they were not so delivered. This lack of challenge followed on the examination which the respondents had had time to make of the documents disclosed to them. There was, further, no challenge to the fact that VAT was charged on the transactions between the defendants and the appellants.

(ii) The independent existence of both VSL and Tradelink was deposed to; in the case of both, exhibiting their annual accounts and their dealings in relation to VAT and corporation tax and, in the case of Tradelink, showing a substantial world-wide trade.

(iii) All the queries raised by the respondents were addressed and responded to by the appellant interveners, particularly in their detailed reply evidence (pages 383 and 422 ff in the bundle).

(iv) Ms Roberts of VSL and Mr Fenton of Tradelink attended at the adjourned hearing with the intention of giving oral evidence and being cross-examined. Both went into the witness box for that purpose, ready to assert their bona fides and to deal with the challenge by the respondents which had been asserted.

9. The hearing was thus ready and able to enable the learned judge to decide the proprietary claim issue and, in relation to the alternative Angel Bell case, to enable a thorough investigation of the witnesses as well as the detailed examination of their documents which had already occurred. The hearing took, in the event, a most unfortunate turn. Notwithstanding that that had been the purpose of the hearing, and notwithstanding the expressed willingness of the witnesses to give evidence and to be cross-examined, the judge appears to have discouraged such issue being canvassed and/or the witnesses being cross-examined, and in the end assumed their bona fides.
10. It is necessary briefly to summarise the central parts of the transcript with which we have been provided to indicate how this occurred. Towards the beginning of the hearing the judge said this (page 17):

"It is the fraud of the interveners that was bothering me more than the fraud of the defendants. There seems to be a sort of indication that they may have been involved in this in some capacity or other, more knowingly at least. I do not know what the relevance of that is to these proceedings."

11. Mr Patchett-Joyce said:

"My Lord, the state of knowledge of the interveners is relevant. If they were part of the design then plainly there should be no lifting of the Mareva injunction. But, my Lord, even if they were not party to the design then for the reason that I sought to explain in the skeleton argument my learned friend's application must proceed on a proprietary basis. My Lords, for the reasons that I hope I have set out in my skeleton argument and my submissions, as a matter of law, it fails. So, my Lord, if your Lordship is happy to deal with the matter on that basis then really, my Lord, it is for my learned friend to set out his stall in relation to the law."

12. The learned judge said:

"You will have to make a choice at the beginning, Mr Patchett-Joyce. It is really up to you. You said you wanted to cross-examine people."

13. Mr Patchett-Joyce said:

"Yes, my Lord."

14. The witnesses were present, and so the judge said:

"They have sworn affidavits. If you wish to examine them on relevant matters, as far as I can see, you are entitled to do so. I am in no position to give you indications at this stage as to whether it is necessary, in the sense that you may or may not win if you do not. If you choose not to, that will be the end of the matter. We will simply proceed to the hearing and I will give judgment in due course."

15. Mr Patchett-Joyce said:

"Yes."

16. The judge said:

"You cannot have another bite of the cherry."

17. Mr Patchett-Joyce said:

"No."

18. The judge said:

"It is up to you what you want to do."

19. Mr Patchett-Joyce said:

"My Lord, my position has always been that I wish to cross-examine them, and I wish to cross-examine them."

20. The judge said:

"I do not want to hear any allegations of fraud. I do not think it right that the witnesses should be put into the witness box here and, as it were, interrogated about their own potential fraud. I think it would be wrong to do so."

21. The judge expanded on that. Mr Patchett-Joyce said:

"I will endeavour not to transgress that line and if I do I am sure the court will be able to indicate it and I will desist immediately."

22. Mr Patchett-Joyce at that stage accepted what the learned judge was indicating.
23. Mr McCue pointed out to the judge (at page 125 of the transcript; this was after cross-examination of the witnesses):

"All the evdience we have had from the Commissioners is still on that line about proving that my clients are in some way involved."

24. The judge said:

"Cross-examination, no doubt on my direction, was not proceeded on that basis."

25. Mr McCue said:

"Well, my Lord, I am certainly not fighting a battle that I do not need to fight, because obviously it is the remarks about the Mareva jurisdiction that there are in this judgment"

- he was referring to Normid Housing v Ralphs [1989] 1 Lloyd's Rep 265 -

"that I am relying on."

26. The judge said:

"Well, let us put out of mind this question of collusion at the moment."

27. At page 130, still in the course of submissions by Mr McCue, the judge picked up the rhetorical question by Mr McCue - "In what way is his claim in any respect dubious? He has handed over a whole load of money in return for some goods." The judge said:

"Well, when you say `dubious', I do not think anyone is suggesting he has a dubious claim. He may well have a personal claim against these people."

28. The judge pointed out that it was an unliquidated claim for damages. There was discussion about what the nature of the claim was, which was relevant given the existence of the proprietary claim then being pursued.
29. At page 162, in the course of Mr Patchett-Joyce's submissions, he said:

"The second point which your Lordship may bear in mind is that there are plain links between the parties. Whilst I did not wish to stray too far across your Lordship's indication that no cross-examination as to fraudulent conduct would be allowed, nonetheless, your Lordship will be aware that ..... "

and then he made some suggestions about what the evidence might show from the respondent's point of view. The judge said:

"Well, it may well be not. I do not know what I can say about that. It is not really possible on the information to find evidence of complicity."

30. Mr Patchett-Joyce said:

"My Lord, it could not be explored in the circumstances."

31. The judge said:

"Well, I know, but you understand the reasons. I was particularly concerned that I was not aware of the precise nature of the allegation and how it was going to be used, which you did not raise in your skeleton argument."

32. This is a reference to the fact that in the skeleton argument served by Mr Patchett-Joyce, unlike that of his predecessor, there was no specific reference to the question of possible mala fides. The judge said:

"So if you are shut out I think you have only got yourself to blame."

33. Mr Patchett-Joyce said:

"At that stage I was seeking to answer the way in which my learned friend puts it."

34. The judge said:

"That may be, but you make the point yourself in regard to these fraud allegations that they should not really be pulled out of the hat and I think for complicity in a VAT fraud it needs to be spelt out in advance."

35. Mr Patchett-Joyce said:

"Well, my Lord, certainly there has been no resiling from the evidence which is evidence that was put before the judge back in March."

36. The judge said:

"I think all that may well be right. I just have great diffidence in going down that route in a sort of rather half-hearted way. If it is going to be raised it ought to be raised plainly and squarely and proved."

37. At page 168, not surprisingly, Mr McCue said:

"As your Lordship said a moment ago to my friend, it is no good going with some half-hearted allegation of fraud. If fraud is to be alleged against my clients it should be fairly and squarely put and proved."

38. Over the page the judge said:

"I think there is quite a lot of argument that Mr Patchett-Joyce would like to put forward to the contrary."

39. Mr McCue said:

"Well, my Lord, then I say let him put it because they do not have a case against us for fraud. It is completely ridiculous. We have answered everything point for point."

40. The judge said:

"I appreciate your willingness to dispose of the whole thing this evening. I am beginning to think you ought to recall all your witnesses and have these allegations put, seeing the arguments that both you and your opponent are raising. I want to make a finding on them. It is very unsatisfactory for me effectively to be required to hold that your bona fides is proved when I have not allowed the other side even to put the contrary."

41. At page 176 Mr McCue said:

"My concern is only this, my Lord, that my friend will somehow seek to propagate some whiff of impropriety or hint of something wrong and wave it about and use that as a way to fight off my application that is being made on the principles that I have just adumbrated this afternoon. If my friend is proposing to do that so that he can get himself into a position where he can say in his final submissions `there is obviously something a little bit suspicious.'"

42. The judge said:

"I was proposing to direct that proper particulars be given of any allegation."

43. The position was then that the court was adjourned until the following morning. At page 182 Mr McCue began by saying:

"The picture has become clearer since yesterday afternoon when you rose ..... My friend - unless you require it - at the moment does not require there to be any further oral evidence."

44. The judge said:

"I thought that was common ground yesterday,"

45. which, until he had raised the question of recall of the witnesses, perhaps it had been. Mr McCue said:

"Well, it was and then it was not and then it was and then it was not. I am putting my clients forward as bona fide people. If any one is going to say that that has not been explored then I obviously wish to afford the court every opportunity to explore it. That is what I thought the position was yesterday morning. At all events there has been a certain amount of exploration as it happens prior to lunch, but my friend does not want them recalled. I am content with that obviously provided it is entirely clear that that is the basis upon which I am putting this application."

46. Finally, Mr McCue, still clearly finding a difficulty in the way that the judge was responding to his submissions, said at page 216:

"I thought we were proceeding on the basis that it was understood that my clients were bona fide. I keep falling into a crevasse on this."

47. That gives a flavour of what I have described as the unfortunate turn which the hearing took.
48. In his judgment, which dealt at length with the proprietary claim and dismissed it, the judge dealt with the primary claim for Angel Bell variation very shortly. He commenced dealing with it at page 71a of our bundle as follows:

"In my judgment therefore ..... I am prepared to assume the bona fide of the interveners."

49. There is no cross-appeal against that finding by the respondents nor against what, in essence, would amount to a refusal by the judge to allow the respondents to cross-examine on the issue of bona fides. Notwithstanding this, the judge, in the exercise of his discretion, declined to vary the order. He gave his reasons on this primary claim in very short form indeed. It reads as follows:

"In my judgment therefore while I am prepared to assume the bona fides of the interveners, what they seek is not payment of an ordinary business debt. It is the settlement in advance of any judgment of a claim for damages or the return of the purchase price. Mr McCue asks what is the point of a judgment when the defendants do not dispute the debt. The answer to that is two-fold. First, I do not think that the attitude of the defendants on whether the interveners should be paid is of any relevance at all. Secondly, it is for the interveners to satisfy me that they require the money for a purpose that does not conflict with the policy underlying the Mareva injunction. It is not appropriate, in my view, that the flexibility in the jurisdiction to make Mareva injunctions should be constrained by a tight definition of what is an ordinary business debt. But, in circumstances such as those that presently confront me, the nature of the obligation and inchoate liability leads me to the view that this case falls on the wrong side of the line so far as the interveners are concerned. If the injunction is relaxed to enable them to be paid that will be seen as a dissipation of assets in conflict with the basic principle underlying the making of a Mareva injunction rather than as payment of an ordinary business debt. To adapt the words of Mr Justice Neuberger in Customs and Excise v Anchor Foods Ltd [1999] 1 WLR 1139 at 1148: `an arm's length judgment might well produce a different consideration'. So on the basic question of what is just and convenient in this case, it is in my view clear that the balance of jsutice and convenience favours the continuation of the injunction in its current form. It may weel be that the interveners will continue to wish to intervene and secure injunctions in the action. It remains to be seen what the outcome is as regards the claim by the Commissioners against the defendants."

50. Although the general jurisdiction on a variation is to do what is just and convenient, the principles which underlie the court's discretion are well established, beginning at The Angel Bell, to which I have referred. They are as follows.
51. First, as the purpose of a freezing order is to avoid dissipation of a defendant's assets in order to avoid a judgment, it is only bona fide debts in the ordinary course of business of a defendant whose assets are frozen that will be permitted to be paid out, including debts which are not themselves enforceable, as in the case of The Angel Bell itself. (See The Angel Bell at page 73, Avant Petroleum Inc v Gatoil [1986] 2 Lloyd's Rep 236 at 242 per Lord Justice Neill and as exemplified in Normid Housing v Ralphs, to which reference has been made, especially at 278-9.
52. Second, the onus is upon the applicant for a variation to establish his entitlement, and payment out will not be permitted if the debt in the ordinary course of business is not established, and/or if there is or may be collusion and/or the money is or may beneficially belong to or be intended to be paid out for the benefit of the defendant or if it appears that the payment is sought for the purpose of defeating the claimant's claim. (See SCF and The Coral Rose [1991] 1 Lloyd's Rep 563, 569-70).
53. Third, the freezing order is not to be used to create a secured debt or to give priority for the claims over an established creditor.
54. The position here appears to me to be as follows. The basis on which the judge concluded that he would not allow the variation is that he was not satisfied there was a debt in the ordinary course of business. At page 108 of the transcript he made the following statement:

"To receive what is owing if there is a perfectly ordinary trade debt - no problem about it. One might say that there was no reason at all why for that trade debt the Mareva injunction should not be lifted. But this is not an ordinary trade creditor. It is not what I see as an ordinary trade creditor anyway. There is a very exceptional circumstance where there is an alleged breach of contract. It is not paying a running debt, setting up with a tailor or something like that. This all depends on the resolution of this dispute about whether it is their money or not,"

which was a reference to the other issues he had to decide, namely the proprietary claim. That statement became enshrined in the short passage, which I have read, of his judgment. The judge had however suggested the contrary in the course of the hearing in clear terms. At page 86 he said as follows:

"It was never my intention to suggest that there was anything suspicious about this transaction. I hope I said that it was not in my mind at all to make that sort of suggestion. I understood that the whole premise of the Customs and Excise case was that these defendants were not paying the VAT but were charging the customer for VAT and were doing that which is not unheard of in these circles which is to sell at a slightly cheaper price, thus undercutting the operation, so making use of the VAT savings, ..... using the VAT element to make the deal more attractive. I understood that they were being sold, not suspiciously cheaper, but at any rate cheap."

55. Mr McCue said:

"Then in that case I entirely misunderstood your Lordship."

56. The judge said:

"That was the whole thrust. It was not intended to cast suspicions. It was not putting it on the basis of something bought in a pub or something like that. This was a competitive price - put it that way."

57. At page 136, after Mr McCue had developed his submission, the judge said:

"Properly seen, this is just an ordinary business debt, a bona fide business debt."

58. He repeated that suggestion at page 217 when he said:

"I do not think I could possibly ever - this is what Mr Patchett-Joyce is saying - go so far as to say simply because he was engaged in a VAT fraud he could never have an ordinary course of business."

59. In my judgment, once the judge had assumed and thus found bona fides in favour of the appellant interveners, he could not base a finding of `not in the ordinary course of business' on any finding of lack of bona fides, which must include any questions of suspiciousness, dubiousness or questionableness, all of which fall once there is such a finding.
60. What he seems to rely on are the same matters which led him to conclude that there was no proprietary claim established. For the purpose of dismissing the proprietary claim he had concluded (1) that he did not regard it as proved that the term that the defendants would have title to the chips when they were paid by the interveners was made part of the contract (pages 69 D to 71 B of his judgment); (2) that there was no fraudulent misrepresentation as to title by the defendants deceiving the appellant interveners into contracting with them established (page 71 C to 71a E).
61. In my judgment this is no basis for a finding that there was not a debt in the ordinary course of business, in the light of his finding in the appellant interveners' favour on bona fides. There was a sale and a purchase upon which VAT was charged. There was nothing suspicious about the transaction on the judge's finding. It cannot be part of the logic of the Angel Bell jurisdiction that only sums due in debt, as opposed to by way of claim for moneys had and received or liquidated damages, are payable, such that the judge's doubt as to whether the obligation was one of debt or damages cannot of itself amount to a reason not to allow the payment, or to conclude that there was an attempt to dissipate the defendant's assets.
62. In so far as the suggestion is made that there can be no ordinary course of a business by one who is allegedly involved in a carousel fraud when he is carrying out one of a series of transactions with a bona fide purchaser, the learned judge was rightly dismissive of such a suggestion in the passage I have quoted from page 217 of the transcript. There may be cases in which there is no ordinary course of business at all, but not, in my judgment, where the alleged fraud relates to the manner of acquisition, while an innocent purchaser is held, without any imputation of lack of bona fides, to have bought goods so acquired.
63. To make the order would not, as was suggested in argument before the judge and before us, give priority to the appellant interveners or render them preferred creditors. Indeed, refusal of the order would do the reverse, accelerating a presently unestablished claim by the respondents ahead of an established creditor who would otherwise be paid out.
64. The hearing below was, in my judgment, an unsatisfactory one, given that its purpose was plainly not only to investigate the issue of a proprietary claim but also the issue of the appellant interveners' bona fides. But in the light of the fact that the appellant interveners were not permitted further to establish their bona fides and that the learned judge made a finding in their favour in that regard, I am satisfied that there is no basis on which the apparent conclusion of the judge that this does not relate to a debt in the ordinary course of business can be based, nor any other basis on which the judge's order can now be justified.
65. I will permit the variation to the extent now sought by Mr McCue and allow the appeal.
66. LORD JUSTICE LATHAM: I agree.
67. LORD JUSTICE BROOKE: I agree. The appeal is allowed subject to the variation to which my Lord has referred.
Order: Appeal allowed with the costs in this court assessed at £10,000 and half of costs below