QUEEN’S BENCH DIVISION
London WC2A 2LL
B e f o r e :
|(1) PEAKVIEWING (INTERACTIVE) LIMITED|
|(2) TANMARSH COMMUNICATIONS LIMITED|
|(3) PEAKVIEWING TRANSATLANTIC BV||Claimants|
|SECRETARY OF STATE FOR|
|CULTURE, MEDIA AND SPORT||Defendant|
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
for the Claimants.
Mr Alistair McGregor QC and Mr Jonathan Swift (instructed by the Treasury Solicitor)
for the Defendant.
AS APPROVED BY THE COURT
Crown Copyright ©
Mr Justice Lawrence Collins:
II Legislative and financial framework
“For the purposes of this Schedule the labour costs of a film shall be taken to be, subject to paragraph 8, the total amount of the payments paid or payable in respect of the labour or services of persons directly engaged in the making of the film, in so far as those payments are attributable to the making of that film”.
“Where it is material, in connection with an application under paragraph 2 in relation to a negative, tape or disc of a film, to ascertain the labour costs of the film or the proportion of those costs which represents payments in respect of the labour or services of persons of any particular class, then -
(a) if it appears to the Secretary of State that any sum which, as part of those costs, is paid or payable in respect of the labour or services of any particular person is so great as not to be a bona fide payment by way of remuneration for the said labour or services, the Secretary of State may direct that that sum, or part of that sum, shall be disregarded in ascertaining the said labour costs or the said proportion thereof, as the case may be; and
(b) if it appears to the Secretary of State that no sum or a sum so small as not bona fide to represent all the remuneration therefore is paid or payable as part of those costs in respect of the labour or services of any particular person, the Secretary of State may direct that such sum, or (as the case may be) such greater sum, as may be specified in the direction shall be treated as so paid or payable”.
III The applications and the refusal of the certificates
The Tanmarsh completion bonds
“1. If so, and if Tanmarsh Communications Ltd. is the financier of the series, could you clarify what merit is there in a fee totalling so much as £156,598 (on “Let’s Go”) going back from the production company to the financier Tanmarsh Communications Ltd. for this service?
2. Given that you do not reinsure, what services at Tanmarsh Communications Ltd does this fee of £156,598 cover?
3. Is it the case that the bond had never had to be called upon for any of these “Let’s” series?
4. What is the perceived risk in the case of those series that required a ‘bond’ to cover it? In what way does producing large numbers of the ‘Let’s’ series increase a ‘risk’ rather than spread it…”
“The desire of all those making a business of providing the finance to fund film production, and in particular, the desire of all those making a commitment to fund overcost, is not to have to incur such costs. The fact that there are bond companies at all means that on balance, fewer productions call upon the bond than don’t call upon the bond and that a profit is to be made from the activity.
As to perceived risk, when the rate was set it was - and continues to be - an Industry accepted rate.
The risk of overcost is the same for every production and as financiers, we insist that provision be made to cover it. Although we have decided not to seek an external bond, we recognise the need for provision nonetheless to be made and hold the fees that we would otherwise pay to third parties as our reserve. If no overcost is incurred on one production, then the profit on fees earned on earlier productions are a means of ensuring that such funds are available on future productions.
Many large companies have faltered or failed as a result of failing to take proper alternative internal measures to cover or spread the risk of overcost - however small it might have appeared at the time - having taken the view that no external bond is required. I worked for a large multinational that collapsed precisely because of this issue. What is more, so extensive was the number of small companies failing for this exact same reason that not long after Channel 4 began commissioning independents, it had seriously to address this exact problem.”
“As to the bond, the bond is irrelevant to qualification and consideration of this issue cannot possibly legitimately hold up consideration of an application. It is included in the statement of expenditure only because you have advised that it must be. It is a cost that is pro-rated as between UK and non-UK activity and is not a labour cost. Whether we have a bond or charge a fee internally for a similar service or how much we charge has absolutely no bearing on the certification process. It is a commercial judgment. The DCMS was not created to second-guess commercial judgments….”
Payments and source of finance
“We have not revised our sales estimates downwards at all. They remain valid although were we to revise them we would be putting them up. The Singapore site is the test site for the international broadband launch and we are currently in heavy negotiations with a number of broadcasters in the UK for the UK launch, a date for which has not yet been set. What we are doing, however, is launching a test with One2One and Ericsson in the UK to test the mobile phone version of the series and a test with Manx Telecom and Siemens in the Isle of Man as a further test of the broadband application. Both of these tests are scheduled over the next three months.”
“It is still our intention to launch or own pre-school channel by the end of the year but you seem obsessed with the UK and UK carriers. The UK is not the only - it is certainly not the biggest - media market and we are not limiting ourselves by so thinking. We are not ‘hoping’ for anything. We are making it happen.
We have a number of options. The Sky signal is carried by a particular satellite. The same satellite carries a lot more than just Sky. We can choose that satellite if we wish or any other. We can uplink from the UK or from anywhere else for that matter. We can downlink via Sky or via cable. How we do it and when we launch is our decision. We may do it in concert with an existing channel, or we may launch our very own channel. We may do it by satellite or we may do it via cable. Our business plan is coming together nicely and we have the finance to launch. Frankly, the only thing holding us up is your interference since these unconscionable and quite unjustifiable delays are causing horrendous damage.”
Refusal to issue certificates
(1) They had asked questions but had not been satisfied with the answers, for example, the reasons given for the very high nature of the fees in the applications, and whether the fees had actually been paid and received.
(2) An internal paper titled “Keys to profitability in production” and a letter from Ms Matthews to Lombard North Central suggested that the films could be a profit centre if costs could be charged at 10 times the actual cost. Consequently, DCMS believed that by entering costs which were not true costs, Peakviewing was able to cover its real costs and overheads and make a profit solely out of sale and leaseback receipts
(3) That was supported by DCMS’s understanding that none of the Viewing4Leisure series had ever been sold.
(4) A company document showed the benefits to be gained for each of 64 series of Viewing4Leisure:
Total cost £861,000
Sale & Leaseback (11.5%) £99,015
Less out of pocket cash costs £35,000
Net cash benefit £64,015
(5) In the tax year 2000/01 the management fees, producers fees and directors fees were said to be payable by Tanmarsh/Peakviewing companies under an unconditional obligation. As auditor of the Peakviewing/Tanmarsh companies, Roger Downes also took the view that they would be paid by the companies concerned and that they were properly included in the statement of costs which were included in the applications for certificates from DCMS. DCMS understood that at exactly the same time he took the opposite view in respect of the tax returns prepared for Elizabeth Matthews, Paul Matthews and Peter Matthews. If the entitlement to these payments from the companies was unconditional in the hands of the recipients then the management fees, directors fees and producers fees should have been included on the tax returns by the individuals concerned.
(6) DCMS had information which suggested that Mr Downes of Andorran Ltd had been too closely involved in the running of the Peakviewing companies and was in consequence not in a position to give an independent statement as to a true and fair view of the costs incurred by the company as shown in the applications.
“We believe the majority of the costs stated on the applications are not the true costs that have been incurred, and we do not believe the bulk of the costs have actually been paid and received. We intend to reject the recent applications, and withdraw previous certificates on the same basis. We would appreciate your clients comments on this or any of the above.”
IV The contentions
“Since December 2001, the DCMS have also raised a number of questions in correspondence concerning the fee charged by Tanmarsh for the provision of the in-house completion bond.
As a prudent investor in films, Tanmarsh requires proper provision to be made for any costs which exceed the budgeted amount. Many companies have gone bust because they have failed to do so. This can be done by taking out a bond with a third party, or by taking prudent internal measures, supported by an internal fee.
The completion bond does not affect the production cost test because it is pro rated between costs incurred in the UK and costs incurred outside of the UK in accordance with the Guidelines issued by the DCMS. As such, the enquiries from the DCMS are irrelevant to the determination of the production cost test.”
“Our management accounts prepared on this basis show turnover of £223,000,000 and a gross profit across the Group of £14,000,000… The turnover is largely represented by intra-group sales. External sales amounted to £26,600,000, up from around £6,000,000 last year. Although the balance of the revenue may fall away on a consolidation, the profit will not. We have £97,000,000 of cash in the bank, although the bulk of this is subject to charges in support of our obligations to pay lease rentals.”
“Despite this it is not true that the series has not been sold. Every series has been sold to Peakviewing Transatlantic BV and, in relation [to] the majority of the series, on terms that guarantee to Tanmarsh the return of the full costs of production, as reflected in the statements of expenditure accompanying the applications for certification. Following a re-organisation, Peakviewing Transatlantic BV is no longer a member of the Tanmarsh group. Every series has also been sold to partnerships managed by Future Film and the thirty two series in the latest block have been co-produced by co-production partners who have made a significant net cash contribution to the series which they expect to recoup in full… We chose Singapore, incidentally, because it has one of the world’s best-developed broadband markets…. On-line spending reached S$22.3 billion in 1999, was S$25.93 billion in 2000 and is predicted to rise to S$34.9billion by the end of 2002.”
“The launch of the traditional broadcast channel, the first step in the launch of the interactive offering, later this year has been put on hold, pending resolution of this dispute, as has the building of the broadband delivery application.
Despite this it is not true that the series has not been sold. Every series has been sold to Peakviewing Transatlantic BV and, in relation the majority of the series, on terms that guarantee to Tanmarsh the return of the full costs of production, as reflected in the statements of expenditure accompanying the applications for certification. Following a re-organisation, Peakviewing Transatlantic BV is no longer a member of the Tanmarsh Group. Every series has also been sold to partnerships managed by Future Film and the thirty two series in the latest block have been co-produced by co-production partners who have made a significant net cash contribution to the series which they expect to recoup in full.”
MR JUSTICE LAWRENCE COLLINS: For the reasons as given in the judgment which I have handed down, the challenge fails.
MR GOUDIE: My Lord, your Lordship should have had, I think, from my learned friend a note of four typographical matters.
MR JUSTICE LAWRENCE COLLINS: Yes. Are there some more?
MR GOUDIE: No, my Lord. I have not found any more.
MR JUSTICE LAWRENCE COLLINS: Thank you.
MR GOUDIE: My Lord, I ask your Lordship's permission to appeal to the Court of Appeal. As your Lordship appreciates, this is the --
MR JUSTICE LAWRENCE COLLINS: I am rather inclined to, unless I can be persuaded otherwise.
MR GOUDIE: Yes.
MR SWIFT: Sorry, my Lord?
MR JUSTICE LAWRENCE COLLINS: I am rather inclined to give permission to appeal, unless I am persuaded otherwise.
MR SWIFT: My Lord, the anticipated points my learned friend Mr Goudie is going to make are perhaps the points that are in my Lord's mind. I say simply this. Clearly, your decision did involve a question of construction of the meaning and effect of the terms of the schedule. However, having regard to the terms of the judgment, it did not appear from those that it was a matter which ultimately was regarded by my Lord as being one which was finely balanced. It appears to have been one which, having considered the arguments on either side, there was a clear answer to it.
My Lord, further, in relation to the application of the facts of this case to the answer to the construction question, there seems to have been no doubt in my Lord's mind as to the existence of no reasonable basis for the decision taken by the Secretary of State in this matter.
My Lord, in those circumstances, I would say that there is no reason for you to give permission to appeal, and that if an application is to be made, it should be made to the Court of Appeal.
Now, I appreciate Mr Goudie's response to that is probably going to be along the lines of, well, we have this date in August; it is all terribly important; it needs to be determined by then; we just do not have time to make an application for permission to the Court of Appeal. My Lord, in response to that, I would say that that is not a persuasive argument. Clearly, if the claimant is able to convince the Court of Appeal that this is something that is worthy of a second hearing, the Court of Appeal usually goes out of its way to accommodate, insofar as it is able, the timetable of the parties, and the appeal itself could be considered either at the same time as the application for permission or immediately thereafter.
So, my Lord, I would say there is no basis upon which you should grant permission to appeal.
MR JUSTICE LAWRENCE COLLINS: Although I have come to a clear view on the substance, I do think I should give permission to appeal because there is obviously an arguable point of law there.
MR GOUDIE: Thank you.
MR SWIFT: My Lord, I also apply for my costs.
MR GOUDIE: My Lord, I cannot resist that.
MR JUSTICE LAWRENCE COLLINS: No. Very well.
MR GOUDIE: My Lord, we are very grateful to your Lordship for having delivered the judgment with such expedition.
MR JUSTICE LAWRENCE COLLINS: Thank you very much.