England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURTS OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		14th June 2010

MR JUSTICE DAVID RICHARDS:

1. This is an application made in the winding up of Abbey Forwarding Limited. The applicants are Richard Hone, Patrick Owen and William Owen who are all shareholders and former directors of the company. Patrick Owen and William Owen are also creditors. The Respondent is the Liquidator, Louise Brittain.
2. The company was wound up by an order made on 18^th March 2009, on the petition of HM Revenue & Customs ("HMRC") as a creditor, based on assessments to excise duty totalling £5,965,704.
3. On 4^th February 2009, HMRC had successfully applied to Blackburne J for the appointment of Ms Brittain as provisional liquidator. On the same day and immediately following her appointment, she applied on behalf of the company for and was granted a worldwide freezing order against the present Applicants and another director. This was in aid of a claim to be issued by the company for breach of fiduciary duty in allegedly conducting the business of the company in such a way as to lead to the assessments to excise duty. The assessments in question are those issued in February 2009, together with assessments totalling £500,218 issued during 2008. It is alleged that the present Applicants acted dishonestly, recklessly or negligently and as against the Fourth Defendant, who is not an Applicant today, that he acted negligently. The trial of the action with an estimate of between 10 and 15 days is fixed to start in the week commencing 5^th July 2010. The Defendants have fully participated those proceedings.
4. Following her appointment the liquidator exercised the company's statutory right to request a formal departmental review of the assessments issued in February 2009. The assessments were upheld by the review and the decision was notified in a reasoned letter dated 29^th April 2009. The company had a statutory right to appeal the assessments within 21 days of notification of the review decision. The liquidator, having considered the evidence and consulted specialist tax counsel, decided not to appeal. The Applicants' solicitors were notified of this decision in a letter dated 27^th May 2009. One of the Applicants, Mr Hone, also requested reviews of these assessments and of assessments made in 2008, and in July 2009 lodged appeals against the assessments. At first HMRC accepted that he had standing to appeal, but HMRC's position changed in September 2009 and they issued an application in November 2009 to strike out the appeals. The Applicants now accept that none of them had standing, as they had no liability in respect of the assessments.
5. At a hearing in February 2010, the Tax Tribunal made an order in the following terms:

"It is directed that the Respondent's applications to strike out the appeals and for costs of today's proceedings be adjourned on Mr Pickup undertaking on behalf of the Appellant to make an application to the Chancery Division pursuant to the provisions of the Insolvency Act 1986 within 14 days indemnifying the liquidator from the costs of such proceedings. Such application being to permit the directors to have the conduct of these proceedings on behalf of Abbey Forwarding Limited (in liquidation), on the basis that it were substituted as Appellant in these appeals." (Quote unchecked)

6. The application now before the court was issued on 17^th March 2010 and seeks relief as follows:

"1. An order removing the Respondent as liquidator of Abbey Forwarding Limited and replacing her with another liquidator pursuant to s.172 of the Insolvency Act 1986, ("the 1986 Act").

2. Further or alternatively an order pursuant to s.167(3) and/or 168(5) of the 1986 Act and of the inherent jurisdiction of the court that the Respondent do give the conduct of the following appeal before the first tier tribunal tax chamber to the Applicants or one or more of them on such terms as the court shall think fit."

There are then set out the references for each of those appeals:

"3. Further or alternatively, that the court do give such further directions for the future conduct of the said appeals before the first tier tribunal tax chamber." (Quote unchecked)

7. Mr Pickup QC for the Applicants has made clear that the primary relief sought is an order in the terms of paragraph 2. The order sought in paragraph 2 is, as drafted, insufficient for the Applicant's purpose. Mr Hone has conduct of the appeals to the post tier base tribunal and he needs no order from this court to conduct them. However, it is clear from the tribunal's order of 26^th February 2010, that what is envisaged is an application by the company to the tribunal to be substituted as Appellant in place of Mr Hone and that the Applicants then have conduct of the appeal. This was made clear to the liquidator's solicitors in a letter from the Applicant's solicitors dated 28^th May 2010 and I will proceed on that basis.
8. The application for an order in the terms of paragraph 2 of the application notice is, as there stated, made under s.167(3) to 168(5) of the Insolvency Act 1986. Section 167, so far as relevant, provides as follows:

"(1) Where a company is being wound up by the court, the liquidator may

(a) with the sanction of the court or the liquidation committee, exercise any of the powers specified in Parts I and II of Schedule 4 to this Act (payment of debts; compromise of claims, etc., institution and defence of proceedings; carrying on of the business of the company), and -

(b) with or without that sanction, exercise any of the general powers specified in Part III of that Schedule.

(3) The exercise by the liquidator in a winding up by the court of the powers conferred by this section is subject to the control of the court, and any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of any of those powers.

Section 168 so far as relevant provides as follows:

(1) This section applies in the case of a company which is being wound up by the court in England and Wales.

(3) The liquidator may apply to the court (in the prescribed manner) for directions in relation to any particular matter arising in the winding up.

(4) Subject to the provisions of this Act, the liquidator shall use his own discretion in the management of the assets and their distribution among the creditors.

(5) If any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just.

9. The Applicants accept that whether or not to appeal the assessments was, by the terms of the insolvency legislation, a matter for decision by the liquidator. It is not enough for them to show that the liquidator could have reasonably appealed the assessments. They make their application on the basis that the only reasonable course which a liquidator could have taken was to appeal the assessments. The test is a high one. In Edennote Limited [1996] 2 BCLC 389 the Court of Appeal (Nourse and Millett LJJ) adopted and applied a test derived from earlier authorities, that, bad faith apart, the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable person would have done it.
10. The application to remove the liquidator is made under s.172 of the Insolvency Act 1986 which, so far as relevant, provides as follows:

(1) This section applies with respect to the removal from office and vacation of office of the liquidator of a company which is being wound up by the court, or of a provisional liquidator.

(2) Subject as follows, the liquidator may be removed from office only by an order of the court or by a general meeting of the company's creditors summoned specially for that purpose in accordance with the rules; and a provisional liquidator may be removed from office only by an order of the court.

The Act does not specify any particular grounds which must be established for the removal of a liquidator and the courts have been careful not to limit or define the grounds which must be shown, but it is clear that there must be substantial grounds established before taking so serious a step. This jurisdiction was also considered in Re Edennote Limited where the judge's decision to remove the liquidator was reversed although the court interfered with a decision of the liquidator under s.168(5) was held to have made a serious mistake.

11. The business of the company as described in the affidavit of Mr Hone dated 16^th March 2010 in support of application was as follows:

"8. The company traded as a tax warehouse despatching goods both nationally and internationally. In or around 1982 the company was granted a drive-on licence and authorised by HMRC to receive despatched goods under that licence. In or around 2002 the company was granted a (inaudible) licence and authorised by HMRC to receive and despatch alcohol under excise duty suspension arrangements.

9. This arm of the business greatly increased the company's profits and by 2006 approximately 65 per cent of the work undertaken was of this nature. The company also obtained a movement guarantee of £40,000 in 2004. This movement guarantee was increased to £250,000 in order to cover the rise in work undertaken by the company.

10. The company's business including the warehouse and the duty to suspend alcohol and its transportation to other warehouses in the European Union proved by tax authorities in their member states." (Quote unchecked)

12. In a further affidavit dated 4^th June 2010, Mr Hone gave the following description:

"Abbey had a warehouse business, import and export divisions and an air freight division and a bonded division and operated two vehicles for the local intra-UK deliveries. The warehouse was 53,000 square feet in size and there were 23 employees. Abbey was not a haulier.

17. A significant amount, but by no means all of the trading conducted by Abbey involved duty suspended goods. It was trading in duty suspended goods, which gave rise to the assessments." (Quote unchecked)

It was trading in duty-suspended goods which gave rise to the assessments.

13. The effect of duty suspension was described by Mr Hone in his affidavit of 4^th June 2010 as follows:

"18. Alcohol liquor produced in or imported into the United Kingdom becomes in principle liable to excise duty when it is produced, usually at the moment when it is put into any package or removed from the brewery or imported. However, liability to pay the duty is delayed and arises only when the alcohol liquor passes the duty point. The duty point is usually the point at which the alcohol and liquor is released for consumption. However, the duty point may be disposed and the alcohol liquor may remain duty suspended if it is removed from other registered premises or to an approved excise warehouse, often referred to as a bonded warehouse. If the goods in duty suspension are then exported, UK excise duty does not become payable at any point. Duty suspended alcohol, if it is exported, may only be delivered to an approved excise warehouse in the destination of the company.

20. A major wholesale would purchase duty suspended alcohol and place it in Abbey's bonded warehouse. The wholesaler might then wish to supply a customer based in say, France and will arrange for the UK bonded warehouse, Abbey, to deliver the alcohol to a bonded warehouse in France. Before the French customer can remove the alcohol from the French bonded warehouse it would have to pay the relevant amount of duty." (Quote unchecked)

14. A particularly important feature of the legal regime for trading in duty suspended goods is the requirement to use documents known as accompanying administrative documents, ("AADs"), which are in a form prescribed by the relevant regulations. In an affidavit sworn on 3^rd February 2009 by Peter Edward Smith, an officer of HMRC, in support of the application for the appointment of a provisional liquidator, he gives the following description of AADs and their use:

"37. For European Union wide movements the prescribed commercial document is an AAD. The AAD is a four-part document. Copy one is retained by the warehouse of despatch, copies 2, 3 and 4 must travel with the excise products. Copy 2 is used by the warehouse of destination for entry into their (inaudible), copy 3 is (inaudible) discharged by the warehouse of destination as evidence of receipt of the consignment, and to be returned to the warehouse keeper of despatch by no later than the 15^th day of the month following the month of receipt. Copy 4 is provided for the use of the tax authorities in the relevant state of destination. It is optional whether this copy is rendered to those authorities, but HMRC as a UK tax authority do not exercise this option.

38. There is a provision, not adopted by the UK, for copy 3 to be presented to the tax authorities in the member state of destination for annotation with their official stamp prior to return of the AAD to the warehouse keeper of despatch. It is HMRC's position that this process is not deemed to be conclusive confirmation that the excised products have been properly received. This is because member state tax authorities are unlikely to have witnessed the delivery of the excised products to the warehouse of destination.

39. The AAD is completed by the warehouse keeper of despatch either in manual or electronic format. Section C is certification of reception or exportation is completed by warehouse destination. The information included on the AAD as prescribed by the Commission and is detailed within PN197." (Quote unchecked)

He then sets out the details which have to be completed on the form. They include: the consignor or warehouse keeper of despatch; the consignee or warehouse keeper of destination; a unique AAD number and warehouse reference numbers; place of delivery; date of movement and time of delivery, guarantee details; transport details, including the vehicle registration number (inaudible) appropriate; a full description of the excised products and a certificate by the warehouse keeper of despatch that the information on the AAD is correct.

15. The basis of the assessments in 2008/2009 was that the relevant consignments of alcoholic goods had not reached approved warehouses in other European Union states, specifically France and Holland, but had been diverted while still in transit in the UK. As guarantor of the movements of the goods, the company was under the relevant regulations jointly and severally liable with any person who caused the goods to reach an excise duty point to pay the excise duty. The assessments were made against the company on that basis. This is a strict liability. It is not necessary to show that the company took any part in the diversion or knew or had reason to believe that it would or might occur.
16. There were just two consignors for the 301 consignments to which the assessments of February 2009 related, SAS Wines Limited and Way2Wines Limited, both English companies. According to the AADs said to have accompanied the consignments, 268 consignments were destined for a bonded warehouse in Calais known as MT Manutention ("MT Manu") with the remaining 33 consignments shown as going to a warehouse called Wybo. All the goods were, it is said, sold to three cash and carry businesses in Calais called Davidas SARL, Boissons Extra EURL and Calais SURL.
17. It was HMRC's case, spelt out in considerable detail in Mr Smith's affidavit, that the cash and carry companies were not genuine businesses at all, but were simply facades used in the paperwork to facilitate the illegal diversion of the consignments by SAS Wines and Way2Wines. Substantial evidence was given about all these companies. Winding up petitions were presented by HMRC against SAS Wines and Way2Wines and a third company, A & S Drink Supplies Limited, on 4^th February 2009, and Ms Brittain was appointed provisional liquidator of those companies on the same day. HMRC alleged also that MT Manu fraudulently or recklessly authenticated the AADs said to relate to the consignments.
18. HMRC were alerted to the activities of SAS Wines, Way2Wines and A & S Drinks by the detection of a significant number of lorries identified on AADs as being empty when they entered the Channel Tunnel or boarded ferrier in England. All the consignments referred to in the AADs were sent from the company's warehouse and the destination in most cases was stated in the AADs to be MT Manufacturing, but with Wybo in other cases. In all cases there are AADs bearing stamps of MT Manu or other approved warehouses.
19. The Applicants submit that the evidence that the goods in fact reached the French approved warehouses is of sufficient strength that any liquidator acting reasonably would appeal the assessments. They rely in particular on the AADs authenticated by the approved warehouses in France. The authentication takes the form of both the warehouse's won stamp and what is said to be a tamper-proof stamp provided by French Customs. They point out that HMRC has evidence of only three of the lorries out of a total of 301 consignments being empty when leaving England. There is, as I understand it, no evidence one way or the other as regards the remainder. The Applicants have themselves obtained documents from MT Manu which, they say, support their position that the goods in fact reached the French warehouse. They rely also on evidence which they have obtained from Neil & David Austin, the director of MT Manu with day-to-day responsibility for running the bond. They have served a witness statement from him the liquidator's proceedings against them.
20. The Applicants further submit that the proper forum for determining the fundamental factual issues as to whether the goods were in fact delivered to the French warehouse and hence the validity of the assessments is the tax tribunal on an appeal against the assessments. It is the tribunal which by statute has jurisdiction to determine the validity of assessments. It has expertise in this area. HMRC would be a party and would therefore likely be required to disclose documents which were contrary to their case or would support the company's case. HMRC might be required to seek assistance from the French and Dutch Customs. If an appeal were successful it would render nugatory the liquidator's action against the former directors. The loss claimed is the liability to HMRC under the assessments. It could therefore save costs if this issue were determined by the tribunal.
21. I do not accept these submissions. First and foremost I am not persuaded that the only reasonable course open to the liquidator is to appeal the assessments. As these are matters which will come to trial with oral the evidence and examination of the documents, it is neither possible nor appropriate to analyse the merits of each side's case at this stage on the issue as to whether the goods were diverted or not. I am satisfied, having considered the evidence and submissions of the Applicants against the totality of the other evidence before me, that the liquidator could reasonably take the position that the company should not appeal the assessments.
22. There are further factors to take into account in deciding the application. First, the Applicants as directors of the company themselves had the opportunity of opposing the winding up petition on the grounds that the company had a real prospect of successfully appealing the assessments. They did not do so and put forward no evidence to suggest that the assessments were wrong. Following the winding up order the Applicants failed to respond to the liquidator's request for any substantive evidence which might assist a challenge to the assessments. Only much later, long after the time for appealing had passed, did the Applicants seek to put forward such material. They cannot rely on an intention to pursue their own appeals for the delay, because from 29^th September 2009 they knew that HMRC challenged their standing as appellants.
23. Secondly, they have not only fully participated as Defendants in the action against them, but have pressed for as early a trial date as possible. The trial date (a five day window from 5^th July 2010) was fixed on 16^th June 2009 and all parties have worked to that date. There has been substantial disclosure, and witness statements exchanged on 16^th April 2010. The fact there has been a change in the Applicant's legal representation and with it a change of strategy, is not a factor on which the Applicants can place much, if any, reliance. They cannot distance themselves from their own previous conduct.
24. Acceding to the application would inevitably mean the vacation of a trial date when it is now only three weeks away. Whatever merit the Applicant's arguments as regards saving costs might have had a year ago, they have little or no merit now.
25. There was some debate about the principle of the tribunal's exclusive jurisdiction to consider the validity of assessments and I was referred to the decisions in Glaxo Group v. IRC [1995] STC 1075 and Stow v. Stow [2008] Ch 461. This is not a case in which the principle has any direct application, as Mr Pickup accepted. It is not a case between HMRC and the taxpayer. The issue as to whether the Defendants as directors are culpable, whether on the grounds of dishonesty, recklessness or negligence, would not arise in proceedings before the tribunal. The relief sought in the action, compensation for breach of fiduciary duty, is obviously not relief which can be sought in the tax tribunal. The Defendants are entitled, as they are doing, to defend the action in part on the basis that the relevant consignments were not diverted and, that therefore there was no basis for any liability on the company to excise duty. The liquidator accepts that they are so entitled and is adducing substantial evidence from HMRC officers to meet that defence. I note in passing that in the defence the allegations of diversion are not admitted rather than being denied. The Defendants are not on the pleadings putting forward a positive case, but nothing turns on this for present purposes.
26. As to the procedural advantages of an appeal to the tax tribunal to which HMRC would be party, there is, in my judgment, little in the point. The Defendants could seek disclosure of documents from HMRC under CPR 31.17. I accept that the requirements of that provision may be more restrictive than the disclosure that may be ordered by the tribunal. The order for disclosure under CPR 31.17 must specify the documents or classes of documents to be disclosed, but that should enable all or most documents which would be available in tribunal proceedings to be disclosed in the action. As HMRC are the principal beneficiary of the proceedings and as they are actively assisting the liquidator with the provision of substantial evidence, the court would expect them to cooperate fully in the disclosure of the relevant documents.
27. It follows from what I have already said that there is nothing in the liquidator's approach to the question of appeals against assessments which would provide any ground to remove the liquidator from office.
28. A further ground was put forward that the liquidator had failed to take proper steps to preserve the value of parts of the company's business not connected with the bonded warehouse. This was not part of the grounds originally advanced, but was a late thought contained in Mr Hone's affidavit of 4^th June 2010. The evidence is little more than assertion, apart from the reference to an order for 300 containers of light bulbs, which it is said would have earned £50,000 to £60,000 profit over the course of a year. The liquidator had virtually no opportunity to respond to this evidence, which was served only three days before the hearing. But in any event, it is far too thin to establish a ground for the removal of the liquidator.
29. Accordingly, I refuse to make any of the orders sought by the application, which I dismiss.
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