England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/10/2014

Mr Justice Norris :

1. This is the fourth round of litigation between members of the Hague family. Before me is the fifteenth application in that fourth round. It is remarkable because (most commendably) the parties have reached a large measure of agreement.
2. The most significant round of earlier litigation ("Hague 1") was conducted between David and Dianne Hague on the one hand and Martin and his wife (Jean Angela) on the other over the ownership of two of the three issued shares in MHH Contracting Limited ("MHH") which (to put the matter loosely and neutrally) grew out of Hague Plant Limited ("HPL"). David and Dianne lost that ground of litigation and the shares in MHH were found to belong to Martin and Jean Angela. The result is that the business of MHH is conducted for the benefit of Martin and Jean Angela (and David and Dianne do not benefit from it).
3. When that result became known, David and Dianne reviewed the mutual dealings between HPL and MHH. If both businesses were in the same effective beneficial ownership their mutual dealings were of no importance. If the businesses were in different effective beneficial ownership they might be. So David and Dianne stopped all mutual dealings with effect from April 2009 and removed Martin as a Director of HPL. In these new proceedings HPL claims (to put the matter shortly) that MHH's business is held on trust for HPL (and if that is right then David and Dianne will benefit from it not through direct shareholdings in it, but because their shareholdings in HPL will enable them indirectly to benefit). HPL's present claim is founded on the fact that Martin was a Director both of HPL and of MHH, and HPL say that this presented him with a conflict of interest when it came to addressing business opportunities, which conflict of interest he did not properly manage.
4. The mutual dealings between HPL and MHH featured in Hague 1 as part of an attack by each side upon the credibility of other. The mutual dealings were said to involve and were found by the judge to involve fraudulent tax evasion. One of the methods used was "cross-invoicing". The judge summarised the scheme at paragraph 20 of his judgment:-

"At or near the end of the tax year a Hague Company would submit to another Hague Company a fraudulent or inflated invoice so as the reduce the profits of the first company tax. Counter invoices would be submitted by the second company at the beginning of the next tax year. This had the effect of transferring a profit into the later tax year and thus deferring the tax payable".

Each side suggested that the knowledge and participation of the other in such cross-invoicing damaged its credibility. The judge decided that everybody (apart from the accountant) was involved to a greater or lesser degree.

5. In this action the issue of cross-invoicing crops up again, but as part of the substantive defence (rather than as a matter going to credibility). In order to overcome limitation difficulties HPL has to allege that Martin was dishonest. As part of its case that Martin was dishonest HPL alleges that Martin "in deliberate and conscious breach of his fiduciary duties" procured HPL to transfer monies to MHH which were in no way referable to any goods or services provided to HPL (and it identifies categories of invoice). HPL also alleges that Martin procured HPL to provide goods and services to MHH to a value greater than the charges invoiced to MHH.
6. Martin and Jean Angela respond to these allegations by admitting (in paragraph 56(c)(i) of the Re-Amended Defence) that Martin procured HPL to transfer monies to MHH which he knew were not referable to any goods or services provided to HPL and/or which far exceeded the value of the services and goods provided, but averring that this was part of a process of cross-invoicing. They then aver (in what is now paragraph 56(c)(ii)) that exactly the same process was undertaken in reverse and that he procured MHH to transfer monies to HPL which he knew were not referable to any goods or services provided to MHH or which far exceeded the value of the services and goods provided. The present Re-Amended Defence goes on to explain (in paragraph 56(c)(iii)) that the monies travelling each way were calculated so as to balance out and to create no net cost to either company. A particular example of this is given in paragraph 56(f) and Appendix 9 relating to invoices for soil. The statement of case further alleges (in paragraph 56(c)(iv)) that cross-invoicing was a means by which each company attempted to reduce its liability for corporation tax, and that the practice was known by, consented to, authorised by and participated in by HPL, Diane and David.
7. The statement of case also contains an allegation that in addition to fictional invoices and inflated invoices which were utilised in the cross-invoicing scheme there are also some invoices which simply mis-describe the services provided and in respect of which charges were raised: but this line of defence is separate from the cross-invoicing issues. There are many other lines of defence, not least limitation.
8. The Reply (in paragraph 23 of its present form) does not admit "the alleged practice of cross-invoicing" and complains that the pleading of it is "vague and embarrassing for want of particularity". It puts in issue that part of Jean Angela's separate Defence in which she says that she was ignorant of any dishonesty (as alleged) of Martin.
9. It is common ground that because of an outstanding appeal as to the form of HPL's Particulars of Claim (and in consequence two stalled applications to amend pleadings) the pleadings cannot be closed and there is no prospect of conducting the trial of this action in the 10 weeks presently allocated between 13 April and 26 June: but that use could be made of that time if a preliminary issue likely to have a significant effect upon (if not determinative of) the outcome of the case as a whole could be identified. The parties are agreed that "cross-invoicing" is such an issue.
10. There are many warnings about the dangers of selecting one issue for determination before the remaining issues are determined at trial. I heed them. I also recognise that the outcome of the case of dishonesty against Martin (and the accessory case against Jean Angela) may make examination of the cross-invoicing issue largely irrelevant. But I agree with the parties that the effort should be made. If it is made, then it is essential that the issue be defined, be related to the case as it stands on the pleadings at present, be confined in time (for it will otherwise turn into the trial of the actions asmore tangential issues are drawn in) and that the consequences of the determination of the preliminary issue are thought about in advance.
11. At the conclusion of the hearing I indicated that I was in favour of the agreed approach, but was not willing to pick and choose between the rival draft orders with which I was presented. The terms of the Order I have settled upon are appended to this judgment.
Appendix ORDER for Trial of Preliminary Issues

The Court heard Leading Counsel for the Claimants and Counsel for the First and Third and Counsel for the Second Defendant.

The parties consented to the trial of preliminary issues in advance of the trial of the action.

It is common ground that there was a deliberate transfer of some monies which were known by Martin either (a) not to be referable to any goods or services provided to the paying company or (b) to be far in excess of the value of the goods and services provided to the paying company ("unjustified payments"). By reference to the financial years (a) 1990/1991, 1991/1992 and 1992/1993 and (b) 1998/1999 1999/2000 and 2000/2001 ("the Relevant Years") the following issues ("the Issues") shall be determined in advance of the trial:-

1. Were such unjustified payments made pursuant to a cross-invoicing arrangement between MHH and HPL as admitted and averred in paragraph 56(c)(i) and (ii) and paragraph 56(f)(i) (last substantive paragraph beginning "For the avoidance of doubt…") of the Re-Amended Defence of the First and Third Defendants and the parallel paragraphs in the Re-amended Defence of the Second Defendant ("the Defences")?

2. If such unjustified payments were made as part of a cross-invoicing arrangement, were the payments each way calculated to balance out so as to create no substantial net loss to either company as alleged in paragraph 56(c)(iii) of the Defences?

3. If such unjustified payments were made as part of a cross-invoicing arrangement, was the practice known by, consented to and authorised by and participated in by HPL and/or Dianne and/or David (as alleged in paragraph 56(c)(iv) of the Defences)?

4. In the middle year of each tranche of Relevant Years did the payments each way broadly balance out so as to create no substantial net loss to either company as alleged in paragraph 56(c)(iii) of the Defences? (In answering this question there will be no detailed account taking and no final determination of figures).

5. If HPL its directors and shareholders were involved in any cross-invoicing arrangement, then (as raised in response 65 in an Answer dated 7 December 2012 to HPL's Part 18 Request) did HPL know that it could not rely upon the accuracy of inter-company invoicing? Can HPL now complain that invoices are inaccurate? Can HPL put forward a case based upon the accuracy of such invoices or the expectation that they would be accurate?

6. To what extent (if at all) are these issues to be determined by reference to findings or admissions made in the proceedings usually referred to as "Hague 1"?

7. If (i) the answer to Question 2 is "No" or (ii) the answer to Question 2 is "Yes" but the answer to Question 4 is "No" then the question of whether Martin was honest or dishonest and the question of whether (if he was dishonest) Jean Angela was ignorant of that dishonesty shall not be determined as part of the Issues but shall be determined at the trial of the action.

I give the following directions in relation to the determination of the Issues:-

1. The Claimants shall by 4 pm 7 November 2014 file and serve Points of Claim in the Issues which shall identify

(a) What payments it is alleged were made by HPL in the Relevant Years which were unjustified payments?

(b) (Concisely) the material facts relied on as establishing that the identified payments were unjustified payments;

(c) What findings of fact or admissions in Hague 1 are relied upon in relation to the case to be advanced;

(d) (Concisely) any conclusions which it is said may be drawn either from the audited accounts of HPL for the Relevant Years or from the primary accounting records or the Grey Books which demonstrate that no cross invoicing arrangement was in operation;

(e) (In a Schedule) what parts of the statements of case in the main action are said to be relevant to the determination of the Issues.

2. The First to Third Defendants shall by 4 pm 5 December 2014 file and served Points of Defence in the Issues identifying

(a) Which of the payments identified in the Points of Claim in the Issues they admit to be unjustified payments by HPL;

(b) Which payments they allege were unjustified payments by MHH in the Relevant Years;

(c) Which of those payments by HPL and MHH they say form part of a cross invoicing scheme;

(d) The principal documents on which they rely in support of that case;

(e) To the extent that these Defendants say that it is not possible fully to plead out particularised allegations under paragraphs (b) and (c) the reasons why that is so;

(f) (Concisely) the material facts relied on in relation to the case to be advanced under Question 5 of the Issues;

(g) What findings of fact or admissions in Hague 1 are relied upon in relation to the case to be advanced;

(h) What response is made to any case advanced on the audited accounts or the primary accounting records of HPL or the Grey Books;

(i) (In a Schedule) what parts of the statements of case in the main action are said to be relevant to the determination of the Issues;

(j) (In summary form) the heads of argument to be advanced in defence.

3. The Claimants shall by 4pm 19 December 2014 file and serve Points of Reply in the Issues. Such document must contain a concise statement of any facts on which the Claimants rely as rebutting the case advanced in the Points of Defence and state (in summary form) the heads of argument to be advanced in support of the Points of Claim and in response to the Points of Defence.

4. The direction to set out "heads of argument" is not a direction to prepare a skeleton argument. Its purpose is to give notice of the areas of argument (not to set out even in summary form the arguments themselves). Examples might be: "The Claimants say that the Grey Books show the payments were not in balance" and "The Defendants say the Grey Books are not a complete record".

5. Each party may rely on any document (a) of which disclosure has already been given or (b) which is contained in a Supplemental Disclosure List filed and served by 4pm on 16 January 2015.

6. The parties shall exchange the statements of witnesses of fact (confined to matters relevant to the determination of the Issues) by 4 pm 13 February 2015.

7. There will be a Case Management Conference confined to the trial of the Issues at which the Court will consider

(a) any applications arising of compliance with the preceding directions;

(b) whether in the light of the degree of reference to the pleadings in the main action it remains feasible to determine the Issues in advance of the trial;

(c) the question of expert evidence (from handwriting, soil and forensic accountancy experts).

This CMC will be by telephone hearing in the week commencing 23 February 2015. Arrangement shall forthwith be made with the Listing Officer at Leeds for time to be allocated in the Newcastle List for that week.

8. The trial of the Issues will take place at Leeds from 3 June 2015 until 19 June 2015. The week commencing 22 June 2015 will be reserved for consideration of judgment.

9. Costs Reserved