England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		7 Rolls Building Fetter Lane London
		25th September 2017

1. MR JUSTICE NORRIS: The liquidators of Changtel Solutions Limited ("Changtel") have commenced proceedings under Sections 212, 213 and 214 of the Insolvency Act 1986 against Changtel's sole director Mr Jason Tsai ("Mr Tsai"). I have before me two applications relating to those proceedings.
2. The first is an application dated the 27^th of July 2017 that the time for the filing and service of Mr Tsai's Points of Defence should be extended until the 15^th of September 2017, and that the respondent's funds now subject to a freezing order may be used in respect of his costs incurred and to be incurred in the course of the legal proceedings. In the course of his submissions, Mr Young indicated that the sum sought was £333,000.
3. The second application is an undated application, but apparently issued sometime last week, modifying that relief by seeking an extension until the 31^st October 2017 for the filing and serving of the Points of Defence and identifying the fund from which the sums needed by the legal defence team should be taken, namely funds which are frozen in Hong Kong. It also seeks, to the extent required, relief from sanction in respect of any default that the Court may find in respect of the delay in serving the Points of Defence. There is also a request for disclosure which has not been pursued and may be ignored.
4. For the reasons which I shall give in the course of this judgment, I do not regard it as proper to grant either application.
5. When the applications were made, the liquidators made an open offer relating both to the extension of time and to access to funds in order to avoid the cost of the contested hearing. Their proposal was to extend time for service of the points of defence until the 6^th of October 2017 and their proposal as to funding was that the sum of £30,000 should be made available from identified assets in Hong Kong, subject to conditions designed to secure that it was expended solely upon the production of Points of Defence. But this open offer was rejected by Mr Tsai and, accordingly, I must determine the applications on their merits, taking care to avoid treating the liquidator's open offer as some sort of base position on which Mr Tsai can build by arguing on his applications.
6. As I have indicated, the nature of the applications demonstrates that we are at an early stage in the insolvency proceedings commenced by the liquidators. But this present litigation takes place against a background of extensive earlier litigation before tax tribunals and in the Companies Court, as well as significant interlocutory activity in the present proceedings.
7. It is sufficient if I seek to outline what I think must be uncontroversial. Changtel had a legitimate business distributing computer components for Microsoft and others in the United Kingdom. It was a thriving and successful business with a turnover of some £40 million before the events immediately in question. Such a turnover on business in the UK generated a substantial VAT liability. From 2004 onwards, Changtel indulged in a missing trader intra-community ("MTIC") fraud, which enabled it to generate offsetting invoices so that it could retain, for its own benefit, the VAT levied upon customers. It appears that the VAT fraudulently offset amounts to about £20 million odd. This money did not remain within Changtel. It is alleged by the liquidators that this retained VAT was extracted from Changtel for the personal benefit of Mr Tsai and his family by means of false invoicing and the payment of unlawful dividends.
8. The MTIC scheme has been the subject of examination before tax tribunals and was found to exist in judgments beginning in July 2016. The manner of the conducting of business and the liability to VAT has been found in the Companies Court to exist and to justify the winding up of Changtel for reasons explained in a judgment of Lord Justice Vos in the Court of Appeal at [2015] EWCA Civ 29.
9. The order for liquidation led to the appointment of the liquidators. The liquidators formed the view that Mr Tsai was liable to contribute to the assets of the Changtel liquidation, Changtel apparently being devoid of assets of the date of liquidation. This led them to seek a freezing order. A freezing order was granted by Mr Justice Birss against Mr Tsai on the 15^th of February 2017 and was renewed at an inter-parties hearing before Mr Justice Mann, at which Mr Tsai was represented by Mr Dean of counsel.
10. I should draw attention to four features of the freezing order. First, the amount frozen was some £24.7m. In relation to assets (both in the name of Mr Tsai and other assets not in his name, including assets which were jointly owned or solely owned by others) the freezing order contained the usual provisions as to what "ownership" meant, including the power to control assets. Secondly, as is usual, the freezing order contained an order that Mr Tsai must immediately and to the best of his ability inform the liquidator's solicitors, "...of all of his assets worldwide whether in his own name or not and whether solely or jointly owned giving the value, location and details of such assets". Thirdly, there was an exception from the freezing order which permitted Mr Tsai to spend £50,000 on legal advice and representation (subject to the usual condition that before spending the money, he had to tell the liquidator's legal representatives where the money was to come from). In the course of subsequent negotiations, I should at this point note that the fund for legal expenses was by agreement increased to £150,000. Finally, the freezing order contained a provision that Mr Tsai must immediately deliver up to the liquidators' solicitors every passport and any other travel documents he held relating to himself, to be held to the order of the court. When the ex parte freezing order was confirmed on the 22^nd of February 2017, the order specifically confirmed that the provisions relating to the provision of information continued to apply, as did the passport order.
11. Following the granting of the freezing order, two sets of events occurred. The first was the delivery by the liquidators on the 12^th of April 2017 of Points of Claim in the insolvency proceedings. A draft of those Points of Claim had accompanied the application for a freezing order: and so from about the 17^th of February 2017, Mr Tsai has been aware of the nature of the case that was being brought against him and of the foundation of the freezing order in the sum of £24.7 million which was being sought.
12. The Points of Claim in fact seek relief under Sections 212, 213 or 214 in the sum of just short of £35 million, and so the freezing order did not cover the full extent of the liquidator's claim. The Points of Claim are founded upon facts which were considered by the tax tribunal and in the Companies Court and are framed around the conclusions which the First Tier Tax Tribunal has reached and which the Court of Appeal also reached in deciding to make the winding up order. They are therefore based upon material which has been considered by the court on earlier occasions and in respect of which, Mr Tsai has made some 34 witness statements. I have gone through the Points of Claim with counsel for Mr Tsai to identify those parts which are controversial.
13. By reason of their nature, it is acknowledged by counsel that such matters as are in controversy will in fact be within the personal knowledge of Mr Tsai and are not dependent upon a detailed examination of documents not already referred to in the Court proceedings. So far as the Points of Defence are concerned, these should have been served under a consent order reached between the liquidators and Mr Tsai by the 10^th of May 2017, though that has been the subject both of further extensions ordered by the court and granted by consent of the liquidators. The final date for service of the Points of Defence under the orders as varied was the 21^st of July 2017. As the application indicates, no Defence has, even at the 25^th of September 2017, been tendered or served.
14. The second chain of events was that Mr Tsai deliberately breached the freezing order. He failed to hand over all of his travel documents. He travelled to Taiwan and, as found by Mrs Justice Rose in a judgment to which I will come, did so with the object of moving funds so as to frustrate the liquidators in their tracing of assets. He also failed to provide the information which he had been ordered to provide. In these circumstances, the liquidators issued an application for his committal including an application for the making of a debarring order preventing Mr Tsai from defending the claim unless he fulfilled his obligations under the freezing order.
15. This committal application came before the court on the 10^th of May on which occasion, Mr Tsai applied for and obtained an adjournment on the basis as it appeared that he had not begun the preparation of his defence of the committal proceedings, although it was later to transpire that in fact he would be relying on four affirmations made on the 2^nd of May. At all events, he obtained an adjournment until mid-June. The hearing of the committal application took some 10 days in the latter part of June. Judgment, [2017] EWHC 1860 (Ch), was given by Mrs Justice Rose on the 21^st of July. As I understand matters, it had been anticipated that on that occasion an application would be made to fix a new timetable for the service of Points of Defence, but no such application was in fact before the judge on that occasion.
16. The judgment is lengthy and meticulous. It concludes that Mr Tsai was in breach of the freezing orders of Mr Justice Birss and of Mr Justice Mann in some 27 respects. In consequence of that, he received a sentence of imprisonment of 18 months with the judge indicating that six of those 18 months were to encourage compliance with the freezing orders and might – the emphasis being on "might" – be remitted in the event that his contempts were purged. The judge made the important point that although the evidence indicated that Mr Tsai had attempted to dissipate assets in breach of the freezing order, it had not been established that any dissipation had actually occurred, largely because the liquidators had become alert to the attempt and had managed to retain the assets.
17. Accordingly, the relevant breaches were confined to the blatant breach of the passport order and to the failure to disclose assets. As to the passport order, Mrs Justice Rose regarded that as a serious and deliberate breach of the court's orders. It was an aggravating feature that Mr Tsai's excuse for breaching the order was, as found by the judge, entirely false and she was satisfied, "that the real purpose of his visit to Taiwan was to arrange for his wife to travel to Singapore to move money from her DBS bank account into another account." The movement of money from the DBS bank account was a movement of money into two accounts with the Taipei Fubon Commercial Bank Limited in Hong Kong, as was established beyond argument by disclosure of documents from Mr Tsai's former solicitors in relation to which he had (through his actions in blaming them for some of his shortcomings) waived privilege. I will refer to these as the "Hong Kong accounts". Mrs Justice Rose found that the money in the DBS accounts that was to be moved to the Hong Kong accounts was "not from any inheritance of Mrs Tsai, that Mr Tsai knew about these accounts and that the money in them was money generated by Changtel's business in England".
18. Of the remaining breaches, it is unnecessary to list them all and sufficient to identify their general nature. Many of the cases of breach involved false statements about the ownership of property and bank accounts reference to which the liquidators had found. Thus, in relation to one RBS account ending "5402", the judge found that Mr Tsai had falsely stated that it was owned by his wife. In relation to an RBS account ending "7057", she found that he had failed to disclose its existence and of his interest in it. In relation to DBS bank accounts in Singapore, both in the name of Mrs Tsai and in the name of another family member, she found he had failed to disclose their existence. She found that he had failed to disclose the existence of bank accounts in Taipei, his ownership of companies and properties in Bulgaria and failed to disclose the existence of the Hong Kong accounts which contained just over £10 million.
19. It is against this background which, as I say, contains material that cannot be regarded as controversial that I must address the applications now made.
20. I am invited first to address a threshold question. Should I entertain the applications at all given that Mr Tsai is in continuing breach of the freezing orders, has had the opportunity to purge his contempt, (as indicated by the sentence passed by Mrs Justice Rose) but has not taken that opportunity? In relation to that, Counsel for the liquidators identifies the relevant question as, whether in the circumstances of this case, the interests of justice are best served by hearing rather than refusing to hear Mr Tsai, bearing in mind the paramount importance which the court must attach to prompt and unquestioning observance of its orders.
21. I was referred to a convenient summary of the principles given by Mr Justice Popplewell in JSCBTA Bank v Ablyazov [2013] EWHC 1979 at paragraph 13. I bear those principles in mind. Whilst a powerful case was made that I should not consider the applications at all, and counsel for the liquidators may well be right that if the question were considered, I would simply refuse to hear the applications, I nonetheless prefer to rest my decision upon a consideration of the merits of the claim, even if Mr Tsai ought to have been driven from the judgment seat by reason of his being in contempt. In so doing, I would not wish to give encouragement to other contemnors who think that their applications will be entertained even though they remain in contempt. It is just that in this case, I can reach my conclusion on the merits.
22. So the first question that arises is whether I should grant an extension. There immediately arose an issue as to what principles I should apply. In making the application, Mr Young submitted that it was just a question of my exercising a general discretion by reference to the overriding objective. By contrast, Mr Robins submitted on behalf of the liquidators that I must decide whether this was an "in time" or "out of time" application: and if I decided that it was an "out of time" application for an extension then I should follow the terms of CPR 3.9.
23. This then generated an enquiry as to when the application had been made. The application included in the application bundle is dated the 27^th of July. There is no earlier application. Although not in evidence, instructions from Mr Tsai's solicitors to Counsel enabled the court to learn that the solicitor had attempted to file an application seeking an extension of time at 12.51 on the 20^th of July by electronic means, asking for the matter to be determined the following day. The Issues Section declined to issue such a late application for hearing the following day: and accordingly no application was issued.
24. In these circumstances, I am satisfied that the only application before me is dated the 27^th of July (not on the 21^st or the 22^nd ) and that it is an application which is out of time. Accordingly, I must apply the approach set out in CPR3.9. I must first identify whether the failure to file a defence by the 21^st of July 2017 (it having been first ordered to be filed by the 10^th of May 2017) is a default of seriousness and of significance. In my judgment, it is both serious and significant. The filing of the defence is obviously the key next step that would shape the litigation commenced by the liquidators.
25. The Points of Claim were served on the 12^th of April 2017. They were first to be answered by Points of Defence which by agreement were to be filed by the 10^th of May. That date was extended by order of the court. That extended date was itself extended by agreement with the liquidators. There has therefore already been a substantial delay in knowing what Mr Tsai's case would be in answer to material which is agreed is, in large part, uncontroversial and which (as to my mind, was demonstrated in interlocutory exchanges with Counsel) depends largely on matters within his own knowledge. Such a delay is significant. The failure to give the litigation shape is a serious breach.
26. I must then ask whether there is a good reason why the default occurred. In my judgment, there is not. What is said in the application was that the defence in some sense depends on documents which are in the control of the liquidators and to which Mr Tsai is entitled (by reason of a passing reference to them in the liquidator's evidence) and without which he cannot formulate his defence. I do not accept any of this. In my judgment, what is required is a Defence which sets out Mr Tsai's response to the allegation that he had knowledge of certain facts which, on the basis of findings by the First Tier Tribunal and the Court of Appeal, cannot be regarded as controversial. There is no reason why he should not have done that.
27. The two reasons put forward for not filing Points of Defence were first that he was engaged and was encouraged to be engaged in the committal application. The second is that his legal team does not have funds.
28. Mr Tsai had £150,000 allowed to him for the conduct of his defence of the liquidator's claim. Part of that involved a response to the committal application. But as Mrs Justice Rose found in the course of her judgment, Mr Tsai's response to the committal application was to tell untruths which were painstakingly exposed over a 10-day hearing, at the end of which he had a change of heart and attempted to admit some allegations, but in circumstances where he continued to deny others and where his admissions could not, on past experience, be taken at face value.
29. At paragraph [93] of the judgment at [2017] EWHC 1860 Mrs Justice Rose said,

"Having seen Mr Tsai give evidence and in the light of the matters I have described above, I have formed the view that Mr Tsai was a thoroughly dishonest witness and that almost all of the answers he gave during his oral evidence in the witness box were deliberate lies aimed at misleading the court. I believe very little of what he said unless it was adverse to his own interests. In forming that view I take into account of the following matters. First there are frequent changes of stance between his different affirmations and during the course of the trial. That does not give me confidence that any of his evidence is true… Thirdly there is Mr Tsai's insistence on the truthfulness of evidence which is wholly implausible…".

30. If Mr Tsai chooses to spend his time defending the committal application in that way and if he chooses to expend his available legal resources in pursuing that course, he cannot now say that that is a good reason for not using his time and spending his resources in preparing a defence.
31. The third matter I must consider is whether, looking at all of the issues in the round, it is unjust to deprive Mr Tsai of an extension of time. In my judgment, there is no injustice in taking that course. In weighing this limb of the tests posed by CPR 3.9, I must have particular regard for the need for litigation to be conducted efficiently and at proportionate cost and with the need to enforce compliance with rules and court orders. Unfortunately, Mr Tsai has shown himself to have no regard for the need to conduct litigation efficiently and at proportionate cost. Because of his willingness to fabricate evidence as he did before the Court of Appeal and as he did in the course of the Companies Court proceedings at first instance, he demonstrates no willingness to comply with rules or orders. It would therefore not be "just" simply to extend time now that he wishes to engage in the litigation. Indeed, the act of refusing him an extension of time does not seem to me in the least unjust. It means that the litigation may now proceed.
32. Mr Tsai may take it upon himself to prepare a Defence and apply to serve it out of time. Or the liquidators may seek to obtain a judgment in default of defence; and if they succeed in that then Mr Tsai will have the opportunity to seek to set aside that default judgment but only by producing a Defence and by demonstrating that it has sufficient substance, that is to say that by reference to the available material and within the context of the existing findings by the First Tier Tribunal and the Court of Appeal, it is a defence which is real not fanciful. Leaving the initiative with him in that way seems entirely just.
33. Mr Young submitted that that outcome runs counter to what Mrs Justice Rose had decided in relation to the liquidators debarring application. She had concluded that it would not, in the circumstances of the case, be appropriate to impose a debarring order. It is important to recognise the sort of debarring order that she was being asked to make. It was an order debarring Mr Tsai from defending unless he complied with the freezing order and purged his contempt within a limited time. I can well understand the procedural difficulties in making an order of that sort. But I am not making a debarring order and my refusal to extend time does not have the consequences with which Mrs Justice Rose had to wrestle in relation to the debarring application that was before her. I therefore refuse an extension of time.
34. This renders otiose any question about funding in large part, but I shall consider it lest it impact on the future course which Mr Tsai takes.
35. Mr Young submitted that in seeking to vary the freezing order granted by Mr Justice Birss renewed by Mr Justice Mann with its limitation on the amount that can be expended upon reasonable legal costs, I am doing no more than exercising a general jurisdiction to be exercised in accordance with the overriding objective. The submission was that a substantial variation to permit a further £333,000 on top of the existing £150,000 would be appropriate to enable Mr Tsai to pay his legal team £175,000 costs which they have already incurred in defending the committal application and a further sum in relation to the preparation of the Defence.
36. For the liquidators, Mr Robins submitted that it was not a matter of general discretion and that what one was doing was varying an existing freezing order, and that there were well established principles upon which such relief ought to be considered. He referred me in particular to the summary of those principles given by Mr Justice Males in Tidewater Marine v Phoenixtide Offshore Nigeria Limited [2015] EWHC 2748 (Commercial) in a series of paragraphs running from paragraph [33] through to paragraph [47]. I have that succinct summary well in mind, but I will not lengthen this judgment by repeating it.
37. In the instant case, as matters stand, there has been a finding that the money in the Hong Kong accounts is derived from Changtel's operations in England. Of course at present this may be a provisional view: but the clear finding has been made.
38. In these circumstances, upon what grounds should Mr Tsai be able to access for his defence to claims for breach of his duty, what is (at present, seriously arguably) the company's money? Why should he not have resort to his resources? Why should he not have resort to the resources of others who are willing to support him? As the Tidewater decision makes clear (see paragraph [40]) there is a burden of persuasion upon an applicant for a variation of the freezing order. That burden lies on the applicant because it is the applicant for the variation, not the holder of the freezing order, who will know the facts, the court having already formed the view that there is a real risk that the applicant will dissipate assets unless restrained.
39. When assessing whether the burden of persuasion has been discharged, I am entitled to have a very healthy scepticism about what Mr Tsai says as to the availability of other assets. In the instant case, Mr Tsai himself says nothing about the availability of other assets. All the material I have are statements by Mr Davis, his solicitor. He says in paragraph 6 of his witness statement that all funds available to fund Mr Tsai's legal team had been exhausted by mid-July. He says in correspondence, "The instructions we have are that no family members are prepared/able to fund Mr Tsai's legal costs." It is this material that I must address with a degree of scepticism.
40. In my judgment, Mr Tsai has singularly failed to discharge the burden of persuasion that lies upon him, that I should release what is provisionally the company's money (and in respect of which two judges have found there to be a real risk of dissipation of funds) to enable Mr Tsai to conduct his Defence. He having exhausted his present funds by an improper defence of the committal proceedings involving dishonesty and lying on his part, it would, in my judgment, offend the interests of justice (rather than promote the interests of justice) if I were to facilitate his access to those monies.
41. For those reasons, I decline to grant either of Mr Tsai's applications in either of the application notices.
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