England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/05/2009

Mr. Justice Teare:

1. This is an application by the Claimants to strike out a Counterclaim pleaded against them by the Sixth Defendant.
2. The Claimants have brought proceedings against the Defendants but now proceed against the Sixth to Eighth Defendants only. They allege that the Seventh and Eighth Defendants acted fraudulently and that the Sixth Defendant dishonestly assisted them. One aspect of the fraud is that the identity of Guernsey companies which received payment from the Claimants was deliberately concealed. Those companies shared the same names as English companies. The Claimants allege that invoices deliberately bore no company registration details, and no Guernsey address, so that it would be unclear to the Claimants that the relevant supplier of goods was not the English company.
3. The Sixth Defendant wishes to counterclaim against the Claimants alleging, in essence, that they have maliciously prosecuted him in criminal proceedings and in these civil proceedings.
4. On 31 July 2008 Beatson J. struck out an earlier counterclaim. The history of the action is set out in paragraphs 1-15 of his judgment. He was asked to strike out a counterclaim which had been served in April 2004. He decided to strike out the counterclaim but gave the Sixth Defendant leave to plead a further counterclaim "if it can properly be done". He noted that if the new counterclaim is "still defective, then it will be open to the Claimants to apply to have that struck out" (see paragraph 37 of the judgment). The Claimants say that the new counterclaim is defective and therefore apply to have it struck out.
5. Beatson J. also dismissed an argument based upon an order made by Ian Glick QC, sitting as a deputy High Court judge in this matter; see paragraphs 31-34. That argument was repeated before me but it is not open to the Sixth Defendant to repeat an argument which has been dismissed and has not been appealed.
6. It is necessary to set out the counterclaim in its entirety, save for the particulars of damage.

"Overview of Counterclaim: Causes of Action

109. The Sixth Defendant counterclaims against the Claimants in the tort of malicious prosecution arising from the failed criminal proceedings. As set out in Gregory v Portsmouth [2001] 1 AC 419, the Sixth Defendant avers that:

(i) the law was set in motion against him on a criminal charge;

(ii) that the prosecution was determined in his favour;

(iii) that it was without reasonable and proper cause;

(iv) that it was malicious.

110. Alternatively the Sixth Defendant will counterclaim that the Claimants are liable to him in the torts of malicious falsehood and/or maliciously procuring his arrest.

111. The Sixth Defendant will aver that the Claimants did not reveal important information at the earlier stages of the prosecution and/or made statements they knew or should have known to be false, particularly in relation to the Sixth Defendant's involvement. By doing so they effectively removed the independence of the prosecuting authority in the criminal proceedings and procured the prosecution of the Sixth Defendant. The Sixth Defendant relies upon the authority of Moon v Kent CC [1995] 3 WLR 318.

112. He further finally counterclaims in the tort of civil prosecution arising from this civil action. He will aver that the circumstances of this case are such that it would be right to extend the law of tort where otherwise he would be left without an adequate remedy.

Particulars

113. In relation to all the above causes of action, the Sixth Defendant avers that civil and criminal prosecutions were brought or procured by the Claimant maliciously and without reasonable and proper cause. In support of the same, the Sixth Defendant relies upon the following:

(i) The Claimants knew from disclosure from Royal Bank of Scotland Group in the criminal proceedings that the Sixth Defendant did not control any of the Natwest bank accounts operated by the Guernsey companies. These were all controlled by the Seventh and/or Eighth Defendant. As these accounts were only accounts through which the transfer of funds was made, it was malicious of the Claimants to continue to allege that the Seventh Defendant had any control over the flow of those funds. The disclosure took place on 23^rd November 2000.

(ii) None of the documents show that the Sixth Defendant actually ordered any transfer of monies. They all show that the transfers were undertaken by the Seventh Defendant (as he was the only one in control of the accounts).

(iii) The Claimants knew from disclosure in the proceedings commenced in Liechtenstein that the Sixth Defendant was an employee of the Seventh Defendant and acted solely upon his instructions.

(iv) Having received this information the Claimants maliciously continue to assert that the Sixth Defendant controlled the transfer of funds. There is no evidence at all to support this allegation.

(v) The Claimants knew from the disclosure in the criminal proceedings that the entire purpose of the setting up the UK companies and then the Guernsey companies, with professional advice from PKF, was to reduce the Seventh Defendant's tax liabilities. To continue to suggest otherwise is malicious.

(vi) Indeed, despite the Claimants continually suggesting that the Guernsey Companies were set up to hide monies, they have never explained why or how this was to be the case. The fact is that the Structure simply led to Tramec AG, a company of good repute, then back to Guernsey.

(vii) This fact that the scheme was to reduce tax was acknowledged by the expert's report of the 31^st August 2001.

(viii) The Claimants' internal Control Risks Report dated September 2000 set out with the objective to discover whether the Sixth Defendant had colluded with the First and Third Defendants. They did not find any such evidence. This seems to now have been ignored by the Claimants.

(ix) The same report interviewed Sue Webb, HSM's former accountant. She divulged that she knew that the Seventh and Eighth Defendants operated several companies in Guernsey and was aware of their "inappropriate relationship" with the First and Third Defendants. Despite this, no prosecution or further action has been brought against Ms Webb. The Sixth Defendant submits that his knowledge was not of the same level as Ms Webb's, and the decision to prosecute him and not her is evidence of malice.

(x) Likewise the Claimants are aware that Roger Bennett of Fortress Management of the Isle of Man, incorporated companies and signed contracts for those companies with the First Defendant, who signed on behalf of the Claimant. Mr. Bennett simultaneously paid the First Defendant sums of money under direct instructions from the Seventh Defendant. Despite this, no prosecution or further action has been brought against Mr. Bennett. The Sixth Defendant submits his knowledge and actions were not of the same level as Mr. Bennett, and the decision to sue him, but not Mr. Bennett, is evidence of malice.

(xi) The Claimants have continued to insist that they operate a proper system of control at their stores (Paragraph 6^[1] of their Reply to the Defence of the Sixth Defendant). However the prosecution expert evidence that was produced at the criminal proceedings by Grant Thornton was to the contrary. To date, the Claimants have not adduced any expert evidence which supports this assertion.

(xii) The Claimants have continued to insist that they suffered a loss of £16.7 million despite there being no expert evidence to support this figure.

(xiii) The Claimants have continued in this action to claim damages from the Sixth Defendant when it is apparent that there can be no further loss.

(xiv) The Claimants have continue to aver that the Sixth Defendant holds any commission received by him on behalf of the Claimants (Paragraph 17.1(5)(b)), when there is no evidence that he did so receive any commission.

(xv) The Claimants have continued in this action despite the failure of the criminal proceedings against the Sixth Defendant.

(xvi) The Sixth Defendant believes that the Liechtenstein proceedings were instituted by the Claimants in order to recover the monies held by the Seventh Defendant. He believes that the Claimants advised that he was a principal in the fraud, despite there not being any evidence of this. He requests disclosure of all correspondence between the Claimants and the Liechtenstein prosecuting authorities.

(xvii) This view is supported because the disclosure in the criminal proceedings there is reference to the Claimants providing a Statement of Facts dated 17^th December 2000. Again the Sixth Defendant seeks disclosure.

(xviii) The Sixth Defendant believes that the only way to recover funds was to have him charged and prosecuted in England. He believes that this was done maliciously and without any proper regard to the evidence.

7. The "overview" in paragraphs 109-112 identifies the causes of action on which on which the Sixth Defendant relies. They are malicious criminal prosecution, malicious falsehood, maliciously procuring an arrest and malicious civil prosecution. The particulars relied upon are set out in 18 sub-paragraphs of paragraph 113. It appears, and was accepted by the Sixth Defendant during the hearing of the application, that sub-paragraphs (i)-(viii) and (xi)-(xv) relate to malicious prosecution of these civil proceedings. Some might also be particulars of malicious falsehood. Sub-paragraphs (ix)-(x) and (xviii) relate to malicious criminal prosecution though sub-paragraph (x) also relates to malicious prosecution of these civil proceedings. Sub-paragraphs (xvi)-(xvii) are requests for disclosure.
8. Both the Sixth Defendant and the Claimants provided the court with witness statements but whether or not the counterclaim discloses a reasonable cause of action depends upon the terms of the pleading.

Malicious falsehood and malicious prosecution of these civil proceedings.

9. There is no general tort of tort of malicious prosecution of civil proceedings; see Gregory v Portsmouth City Council [2001] 1 AC 419. The Sixth Defendant accepts that he needs to extend the law; see paragraph 112 of the Counterclaim. However, some, though perhaps not all, of the allegations he makes with regard to malicious prosecution of civil proceedings could be and are made in support of the allegations of malicious falsehood.
10. The allegations in sub-paragraphs (i)-(iv) amount, in essence, to an allegation that the Claimants, maliciously and without reasonable and proper cause, have alleged and asserted that the Sixth Defendant^[2] had control over the flow of funds through the accounts of the Guernsey companies. The Claimants' allegations are said to have been made in these civil proceedings.
11. Allegations are made against the Sixth Defendant in the Re-Re-Re Amended Claim in paragraphs 10A and 15.14-15.15 and in Schedule C at paragraph 5. They do not include an allegation that the Sixth Defendant had control over the flow of funds through the accounts of the Guernsey companies. The Sixth Defendant did not refer me to any passages in the Claimants' Re-Re-Re Amended Points of Claim in which such allegation or assertion was made. However, I have noted that in the Re-Amended Reply at paragraph 9 the Claimants have responded to an allegation by the Sixth Defendant in paragraph 11 of his Defence that "he did not transfer any funds nor could he have done since he had not control over the relevant accounts". The reply sets out a detailed allegation which ends by saying that the Sixth Defendant had a "de facto" element of control over the transfer of funds. What is expressly not alleged is that the Sixth Defendant had "ultimate or sole control" over the transfer of funds.
12. The pleaded counterclaim gives an incomplete description of the allegation made by the Claimants in the Reply. There is no attempt to identify which part of the limited allegation made in the Reply is false. For that reason I consider that the allegations in sub-paragraphs (i)-(iv) are incoherent and make no sense and therefore fail to disclose a reasonable cause of action; see CPR Part 3.4(2)(a) and the Practice Direction to CPR Part 3 at paragraph 1.4(2).
13. The allegations in sub-paragraphs (v)-(viii) amount, in essence, to an allegation that maliciously and without reasonable and proper cause the Claimants have suggested that the purpose of setting up the UK and Guernsey companies was to hide monies and was not to avoid tax. The Sixth Defendant, in paragraphs 30-34 of the Defence, has pleaded that he was taking professional advice from PKF and devised a scheme to ensure that profits were taxed only in Liechtenstein and that pursuant to that scheme the UK and Guernsey companies were formed. At paragraph 18 of the Claimants' Re-Amended Reply no admissions are made as to those allegations "since such matters are not presently within the Claimant's knowledge". The matter is further dealt with at paragraphs 84-87 of the Defence to Counterclaim (pleaded to by the Claimants without prejudice to their right to strike out the same) in which it is said that "the purpose of setting up the UK companies and then the Guernsey companies was to engage in the fraudulent supply transactions described in the Claimants' pleadings. The way the companies in fact operated was to facilitate the fraud." It is also said that "it is no part of the Claimant's case that PKF knew of that fraudulent purpose. PKF were free to advise in relation to whatever proposed structure was put before them. Whether or not one purpose of setting up such companies (with whatever professional advice was given by PKF, as to which no admissions are made) was to reduce Mr. Hauxwell-Smith's tax liabilities, it is denied that the Claimants' case is "malicious."
14. The essence of this part of the counterclaim is that documents disclosed in the criminal proceedings and an expert's report dated 31 August 2001 caused the Claimants to know that "the entire purpose of the setting up of the UK companies and then the Guernsey companies …was to reduce the Seventh Defendant's tax liabilities" and that the allegations being made by the Claimants are contrary to what they know to be true. However, as is apparent from paragraph 86 of the Defence to Counterclaim the Claimants rely upon the number of supplier companies and the use of invoices which are said to bear no reference to the existence of the Guernsey companies to support their allegations as to dishonest fraudulent supply transactions. There is no attempt in the counterclaim to allege that such matters did not give the Claimants reasonable and proper grounds to believe that the allegations they make are true. The counterclaim fails to grapple with the matters relied upon by the Claimants in support of their claim. For that reason I consider that the allegations in sub-paragraphs (v)-(viii) are incoherent and make no sense and therefore fail to disclose a reasonable cause of action; see CPR Part 3.4(2)(a) and the Practice Direction to CPR Part 3 at paragraph 1.4(2).
15. Sub-paragraph (x) contains an allegation that the Claimants sued the Sixth Defendant but did not sue a Mr. Roger Bennett when there was evidence that the actions of the Sixth Defendant were not "of the same level as Mr. Bennett." This allegation fails to address the reasons why the Claimants have sued the Sixth Defendant and so does not amount to a coherent case of malicious falsehood against the Claimants.
16. So far as sub-paragraph (xi) is concerned complaint is made of the Claimants' response in their original Reply at paragraph 5 to the effect that they had a proper system to verify whether goods identified by the supplier as having been sent had actually been sent. That system was described in detail. It is not alleged that that description or any part of it was false, only that an expert's report was "to the contrary" and that the Claimants have not produced an expert's report which supports their description. This is not a coherent case that the matters of fact relied upon by the Claimants in support of their plea do not amount to reasonable and proper cause for believing their plea to be true.
17. Sub-paragraphs (xii) and (xiii) allege, in effect, that the Claimants are alleging substantial losses when there is no expert evidence in support and "it is apparent there can be no further loss". The loss which is claimed is set out in the Re-Re-Re Amended Claim under paragraph 16.1. It is based upon the amount paid by the Claimants for goods which were not delivered, with credit being given for recoveries made with the assistance of the Serious Fraud Office and the Liechtenstein authorities. Again, there is no coherent case that the matters of fact relied upon by the Claimants in support of their plea do not amount to reasonable and proper cause for believing their plea to be true.
18. In sub-paragraph (xiv) complaint is made that the Claimants allege that the Sixth Defendant holds any commission received by him on behalf of the Claimants where there is no evidence that he has received any such commission. The relevant plea (paragraph 17.1(5)(b) of the Re-Re-Re Amended Claim) does not assert that the Sixth Defendant holds commission but that any commission received by him in respect of his alleged dishonest assistance is held on trust for the Claimants. It is impossible to see how this could amount to a tort.
19. Sub-paragraph (xv) relies upon the maintenance of this action despite the failure of criminal proceedings against the Sixth Defendant. This cannot by itself amount to a tort; otherwise any civil recovery action after a failed criminal action would be a tort. Yet civil recovery actions in such circumstances are not uncommon. There may be many reasons why criminal prosecutions fail which do not mean that a civil claim must inevitably fail.
20. Sub-paragraphs (xvi)-(xvii) are requests for disclosure. They cannot amount to a properly pleaded counterclaim.
21. I have therefore concluded that the above allegations do not disclose a reasonable cause of action based upon the tort of malicious falsehood. Further, no attempt was made to persuade me that there was a realistic prospect that English law was likely to be extended so as to recognise a hitherto unrecognised general tort of malicious prosecution of civil proceedings, and in particular with regard to allegations made by way of Reply.

Malicious criminal prosecution

22. In order to bring home a claim for malicious prosecution of criminal proceedings where the defendant is not the prosecutor but has provided evidence to the prosecutor it is necessary show that the defendant falsely and maliciously gave evidence desiring and intending that a prosecution be brought, that the facts relating to the crime are exclusively within the defendant's knowledge so that the prosecution authorities cannot exercise their independent judgment in the matter and that a prosecution is virtually inevitable; see Clerk and Lindsell on Torts paragraph 16-12.
23. Paragraph 111 of the Overview of the Counterclaim does not give any or any adequate particulars of these matters. Nor do the Particulars under paragraph 113. Sub-paragraphs (ix) and (x) merely complain of a decision to prosecute the Sixth Defendant rather than other persons. But the decision to prosecute was that of the prosecuting authority not the Claimants. Sub-paragraph (xviii) is merely a statement of the Sixth-Defendant's belief.
24. I have therefore concluded that the Counterclaim does not disclose a reasonable cause of action based upon the tort of malicious prosecution of criminal proceedings.
25. For these reasons I have decided that the Counterclaim must be struck out.

Note 1   This must be a mistake for paragraph 5 of the Reply.    [Back]

Note 2   Sub-paragraph (i) refers to the Seventh Defendant in the last sentence. This must be a mistake for the Sixth Defendant.     [Back]