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A A
CACV 269/2010 AND HCMP 266/2011
B B
CACV 269/2010
C C
IN THE HIGH COURT OF THE
D D
HONG KONG SPECIAL ADMINISTRATIVE REGION
E COURT OF APPEAL E
CIVIL APPEAL NO. 269 OF 2010
F F
(ON APPEAL FROM HCMP NO. 938 OF 2010)
G ---------------------------- G
HCMP 266/2011
H H
IN THE HIGH COURT OF THE
I
HONG KONG SPECIAL ADMINISTRATIVE REGION I
COURT OF APPEAL
J J
MISCELLANEOUS PROCEEDINGS NO. 266 OF 2011
K (ON AN INTENDED APPEAL FROM HCMP NO. 938 OF 2010) K
----------------------------
L L
IN THE MATTER OF Section 21M(1) of
M the High Court Ordinance, Cap. 4 of the M
Laws of the Hong Kong Special
N
Administrative Region N
--------------------------
O O
BETWEEN
P HER MAJESTY'S REVENUE & CUSTOMS Applicant P
Q and Q
R HASHU DHALOMAL SHAHDADPURI 1st Respondent R
nd
DAYAL DHALOMAL SHAHDADPURI 2 Respondent
S S
-------------------------
T Before: Hon Tang VP and Fok JA in Court T
Date of Hearing: 8 June 2011
U U
V V
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A
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Date of Handing Down Judgment: 6 July 2011
B B
C C
JUDGMENT
D D
Hon Tang VP:
E E
F 1. By a concurrent originating summons dated 18 May 2010, the F
Applicant (HMRC) commenced these proceedings in Hong Kong, pursuant to
G G
ss. 21L and 21M of the High Court Ordinance (Cap 4) for a Mareva injunction
H over the assets of the 1st and 2nd Respondents in Hong Kong, in aid of H
proceedings commenced in England. The 1st Respondent is said to be a
I I
resident of Singapore and the 2nd Respondent a resident of Hong Kong.
J J
2. On the same day, Chu J (as she then was) granted an ex parte
K K
Mareva injunction against the Respondents. The injunction covered assets up
L
to the value of £40,000,000. L
M 3. By summons dated 13 July 2010, the 1st Respondent applied to M
strike out the Concurrent Originating Summons on the ground that it discloses
N N
no reasonable cause of action and other consequential relief. The basis of the
O application is that the English proceedings were not capable of giving rise to a O
judgment which may be enforced in Hong Kong because the court does not
P P
have jurisdiction to entertain an action for the enforcement, directly or indirectly
Q of a revenue law, of a foreign state. He relies on Rule 3 in Dicey, Morris and Q
Collins on the Conflicts of Laws 14th ed. Vol. 1 ("Rule 3") which reads:
R R
"English courts have no jurisdiction to entertain an action: (1) for the
S enforcement, either directly or indirectly, of a penal, revenue or other S
public law of a foreign state; …"
T T
st
4. The 1 Respondent's application was dismissed by Recorder Jat SC.
U This is the 1st Respondent's appeal. U
V V
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A
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5. The English Action concerns what is known as "missing trader
B B
intra-community fraud" ("MTIC fraud") which has been described by
C Blackburne J in Regalway Care Ltd v Shillingford and others [2005] C
EWHC 261 at §§3-7 as follows:
D D
"MTIC fraud
E E
3. To set the scene for what follows it is appropriate to say something
about a particular species of VAT fraud. I begin with the relevant
F F
regulatory backdrop.
G 4. Under the rules concerned with the charging and collection of VAT, G
supplies of goods between registered traders in different member
states of the European Union are zero-rated provided the seller in
H one member state obtains the VAT registration number of the H
customer in another member state and can show that the goods in
I
question were removed from the seller's member state to the other I
member state. The result of those rules is that where an entity
registered for VAT in the United Kingdom imports goods from
J another member state, it need not make any payment in respect of J
VAT to the vendor. In due course it will be obliged to account in
the United Kingdom for output tax on its sales to customers in the
K K
United Kingdom. If the goods are purchased by an entity
registered for VAT in the United Kingdom which the entity then
L sells abroad, that entity will not be entitled to charge output tax on L
the sale but, conversely, having incurred and paid input tax on its
purchase of the goods (assuming the purchase was from somebody
M registered for VAT in the United Kingdom) will be entitled to M
recover that input tax from HM Commissioners of Customs and
N Excise ('HMCE' for short). N
5. It is the opportunities for fraud provided by these rules that have
O given rise to the kinds of dishonest scheme summarised in the O
following passage of the judgment of Jacob L.J. in R (on the
application of Federation of Technological Industries) v Customs
P P
& Excise Commissioners [2004] EWCA Civ.1020 (at paras 17-21):
Q '17. The simplest form of abuse is what [HMCE] call Q
"acquisition fraud". A business in the UK acquires goods
from an EU supplier VAT free and sells them on into the
R United Kingdom market directly or indirectly. When it R
sells these goods to its U.K. customers it charges VAT but it
fails to account to [HMCE] for the VAT it collects. Before
S S
[HMCE] catch up with it the trader simply disappears.
T 18. This kind of abuse is somewhat limited in that the T
importer who intends to defraud is actually selling the goods
into the United Kingdom market. He has to find real
U customers or his customers do. U
V V
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19. Much more significant is the second type of abuse
B which [HMCE] call "carousel fraud". Again, there is a UK B
importer buying from a supplier in another EU state.
Again, he pays no VAT on his purchase. He then sells to a
C C
"customer" in the U.K., charging VAT. That "customer" sells
on to another "customer", himself charging VAT (output tax)
D and setting that against the tax he paid to his supplier (input D
tax). This may go through several traders (whom [HMCE]
call "buffers"). The last buffer in the chain does not,
E however, sell on to ultimate UK customers. He sells back E
into the EU very often to the original seller. He will have
F paid input tax on his purchase. This he claims "back" from F
[HMCE]. None of this would matter if the original
importer, who has charged output tax to the first of the
G buffers, were around to account to [HMCE] for that tax. G
But by now he has disappeared.
H H
20. So on each circuit of the "carousel" 17.5% of the value
of the goods is extracted from [HMCE]. The scheme
I requires high value, low physical size goods - a container I
full of mobile phones or computer chips is just right for this.
A pallet-load arrives at Heathrow, the transactions all take
J place quickly (perhaps in the same day) and the pallet moves J
out again.
K K
21. [HMCE] estimate ... that the annual cost to the UK in
2002-3 was between £1.65 and £2.64 billion. The problem
L is, whatever the precise figure, vast. It is not confined to L
the UK but is EU wide...'
M One of the features of carousel fraud is that there is no need to find real M
end-customers for the goods in the United Kingdom. The overseas
N customer to whom the goods are exported may or may not be a N
genuine purchaser of them. It is because the goods may end up with
the original supplier that the designation 'carousel' is used. Dishonest
O schemes of this nature have become known as missing trader O
intra-community fraud, or 'MTIC fraud' for short.
P P
6. The value to those participating in MTIC fraud is the sharing of the
VAT extracted from HMCE (effectively the amount of the output tax
Q which the missing importer has charged to his purchaser but failed to Q
pay to HMCE). It is only if the exporter fails to recover the input tax
he has paid on his acquisition of the goods that the VAT position is
R neutral. Since the transactions - certainly those that the evidence R
before me has explored - can take place (or are said by the parties to
S them to have taken place) in the space of a single day (with completion S
of the transactions occurring over, at the most, a few days) and it may
be some time before the importer defaults on his obligation to account
T for the output tax he has charged and been paid, it requires vigilance on T
the part of HMCE to realise, when a payment claim is made, that it is
part of a carousel fraud.
U U
V V
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7. It can happen that one or more of the 'buffers' is innocent of any
B involvement in the fraud: he just happens to have purchased the goods B
and sold them on. But if the goods end up with an exporter who is
involved in the fraud (because, for example, it can be shown that he is
C C
the recipient of a commission or the like which has been paid to him by
a purchaser/vendor higher up the chain or coincidence cannot
D satisfactorily account for the number of chains in which that exporter D
and the same importer are involved) the buffer may find it difficult to
resist the inference that he too is involved, particularly if he has sold
E direct to that exporter or there are other features of his involvement E
indicating that his purchase and on-sale are other than what one would
F expect in the case of a genuine arms-length transaction." F
G G
6. We have a copy of Amended Particulars of Claim ("APoC") filed
H on behalf of HMRC (the successor to HMCE), and an affidavit of Susan H
Elizabeth Ogburn ("the affidavit") made in support of the application for a
I I
Mareva injunction.
J J
7. In the APoC, MTIC fraud was explained in para 12, and that MTIC
K K
fraud typically involved also:
L L
"(f) the exporter (or 'Broker') [who] claims repayment from HMRC
of the VAT charged on its acquisition of the goods, while the
M importer (or 'Defaulter') having directed payment of its invoice M
to a Third Party Recipient, fails to account to HMRC for the
VAT due on its sale of the goods;"
N N
8. After comparing a lawful chain of supply with MTIC fraud,
O O
para 12 went on to say:
P P
"(m) By contrast, the net effect of MTIC fraud transactions is that:
Q (i) no VAT in (sic) received by HMRC from the importer (the Q
Defaulter);
R R
(ii) HMRC nevertheless makes a repayment to the exporter
(the Broker);"
S S
9. Paras. 13-15 of the APoC are important and are quoted in full:
T T
"HMRC's claims
U U
V V
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13. HMRC have identified 719 MTIC fraud transaction chains ('the
B Relevant Transaction Chains') between August 2004 - January B
2006 bearing each of the following characteristics:
C C
(a) the importation of goods by a Defaulter from an EU
Supplier;
D D
(b) the sale of the goods by the Defaulter to a Buffer;
E (c) the instruction by the Defaulter to the Buffer to pay E
substantially the entirety of the purchase price for the
goods (including the VAT element) to Third Party
F F
Recipients, primarily to Sunico;
G (d) the non payment by the Defaulter of the VAT G
attributable to its sales to the Buffers referred to at
sub-paragraph (b) above;
H H
(e) the making of payments to (amongst others) Sunico in
accordance with the payment instructions, such
I I
payments either being made by the Buffer to whom the
Defaulter sold the goods or alternatively by a
J subsequent Buffer in the transaction chain; J
(f) the sale of the goods by a Buffer to a Broker at a price
K inclusive of VAT; K
(g) the export by the Broker of the goods VAT zero rated;
L L
(h) the making of a VAT repayment claim by the Broker in
M respect of the VAT period in which the goods were M
acquired and sold as set out above;
N (i) the making by HMRC of the VAT repayment to the N
Broker.
O 14. By reason of the Relevant Transaction Chains, HMRC have O
suffered loss in the sum of £40,391,100.01, being the VAT that
P
it has repaid to the Brokers in respect of those chains, having P
received no VAT payment from the Defaulter. A table
1
summarising the loss in attached hereto as Appendix 1 . Of
Q the loss of £40,391,100.01: Q
(a) £39,387,622.36 is identifiable by reference to the
R R
unpaid VAT in 697 Relevant Transaction Chains
involving the Defaulters set out at Paragraphs 17 - 76
S below; and S
(b) £1,003,477.65 is identifiable by reference to VAT
T repayments made to Brokers in 22 Relevant Transaction T
Chains set out at Paragraphs 77 - 83 below.
U 1 U
We have not been provided with Appendix 1.
V V
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15. Of the 697 Relevant Transaction Chains referred to at
B Paragraph 14(a) above: B
(a) HMRC have identified 237 chains in which:
C C
(i) there is a Defaulter who has failed to account of
D the VAT on its sale; D
(ii) a Buffer made a third party payment to Sunico;
E and E
(iii) HMRC have paid the VAT repayment claim by
F the Broker; F
(iv) the total value of the VAT loss in those 237
G G
Relevant Transaction Chains is £12,939,472.39;
H (b) as to remaining 460 chains, HMRC have identified (i) H
there is a Defaulter who has failed to account of the
VAT on its sale; and (ii) a Buffer has made a third party
I payment to Sunico. HMRC has been unable to trace I
each link in the chain between the UK trading parties.
J In particular it has been unable to trace the chain J
through to the Broker. However, it may be inferred
that a VAT repayment claim was made by the Broker in
K those chains and that such repayment claim was paid. K
Such inference is made from the following facts:
L (i) in so far as known, each of the 697 Relevant L
Transaction Chains contained essentially the
M same characteristics and resulted in an export by M
a Broker who submitted a VAT repayment
claim;
N N
(ii) HMRC only declined to make pay a VAT
repayment claim where it was able to identify
O O
the transaction chain back from the Broker to the
Defaulter;
P P
(iii) in none of the 697 Relevant Transaction Chains
referred to at Paragraph 14(a) have HMRC
Q identified the chain back from the Broker to the Q
Defaulter;
R R
(iv) the Brokers' VAT repayment claims in the
remaining 460 Relevant Transaction Chains
S must have been paid." S
T 10. However, in the affidavit, Ms Ogburn said: T
U U
V V
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"8 In respect of those 697 transactions the total VAT that was paid
B away and was unpaid by the Defaulting Traders to HMRC was B
£39,387,622.36.
C C
9 Of those 697 transaction chains HMRC have been able to trace
237 up to an exporting Broker in which a repayment claim was
D paid by HMRC. The total loss suffered by HMRC in respect D
of these 237 transactions is £12,939,472.39. The
reconstruction of complete chains (from Defaulting Trader to
E Broker) involves tracking the documentation for each stage of E
the chain. This has not been possible for all 697 chains in
F
which Sunico have received monies. F
10 In addition HMRC has traced 22 of fraudulent transaction
G chains back from two brokers which follow the outline pattern G
above. The loss to HMRC suffered in these chains together
with the loss suffered as referred to above totals
H £13,942,950.04. This is the quantum of HMRC's claim for H
damages against Sunico and the other Defendants."
I I
11. In para 51 of the affidavit, Ms Ogburn explained that the claim has
J J
excluded:
K "51. … all those chains which involve Sunico and which ended with K
a Broker whose repayment claim was denied".
L L
12. At first instance, counsel for the 1st Respondent were content to
M proceed on the basis that HMRC's claim was in nature of a carousel fraud. On M
appeal, Mr Chan Chi Hung, SC, leading Mr Jeffrey Tam (neither of whom
N N
st
appeared below) on behalf of the 1 Respondent, contended that HMRC's claim
O O
did not involve a carousel fraud.
P P
13. Mr Chan also submitted that the claim in the UK action is not an
Q action for the return of the refund paid to the broker/exporters, nor for damages Q
for loss suffered in paying out the refund on the basis that the HMRC should not
R R
have paid out the refund to the exporters and would not have done so had they
S known the facts they pleaded in the APoC. He submitted that there was no S
allegation in the APoC that the exporters were parties to or had knowledge of
T T
the conspiracy or fraud; or that the exporters were not entitled to the refund.
U Mr Chan submitted that the parties to the conspiracy were set out in APoC para U
V V
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100. They were: the importer-defaulters, the EU suppliers (or the unknown
B B
parties hijacking the names of such EU suppliers), the buffers making the
C payments to Sunico; or giving/passing on the instructions to pay Sunico; and the C
Defendants, but the exporters were not listed in para 100. Also, that each of
D D
the unlawful acts relied on was by the importer-defaulters, not the
E exporters/brokers. He pointed out that para 101 went on to allege that as a E
result of the conspiracy, the VAT payable (not the refund), which ought to be
F F
accounted and paid to HMRC, was diverted to Sunico or other overseas
G recipients. G
H H
14. Thus, Mr Chan submitted that the action is in substance a claim by
I HMRC for the VAT which had not been paid to them and as such is covered by I
Rule 3.
J J
K
15. On the other hand, Mr Charles Sussex, SC (leading Mr Johnny K. K
st
C. Ma), for the HMRC, submitted that the 1 Respondent has mis-characterized
L L
HMRC's claim, telling only "half the story" by cherry-picking only part of
M HMRC's pleaded case and ignoring the out of pocket losses which HMRC had M
suffered as a result of the conspiracy. That as pleaded,
N N
(1) HMRC's right to claim damages arose from the 719 MTIC fraud
O O
transaction chains, each involving inter alia the making by HMRC
P of VAT refund to the Broker (which was channeled up the chain to P
Third Party Recipients);
Q Q
R (2) HMRC's claim excludes chains in which a Broker's refund claim R
had been denied. Thus, HMRC is not making a claim simply
S S
because it failed to collect VAT due to the Defaulters' default -
T otherwise it would have included those excluded chains; T
U U
(3) Mere default was not sufficient even from the conspirators'
V V
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perspective, as what they really wanted was not merely to evade
B B
VAT liabilities but, more importantly, to obtain money out of the
C conspiracy. C
D D
16. In my view, the paragraphs from the APoC quoted in para 9 above
E show that "carousel" is an apt description of the HMRC's case in that goods E
which were imported in the United Kingdom were ultimately exported. As
F F
Blackburne J has explained:
G G
"5. … It is because the goods may end up with the original supplier
that the designation 'carousel' is used. …"
H H
17. I also note that the exportation of the goods and the refund of the
I I
VAT were integral parts of the HMRC's claim2.
J J
18. Also, paras. 100 and 101 should be read together with para 102
K APoC which states: K
L "102. In support of the allegation that each of the Defendants L
conspired as aforesaid, HMRC rely on the matters set out at Paragraphs
M
13-98 above and 103-109 below." M
19. Para 77 of the APoC should, in particular, be noted. It reads:
N N
"77. Of the loss of £1,003,477.65 set out at Paragraph 14 above:
O O
(a) the sum of £771,077.65 represents VAT repayments made
P
by HMRC to the Broker Dhalomal Kishore trading as P
Movil 2000 ('Movil 2000'). These repayments relate to
Relevant Transaction Chains particularised at Paragraphs
Q 78 - 86 below; Q
(b) the sum of £232,400 represents VAT repayments made by
R HMRC to the Broker Amber Communications R
Management Limited ('Amber'). These repayments relate
S to Relevant Transaction Chains particularised at S
Paragraphs 86 below."
T T
20. In connection with the allegations concerning Movil 2000 and
U 2 U
See para 13(f) to (i) quoted in para 9 above.
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Amber, I turn to the affidavit.
B B
C 21. Ms Ogburn first explained "the terminology that has been C
developed in MTIC cases and is used in the affidavit":
D D
"16.1 The EU based supplier that sells the goods for import into the
E UK is known as the 'EU Supplier'. E
16.2 The UK importer (who defaults on its liability to account to
F HMRC for the VAT due on the on-sale of the goods) is called F
the Defaulting Trader or 'defaulter'. On many occasions the
defaulter also goes missing - that is it can no longer be
G G
contacted through the details provided at the time it registered
for VAT or subsequently. Such defaulters are known as
H 'missing traders'. (For completeness a 'hijacked trader' is where H
the VAT identity of a legitimate trader has been used in a
MTIC fraud).
I I
16.3 The 'first line buffer traders' are the immediate trading entities
J
the defaulter or missing trader sells to. J
16.4 The second line buffers are the trading entities the first line
K buffers then sell to. This process which as Jacob LJ explains at K
paragraph 20 of his judgment referred to above, can and
frequently does all take place on the same day can be repeated
L through more 'Buffer' layers. L
M
16.5 The trading entity which re-exports the goods and seeks to M
reclaim the input tax it paid on its purchase (paragraph 19 of
Jacob LJ's judgment) is frequently called 'the Broker'."
N N
22. Ms Ogburn went on to explain in para 7 that HMRC's case is that
O O
Sunico, the 1st Defendant in the English Action, was a prominent recipient of
P third party payments, especially between 2004 and 2006. P
Q 23. Ms Ogburn then said: Q
R "… the EU Suppliers purchase the goods from Sunico for an apparent R
agreed price and then sell them into the UK at a loss … [which] they
do not recover … during the transaction chain. …" Paras 492, 493
S S
"The loss … is … a paper loss as the EU [Supplier] makes no actual
T payment to Sunico." para 494. T
U U
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"In the circumstances it is clear that the transactions between Sunico
B and the EU Supplier and the onward sale between the EU Supplier and B
the UK importer are contrived. …" para 496
C C
24. About Movil 2000, Ms Ogburn said:
D D
"Dhalomal Kishore t/a Movil 2000
E 273 At paragraph 56 above I referred to Movil 2000, the trading E
name of Dhalomal Kishore. Movil 2000 traded in the import
and export of telecommunications equipment from premises
F F
known as 'the Churchill' 1 Chartwell Place, Off Middle Road,
Harrow, Middlesex. Movil 2000 completed a VAT1 Form to
G register for VAT on 6 March 2000 (SO10/8 -11). G
274 As has been illustrated by the numerous examples above, Movil
H 2000 has occupied the position of a broker exporting mobile H
phones in transaction chains that involved MTIC fraud. In
I each instance it would export the phones to Dhalomal I
Ramchand. As may be seen from the table at SO10/67 - 68
there are 21 transactions in which HMRC made VAT
J repayment to Movil 2000 in chains in which (a) VAT was J
unpaid by the defaulter and (b) 3rd party payments were made
to Sunico The total amount of VAT repaid in respect of these
K K
transactions was £710,490.15.
L 275 In the various examples referred to above, the documentation L
showed that in selling the goods to Dhalomal Ramchand, Movil
2000 made no profit. Whilst that would appear to be lacking
M in any commercial logic, the wider pattern of Movil 2000's M
trading during the period under review in this case in even
N
more extraordinary. At SO10/18 - 66 are copies of its N
purchase and sale summaries that it provided to HMRC. In
October 2005 it made gross purchases of £60,470,218
O (SO10/18 - 34) (and gross sales of £60,464,663 (SO10/35 - 51) O
(a loss of £5,555). In November 2005 it made gross purchases
of £4,271,266.97 (SO10/52) and gross sales of £2,447,700
P P
(SO10/53 - 54) (a loss of £1,823,566). In December 2005 it
made gross purchases of £13,070,613 (SO10/55 - 60) and gross
Q sales of £12,550,029 (SO10/61 - 66) (a loss of £520,584). In Q
total over this 3 month period it appeared to have made a loss
of approximately £2.3m.
R R
276 This trading pattern is extraordinary and is inconsistent with
S
ordinary bona fide commercial activity. In November, Movil S
[2000] bought 21,146 units and sold 10,840. The sales made
were at the same prices as its purchases and all took place on
T the same day or within 2 days. It is wholly unclear why a T
further 10,666 units were acquired given that Movil 2000's
trades were substantially back to back.
U U
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277 In December the number of units bought and sold was the same
B - 81,819, though according to the deal documents supplied by B
Movil 2000 there were large discrepancies between the
purchase and sale prices."
C C
25. The claim involving Amber as broker was also elaborated in the
D D
affidavit. Ms Ogburn said:
E E
"323. Amber have also been identified by HMRC as a broker in
fraudulent MTIC claims. …
F F
……
G G
344. Amber submitted a repayment claim for VAT for the period
07/05. HMRC paid Amber £5,027,249.68 in respect of this
H return by two instalments (SO3/418A-418J). Following H
further investigations into Amber by HMRC an assessment was
raised 2006 to reclaim the money paid to Amber for the period
I I
07/05 (SO3/418A-418J). That assessment remains unpaid and
is the subject of an appeal to the First Tier Tax Tribunal:
J HMRC has therefore at present suffered a loss arising from the J
transaction detailed above.
K …… K
363 The paperwork therefore suggests that Amber, the broker at the
L L
end of the chain, ordered the goods on 24 August 2005 and had
a sale lined up on that date as reflected in Amber's invoices.
M Europecom, Fix, Zeetta, Sheeling, Team Mobile and Goldex all M
dated their invoices 25 August 2005. However Europecom
Sarl, despite the date of its invoice to Fix, did not in fact order
N the goods in question until 26 August 2005 on which date N
Sunico raised its invoice despite those invoices showing that
O the goods had been delivered the day before. This suggests O
that the entire transaction chain was contrived with paperwork
such as purchase orders and invoices being prepared after the
P event." P
Q 26. In para 359 Ms Ogburn said that for the period 08/05, Amber made Q
a reclaim of VAT in the sum of £10 million which:
R R
"… was not met by HMRC due to a lack of evidence provided by
S Amber to support its claim. …" S
T That was, however, under appeal by Amber. T
U 27. Also in Section 6 of the affidavit (paras 62 to 370 of the affidavit) U
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which dealt with Examples of Fraudulent Transaction Chains and which
B B
covered transactions including those involving Movil 2000 and Amber, Ms
C Ogburn said: C
D "140. … Further as is shown in the example transactions set out in D
this section (section 6) …, goods are often sourced from one country
only to pass through Sunico to be ultimately sold back into that same
E E
country. This suggests a circular movement of the goods. As the
majority of parties in a transaction add a mark up on the purchase price,
F no matter how small, if the goods are moving in a circular fashion at F
some point there had to be a readjustment in price. If, as suspected,
the same goods are being used over and over again to perpetrate the
G fraud then what Sunico purportedly paid for the goods is irrelevant. G
The transactions do not reflect actual commercial activity as the object
H of the exercise is to induce a loss to HMRC by failing to account for H
VAT on transactions within the UK.
I 141. Finally, it is noted that the mobile phones were originally I
purchased from a company in Dubai by Sunico and exported by the
broker Movil 2000 back to Dubai."
J J
28. It is clear from para 77 APoC and the affidavit, that although
K K
neither Movil 2000 nor Amber was named or sued as a party to the conspiracy,
L they could not be described as innocent parties. Also, notwithstanding L
para 1013 APoC, as para 144 APoC and para 515 of the affidavit made plain,
M M
HMRC's claim is confined to the refund actually made to the exporters.
N N
29. I also find the suggestion that there was a circular movement of
O O
goods compelling. I believe that a circular movement of goods would most
P probably also involve a circular movement of funds. In other words, the object P
of the conspiracy was not an acquisition fraud with the limitations described by
Q Q
Jacob LJ6. The object of the conspiracy was the refund by HMRC7.
R R
3
"Pursuant to the unlawful conspiracy, monies that were properly payable to HMRC were diverted
S initially to Sunico and thereafter distributed to Sunico …" S
4
"… HMRC have suffered loss in the sum of £40,391,100.01, being the VAT that it has repaid to the
T Brokers in respect of those chains, having received no VAT payment form the Defaulter." T
5
See para 11 above.
6
See para 5 above.
U 7 U
Namely, a carousel fraud.
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30. Revenue and Customs Commissioners v Total Network SL [2008] 1
B B
AC 1174 was concerned with a MTIC carousel fraud. There, the
C Commissioners brought an action against the Defendant for damages at C
common law for unlawful means conspiracy in sums equivalent to the amount
D D
of value-added tax ("VAT") which they had refunded as a result of the carousel
E frauds. The defence relying on Article 4 of the Bill of Rights 1689 was that E
the claim was not maintainable because no money should be levied for or to the
F F
use of the Crown, except by grant of Parliament.
G G
31. The House of Lords, by a majority, held that the criminal conduct
H H
at common law or by statute, engaged in by conspirators as a means of inflicting
I harm on the claimants, could constitute "unlawful means" and was actionable as I
the tort of conspiracy whether or not such conduct on the part of a single
J J
individual would be actionable at the suit of the claimant as some other tort; and
K that, accordingly, the judge had been correct to hold that the claim could exist in K
law and should not be struck out.
L L
M 32. There, Lord Walker described a MTIC carousel fraud as "worse M
than evasion; it is the fraudulent extraction of money from the Exchequer"8.
N N
He went on to say in para 109:
O O
"… But if an official vehicle carrying cash belonging to the
commissioners (cash representing collected taxes) were hijacked and
P the cash stolen, it seems to me that the commissioners would P
undoubtedly have a civil remedy available to reclaim it, if the robbers
were apprehended and the proceeds of the robbery traced to a bank
Q account. In my opinion the present case is essentially the same." Q
R 33. Mr Chan sought to distinguish Total Network on the basis that it R
involved a carousel fraud and that the exporter was allegedly party to the
S S
conspiracy such that it was never entitled to any refund of VAT. He submitted
T that in the present case, on the basis that the exporters were innocent parties, T
U 8 U
at page 1257C
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they were in law entitled to the refund. He relied on Optigen Ltd v Customs
B B
and Excise Comrs (ECJ) [2006] 2 WLR 456, a decision of the Court of Justice
C of the European Communities which decided a trader, who had no knowledge C
of the fact or means of knowing that a previous or subsequent transaction in the
D D
chain was vitiated by VAT fraud, was entitled to a VAT refund.
E E
34. I have endeavoured to show that, in present case, exporters such as
F F
Movil 2000 or Amber might not have been innocent parties. Thus, it is
G premature to say, on an application to strike out, that any judgment obtained in G
the English Action would be made on the basis that these or other exporters had
H H
no knowledge or means of knowledge of the carousel fraud.
I I
35. Mr Chan submitted, however, that even if the HMRC's case in the
J J
UK action involved an allegation against the exporter/broker and is therefore
K
indistinguishable from Total Network, enforcement of such a claim in Hong K
Kong would nevertheless be an indirect enforcement of the revenue law of the
L L
United Kingdom and hence contrary to Rule 3.
M M
36. Mr Chan relied on Government of India, Ministry of Finance
N (Revenue Division) v Taylor [1955] AC 491, a decision of the House of Lords, N
where the Government of India sought to prove in the voluntary liquidation of a
O O
company registered in the United Kingdom but trading in India for a sum due in
P respect of Indian income tax, including capital gains tax, which arose on the P
sale of the company's undertaking in India. It was held that the claim was not
Q Q
maintainable because it was a claim by the Government of India to recover tax.
R There, Lord Keith of Avonholm made the following observations about Peter R
Buchanan Ld v McVey (Note) [1955] AC 516.
S S
T 37. Lord Keith said: T
U U
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"… The plaintiff (in Peter Buchanan) company was a company
B registered in Scotland which had been put into liquidation by the B
revenue authorities in Scotland under a compulsory winding-up order
in respect of a very large claim for excess profits tax and income tax.
C C
The liquidator was really a nominee of the revenue. The defendant
held 99 one pound shares of the capital of the company and the
D remaining share was held by a confidential cashier and bookkeeper as D
trustee for him. These two sole shareholders were also sole directors.
The defendant having realized the whole assets of the company in his
E capacity as a director and having satisfied substantially the whole of E
the company's indebtedness, other than that due to the revenue, by a
F variety of devices had the balance transferred to himself to his credit F
with an Irish bank and decamped to Ireland. The action was in form
an action to recover this balance from the defendant at the instance of
G the company directed by the liquidator. The first answer of the G
defendant was that, as he had received the money from the company in
H
his capacity as a shareholder in pursuance of an agreement between all H
the corporators, the company could not now ask to have it back. The
judge held that the transaction was a dishonest transaction designed to
I defeat the claim of the revenue in Scotland as a creditor and was ultra I
vires of the company and accordingly rejected the defendant's
submission. On the other hand, he held that although the action was
J J
in form an action by the company to recover these assets it was in
substance an attempt to enforce indirectly a claim to tax by the revenue
K authorities of another State. He accordingly dismissed the action. K
The judgment contains an able and exhaustive examination of the
authorities.
L L
One explanation of the rule thus illustrated may be thought to
be that enforcement of a claim for taxes is but an extension of the
M M
sovereign power which imposed the taxes, and that an assertion of
sovereign authority by one State within the territory of another, as
N distinct from a patrimonial claim by a foreign sovereign, is (treaty or N
convention apart) contrary to all concepts of independent sovereignties.
Another explanation has been given by an eminent American judge,
O O
Judge Learned Hand, in the case of Moore v. Mitchell, in a passage,
quoted also by Kingsmill Moore J. in the case of Peter Buchanan Ld.
P as follows: 'While the origin of the exception in the case of penal P
liabilities does not appear in the books, a sound basis for it exists, in
my judgment, which includes liabilities for taxes as well. Even in the
Q case of ordinary municipal liabilities, a court will not recognize those Q
arising in a foreign State, if they run counter to the "settled public
R
policy" of its own. Thus a scrutiny of the liability is necessarily R
always in reserve, and the possibility that it will be found not to accord
with the policy of the domestic State. This is not a troublesome or
S delicate inquiry when the question arises between private persons, but S
it takes on quite another face when it concerns the relations between
the foreign State and its own citizens or even those who may be
T T
temporarily within its borders. To pass upon the provisions for the
public order of another State is, or at any rate should be, beyond the
U powers of the court; it involves the relations between the States U
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themselves, with which courts are incompetent to deal, and which are
B intrusted to other authorities. It may commit the domestic State to a B
position which would seriously embarrass its neighbour. Revenue
laws fall within the same reasoning; they affect a State in matters as
C C
vital to its existence as its criminal laws. No court ought to undertake
an inquiry which it cannot prosecute without determining whether
D those laws are consonant with its own notions of what is proper.' D
On either of the explanations which I have just stated I find a
E solid basis of principle for a rule which has long been recognized and E
which has been applied by a consistent train of decisions. …" pages
F
510-511 F
G
38. Buchanan and Government of India were considered in Williams G
and Humbert Ltd v W & H Trademarks (Jersey) and Ors [1986] AC 368, where
H H
Lord Mackay of Clashfern said at 440:
I "Having regard to the questions before this House in [Government of I
India] I consider that it cannot be said that any approval was given by
J the House to the decision in the Buchanan case except to the extent J
that it held that there is a rule of law which precludes a state from
suing in another state for taxes due under the law of the first state. …"
K K
39. Buchanan and Government of India were followed, in QRS 1 Aps
L L
and others v Frandsen [1999] STC 616, a case which was indistinguishable on
M the facts from Buchanan, where Simon Brown LJ said at 630F: M
N "I can readily understand Lord Mackay's insistence on the narrowness N
of the Buchanan decision and his approach certainly appears consistent
with the view of the editors of Cheshire and North's Private
O International Law (12th edn, 1992) p116: 'It is questionable whether O
the general ban on indirect enforcement is not too rigid.' They do not,
P however, criticise Buchanan and, as I repeat, the present case is P
indistinguishable from Buchanan: both are to be regarded as cases
where the liquidator, as nominee for a foreign state, in substance is
Q seeking a remedy designed to give extra-territorial effect to foreign Q
revenue law. …"
R R
40. Mr Chan submitted that even if the present case is
S indistinguishable from Total Network, enforcement of any such judgment would S
nevertheless be an indirect enforcement of foreign revenue law. But as Dicey,
T T
Morris and Collins put it:
U U
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"… Indirect enforcement is, however, easier to describe than to
9
B define …" B
C 41. In a commentary on Fransden, Mr Adrian Briggs said10: C
D "… the case was one of indirect enforcement. But, it may be time to D
reconsider this. The effect of the judgment is that the claims of a
company against a fraudster are denied because the company has been
E E
put up to the action by the Revenue. Quite apart from the difficulties
which arise in a case where there are civil claimants alongside the
F taxman, one wonders why the fraudster is to be preferred to the F
Revenue? If there ever was a rule to this effect, it is time to
acknowledge that it has outlived its usefulness, but also that it has lost
G sight of its roots." G
H 42. Indeed, in Fransden Simon Brown LJ pointed out that counsel for H
the company did not:
I I
"… contend that as a matter of domestic law this court could do
J otherwise than apply Buchanan (although he leaves open the J
possibility of the House of Lords wishing to revisit this area of indirect
11
K enforcement)." K
L 43. There are authorities, outside of England, which have questioned L
the width or limited the scope of the prohibition against indirect enforcement.
M M
44. In Ayres v Evans [1981] 39 ALR 129, a decision of the Federal
N N
Court of Australia, Fox J said at page 131:
O O
"… the rule does not apply where a liquidator or an official assignee
seeks to get in property which will in a due course of administration
P benefit ordinary creditors as well as the revenue. …" P
Q 45. In South Africa, Eloff J's decision in Priestley v Clegg 1985 (3) SA Q
955 was to similar effect, where 94% of all claims in the estate related to a tax
R R
liability to the U.K. Inland Revenue.
S S
T T
9
At para 5-023
10
(1999) 70 B.Y.I.L. 341
U 11 U
At 627G
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46. In Re Tucker (a bankrupt), ex parte Bird [1988] LRC (Comm) 995,
B B
a decision in the High Court (Staff of the Government Division) in the Isle of
C Man, Hytner JA said at page 1007: C
D "We regard the decision in Peter Buchanan Ld v McVey as one decided D
on its unusual and particular facts, and deciding no more than that an
action by the tax authorities of State A against a tax debtor in the
E E
Courts of State B for moneys to satisfy a revenue debt fails even
though it is clocked by the use of a 'puppet agent'. We leave open,
F however, the question of whether the decision would be followed in F
the Manx courts if the identical facts ever arose for consideration in the
future."
G G
47. Lord Walker in Total Network (see para 32 above) has compared a
H H
MTIC carousel fraud with a robbery of HMRC's cash. With respect, I agree
I that the two are essentially the same. A robber would be subject to extradition. I
I find it difficult to accept that enforcement of a judgment to recover the loot
J J
should fail on the ground that it amounts to an indirect enforcement of foreign
K revenue law. I do not believe that Government of India compels such a K
conclusion. If, it does, I am respectfully of the view that our courts may wish
L L
to consider whether Government of India should be followed.
M M
48. It is inappropriate and unnecessary at this juncture to say more than
N N
that this is not a case where the claim ought to be struck out. Whether any
O judgment in the English action will be enforced will depend on the actual basis O
of the decision and a determination by our courts on the scope of Rule 3.
P P
Q
Disposition Q
R 49. I have had the advantage of reading Fok JA's judgment in draft. I R
agree that leave to appeal should be refused. Indeed, for the reasons given
S S
above, I would have dismissed the appeal in any event.
T T
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Hon Fok JA:
B B
C 50. I have had the benefit of reading the judgment of Tang VP in draft. C
With respect, assuming we should entertain the appeal, I agree with his reasons
D D
for dismissing it.
E E
51. The question of whether we should entertain the appeal or not
F arises because the respondents did not apply for leave to appeal, as was required. F
The application for leave should have been made to the Recorder below: RHC
G G
Order 59 rule 2B(2). It should have been made within 14 days of his judgment:
H RHC Order 59 rule 2B(1). H
I I
52. The respondents apparently omitted to make such an application
J because their solicitors took the view that the Recorder's order was within RHC J
Order 59 rule 21(2)(b) being "an order striking out …" and so one from which
K K
leave to appeal was not required. This view was also apparently shared by the
L applicant's solicitors at one stage. It was, however, an erroneous view since L
the Recorder's order was not an order striking out an action or pleading and
M M
leave is required to appeal against a refusal of such an application. The
N question is now whether this court should grant leave to appeal and the N
necessary extension of time for the appeal. The judgment was handed down
O O
on 16 November 2010 and the application for leave to appeal was not made
P until 22 February 2011, a delay of over two and a half months. P
Q Q
53. Even if I were prepared to accept that the delay due to a
R misunderstanding of the new rules of court was excusable (this being the reason R
proffered in the respondents' solicitor's affirmation) so that the test for leave is
S S
whether the respondents can show a reasonable prospect of success, I do not
T think that test is satisfied in the present case. T
U U
54. In my view, the respondents cannot show a reasonable prospect of
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success on the appeal given the high threshold required to sustain the strike out
B B
application in this case. It should be noted that, on the originating summons
C by which the applicant commenced the proceedings in this jurisdiction, all the C
applicant is required to demonstrate in order to establish jurisdiction for the
D D
grant of the Mareva injunction in aid of the English proceedings is that there is a
E good arguable case that the English proceedings are capable of giving rise to a E
judgment which may be enforced in Hong Kong. In order for the strike out to
F F
have succeeded, the respondents would have had to show that it is plain and
G obvious that there is no such case. In my opinion, for the reasons set out in the G
judgment of Tang VP above, the respondents' arguments fall far short of that
H H
hurdle. I would therefore refuse leave to appeal.
I I
Hon Tang VP:
J J
K
55. Leave to appeal is refused, and I make a costs order nisi in favour K
of HMRC.
L L
M M
N N
O (Robert Tang) (Joseph Fok) O
Vice-President Justice of Appeal
P P
Mr Chan Chi Hung, SC & Mr Jeffrey Tam instructed by Messrs Fairbairn
Q
Catley Low & Kong for the 1st Respondent Q
Mr Charles Sussex, SC & Mr Johnny K. C. Ma instructed by Messrs Mallesons
R R
Stephen Jaques for the Applicant
S S
T T
U U
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