Her Majesty's Revenue & Customs v. Hashu Dhalomal Shahdadpuri and Another

CACV 269/2010 and HCMP 266/2011

CACV 269/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 269 OF 2010

(ON APPEAL FROM HCMP NO. 938 OF 2010)

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HCMP 266/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 266 OF 2011

(ON AN INTENDED APPEAL FROM HCMP NO. 938 OF 2010)

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BETWEEN

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Before: Hon Tang VP and Fok JA in Court

Date of Hearing: 8 June 2011

Date of Handing Down Judgment: 6 July 2011

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J U D G M E N T

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Hon Tang VP:

1.By a concurrent originating summons dated 18 May 2010, the Applicant (HMRC) commenced these proceedings in Hong Kong, pursuant to ss. 21L and 21M of the High Court Ordinance (Cap 4) for a Mareva injunction over the assets of the 1^st and 2^nd Respondents in Hong Kong, in aid of proceedings commenced in England. The 1^st Respondent is said to be a resident of Singapore and the 2^nd Respondent a resident of Hong Kong.

2.On the same day, Chu J (as she then was) granted an ex parte Mareva injunction against the Respondents.  The injunction covered assets up to the value of £40,000,000.

3.By summons dated 13 July 2010, the 1^st Respondent applied to strike out the Concurrent Originating Summons on the ground that it discloses no reasonable cause of action and other consequential relief.  The basis of the application is that the English proceedings were not capable of giving rise to a judgment which may be enforced in Hong Kong because the court does not have jurisdiction to entertain an action for the enforcement, directly or indirectly of a revenue law, of a foreign state.  He relies on Rule 3 in Dicey, Morris and Collins on the Conflicts of Laws 14^th ed. Vol. 1 ("Rule 3") which reads:

"English courts have no jurisdiction to entertain an action: (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state; …"

4.The 1^st Respondent's application was dismissed by Recorder Jat SC.  This is the 1^st Respondent's appeal.

5.The English Action concerns what is known as "missing trader intra-community fraud" ("MTIC fraud") which has been described by Blackburne J in Regalway Care Ltd v Shillingford and others [2005] EWHC 261 at §§3-7 as follows:

"MTIC fraud

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 regulatory backdrop.

4.   Under the rules concerned with the charging and collection of VAT, supplies of goods between registered traders in different member states of the European Union are zero-rated provided the seller in one member state obtains the VAT registration number of the customer in another member state and can show that the goods in question were removed from the seller's member state to the other member state. The result of those rules is that where an entity registered for VAT in the United Kingdom imports goods from another member state, it need not make any payment in respect of 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 United Kingdom.  If the goods are purchased by an entity registered for VAT in the United Kingdom which the entity then sells abroad, that entity will not be entitled to charge output tax on the sale but, conversely, having incurred and paid input tax on its purchase of the goods (assuming the purchase was from somebody registered for VAT in the United Kingdom) will be entitled to recover that input tax from HM Commissioners of Customs and Excise ('HMCE' for short).

5.   It is the opportunities for fraud provided by these rules that have given rise to the kinds of dishonest scheme summarised in the following passage of the judgment of Jacob L.J. in R (on the application of Federation of Technological Industries) v Customs & Excise Commissioners [2004] EWCA Civ.1020 (at paras 17-21):

'17.    The simplest form of abuse is what [HMCE] call "acquisition fraud".  A business in the UK acquires goods from an EU supplier VAT free and sells them on into the United Kingdom market directly or indirectly.  When it sells these goods to its U.K. customers it charges VAT but it fails to account to [HMCE] for the VAT it collects.  Before [HMCE] catch up with it the trader simply disappears.

18.    This kind of abuse is somewhat limited in that the importer who intends to defraud is actually selling the goods into the United Kingdom market.  He has to find real customers or his customers do.

19.   Much more significant is the second type of abuse which [HMCE] call "carousel fraud".  Again, there is a UK importer buying from a supplier in another EU state.  Again, he pays no VAT on his purchase. He then sells to a "customer" in the U.K., charging VAT. That "customer" sells on to another "customer", himself charging VAT (output tax) and setting that against the tax he paid to his supplier (input tax).  This may go through several traders (whom [HMCE] call "buffers").  The last buffer in the chain does not, however, sell on to ultimate UK customers.  He sells back into the EU very often to the original seller.  He will have paid input tax on his purchase.  This he claims "back" from [HMCE].  None of this would matter if the original importer, who has charged output tax to the first of the buffers, were around to account to [HMCE] for that tax.  But by now he has disappeared.

20.    So on each circuit of the "carousel" 17.5% of the value of the goods is extracted from [HMCE].  The scheme requires high value, low physical size goods - a container full of mobile phones or computer chips is just right for this.  A pallet-load arrives at Heathrow, the transactions all take place quickly (perhaps in the same day) and the pallet moves out again.

21.    [HMCE] estimate ... that the annual cost to the UK in 2002-3 was between £1.65 and £2.64 billion.  The problem is, whatever the precise figure, vast.  It is not confined to the UK but is EU wide...'

One of the features of carousel fraud is that there is no need to find real end-customers for the goods in the United Kingdom.  The overseas customer to whom the goods are exported may or may not be a genuine purchaser of them.  It is because the goods may end up with the original supplier that the designation 'carousel' is used.  Dishonest schemes of this nature have become known as missing trader intra-community fraud, or 'MTIC fraud' for short.

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 which the missing importer has charged to his purchaser but failed to 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 neutral.  Since the transactions - certainly those that the evidence before me has explored - can take place (or are said by the parties to them to have taken place) in the space of a single day (with completion 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 for the output tax he has charged and been paid, it requires vigilance on the part of HMCE to realise, when a payment claim is made, that it is part of a carousel fraud.

7. It can happen that one or more of the 'buffers' is innocent of any involvement in the fraud: he just happens to have purchased the goods 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 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 satisfactorily account for the number of chains in which that exporter 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 direct to that exporter or there are other features of his involvement indicating that his purchase and on-sale are other than what one would expect in the case of a genuine arms-length transaction."

6.We have a copy of Amended Particulars of Claim ("APoC") filed on behalf of HMRC (the successor to HMCE), and an affidavit of Susan Elizabeth Ogburn ("the affidavit") made in support of the application for a Mareva injunction.

7.In the APoC, MTIC fraud was explained in para 12, and that MTIC fraud typically involved also:

"(f) the exporter (or 'Broker') [who] claims repayment from HMRC of the VAT charged on its acquisition of the goods, while the importer (or 'Defaulter') having directed payment of its invoice to a Third Party Recipient, fails to account to HMRC for the VAT due on its sale of the goods;"

8.After comparing a lawful chain of supply with MTIC fraud, para 12 went on to say:

"(m) By contrast, the net effect of MTIC fraud transactions is that:

(i) no VAT in (sic) received by HMRC from the importer (the Defaulter);

(ii) HMRC nevertheless makes a repayment to the exporter (the Broker);"

9.Paras. 13-15 of the APoC are important and are quoted in full:

"HMRC's claims

13. HMRC have identified 719 MTIC fraud transaction chains ('the Relevant Transaction Chains') between August 2004 - January 2006 bearing each of the following characteristics:

(a) the importation of goods by a Defaulter from an EU Supplier;

(b) the sale of the goods by the Defaulter to a Buffer;

(c) the instruction by the Defaulter to the Buffer to pay substantially the entirety of the purchase price for the goods (including the VAT element) to Third Party Recipients, primarily to Sunico;

(d) the non payment by the Defaulter of the VAT attributable to its sales to the Buffers referred to at sub-paragraph (b) above;

(e) the making of payments to (amongst others) Sunico in accordance with the payment instructions, such payments either being made by the Buffer to whom the Defaulter sold the goods or alternatively by a subsequent Buffer in the transaction chain;

(f) the sale of the goods by a Buffer to a Broker at a price inclusive of VAT;

(g) the export by the Broker of the goods VAT zero rated;

(h) the making of a VAT repayment claim by the Broker in respect of the VAT period in which the goods were acquired and sold as set out above;

(i) the making by HMRC of the VAT repayment to the Broker.

14. By reason of the Relevant Transaction Chains, HMRC have suffered loss in the sum of £40,391,100.01, being the VAT that it has repaid to the Brokers in respect of those chains, having received no VAT payment from the Defaulter.  A table summarising the loss in attached hereto as Appendix 1[1].  Of the loss of £40,391,100.01:

(a) £39,387,622.36 is identifiable by reference to the unpaid VAT in 697 Relevant Transaction Chains involving the Defaulters set out at Paragraphs 17 - 76 below; and

(b) £1,003,477.65 is identifiable by reference to VAT repayments made to Brokers in 22 Relevant Transaction Chains set out at Paragraphs 77 - 83 below.

15. Of the 697 Relevant Transaction Chains referred to at Paragraph 14(a) above:

(a) HMRC have identified 237 chains in which:

(i) there is a Defaulter who has failed to account of the VAT on its sale;

(ii) a Buffer made a third party payment to Sunico; and

(iii) HMRC have paid the VAT repayment claim by the Broker;

(iv) the total value of the VAT loss in those 237 Relevant Transaction Chains is £12,939,472.39;

(b) as to remaining 460 chains, HMRC have identified (i) there is a Defaulter who has failed to account of the VAT on its sale; and (ii) a Buffer has made a third party payment to Sunico.  HMRC has been unable to trace each link in the chain between the UK trading parties.  In particular it has been unable to trace the chain through to the Broker.  However, it may be inferred that a VAT repayment claim was made by the Broker in those chains and that such repayment claim was paid.   Such inference is made from the following facts:

(i) in so far as known, each of the 697 Relevant Transaction Chains contained essentially the same characteristics and resulted in an export by a Broker who submitted a VAT repayment claim;

(ii) HMRC only declined to make pay a VAT repayment claim where it was able to identify the transaction chain back from the Broker to the Defaulter;

(iii) in none of the 697 Relevant Transaction Chains referred to at Paragraph 14(a) have HMRC identified the chain back from the Broker to the Defaulter;

(iv) the Brokers' VAT repayment claims in the remaining 460 Relevant Transaction Chains must have been paid."

10.However, in the affidavit, Ms Ogburn said:

"8 In respect of those 697 transactions the total VAT that was paid away and was unpaid by the Defaulting Traders to HMRC was £39,387,622.36.

9 Of those 697 transaction chains HMRC have been able to trace 237 up to an exporting Broker in which a repayment claim was paid by HMRC.  The total loss suffered by HMRC in respect of these 237 transactions is £12,939,472.39.  The reconstruction of complete chains (from Defaulting Trader to Broker) involves tracking the documentation for each stage of the chain.  This has not been possible for all 697 chains in which Sunico have received monies.

10 In addition HMRC has traced 22 of fraudulent transaction chains back from two brokers which follow the outline pattern above.  The loss to HMRC suffered in these chains together with the loss suffered as referred to above totals £13,942,950.04.  This is the quantum of HMRC's claim for damages against Sunico and the other Defendants."

11.In para 51 of the affidavit, Ms Ogburn explained that the claim has excluded:

"51. … all those chains which involve Sunico and which ended with a Broker whose repayment claim was denied".

12.At first instance, counsel for the 1^st Respondent were content to proceed on the basis that HMRC's claim was in nature of a carousel fraud.  On appeal, Mr Chan Chi Hung, SC, leading Mr Jeffrey Tam (neither of whom appeared below) on behalf of the 1^st Respondent, contended that HMRC's claim did not involve a carousel fraud. 

13.Mr Chan also submitted that the claim in the UK action is not an action for the return of the refund paid to the broker/exporters, nor for damages for loss suffered in paying out the refund on the basis that the HMRC should not have paid out the refund to the exporters and would not have done so had they known the facts they pleaded in the APoC. He submitted that there was no allegation in the APoC that the exporters were parties to or had knowledge of the conspiracy or fraud; or that the exporters were not entitled to the refund.  Mr Chan submitted that the parties to the conspiracy were set out in APoC para 100.  They were: the importer-defaulters, the EU suppliers (or the unknown parties hijacking the names of such EU suppliers), the buffers making the payments to Sunico; or giving/passing on the instructions to pay Sunico; and the Defendants, but the exporters were not listed in para 100.  Also, that each of the unlawful acts relied on was by the importer-defaulters, not the exporters/brokers.  He pointed out that para 101 went on to allege that as a result of the conspiracy, the VAT payable (not the refund), which ought to be accounted and paid to HMRC, was diverted to Sunico or other overseas recipients. 

14.Thus, Mr Chan submitted that the action is in substance a claim by HMRC for the VAT which had not been paid to them and as such is covered by Rule 3.

15.On the other hand, Mr Charles Sussex, SC (leading Mr Johnny K. C. Ma), for the HMRC, submitted that the 1^st Respondent has mis-characterized HMRC's claim, telling only "half the story" by cherry-picking only part of HMRC's pleaded case and ignoring the out of pocket losses which HMRC had suffered as a result of the conspiracy.  That as pleaded,

(1) HMRC's right to claim damages arose from the 719 MTIC fraud transaction chains, each involving inter alia the making by HMRC of VAT refund to the Broker (which was channeled up the chain to Third Party Recipients);

(2) HMRC's claim excludes chains in which a Broker's refund claim had been denied.  Thus, HMRC is not making a claim simply because it failed to collect VAT due to the Defaulters' default - otherwise it would have included those excluded chains;

(3) Mere default was not sufficient even from the conspirators' perspective, as what they really wanted was not merely to evade VAT liabilities but, more importantly, to obtain money out of the conspiracy.

16.In my view, the paragraphs from the APoC quoted in para 9 above show that "carousel" is an apt description of the HMRC's case in that goods which were imported in the United Kingdom were ultimately exported.  As Blackburne J has explained:

"5. … It is because the goods may end up with the original supplier that the designation 'carousel' is used. …"

17.I also note that the exportation of the goods and the refund of the VAT were integral parts of the HMRC's claim[2]. 

18.Also, paras. 100 and 101 should be read together with para 102 APoC which states:

"102.    In support of the allegation that each of the Defendants conspired as aforesaid, HMRC rely on the matters set out at Paragraphs 13-98 above and 103-109 below."

19.Para 77 of the APoC should, in particular, be noted.  It reads:

"77. Of the loss of £1,003,477.65 set out at Paragraph 14 above:

(a) the sum of £771,077.65 represents VAT repayments made by HMRC to the Broker Dhalomal Kishore trading as Movil 2000 ('Movil 2000').  These repayments relate to Relevant Transaction Chains particularised at Paragraphs 78 - 86 below;

(b) the sum of £232,400 represents VAT repayments made by HMRC to the Broker Amber Communications Management Limited ('Amber').  These repayments relate to Relevant Transaction Chains particularised at Paragraphs 86 below."

20.In connection with the allegations concerning Movil 2000 and Amber, I turn to the affidavit. 

21.Ms Ogburn first explained "the terminology that has been developed in MTIC cases and is used in the affidavit":

"16.1 The EU based supplier that sells the goods for import into the UK is known as the 'EU Supplier'.

16.2 The UK importer (who defaults on its liability to account to HMRC for the VAT due on the on-sale of the goods) is called the Defaulting Trader or 'defaulter'.  On many occasions the defaulter also goes missing - that is it can no longer be contacted through the details provided at the time it registered for VAT or subsequently. Such defaulters are known as 'missing traders'. (For completeness a 'hijacked trader' is where the VAT identity of a legitimate trader has been used in a MTIC fraud).

16.3 The 'first line buffer traders' are the immediate trading entities the defaulter or missing trader sells to.

16.4 The second line buffers are the trading entities the first line buffers then sell to. This process which as Jacob LJ explains at paragraph 20 of his judgment referred to above, can and frequently does all take place on the same day can be repeated through more 'Buffer' layers.

16.5 The trading entity which re-exports the goods and seeks to reclaim the input tax it paid on its purchase (paragraph 19 of Jacob LJ's judgment) is frequently called 'the Broker'."

22.Ms Ogburn went on to explain in para 7 that HMRC's case is that Sunico, the 1^st Defendant in the English Action, was a prominent recipient of third party payments, especially between 2004 and 2006. 

23.Ms Ogburn then said:

"… the EU Suppliers purchase the goods from Sunico for an apparent agreed price and then sell them into the UK at a loss … [which] they do not recover … during the transaction chain. …" Paras 492, 493

"The loss … is … a paper loss as the EU [Supplier] makes no actual payment to Sunico."  para 494.

"In the circumstances it is clear that the transactions between Sunico and the EU Supplier and the onward sale between the EU Supplier and the UK importer are contrived. …"  para 496

24.About Movil 2000, Ms Ogburn said:

"Dhalomal Kishore t/a Movil 2000

273   At paragraph 56 above I referred to Movil 2000, the trading name of Dhalomal Kishore.  Movil 2000 traded in the import and export of telecommunications equipment from premises known as 'the Churchill' 1 Chartwell Place, Off Middle Road, Harrow, Middlesex.  Movil 2000 completed a VAT1 Form to register for VAT on 6 March 2000 (SO10/8 -11).

274   As has been illustrated by the numerous examples above, Movil 2000 has occupied the position of a broker exporting mobile phones in transaction chains that involved MTIC fraud.  In each instance it would export the phones to Dhalomal Ramchand.  As may be seen from the table at SO10/67 - 68 there are 21 transactions in which HMRC made VAT repayment to Movil 2000 in chains in which (a) VAT was unpaid by the defaulter and (b) 3rd party payments were made to Sunico The total amount of VAT repaid in respect of these transactions was £710,490.15.

275   In the various examples referred to above, the documentation showed that in selling the goods to Dhalomal Ramchand, Movil 2000 made no profit.  Whilst that would appear to be lacking in any commercial logic, the wider pattern of Movil 2000's trading during the period under review in this case in even more extraordinary.  At SO10/18 - 66 are copies of its purchase and sale summaries that it provided to HMRC.  In October 2005 it made gross purchases of £60,470,218 (SO10/18 - 34) (and gross sales of £60,464,663 (SO10/35 - 51) (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 (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 sales of £12,550,029 (SO10/61 - 66) (a loss of £520,584). In total over this 3 month period it appeared to have made a loss of approximately £2.3m.

276   This trading pattern is extraordinary and is inconsistent with ordinary bona fide commercial activity.  In November, Movil [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 the same day or within 2 days.  It is wholly unclear why a further 10,666 units were acquired given that Movil 2000's trades were substantially back to back.

277   In December the number of units bought and sold was the same - 81,819, though according to the deal documents supplied by Movil 2000 there were large discrepancies between the purchase and sale prices."

25.The claim involving Amber as broker was also elaborated in the affidavit.  Ms Ogburn said:

"323.  Amber have also been identified by HMRC as a broker in fraudulent MTIC claims. …

……

344.   Amber submitted a repayment claim for VAT for the period 07/05.  HMRC paid Amber £5,027,249.68 in respect of this return by two instalments (SO3/418A-418J).  Following further investigations into Amber by HMRC an assessment was raised 2006 to reclaim the money paid to Amber for the period 07/05 (SO3/418A-418J).  That assessment remains unpaid and is the subject of an appeal to the First Tier Tax Tribunal: HMRC has therefore at present suffered a loss arising from the transaction detailed above.

……

363   The paperwork therefore suggests that Amber, the broker at the 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.  Europecom, Fix, Zeetta, Sheeling, Team Mobile and Goldex all dated their invoices 25 August 2005.  However Europecom Sarl, despite the date of its invoice to Fix, did not in fact order the goods in question until 26 August 2005 on which date Sunico raised its invoice despite those invoices showing that the goods had been delivered the day before.  This suggests that the entire transaction chain was contrived with paperwork such as purchase orders and invoices being prepared after the event."

26.In para 359 Ms Ogburn said that for the period 08/05, Amber made a reclaim of VAT in the sum of £10 million which:

"… was not met by HMRC due to a lack of evidence provided by Amber to support its claim. …"

That was, however, under appeal by Amber.

27.Also in Section 6 of the affidavit (paras 62 to 370 of the affidavit) which dealt with Examples of Fraudulent Transaction Chains and which covered transactions including those involving Movil 2000 and Amber, Ms Ogburn said:

"140.   … Further as is shown in the example transactions set out in this section (section 6) …, goods are often sourced from one country only to pass through Sunico to be ultimately sold back into that same 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, no matter how small, if the goods are moving in a circular fashion at 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 fraud then what Sunico purportedly paid for the goods is irrelevant.  The transactions do not reflect actual commercial activity as the object of the exercise is to induce a loss to HMRC by failing to account for VAT on transactions within the UK.

141.   Finally, it is noted that the mobile phones were originally purchased from a company in Dubai by Sunico and exported by the broker Movil 2000 back to Dubai."

28.It is clear from para 77 APoC and the affidavit, that although neither Movil 2000 nor Amber was named or sued as a party to the conspiracy, they could not be described as innocent parties.  Also, notwithstanding para 101[3] APoC, as para 14[4] APoC and para 51[5] of the affidavit made plain, HMRC's claim is confined to the refund actually made to the exporters.

29.I also find the suggestion that there was a circular movement of goods compelling.  I believe that a circular movement of goods would most probably also involve a circular movement of funds.  In other words, the object of the conspiracy was not an acquisition fraud with the limitations described by Jacob LJ[6]. The object of the conspiracy was the refund by HMRC[7]. 

30.Revenue and Customs Commissioners v Total Network SL [2008] 1 AC 1174 was concerned with a MTIC carousel fraud.  There, the Commissioners brought an action against the Defendant for damages at common law for unlawful means conspiracy in sums equivalent to the amount of value-added tax ("VAT") which they had refunded as a result of the carousel frauds. The defence relying on Article 4 of the Bill of Rights 1689 was that the claim was not maintainable because no money should be levied for or to the use of the Crown, except by grant of Parliament.

31.The House of Lords, by a majority, held that the criminal conduct at common law or by statute, engaged in by conspirators as a means of inflicting harm on the claimants, could constitute "unlawful means" and was actionable as the tort of conspiracy whether or not such conduct on the part of a single individual would be actionable at the suit of the claimant as some other tort; and that, accordingly, the judge had been correct to hold that the claim could exist in law and should not be struck out.

32.There, Lord Walker described a MTIC carousel fraud as "worse than evasion; it is the fraudulent extraction of money from the Exchequer"[8].  He went on to say in para 109:

"… But if an official vehicle carrying cash belonging to the commissioners (cash representing collected taxes) were hijacked and the cash stolen, it seems to me that the commissioners would undoubtedly have a civil remedy available to reclaim it, if the robbers were apprehended and the proceeds of the robbery traced to a bank account.  In my opinion the present case is essentially the same."

33.Mr Chan sought to distinguish Total Network on the basis that it involved a carousel fraud and that the exporter was allegedly party to the conspiracy such that it was never entitled to any refund of VAT.  He submitted that in the present case, on the basis that the exporters were innocent parties, they were in law entitled to the refund.  He relied on Optigen Ltd v Customs and Excise Comrs (ECJ) [2006] 2 WLR 456, a decision of the Court of Justice of the European Communities which decided a trader, who had no knowledge of the fact or means of knowing that a previous or subsequent transaction in the chain was vitiated by VAT fraud, was entitled to a VAT refund.

34.I have endeavoured to show that, in present case, exporters such as Movil 2000 or Amber might not have been innocent parties.  Thus, it is premature to say, on an application to strike out, that any judgment obtained in the English Action would be made on the basis that these or other exporters had no knowledge or means of knowledge of the carousel fraud.

35.Mr Chan submitted, however, that even if the HMRC's case in the UK action involved an allegation against the exporter/broker and is therefore indistinguishable from Total Network, enforcement of such a claim in Hong Kong would nevertheless be an indirect enforcement of the revenue law of the United Kingdom and hence contrary to Rule 3. 

36.Mr Chan relied on Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491, a decision of the House of Lords, where the Government of India sought to prove in the voluntary liquidation of a company registered in the United Kingdom but trading in India for a sum due in respect of Indian income tax, including capital gains tax, which arose on the sale of the company's undertaking in India.  It was held that the claim was not maintainable because it was a claim by the Government of India to recover tax.  There, Lord Keith of Avonholm made the following observations about Peter Buchanan Ld v McVey (Note) [1955] AC 516.

37.Lord Keith said:

"… The plaintiff (in Peter Buchanan) company was a company registered in Scotland which had been put into liquidation by the revenue authorities in Scotland under a compulsory winding-up order in respect of a very large claim for excess profits tax and income tax.  The liquidator was really a nominee of the revenue.  The defendant held 99 one pound shares of the capital of the company and the remaining share was held by a confidential cashier and bookkeeper as trustee for him.  These two sole shareholders were also sole directors.  The defendant having realized the whole assets of the company in his capacity as a director and having satisfied substantially the whole of the company's indebtedness, other than that due to the revenue, by a variety of devices had the balance transferred to himself to his credit 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 the company directed by the liquidator.  The first answer of the defendant was that, as he had received the money from the company in his capacity as a shareholder in pursuance of an agreement between all the corporators, the company could not now ask to have it back.  The judge held that the transaction was a dishonest transaction designed to defeat the claim of the revenue in Scotland as a creditor and was ultra vires of the company and accordingly rejected the defendant's submission.  On the other hand, he held that although the action was 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 authorities of another State.  He accordingly dismissed the action.  The judgment contains an able and exhaustive examination of the authorities.

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 sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties.  Another explanation has been given by an eminent American judge, 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. as follows: 'While the origin of the exception in the case of penal 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 case of ordinary municipal liabilities, a court will not recognize those arising in a foreign State, if they run counter to the "settled public policy" of its own.  Thus a scrutiny of the liability is necessarily 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 delicate inquiry when the question arises between private persons, but 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 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 powers of the court; it involves the relations between the States themselves, with which courts are incompetent to deal, and which are intrusted to other authorities.  It may commit the domestic State to a position which would seriously embarrass its neighbour.  Revenue laws fall within the same reasoning; they affect a State in matters as vital to its existence as its criminal laws.  No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper.'

On either of the explanations which I have just stated I find a solid basis of principle for a rule which has long been recognized and which has been applied by a consistent train of decisions. …"  pages 510-511

38.Buchanan and Government of India were considered in Williams and Humbert Ltd v W & H Trademarks (Jersey) and Ors [1986] AC 368, where Lord Mackay of Clashfern said at 440:

"Having regard to the questions before this House in [Government of India] I consider that it cannot be said that any approval was given by the House to the decision in the Buchanan case except to the extent 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. …"

39.Buchanan and Government of India were followed, in QRS 1 Aps and others v Frandsen [1999] STC 616, a case which was indistinguishable on the facts from Buchanan, where Simon Brown LJ said at 630F:

"I can readily understand Lord Mackay's insistence on the narrowness of the Buchanan decision and his approach certainly appears consistent with the view of the editors of Cheshire and North's Private International Law (12th edn, 1992) p116: 'It is questionable whether the general ban on indirect enforcement is not too rigid.' They do not, however, criticise Buchanan and, as I repeat, the present case is indistinguishable from Buchanan: both are to be regarded as cases where the liquidator, as nominee for a foreign state, in substance is seeking a remedy designed to give extra-territorial effect to foreign revenue law. …"

40.Mr Chan submitted that even if the present case is indistinguishable from Total Network, enforcement of any such judgment would nevertheless be an indirect enforcement of foreign revenue law. But as Dicey, Morris and Collins put it:

"… Indirect enforcement is, however, easier to describe than to define …"[9]

41.In a commentary on Fransden, Mr Adrian Briggs said[10]:

"… the case was one of indirect enforcement.  But, it may be time to reconsider this.  The effect of the judgment is that the claims of a company against a fraudster are denied because the company has been 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 taxman, one wonders why the fraudster is to be preferred to the 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 sight of its roots."

42.Indeed, in Fransden Simon Brown LJ pointed out that counsel for the company did not:

"… contend that as a matter of domestic law this court could do otherwise than apply Buchanan (although he leaves open the possibility of the House of Lords wishing to revisit this area of indirect enforcement)."[11] 

43.There are authorities, outside of England, which have questioned the width or limited the scope of the prohibition against indirect enforcement.

44.In Ayres v Evans [1981] 39 ALR 129, a decision of the Federal Court of Australia, Fox J said at page 131:

"… 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 benefit ordinary creditors as well as the revenue. …"

45.In South Africa, Eloff J's decision in Priestley v Clegg 1985 (3) SA 955 was to similar effect, where 94% of all claims in the estate related to a tax liability to the U.K. Inland Revenue.

46.In Re Tucker (a bankrupt), ex parte Bird [1988] LRC (Comm) 995, a decision in the High Court (Staff of the Government Division) in the Isle of Man, Hytner JA said at page 1007:

"We regard the decision in Peter Buchanan Ld v McVey as one decided 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 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, however, the question of whether the decision would be followed in the Manx courts if the identical facts ever arose for consideration in the future."

47.Lord Walker in Total Network (see para 32 above) has compared a MTIC carousel fraud with a robbery of HMRC's cash.  With respect, I agree that the two are essentially the same.  A robber would be subject to extradition.  I find it difficult to accept that enforcement of a judgment to recover the loot should fail on the ground that it amounts to an indirect enforcement of foreign revenue law.  I do not believe that Government of India compels such a conclusion.  If, it does, I am respectfully of the view that our courts may wish to consider whether Government of India should be followed.

48.It is inappropriate and unnecessary at this juncture to say more than that this is not a case where the claim ought to be struck out.  Whether any judgment in the English action will be enforced will depend on the actual basis of the decision and a determination by our courts on the scope of Rule 3.

Disposition

49.I have had the advantage of reading Fok JA's judgment in draft.  I agree that leave to appeal should be refused.  Indeed, for the reasons given above, I would have dismissed the appeal in any event.

Hon Fok JA:

50.I have had the benefit of reading the judgment of Tang VP in draft.  With respect, assuming we should entertain the appeal, I agree with his reasons for dismissing it.

51.The question of whether we should entertain the appeal or not arises because the respondents did not apply for leave to appeal, as was required.  The application for leave should have been made to the Recorder below: RHC Order 59 rule 2B(2).  It should have been made within 14 days of his judgment: RHC Order 59 rule 2B(1).

52.The respondents apparently omitted to make such an application because their solicitors took the view that the Recorder's order was within RHC Order 59 rule 21(2)(b) being "an order striking out …" and so one from which leave to appeal was not required.  This view was also apparently shared by the applicant's solicitors at one stage.  It was, however, an erroneous view since the Recorder's order was not an order striking out an action or pleading and leave is required to appeal against a refusal of such an application.  The question is now whether this court should grant leave to appeal and the necessary extension of time for the appeal.  The judgment was handed down on 16 November 2010 and the application for leave to appeal was not made until 22 February 2011, a delay of over two and a half months.

53.Even if I were prepared to accept that the delay due to a misunderstanding of the new rules of court was excusable (this being the reason proffered in the respondents' solicitor's affirmation) so that the test for leave is whether the respondents can show a reasonable prospect of success, I do not think that test is satisfied in the present case.

54.In my view, the respondents cannot show a reasonable prospect of success on the appeal given the high threshold required to sustain the strike out application in this case.  It should be noted that, on the originating summons by which the applicant commenced the proceedings in this jurisdiction, all the applicant is required to demonstrate in order to establish jurisdiction for the grant of the Mareva injunction in aid of the English proceedings is that there is a good arguable case that the English proceedings are capable of giving rise to a judgment which may be enforced in Hong Kong.  In order for the strike out to have succeeded, the respondents would have had to show that it is plain and obvious that there is no such case. In my opinion, for the reasons set out in the judgment of Tang VP above, the respondents' arguments fall far short of that hurdle.  I would therefore refuse leave to appeal.

Hon Tang VP:

55.Leave to appeal is refused, and I make a costs order nisi in favour of HMRC.

Mr Chan Chi Hung, SC & Mr Jeffrey Tam instructed by Messrs Fairbairn Catley Low & Kong for the 1^st Respondent

Mr Charles Sussex, SC & Mr Johnny K. C. Ma instructed by Messrs Mallesons Stephen Jaques for the Applicant