HER MAJESTY'S REVENUE & CUSTOMS v. HASHU DHALOMAL SHAHDADPURI AND ANOTHER

HCMP938/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.938 OF 2010

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J U D G M E N T

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Introduction

1.  This is an application by the 1^st respondent to strike out the Concurrent Originating Summons dated and issued on 18 May 2010 (“OS”).

2.  The OS was issued pursuant to sections 21L and 21M of the High Court Ordinance, Cap. 4. Section 21L gives the court jurisdiction to grant an injunction in all cases in which it appears to the Court “to be just and convenient to do so”.  Section 21M, in force since 2 April 2009, gives the court jurisdiction to grant interim injunctions in aid of substantive proceedings commenced outside Hong Kong even though the Hong Kong courts do not have jurisdiction over any substantive cause of action.  The material part of section 21M provides as follows :

“(1) Without prejudice to section 21L(1), the Court of First Instance may by order … grant … interim relief in relation to proceedings which—

(a) have been or are to be commenced in a place outside Hong Kong; and

(b) are capable of giving rise to a judgment which may be enforced in Hong Kong under any Ordinance or at common law.

…

(3) Subsection (1) applies notwithstanding that—

(a) the subject matter of those proceedings would not, apart from this section, give rise to a cause of action over which the Court of First Instance would have jurisdiction; or

(b) … the interim relief sought is not ancillary or incidental to any proceedings in Hong Kong.”

3.  In this case, the OS seeks an interim injunction in aid of proceedings commenced by the applicant (“HMRC”) on 17 May 2010 in the Royal Courts of Justice in England (“English Action”).  On that day, HMRC obtained from the English High Court a worldwide Mareva injunction against (inter alios) the respondents to the extent of £40 million, on the basis that the respondents are said to have been parties to what may be described as “MTIC VAT fraud” or sometimes “carousel fraud”.

4.  On 18 May 2010, Chu J granted an ex parte Mareva injunction (and ancillary orders for disclosure in aid of the injunction, etc., including an order for leave to issue the OS and service on the 1^st respondent out of jurisdiction) against the respondents restraining them from removing from this jurisdiction or disposing of any of their assets in this jurisdiction up to the value of £40 million. The injunction was continued on 28 May 2010 and 17 June 2010.  The 1^st respondent seeks, upon striking out the OS, to discharge the injunction as well.

Background and assumed facts

5.  The sole ground on which the 1^st respondent relies in his application is that the OS “discloses no reasonable cause of action” : Order 18, rule 19(1)(a) Rules of the High Court, Cap. 4A.

6.  It is not disputed that Order 18, rule 19(1)(a) applies to an originating summons, and that the facts relied on in support of the OS must be assumed to be true.  In the present context, the facts must be those pleaded in the Amended Particulars of Claim filed in the English Action, and the affidavit evidence filed in support of the OS : Hong Kong Civil Procedure 2011, para. 18/19/3(4), p. 404; Re Caines [1978] 1 WLR 540.

7.  In short, HMRC claims that the respondents were parties to conspiracies to defraud HMRC by way of MTIC frauds.  The essence of such fraudulent schemes has been described in various judgments in the UK.  The most frequently cited reference is probably the judgment of Blackburne J in Regalway Care Ltd v Shillingford [2005] EWHC 261 at §§3-7, which for ease of reference is cited here in full :

“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.”

See also Revenue and Customs Commissioners v Total Network SL [2008] 1 AC 1174, at 1179-1180 (the Court of Appeal’s judgment §§2-3) and at 1122-1123 (§§4-8 of the judgment of Lord Hope of Craighead).

8.  In the current case, the relevant frauds are described in some detail in the affidavit of Ms Susan Ogburn, an officer of HMRC, filed in support of the OS and the ex parte application.  I need not burden this judgment with lengthy extracts from that affidavit, save to mention one aspect of such frauds which is particularly relevant to the present case, that is, the involvement of “Third Party Recipients” :

“Further Typical Features of MTIC fraud

17 A typical feature of MTIC fraud – and one of the ‘footprints’ of this form of fraud – is what is known as ‘third party payments’.

18 The on-sale of the goods by the defaulter to the first line buffer creates a book debt due from the first line buffer to the defaulting trader of the amount of the purchase price (with VAT). In legitimate trading, the would-be defaulter would have an asset (the receivable from the first line buffer trader) from which it could discharge its VAT liability.

19 In MTIC trading and in order to avoid it being placed in funds to discharge its VAT, the defaulter will on the sale of the goods to the first line buffer, give instructions that payment of all or nearly all of the price (including the VAT) should not be paid by its customer to it, but to a third party – usually out of the jurisdiction. The third party recipient will usually not even be the EU supplier (nor indeed any supplier) to the defaulter. Significantly, the amount which the defaulter will require its purchaser to pay away [sic] the 3^rd parties (in this instance, principally to Sunico) is almost the entirety of the VAT inclusive price at which the defaulter sold the goods. The effect of this is that the defaulter will cause an artificial overpayment to be made.

20 This may be illustrated by a hypothetical, but typical example. Suppose that a defaulter acquires 1,000 mobile phones at £99 each from an EU supplier. There being no VAT payable on its intra community supply, the total price payable by the defaulter to its supplier is £99,000. If the defaulter sells the phones to a UK purchaser at a profit of £1 each (i.e. £100), the total sum payable by the purchaser is £100,000 plus VAT. At the rate prevailing at the time of the transactions relevant to these proceedings (17.5%), the amount that the defaulter ought to receive is £117,500. Of that sum the defaulter would be liable to pay £99,000 to its EU supplier; £17,500 would be the net VAT payable by the defaulter to HMRC; £1,000 would be the defaulter’s profit. Typically however the defaulter will give instructions for only £1,175 to be paid to it (i.e. its profit plus the VAT thereon). The entire balance of (£116,325) will be directed to be paid to 3^rd parties. No sums will be paid to HMRC in respect of the defaulter’s VAT liability. The total sum paid to 3^rd parties of £116,325 will exceed the £90,000 which the defaulter was liable to pay. The extent of the overpayment is substantially the unpaid VAT. It equated to the entirety of the VAT payable by the Defaulter (excluding the VAT on the Defaulter’s own profit). Indeed the amount directed to be paid away could be calculated as the price at which the EU supplier sold plus 17.5%.”

9.  HMRC claims that the respondents were co-conspirators with the other defendants named in the English Action.  It is said that a Danish company, Sunico, acted as a substantial “Third Party Recipient” in 712 fraudulent transaction chains forming the subject matter of HMRC’s claim in the English Action.  In turn, Sunico allegedly entered into a sham commission agreement with an Indonesian entity P.T. Naina.  The 1^st respondent, who resides in Singapore, was one of the people behind P.T. Naina.  The 2^nd respondent is the 1^st respondent’s brother and resides in Hong Kong.  He is said to have received the proceeds of fraud, or at least a substantial part of it, purportedly as commission payable to P.T. Naina, through a bank account maintained by him in Hong Kong.  In short, the 1^st and 2^nd respondents are said to be co-conspirators with the other defendants in the English Action in the MTIC fraud and were parties to an arrangement to launder the proceeds of the fraud and to share such proceeds amongst the conspirators.

The application and summary of parties’ contentions

10.  As stated above, the 1^st respondent contends that the OS disclosed no reasonable cause of action.  His case, in essence, is that HMRC’s claim in the English Action is not capable of “giving rise to a judgment which may be enforced in Hong Kong under any Ordinance or at common law” under section 21M. This is because, in substance if not in form, the English Action seeks to recover loss of VAT and such an action, if commenced in Hong Kong, would amount to enforcement either directly or indirectly of revenue law of the UK and would not be entertained by the Hong Kong courts, hence a judgment obtained in the English Action would not be enforced in Hong Kong.  Accordingly, the 1^st respondent contends that the Court lacks jurisdiction to grant the Mareva injunction and the OS must be struck out.

11.  In support of that contention, Mr Hectar Pun, appearing with Mr Newman Lam, relied on the well established proposition stated in Dicey, Morris & Collins, The Conflict of Laws (14^thed. 2006) Rule 3 that the Hong Kong 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 …”[1]

12.  Mr Pun refers to a number of well-known authorities, including Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491, which in turn approved and applied Peter Buchanan Ltd v McVey (Note) [1955] AC 516, in support of his submission that in substance, the English Action is one whereby HMRC seeks to recover loss “being the VAT that it has paid to the Brokers in respect of those chains, having received no VAT payment from the Defaulter” : Amended Particulars of Claim §14. Reference was also made to various parts of the Amended Particulars of Claim to support his submission that HMRC’s case is for the recovery of VAT which the Defaulters have failed to pay.

13.  Mr Pun also relies on what he submits is a “concession” on the part of Mr Johnny Ma, counsel for HMRC, in his Skeleton Submissions to the effect that the Brokers involved in the carousel fraud are not necessarily parties to the conspiracy, including some who may be wholly innocent.  Mr Pun submits that because some of the Brokers (recipients of refund from HMRC) may be innocent, the only viable claim can only be for loss resulting from failure by the Defaulters to pay the VAT.

14.  In response, Mr Ma contends that HMRC’s claim in the English Action is for damages based on the tort of unlawful means conspiracy to injure HMRC. The 719 fraudulent transaction chains in question are not genuine transactions but are “contrived and inconsistent with bona fide commercial trading”; that the transaction entered into by Sunico “had no bona fide commercial legitimacy and were little more than devices to enable Sunico to benefit from receipt of the proceeds of MTIC fraud”, etc. : see Amended Particulars of Claim §§103, 109, 124 and 126.  The English Action is therefore not one which seeks, whether directly or indirectly, to enforce the UK’s revenue laws.  There is thus no basis to suggest that any judgment which HMRC may obtain in the English Action would not be enforceable in Hong Kong.

15.  As to the “concession”, Mr Ma contends that the fact that some of the Brokers may have been innocent does not in any way affect the true nature of HMRC’s claim, which is to recover the losses suffered by HMRC as a result of the unlawful conspiracy.  The refund to the Brokers was the means by way of which money was extracted from HMRC, which was then used to fund the “carousel”.  In any case, HMRC does not accept that the Brokers were innocent; its case is only that it does not rule out the possibility that some of the Brokers might have been innocent : see Regalway, §7 cited above.

Discussion

16.  Central to HMRC’s case is the House of Lords decision in Total.  In that case, one of the two preliminary issues for determination was whether an action by the Revenue and Customs Commissioners against

Total (the Spanish supplier/buyer in that case) for damages at common law for conspiracy to defraud the commissioners in sums they claimed to have lost as a result of MTIC frauds contravened Article 4 of the Bills of Rights 1689 :

“That levying money for or to the use of the Crown, by pretence of prerogative without grant of Parliament for longer time, or in other manner then the same is or shall be granted, is illegal.”[2]

17.  The argument of Total in that case, which found favour with Lord Hope of Craighead, was that albeit advanced as one for damages for conspiracy by unlawful means, in substance the claim was to recover VAT from Total, being a person who was not for the purposes of the VAT legislation a taxpayer : see §§21, 29 and 32.

18.  The majority of the House, however, held that the claim was not in substance a claim for unpaid tax or the levying of tax but a claim for loss caused by the conspiracy.  Lord Scott of Foscote emphasised that the carousel fraud did not constitute genuine commercial transactions on which VAT would be payable : it was a charade, a fraudulent scheme designed to extract by deception money from the revenue : see §§49-55 and 58-59.  Lord Neuberger of Abbotsbury, in §§168-171, came to the same conclusion on essentially the same ground, i.e. the claim was not one for enforcement of the revenue law but for damages for the tort of conspiracy practised on it.  Lord Mance agreed with Lord Scott and Lord Neuberger on this point : see §127.  Lord Walker of Gestingthorpe considered that the MTIC fraud amounted to “fraudulent extraction of money from the Exchequer” which in his Lordship’s view was no different from armed robbery of cash belonging to the revenue : §§108-109.[3]

19.  Mr Pun seeks to distinguish the Total case on the basis that the majority’s view in that case was said in the context of the Bills of Right argument.  That may have been so, but I fail to see why the majority’s analysis of the nature of the claim in Total (which is no different from that advanced in this case) does not apply in this case.  Indeed, as Mr Ma points out, the 1^st respondent’s arguments on the nature of the claim are no different from those advanced on behalf of Total and firmly rejected by the majority of the House : see Total at 1211D-E, 1213H and 1214B-1215C.

20.  In my view, HMRC is not seeking to recover any tax properly payable or seeking to enforce the UK’s VAT legislation, but to seek recovery by way of damages the out of pocket losses which it has suffered as a result of the alleged fraud perpetuated by the conspirators.  Mr Pun, in focusing his case on the failure on the part of the Defaulters to pay VAT, is only looking at half the story — and, for that matter, perhaps not the important half. I agree with Mr Ma that the whole fraudulent chain must be considered and the inevitable view one comes to when taking into account the entire “carousel” is that the scheme was a fraudulent one engineered to deceive HMRC by exploiting a loophole in the VAT legislation.  The conspirators, in HMRC’s case, set out to obtain a pecuniary advantage to themselves at the expense of HMRC by means of a fraudulent scheme.  It would be to mis-characterise HMRC’s claim to suggest that it is one for the recovery of VAT or enforcing the VAT legislation.

21.  Accordingly, I reject the submissions advanced on behalf of the 1^st respondent that the claim is in substance one that seeks to enforce the UK’s revenue laws.

22.  Having come to the view expressed above, it is unnecessary for me to say very much about the other authorities relied on by Mr Pun.  Peter Buchanan Ld v McVey (Note) [1955] AC 516 was what one may call a tax evasion case.  In that case a Scottish company, beneficially owned by the defendant, failed to pay excess profits tax and income tax.  The defendant procured the company to pay over to him all the assets of the company purportedly through a number of transactions, which the trial judge found to have been dishonestly designed to defeat the revenue’s claim.  The company was put into liquidation and the liquidator, appointed by the revenue which was the only creditor, sought to recover from the defendant (then decamped to Eire) by advancing a claim on behalf of the company to recover its assets. In those circumstances Kingsmill Moore J in the High Court of Eire held (upheld on appeal) that in substance the claim was an attempt indirectly to enforce a claim for tax by the Scottish tax authorities.

23.  Similarly, QRS 1 Aps v Frandsen [1999] STC 616 was a claim by the Danish tax authorities to enforce paying of unpaid tax.  In that case an English domiciliary owned several Danish companies.  He disposed of the assets of the companies for cash, which was then used to purchase his shares.  The Danish tax authorities claimed that the companies owed outstanding corporate taxes.  The tax authorities, being the only creditors of the companies, appointed a liquidator and funded an action in the name of the companies against the defendant for restitution of the companies’ assets.  The Court of Appeal held that the case was indistinguishable from Buchanan and dismissed the action. 

24.  Properly analysed, these cases are plainly distinguishable from the instant case.  In both Buchanan and QRS, there were genuine outstanding tax liabilities on the part of the defunct companies which the defendants by dishonest means sought to evade, and the actions were rightly held to be indirect attempts by the foreign tax authorities, acting through their nominees, to enforce the foreign country’s tax laws.  In contrast, in this case, as in Total, there was no genuine commercial transaction underlying the carousel frauds.  The fact that potentially innocent brokers might have been involved, presumably to give the scheme some resemblance of legitimacy, does not convert a fraudulent scheme into a legal one, even partially.  The plain fact as raised by HMRC in its pleaded case is that it has suffered monetary loss by having paid out on VAT refund claims which are not genuine and which are presented to it fraudulently pursuant to the conspiracy.

25.  It is unnecessary to consider other submissions made by counsel on other issues which in my view do not really arise in this case.

Conclusion

26.  In my judgment, the requirements of section 21M are satisfied and the application must be dismissed with costs.

27.  I thank counsel for their valuable assistance.