21st Century Logistic Solutions Ltd ((in Liquidation)) v Madysen Ltd
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Field,Mr Justice Field |
| Judgment Date | 17 February 2004 |
| Neutral Citation | [2004] EWHC 231 (QB) |
| Court | Queen's Bench Division |
| Date | 17 February 2004 |
| Docket Number | Case No: HQ03X1643 |
[2004] EWHC 231 (QB)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Field
Case No: HQ03X1643
Mr. John Briggs (instructed by Boyes Turner) for the Claimant.
Mr. Gerard McMeel (instructed by Simon F H Holmes) for the Defendant.
Hearing date: 29 th January 2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is a claim by 21 st Century Logistic Solutions Limited ("21 st C") suing by its Liquidator, Ms Louise Brittain, for the price of goods sold and delivered. The goods in question are 7,220 Intel 2.4 533 mhz computer processor units ("CPUs"). The price was £770,400 plus £134,820 VAT, making a total of £905,220. The buyer, Madysen Limited ("Madysen"), does not dispute delivery or quality. It contends that it is not liable for the price on grounds of illegality. This is therefore yet another case where it is appropriate to quote Lord Mansfield's famous dictum in Holman v Johnson (1775) 1 Cowp 341, at 343:
"The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but is founded on general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may say so. The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa or the transgression of a positive law of this country, there the Court says he has no right to be assisted."
The facts giving rise to this plea of illegality are agreed. 21 stC was incorporated by an individual using the name Darren King on 20 March 2002 as part of "a missing trader fraud" or "carousel fraud" designed to defraud HM Customs & Excise ("HMCE") of VAT. In this type of fraud a trading entity (the "missing trader") is incorporated and registered for VAT in the UK. It then purchases high value, low volume goods, eg CPUs, from suppliers outside the UK but within the EU, effectively free of VAT. The missing trader then sells the goods on in the UK, charging VAT. The goods are often passed down a chain of contracts, VAT being charged on each supply but with the intermediate suppliers setting off the output tax arising on the onward supply against the input tax arising on the acquisition. The missing trader, however, has no intention of accounting for the output tax due on the supply it makes to the first buyer in the chain. Instead, it pockets the price, including the VAT, and then disappears without paying anything to HMCE.
HMCE maintain that the same person who incorporated 21 stC had earlier incorporated another missing trader called Simtru Ltd ("Simtru") which he used to implement a substantial missing trader fraud. He then abandoned Simtru to its fate and incorporated 21 stC as a "phoenix company" to carry on where Simtru left off.
At a date unknown, Darren King caused 21 stC to purchase a consignment of 7,200 CPUs from Phoenix Technology, a foreign supplier operating from Luxembourg. The price agreed was £864,000 (£120 per unit) and no VAT was charged. The consignment entered the UK and was stored by 21 stC at the premises of Shurgard Storage Centres UK Ltd ("Shurgard") in Essex. Sometime in December 2002, a man calling himself Darren King telephoned a Mr Patrick of Madysen. Darren King purported to be acting on behalf of 21 stC. The two men agreed that Madysen would buy the 7,200 CPUs from 21 stC for £107 per unit, plus VAT, and then sell them immediately on to a company called Pycom Limited ("Pycom") at £108 per unit, plus VAT. It was explained to Mr Patrick that 21 stC were not allowed to deal with Pycom because of a territorial issue. The goods were to be delivered by 21 stC direct to Pycom. By an invoice dated 10 th December 2002, ("the VAT invoice") 21 stC invoiced Madysen for the sale of the 7,200 CPUs at a cost of £770,400, plus VAT of £134,820, making a total price of £905,220. By an invoice dated 11 th December 2002, Madysen invoiced Pycom for the sale of the 7,200 CPUs at a price of £777,600 plus £136,080 VAT and on 12 December 2002 Madysen received £913,680 from Pycom for the sale of the CPUs.
Madysen received payment instructions from 21 stC in the form of a faxed letter on 21 stC letterhead dated 11 December 2002 from Darren King (described as "Managing Director"). These instructions split the price into two tranches and required each tranche to be paid outside the UK. This appeared to Mr Patrick to be suspicious and he reported his concerns to HMCE on 13 December 2002.
On the same day, Mr Patrick received a telephone call from Darren King requesting him to refund the sale proceeds to Pycom. He refused to do this. Pycom claims that on 13 th December 2002 an impostor claiming to be Mr Patrick at Madysen falsely represented over the telephone that Madysen wanted to cancel the contract with Pycom because 21 stC was being investigated for VAT fraud and Madysen wished to return the goods to 21 stC. Pycom claims that it was then agreed that if it made available 7,200 equivalent units for collection by 21 stC, Madysen would reimburse to Pycom the £913,680. Relying on this agreement, Pycom allowed 21 stC to collect 7,200 equivalent units from Shurgard.
On 16 January 2003, HMCE obtained a freezing injunction against 21 stC and Darren King which inter alia required Madysen to pay to HMCE the debt of £905,220. That order was then varied to allow Madysen to pay that sum into a joint solicitors' account and £828,220 is now secured in this way. On 5 th February 2003, HMCE served a notice of direction on 21 stC following which they claimed that 21 stC owed £134,820 in VAT. On 31 st March 2003, pursuant to a winding up petition presented on 20 th March 2003 by Pycom (HMCE consenting), Ms Brittain was appointed Provisional Liquidator of 21 stC on the application of HMCE and Pycom.
HMCE and Pycom have each proved in 21 stC's liquidation. HMCE claim to be entitled to the output tax payable on the supply to Madysen and also to be able to look to the assets of 21 stC to satisfy their claims against Simtru and Darren King for fraudulent evasion of VAT. Pycom's claim is for damages arising out of the alleged re-delivery of CPUs to 21 stC. Given the timing of the VAT invoice and the winding up order, it seems that HMCE is a preferred creditor for the VAT owed by 21 stC, and thus if the plea of illegality fails HMCE will be paid the VAT due from 21 stC on the supply of the CPUs to Madysen.
HMCE have agreed with Madysen that they may set off the input tax payable on the acquisition of the CPUs against the output tax due on the supply to Pycom. However, if Madysen's illegality defence succeeds, this agreement will be reversed and Madysen will account to HMCE for the output tax without the benefit of the set-off. Even so, 21 stC will be still be in default of its obligation to account to HMCE for the VAT due on the supply to Madysen.
It is agreed for the purposes of this hearing that at the time of the contract between 21 stC and Madysen, Darren King had no intention of causing 21 stC to pay to HMCE the VAT arising from that supply and intended 21 stC to "go missing". It also agreed that Madysen was unaware that Darren King had this intention. There can be no doubt that Darren King was the directing mind and will of 21 stC at the time of the contract with Madysen. It follows that I must decide this case on the basis that at the time the contract was made, 21 stC dishonestly intended to defraud HMCE by not accounting for or paying the VAT and Madysen was unaware of this intention.
Is the contract unenforceable on grounds of illegality?
It is often said that a party who enters into a contract for a fraudulent purpose is disabled from enforcing the contract. Thus, the authors of Chitty on Contracts (28 th ed) refer in paragraph 17–158 to "the general common law principle that one who knowingly enters into a contract with an improper object cannot enforce his rights thereunder" and in Skilton v Sullivan CA 18 March 1994; The Times, 25 March 1994, Beldam LJ said:
In a case in which one party to a contract seeks performance of an obligation under the contract by the other party, it is now well established that the contract entered into with the object of committing an illegal act is unenforceable. If both parties enter that contract with that objective, neither can enforce it. If one of the parties does so and the other is unaware of the illegal purpose the party whose object is illegal cannot enforce the obligation of the other.
A similar statement is to be found in Hall v Woolston Hall Leisure Limited [2001] 1 WLR 225 in para 30 where Gibson LJ said:
In two types of case it is well established that illegality renders a contract unenforceable from the outset. One is where the contract is entered into with the intention of committing an illegal act; the other is where the contract is expressly or implicitly prohibited by statute: St John Shipping Corpn v Joseph Rank Ltd [1957] 1 QB 267, 283 per Devlin J.
Mr. McMeel who appeared for Madysen relies on these statements of principle. He submits that 21 stC entered into the contract with Madysen for the purpose of defrauding HMCE and thus cannot now rely on that contract...
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