Arrowhead Capital Finance Ltd ((in Liquidation)) v KPMG LLP
| Jurisdiction | England & Wales |
| Judge | Stephen Males QC |
| Judgment Date | 02 July 2012 |
| Neutral Citation | [2012] EWHC 1801 (Comm) |
| Docket Number | Case No. 2011 Folio 1028 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 02 July 2012 |
[2012] EWHC 1801 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London WC2A 2LL
Stephen Males QC
(sitting as a Deputy High Court Judge)
Case No. 2011 Folio 1028
Philip Coppel QC and Iain MacWhannell (instructed by Thomas Cooper) for the Claimant
Alex Hall Taylor (instructed by Stephenson Harwood LLP) for the Defendant
Hearing date: 20 June 2012
Introduction
This is an application by the defendant accountants ("KPMG") to strike out the claim under CPR 3.4(2)(a) on the ground that the claimant's statement of case discloses no reasonable grounds for bringing the claim, alternatively for summary judgment pursuant to CPR 24.2. There are two issues. The first is whether KPMG owed a duty of care to the claimant ("Arrowhead"), who was not its client but an investment fund which loaned money to a special purpose vehicle which in turn loaned money to KPMG's client, in performing the services for which it was engaged. The second is whether the claim is time barred on the ground that the damage which is an essential ingredient of a cause of action in tort occurred more than six years before 30 August 2011, the date when the claim form was issued.
Although the application is made on two bases, strike out under CPR 3.4(2)(a) and summary judgment under CPR 24.2, it is unnecessary to consider these separately. In both cases an applicant faces a high hurdle, but the parties were content to proceed on the basis of the test applicable for a summary judgment, that test not being in dispute. It is therefore necessary for KPMG to establish that the claim has no realistic prospect of success. In considering whether KPMG is able to do so, I apply the principles summarised by Lewison J in Easyair Ltd v. Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15] which have been approved in later cases.
Background
KPMG's client was Dragon Futures Ltd ("Dragon"), an English company. Dragon carried out only minimal activities until 2003 when it decided that it would trade in the grey market in mobile telephones, a grey market being a trade in branded goods outside of the distribution channels authorised by the brand owners. In a typical transaction, Dragon would buy a consignment of mobile telephones from one party and sell them to another party for a profit. Dragon would therefore pay VAT on the purchase price, which it would reclaim from HM Customs & Excise ("HMCE"). It was critical to Dragon's business plan that Dragon would be able to recover VAT in this way.
In order to be recoverable the VAT in question had to qualify as "input tax" within the meaning of section 24(1) of the Value Added Tax Act 1994 which provides:
"Subject to the following provisions of this section, 'input tax', in relation to a taxable person, means the following tax, that is to say–
(a) VAT on the supply to him of any goods or services;
(b) VAT on the acquisition by him from another member State of any goods; and
(c) VAT paid or payable by him on the importation of any goods from a place outside the member States,
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him."
If the purchases and sales, judged objectively, were devoid of economic substance, they would not be part of any economic activity, and the purchases would not qualify as supplies used or to be used for the purpose of a business. This was the position at all material times, although the point came into even sharper focus after a series of decisions by the European Court of Justice in 2006 holding that a transaction would not be vitiated by fraud elsewhere in the supply chain, provided that the trader seeking repayment of VAT had neither knowledge nor any means of knowledge of the fraud: see eg Optigen Ltd v. Customs & Excise Commissioners (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] Ch 218. This was affirmed in Kittel v. Belgium (Joined Cases C-439/04 and 440/04) where the Court held at [61]:
"… where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct."
At first Dragon traded on a fairly small scale in order to establish a track record and to test the market, but it was ambitious to expand its trading, for which purpose it would need to attract finance from investors. It recognised, however, that such investors would need to be satisfied about the viability of its business plan, including in particular the recoverability of VAT. In 2003 HMCE had introduced a package of measures to assist in combating fraud in the wholesale market in (among other things) mobile telephones. It is unnecessary for present purposes to describe what were known as "Carousel Frauds" or "Missing Trader Intra-Community Frauds", but such schemes, designed to obtain a substantial repayment of sums which had never been paid as output tax, were widespread. In August 2003 Customs Notice 726 was published, in which HMCE set out advice to traders as to how they could avoid being caught up in such frauds and the checks which HMCE would expect them to take in order to demonstrate that they had done everything they could to ensure the integrity of the supply chain. If HMCE considered that the transactions for which VAT was sought to be recovered were not genuine transactions because they were part of such a fraud, a claim for recovery of VAT would be denied unless the trader concerned was able to satisfy HMCE that it had made appropriate checks.
Thus although the decisions in Optigen and Kittel provided authoritative rulings, they did not (at least so far as the present case is concerned) bring about any fundamental difference in what a trader was required to do or the circumstances in which VAT repayments could be successfully claimed. Mr. Philip Coppel QC made clear on behalf of Arrowhead that its case is that KPMG's conduct fell short of the standards required as they already existed when the work was done in 2003 and 2004 and not merely short of any more demanding standards which may or may not have existed after 2006 as a result of the European Court decisions.
In order to ensure that it would be able to recover VAT, Dragon determined to establish rigorous operating procedures, which would go even further than the reasonable steps set out in Customs Notice 726. It took legal advice and in addition decided to engage the services of KPMG. It appears that initial contact with KPMG was made in early September 2003, and included a meeting on 16 September 2003 with Mr. Steve Simmonite, a director of KPMG and an expert in VAT, who had previously been with HMCE for 18 years, leaving in 1994 as a Senior Executive Officer. Mr. Jim Robinson, a director of Caydal LLC ("Caydal"), also attended that meeting. Caydal was a United States venture capital company which was itself an investor in Dragon and also a possible source of introductions to other potential investors.
The terms on which Dragon engaged KPMG were set out in KPMG's engagement letter dated 17 September 2003. This provided that:
"We will deliver services to you in connection with the implementation of a due diligence strategy to address the threat posed by HM Customs & Excise ('HMCE') and its approach to companies dealing in the mobile telephone industry.
Scope of services
KPMG will provide the following services:
• Review the existing business records to identify areas for attention.
• Analyse the current measures Dragon Futures takes to protect itself from fraudulent traders.
• Update the existing procedures to take into account the recent Budget measures.
• Provide a regular review of systems and documentation, dates to be agreed with yourself.
We will agree with you, in advance, the scope of any further work that you require us to do over and above that detailed."
The letter went on to identify the KPMG staff and resources responsible for undertaking this work and the charges which would apply, and stated that the engagement was accepted on the basis that KPMG's attached General Terms of Business would apply. It requested Dragon to read these terms carefully and pointed out that they included various exclusions and limitations on KPMG's liability. In particular, the letter drew specific attention to an exclusion of liability for indirect or consequential economic losses, to a limitation of liability in connection with direct losses, and to the fact that any claim against KPMG was required to be brought within four years of the work giving rise to the claim being performed. Although not specifically referred to in the engagement letter itself, the terms also provide that the contract between Dragon and KPMG would not create or give rise to any third party rights and excluded the application of any legislation giving to or conferring on third parties any contractual or other rights.
With a view to attracting potential investors, Dragon prepared two documents. The first, entitled "Dragon Financing Opportunity", stated under the heading "Institutional Quality":
"From the outset, Dragon has been designed to be acceptable to institutional investors. Our systems, risk controls, transparency, personnel, legal structure and selection of advisers have all been driven by this standard."
The second document, entitled "Dragon Business Plan", included reference to "KPMG audits" under the heading "IQ Standards." It also referred to the management of the risk of being involved in a carousel fraud by means of (among other things) "KPMG Advice" and referred...
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