Dodika Ltd v United Luck Group Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Nugee,Lord Justice Popplewell,Lord Justice Underhill |
| Judgment Date | 07 May 2021 |
| Neutral Citation | [2021] EWCA Civ 638 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A4/2020/1644 |
| Date | 07 May 2021 |
[2021] EWCA Civ 638
Lord Justice Underhill
(Vice-President of the Court of Appeal (Civil Division))
Lord Justice Popplewell
and
Lord Justice Nugee
Case No: A4/2020/1644
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
Mr Peter MacDonald Eggers QC sitting as a Deputy Judge of the High Court
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Matthew Hardwick QC (instructed by Clifford Chance LLP) for the Appellant
Mr Alain Choo-Choy QC (instructed by Taylor Wessing LLP) for the Respondents
Hearing date: 29 April 2021
Approved Judgment
Introduction
This appeal concerns the question whether a notice given by the buyer under a sale and purchase agreement in relation to a potential claim under a tax covenant complied with the requirements of the agreement.
The Appellant, United Luck Group Holdings Ltd, is the Buyer under a Sale and Purchase Agreement dated 21 December 2016 ( “the SPA”) of the issued share capital of an English company called Outfit7 Investments Ltd ( “Investments”). There were numerous Sellers, a number of whom were also Warrantors. This includes the Respondents. The Warrantors gave the Appellant a Tax Covenant under which they agreed to pay an amount equal to any Tax Liability of a Group Company arising (in summary) from pre-completion matters.
It was a condition of the Appellant being able to claim under the Tax Covenant that it give written notice by 1 July 2019 to the Warrantors stating “in reasonable detail” various things, including “the matter which gives rise to such Claim”. On 24 June 2019 the Appellant, by letter from its solicitors Clifford Chance LLP ( “the 24 June letter”), gave (or purported to give) such a notice referring to an investigation which had been launched by the Slovene tax authority into the transfer pricing practices of a Group Company called Ekipa2 d.o.o. ( “Ekipa2”).
The question is whether the 24 June letter complied with the requirements of the SPA, and specifically whether it stated in reasonable detail the matter giving rise to such a claim. The Respondents brought these proceedings by way of Part 8 claim seeking a declaration that it did not, and sought summary judgment to that effect. The application was heard by Mr Peter MacDonald Eggers QC sitting as a Deputy Judge of the High Court ( “the Judge”). By his judgment dated 30 July 2020 at [2020] EWHC 2102 (Comm) ( “the Judgment” or “Jmt”) he upheld the Respondents' contentions and by his Order dated 9 September 2020 he granted them summary judgment declaring that the 24 June letter failed to comply with the requirements of the SPA and various consequential relief.
The Appellant appeals with permission granted by Males LJ on 23 November 2020.
Facts
The facts have not yet been found but they are mostly documented and with one exception, there was little dispute of fact identified before us. On the material we were shown they can be summarised as follows.
The SPA is dated 21 December 2016 and governed by English law. By it the Appellant agreed to purchase the issued share capital in Investments for the sum of US$1bn. Investments is a holding company for the Outfit7 Group. The Group's business is primarily the development of apps for mobile phones, including an app called Talking Tom which has been very successful. These are free to download but monetized through advertising and purchasable add-ons. Investments has a direct subsidiary called Outfit7 Ltd, which is incorporated in the UK but has a tax residence in Cyprus. Outfit7 Ltd in turn has a number of subsidiaries, including Ekipa2, a company incorporated in, and tax resident in, Slovenia, where the original business was founded in 2009.
The business was founded by Samo and Iza Login, who are husband and wife. Before the sale, they had been Chief Executive Officer and Deputy Chief Executive Officer respectively and both had operational roles, Mrs Login being responsible for finances, legal department, marketing and licensing. Although there were numerous Sellers under the SPA (most with small holdings), over 60% of the shares were held by the 3 rd Claimant, a Liechtenstein entity then called Izzas Establishment (now called Login Establishment), which is understood to be a vehicle for Mr and Mrs Login's interests; and under the SPA the Sellers appointed Mr and Mrs Login to act as Sellers' Representatives to deal with any matter as between the Appellant as Buyer and the Sellers.
A small number of the Sellers acted as Warrantors. This included the Respondents. As well as giving warranties in the usual way, by cl 10 and sch 7 the Warrantors gave a Tax Covenant, which, so far as material, was in the following terms (sch 7 para 2):
“ 2 Covenant
2.1 The Warrantors severally Covenant to pay to the Buyer an amount equal to:
(a) any Tax Liability of a Group Company which has arisen or arises:
(i) in consequence of an Event which occurred on or before Completion; or
(ii) in respect of any Income, Profits or Gains which were earned, accrued or received on or before Completion or in respect of a period ending on or before the Completion Date.
(b) [concerns Tax Liability where another person is primarily liable]
2.2 The Warrantors covenant to pay to the Buyer an amount equal to any reasonable costs and expenses properly incurred by the Buyer and/or a Group Company in connection with any successful claim under this schedule.”
This contains a number of defined terms but it is not necessary to set out the definitions here and I will refer to them so far as appropriate below.
By sch 4 para 2 it was provided as follows:
“ 2 Time limits
2.1 The rights of the Buyer in respect of:
(a) [concerns Warranty Claims]
(b) any Indemnity Claim or Claim under the Tax Covenant shall only be enforceable if the Buyer gives written notice to the Warrantors stating in reasonable detail the matter which gives rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof before the Second Claims Escrow Release Date.”
The Second Claims Escrow Release Date was 1 July 2019.
Completion took place on 28 December 2016. Under escrow arrangements, the detail of which it is not necessary to set out, $100m of the consideration was held in escrow in effect to meet claims among other things under the Tax Covenant (to be released in two tranches, each of $50m, on pre-agreed dates). It is common ground between the parties that the effect of para 2.1(b) of sch 4 is to create a condition precedent to any liability under the Tax Covenant, with the practical consequence that if the Appellant has duly given a notice which complies with the requirements of para 2.1(b), the second $50m tranche will remain held in escrow, but if it has not, it will be released to the Sellers.
From July 2018 the Slovene tax authority (Financna uprava Republike Slovenije or in translation the Financial Administration of the Republic of Slovenia) ( “the Tax Authority”) conducted an investigation into Ekipa2. Mr Matthew Hardwick QC, who appeared for the Appellant, took us in some detail through the course of the investigation between 23 July 2018 when it was launched to 24 June 2019 when the 24 June letter was written. It is not necessary for the purposes of this judgment to set it all out, but it can be summarised as follows:
(1) On 23 July 2018 the Tax Authority formally decided to conduct a tax inspection of Ekipa2, the subject-matter of the investigation being Ekipa2's corporate tax for the period 1 January 2015 to 31 December 2017.
(2) In September 2018 the Tax Authority indicated that it required documentation relating to transfer pricing.
(3) In October 2018 Ekipa2 retained a Slovene KPMG firm ( “KPMG”) to act for it in the investigation, and in December 2018 KPMG submitted an analysis of Ekipa2's transfer pricing to the Tax Authority. This indicated that Ekipa2 provided services (initially software development but later broadened to include other services) almost exclusively to Group companies, and did so on the basis of a 15% uplift on costs; KPMG concluded that Ekipa2 should be classified as a low risk routine service provider and that on that basis the transfer prices it charged were compliant with the arm's length principle.
(4) In February 2019 KPMG submitted further material in response to a request from the Tax Authority.
(5) In March 2019 the Tax Authority decided to extend the investigation to cover the calendar years 2013 and 2014. The formal decision letter included the following:
“On the basis of documentation provided by the Taxable Person and data from tax accounting records and publicly-accessible data, the tax authority established that the selected transfer pricing method mentioned in the transfer pricing documentation was most likely not appropriate.”
(6) KPMG requested access to the Tax Authority's file. That was granted and the inspection took place at a meeting on 5 April 2019. The file did not however contain any documents not already in Ekipa2's possession. KPMG also asked to be informed of relevant facts and evidence in the tax inspection. That led to the Tax Authority supplying an Official Note on 19 April 2019. This included the following:
“During the meeting, the Taxable Person...
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