KS Lincoln & others v C B Richard Ellis Hotels Ltd
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Coulson,Mr Justice Coulson |
| Judgment Date | 24 May 2010 |
| Neutral Citation | [2009] EWHC 2344 (TCC),[2010] EWHC 1156 (TCC) |
| Docket Number | Case No: HT-09–147,Case No: HT-09147 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 24 May 2010 |
[2009] EWHC 2344 (TCC)
Before: MR JUSTICE COULSON
Case No: HT-09147
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Mr Anthony Speaight QC (instructed by Stockler Brunton) for the Claimants
Mr Patrick Lawrence QC (instructed by Reynolds Porter Chamberlain LLP) for the Defendant
Hearing date: 14 th September 2009
Mr Justice Coulson :
Introduction
This is an application by the claimants pursuant to CPR 3.4 to strike out paragraph 58.2 of the defendant's defence (which contains an allegation of unlawful tax evasion) or, in the alternative, an order that the defendant provides further information containing full particulars of this allegation.
The claimants are all special purchase vehicles created by a Danish company, Scanplan, to buy eight hotels in England in 2005. They engaged the defendant to carry out valuations of each of those eight hotels. In these proceedings, they claim that the defendant was negligent or in breach of contract in carrying out the valuations, and they maintain that, in consequence, they paid too much for each hotel. They are, to that extent at least, relatively standard claims for professional negligence. The total damages claim is, however, said to exceed £7.5m.
The quantum of the damages claim is calculated in two ways. The primary way in which the damages claim is put is by comparing the defendant's valuation (which for the eight hotels amounted to a total of £39,470,000), with what the claimants claim is the “non-negligent net valuation” of the hotels, which is in the total sum of £34,350,000. That gives rise to a shortfall of £5,120,000. To that is added a figure of £2,397,805 in respect of “wasted purchase costs”, making a total damages claim, on this calculation, of £7,517,805.
The alternative claim compares the price actually paid for each hotel (said to total £41,039,800) with the non-negligent valuation/true valuation figure of £34,350,000 referred to above. That secondary method of calculation produces a total damages claim of £6,689,800.
This alternative claim highlights – for the first time —the actual purchase price paid by the eight claimants for their hotels. The purchase price is said to be made up of two separate figures. The hotel in Lincoln, the subject of the claim by the first claimant, will serve as an example of this calculation. The total price paid for that hotel is said to have been £5,221,800. That is made up of the sum paid to the seller of the hotel (£4,835,000), and an additional figure, calculated at 8% of the price paid to the seller (in this case £386,800) which was a payment made, not to the seller, but to a property location agent called ESL Properties Limited.
It is this 8% uplift figure, applied to each of the eight hotels, which is at the heart of the present application. The relevant pleadings are as follows:
a) The Particulars of Claim
Paragraph 105 of the Particulars of Claim provides as follows:
“For reasons of convenience and of tax efficiency in Denmark, the transactions were in each case carried out at a rolled-up price inclusive of a buffer of 8%, which sum was assessed to be sufficient to cover all associated costs. This was accomplished by the sellers entering into a side agreement with ESL under which the sellers agreed to deduct 8% of the nominal sale price on the date of completion and pay this to ESL in consideration of ESL's introduction of the purchasers.”
There then follows a table in which the two sums (the payment to the sellers and the 8% paid to ESL) are identified in relation to each hotel, thus explaining the total price paid.
b) The Defence
Paragraph 58.2 of the Defence deals with the 8% in this way:
“The 'explanation' for the inclusion of an additional 8% over and above the 'nominal' sale price for the hotels is noted. It appears that the claimants have deliberately added 8% to the true purchase price to disguise the nature of the payment and to circumvent the fact that the professional fees were not tax deductible. Prima facie, and subject to the condition that Danish tax law is not more benevolent to the tax payer than English tax law, this was unlawful tax evasion. The defendant will investigate the position and reserves the right to plead further on this point. If the purchase was structured to obtain an unlawful tax saving, the claims fail for illegality.”
c) The Reply
Paragraph 21 of the Reply deals in detail with this allegation in the following terms:
“a) The fact that the price paid was a “rolled-up” price inclusive of some 8% transaction costs was not disguised. It was openly stated in the prospectuses for all 8 claimants. The prospectuses were reviewed by Deloitte, who issued an auditor's declaration in respect of each.
b) The annual financial reports of the claimants, which have been audited by Deloitte, contain a cost price. These annual reports are filed with the Danish Commerce and Companies Agency, and are public documents.
c) There would be no tax advantage to be gained from misleading the Danish tax authorities into believing that the transaction prices (for instance, £5,221,800 in the case of Lincoln hotel) did not include the topping up with transaction costs, since the Danish tax laws permit lawyers fees, surveyors fees, land tax and so on to be included in the capital acquisition sum for the purposes of depreciation. Each year up to a specified percentage of such capital may be set against current income, for the purpose of calculating taxable profit. In 2005 this percentage was 5%; today it is 4%. (In the case of a hotel the value of land acquired, as opposed to buildings, machinery and installation, may not be depreciated.)
d) What has been an issue in Denmark is whether the fee of the promoter of a K/S (in this case Scanplan's fee) may be included in the capital costs thus depreciated. The Danish courts have recently held that this is not permissible. The prospectus highlighted this issue and included a sensitivity analysis of its tax impact.
e) The persons who are responsible for submitting a tax return in respect of such annual profits are the individual limited partners of the K/S. The K/S itself is a “tax transparent” entity in Denmark.
f) The payment of a rolled-up price (covering a whole series of different outgoings and disbursements in respect of transaction costs) contributed to simplicity of presentation, and to administrative convenience and efficiency. But, save in that sense, it did not create any tax advantage.
g) It is denied that the nature of the additional 8% payment was disguised.
h) It is denied, if it should ever be alleged, that the claimants were engaged in unlawful tax evasion.
i) Without prejudice to the above, the last sentence of paragraph 58.2 is, as a matter of law, denied.”
The Parties' Competing Submissions
For the purposes of this application to strike out (but emphatically not for any other purpose) Mr Speaight QC, on behalf of the claimants, accepts that I should assume that the transaction was structured in order to facilitate unlawful tax evasion. However, he says that, even making such an assumption, there would be no ground in law for the claims against the defendant to fail for illegality. Thus he submits that, since paragraph 58.2 only exists in order to allow the defendant to assert illegality and thus the failure of the professional negligence claims against them, the paragraph should be struck out.
On behalf of the defendant, Mr Lawrence QC takes three points. First he asserts that illegality has not actually been pleaded, and that the offending paragraph merely warns the claimant that an illegality point may be taken if, following disclosure, it appears from the tax returns that unlawful tax evasion has occurred. Secondly he submits that, contrary to Mr Speaight's submissions, if there had been unlawful tax evasion then it would be at the very least arguable that the professional negligence claims would indeed fail for illegality. Allied to this submission is his third point, to the effect that, prior to disclosure of the relevant tax returns and their proper consideration, it would be premature to strike out this part of the defence.
The Nature Of The Defendant's Pleading
I deal first with the suggestion that paragraph 58.2 does not, in reality, amount to a positive averment of tax evasion and/or an assertion that the claim against the defendant must fail for illegality. In my judgment, such a submission is unsustainable.
Pleadings in civil proceedings are intended to set out a clear summary of each party's case, so that the particular issues between them can be identified at the outset and form the necessary agenda for the witness statements, the experts' reports and the subsequent trial. Following the introduction of the CPR, a defendant is not entitled blankly to deny (or fail to admit) specific matters relied on by the claimant; wherever possible a defendant is obliged to plead a positive case.
By the same token, neither a defendant, nor for that matter a claimant, can use the pleadings as a means of (as it is sometimes put) 'firing warning shots' to the other side, or 'putting down markers' as to arguments which, at present, have not been fully thought through. Such an approach to pleadings makes for uncertainty and confusion. A positive averment is either made or it is not, and there can be no sensible half-way house.
In my view, when considered in the round, paragraph 58.2 of the defendant's defence is raising, albeit in rather languid terms, an allegation of fraud and...
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