The Commissioners for HM Revenue & Customs v Winnington Networks Ltd and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 14 March 2014 |
| Neutral Citation | [2014] EWHC 1259 (Ch) |
| Date | 14 March 2014 |
| Court | Chancery Division |
| Docket Number | Claim No: 2011 Folio 792 |
[2014] EWHC 1259 (Ch)
IN HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Royal Courts of Justice
Strand
London
WC2A 2LL
Mr Justice Norris
Claim No: 2011 Folio 792
Mr Christopher Brockman (instructed by Howes Percival LLP) appeared on behalf of the Claimant
The Respondents did not appear or represented
I have before me two without notice applications for the appointment of provisional liquidators in relation to the affairs of Bartel Networks Limited and Winnington Networks Limited.
The petitions for the winding up of these companies were issued today at the suit of HMRC. The petition against Winnington is founded on historic VAT assessments in the sum of £2.844 million. Those assessments are under appeal but notwithstanding the appeal, the sums remain due and payable. The petition is also founded upon contingent or perspective debts relating to an assessment which is due to be served in the immediate future in the sum of £5.945 million in respect of unpaid VAT. As far as Bartel is concerned, its petition is also founded upon a historic assessment in the sum of £273,455 and debts contingently or prospectively due in respect of assessments due for service in the sum of £8.668 million.
The principles upon which I will proceed in dealing with these applications are as follows. First, that the appointment a provisional liquidator is a most serious step and (as the Court of Appeal has indicated), should be the subject of most anxious consideration.
Secondly, the application is without notice: in those circumstances it needs to be justified by exceptional circumstances. A judge should not entertain an application of which no notice has been given unless either giving notice would enable the defendant to take steps to defeat the purpose of the remedy, or there has been literally no time to give notice. The applications are made without notice in the instant case on the first of those grounds.
Thirdly, this is not a trial of the petition itself and accordingly, one is proceeding upon a provisional and interim basis.
Fourthly it is for the petitioner to show that the petitioner is likely to obtain a winding up order on the hearing of the petition. This involves demonstrating that the petitioner is entitled to present the petition and that a material part of the petition debt is not capable of serious dispute.
Fifthly, on a without notice application for a provisional liquidator, that latter assessment falls to be made without the company having had the chance to demonstrate that it does have a good arguable case in support of a dispute as to the debt. The court must therefore be assured that it has a fair picture of the circumstances in which the petition is presented and in that regard, that the petitioner has given full and frank disclosure. However, in my judgment the court can take into account the company's engagement with and response to any prior investigatory steps which would have been undertaken by the creditor, in the expectation that if the company has a serious case to advance, it will have advanced it in the course of that engagement and will not have kept it up its sleeve.
Sixthly, I must be satisfied that the appointment of a provisional liquidator is the right course to take in all the circumstances.
Seventhly, material to a consideration of those circumstances is the need to protect assets and in that context, assets is to be given a fairly broad interpretation. As Lewison J pointed out in Rochdale [2011] EWCA Civ 1116 at para 97, in cases where there are real questions as to the integrity of a company's management and the quality of its accounting and record-keeping functions, it will be an important factor to ensure that an incoming liquidator obtains control of all of those records so that the necessary investigations can be undertaken. These investigations may well include bringing claims against the management and whether there ought to be a report to the Secretary of State possibly leading to disqualification proceedings. These causes of action and possible steps are to be regarded as part of the assets of the company for the purposes of assessment.
Eight and last, although the relief being sought is interim relief that relief is being sought by a public body discharging a public function and for the public good. In those circumstances a cross undertaking in damages is not generally to be required. Those are the principles which I will seek to apply in approaching these two applications.
As a general overview, what is said by the HMRC in support of its two petitions is (a) that each of these companies has conducted a trade on a visibly uncommercial basis; (b) that it is possible to see that the benefit to the participants is not any profit gained by the conduct of the trading activity but is rather the ability to retain VAT which has been collected in the course of that trade: (c) thirdly, that that ability results from false claims for input tax which have been generated by fictitious trading.
As I have indicated, there are historic assessments in relation to both companies which would of themselves support a petition. However, that is not the basis on which the appointment of provisional liquidators is sought in the instant case. Rather, HMRC rely on the allegedly fraudulent trading that I have described in the general overview. The first limb of that was uncommercial trading and I will take as my example Winnington Networks Limited.
Winnington sells electrical white goods and electronic goods such as hard drives. It acquires those goods from Samsung or LG under legitimate supplies to an Irish company called, "Osmosis". The supply by Samsung and LG is a zero-rated VAT supply. According to the paper trail, Osmosis then sell those goods to a Czech company called, "Winnington Prague". This is an off-shore, zero-rated VAT supply. Winnington Prague then "under-invoices"; that is to say it sells goods to Winnington at either cost or below cost. When Winnington has acquired the goods according to the paper trail, it then makes a VAT able supply to Impact UK. Impact UK then undertakes retail sales to the ultimate consumers of the goods at below cost price.
In the course of this chain of supply, there is one VAT rated supply where Winnington collects the VAT due on its supply of goods to Impact. In the whole chain as I have indicated, the goods are ultimately sold at cost or below cost to the ultimate consumer. No profit is generated from the trading. The goods are sold at cost or below cost in order to secure that all goods are sold to ultimate consumers and are sold as rapidly as possible. This means that the through-put is enlarged and the VAT which Winnington collects is maximised.
The trading is also uncommercial in another sense. I have identified what is the alleged paper trail for the goods. But in fact, the goods do not pass through those hands successively. The actual movement of the goods is this. The goods remain under the control of the Irish company, Osmosis, until they are actually delivered directly to Impact which sells to the final legitimate consumer. Neither Winnington Prague nor Winnington itself ever has physical possession or control of the goods. The artificiality of this structure is recognise in transcripts of recorded conversations between the principal participants in the two companies. These recorded conversations indicate a complete understanding of the chain of supply which I have indicated and the role played by each successive member in the supply chain. On the trading side there is therefore uncommercial trade.
This uncommercial trade has generated VAT which Winnington has collected. Winnington does not account for that VAT because it generates input tax to off-set that collected tax. It does so by means of apparent trading in voice over internet protocol, ("VOIP") units. It is necessary briefly to explain how this is achieved. The full explanation is set out in the affidavit of Mr O'Hara.
Telecommunications depend on origination of the call, transmission of the call and termination of the call. The origination and the termination of the call will be under the control of network providers. The transmission of the call (which is the...
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