Quest Trading Company Ltd & Anor v Revenue & Customs [2006] UKVAT V19909 (27 November 2006)
19909
LONDON TRIBUNAL CENTRE Reference No: LON/2003/488
Copy sent to:
Appellant/Applicant
Respondents
QUEST TRADING COMPANY LIMITED (in Liquidation)
(ACTING BY ITS LIQUIDATOR, MRS SHARMA) Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents
- and -
COTSWOLD COMPUTERS COMPONENTS LIMITED Applicant
Tribunal: CHARLES HELLIER (Chairman)
Sitting in private in London on 7 April 2006
DIRECTION
UPON HEARING Michael Patchett-Joyce of Counsel instructed by Hassan Khan & Co - for the Applicant, Amanda Tipples of Counsel instructed by the Acting Solicitor for HMRC for the Respondents and the Appellant did not appear and was not represented.
- This is an application by Cotswold Computers Components Limited (Cotswold) to be substituted, pursuant to Rule 13 of the VAT Tribunal Rules 1986, for Quest Trading Company Limited (the Appellant) in the appeal made by the Appellant on 14 May 2003 and assigned the number LON/2003/0488.
- The appeal relates to a claim for input tax repayment made by the Appellant and denied in part by the Revenue and Customs. The Revenue and Customs contend that claims for input tax in respect of four invoices totalling £671,342 were not deductible because the invoices represented part of a circular chain of transactions which did not in their view constitute an economic activity. The disputed decision was contained in a letter from Customs dated 16 April 2003.
- Rule 13 of the VAT Tribunal Rules 1986 provides:
"(1) This rule applies where, in the course of proceedings, the liability or interest of the applicant or appellant passes to another person ("the successor") by reason of death insolvency or otherwise."
Both parties agreed that "in the course of proceedings" meant in the course of proceedings before the VAT and Duties Tribunal rather than unrelated proceedings, such, for example as probate or bankruptcy proceedings. I agree: the situation of those words within the rules indicates that they refer to proceedings under those rules. Rule 13 continues:
"(2) The tribunal may direct, on the application of the Commissioners or the successor, and with the written consent of the successor, that the successor shall be substituted for the applicant or appellant in the proceedings."
Cotswold maintains that by a deed of assignment (dated 14 March 2005) Quest assigned its interest in this appeal to Cotswold. The Respondents contest this.
- The issues in this application are therefore these:
(i) was the effect of the deed of assignment to pass the interest of the Appellant to Cotswold? and
(ii) if it was, should the tribunal exercise its discretion under rule 13(2) to substitute Cotswold as successor to the Appellant.
Further Background
- I have also been told the following:
- The Appellant was placed into creditors' voluntary liquidation on 15 March 2004. Mrs Gagen Dulari Sharma was appointed Liquidator.
- The Appellant also lodged an appeal on 30 September 2002 against an assessment for £555,349. The appeal was given reference LON 2002/0949.
- The Appellant also commenced judicial review proceedings against the Respondents with reference number CO/2612/2003 and, consolidated with others, CO/2080/2003.
- The deed of assignment was made 12 months after Mrs Sharma was appointed and was executed by her.
A Preliminary Issue
- By a letter dated 7 March 2005 (7 days before the date of the deed of assignment) the liquidator asked the Tribunal to substitute her as the appellant. By a letter dated 22 September 2005 the Proper Officer indicated that that substitution had been made.
- In Ayerst (Inspector of Taxes) v C & K (Construction) Ltd 1975 STC 345 the question was whether a company in liquidation had beneficial ownership of its assets. Lord Diplock gave the only speech. He explained the effect of a winding up order (at pages 348-9):
"(1) The custody and control of all the property and choses in action of the company are transferred from those persons who were entitled under the memorandum and articles to manage its affairs on its behalf, to a liquidator charged with the statutory duty of dealing with the company's assets in accordance with the statutory scheme …. Any disposition of the property of the company otherwise than by the liquidator is void …. (2) The statutory duty of the liquidator is to collect the assets of the company and to apply them in discharge of its liabilities …. If there is any surplus he must distribute it among the members of the company in accordance with their respective rights under the memorandum and articles of association …. (3) All powers of dealing with the company's assets, including the power to carry on its business so far as may be necessary for its beneficial winding-up, are exercisable by the liquidator for the benefit of those persons only who are entitled to share in the proceeds of realisation of the assets under the statutory scheme. The company itself as a legal person, distinct from its members, can never be entitled to any part of the proceeds",.
and then went on to say that there was a difference between the functions of a liquidator and a trustee in bankruptcy in that:
"whereas the legal title in the property of the bankrupt vests in the trustee and the legal title to property of the deceased vests in the executor, a winding-up order does not of itself divest the company of the legal title to any of its assets."
- He then held that whereas a company in liquidation retained the legal interest in its assets, it lost the beneficial ownership of the assets. The beneficial ownership (as was explained in Sainsbury (J) plc v O'Connor (Inspector of Taxes went into suspense [1991] STC 318).
- Rule 13 applies when the "interest of the…Appellant passes to another person". On liquidation it is clear that the legal interest in the company's assets does not pass to another person. The company does however, lose the beneficial interest, but that interest goes into suspense and does not pass to the liquidator or any other person. But the words "the interest of the appellant" in Rule 13 do not seem to me to be limited to the interest of the appellant in assets, but can also bear the meaning of the "interest in the appeal". The liquidator has custody of the company's actions and is the only person able to advance the company's interest in the appeal. That is an interest, and it passes to the liquidator.
- Thus it seems to be that it is possible under Rule 13 to substitute the liquidator for the Appellant (although it may not be necessary so to do since the company can still act in the appeal albeit only through its liquidator). Accordingly, I can properly treat this as an application for a further substitution of Cotswold for the liquidator.
Issue (i) Was the effect of the deed of assignment to pass the Appellant's interest to Cotswold?
- The deed of assignment is not the most elegantly drafted document. But it is short. It is between the Appellant, Mrs Sharma, and Cotswold. I set out below its provisions with the submissions of the parties.
- It begins with five recitals:
"1. H.M. Customs & Excise claim that they are creditors of the Company in respect of:
(i) a dispute concerning the correct rate of value added tax to be charged in respect of all supplies that have been made by the company to Total Telecom SL, the said dispute being the subject of Judicial Review with reference no. CO/2613/2003; and
(ii) a dispute concerning input value added tax credit arising from a decision of H.M. Customs & Excise contained in a letter dated 16 April 2003, the said dispute being the subject of an appeal to the VAT & Duties Tribunal with reference LON/03/0488."
Miss Tipples questions the word "creditors" in the first line. She says that it is the Appellant's case that it is a debtor. Mr Patchett-Joyce asks whether this lack of elegance invalidates the deed: it is clear that 1(ii) deals with input tax credit. I note that the letter dated 16 April 2003 contains the decision of Customs against which this appeal, LON/03/0488, is made and that that letter indicates that the amount which would be repaid by Customs will be reduced, thus leaving the Appellant with a claim (as it sees the position) for the repayment of input tax in which the Respondents are the debtor. I should also note that by a later deed of variation the reference "CO/2613/2003" was deleted and replaced with "CO/2612/2003 and CO/2080/2003.")
"2. H.M. Customs & Excise having raised assessments in respect of (i) and (ii) above, H.M. Customs & Excise have set off the assessed amounts against credit, which is due to the Company."
Miss Tipples rightly says that this is difficult at best to understand: how can an assessment have been raised in respect of a Judicial review action, how can a claim for repayment of input tax have an assessment raised in respect of it, and if assessments have been raised what is the credit against which they have been set off? Mr Patchett-Joyce says that "assessment" has in normal usage a range of meanings.
"3. The Company does not accept that H.M. Customs & Excise are correct. It avers that H.M. Customs & Excise are indebted to the Company in the sum of approximately £1,215,000 together with interest, ("the Debt").
Miss Tipples said that it was not possible to determine from this clause what was being assigned and in particular whether what was purported to be assigned had any relationship to the subject matter of the appeal: the "Debt" was an "approximate" sum, there was no explanation of what it related to or how it had been calculated. Where did £1,215,000 come from when the appeal was in respect of £671,342? Mr Patchett-Joyce said that the meaning of this clause followed plainly from recital 2. The £1,215,000 was capable of including the £671,342.
"4. The Company further avers that H.M. Customs & Excise caused its liquidation and that it suffered consequential loss and damage ("the Damages") such damages being actionable in domestic and or Community law.
"5. The company was placed into Creditors Voluntary Liquidation on the 15 day of March 2004."
17. Then come the operative clauses:
"1. In consideration of the sum of £10,000 plus VAT paid by the Assignee to the Liquidator (the receipt of which the Liquidator and the Company respectively acknowledge) the company with full title guarantee assigns to the Assignee:
(i) the right to conduct, continue, defend, compromise or withdraw the proceedings at 1(i) and (ii) above,"
Mr Patchett-Joyce says the rights assigned include the right to conduct this appeal. And he says that it is not just the right to appeal which is assigned, but - as will be seen, it is the Debt too. This is not the assignment of a bare right of action.
(ii) the right to bring such further proceedings in the name of the Company against any person the Assignee deems necessary in order to recover damages arising out of any matter connected or related to any of 1, 2, 3, 4 above but subject to the written consent of the Liquidator,"
Miss Tipples says that this is an odd provision. How could damages arise out of a debt or a input tax claim. Mr Patchett-Joyce says that damages are referred to in recital 4 the rest is just surplusage.
(iii) "all or any of the Debt due and or the damages owing to the Company by H.M. Customs & Excise or any other person together with any interest or repayment supplement,"
Miss Tipples says that this is ineffective to assign any right to input tax in relation to the appeal: it assigns only the "Debt". The "Debt" is defined in the defective recital 3. That "Debt" is not the right in the appeal under recital 1(ii). Indeed the drafting of Recital 1 suggests that it is dealing with money owed by the company, not to it. This "Debt" she says is not the right in this appeal. Mr Patchett-Joyce says that "Debt" refers to recital 3 and it is clear what recital 3 means - it clearly incorporates the alleged debt in this appeal.
(iv) "any right and or benefit which has or will become due arising under an Insurance policy held by the Company with IRPC Taxation Services."
"2. The Assignee agrees to indemnify the Liquidator in respect of any costs, which have or may be claimed by any party in the course of action arising in or under this Deed."
Miss Tipples says that this clause is not consistent with the idea of an assignment. If the right has been assigned the liquidator has no interest - how can it incurs costs. Mr Patchett-Joyce says that whatever it says it is irrelevant to the construction of the deed. All it does is to protect the liquidator and any cautious liquidator would seek such protection.
"3. The Assignee shall instruct H.M. Customs & Excise or any other person to make the Liquidator any payment which may become due to the Company. Save in respect of the repayment of any litigation costs which the Assignee has incurred and secured payment of, the Liquidator shall be entitled to retain up to but not exceeding 20% of any payment received as she sees fit towards the discharge of her duties as Liquidator."
Miss Tipples says that this clause displays that the Applicant has no interest in the appeal. The clause requires all the money to be paid to the Appellant. She accepts it says that the Appellant retains 20% but says that there is no direction as to how the remaining 80% is to be dealt with. Since it is not directed to be paid to Cotswold, Cotswold has no interest in it. Mr Patchett-Joyce says it is a badly drafted clause but it is clear that although the money is to be paid to Quest, Cotswold retains an interest in the money, and its interest is in all of it other than the 20% which the liquidator retains.
"4. It is certified that the transactions hereby effected to not form part of a larger transaction or series of transactions."
This clause would be applicable were the assignment potentially stampable. the respondents accept that it is not a stampable document. This clause is otiose.
Conclusion Issue (i)
- I fear that I conclude that this document does pass the interest of the Appellant to Cotswold. I do so with sadness that such a badly drafted document could be found to be effective. But when one reads through the document and takes it as a whole it is perfectly clear what it is intending to do. It is clearly intended that in return for £10,000 the specific rights against the Respondents are transferred to the Appellant on the understanding that 20% of the net proceeds of the claim be paid to the Liquidator and that Cotswold should retain the other 80%. It is intended too that Cotswold are intended to have conduct of the action.
- It is also clear that the instant appeal relates to a claim for input tax against the Revenue and Customs and that, notwithstanding the confusion in recital 1. of "creditors" with "debtors", that the right to any input tax repayable if the appeal is successful is one of the assets intended to be assigned to Cotswold.
- The drafting is inept, confusing, and occasionally plain wrong, but, through the mist of confusion, the outline of the parties' intentions is plain and cannot be avoided.
- In my judgment, the effect of the assignment is thus to divide the spoils of war between Cotswold and the Appellant. Such division of the spoils where a right to litigate is assigned is traditionally unenforceable as being champertous. But for the following reasons it is not to be so treated when the assignment is by a liquidator.
- I am grateful for Miss Tipples' reference to Lord Hoffman's speech in Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1, at p11:
"The law is traditionally hostile to the assignment of causes of action in return for a share of the proceeds. Such transactions were described as champerty (division of the field) and regarded as illegal and unenforceable. It is unnecessary to examine the reasons: judges said that it would encourage malicious suits, but treating such arrangements as criminal was also, before the introduction of legal aid, an effective way of preventing poor people from obtaining legal redress. The position of liquidators and trustees in bankruptcy is however quite different. The courts have recognised that they often have no assets with which to fund litigation and that in such case the only practical way in which they can turn a cause of action into money is to sell it, either for a fixed sum or a share of the proceeds, to someone who is willing to take proceedings in his own name. In this respect they are of course no different from many other people. But because trustees and liquidators act on behalf of creditors, the courts have for the past century construed their statutory powers as placing them in a privileged position".
- Miss Tipples also noted that a liquidator has a power to sell a cause of action (as she fairly and helpfully put the issue in her skeleton argument) because a liquidator has power, without sanction, to "sell any of the company's property by public auction or private contract, with power to transfer the whole of it to any person or to sell the same in parcels": section 165(3)[1] and 167(1)(b)[2] of the Insolvency Act 1986 ("the 1986 Act"); paragraph 6 of Part III of Schedule 4 to the 1986 Act. Property includes "money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property" (section 436 of the 1986 Act)."
- Accordingly, I conclude that there is no reason why the assignment should be treated as void or unenforceable.
Issue (ii): Should the tribunal exercise its discretion under Rule 13?
- Section 136 Law of Property Act provides that an absolute assignment in writing of a debt or other legal thing in action is effectual in law to pass to the assignee all legal and other remedies for the thing assigned. In this manner the law recognises the right of an assignee to bring an action to recover the debt: if the debt is disputed the assignee is not prevented from pressing the case and proving the debt because he is not the original creditor.
- Thus at first sight there appears no reason why a claim against the Crown for reimbursement of VAT should be incapable of assignment merely because the assignee will have to argue the assignor's case in order to prove his debt. But the right of appeal to the VAT tribunal is not a "remedy" for the right assigned. It is a statutory means of resolving a dispute.
- It does not seem to me that the effect of section 136 is to trump Rule 13 so as to remove the tribunal's discretion as to whether or not to substitute the assignee in the appeal.
- There is, I think, a difference between a cause of action and a statutory right of appeal.
- The right to receive the excess of input tax credits over output tax is given by section 25(2) VATA, which provides for the excess to be paid to the taxpayer by the Revenue and Customs. Section 25(4) permits a credit to be held over in accordance with regulations. Section 83(c) VATA 1994 provides for a right of appeal in respect of "the amount of input tax which may be credited to a person".
- If input VAT is due to be repaid the right to enforce its payment is not a right enforceable in this tribunal. The rights of appeal given by section 83 VATA do not extend that far. It must be recovered as a debt due from the Crown. But if the taxpayer brought an action in the courts for the payment of input VAT which was disputed by HMRC, then the courts would generally decline jurisdiction in relation to the dispute because the issues raised would be within the ambit of specific statutory appeal procedures (see Autologic Holdings plc v Inland Revenue Commissioner [2006]1AC 118,HL, . The taxpayer's resort would therefore, in the first instance, be to the tribunal; and would only be to the High Court if, following a final finding that the payment was due, HMRC failed to pay.
- In the case of an assignee of a debt due in respect of input VAT, the assignee has access to the tribunal only if that access is granted in the exercise of the tribunal's discretion. Thus if the tribunal were to refuse to permit the assignee to be joined or to be substituted, the assignee would have either to try to persuade the High Court to assume jurisdiction over the dispute, or to wait idly by until any appeal had been determined by the actions of the assignor - who might have no interest in the results of the claim.
- On the other hand, if the debt were, rather than a right against HMRC, a claim under a contract then the assignee could bring the action in his own name in the High Court and litigate the points of dispute arising under the contract. I see no reason in principal why there should be any difference between the position under an ordinary contract and in relation to a statutory right.
- The comparison between the two suggests to me that a tribunal should, in circumstances where there has been an assignment of a right to input tax repayment, act on a presumption in favour of exercising its discretion to permit the assignee to be a party. Of course an assignee could always stipulate that the assignor should conduct the litigation in accordance with the assignee's instructions and at the assignee's expense - so that the assignee would be the puppet master in the appeal. But in the absence of injustice to Revenue and Customs there seems to me to be no good reason why the tribunal should, by withholding consent to substitution, effectively force assignees to adopt that rather artificial course; the presumption should be the reverse.
- Furthermore, it seems to me that the exercise the tribunal's discretion in such a way as to deprive the Appellant of the benefit afforded to a liquidator who may not have the funds to prosecute an appeal by the Insolvency Act provisions referred to above should generally be avoided.
- Accordingly, in the case of an assignment by a liquidator, it seems to me that the tribunal's discretion to substitute an assignee should generally be exercised in the assignee's favour in the absence of circumstances such as abuse of process or serious difficulty or other injustice in the management of the appeal.
- The discretion given to the tribunal by Regulation 13 is to substitute another person for the original Appellant, not merely to join another person. That discretion is given by Rule 13 where the interest in the appeal has passed to another person.
- There is a difference between the position of an assignee of a right under which the interest in the right passes to the assignee, and that of a person who has an interest in the appeal for example by reason of an indemnity. Thus in Schwarczand others v Aeresta and Customs and Excise [1989] STC 2300, the Schwarczes had indemnified a company which was conducting an appeal - and therefore had an "interest" in the appeal. The Schwarczes had sought to be substituted or joined as party to the appeal. The application to be joined was refused inter alia because it would have been unjust if the Schwarczes became parties and put forward a line of argument which was wholly inconsistent with that which an Appellant would have put forward at the hearing of the appeal.
- By contrast in the case of an assignment under which the entire right to the relevant debt passes there is only one party who needs to conduct the action. The Assignee has the interest which is being litigated. Rather than joining parties whose potentially contradictory submissions could put the Revenue and Customs to additional expense, a substitution leaves the Reevenue and Customs facing just one opponent. The tribunal therefore has no reason to decline to exercise its discretion to substitute for the reasons which prompted the refusal in Schwarcz.
- What if the effect of substituting the applicant is that it would not longer have the information to prosecute the appeal? The onus of proof in the appeal is on the Appellant. If the substituted Appellant does not have the recourse to the evidence which the original Appellant would have, then it may be unsuccessful in the appeal. But that does not prejudice the Revenue and Customs.
- Substitution may in such circumstances and in a case where the Appellant retains a right to part of the proceeds prejudice the original Appellant. The Appellant should therefore be heard in relation to the substitution application. The Appellant was not represented at this hearing. For that reason, among others, the direction to be made must give her a chance to object to the substitution.
- Is there any injustice which would arise to the Revenue and Customs as a result of the substitution? If the appeal were wholly without merit or was malicious, Revenue and Customs might be put to additional cost and trouble to which they would not have been put had the substitution been denied and the Appellant left to prosecute the appeal.
- There has been no suggestion that this appeal malicious. Given the recent judgment of the ECJ in Optigen Ltd (C- 354/03) there is an issue of some substance to be determined.
- If the appeal is determined in the favour of Revenue and Customs and costs are awarded to the Respondents then is there any risk that the applicant may be unable to pay those costs which should be taken into account in determining whether it is unjust to effect the substitution? I heard nothing to suggest that the continuation of the appeal by Cotswold would put the respondents in special jeopardy: the legislature, by permitting a Liquidator to assign a right of action puts a defendant at risk of costs in circumstances in which had there been no assignment such costs would not have been incurred because the Liquidator did not have the funds to pursue the cause of action, provides a strong hint that only if there is some special jeopardy of loss should account be taken of that risk in deciding whether to exercise the discretion to substitute.
- In the case of the present assignment the company through its liquidator has retained an interest in 20% of the net proceeds. It might therefore be possible to say that not all the interest of the Appellant has passed to the Applicant as required by Rule 13. The effect of the Deed of Assignment however is in my judgment to pass all the interest of the Appellant in the appeal to Cotswold. That I believe is the intention of clause 1(i).
- Lastly the prosecution and determination of the appeal will not affect any right the Respondents may have to offset any input tax which may be repayable against any tax due to them: because any decision on the appeal merely determines the amount of such tax.
- I conclude that there are no reasons in this appeal which would displace the presumption that the discretion to substitute should be exercised in the applicant's favour.
The Letter of 7 April from Dass
- On the day of the application Dass, Solicitors, wrote to the tribunal enclosing a letter to Hassan Khan & Co (the Appellant's Solicitors) indicating they acted for Mrs Sharma as Liquidator of the Appellant. They indicated that they had heard of the application only that morning [(although the tribunal's file indicated that they had been given notice of the hearing)] and that their client had a substantial interest in the proceedings in that:
(i) "if the assignment were accepted their client was to be paid 20% of any sum received by Cotswold"; and
(ii) "if the assignment [was] not accepted then [their] client may wish to deal with the tribunal matter herself".
- They indicated that they thought that the hearing should be adjourned.
- I declined to adjourn the hearing. I took the view that I should hear the representations made by Cotswold and the Revenue and Customs but give Hassan Khan & Co and Mrs Sharma the right to object and to reinstate the application. Rule 26 of the Tribunal Rules permits the tribunal to hear an application in the absence of a party but for any direction to be set aside to be set aside on application by the party within 14 days of release of the direction. In the circumstances I will allow 21 days.
- Accordingly, it is DIRECTED that:
(1) a copy of this direction be sent to Dass Solicitors acting for Mrs Sharma;
(2) If within 21 days after the dispatch of this direction to Dass, Mrs Sharma, or Dass on behalf of Mrs Sharma, writes the tribunal centre objecting to these directions a date for a hearing should be set as soon as practicable to consider setting aside the direction below;
(3) If no such objection is received within 23 days after such dispatch, then on receipt by the tribunal of the written consent of Cotswold to its substitution in this appeal for Mrs Sharma, Cotswold be substituted in this appeal in place of Mrs Sharma; and
(4) that thereafter the Respondents and Cotswold should have liberty to apply for further directions relating to the conduct of the appeal.
CHARLES HELLIER
Chairman
Release Date: 27 November 2006
