South Africa’s Tax Authorities v Dave King – Now In the High Court in London

I was looking, at the inadvertent prompting of Iain, one of the Rangers supporting commenters on the blog, at the history of Rangers rights and share issues.

I was diverted, as I often am. This time it was by a mention in the Murray International publicity about the £53 million share issue in Rangers Football Club plc in 2000 as follows:-

“Of the £32.3 million, the Murray Group is investing £9.3 million with new investment of approximately £20 million from Ben Nevis Holdings, a company associated with Dave King, a successful Scottish businessman based in South Africa.”

I have written about Mr King and his tax issues with the South African authorities before.

However a recently reported case from the Court of Chancery in England is of interest, both to tax practitioners, but also to those with an historical interest in the “fit and proper” person test in Scottish football.

The case of Revenue and Customs & Anor v Ben Nevis (Holdings) Ltd & Ors [2012] EWHC 1807 (Ch) was decided on 20 July 2012. The decision can be found here.

The case sheds an interesting light on some of Mr King’s dealings and history, and we see the vigorous defence being put up by his lawyers, no part of which is that he does not owe the money!

The Opinion details the allegations against Mr King in detail, and the remarkable fact that, as mentioned above, he invested £20 million in Rangers at a time a tax bill eleven times that size was being run up. If it was an effort at concealing funds, as I am sure it was not, then it failed – firstly because it was done in plain view and secondly because the £20 million of shares are worthless.

However, at no time did the raft of allegations against Mr King affect his position as a director of Rangers Football Club plc, nor indeed his status as a fit and proper person to be a company director.

Be warned – there is a lot of technical tax, jurisdiction and procedure stuff to follow, and the bits about Mr King are near the top.

Introduction

His Honour Judge Pelling QC describes the case in his introduction as follows:-

“HMRC is the competent authority within the UK for the collection and management of tax revenue. SARS is the competent authority for the collection and management of tax revenue within the Republic of South Africa (“RSA”). The First Defendant (“Ben Nevis”) is a company incorporated in accordance with the laws of the British Virgin Islands (“BVI”). Its corporate director is incorporated in accordance with the laws of Guernsey. Its sole registered shareholder is the Third Defendant (“HSBCT”), also a company incorporated in accordance with the laws of Guernsey. HSBCT holds the shares as trustee for the Glencoe Investments Trust (“GIT”), an offshore discretionary trust established in accordance with the laws of Guernsey for a class of beneficiaries that include Mr David King (a UK Citizen but a long time resident in RSA), his wife and children. Although disputed by the Defendants, the Claimants’ case is that although Mr King is theoretically merely one of a class of beneficiaries of GIT, in practice he controls the structure to which I have so far referred. The issue has not been argued before me and I make no findings concerning it.”

I pause to comment on the irony of a case about a former Rangers director involving alleged misuse of offshore discretionary trusts. It also shows that Mr Whyte was not the first businessman with interests in the BVI to walk through the famous doors at Ibrox.

“Ben Nevis is liable to SARS for taxes for the 1998, 1999 and 2000 years of assessment in the total sum (inclusive of various penalties and interest) of Rand 2.6 billion (approximately £222 million) following the final determination of a tax appeal in October 2010. On 4^th March 2011, judgment was entered against it in proceedings in RSA for these sums.”

So, in March 2000 when Ben Nevis Holdings was investing £20 million in Rangers, it had run up tax bills for that and the two preceding years of £222 million! So Mr Whyte was not the first person to consider withholding tax to invest in his favourite football team either!

“The Claimants’ case is that Mr King learned that SARS was investigating Ben Nevis’s tax affairs and that as a result he procured the transfer of Ben Nevis’s assets to the Second Defendant (“MTL”). MTL is also a company incorporated in accordance with the laws of the BVI, its corporate director is incorporated in accordance with the laws of Guernsey and its sole registered shareholder is HSBCT who holds the shares on trust as trustee of GIT. SARS became aware that as a result of these activities a fund of approximately £7.8 million had been credited to a bank account with a London bank in the name of MTL (“the Bank Deposit”).”

So, the allegation goes, Mr King decided to put some of his company’s assets beyond the taxman by shifting them from one BVI company to another.

The History of These Proceedings

“These proceedings were commenced on 22^nd February 2012 and consist of two claims. The first (“the Tax Recovery Claim”) is a claim by HMRC against Ben Nevis for the sum that Ben Nevis has been held to owe SARS in taxes penalties and interest and is purportedly brought pursuant to the mutual assistance provisions contained in Article 25A of a Double Tax Convention (“DTC”) entered into between the UK and the RSA (“the 2002 Convention”), which became part of English law by the Double Taxation Relief (Taxes on Income) (South Africa) Order 2002, as amended by the Double Taxation Relief and International Tax Enforcement (South Africa) Order 2011 which gave effect to a protocol entered into by the Governments of the RSA and the UK in 2010 by which various amendments to the 2002 Convention were agreed (“the 2010 Protocol”). The second claim (“the IA Claim”) is a claim by both Claimants against all the Defendants brought pursuant to, and seeking relief under, Section 423 of the Insolvency Act 1986 (“IA”). The purpose of the IA claim is to enable the Bank Deposit to become available in partial satisfaction of any judgment obtained in the Tax Recovery Claim.”

HMRC therefore is seeking to get the money, or some of it anyway, owed to SARS paid to it, for onward transmission to South Africa under the Convention.

“On 22^nd February 2012, the Claimants sought and obtained a freezing order against all the Defendants. The purpose of this order was to preserve the Bank Deposit until after resolution of these proceedings.

“This is the hearing of applications by the Defendants to (a) set aside the Order made by Mann J on 22^nd February 2012 by which he gave the Claimants permission to serve the Claim Form in these proceedings on the Defendants out of the jurisdiction; and (b) for an Order dismissing the Claim (together “the Jurisdiction Challenge”); alternatively (c) to discharge the Freezing Order (“the Freezing Order Challenge”).”

Criminal Proceedings against Mr King

The Judge then touches upon ongoing criminal proceedings against Mr King in South Africa, saying:-

“In 2005, Mr King was charged with criminal offences involving alleged tax evasion and breaches of exchange control regulations in relation to the activities that gave rise to the charges to tax that are the subject of the Tax Recovery Claim (“the 2005 Charges”). In May 2010, Mr King was charged with further offences concerning alleged fraudulent market abuse (“the 2010 Charges”). The current expectation is that the 2010 Charges will be tried before the 2005 Charges in early 2013.

“Following the charging of Mr King with the 2005 Charges, an application was made in the Crown Court at Southwark for a restraint order pursuant to the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005. His Honour Judge Wadsworth QC granted that order (“the Restraint Order”) on 31^st May 2006. It is common ground that the Restraint Order applied to and prevented further dealing with the Bank Deposit.

“As a result of the delays in the RSA to the progress of the criminal proceedings, an application was made to the Crown Court for the discharge of the Restraint Order. That application was itself the subject of a series of somewhat startling delays. The discharge application was issued in November 2009. It was heard initially on 26-27 May 2010 when it was adjourned part heard and resumed on the 20-22 February 2012. On 22^nd February 2012 (the date when the Claimants applied for and were granted the Freezing Order), it was again adjourned part heard and has been relisted to resume on 4^th February 2013 – in excess of 3 years following the making of the discharge application.

“These events are said to be material only to the application to discharge the Freezing Order because it is submitted on behalf of the Defendants that the continued existence of the Restraint Order meant that there was no real risk of dissipation of the Bank Deposit, which is the only asset against which the Freezing Order was and is effective.”

To summarise, Mr King faces criminal charges of tax evasion and breach of currency controls and separately of fraudulent market abuse. These proceedings have been running for some time and are unresolved. Mr King maintains his innocence.

In connection with the evasion charges a Restraint Order was granted against Mr King and his assets in the UK in 2006. He applied to release it in 2009. That application has still to be determined. The Restraint Order now only affects the same asset subject to the Freezing Order in this case, namely the Bank Deposit.

The Defences Advanced

The Judge described the issues as follows:-

“The Defendants maintain that the Tax Recovery Claim is unsustainable and misconceived because on its true construction Article 25A of the 2002 Convention does not apply to the enforcement in the UK of RSA taxes arising in any year of assessment prior to the coming into effect of the 2002 Convention by operation of Article 27 of the 2002 Convention, or if it does, then because the amendment took effect by operation of Section 173 of the Finance Act 2006 (“FA 06”) it is ultra vires and void to the extent that it purports to have any effect earlier than the date of commencement of that Act. If neither of these points is correct, then it is submitted that the effect contended for is incompatible with Ben Nevis’s rights under Article 1 of the First Protocol of the European Convention on Human Rights (“A1P1”). It is submitted therefore that there is no serious issue to be tried and that the permission to serve out granted by Mann J should be set aside and the Tax Recovery Claim dismissed. It is common ground that if this is the outcome then the IA Claim cannot be pursued and so must also be dismissed, and in consequence the Freezing Order will cease to have effect.”

Argument 1 therefore is that taxes alleged to be due prior to the Convention coming into force in 2002 are not recoverable under the Convention but even if the Convention allows that, it is ultra vires if sought to be applied before ht e coming into effect of s173 of the 2006 Finance Act. If neither of those works, then the rights of Ben Nevis under the European Convention on Human Rights are breached. (Yes, I know Ben Nevis is a BVI company based in South Africa and alleged to be involved in evading South African taxes, but the ECHR gives it rights in the UK.)

He goes on to say:-

“Even if all that is not correct, the Defendants maintain that in any event:

a. SARS has no locus to bring or continue these proceedings and thus the claim as brought by it should be dismissed; and/or

b. HSBCT is not properly joined as a Defendant because it is merely the registered shareholder of Ben Nevis and MTL and thus neither Claimant has any cause of action against it

c. Leave to serve the IA Claim should not have been granted and/or ought to be set aside on the grounds that:

i. There is no sufficient connection with this jurisdiction to justify the making of the Order; and/or

ii. The forum conveniens for such a claim is Guernsey not England

d. The Freezing Order ought to be discharged on the grounds that:

i. There is not and never was any real risk of dissipation because the Bank Deposit comes within the scope of the Restraint Order made by the Crown Court; and/or

ii. The Order was obtained from Mann J as a result of material non-disclosure both as to (1) the likelihood of the Restraint Order being discharged by the Crown Court and (2) the Defendant’s likely defences to the Tax Recovery Claim; and/or

iii. The Claimants ought to have given notice to the Defendants of the making of the application.”

Does the Law Permit Recovery of Taxes Due Before the Convention Was Entered Into?

After narration of the Convention and of the relevant legislation, the Judge refers to one of my favourite treaties from my Public International Law studies, the Vienna Convention on the Law of Treaties.

“SECTION 2. APPLICATION OF TREATIES

Article 28

Non-retroactivity of treaties

Unless a different intention appears from the treaty or is otherwise established, its provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the date of the entry into force of the treaty with respect to that party.

…

SECTION 3. INTERPRETATION OF TREATIES

Article 31

General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;

(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

3. There shall be taken into account, together with the context:

(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;

(c) any relevant rules of international law applicable in the relations between the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended.

Article 32

Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable”

However recourse to that argument by HMRC failed as the UK has ratified the Convention, but RSA has not.

He goes on to detail the applicable principles as follows:-

“In my judgment the applicable principles are those identified by Mummery J, as he then was, in IRC v. Commerzbank AG [1990] STC 285. … The applicable principles were summarised by Mummery J at pages 297H-298H in the following terms:

“(1) It is necessary to look first for a clear meaning of the words used in the relevant article of the convention, bearing in mind that consideration of the purpose of an enactment is always a legitimate part of the process of interpretation’: per Lord Wilberforce (at 272) and Lord Scarman (at 294). A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at 285) and Lord Scarman (at 290). A literal interpretation may be obviously inconsistent with the purposes of the particular article or of the treaty as a whole. If the provisions of a particular article are ambiguous, it may be possible to resolve that ambiguity by giving a purposive construction to the convention looking at it as a whole by reference to its language as set out in the relevant United Kingdom legislative instrument: per Lord Diplock (at 279).

(2) The process of interpretation should take account of the fact that—

‘The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament which deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited, [1987] AC 141 at 152, “unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation’: per Lord Diplock (at 281–282) and Lord Scarman (at 293).’

(3) Among those principles is the general principle of international law, now embodied in article 31(1) of the Vienna Convention on the Law of Treaties, that ‘a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. A similar principle is expressed in slightly different terms in McNair’s The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is ‘the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances’. It is also stated in that work (p 366) that references to the primary necessity of giving effect to ‘the plain terms’ of a treaty or construing words according to their ‘general and ordinary meaning’ or their ‘natural signification’ are to be a starting point or prima facie guide and ‘cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them’.

(4) If the adoption of this approach to the article leaves the meaning of the relevant provision unclear or ambiguous or leads to a result which is manifestly absurd or unreasonable recourse may be had to ‘supplementary means of interpretation’ including travaux préparatoires: per Lord Diplock (at 282) referring to article 32 of the Vienna Convention, which came into force after the conclusion of this double taxation convention, but codified an already existing principle of public international law. See also Lord Fraser (at 287) and Lord Scarman (at 294).

(5) Subsequent commentaries on a convention or treaty have persuasive value only, depending on the cogency of their reasoning. Similarly, decisions of foreign courts on the interpretation of a convention or treaty text depend for their authority on the reputation and status of the court in question: per Lord Diplock (at 283–284) and per Lord Scarman (at 295).

(6) Aids to the interpretation of a treaty such as travaux préparatoires, international case law and the writings of jurists are not a substitute for study of the terms of the convention. Their use is discretionary, not mandatory, depending, for example, on the relevance of such material and the weight to be attached to it: per Lord Scarman (at 294).”

“Both parties have developed elaborate detailed submissions by reference to a significant amount of supplementary material, but it is necessary to be clear as to the circumstances in which it is appropriate to resort to such material. The first stage will always be to look for a clear meaning of the words used in the relevant article of the convention, bearing in mind the purpose of the provisions to be construed as a legitimate part of the process. It is only if that approach leaves the meaning of the relevant provision unclear or ambiguous or leads to an outcome that is absurd or obviously unreasonable that consideration of secondary material becomes necessary or permissible. The only exception to this approach may be in relation to the OECD Model (on which Article 25A is based) and the Commentary thereon. The importance of this material as a source has been recognised in cases decided by the appellate courts after IRC v. Commerzbank AG (ante), which explains why there is not mention of it in Mummery J’s judgment in that case.”

He refers to the Defendants’ argument as follows:-

“The Defendants’ case is in essence a simple one. Article 25A has been inserted into the 2002 Convention by amendment. It follows, it is submitted, that it can only take effect in accordance with Article 27 of the 2002 Convention. Article 27 provides that the 2002 Convention has effect only upon the completion “…of the procedures required … for the bringing into force of this Convention …“. It is common ground that the 2002 Convention came into force on 17^th December 2002. It is submitted therefore that the 2002 Convention is capable of applying only to taxes imposed by the RSA only for taxable years on and after 1^st January 2003. It is submitted that since the Tax Recovery Claim is in respect of taxes assessed in years prior to that it follows that the mutual assistance provisions contained in Article 25A can be of no application and thus the attempt to recover the taxes owed by Ben Nevis to the RSA tax authorities violates the Revenue Rule.”

He rejects this argument, and the interpretation urged on him by the Defendants saying:-

“Paragraph 2 of the 2011 Order states in terms that one of the purposes of the 2010 Protocol was “… for the purpose of assisting international tax enforcement …”. This expression of purpose does not suggest any logical or policy reason for imposing, or an intention to impose, a temporal limitation on the scope of Article 25A of the sort contended for by the Defendants – that is that the Article has retrospective effect but not to tax years arising earlier than the coming into effect of the 2002 Convention. … The Defendants accept that as a matter of construction Article 25A has retrospective effect at least to the extent provided for by Article 27 but subject to their second, ultra vires, case. The Defendants have not asserted, and the evidence does not establish, any policy or other reason for distinguishing between revenue claims by the RSA for years of account before the coming into effect of the 2002 Convention. This suggests a probable intention that the only relevant qualification to the applicability of Article 25A should be that concerning bars to collectability imposed by the laws of the assessing state.

The effect of Article 27 is not in any event as the Defendants contend. … It does not provide that it will have effect in the UK from the date when the Convention enters into force in accordance with its terms. The effect of Article 27(1)(b) is that the Convention is to have effect in the UK in respect of income tax, corporation tax and capital gains tax (that is the taxes of that type levied in the UK) for any year of assessment after the tax year beginning on the 6^th April in the year that follows the entry into force of the Convention. Thus if Article 27 has effect in relation to Article 25A then Article 25A would be of no effect at all since the only force given to the 2002 Convention in relation to the UK is in respect of the identified UK taxes referred to in Article 27(1)(b). Even if that difficulty could be avoided, the effect of Article 27 on Article 25A would be that it would take effect in the UK by reference to the date on which UK, not RSA tax years commence. This is illogical since if there is anything at all in the complaint that mutual assistance for tax years prior to those identified by Article 27 is objectionable it could only be by reference to the position of Ben Nevis as a tax payer in the RSA not by reference to the position it would have been in had it been (hypothetically) a UK tax payer. Indeed it is the illogicality of this position that explains why collectability is defined by reference to limitation in the assessing state – see Article 25A(3) – rather than the collecting state – see Article 25A(5).

None of the textual points I have so far considered creates any difficulty as long as Article 27 is confined in its effect to the provisions within the 2002 Convention as originally drafted (including to the information sharing provisions contained in the original 2002 Convention both because of the nature of that provision and because the earlier Conventions contained information sharing provisions). However it makes no obvious sense when applied to a mutual assistance provision that has been agreed for the first time and is being inserted into an earlier convention by amendment. These points suggest that to construe Article 25A as having effect subject to Article 27 of the 2002 Convention is a construction that gives rise to obvious absurdity or is manifestly unreasonable as well as defeating at least in part the purpose for which Article 25A was agreed in the first place.

In my judgment the true intention of the parties is apparent from Article VI of the 2010 Protocol, a provision which the Defendants’ submission as to the true construction of Article 25A in effect ignores. … The Article provides that the Protocol shall have effect from the date when the last of the two contracting states notifies the other of the completion of the processes required for bringing the Protocol into effect.

In my judgment therefore the true effect of Article 25A … is that once the 2010 Protocol entered into force, Article 25A thereupon applied to all revenue claims as defined subject only to the qualifications referred to within Article 25A itself and subject to the proviso that the request for assistance was made on or after the date when the 2010 Protocol entered into force. Such an approach is consistent with and gives full effect to the purpose of Article 25A – that is mutual bilateral cross frontier tax enforcement – and is consistent with, and gives full effect to, the whole of the 2010 Protocol and in particular Article VI and all the provisions within Article 25A itself. To regard Article 25A as qualified by Article 27 of the 2002 Convention would at least in part defeat the purpose for which Article 25A was agreed between the contracting states because it would exclude at least some revenue claims that would otherwise be included and would do so for no discernible rational or logical reason. That the 1968 Convention was not amended so as to insert Article 25A into that Convention as well is in my judgment entirely consistent with the intention of the parties being as I have described. In those circumstances I conclude that the Defendants’ primary case concerning the effect of Article 25A is to be rejected.”

Is This Unlawful Retrospective Legislation?

He then discusses the question of retrospective legislation saying:-

“I turn next to the Defendants’ alternative submission that Article 25A is to be construed as applying in the UK only in respect of tax debts arising on or after 19^th July 2006 (being the date when FA 06 came into force) and/or the Order in Council by which effect was given to the 2010 Protocol is ultra vires in so far as it purports to apply to earlier tax debts. The premise on which the Defendants’ submission depends is that Article 25A offends against the presumption against restrospectivity unless it is so construed. Thus it is necessary that I attempt to identify the scope and effect of the presumption.

It is common ground that absent express wording to the contrary, it is to be presumed that, a statute was not intended by the legislature to have retrospective effect or, where it would appear that some retrospective effect was intended, that such effect was intended to be limited to the minimum necessary to achieve the relevant legislative purpose. However, there are limits to the scope of that presumption. As Mr. Francis Bennion put it in Bennion on Statutory Interpretation (5^th Ed) p.317:

“It is important to grasp the true nature of objectionable retrospectivity, which is that the legal effect of an act or omission is retroactively altered by a later change in the law. However, the mere fact that a change is operative with regard to past events does not mean that it is objectively retrospective. Changes relating to the past are objectionable only if they alter the legal nature of a past act or omission in itself. A change in the law is not objectionable merely because it takes note that a past event has happened and bases new legal consequences upon it. “

or as Dickson J put in when giving the majority opinion in the Supreme Court of Canada in Gustavson Drilling (1964) Ltd v. Minister of National Revenue [1977] 1 SCR 271 at 282: “… No one has a vested right to the continuance of the law as it stood in the past …”. As Mr Stephen Richards (as he then was) held in R v. Southwark LBC ex parte Bediako (1997) 30 HLR 22 when rejecting the contention that applicants for housing assistance under Part III of the Housing Act 1985 were entitled to have their pending applications determined by reference to those provisions rather than Part VII of the Housing Act 1996 which replaced Part III of the 1985 Act between the date when they applied for assistance and the date of decision by the local authorities: “The fact that [Section 9(2)] bites on existing applications does not make it retrospective in effect. It bites on those applications only in so far as future stages of the process are concerned …”. This clear distinction is apparent from the formulation adopted by Willes J in Phillips v. Eyre (1870) LR 6 QB 1 at 23, the authority relied on by the Defendants in Paragraph 64 of their written submissions, for he identified the true principle as being that “…legislation … ought not to change the character of past transactions carried on upon the faith of the then existing law …”

Against that background I turn to the Defendants’ secondary case, which I reject for the following reasons. As I have explained already the Revenue Rule precludes the enforcement in England of taxes assessed by a foreign tax authority. Thus as long as that rule applies, persons in the position of Ben Nevis are entitled to resist any attempt by a foreign tax authority such as SARS to collect tax from it in England. However, an entitlement to resist collection as long as that rule applies does not give rise to an expectation that in relation to such liabilities the law that presently precludes collection in England will never be changed. If the rule is changed then as Mr Richards might have put it, it bites only as to the future enforcement of the existing debt. The fact that the debt was incurred prior to the change in the law is immaterial so long as the taxpayer cannot under the laws of the assessing state prevent its collection. The presumption against retrospectivity would preclude the rearrangement of tax liabilities for prior years of assessment (which is no doubt the, or a, reason why Article 27 is formulated in the terms it was and included in the original of the 2002 Convention) but I see no reason for concluding that it precludes the collection in the future of debts that happen to have fallen due prior to the coming into effect of FA 06. Such a conclusion does not in any relevant sense involve changing ” … the character of past transactions carried on upon the faith of the then existing law …” or the retrospective alteration of the legal effect of an act or omission by a later change in the law.”

So the restrospectivity argument fails too – not looking good for Mr King!

Human Rights Implications

He then addresses the Defendants’ case Concerning the Impact of A1P1 which provides that:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of the state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

The Defendants submit that if Article 25A has the effect for which the Claimants contend and is not ultra vires then it is nonetheless to be treated as retrospective for the purposes of A1P1 and is not to be permitted to have effect because it fails to strike a fair balance between the rights of Ben Nevis and the general interest of the community – see James v. UK (1986) 8 EHRR 123, MA v. Finland (2003) 37 EHRR 210 and R(HMRC) v. Huitson [2010] EWHC 97 (Admin) [2011] QB 174 per Kenneth Parker J at Paragraph 75(ii) and (v). I do not accept that Article 25A has retrospective effect in any objectionable sense and thus I do not accept the premise on which this submission is advanced. This is the fundamental distinction between Huitson and this case. That case was concerned with the effect of Section 58 of the Finance Act 2008 which amended previous fiscal legislation with retrospective effect so as to impose on the claimant in that case an obligation to pay UK Income tax on trust income received since 2001. It was not concerned with mutual assistance between states in the collection of tax due in those states. Once it is accepted as I accept that there is no objectionable retrospective element that arises, there is not a tenable basis for challenging the enforceability of Article 25A, by reference to A1P1 particularly when it is remembered that the state enjoys a wide margin of appreciation in framing and implementing policies in the area of taxation.”

So, in a similar vein, states have power to pass legislation which affects past events and a wide “margin of appreciation” in doing so. Therefore this fails to count as a change so objectionable as to render it a breach of Ben Nevis’ rights.

He then turned to jurisdictional issues, as follows:-

Jurisdictional Issues

The Defendants’ case in relation to the IA Claim is that permission to serve the claim form on the Defendants out of the jurisdiction should be set aside and that part of the claim dismissed because:-

(a) SARS has no standing to bring the claim for the purpose of recovering either directly or indirectly taxes owed under the laws of RSA;

(b) there is no supportable basis for bringing the claim against HSBCT because its sole role is as registered shareholder of Ben Nevis and MTL;

(c) because in any event there is no sufficient connection with this jurisdiction to justify the Court granting relief to HMRC under IA s.423 and

(d) Guernsey is an available forum that is clearly and distinctly more suitable for determining any alleged transaction avoidance claims as between MTL and Ben Nevis. It is to be presumed for the purposes of this application that the Claimants will be able to demonstrate ultimately their factual case concerning the transfer of assets including the Bank Deposit from Ben Nevis to MTL at an under value within the meaning of IA s.423(1).

SARS and Standing

Dealing with part 1 he says:-

“The suggestion that there is no longer any public policy objection that would preclude SARS from taking action under IA s.423 is misplaced. The Revenue Rule was and is one of the widest scope. It is not suggested that the statement of the rule by McNair J in Rossano (ante) is inaccurate or too wide. As he put it, the well settled principle was that: “… the English court will not recognise or enforce directly or indirectly a foreign revenue law or claim …”. The policy consideration that underpins the Revenue Rule (or one of them at any rate) is that identified by Lord Keith in Government of India v. Taylor (ante) at page 511 namely that “… an assertion of sovereign authority by one state within the territory of another … is (treaty or convention apart) contrary to all concepts of independent sovereignties“. In my judgment it is precisely this consideration which led to the formulation of mutual assistance provisions in the terms that have been adopted in Article 25A. Mutual assistance is provided within each convention State by the relevant organs of the collecting State. Had the convention States intended to proceed as the Claimants submit then there would have been no point whatsoever in drafting Article 25A(3) in the terms that have been adopted. Collection by the competent authority of the collecting state is not a permissive provision. It is the sole basis on which a departure from the Revenue Rule is permitted. The only basis on which SARS would be entitled to rely on IA S.423 as against MTL is if it could persuade a court that it was a “victim” in relation to the transfer to MTL by Ben Nevis of the Bank Deposit – see IA s.424(1)(c). A “victim” is defined for these purposes by IA S.423(5) as being “ … a person who is or is capable of being prejudiced by …” the transaction at an under value – that is in this case the transfer of the Bank Deposit from Ben Nevis to MTL. The only factual basis on which SARS is able to suggest that it has been prejudiced by the transaction is to the extent that it (or HMRC on its behalf) is thereby unable to collect in part the tax due from Ben Nevis in RSA.”

“I conclude that SARS has no arguable basis for maintaining the IA claim it has brought against any of the Defendants and therefore permission to serve the proceedings out of the jurisdiction granted to SARS must be set aside. I will hear further argument as to whether on that basis the claim by SARS should be dismissed or merely stayed.”

So SARS cannot seek to recover taxes due to it, allegedly, in a UK court process, and the decision leaves the case by SARS to be either dismissed or, at best, frozen.

No Valid Claim v HSBCT

Re part 2 he says:-

“As I have explained at the outset of this judgment, the only basis on which HSBCT has any connection with this litigation is because it is the registered shareholder of Ben Nevis and MTL, in each case as trustee for GIT. It is right to say that in the body of the Particulars of Claim there are pleaded a number of allegations made against a predecessor of HSBCT which amount to an allegation that its employees conspired with Mr King to transfer away Ben Nevis’s assets for the purpose of defeating SARS’s claims. It is alleged by the Claimants that HSBCT is liable for the acts and omissions of its predecessor as a matter of Guernsey law. These proceedings however relate only to the Bank Deposit, no substantive relief is sought by the Claimants against HSBCT in relation to the transfer of the Bank Deposit, and no other claims of a substantive nature have been made against HSBCT.

All the various reasons that are advanced as a basis for maintaining these proceedings as against HSBCT are in my judgment unsustainable. First the fact that HSBCT is the trustee of GIT is neither here nor there. No claim has been brought against GIT nor have the Claimants identified any tenable claim against GIT. These proceedings are or should be concerned exclusively with a claim by HMRC as competent authority against Ben Nevis to recover tax due from that company to SARS as the competent authority for the assessment and collection of tax in RSA. Allied to that HMRC plead an entitlement to maintain a claim against MTL under IA s.423. HSBCT is not a necessary or proper party to either claim whether as registered shareholder or as trustee of GIT.

The remaining two reasons advanced at the hearing before me as justifying the commencement and continuation of these proceedings against HSBCT were (a) because such is necessary in order to ensure that the orders made against Ben Nevis and /or MTL will be effective and (b) because HSBCT may have documentation regarding the purpose or circumstances surrounding the transfer of the Bank Deposit from Ben Nevis to MTL. Neither of these bases can even arguably give rise to an entitlement to join HSBCT as a defendant to these proceedings as they are presently structured. As to the first of these points, it is to be noted that none of the Defendants has any presence within England and Wales. The sole connection with England and Wales is the presence of the Bank Deposit that is held at a bank in London.

“I conclude that HMRC has failed to demonstrate that it has an arguable basis for seeking permission to serve these proceedings out of the jurisdiction on HSBCT.

So as HSBCT has a role only as shareholder and no other connection to the UK means that it ought not to be party to these proceedings.

Insufficient Connection with England

As for part 3:-

The Defendants submit that there is no sufficient territorial connection between the claim under IA s.423 and England to justify the continuation of this claim. It is submitted that the only appropriate jurisdiction in which any such claim ought to be brought is in Guernsey largely I think because that is the geographical location of the corporate directors of Ben Nevis and MTL and the location of its corporate registered shareholder.

There is no doubt that the jurisdiction under IA s.423 is extra territorial in its scope – see Jyske Bank (Gibraltar) Ltd. V. Spjeldnaes [2000] BCC 16, where Evans Lombe J directed the transfer of land in Ireland from one Irish registered company to another. To similar effect is the decision of Tomlinson J (as he then was) in Dornoch Limited v. Westminster International BV [2009] CLC 226 where the transaction that was set aside was the transfer of a ship out of the jurisdiction between two companies each of which was incorporated in a foreign jurisdiction. In deciding that case Tomlinson J said of the jurisdiction:

“I fully recognise the special need for care when exercising an extra territorial discretionary power – see Banco Nacional de Cuba v. Cosmos [2000] BCC 910. In the context of winding up, the subject matter of that case, one is concerned not just with the connection with this jurisdiction of the company which it is sought to wind up, but also with the connection of potential beneficiaries – see per Knox J in Re Real Estate Development Co … what one is concerned to find is a sufficient connection to justify the court setting in motion procedures over a body which prima facie is beyond the limits of territoriality – see again per Knox J …

In re Paramount [1993] Ch 223, 239-240 Sir Donald Nicholls V-C said that the court will need to be satisfied that, in respect of the relief sought against him, the defendant is sufficiently connected with England for it to be just and proper to make the order against him despite the foreign element. He went on, at 240, to discuss how that connection might be shown:

” … in considering whether there is a sufficient connection with this country the court will look at all the circumstances, including the residence and place of business of the defendant, his connection with the insolvent, the nature and purpose of the transaction being impugned, the nature and locality of the property in question, whether the defendant acted in good faith, and whether under any relevant foreign law, the Defendant acquired an unimpeachable title free from any claims even if the insolvent had been adjudged bankrupt or wound up locally. The importance to be attached to these factors will vary from case to case. By taking into account and weighing these and any other relevant circumstances, the court will ensure that it does not seek to exercise oppressively or unreasonably the very wide jurisdiction conferred by the section.” “

The Defendants place significant reliance on the judgment of Lightman J in Re Banco Nacional de Cuba [2001] 1 WLR 2039. However, it is important to bear in mind the point made by Sir Donald Nicholls V-C in the extract from his judgment in Paramount set out above: each case is likely to be highly fact sensitive and thus the task in each case will be to consider all the relevant factors in the context of the particular case being considered. That case was concerned with the sale, allegedly at an undervalue, of shares held by the first defendant in a subsidiary bank incorporated in the UK. The vendor of the shares sought a declaration that the court would not grant permission for the service of proceedings under IA s.423 on that party out of the jurisdiction. The declaration was granted but expressly on the basis that there was no evidence that the transaction impugned was for the purpose of prejudicing the position of existing or future claimants in relation to their claims and because in any event any judgment would be fruitless since it would not be enforceable in the UK by operation of s.14 of the State Immunity Act 1978. Thus the conclusion that the only appropriate forum was Cuba so that permission would have been refused even if a triable issue could have been demonstrated was obiter. In relation to this last point, Lightman J noted that the only connection with the UK was the presence in the UK of the shares being shares in a UK company only because the share register was in the UK – see Judgment, Paragraph 14. In paragraph 41, Lightman J described this connection as being “… tenuous and … fortuitous …“. The point that exercised the Judge in that case was that what was being sought on the facts of that case was the exercise of the s.423 jurisdiction in respect of a state entity that was formally a central bank and in relation to Cuba’s sovereign debt which he described as being “… invasive of the sovereign affairs of Cuba …“. In such circumstances, it is hardly surprising that the Judge considered there to be no sufficient connection to justify permission to serve out being granted. It is noteworthy however that the Judge acknowledged that the relevant test to be applied was the fact sensitive sufficient connection test identified in Paramount.

In my judgment on the facts of this case as they are presently known there is a sufficient connection with the English jurisdiction to justify granting permission for the service out of the s.423 proceedings in this case. First, a clear connection has been established between Ben Nevis and MTL. Secondly, the evidence establishes a strong prima facie case that (a) the transfer of the Bank Deposit was for no consideration and (b) the conditions set out in IA s423(3) will be made out. Thirdly, the fund that is or represents the proceeds of the impugned transaction is present in the form of a debt owed by a London based bank to MTL. Fourthly there is undoubted jurisdiction enabling HMRC to pursue Ben Nevis for the taxes, penalties and interest that are due from it to SARS. All this establishes a sufficient connection with this jurisdiction to establish a serious issue to be tried.

Forum Non Conveniens

Finally it is necessary for the Claimants to establish that England is clearly the most appropriate forum in which to bring the claim – see Spiliada Maritime Corp v. Cansulex Limited [1987] AC 460. On this issue the Defendants submit that Guernsey is both an available and the most appropriate forum. That assertion is largely based on the factors that I have identified above – that is that although Ben Nevis and MTL are incorporated in accordance with the laws of the BVI, the corporate director of each is a Guernsey registered company that is managed from Guernsey and the registered shareholder is likewise registered and managed from Guernsey. The Claimants assert that this is unreal because SARS through HMRC have an undoubted right to enforce Ben Nevis’s tax liabilities through the English courts pursuant to Article 25A of the 2002 Convention as amended that is not challenged on forum conveniens grounds. It is submitted that in such circumstances it is unreal to assert that enforcement procedures available in England in relation to assets located here should be ignored in favour of Guernsey, particularly as there is no cause of action available to the Claimants or either Claimant against MTL in Guernsey. The Defendants now at least implicitly acknowledge this last point. Although Guernsey law recognises a customary law action by which transfers in fraud of creditors can be set aside – as to which see the unreported decision of the Royal Court of Guernsey in Flightlease Holdings Guernsey Limited v. International Lease Finance Corporation – any attempt by either Claimant in these proceedings to rely on that cause of action in the circumstances of this case would fall foul of the Revenue Rule as applied by the Courts of Guernsey.

In my judgment this last point is in the circumstances of this case sufficient to tip the balance in favour of England. This is so either on the basis that because of this factor the courts of Guernsey are not available for the trial of a claim between the Claimants or either Claimant and MTL or on the alternative basis that the Court will refuse a stay notwithstanding the availability of the courts of another jurisdiction where the interests of justice require it. Whilst Lord Goff recognised in Spiliada (ante) that the existence of a legitimate personal or juridical advantage could not be decisive – see his Opinion at 475G and 482B – 484E – there are limits to that point. Lord Goff regarded such issues as ones that ought not to deter the court from staying English proceedings in favour of an otherwise more convenient jurisdiction but that was so only “ … provided that the court was satisfied that substantial justice will be done in the available appropriate forum” (482F). As he explained by reference to a distinction between conscious choice of a forum with a generous limitation period the issue is one of practical justice.

The ingenious argument of the Defendants, namely that the case should be had on Guernsey, where it would fail, was rejected by the Judge. The presence of the money in London was the only hook justifying the English courts being involved at all, but it was a big enough hook to catch this case and keep it there.

 

Lifting the Freezing Order

The Defendants argued that the Order should be lifted on three grounds:-

i) There is no real risk of dissipation of assets because the Bank Deposit is and will for the foreseeable future continue to be the subject of the Restraint Order made by the Crown Court – see further paras. 8-10 above;

ii) The Claimants failed to give any or any adequate explanation to Mann J as to the legal basis for the Tax Recovery Claim and in consequence there was a material non-disclosure in relation to the Defendants’ likely defences to that claim; and/or

iii) Mann J was misled and/or there was material non-disclosure by the Claimants as to the likelihood of the Restraint Order being discharged.

He deals with these in short order (comparatively).

The Restraint Order?

The Restraint Order is not in the control of HMRC or SARS. Therefore it could be lifted, as indeed the defendants have applied to do. The different nature of the Orders means that they are not duplicates, nor does the existence of one avoid the need for the other.

Non-Disclosure of the Defence

As regards ii:-

I accept that there is a heavy duty of utmost good faith that rests on the shoulders of any party applying for injunctive relief of any sort without notice to the respondent to the application. That is a principle that has applied for very many years and is one by which the court guards against the grant of orders that might turn out to be unlawful or exorbitant in their scope or effect or which otherwise ought not to be granted or not granted until after a full hearing can be arranged. However, there are limits to the scope of this obligation. In relation to defences, there is a duty to disclose defences that are known to the applicant to be relied on or which can reasonably be anticipated to be relied on but bearing in mind the test (at any rate for the grant of a freezing order) that has to be satisfied in relation to the underlying claim namely that the applicant has a good arguable case as to the substance of its claim.

The defences to the Tax Recovery Claim are those that I have considered at some length above. In my judgment there is no substance to them for the reasons identified. However that conclusion does not lead to the conclusion that those defences should not have been identified to Mann J at the without notice hearing if they were known to the Claimants, or ought reasonably to have been known to them as likely to be relied on by Ben Nevis. It is clear that in fact the defences were not disclosed in terms to Mann J – see para. 111 of the Claimants’ skeleton submissions for this hearing. The fact that the materials from which the possible existence of such a defence might be identified are disclosed is not a sufficient compliance with the duty to which I have referred if otherwise it could reasonably be anticipated that the Defendants would rely on those defences. In the circumstances of this case I am not satisfied that the Claimants could reasonably be expected to anticipate the defences that in fact have been relied on, and in any event I am entirely satisfied that had the defences relied on been disclosed it would have made no difference to the outcome of the hearing before Mann J. Mann J would have been bound to conclude that HMRC had demonstrated at least a good arguable case as to the substance of its case on the Tax Recovery Claim. Had I concluded that the Claimants had failed in their duty, I would not have discharged the Freezing Order in any event, applying the principles identified above. There is no evidence that supports the suggestion of a deliberate failure to disclose the points relied on by the Defendants. To discharge the Freezing Order would be manifestly disproportionate in the circumstances, particularly having regard to the likely impact of the matters relied on by the Defendants on the application before Mann J.”

So whilst in seeking a court order in advance of the other party being told about the case there is a duty to tell the judge likely defences, that did not extend as far as the one the Defendants employed here and which in any event the Judge rejected.

Non-Disclosure of Likelihood of Restraint Order being lifted

He rejected argument iii as well:-

In those circumstances, even if the Judge had been supplied with the information that it is said he should have been supplied with, I do not consider it would have made any material difference to the outcome of the application before him since there remained a risk that if notice was given that might enable the Defendants to take steps that would defeat the purpose of applying for the Freezing Order.

Conclusion

The case continues over the fate of the millions sitting in the London bank.

Posted by Paul McConville