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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Bramston v Murphy & Anor [2009] EWHC 316 (Comm) (11 February 2009) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2009/316.html Cite as: [2009] STC 1390, [2009] EWHC 316 (Comm)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		11 February 2009

History and nature of the proceedings

1. This is an adjourned application for directions in an originating application made by the liquidator of DCC, formerly known as The Devon Cider Company Limited ((DCC(). Until 23 July 2007 DCC carried on the business of cider production and contract packing of liquids and beverages. It was a registered cider maker under the Cider and Perry Regulations, 1989 ((the CPR(), which deals with the control and taxation of the production of bottled and bulk cider.
2. In 2006 DCC encountered financial difficulties and its bank withdrew support by April 2007. DCC sought advice from Smith & Williamson ((SW(). No third party purchaser for the business having been found, SW advised a pre-packaged scheme under which DCC would go into administration and sell the business and assets to a new company owned by the directors of DCC with funding obtained by them.
3. In accordance with this plan DCC went into administration on 23 July 2007, with the First Respondents - two insolvency practitioners from Smith & Williamson - being appointed as joint administrators ((the administrators(). On the same day DCC, acting by the administrators, entered into an agreement for the sale of the business to a shelf company which then changed its name to The Devon Cider Company Limited ((Newco() and continued the business from the same premises. Newco(s application for registration under the CPR was signed on 18 July 2007, received by HMRC on 25 July 2007 and effected on 10 August 2007.
4. On 19 September 2007 DCC went into creditors... voluntary liquidation at the instance of HMRC, its only substantial creditor.
5. The originating application concerns excise duty payable in respect of a substantial quantity of bottled and bulk cider held by DCC at 23 July 2007. The share of the sale consideration attributed by the agreement to this stock was (375,000. The excise duty arising on the stock has been assessed by HMRC at (1,625,395.40, a figure with which the liquidator agrees. Though the precise figure may not be accepted by the administrators, it is not, as I understand, in dispute that it is very substantial and many times the (375,000 for which the cider was sold to Newco.


 


6. In essence, the originating application seeks to have determined what was the relevant excise duty point under the CPR and when it occurred.
7. At the time the application was issued on 29 May 2008, the battle lines were as follows. Relying on regulation 11(1)(ii) CPR, HMRC contended that the duty became payable when the stock was (sent out from the premises..., which it equated with the sale of stock to Newco. The liquidator concurred with this analysis. If correct, it would have made the liability for the duty an expense of the administration. The administrators disagreed, contending that the excise liability was triggered by DCC(s entry into administration, preceded the administration, and was therefore an unsecured claim. It is not suggested that this rival analysis had dictated the scheme advised by SW: indeed it appears that the question of duty had simply not been addressed. The contest between these two contentions was seen as affecting the proper conduct of the liquidation in a number of respects, including whether action should be brought against the administrators for negligence or breach of duty.
8. It was against this background that the liquidator issued his originating application. It sought the determination by the court as to whether the duty point was when (DCC entered into administration( or alternatively when (the Administrators sold the business (including the alcoholic stock)... and (therefore whether the duty is an expense of the administration and, if so, in what sum(.
9. Thereafter, however, the lines of battle changed. In a letter dated 12 August 2008, explaining the basis for its assessment of the same date against DCC in the sum of (1,625,395. 40, HMRC switched its reliance to regulation 13, which fixes as a duty point the time when (the business of making cider is discontinued at the cider premises having cider therein..., and confirmed this in its review decision by letter dated 6 November 2008. On this basis, though it is still contended that the duty became payable on 23 July 2007, this is now said to have occurred because DCC stopped making cider on that date.
10. The administrators effected an even more fundamental change of tack. Through their solicitors they argued in a letter of 22 October 2008 that (contrary to their previous position) the duty point was determined by regulation 11, but that the (sending out... did not occur until the stock was subsequently sold and dispatched to customers by Newco. On this basis DCC would never have incurred any liability, and the excise duty would be payable by Newco. The liquidator concurs with HMRC(s revised analysis. Though he has lodged an appeal against the assessment to the VAT and Duties Tribunal (now absorbed into the new tribunal structure), he has done so only to protect his position as against the administrators. That is reflected in the grounds of appeal dated 18 November 2008 which state that:


 


(It is disputed that the duty point arose during the period of Administration upon the transfer of the business of the Company. The former Administrators... Solicitors consider that it arose upon final sale by the successor company which purchased the business. This is the subject of an application for Directions by the Liquidator in the High Court....

11. Strangely, until I pointed it out at the end of the argument, no-one had apparently noticed that the relief claimed by the originating application no longer reflected the revised contentions of the parties. I gave permission for the liquidator to amend to rectify the position. Since the hearing, the application has been amended on 23 December 2008 to claim an order that the excise duty point (occurred during the administration of DCC... and that (if properly assessed, excise duty of (2,111,018. 89 would be payable as an expense of the administration, alternatively that an excise duty point did not occur during the course of the administration of DCC(. (I observe that the inclusion of a figure for the excise duty goes beyond the permission to amend which I granted, the more so since the figure specified is significantly higher than the assessment under appeal.)
12. The change in the nature of the arguments is of considerable significance. Originally, all parties proceeded on the basis that DCC had a liability for duty on the stock, though differing as to whether the duty point had occurred before or during the administration. Though the revised relief still seeks the determination of whether the duty point occurred (during the administration of DCC..., that is a matter of pure form. Given that the dispute is no longer one of the timing of DCC's accepted liability but whether DCC was ever liable, the originating application now effectively seeks a ruling as to whether or not the assessment is valid.
13. In addition, the impact of the dispute on the potential negligence claim by the liquidator against the administrators has become starker. If the liability to duty fell on Newco rather than DCC, the basis for any such claim would disappear.

The administrators... objection

14. The matter came before me not for determination of the point raised by the originating application but as an adjourned application for directions. The principal matter addressed was an objection by the administrators that it was not open to, or appropriate for, the court to adjudicate on this matter. For this purpose the administrators found on the principle that statute has created a separate route for the determination of tax liability which must be followed to the exclusion of litigation in the ordinary civil courts, relying in particular on the decision of the House of Lords in Vandervell Trustees v White, [1971] AC 912.
15. Why it should be in the interests of the administrators to raise this objection is not easy to understand. The dispute turns solely on the proper interpretation of regulations 11 to 13 of the CPR and the tribunal would be unlikely to be in any superior position to deal with the question as compared with a judge of the Chancery Division. Moreover, the administrators... stance might lead to them being deprived of any voice in the determination of this dispute. Though I was told that they would apply to the tribunal to be joined as a party, it is in my view far from certain that the tribunal would be prepared to accede to that request.
16. The obvious concern of the liquidator is that all three parties should bound by a single decision as to whether or not DCC has a liability for the excise duty. If liable, a sale for (375,000 duty paid would appear to have been at a massive undervalue and may expose the administrators to a claim for negligence or other breach of duty. Absent a single tripartite decision, it would be open to the defendants in any such action to argue that the liquidator had not properly prosecuted the appeal against the assessment or deployed arguments to maximum effect. Indeed, the liquidator has already indicated that he agrees with the assessment, and in practice, if the present proceedings continue, he would take a neutral stance and the effective contest would be between HMRC and the administrators.
17. HMRC has no objection to the present proceedings. As the administrators stress, however, if the court is deprived of jurisdiction, it cannot be conferred by consent.

Discussion

18. In Vandervell a question arose as to whether the trustees of a family settlement made by Mr Vandervell or the settlor were entitled to dividends received by the trustees on shares transferred to them. The Revenue assessed Mr Vandervell(s estate to surtax on those dividends on the alleged basis that he had not divested himself of the beneficial interest. His executors appealed that assessment and also began proceedings against the trustees for an order that the estate was entitled to the dividends. They later sought to join the Revenue as a party to those proceedings, to which the Revenue consented but the trustees objected.
19. It is to be noted that the action did not address the validity of the assessment as such: the executors simply sought payment by the trustees of the dividends which they had received, presumably in order to provide the funds with which to pay the surtax assessment if it was upheld on appeal. If, however, the trustees succeeded in their defence and the Revenue was joined as a party they would be unable to resist an assessment for the surtax: equally it would follow that the estate was not so liable.


 


20. All members of the House accepted, following substantial earlier authority, that whether a person was liable to tax could only be determined by an assessment and the validity and quantum of that assessment could only be challenged by an appeal to the commissioners. It was therefore not open to the parties even by consent to obtain a declaration from the court as to validity or quantum binding on the Revenue or the commissioners. In the view of Lord Diplock the same applied to questions of fact or law which underlay the determination of liability or quantum. Three of the Law Lords, Lords Reid, Dilhorne , and Wilberforce disagreed with this suggested extension of the exclusionary rule. There was in their view no jurisdictional obstacle to including the Revenue in an action which did not seek a ruling on tax liability, even if one of the issues was germane to that liability. As Lord Wilberforce pointed out, however, (at 939) in a passage of some relevance to the present case

(there may be questions, in form suitable for the decision of the court, which are in fact so close to the question of the assessment itself that the court ought not to entertain them but leave them to the statutory procedure....

The reason why those three Law Lords, in agreement with the fourth, rejected the joinder was quite different, namely that it was not, as required by the then Rules of the Supreme Court, necessary for the effectual and complete determination of the matters in dispute - a point which no longer arises in the light of subsequent amendment to those Ruler and reflected in the provisions of the CPR.

21. Commenting on Vandervell and earlier cases in Glaxo Group v Inland Revenue [1995] STC 1075 at 1083-1084 Robert Walker J sought to summarize the position as follows:

(It is not easy to discern any clear dividing-line between High Court proceedings which are, and those which are not, objectionable as attempts to circumvent the exclusive jurisdiction principle. Possibly the correct view is that there is an absolute exclusion of the High Court's jurisdiction only when the proceedings seek relief which is more or less co-extensive with adjudicating on an existing open assessment: but that the more closely the High Court proceedings approximate to that in their substantial effect, the more ready the High Court will be, as a matter of discretion, to decline jurisdiction....

22. Were a case similar to Vandervell to arise today it would therefore be a matter for the discretion of the court whether the proceedings should be permitted to continue: a recent example, though involving considerably more complex facts and issues, can be seen in the decision of Warren J in Stow v Stow (HC07C01249) dated 14/03/2008. The present case differs, however, from Vandervell in a particularly important way. In Vandervell the litigation concerned the effect of a private transaction, with the decision on that question affecting (and indeed being determinative of) the validity of the surtax assessment. The present case is the inverse: the litigation seeks (in all but form) the determination of whether or not DCC has a tax liability, in effect whether the tax assessment is valid, with a view to a civil claim against the administrators. To reprise the words of Robert Walker J, the relief sought in the present case (is more or less co-extensive with adjudicating on an existing open assessment.... It therefore falls squarely within the absolute exclusionary rule.

Consequences

23. It follows that the court cannot properly make a declaration in these proceedings binding upon HMRC, and the originating application should be stayed or dismissed as against HMRC
24. The position between the liquidator and the administrators is different. The issue raised by the originating application is one which lies at the heart of the potential negligence action and as between those two parties can realistically be regarded as in effect a preliminary issue in such an action. At some point, it will have to be determined. Even if that were to follow a dismissal of the tax appeal, the administrators could be expected to argue that this was due to a failure of the liquidator to prosecute or argue the appeal properly. That gives rise to the risk of divergent decisions.
25. This problem would not arise if the administrators were to succeed in an application to the tribunal to be joined as parties to the tax appeal, which would lead to their being bound by the result. As I observed earlier, however, such an order is far from certain.
26. An alternative would be for the liquidator to entrust the conduct of the appeal on behalf of DCC to the administrators against an undertaking to abide by the result. Given the present formulation of the grounds of appeal which I quoted earlier, it would appear a logical course. When I proposed it at the outset of the hearing in the hope of avoiding what appeared to me a sterile debate on jurisdiction, it met with no favour from the liquidator, but may in the light of this judgment receive a different reaction.
27. The risk of divergent decisions could also be avoided if both the tax appeal (as between the liquidator and HMRC) and the original application (as between the liquidator and the administrators) decided by the same individual sitting as a tribunal judge and in the Chancery Division. The new tribunal structure created by the Tribunal Courts and Enforcement Act, 2007, and which takes effect for tax and duty cases from April 2009 and will, I was told, apply to this tax appeal, appears to facilitate this possibility.
28. In these circumstances, subject to any submissions when this judgment is handed down, I am minded to adjourn the remainder of this application for directions to permit the parties to consider further this aspect of the matter and, if so advised, to make whatever applications to the tribunal and the Chancery Division may be necessary or appropriate. Depending on the outcome, further directions may prove unnecessary, but there would of course be liberty to restore.