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Her Majesty"s Revenue & Customs v Hashu Dhalomal Shahdadpuri And Another

Judgment Cited authorities 7 Cited in 3 Precedent Map Related
Vincent
Judgment Date16 November 2010
Year2010
Citation[2010] 5 HKLRD 690
Judgement NumberHCMP938/2010
Subject MatterMiscellaneous Proceedings
CourtHigh Court (Hong Kong)
HCMP938/2010 HER MAJESTY'S REVENUE & CUSTOMS v. HASHU DHALOMAL SHAHDADPURI AND ANOTHER

HCMP938/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.938 OF 2010

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IN THE MATTER OF Section 21M(1) of the High Court Ordinance, Cap. 4 of the Laws of the Hong Kong Special Administrative Region

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BETWEEN
HER MAJESTY’S REVENUE & CUSTOMS Applicant

and
HASHU DHALOMAL SHAHDADPURI 1st Respondent
DAYAL DHALOMAL SHAHDADPURI 2nd Respondent
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Before : Mr Recorder Jat, SC in Chambers (Open to Public)

Date of Hearing : 2 November 2010

Date of Handing Down Judgment : 16 November 2010

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J U D G M E N T

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Introduction

1. This is an application by the 1st respondent to strike out the Concurrent Originating Summons dated and issued on 18 May 2010 (“OS”).

2. The OS was issued pursuant to sections 21L and 21M of the High Court Ordinance, Cap. 4. Section 21L gives the court jurisdiction to grant an injunction in all cases in which it appears to the Court “to be just and convenient to do so”. Section 21M, in force since 2 April 2009, gives the court jurisdiction to grant interim injunctions in aid of substantive proceedings commenced outside Hong Kong even though the Hong Kong courts do not have jurisdiction over any substantive cause of action. The material part of section 21M provides as follows :

“(1) Without prejudice to section 21L(1), the Court of First Instance may by order … grant … interim relief in relation to proceedings which—

(a) have been or are to be commenced in a place outside Hong Kong; and

(b) are capable of giving rise to a judgment which may be enforced in Hong Kong under any Ordinance or at common law.

…

(3) Subsection (1) applies notwithstanding that—

(a) the subject matter of those proceedings would not, apart from this section, give rise to a cause of action over which the Court of First Instance would have jurisdiction; or

(b) … the interim relief sought is not ancillary or incidental to any proceedings in Hong Kong.”

3. In this case, the OS seeks an interim injunction in aid of proceedings commenced by the applicant (“HMRC”) on 17 May 2010 in the Royal Courts of Justice in England (“English Action”). On that day, HMRC obtained from the English High Court a worldwide Mareva injunction against (inter alios) the respondents to the extent of £40 million, on the basis that the respondents are said to have been parties to what may be described as “MTIC VAT fraud” or sometimes “carousel fraud”.

4. On 18 May 2010, Chu J granted an ex parte Mareva injunction (and ancillary orders for disclosure in aid of the injunction, etc., including an order for leave to issue the OS and service on the 1st respondent out of jurisdiction) against the respondents restraining them from removing from this jurisdiction or disposing of any of their assets in this jurisdiction up to the value of £40 million. The injunction was continued on 28 May 2010 and 17 June 2010. The 1st respondent seeks, upon striking out the OS, to discharge the injunction as well.

Background and assumed facts

5. The sole ground on which the 1st respondent relies in his application is that the OS “discloses no reasonable cause of action” : Order 18, rule 19(1)(a) Rules of the High Court, Cap. 4A.

6. It is not disputed that Order 18, rule 19(1)(a) applies to an originating summons, and that the facts relied on in support of the OS must be assumed to be true. In the present context, the facts must be those pleaded in the Amended Particulars of Claim filed in the English Action, and the affidavit evidence filed in support of the OS : Hong Kong Civil Procedure 2011, para. 18/19/3(4), p. 404; Re Caines [1978] 1 WLR 540.

7. In short, HMRC claims that the respondents were parties to conspiracies to defraud HMRC by way of MTIC frauds. The essence of such fraudulent schemes has been described in various judgments in the UK. The most frequently cited reference is probably the judgment of Blackburne J in Regalway Care Ltd v Shillingford [2005] EWHC 261 at §§3-7, which for ease of reference is cited here in full :

“MTIC fraud

3. To set the scene for what follows it is appropriate to say something about a particular species of VAT fraud. I begin with the relevant regulatory backdrop.

4. Under the rules concerned with the charging and collection of VAT, supplies of goods between registered traders in different member states of the European Union are zero-rated provided the seller in one member state obtains the VAT registration number of the customer in another member state and can show that the goods in question were removed from the seller's member state to the other member state. The result of those rules is that where an entity registered for VAT in the United Kingdom imports goods from another member state, it need not make any payment in respect of VAT to the vendor. In due course it will be obliged to account in the United Kingdom for output tax on its sales to customers in the United Kingdom. If the goods are purchased by an entity registered for VAT in the United Kingdom which the entity then sells abroad, that entity will not be entitled to charge output tax on the sale but, conversely, having incurred and paid input tax on its purchase of the goods (assuming the purchase was from somebody registered for VAT in the United Kingdom) will be entitled to recover that input tax from HM Commissioners of Customs and Excise (‘HMCE’ for short).

5. It is the opportunities for fraud provided by these rules that have given rise to the kinds of dishonest scheme summarised in the following passage of the judgment of Jacob L.J. in R (on the application of Federation of Technological Industries) v Customs & Excise Commissioners [2004] EWCA Civ.1020 (at paras 17-21):

‘17. The simplest form of abuse is what [HMCE] call ‘acquisition fraud’. A business in the UK acquires goods from an EU supplier VAT free and sells them on into the United Kingdom market directly or indirectly. When it sells these goods to its U.K. customers it charges VAT but it fails to account to [HMCE] for the VAT it collects. Before [HMCE] catch up with it the trader simply disappears.

18. This kind of abuse is somewhat limited in that the importer who intends to defraud is actually selling the goods into the United Kingdom market. He has to find real customers or his customers do.

19. Much more significant is the second type of abuse which [HMCE] call ‘carousel fraud’. Again, there is a UK importer buying from a supplier in another EU state. Again, he pays no VAT on his purchase. He then sells to a ‘customer’ in the U.K., charging VAT. That ‘customer’ sells on to another ‘customer’, himself charging VAT (output tax) and setting that against the tax he paid to his supplier (input tax). This may go through several traders (whom [HMCE] call ‘buffers’). The last buffer in the chain does not, however, sell on to ultimate UK customers. He sells back into the EU very often to the original seller. He will have paid input tax on his purchase. This he claims ‘back’ from [HMCE]. None of this would matter if the original importer, who has charged output tax to the first of the buffers, were around to account to [HMCE] for that tax. But by now he has disappeared.

20. So on each circuit of the ‘carousel’ 17.5% of the value of the goods is extracted from [HMCE]. The scheme requires high value, low physical size goods - a container full of mobile phones or computer chips is just right for this. A pallet-load arrives at Heathrow, the transactions all take place quickly (perhaps in the same day) and the pallet moves out again.

21. [HMCE] estimate ... that the annual cost to the UK in 2002-3 was between £1.65 and £2.64 billion. The problem is, whatever the precise figure, vast. It is not confined to the UK but is EU wide...’

One of the features of carousel fraud is that there is no need to find real end-customers for the goods in the United Kingdom. The overseas customer to whom the goods are exported may or may not be a genuine purchaser of them. It is because the goods may end up with the original supplier that the designation ‘carousel’ is used. Dishonest schemes of this nature have become known as missing trader intra-community fraud, or ‘MTIC fraud’ for short.

6. The value to those participating in MTIC fraud is the sharing of the VAT extracted from HMCE (effectively the amount of the output tax which the missing importer has charged to his purchaser but failed to pay to HMCE). It is only if the exporter fails to recover the input tax he has paid on his acquisition of the goods that the VAT position is neutral. Since the transactions - certainly those that the evidence before me has explored - can take place (or are said by the parties to them to have taken place) in the space of a single day (with completion of the transactions occurring over, at the most, a few days) and it may be some time before the importer defaults on his obligation to account for the output tax he has charged and been paid, it requires vigilance on the part of HMCE to realise, when a payment claim is made, that it is part of a carousel fraud.

7. It can happen that one or more of the ‘buffers’ is innocent of any involvement in the fraud: he just happens to have purchased the goods and sold them on. But if the goods end up with an exporter who is involved in the fraud (because, for example, it can be shown that he is the recipient of a commission or the like which has been paid to him by a purchaser/vendor higher up the chain or coincidence cannot satisfactorily account for the number of chains in which that exporter and the same importer are...

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