Case No:  2010 Folio 754
Neutral Citation Number:  [2010] EWHC 2848 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date:  11 November 2010

Before :

The Hon Mrs Justice Gloster, DBE
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Between:

	DRACHS INVESTMENT No. 3 LIMITED	Claimant/
Applicant	
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	BRIGHTSEA UK LIMITED	Defendant/
Respondent	

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Miss Catherine Otton-Goulder QC
(instructed by Taylor Wessing LLP) for the Claimant/Applicant
Mr. Michael Green QC (instructed by Olswang LLP) for the Defendant/Respondent

Hearing dates:  1st, 2 & 5th July 2010
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Judgment
The Hon Mrs Justice Gloster DBE:
Introduction
1.	These are short reasons for the mandatory order which I made on 5 July 2010 requiring the Defendant/Respondent Brightsea UK Ltd (“the Respondent”) to procure that certain of its named affiliates should pay any sums received from Her Majesty’s Revenue and Customs (“HMRC”) in the total amount of, but not more than, £473,865 into a designated client account of the Respondent’s solicitors, Olswang LLP, in the name of the Respondent.  On that date I also, inter alia, ordered that the Respondent was prohibited from procuring or permitting the withdrawal or any dealing with such sum pending further order, and that the Respondent was to procure that in respect of any Relevant Period (as defined in a tax deed dated 5 September 2007) none of the companies listed in Schedule 1 to that deed, which are companies in the same group of companies as the Respondent, should make any further claim for the surrender of any tax losses or amend any existing claim for the surrender of any tax losses which are the subject matter of the action.  I also ordered that there should be a speedy trial.
2.	These reasons were distributed to the parties in draft on 7 September 2010, and subsequently handed down formally on 11 November 2010.  In the intervening period there had been correspondence and submissions about procedural matters.
Background facts
3.	By a Sale and Purchase Agreement dated 2 August 2007 (“the SPA”), the Claimant, Drachs Investment No.3 Ltd (“the Applicant”) and Equity Trust (Jersey) Ltd, acting as trustee of the Hermie Trust, (“the Sellers”) sold, and the Respondent bought, all the issued share capital of Drachs Investments Ltd and Drachs Investments No. 2 Ltd, and consequently acquired ownership of their respective subsidiary companies (together referred to as “the Acquired Companies”).  White Rose (Leeds) Ltd was also a party to the agreement in its capacity as guarantor.  The four companies were also party to a tax deed dated 5 September 2007 (“the Tax Deed”) which was envisaged in the SPA and contained certain covenants and guarantees relating to tax matters.  Under the SPA, the parties agreed to determine the price for the sale and purchase of the Acquired Companies by reference to the net asset value (“NAV”) of the Acquired Companies;  the NAV was calculated by reference to a consolidated balance sheet, as defined in the SPA, of the Acquired Companies which was drawn up to 13 August 2007.  The consolidated balance sheet included, inter alia, a provision for tax liabilities of the Acquired Companies to that date.
4.	The present dispute concerns the construction of the Tax Deed.  
5.	After completion of the SPA, HMRC made enquiries into the tax returns of some of the Acquired Companies for the accounting periods prior to completion.  As a result of those enquiries, HMRC agreed that the final actual assessed corporation tax liability for the Acquired Companies was lower, by some £473,865, than had been provided for in the consolidated balance sheet prepared in accordance with the SPA.  In principle, therefore, a repayment of tax was due from HMRC to certain of the Acquired Companies.
6.	Under the terms of the Tax Deed, the Applicant was entitled to select a firm of accountants which the Respondent was obliged to procure the Acquired Companies to appoint as their authorised taxation agents having sole conduct of all taxation matters defined as the “Covenantors’ Conduct Matters”.  These were defined as:
“the preparation and submission of all notices, claims, returns and computations, the preparation and submission of all correspondence relating to such notices, claims, returns and computations and the negotiation and agreement of all such notices, claims, returns and computations for a Relevant Period”.
A “Relevant Period” was any period prior to completion on 5 September 2007 in respect of which an Acquired Company was required to make a return or a payment to a taxation authority.
7.	The Applicant nominated Deloitte LLP (“Deloittes”) as the authorised taxation agent in respect of the Relevant Periods.  Deloittes determined that, in the light of the re-calculation of the tax liabilities, it would be possible to amend certain surrenders of losses that had been taken into account in the corporation tax computations of the Acquired Companies and for certain of these losses to be surrendered to companies retained by the Applicant, without (it is asserted) causing any economic detriment to the Acquired Companies or the Respondent, pursuant to the group relief provisions contained in section 402 and other sections of the Income and Corporation Taxes Act 1988 (“the Act”) and in relevant regulations.  There is no dispute between the parties that this would be possible as a matter of law, notwithstanding that the relevant companies are no longer members of the same group.  Rather, the dispute centres on whether, on the correct interpretation of the Tax Deed, the Respondent is obliged to procure what are now subsidiaries of the same ultimate parent in the Respondent’s group of companies to make a claim for group relief by surrendering their reassessed tax losses to companies within the Applicant’s group.  
8.	The Respondent appointed F & C REIT Asset Management (“REIT”) as its taxation agents in relation to subsequent, and what were defined as “straddle”, accounting periods.
9.	By letter dated 23 June 2009 from Deloittes to REIT, Deloittes requested REIT to sign an amended group relief claim on behalf of an Acquired Company, Mulgate Investments Ltd, and revised surrender of loss forms on behalf of a further Acquired Company, Brightsea EOL Ltd (“the Surrendering Company”), which, if signed, would have resulted in a repayment of tax by HMRC to one of the Applicant’s subsidiaries, Astra House Ltd (“the Claiming Company”), in relation to the accounting year ended 31 March 2006.  Although there was some communication between Deloittes and REIT, the relevant forms and consents were not provided.
10.	In a further letter dated 14 January 2010, following a re-calculation by Deloittes of the tax losses in the Surrendering Company in an amount of £1,593,561, Deloittes referred to the fact that, since the date of their earlier letter, they had been in communication with an employee of REIT in order to get the revised group relief documentation agreed and signed, but noted that, despite the elapsed period of six months, REIT had not been able to agree to sign the relevant group relief documentation or provide details of any disagreements with the figures in the documents.  Deloittes again requested REIT to arrange for the group relief documentation attached to the letter, in the revised amounts, to be signed and sent back to Deloittes by return.  If signed, the surrendered tax losses would have given rise to a repayment of tax for the Claiming Company in the sum of £473,865.  Once again neither REIT nor the Surrendering Company provided the consents sought or signed the relevant forms.
11.	No explanation was provided for their failure to do so, nor was any indication given that the Surrendering Company was refusing to do so, until 17 May 2010, when, during the course of a telephone conversation, REIT informed Deloittes that the Surrendering Company would not give the consent sought, nor would they sign the group relief forms.  REIT indicated that the Respondent and its affiliates had been advised that they were not obliged to do so under the terms of the SPA.  
12.	As a result, Deloittes wrote to HMRC on 4 June 2010 informing them of the position and requesting HMRC not, until further notice, to issue any repayments of corporation tax to any of the Respondent group companies.  By letter before action dated 7 June 2010, the Applicant’s solicitors, sought an undertaking pending resolution of the dispute that the Respondent would not seek to recover any over provided tax from HMRC, and that such undertaking should be provided to HMRC.  In their response dated 11 June 2010, the Respondent’s solicitors, Olswang, denied that the claim had any merit or foundation, did not mention the undertakings sought, and stated the Respondent’s intention of seeking repayment of the overpaid tax owed to the relevant companies in the Respondent’s group.  In a further letter dated 16 June 2010, Taylor Wessing sought an alternative undertaking namely that, if the Respondent were to seek the refund, and if HMRC were to make such a refund, the Respondent would pay it into a joint escrow account.  In addition, Taylor Wessing expressed their concern about the credit-worthiness of the Respondent, and in particular its apparent inability to service its £100 million debenture without shareholders’ support.  In Olswang’s reply dated 21 June 2010 no mention was made of the undertakings sought;  Olswang objected to the Applicant communicating with HMRC about the dispute and informed Taylor Wessing that the debenture had been repaid.  In a letter dated 25 June 2010, Olswang confirmed that three of the Acquired Companies within the Respondent’s group of companies (Mulgate Ltd, White Rose Property Investments Ltd and White Rose Development Enterprises Ltd), had indeed written to HMRC on 21 June 2010 seeking repayment of amounts of overpaid taxes.
13.	At the time of the hearing before me no repayment had been made by HMRC.  
The evidence in relation to the parties’ financial position
14.	The latest audited accounts (to 31 March 2009) of the Applicant, and of the group of companies in respect of which it is the ultimate holding company, show, on a consolidated basis, that the group has net assets of approximately £273 million and made a profit of over £2 million in the preceding 12 months.  No suggestion was made on behalf of the Respondent that the Applicant was not in a position to pay damages under its cross-undertaking, were an injunction to be granted and the Respondent were to succeed at trial.
15.	The most recent audited accounts of the Respondent, also for the year ended 31 March 2009, which were actually signed off on 9 June 2010, show a loss for the year of approximately £29 million and a deficit on shareholders funds of £46,288 million.  On a consolidated group basis, the figures in the financial statements show a profit for the year of £22.4 million, and shareholders funds of £14.8 million.  However, the accounts are heavily qualified by the independent auditors BDO LLP.  The group’s principal activity is stated to be property investment in the UK together with the management of its properties.  The Respondent itself is stated to be the holding company of the group.  The auditors’ qualification reads as follows:
“Qualified opinion arising from limitation in audit scope and disagreement about accounting treatment of debenture premium and investment properties 
As explained in note 1, the amortisation of the debenture premium has been accelerated and fully recognised as at 31 March 2009 rather than amortised over the remaining term of the debenture instrument as required by Financial Reporting Standard 4 (Capital Instruments).  Accordingly, creditors (due after more than one year) should be increased by £24,946,000 and profit for the year and profit and loss reserve should be reduced by £24,946,000.  
As explained in note 1, investment properties have been included in the financial statements at 31 March 2009 based on the 31 March 2008 valuation rather than year end open market value as required by Statement of Standard Accounting Practice 19 ‘Accounting for Investment Properties’.  We are unable to quantify the effect, if any, on reserves, tangible fixed assets and profit for the year resulting from this non-compliance with accounting standards.” 
16.	The qualification also referred to the fact that, in relation to the auditors’ work in relation to the debenture stock, they had not obtained all the information and explanations that they considered necessary for the purposes of the audit and were unable to determine whether proper accounting records had been maintained.
17.	A note in the Directors’ Report read as follows:
“… owing to the state of the property market, there was a substantial fall in the property values, which has not been reflected in the financial statements.  Owing to the uncertainties in the property market the directors are not able to provide an accurate valuation of the property portfolio as at the year end.  As at 31 March 2008 the group’s cash forecast indicated that it had insufficient cash resources, without financial support from its ultimate parent company.  This financial support continued until April 2010 by way of continuous cash loans.  In April 2010 the group was restructured and disposed of a substantial part of its portfolio.  The borrowing facilities were refinanced and as a result, whilst the group remains dependent on the continued financial support of its intermediate and ultimate parent companies it anticipates having sufficient cash resources to continue its current operations for the foreseeable future.  Based on this, the directors have concluded that it is appropriate to prepare the group’s financial statements on a going concern basis.”
18.	The report also contains references to the risks inherent in the current property market.
19.	Despite a request from the Bench, no later management accounts showing the current financial position of the Respondent (or at least the position as at 30 March 2010) were produced by the Respondent in evidence.  On the available evidence, therefore, I concluded that there was a serious risk that the Respondent might not be in a position to meet any claim for damages, were the Applicant to win at trial.  On its own (heavily qualified) balance sheet, it is insolvent.  Although the consolidated figures are apparently more healthy, as described above, the accounts are heavily qualified, the value of the Group’s property portfolio is questionable in current market conditions and no up to date figures are available.  The fact that, when the accounts were signed off in June 2010 on a going concern basis, the directors felt able to do so, on the basis of the expectation of continued support from the Respondent’s intermediate and ultimate parent, does little to inspire confidence, in the absence of any up to date information about those entities, or any obligation on their part to provide support.
The Applicant’s submissions
20.	Miss Otton-Goulder QC submitted that, in the circumstances, the court should:
i)	grant a mandatory injunction requiring the Respondent to procure the relevant Acquired Companies forthwith to sign and submit to HMRC appropriately amended forms claiming group relief (as per the forms already submitted by Deloittes), and to surrender the relevant tax losses totalling £1,593,561 to the Claiming Company;  
ii)	grant a mandatory injunction requiring the Respondent, in the event that any of the relevant Acquired Companies received any repayment of tax from HMRC, pursuant to the claims made in the letter dated 21 June 2010, to procure such subsidiaries to pay a sum not exceeding £473,865 into a joint escrow account in the joint names of the Applicant’s and the Respondent’s respective solicitors.
21.	In summary, she submitted that the Applicant had a good arguable case sufficient to support both injunctions and that, applying American Cyanamid principles, mandatory orders in such terms should be made.  She submitted that the Applicant was not making any proprietary claim to that money, nor would the orders sought confer any security over such sums in its favour.  The test was not that for a freezing order;  the relief sought was merely to ensure that the claim for specific performance requiring signature of the amended group relief forms was not rendered nugatory.  But, she said, even if the test were that for a freezing order, the Applicant surmounted the requirements of showing risk of dissipation.
The Respondent’s submissions
22.	In the course of the hearing, Mr. Michael Green QC, leading counsel for the Respondent, accepted that there was a sufficiently good arguable case on the merits of the construction of the Tax Deed, to support the Applicant’s claim for an injunction, such that it was not necessary for me to consider, for the purposes of this application, the parties’ respective arguments in relation to the substantive merits of the claim.  Accordingly, at the request of both counsel, I did not do so, despite the fact that both counsel’s original skeleton arguments contained lengthy argument addressing the construction of the Tax Deed.  
23.	However, Mr. Green submitted that in reality the application was one for a freezing order and that the Applicant had not satisfied the requirements of showing on the evidence that there was a real risk of dissipation, other than in the ordinary course of business.  He submitted that the order sought in relation to the escrow account was in effect an illegitimate attempt on the part of the Applicant to secure its claim for damages;  and that, although he accepted that there were serious issues to be tried as to the construction of the Tax Deed, nonetheless the merits of the Applicant’s claim were weak and did not justify a mandatory interim order requiring the Respondent, forthwith and prior to trial, to procure the Acquired Companies to submit the amended group relief claims to HMRC.  Any such order would in effect be equivalent to the Applicant’s obtaining the relief which it sought at trial and could give rise, if it turned out at trial that the Respondent was correct, to difficulties and problems with HMRC so far as the Respondent and its group of companies were concerned.
24.	He further submitted that the Applicant had no claim as against any of the relevant Acquired Companies which might be in receipt of any repayment from HMRC and that no claim for damages was made as against the Respondent.  In such circumstances, the Applicant’s application was misconceived and should be dismissed.
Disposition
25.	My reasons for making my order on 5 July 2010 in the terms summarised at paragraph 1 above, and declining to make the mandatory order sought by the Applicant that the Respondent do procure the relevant Acquired Companies forthwith to sign and submit to HMRC amended group relief forms and to surrender the relevant tax losses to the Claiming Company (“the proposed first mandatory order”), may be shortly stated as follows.
26.	I consider that, on the evidence referred to above, there is real uncertainty as to whether the Respondent itself would be in a position to pay any damages if the Applicant succeeded at trial and the Respondent were held to be in breach of its obligations under the Tax Deed.  As Mr. Green himself pointed out, any repayment from HMRC will be made to one of the Acquired Companies, not to the Respondent, so it will not have the funds available to do so.  One cannot necessarily assume that a parent company, upon whom the Respondent is apparently dependent for finance, would voluntarily provide funding for such a purpose.  It is also questionable whether damages are in any event an adequate remedy for the Applicant, in circumstances where these might be difficult to quantify since the actual financial loss will be suffered by the Claiming Company (i.e.  the subsidiary, or co-subsidiary which has not had the tax losses surrendered to it).  Again, as Mr. Green pointed out, the Applicant has no claim as against the relevant Acquired Companies in receipt of any repayment.
27.	On the other hand, although the Applicant is in a position to pay any damages, damages might well not be an adequate remedy for the Respondent, if the first mandatory order were granted at this stage, and the Respondent were ultimately to succeed at trial.  This is because, if losses were surrendered and amended claim forms for group relief submitted to HMRC at this interim stage, but the Respondent were to succeed at trial, the tax position might subsequently turn out to be irreversible and HMRC might well not be prepared to accept a further, third, amendment to the group relief claim.  A damages payment, to the Respondent, would not necessarily provide full compensation for losses suffered by the relevant Acquired Companies, and even Miss Otton-Goulder’s suggested indemnity provisions would not necessarily meet the problem and would doubtless give rise to expensive, and perhaps difficult, issues of quantification.  Moreover, I was informed by Mr. Green that there is at least a risk that the Respondent’s relations with HMRC might be damaged, which might give rise to another unquantifiable head of potential prejudice.  
28.	Accordingly, so far as the proposed first mandatory order was concerned, I did not consider that damages would be an adequate remedy for either party.  In turning to consider the issue of the balance of convenience, I bore in mind the principles to be applied in the context of a proposed mandatory order as set out by Chadwick J.  in Nottingham Building Society v Euro Dynamics Systems[1993] FSR 468;  see also page 2801 of Volume 2 of the White Book 2010.  I took the view that requiring the Respondent to procure the relevant Acquired Companies to take positive steps as at this interlocutory stage, carried a greater risk of injustice, if any such order turned out to have been wrongly made, than an order which merely prohibited action, thereby preserving the status quo.  Nor, given my limited review of the merits of the respective construction arguments, was I able to feel “a high degree of assurance” that the Applicant would be able to establish its rights at trial.  Accordingly I declined to make the proposed first mandatory order.
29.	So far as the relief sought by the Applicant that the Court should order the Respondent to procure the relevant Acquired Companies to pay a sum not exceeding £473,865 into a joint escrow account in the joint names of the Applicant’s and the Respondent’s respective solicitors, I considered that, in relation to this head of relief, damages would be an adequate remedy so far as the Respondent and the relevant Acquired Companies are concerned.
30.	However, if, under the terms of the order which in fact I made, the relevant Acquired Companies in the Respondent’s group, or the Respondent, are deprived of the use of any sums repaid by HMRC pending trial, that loss is something that is more easily capable of quantification.  If the loss is greater than the cost of borrowing, pending trial, an equivalent sum to the amount held in the account (e.g.  loss of business transaction or opportunity), that is something that can be much more easily determined.  Accordingly, I take the view that the Respondent and the relevant Acquired Companies can be adequately compensated in damages in respect of an injunction requiring the Respondent to procure that any repayment is held in its solicitors’ client account pending trial, in the event that the Respondent succeeds at trial.
31.	However, I should make it clear that it was always my intention that the undertaking in damages in Schedule B to my order dated 5 July 2010 should extend to any loss suffered by any one or more of Mulgate Ltd, White Rose Property Investments Ltd and White Rose Development Enterprises Ltd (the relevant Acquired Companies which have made repayment claims and whom the Respondent would be procuring to deposit any sums repaid), and not merely to the Respondent.  If necessary, my order should be clarified under the slip rule to reflect that point as I notice that, although the word “Respondents” is used in the plural, those companies are not specifically mentioned.
32.	I saw no need for the money to be paid into a joint deposit account in the names of both solicitors.  The injunction restraining the Respondent from disposing of, or dealing with, the money pending trial provides sufficient protection.
33.	In my judgment, the interests of justice do require that such an order is made.  In reality, the injunction is a prohibitive one, preventing disposal of any repayment from HMRC pending trial.  Although the Applicant is not making any proprietary claim, in order to protect its asserted right to the benefit of the relevant tax losses, the Applicant (if its case is correct) is entitled to say that, if the Respondent had complied with its contractual obligations under the Tax Deed, that particular pot of money would have been paid to the Claiming Company.  That is similar in nature to a proprietary claim.  In my judgment, in circumstances where the Applicant has no claim against the prospective recipient Acquired Companies, it is appropriate for a mandatory order to be made against the other contractual party, namely the Respondent, requiring it to procure those companies to preserve any repayment pending trial.
34.	I tend to agree with Miss Otton-Goulder’s submission that the injunction sought is not a freezing order in character.  But even if this view were wrong, I am satisfied that the evidence shows that the Respondent and its affiliates have acted in such a way that demonstrates a sufficient risk of dissipation.  The history shows that, notwithstanding the fact that Deloittes, in correspondence, were pressing REIT over a lengthy period of time for the relevant Acquired Companies to sign the amended group relief claim forms and surrenders, a claim to HMRC was nonetheless made, apparently by REIT, for repayment, with only ten days prior notice being given to Deloittes, or the Applicants’ solicitors, of the intention to do so.  In the context of the ongoing discussions between the parties, including the requests for undertakings, and on the basis of what may be the limited evidence before me on this interlocutory application, I regard that as somewhat surprising.  Moreover it was perfectly clear from the material before me that recipient companies of any prospective repayment were intending to use any repayment in circumstances where the Respondent was asserting that they had no liability to repay anything to the Applicant, even if the Applicant succeeded at trial.
35.	I also considered that it was appropriate that the ring should be held by requiring the Respondent to procure that no further claim for the surrender of tax losses or amended group relief should be made pending trial.
36.	In the above circumstances, I considered that the interests of justice would best be served by making my order dated 5 July 2010.