A purposive approach to the rule against foreign revenue enforcement International Corporate Rescue 2010, 7(2), 137-139 Joseph Curl The rule against foreign revenue enforcement The principle that the courts of one country will not enforce the revenue laws of another is of long standing. Dicey, Morris & Collins on The Conflict of Laws observes that it is a well established and almost universally applied principle. 1 Tomlin J regarded the principle as being one of considerable antiquity as long ago as 1928: "there is a well recognised rule, which has been enforced for at least 200 years or thereabouts, under which these courts will not collect the taxes of foreign states for the benefit of the sovereigns of those foreign states." 2 Most of the reported cases over the years have had an insolvency context. Lord Keith of Avonholm gave perhaps the best known articulation of the principle in his speech in Government of India, Ministry of Finance (Revenue Division) v Taylor. 3 In that case, the Indian government proceeded against an English company s liquidators for unpaid Indian capital gains tax. A proof had been lodged by the Indian government but it had been rejected by the English liquidator. The liquidator argued that the company s assets could not be used to settle a foreign revenue debt. Lord Keith agreed with the liquidator, holding that: enforcement of a claim for taxes is but an extension of sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties. 4 Both direct and indirect enforcement are prohibited. Dicey, Morris & Collins states that: "[d]irect enforcement occurs where a foreign State or its nominee seeks to obtain money or property, or other relief, in reliance on the foreign rule in question. But indirect enforcement is also prohibited, for a foreign State cannot be allowed to do indirectly what it cannot do directly. Indirect enforcement is, however, easier to 1 L Collins (ed.), Dicey, Morris & Collins on The Conflict of Laws (14 th edn Sweet & Maxwell, London, 2006), para.5-020, p.101. 2 Re Visser [1928] Ch 877, 884. 3 [1955] AC 491. 4 [1955] AC 491, 511. 1
describe than to define...and it is sometimes difficult to draw the line between an issue involving merely recognition of a foreign law and indirect enforcement of it." 5 In the Government of India case, the identity of the plaintiff meant that it was beyond argument that the claim represented an attempted assertion by a sovereign power of its own revenue laws within the territory of another state. The insolvency context in Government of India was provided by the defendant liquidator. However, the trend in other reported cases is for the claim to be asserted by a liquidator or trustee in bankruptcy and not by the foreign sovereign power itself. Where the party bringing the action is an insolvency practitioner discharging his or her duty to maximise the insolvent estate, the question for the court is whether or not the claim amounts to an indirect attempt by a foreign state to enforce its revenue laws through the insolvency practitioner as its nominee. What is a nominee for these purposes? If Dicey, Morris & Collins is correct that the line is difficult to draw, what principles are to be applied in order to determine its whereabouts in each case? To what degree will the courts look to substance as opposed to form? How purposive an approach will be taken? Relfo Limited v Varsani Where the line should be drawn was the question that arose for determination by the High Court of Singapore in Relfo Limited v Varsani. 6 Lady Justice Judith Prakash took a highly purposive approach and dismissed the English liquidator s claim, despite her findings concerning the unattractive conduct of the defendant. The plaintiff in Relfo Limited v Varsani was a British company (Relfo Limited) acting by its English liquidator trying to recover the proceeds of a breach of trust. In April 2004 the United Kingdom Inland Revenue had issued a notice warning of legal proceedings to Relfo Limited based on a 2001 tax liability of GBP 1,409,871.30. Payment was required by 3 May 2004 but no payment was made. On 4 May 2004, the plaintiff s director (Mr Gorecia) paid away GBP 500,000 (about USD 890,050) to a BVI company. The defendant was Mr Varsani, a business associate of Mr Gorecia. On 5 May 2004, Mr Varsani s Singaporean bank account was credited with USD 878,479.35. On 23 July 2004, the plaintiff was wound up. Relfo Limited s liquidator claimed against Mr Varsani for knowing receipt or dishonest assistance. Mr Varsani submitted that the monies he received were not the monies paid away by Mr Gorecia and alleged that various documents relied upon by the liquidator were forgeries. However, Mr Varsani elected not to call any evidence at trial. He submitted that 5 L Collins (ed), Dicey, Morris & Collins on The Conflict of Laws (14 th edn, Sweet & Maxwell, London, 2006), 5-023, p.102. 6 [2008] SGHC 105, [2009] WTLR 1019. 2
there was no case to answer on the basis that Relfo Limited s claim was a concealed claim by the UK Inland Revenue for recovery of unpaid tax and was therefore unenforceable under the principle that courts should never enforce a foreign revenue debt. The first part of Prakash J s judgment in Relfo Limited v Varsani deals with liquidator s positive case. For the purposes of dealing with Mr Varsani s plea of no case to answer, Prakash J had little difficulty in finding in favour of the liquidator on the question of knowing receipt. The three ingredients for knowing receipt were plainly satisfied. Firstly, Prakash J found that Relfo Limited s assets had been disposed of in breach of trust and/or fiduciary duty. 7 Secondly, Mr Varsani had received assets that were traceable to Relfo Limited s assets on the basis of inferences that could be drawn from the liquidator s unchallenged evidence. 8 Thirdly, Mr Varsani had knowledge that the assets were traceable to the plaintiff s assets that made it unconscionable for him to retain them. 9 Up to this point, the liquidator had succeeded on everything. In a nutshell, Prakash J found that there was sufficient evidence to conclude that the money standing to the credit of Mr Varsani s bank account was Relfo Limited s money. Despite the judge s acceptance of the positive case on the question of knowing receipt, Mr Varsani succeeded against the liquidator on the rule against foreign revenue enforcement. Prakash J rejected the liquidator s submission that the rule against foreign revenue enforcement was an archaic principle and found instead that it had been frequently applied in recent times. 10 The judge made particular reference to the Irish case Peter Buchanan Limited v McVey. 11 Peter Buchanan Limited had been cited by Lord Keith in his speech in Government of India and described by his Lordship as an admirable judgment. 12 In Peter Buchanan Limited, the defendant had been the majority shareholder and managing director of the plaintiff company. The defendant had caused the funds of the plaintiff company to be transferred to Ireland to avoid significant tax liabilities arising from its activities in Scotland. The plaintiff company s Scottish liquidator caused the plaintiff to sue the defendant for an account of all monies due to the plaintiff. Despite the Irish court s finding that there had been a dishonest scheme to defeat the Scottish tax liability, the claim failed because the liquidator was really a nominee of a foreign revenue authority and the claim was in substance a claim to enforce foreign revenue laws in Ireland. Prakash J also noted that Peter Buchanan Limited had been followed by the English Court of Appeal in recent times in QRS 1 Aps v 7 Ibid, paras 22-26. 8 Ibid, paras 26-43. 9 Ibid, paras 44-51. 10 Ibid, para. 60. 11 [1955] AC 516. 12 [1955] AC 491, 510. 3
Frandsen. 13 In QRS 1 Aps, the defendant was pursued by the liquidator of certain companies who had been appointed by the Danish tax authorities. The Danish revenue was the only creditor of the claimant companies. It was held by the Court of Appeal in QRS 1 Aps that the facts were indistinguishable from Peter Buchanan Limited. The claim was in substance a claim to enforce Danish revenue laws in England. Mr Varsani submitted that the case before Prakash J was directly analogous to these cases in that the sole objective of the liquidator s action was to collect a debt owing to the UK Inland Revenue. In response, the liquidator sought to show that his claim was not in substance a claim by the UK Inland Revenue. A number of points of distinction were put forward. Firstly, the liquidator pointed out that Relfo Limited had been put into liquidation by Mr Gorecia as its director. This was not the position in either Peter Buchanan Limited or QRS 1 Aps, where the liquidation had been commenced by the revenue authorities. Signalling the strongly purposive approach that was to pervade the entirety of her judgment, Prakash J held that although it was correct that Relfo Limited had been placed into liquidation by its directors and not by the UK Inland Revenue, the real reason for its liquidation had been the pressure exerted by the UK Inland Revenue. 14 The notice of legal proceedings issued by the UK Inland Revenue in April 2004 had signalled to Mr Gorecia that action was about to be taken. It was this that had provoked the liquidation. Next, the liquidator pointed to the fact that at the commencement of the action, the UK Inland Revenue had not been the only creditor. Alongside the UK Inland Revenue s claim, Mr Gorecia had also asserted a claim in the liquidation. This, said the liquidator, undermined Mr Varsani s central contention that the claim was in substance a claim to enforce a foreign revenue law. The liquidator argued that this could not be the case because the claim had been brought for the benefit of multiple creditors. The liquidator highlighted a passage in the judgment of Maguire CJ in Peter Buchanan Limited in support of this argument: [I]f the payment of a revenue claim was only incidental and there had been other claims to be met, it would be difficult for our courts to refuse to lend assistance to bring assets of the company under the control of the liquidator. 15 This argument did not succeed either because by the time the matter came to trial, Mr Gorecia had withdrawn his claim. This meant that the UK Inland Revenue was indeed the only party that would benefit from any judgment against Mr Varsani. In the judgment of 13 [1999] 1 WLR 2169. 14 [2008] SGHC 105, [2009] WTLR 1019, para. 68. 15 [1955] AC 516, 533. 4
Prakash J, it was not relevant that there had been a historic claim by Mr Gorecia. Strikingly, this was the case despite Prakash J s observation that it appeared likely that Mr Gorecia s claim in the liquidation had been tactically withdrawn by him for the purpose of strengthening Mr Varsani s position on this very point. Such motivation was not relevant to the fact that UK Inland Revenue was the only creditor and the claim was thus in substance a claim to enforce a foreign revenue debt. 16 Finally, the liquidator submitted that his activities were not being funded or directed by the UK Inland Revenue and that he bore the risk of failure. Applying her purposive approach once again, Prakash J found that these differences were only superficial. What was significant was that the liquidator was a liquidator of the UK Inland Revenue s choosing and that the liquidator was a specialist who was typically appointed to pursue claims. The UK Inland Revenue was the liquidator s main client and the no-win-no-fee basis on which he worked should not obscure the fact that any funds recovered would (after deduction of fees and expenses) go to UK Inland Revenue. 17 Conclusion Relfo Limited v Varsani is significant because it demonstrates starkly the continuing significance of the rule against foreign revenue enforcement and the pitfalls that may lie in the path of insolvency practitioners pursuing cross-border claims. Prakash J s judgment is all the more stark because the liquidator s claim failed despite a finding that Mr Varsani had knowingly received Relfo Limited s money following a breach of trust. This was still not enough to disapply the fundamental principle. It was also the case that the tactical abandonment by Mr Gorecia of his claim in the liquidation was not held against Mr Varsani. An appeal to the Court of Appeal of Singapore by the liquidator was dismissed. 18 It appears clear that insolvency practitioners pursuing cross-border claims must be prepared for a purposive and unrelenting approach to be taken to the rule against foreign revenue enforcement, 19 even where the merits of the case seem to point in the opposite direction. Where a claim is in substance a claim for the enforcement of a revenue debt (or even where 16 [2008] SGHC 105, [2009] WTLR 1019, para. 69. 17 Ibid, para. 70. 18 It is not local practice for reasoned judgments of the Court of Appeal to be published as a matter of course and unfortunately none is available in this case. However, it is understood that in the judgment of the Court of Appeal of Singapore (consisting of Honourable Chief Justice Chan Sek Keong, Judge of Appeal Justice Andrew Phang Boon Leong and Judge of Appeal Justice V K Rajah), the foreign revenue enforcement point was decisive and Lady Justice Judith Prakash s judgment at first instance was not disturbed. 19 At least outside the European Union: it should be pointed out for completeness that Council Directive [76/308/EEC] on mutual assistance for the recovery of claims (as amended in 2002 [Council Directive (EC) 2001/44]) means that the rule against foreign revenue enforcement will be much less of a problem within the European Union. See further Dicey, Morris & Collins, 5-022, p.102. 5
it will simply have this effect), it would appear from Relfo Limited v Varsani that a liquidator s formal independence from the foreign revenue authorities will be afforded little or no weight. 6