Facts
The English Commercial Court has dismissed a major fraud claim brought against more than 100 defendants by the Kingdom of Denmark (acting through its customs and tax administration, Skatteforvaltningen (SKAT)).
SKAT alleged that it had been the victim of a massive fraudulent conspiracy masterminded by Mr Sanjay Shah, the founder and principal of the now defunct FCA-regulated firm Solo Capital Partners LLP.
Prior to its collapse in 2015, Solo handled aspects of so-called ‘cum-ex trading’, a complex strategy involving the trading of shares on or around their dividend date and the subsequent reclaim of dividend withholding tax from the relevant tax authority.
SKAT claimed that between 2012 and 2015, it mistakenly paid approximately £1.5 billion in dividend withholding tax to Solo and related entities, based on thousands of invalid dividend tax reclaim applications. It alleged that the applicants never actually held the shares in question or received any dividends. The leading defendants against whom fraud was alleged denied any wrongdoing, and claimed that the applications were valid.
The scale of SKAT’s claim, both in terms of the number of defendants and different causes of action pleaded, was almost unprecedented before the English courts, with one Commercial Court judge describing it as “mammoth”. Extensive case management was a feature of the proceedings from the outset, with regular procedural hearings attended by some of the 21 separate legal teams and numerous litigants in person involved in the case. Following almost three years of extensive pleadings and disclosure, the Court listed two preliminary trials in 2021 to deal with specific issues, before a year-long main trial, scheduled to begin in early 2023.
Preliminary trial – the ‘Revenue Rule’
The first preliminary trial took place in March 2021 to decide whether SKAT’s claim infringed the long-standing English common law ‘Revenue Rule’. The rule holds that English courts will not enforce the revenue laws of a foreign state. Four defendant legal teams involved in the case (including a Reed Smith team led by Robert Falkner) argued that SKAT’s claim infringed the Revenue Rule.
SKAT argued that the Revenue Rule did not apply to its claim because it was not seeking to enforce Danish tax laws. Rather, it was seeking to recover the proceeds of a fraud in the exercise of rights that could equally belong to a private individual. In its view, it was irrelevant that the sums it mistakenly paid may have been previously collected as taxes.
Judgment
In his decision handed down on Tuesday,1 Mr Justice Andrew Baker agreed with the defendants that SKAT’s claims were, in substance, claims seeking to enforce in England the Kingdom of Denmark’s sovereign right to tax dividends declared by Danish companies. The claimant’s central interest was to vindicate that sovereign right and have it enforced indirectly in England. Thus, the claims infringed the Revenue Rule and stood to be dismissed in full.
Although not determinative, the judge also agreed with the defendants that it was “blindingly obvious” that SKAT made use, and might well have continued to make use, of powers it has as a sovereign tax authority, that no private litigant would have, to investigate and obtain evidence that it could use, if it wished, in the English litigation and had, to a material extent, already used in the litigation.
Comment
The judgment is to be welcomed as a useful and considered clarification of the law regarding the application of the Revenue Rule and provides a helpful review of the law concerning the enforcement of sovereign powers of other countries in the English courts generally.
The judgment also serves as a stark reminder of the importance of properly researching and assessing legal risks before choosing a forum. The legal rule that derailed this case is a complex one, concerning as it does international relations between sovereign states, the application of international tax treaties and the enforcement of sovereign powers in foreign courts. It is, however, a long-standing rule. While this is the first time the rule has been applied to tax reclaims in this manner, there have been a number of significant English cases dealing with the circumstances in which one country should facilitate the enforcement of the exercise of sovereign powers by another country. With these authorities in mind, the outcome, while not entirely predictable given the wide range of circumstances in which this issue may arise, cannot come as a surprise to Denmark. It assumed a significant financial risk by bringing its case in an English court despite the existence of the Revenue Rule and the central character of its claim being the recovery of tax refunds.
The outcome is also a reminder of the importance and value of effective case management. In reaching his decision, the judge may have been mindful, as a background consideration, of SKAT’s litigation approach. The creation of a virtually unprecedented and unwieldy lawsuit with almost 100 different defendants joined into a single consolidated action may not have counted in SKAT’s favour. Many of the defendants who cited the Revenue Rule had insufficient resources to participate properly in the proceedings, let alone pay any compensation should SKAT succeed in obtaining a favourable judgment. In some respects, the English proceedings look more like the pursuit of criminal justice objectives by a foreign state in the English courts, rather than efforts to recover alleged tax losses on any commercially discernible basis.
The Kingdom of Denmark has indicated that it will seek to appeal the dismissal, in this undoubtedly difficult area of law.
- A copy of the judgment is available at www.bailii.org.
Client Alert 2021-125
