Regalway Care Ltd v Shillingford & Ors [2005] EWHC 261 (Ch)

Case No HC04C03143

[2005] EWHC 261 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 25 February 2005

Before

THE HON MR JUSTICE BLACKBURNE

Between

REGALWAY CARE LIMITEDClaimant

(2) A.V.A.H TRADING LIMITEDRespondents

(3) VICTORIA CLARKEInterveners

(4) EBST LIMITEDRespondent

(5) IMAD YACOUB SHOUBAKIRespondent

(1) FIRST TOUCH COMMUNICATIONS LIMITEDIntervener

(2) DIRECT COMMUNICATION UK LIMITEDIntervener

(3) VITA MODERNA LIMITEDIntervener

George Bompas QC and Peter Shaw (instructed by Moon Beever) for Claimant

Ruth Holtham (instructed by Bankside Commercial) for First Touch Communications Ltd

Hannah Thornley (instructed by Corren Troen) for Direct Communications UK Ltd

Claire Simpson (instructed by Bark & Co) for Vita Moderna Ltd

Hearing Hearing dates: 9 th, 20 th and 21 st December 2004,

11 th and 31 st January, 1 st, 2 nd and 4 th February 2005

Judgment

Introduction

[1]I have before me applications by three separate companies, each applying as a third party intervener, to vary a freezing order made by me on 6 October last against the defendants to these proceedings. The interveners seek this relief to enable the fourth defendant, EBST Limited (“EBST”), to make various payments totalling £1.35 million. For reasons connected with availability of court hearing time, the hearing of these applications has been spread out over a number of days separated by several weeks. Over the course of the adjournments extra evidence has been filed. During the most recent adjournment, the claimant, Regalway Care Ltd (“Regalway”), issued an application to amend its claim in order(a) to join Kevin John Hellard (a partner in the firm of RSM Robson Rhodes LLP and a licensed insolvency practitioner) as second claimant and

(b) to add the three third party interveners as defendants and claim freezing order relief against each of them.

[2]As it turned out Mr Bompas QC, who with Mr Shaw appeared for Regalway, indicated towards the end of his submissions that he was no longer pressing for freezing order relief against the applicants. As regards the application to add the applicants as defendants to the proceedings, I indicated that this should await judgment on the interveners’ applications. I can see no reason why Mr Hellard, who is Regalway’s liquidator, should not be added as a claimant but this too should await judgment on the other applications.

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 involved) the buffer may find it difficult to resist the inference that he too is involved, particularly if he has sold direct to that exporter or there are other features of his involvement indicating that his purchase and on-sale are other than what one would expect in the case of a genuine arms-length transaction.

Regalway and the defendants

[8]It was (and is) the contention of HMCE that Regalway has been involved in MTIC fraud in its role as importer of goods (mobile phones and computer parts) into the United Kingdom. It led to an application by HMCE for the appointment of a provision liquidator of Regalway. The application came before me on 6 October 2004 when I appointed Mr Hellard as provisional liquidator. I did so on evidence which strongly suggested that Regalway, which had been incorporated as recently as 17 March 2004, had indeed been involved in fraudulent activities of the kind that I have just described. The evidence indicated that it had liabilities to HMCE for unpaid VAT of around £3 million (of which £1.4 million odd had been the subject of an assessment dated 6 September 2004) and that, despite warnings from HMCE, had continued a pattern of trading (very strongly suggestive of its involvement in MTIC fraud) whereby it directed the payment to third parties of monies due to it from its sales so as to disable it from meeting its VAT liability, which was steadily increasing. Mr Hellard’s appointment was followed immediately by an application by Regalway, acting now by Mr Hellard as its provisional liquidator, for freezing order relief against the defendants as being involved in the pattern of trading which had knowingly brought about Regalway’s insolvency, in particular its inability to meet its VAT liabilities to HMCE.

[9]The pattern of trading disclosed by the evidence involved purchases by Regalway from an overseas supplier of either mobile phones or computer parts, the immediate resale of the goods in question to the second defendant (“Avah”) and by Avah to EBST, which is the fourth defendant. Avah had been incorporated on 22 January 2004. Its sole director was (and is) the third defendant. EBST was incorporated on 17 April 2002 and has a paid up share capital of £3. Its sole director, sole shareholder and, it would seem, only employee is the fifth defendant (“Mr Shoubaki”). In the evidence relating to their linked transactions, it was apparent that the moving spirits behind Regalway, Avah and EBST in respect of these (and other) transactions were respectively, the first defendant, the third defendant and Mr Shoubaki.

[10]According to that evidence, the pattern of trading between these various entities had the following features: i) the goods were acquired from one of two French suppliers, MAK International or PP Commercialisation; ii) the French suppliers provided Regalway with payment instructions for the purchase price whereby, save for a very small amount to be paid to the supplier, the entirety of the purchase price was directed to be paid to an overseas third party; iii) the goods were sold on by Regalway for a small mark-up (typically 50p per unit of the goods in question) to Avah which (in every case for which records are available) in turn sold them on for a small mark-up (typically 50p per unit) to EBST; iv) Regalway gave two sets of payment instructions to Avah by the first of which it directed Avah to make the same payments that it had received from its supplier but, in addition, required payment by Avah to Regalway’s bank account of a sum sufficient to cover Regalway’s output VAT and its own overall mark-up; v) the second set of payment instructions, which was the set acted upon, directed Avah to pay the entirety of the purchase price, save only for Regalway’s small mark-up, to third parties, in the main overseas companies with overseas bank accounts; vi) Avah duplicated the same instructions to EBST (namely two conflicting sets of payment instructions); vii) it was EBST which in each instance made the payments in accordance with the second set of payment instructions whereby all, save the mark-ups to which Regalway and Avah were entitled, were to be made to the overseas third parties; viii) the payment instructions acted upon provided for the French supplier to Regalway to receive no more than a small commission; ix) the bulk of the payment went to the supplier at the head of the chain of transactions; x) the entire chain of transactions and payments usually took place within one to two days; xi) overall, the third party payees received more than 95% of the price of the goods in question, net of VAT, and received more than 99% of the VAT element.

[11]The goods themselves were apparently located at the premises of a freight forwarding company near Heathrow, either Hawk Freight Forwarders (“Hawk”) or Interken Freighters U.K. Limited (“Interken”), which would act on release instructions received along the chain of sales and sub-sales from the respective purchasers. I come to this in more detail a little later. Other features of the transactions included the following: i) the total sum Regalway directed Avah to pay exceeded the price which Regalway was required to pay for the goods, together with its small mark-up; ii) the sum which Regalway directed to be paid to third parties comprised a) its own purchase price and b) the VAT element on the sale price by it to Avah except only so much of that VAT as corresponded to the difference between the price at which the goods had been sold to it and the price at which it was selling the goods to Avah (i.e. its mark-up); iii) Regalway’s direction with regard to the payment away of the VAT element of its sale to Avah did not form any part of the payment instructions received by it from the French supplier; iv) only minimal sums were ever directed to be paid to Regalway’s French supplier; v) the second payment instruction issued by Regalway to Avah (and by Avah to EBST) did not expressly state that it varied the first instruction but only the second instruction was ever acted upon; vi) the second payment instruction was often sent at the same time as the first; vii) it was evidently contemplated that Regalway would issue the second instruction in as much as, following his appointment, Mr Hellard obtained and imaged the first defendant’s computer which was found to contain template pro-forma documents, including the standard form of second payment instruction.

[12]In all known cases, the payment instructions were passed on by Avah to EBST. In every case, it was EBST that made the payments.

[13]In all, the evidence disclosed that Regalway participated in 46 completed transactions. Those transactions involved total payments to the overseas third parties (excluding the contractual French-based suppliers to Regalway) of £18,455,933 of which £2,781,745.56 was paid away pursuant to the second payment instructions. Indeed, it is the second payment instruction which has had the effect of diverting payment to a third party of monies which would otherwise have been paid to Regalway and would have been available to meet its VAT liability. The result is that, of those 46 transactions, VAT output tax of £2,870,240.63 was payable, of which Regalway has made no payment.

[14]The evidence before me at the time of HMCE’s application for the appointment of a provisional liquidator also described in some detail the involvement of Avah and EBST in transactions involving entities other than Regalway which, exhibiting features identical to those described in relation to the transactions in which Regalway was engaged, were strongly indicative of MTIC fraud.

[15]EBST’s participation in high volume trading in mobile phones and computer chips seems only to have got seriously underway in around June 2004. Its trading results for the three months to the end of January 2004 disclosed a turnover of £156,000. In the period 30 July to 8 October 2004, by contrast, turnover had risen to just under £45 million. An analysis of its receipts and payments for that period disclose that £39 million odd was paid to just seven overseas suppliers. Documents in evidence indicate that EBST fulfilled what in effect was a banking role in its trading of mobile phones and computer chips in that it would act on instructions from its vendor (in turn passing on instructions from the importer) as to how to disburse the monies received by it under the given transaction. Mr Hellard estimates that these instructions resulted in the payment away by EBST to third parties (ie persons other than the person - the buffer - from whom EBST had made the particular purchase) of almost all the monies that EBST received on its sale of the goods. They resulted in the importer receiving only a tiny payment. Indeed, the instructions provided for the importer to receive only what some of them described as a “commission” being a sum equal only to a minute fraction of the VAT charged (and received) in respect of the transaction. (See, for example, B3/200-204 and 205-209 illustrating how monies were disbursed in respect of transactions 128 and 132.)

[16]The result was that, on the application of Regalway acting by Mr Hellard, I made worldwide freezing orders against the defendants limited to £3,010.607.20. That figure was the extent of the loss to Regalway (being a sum equivalent to the amount of Regalway’s liability to HMCE for unpaid VAT) which the evidence strongly indicated had been dishonestly caused by the defendants’ activities.

[17]The claim against Mr Shillingford is for damages for breach of his fiduciary duty to Regalway. Against the others it is for knowing assistance in that breach of fiduciary duty. All five are separately sued in damages for having unlawfully having conspired to prevent Regalway from discharging its proper VAT liability.

[18]It is material to point out that, following his appointment as provisional liquidator, Mr Hellard conducted enquiries and investigations into the various transactions in which Regalway and the defendants were engaged, the results of which are summarised in his first affidavit. They reinforce the questionable nature of those transactions. Such evidence as was filed in opposition to a continuation of freezing order relief came from EBST and Mr Shoubaki. However, when the matter came before me on 9 December there was no opposition to the continuation of freezing order relief against any of the defendants pending trial of Regalway’s claims or further order in the meantime.

[19]Already on 17 November Regalway had been placed in liquidation with Mr Hellard being appointed liquidator on 25 November.

[20]The freezing order, which was made on a without notice application, is in common form. It contains the usual proviso stating that the order does not prohibit the defendants from “dealing with or disposing of any of their assets in the ordinary and proper course of business.” It also contains the standard provision whereby anyone served with or notified of the order is at liberty to apply to the court at any time to vary or discharge it. It is under that provision that the three applications by the third party interveners were made which are now before me.

The interveners’ applications

[21]The three applicants each claim to be prejudiced by the freezing order so far as it affects EBST’s assets. Each seeks a variation of that order to enable EBST to make payment, as it wishes to do, of substantial sums out of its frozen bank account in satisfaction of claims which the three applicants say that they have against it.

[22]The application by First Touch Communications Ltd (“FTC”) is for EBST to repay £642,600 paid by it to EBST on 7 October 2004 in respect of a purchase of 4,000 mobile phones said to have been entered into on 30 September 2004. (In fact, the sum paid was slightly less.) The application by Direct Communication UK Ltd (“DC UK”) is for EBST to repay £465,300 paid by it to EBST on 8 October 2004 in respect of a purchase of 4,000 memory sticks, also said to have been entered into on 30 September 2004. The application by Vita Moderna Ltd (“Vita”) has two aspects. The first is for EBST to repay £240,474 paid by it to EBST on 8 October in respect of a purchase of 2880 computer chips, also said to have been entered into on 30 September 2004. The second is that, as purchaser from DC UK for £467,650 of the 4,000 memory sticks which DC UK had purchased from EBST, it applies, in effect in support of DC UK, for the sum paid to EBST by DC UK to be repaid to enable DC UK in its turn to repay what it received from Vita for the goods.

[23]The essence of each application is that the applicant purchased and paid for the goods in question which it then sold on (in the case of DC UK to Vita) but the purchaser from it (or from Vita in the case of the 4,000 memory sticks which DC UK had bought from EBST) never received the goods in question. It seeks to recover from EBST what was paid to EBST for the goods on the basis that the end-purchaser, not having received the goods, has demanded its money back and, except for the purchaser from FTC which has, it seems, been repaid its money, is threatening to take proceedings against the applicant to recover what it paid out.

The approach in law

[24]Before coming to the circumstances of each application, I should say something about the basis upon which I have approached them. It is well established that in deciding whether to vary a freezing order to enable a payment to be made, whether on the application of the defendant whose assets have been frozen but who wishes to make the payment out of them or, as here, on the application of a third party who wishes to establish that the defendant is free to make the payment, the court seeks to do what is just and convenient in the circumstances and is guided by the following considerations: i) only bona fide obligations will be permitted to be paid out; ii) such obligations may include obligations which arise otherwise than in the ordinary course of business or which are not legally enforceable but which the defendant reasonably wishes to discharge; iii) the onus is on the applicant for the variation to establish that the payment should be permitted; iv) the fact that the defendant leaves it to the third party to make the application (rather than make the application himself) does not alter the burden of proof; v) the court will refuse to sanction the payment if there is credible evidence for supposing that there is or may be collusion between the defendants and the third party, or the payment sought is for the purpose of defeating the claimant’s claim, or that there are other circumstances which fairly call into question the good faith of the intended payment; vi) the fact that there is no basis for questioning the good faith of the third party is not, in itself, a sufficient reason for sanctioning the payment: the court must be satisfied by evidence that in allowing the payment to be made out of assets caught by the freezing order, it is sanctioning no more than a payment which would normally have been made out of such assets had there been no freezing order.

[25]It is also well established that the court’s jurisdiction to grant freezing orders is not to be used to create for the claimant a secured debt or otherwise give priority to the claimant in respect of his claim.

[26]Where a genuine question arises whether a proposed payment is in good faith and whether therefore the freezing order should be varied to permit the payment to be made, the court may feel able to decide the question summarily but, if not, may direct the question either to be tried as a preliminary issue in advance of the trial of the claimant’s claim against the defendant (in which the freezing order has been made) or to await the result of the trial.

[27]I derive the propositions set out in the previous three paragraphs from Iraqi Ministry of Defence v Arcepey Shipping Co. S.A.

[1981] 1 QB 65

; A v D (XI Intervening) [1983] 2 Lloyds Rep. 532; SCF Finance Co.Ltd v Masri

[1985] 1 WLR 876

; Avant Petroleum Inc. v Gatoil Overseas Inc.

[1986] 2 Lloyd’s Rep 236

and Commissioners of Customs & Excise v Sawyer and Ors.

[2001] EWCA Civ. 1976

Regalway’s grounds for opposing the interveners’ applications

[28]Each of the three applications is opposed. Essentially, the grounds of opposition are twofold. First, it is said that the evidence suggests that the transaction which each applicant seeks in effect to reverse was completed in the sense that the goods were released down the chain to the end-purchaser which now seeks to say that they were never received. Second, it is said that the applicants were not purchasers in good faith when entering into their purchase and sale transactions but that they went into them as knowing participants in MTIC fraud.

[29]As these applications have proceeded and the evidence has grown, it has become abundantly apparent that there are many issues of fact which cannot be satisfactorily determined on a summary basis, that is, simply on witness statements and counsel’s submissions. The question which I have asked myself, separately in respect of each applicant, is whether at the end of the day (and ignoring unresolved side issues) Regalway, effectively Mr Hellard the liquidator, has demonstrated that there are credible grounds for saying either that the goods in question were released down the chain of supply to the end-purchaser or that the applicant for relief has knowingly involved itself in MTIC fraud, or both. I put it that way as there is no doubt that the payments were made which each applicant says that it made and equally no doubt that the payments were made for goods which, directly or indirectly, that applicant purchased from EBST and which each sold on to another.

The freight forwarder

[30]Common to each application is the role played by the freight forwarder. See paragraph 11 above. In each case the freight forwarder was Interken. There is nothing necessarily sinister in that fact or in the fact that, as mentioned in paragraph 11, Interken or Hawk acted in the various transactions involving Regalway which led me to place it in provisional liquidation and thereafter make freezing orders against the defendants. Relevant to this is that the evidence before me suggests that both are prominent among freight forwarding companies in transactions involving the trading of mobile phones and computer parts. It is certainly not the case - and the contrary has not been suggested - that trading in such items as if they were commodities, even where the goods in question first come into this country from abroad and at the end of a chain of transactions are exported abroad again, is necessarily fraudulent. Indeed, as the evidence of each applicant was at pains to explain and as their counsel submitted, HMCE have devised procedures and published a Notice (Notice 726) designed to assist bona fide traders in these items to avoid becoming participants in transactions where MTIC fraud is or may be involved. It is a feature of the transactions which form the subject matter of these applications that the applicants took steps in compliance with the guidance in Notice 762, for example, verifying that the entity with which it was dealing had, at the time of the transaction, a valid VAT registration.

[31]In view of the central role played by Interken in each chain of sales involved in these three applications and the assertion by each applicant that, notwithstanding payment in full for the goods by a purchaser in the supply chain, it is open to Interken, acting simply on the instructions of the person or entity that has caused the goods to be delivered to Interken in the first place, to recall the goods and divert them to a different destination and, what is more, to do so without even informing any of the subsequent purchasers of this step, I should set out Interken's evidence as to how it operates in the case of supply chains of the kind in issue before me. The evidence was adduced by Vita but was relied on, as I understood it, by the other two applicants.

[32]In a lengthy 71 paragraph witness statement, Mr Pushp Ghai who is its Operations Manager, sets out in Interken’s history and ownership (essentially a family-run freight forwarding business established by Mr Ghai’s family 20 years ago and now owned by his cousins), the nature and scale of its business operations and the importance it attaches to complete security for the goods warehoused with it. In paragraph 14 he states that Interken has for the last 5 years “specialised in the logistics and airfreight of mobile telephones, computer processing units… and semi-conductors" and that it has built up a reputation for fair dealing. He goes on to explain that Interken asks customers for their VAT registration certificate and takes step to verify their VAT number with HMCE. He refers also to the carrying out of credit risk checks on customers although, as this is a matter which he personally does not handle, does not set out what those checks comprise. He states that Interken has developed close links with overseas freight forwarders. He refers among others to an organisation called Worldwide Travel in Hong Kong and Hawk Freight Services in Dubai. He explains how Interken cooperates closely with HMCE. This includes furnishing HMCE monthly and on a voluntary basis with what are described as Interken's “bond sheets”. These are documents which set out the nature and quantity of all goods passing through Interken’s warehouse. Each bond sheet “tracks their allocation to buyers through the chain and records the eventual release of the goods”.

[33]Between paragraphs 28 and 45 of his witness statement, Mr Ghai sets out “a typical transaction in which our services or those of another freight forwarder would be used”. From those paragraphs I extract the following: i) Trading in mobile telephones and computer components is a “modern industry” in which the freight forwarder “takes on the role of the bank in ensuring that the goods are secure until payment is made.” Mr Ghai explains that this is because the trade in such high value products is extremely fast moving and the traditional methods of trading are “too cumbersome and time consuming”. ii) Interken’s involvement, he explains, begins when a manufacturer or wholesaler, whom he refers to as “the main supplier”, contacts Interken to say that it wishes to store its goods in Interken’s premises and utilise Interken’s services while it conducts a sale. This, he explains, is done by fax or by telephone. Thereafter Interken will either arrange to collect the consignment from the main supplier’s premises or the main supplier will arrange the delivery. iii) Mr Ghai explains that once goods are in Interken's warehouse he will arrange for them to be inspected and counted. He says that his policy on inspection has varied over the years and that inspection by Interken is the usual but not the invariable practice. He states that Interken contracts out inspections to a company called Aberdale Logistics Ltd and that, as a result of the large volume of consignments arising at Interken each day, Aberdale attends at 10.00 am every day to check the new deliveries. iv) Mr Ghai states that, usually some time after the goods have arrived at Interken’s warehouse, he will receive a fax or telephone call from the main supplier asking him to allocate all or a part of the goods to a particular party or parties whom he terms “trader 1”. He states that ownership of the goods does not pass to trader 1 when Interken receives the main supplier’s fax allocating the goods to that trader but only passes when the main supplier has received payment for the goods and the goods are released to trader 1 and onwards down the chain of supply. Allocation, he explains, allows trader 1 to inspect the goods and allocate them to its purchaser whom he refers to as “trader 2”. v) He states that the process of allocation is a trade practice which has evolved quickly to allow easy trading, and that it allows trading to be carried on by parties with insufficient funds to purchase goods outright. He states that the right to inspect the goods is granted at allocation as it enables the trader to sell the goods more easily if his buyer can check their quantity and quality. vi) He explains that, until the goods are exported, the main supplier has no interest in the identity of the “allocatees” (ie the purchasers down the chain) because, he says, he knows that the goods are safe in Interken's warehouse. This is because the goods are fully insured and will not leave the warehouse without the main supplier’s prior approval. Moreover, he states, the main supplier can, at any stage prior to release, withdraw the allocation with the result that “the chain of supply will collapse returning the goods to the main supplier’s full control”. As Mr Ghai puts it:

“in effect the main supplier has a trump card”. vii) Mr Ghai goes on to say that there may be any number of traders in a chain of supply but, for the purposes of his explanation, assumes that there are only two. Trader 2 agrees to sell the goods to the exporter who, in his turn, agrees a sale with the final purchaser abroad and with it the right to inspect and allocate passes. The final purchaser will usually want to inspect the goods before making payment but as it would make no sense for that purchaser (being abroad) to inspect them in this country as, assuming the deal is concluded, they will have to be transported overseas to the final purchaser in any event, arrangements are made for the goods to be exported to where the end-purchaser is based. Nonetheless, in Mr Ghai’s opinion, “exportation has no bearing on the title to the goods, which remains with the main supplier”. viii) Mr Ghai states that before arranging exportation of any goods, Interken always checks whether this is acceptable to the main supplier who will usually ask for Interken's views on the reliability of the exporter and the final purchaser. However, Interken does not disclose the identity of these parties to the main supplier. By contrast, the identity of the country to which the goods are to be exported will be supplied as there are some countries to which many main suppliers will not allow their goods to be sent. ix) Assuming the main supplier allows the goods to be exported, Interken then ships them out but on the basis that they are not to be released to the final purchaser until payment has been received by the main supplier. He explains that, for any destination other than Spain (where it has a warehouse), Interken has to rely upon a local freight forwarder to ensure that the goods are not released prior to instruction from the main supplier. x) The overseas freight forwarder then collects the consignment from the airport in the destination country and, certainly in the case of imports to Hong Kong and Dubai, will bring the goods into the country through the free port so that local import duties do not have to be paid until the goods are released to the final purchaser who has the responsibility for making payment of those duties. xi) Once the final purchaser has inspected and approved the goods he makes the necessary payment which he will send to the exporter. In his turn the exporter will make payment to trader 2 and send what Mr Ghai describes as a “release note” to Interken. This process goes on up the chain so that on receiving payment the main supplier sends its release note to the freight forwarder. Assuming that all the release notes have been sent to Interken, Interken will then instruct the overseas freight forwarder to release the goods to the final purchaser. xii) Regarding what Mr Ghaidescribes as “documentation and practicalities”, he explains that when Interken receives a release note from the main supplier, he will check his files to see whether he has received release notes from all the other “allocatees” (ie purchasers) in the chain and that if any are missing he will contact that allocatee to chase up the paperwork. Only when everything is in place, he says, will he instruct the overseas freight forwarder to release the goods. He explains that he amends the entries in the computerised bond sheet so that at any given time he knows the exact goods in the warehouse, the physical location of any goods received and their current ownership and allocation. xiii) He states that differing traders have differing practices in relation to issuing release notes in that some do not send Interken a release note until they have received payment whereas others, apparently, prefer to get all the documentation in place for a deal so that they can “move on to the next deal knowing that all that remains …for them to do is to receive and make a payment”

. These traders, Mr Ghai explains, send Interken their release notes at the same time as the allocation notice. Nevertheless, a main supplier, he points out, would never send its release note without first receiving the funds.

[34]In a subsequent passage in his witness statement he explains that, in respect of high value goods such as computer chips, Interken will send instructions to the local freight forwarder that the goods are being shipped “on hold”. This means, he says, that the goods cannot be released to the final purchaser until specific instruction is given by Interken to that freight forwarder. Interken, he points out, will not send the release instructions to the local freight forwarder until it has received a release note from every party in the chain of supply. In this way, he explains, “the cargo is safeguarded against release before payment”.

[35]In a section marked “secrecy and trust” Mr Ghai explains that Interken will not tell the main supplier the identity of the parties further down the chain of supply because, if it were to do so, the main supplier would withdraw the goods from the chain and approach the exporter or final purchaser directly, causing the other parties to lose business. “Similarly,” he states “we will not disclose the identities of any of the traders in a chain to the other traders in the chain. It is essential for my business that all my customers trust me to look out for their interests”.

Observations on the system of supply chain

[36]The system described by Mr Ghai seems all very well so far as ultimate release of the goods to the overseas end-purchaser is concerned: unless and until Interken receives a release note from each purchaser in the chain the goods cannot be released to that end-purchaser. What, as it seems to me, his explanation fails to provide for is the case where the main supplier decides to withdraw the goods from sale. The main supplier can apparently do so at any stage prior to sending his release note. The fact that payments for the goods have been made up the chain does not, it seems, prevent the main supplier from taking this step. It is a feature of the system, according to Mr Ghai’s description of events, that Interken is not involved in the transmission of payments; that occurs as between the individual parties to each transaction in the chain independently of any involvement by Interken. This means, as far as I can see, that the main supplier could receive payment and still recall the goods. This is because, whether or not payment has been made, is not something of which Interken will necessarily have any knowledge. Moreover, since, according to Mr Ghai, Interken keeps confidential the identity of all parties in the chain which has been collapsed, the trader’s only recourse when the supply chain has “collapsed” is to seek to recover from his vendor the money he has paid. He has no right to prevent the goods for which he may have paid in full from being returned to the main supplier against whom he has no rights. Yet he may have no security at all for the recovery of his money. One of the striking features of the evidence was the apparent acceptance by the witnesses that this could happen. Thus, I read with some surprise paragraph 9 of the second witness statement of Mr Lamber Singh Teji (“Mr Singh”) of FTC. In that paragraph Mr Singh describes how, notwithstanding allocation of goods to a purchaser and payment to that purchaser for those goods, where there has been no release the main supplier can reallocate the goods to another. Indeed, in his experience, “reallocation of goods occurs regularly” in the mobile phone industry. What is more, Mr Singh states, this may happen without the trader ever discovering the identity of either the main supplier or of the new purchaser. To similar effect was the evidence of Mr Fabian Thorpe, a director of Vita, who stated (in paragraph 30 of his first witness statement):

“The traders rush to prepare the documentation because once the paperwork is in place there is an even greater chance that a deal will go through because a trader will lose face in the market if the paperwork is completed and then the transaction fails for some reason. That said, a deal is actually only done when money has been received and the goods have been released. I have known transactions to fail at the stage where all the documentation is in place, the money has been received and then there is a problem with the release so that funds have to be returned, although I have never known circumstances such as these where the goods are not released and the funds are not returned.”

(emphasis added)

[37]If the trader has carried out no investigation into the underlying worth of his vendor (as appears to have been the position in the case of each of the three applicants before me) and if, not knowing the identity of participants higher up the chain, he is unable to carry out any investigation into their worth, he exposes himself to the risk of non-recovery of his money. If, as in the instant cases, very substantial sums are involved (FTC, for example, seeks to recover almost £⅔ million on a single transaction), the risk is all the greater. Indeed, the lower down the chain a trader is, the greater his risk if he has paid his money in that he is at the risk of each person higher up the chain not sending his release.

[38]Nor is it immediately apparent to me, at any rate on the information about supply chains which Mr Hellard has assembled, why the identity of the main supplier is such a closely guarded secret. For it is an invariable feature of the supply chains referred to in Mr Hellard’s evidence that the unit price at which the main supplier sells the goods to its customer is significantly higher not only than the unit price at which the party in the supply chain (invariably the main supplier’s customer) sells the goods into the United Kingdom but also than the unit price at which the goods are exported out of the United Kingdom at the (apparent) end of the supply chain. In other words, there is no commercial incentive for anyone in the supply chain to want to deal directly with the main supplier (or vice versa), even if his identity is known.

[39]If, however, persons are willing to participate in the supply chain without feeling any need to enquire who (apart from their immediate supplier and immediate customer) the others are in the chain because they are confident that, should it become necessary to collapse the chain, the flow of payments will be automatically reversed (and with no questions asked) and that, as implied by Mr Thorpe in the passage from his first witness statement set out above), this is what always happens, it is but a short step to show, when coupled with other features, that the supply chain does not represent a series of genuine transactions which have been negotiated at arm’s length but that it has been structured to serve another, non-commercial, purpose. If those other features include the importation of the goods into this country, their sale down the supply chain and their exportation out of this country all on the same day (or within the space of a couple or so days), a regular round-sum mark-up in the unit price of the goods (yielding for each trader in the supply chain a small profit on the transaction), followed by a rather larger mark-up in the price at which the goods are exported, the recurrence of the same group of participants in the supply chains, a lack of concern on the part of the participants to inspect or insure the goods (trusting it to the freight forwarder with whom at all material times the goods are warehoused to ensure that this happens) and the dependence on the next person down the supply chain to find the money for the goods (so that, in appearance, it is the overseas purchaser of whom little or nothing is known that is funding the chain of supply), the inference that the supply does not represent a series of genuine commercial transactions becomes all the greater.

[40]Mr Bompas points to features of this kind as indicating that, viewed overall, the transactions involved in the three applications before me cannot have been honestly entered into. It is to the circumstances of those transactions that I now turn.

FTC’s application

[41]As I have mentioned, FTC’s application is for a variation of the freezing order to permit EBST to make a payment to it of £642,600. For reasons which will appear the figure should be £640,250 rather than some larger amount.

[42]FTC was incorporated on 31 May 2002. Its business is described as “trading in mobile phones”. It has a £2 paid up capital and two shareholders, a Mr Samra and a Mr Jay Singh. Mr Samra is the only director. Mr Samra’s wife is the company secretary. The registered office of FTC is at the Samras’ home in West London. Mr Singh describes himself as FTC’s sales manager.

[43]The particular transactions which have given rise to FTC’s application appear to have taken place during the afternoon of 30 September 2004. So far as evidenced in documented communications, what occurred was as follows. Sometime before 2.44 pm in the afternoon of 30 September, FTC (which throughout acted by Mr Singh) faxed a purchase order to EBST for 4,000 Nokia 6230 mobile phones at a price of £157.50 per phone. The overall price for the phones was therefore £630,000 together with £110,250 VAT, making £740,250 in all. At the same time, FTC faxed to EBST a so-called supplier declaration. After referring to the purchase order and the goods ordered, the declaration sought the supplier’s (ie EBST’s) confirmation(1) that EBST had full legal title to the goods and that the title was free of third party claims and would be passed to FTC,

(2) that the goods existed, had not been sold previously and had been “subject to inspection by us [ie EBST]/freight forwarders”,

(3) that EBST had “no reasonable grounds to suspect that the relevant VAT on these specific goods has not been paid by our supplier or will not be paid” and

(4) that “due diligence checks had been carried out on our supplier(s) of the above goods ”.

[44]At 2.44 pm EBST faxed back the purchase order containing a signed acknowledgement confirming that EBST had validated their supplier’s VAT registration details and had no suspicion or reason to believe that the supplier would default in respect of its VAT liabilities. A signed copy of the supplier declaration was faxed back at the same time. By it EBST gave the confirmation summarised in the previous paragraph.

[45]Twenty minutes later, at 3.05 pm, EBST faxed FTC an invoice for £740,250. Ten minutes later, FTC faxed to HM Customs and Excise’s VAT office in Redhill a so-called VAT Verification seeking confirmation that EBST’s VAT registration number was as stated on the fax. That confirmation was faxed back at 4.15 pm.

[46]At an unspecified time that same day, Mr Singh says that he faxed to Interken (the freight forwarder) a request marked for the attention of “Push” (I assume Mr Ghai to whom I have made mention earlier in this judgment) to “confirm the following details and urgently re-fax back to us”. Those details were that Interken had 4,000 Nokia 6230 mobile phones, that the supplier was EBST, that the phones were “solely owned by the supplier with legal title” and that the goods were “physical for inspection”. No return fax by Mr Ghai (as required by FTC’s fax) giving the confirmation sought is available. Miss Holtham, who appears for FTC, said on instructions that the outward fax (to Interken) was sent that same afternoon. She could not account for the absence of any return fax and speculated that Mr Ghai may have given the desired confirmation orally (ie over the telephone).

[47]At 5.21 pm that same day, Mr Singh already had a purchaser for the 4,000 mobile phones, a company called Evolution Export Trading Ltd (“EET”). Miss Holtham informed me that a Mr Hancox of EET was the person with whom FTC dealt in the matter. According to its annual return, made up to 25 April 2004, EET, like FTC, is a company with a £2 paid up share capital. It was incorporated on 25 April 2003. Mr Hancox and a Mr Patel each hold one share and are EET’s only directors. I was given to understand that at the time of the transaction Mr Singh had known Mr Hancox for two years and that the two were “in regular phone contact”.

[48]At 5.21 pm that same day, 30 September 2004, EET faxed FTC a purchase order for the 4,000 mobile phones at £158 each, a mark-up of 50p per phone on FTC’s purchase three hours earlier from EBST. Inclusive of VAT the price EET had to find to complete its purchase was therefore £742,600, an overall mark-up of £2,350 (£2000 plus £350 VAT) over FTC’s purchase of the same goods from EBST. It is not evident what if any diligence FTC conducted in relation EET’s ability to find that large sum of money. The purchase order was accompanied by a form of warranty similar in terms to the supplier declaration which, earlier that afternoon, FTC had sent to EBST and later received back duly signed. The same appears to have happened as on the sale by FTC to EET: the purchase order and warranty were sent back shortly afterwards duly endorsed with FTC’s acceptances. A little later that same day (quite when is not apparent because of the absence of any fax transmission details in respect of FTC’s communications but I assume it was on 30 September) FTC sent EET an invoice for £742,600.

[49]I am told that later that same day Mr Singh faxed to Interken a document headed “allocation”. A copy dated 30 September 32004 was exhibited to Mr Singh’s witness statement. The allocation is in the following terms:

“Dear Push, Please can you allocate 4,000 Nokia 6230 To our Customer: Damien … Evolution Export Trading Ltd. Our Supplier: EBST Ltd. Please do not release any stock until First Touch Communications Ltd gives verbal and written confirmation. Thanks in Advance. Jay Singh.”

The reference to “Damien” is to Damien Hancox.

[50]There is then a gap of seven days until 7 October 2004 when EET paid £642,600 into FTC’s bank account. Mr Singh says that the delay was because at the time the sale to EET was negotiated Mr Hancox had requested seven days for payment. The payment was exactly £100,000 short of the full price (inclusive of VAT). Mr Singh says that Mr Hancox had contacted him to say that this balance would be paid at the latest the following day (8 October) as he was awaiting a payment from one of EET’s customers. But the balance did not come the next day as promised. There is no explanation for this shortfall which was never made good. On 8 October, when the balance should have been forthcoming, FTC transferred £640,250 to EBST. There was the same £100,000 shortfall. Quite why FTC did not pay the balance is a little puzzling in that, according to bank statements of FTC exhibited to Mr Singh’s third witness statement, FTC had over £200,000 in its bank account at this time. The difference between what FTC had received from EET and what FTC transferred to EBST was £2,350, which is the precise amount of FTC’s expected profit. It is curious that FTC should have failed to pass on this amount to EBST. It suggests that FTC was more anxious to retain its expected profit from the transaction than to discharge its payment obligation to EBST. What is also curious is that nobody seems at the time to have enquired about the missing £100,000. This may be because, according to Mr Singh, he contacted Mr Shoubaki at EBST “shortly after the 8th October 2004 requesting confirmation of the payment”. It is not apparent why he should want to do this as it would be apparent from FTC’s bank statement that the payment had been made. At all events, according to Mr Singh:

“Imad [ie Mr Shoubaki] later contacted me stating that EBST were experiencing difficulties with their bank and as such were unable to release the phones to FTC. I became concerned and contacted our solicitors, Cooper Kenyon Burrows, and requested that they contact EBST Ltd and request the immediate return of the funds transferred to EBST…”

It later emerged that EBST were caught by the freezing order which I had made on 6 October.

[51]The letter from Cooper Kenyon Burrows is dated 18 October. Unless they were unusually dilatory in sending their letter, its timing suggests that they were not consulted until shortly before they wrote it which in turn suggests either that Mr Singh did not find out about EBST’s banking difficulties until several days after 8 October (which would be consistent with the position in relation to Vita and DC UK neither of which, as will later appear, was apparently aware of any problem affecting EBST until 12 October) or that he did but for a few days at least - until he contacted Cooper Kenyon Burrows - he was not concerned to pursue the matter. After referring to FTC’s purchase of the mobile phones and to EBST having informed FTC “shortly” after 8 October that EBST had been “encountering difficulties and were unable to provide [FTC] with the mobile telephones in question”, the letter stated that as EBST was unable to fulfil the contract with FTC, FTC accepted its anticipatory breach and required immediate repayment of the £640,250. It sought repayment “by return”, stressing that time was “of the essence”.

[52]That same day, 18 October, EET’s solicitors, a firm called BP Collins, wrote a similar letter to FTC. The letter was faxed to FTC at 12.39 p.m. After reciting EET’s contract with FTC and enclosing a copy of EET’s purchase order, the letter continued:

“We understand our client has made payment to you in the sum of £642,600. However, just before they were due to send you the final payment of £100,000 you informed our client that you were encountering difficulties with your own supplier, to the extent that you were unable to provide our client with the mobile telephones. Accordingly, since our client was and remains ready and willing to deposit the additional sum of £100,000 with yourselves, but you are unable to fulfil the contract, our client accepts your anticipatory breach of contract and requires you to immediately repay our client the sum of £642,600. We confirm that unless these monies are returned to our client by 4p.m. today, Monday 18 October 2004, we have received instructions to present a Winding-Up petition against your company, without further reference to yourselves. We trust this will not be necessary and that you will make immediate arrangements to repay our client the sum of £642,600. Alternatively, if you can immediately confirm to us that you are now in a position to deliver the mobile telephones to our client, we will request that our client deposits the sum of £100,000 with this firm and upon receiving confirmation that the goods have been delivered in accordance with the contract, we will release these monies to you. Time is clearly of the essence in this matter.”

It is not evident quite when on 18 October Cooper Kenyon Burrows sent their letter or how. It would be a little surprising if it was sent before FTC had received the letter from BP Collins since, by terminating its contract with EBST, FTC was inevitably exposing itself to a claim by EET. There was no reply to Cooper Kenyon Burrows’ letter.

[53]There was no follow-up to BP Collins’ letter, at any rate as between solicitors. On 21 January 2005 Mr Hancox wrote direct to FTC threatening winding-up proceedings within seven days if payment was not made. According to Mr Singh’s third witness statement, FTC repaid EET £642,600 on 26 January.

[54]One would have thought that, faced with EET’s ultimatum (as set out in the letter from BP Collins), the least FTC would have done before making its application to the court would have been to seek to establish that the mobile phones were secure, particularly if they were being held by Interken to FTC’s order. But apparently not. Rather to my surprise, Miss Holtham told me that Mr Singh had not approached Interken. Instead, she said, he took the view that FTC was entirely dependent upon Mr Shoubaki of EBST as to what had happened to the phones. In his second witness statement (made and served after Miss Holtham had completed her submissions shortly before Christmas) Mr Singh stated - presumably on the basis of information supplied to him by Mr Ghai (although Mr Ghai’s evidence before the court is silent on the matter) - that Interken told him “that the main supplier of the goods had allocated the goods to another supplier” but that he did not know “which supplier the main supplier reallocated the goods to” because Interken was “unable to give out this information to FTC”.

[55]Having regard to(1) EBST’s warranty that it had full legal title to the 4,000 mobile phones free from any third party claim,

(2) FTC’s own warranty to EET that the phones existed, had been examined and were in accordance with their description,

(3) FTC’s understanding that the phones were being held by Interken which was under instructions not to release them without FTC’s verbal and written authority and

(4) EET’s assurance (through BP Collins) that it had the £100,000 balance of the purchase moneys and was ready and willing to pay them over, it is something of a puzzle, looking simply at the circumstances of FTC’s purchase and onward sale, why FTC should have been willing to accept and act on Mr Shoubaki’s assertion that, because of difficulties with its bank, EBST could not release the phones. Upon payment of the remaining £100,000 there could be no reason why, on the face of the available documentation, the 4,000 phones should not have been released (assuming that, until paid the balance due to it, EBST was entitled to direct Interken not to release the goods) down the line to EET.

[56]Be that as it may, if there were no more than this to FTC’s purchase of the goods and their onward sale to EET, I might have been ready to put aside these doubts and accede to FTC’s application. But there are other aspects to FTC’s dealings in relation to these goods which indicate that all is not quite as Mr Singh suggests.

[57]According to information in the possession of Mr Hellard (see bundle D2/231-4), the chain giving rise to FTC’s payment of £640,250 was immediately followed by a sale of the phones by EET to a business in Dubai called Farouk & Suhail Trading Co LLC for £672,000. As it was an export the sale was VAT-free. Ignoring the VAT arising on the sale by FTC to EET, the mark-up on the sale by EET to Farouk & Suhail was £40,000. In a letter dated 31 December 2004 to Mr Hellard’s firm, EET stated that its deal with FTC had “completed”. The letter is from a Mr Buxton “for and on behalf of Damien Hancox, Evolution Export Trading Ltd”. See bundle D2/181. On the basis of other documents which have come to his attention, coupled with a statement in the evidence of Mr Holland, the solicitor acting for EBST and Mr Shoubaki, Mr Hellard has good grounds for thinking that FTC’s purchase and onward sale to EET were part of what is described in the evidence as Regalway chain 63. The documents which demonstrate that chain (exhibited at D2/213 (and following) to the second witness statement of Nicholas Nicholson, a manager employed in Mr Hellard’s firm) suggest that the goods were imported by Regalway from its usual French supplier, PP Commercialisation, that, before that, they had come from another off-shore entity called PSG Computers SA and that the goods were sold on to Avah and thence to EBST. What is more, all of the transactions - from PSG Computers at the top of the chain down to Farouk & Suhail at the bottom - are said to have been entered into on 30 September. Certainly, all of the documentation, so far as it is available, bears that date. According to bank statements of EBST which have become available to Mr Hellard (see B6/152 and following), EBST made a number of significant payments to PSG Computers in the period 5/6 October 2004. The amounts transferred to PSG Computers more than exceed the amount which Regalway was required by PP Commercialisation to pay PSG Computers for them. Mr Hellard believes it is possible that these payments included payments for the mobile phones featured in chain 63.

[58]In his third witness statement, Mr Singh says that Mr Hancox has since told him that EET did indeed ship the goods to Dubai (via Interken) but that they were not released by the main supplier with the result that EET was unable to release them to its purchaser and therefore the transaction was not completed. No details, however, are available to put flesh on these assertions. For example, it is not stated when the goods reached Dubai, the basis upon which EET shipped them to that destination, where they were kept on arrival and, crucially, when precisely EET first discovered that there was a problem (if indeed there was) about obtaining their release.

[59]Another curiosity is that there have come into Mr Hellard’s possession documents (exhibited at D2/191 and following) relating to another chain, referred to as Regalway chain 62, also dated 30 September 2004. This chain is for an identical quantity of goods as in chain 63. The only difference is that the sale by EBST (for £740,250 inclusive of VAT, which is the same price as FTC was invoiced by EBST in chain 63) was to a company called “The Export Company” which, coincidentally, was EET’s supplier on two other Regalway chains. The Export Company in turn sold on to EET for £742,600 which is the same price at which FTC sold the 4000 mobile phones to EET. In this case, however, only one-quarter of the supply was sold on to Farouk & Suhail.

[60]A most material factor in all of this is that there are solid grounds for believing that Mr Hancox is implicated in MTIC fraud. Documents, to which my attention was drawn by Mr Bompas, show that one of the recipients of payments by EBST was an off-shore entity called Wall Street Banking Corporation Ltd (“Wall Street”). Mr Hellard’s analysis of payments made by EBST in the period 30 July to 8 October 2004 discloses that Wall Street received £148,937.20 during this period (see B3/169). Other evidence (see B3/61) indicates that a Mr Damien Hancox is connected with Wall Street.

[61]Assuming that, as the documents suggest, Mr Hancox has been implicated in illicit activities through his connection with EBST, the question which inevitably arises is whether it is no more than a coincidence that FTC should have bought the 4000 mobile phones from EBST and sold them on to Mr Hancox’s company which then exported them.

[62]More generally, Mr Bompas points to the fact that until mid-2004 FTC was in a comparatively small way of business. Its business turnover then underwent a dramatic upturn. In July 2004 its purchases (exclusive of VAT) amounted to £15.4 million of which £6.3 million was attributable to just eight transactions with EBST. In September 2004 its purchases (ignoring VAT and ignoring the transaction with EBST giving rise to this application) totalled £8.2 million of which a little over £1 million was attributable to four transactions with EBST. Its first purchase from EBST, on 5 July, was at a cost (inclusive of VAT) of £541,675. On 30 July it made two purchases from EBST, one for £1.41 million and the other for £1.17 million (both figures being inclusive of VAT). The transaction at £1.41 million (invoiced to it by EBST as invoice 71) involved payments by FTC to EBST over a six day period in early August in tranches of £100,000. They necessarily resulted in FTC extending considerable credit to EBST since the goods in question (6000 CPUs) were only to be released once payment in full had been made for them. Bank statements of EBST annotated in what is believed to be Mr Shoubaki’s handwriting indicate that one of the entities to which a payment was made by EBST in connection with this transaction (and two others in which FTC was not involved) was Wall Street. It was paid £44,847.33. Wall Street, as I have pointed out, has a connection with Mr Hancox. FTC’s September purchases from EBST, other than the purchase which is the subject of FTC’s application, involved sales on of the goods in question to a company called Saphire Ltd, in each case at a mark-up of 50p per item. In each case the goods had been supplied higher up the chain by Regalway. In the case of one of the transactions, FTC sold two-thirds of the supply to Saphire and the remaining one-third to a company called Insignia Telecom UK Ltd which, in its turn, immediately on sold the goods to Saphire.

[63]A striking feature of the trading relationship between EBST and FTC - apart from the sheer scale of the transactions - was how minimal and recent the connection was between Mr Singh and Mr Shoubaki before trading started and how minimal the “diligence” was that each had undertaken in connection with the other’s creditworthiness and how trusting therefore each was of the other. Neither company was one of any financial substance. Indeed, the circumstances in which FTC came to trade with EBST are obscure: Mr Singh has provided two different accounts of how this occurred, each involving no more than a website address. What neither explains is how it came about that, from the outset of their trading relationship, EBST and FTC came to deal in such large sums. Mr Shoubaki and Mr Singh’s only personal contact was over the telephone: they had not met face to face before trading with each other.

[64]Another striking feature of the evidence is that, as Mr Hellard explains, almost all of FTC’s trading partners appear to be implicated in MTIC fraud. Mr Bompas also points to particular features of supply chain 63 which, he said, are difficult to reconcile with honest trading by FTC. Those features are(1) the absence of any credible explanation for the speed with which the chain of back-to-back sales was formed;

(2) the implausibility of a neat supply chain being built up with small profits on UK transactions and a large profit on the export deal;

(3) the implausibility, if the transactions had been genuinely negotiated at arms length, that the mark-up on UK transactions is usually, if not invariably, in multiples of 50p per unit and never in some odd number of pence;

(4) the absence of any satisfactory explanation for FTC’s failure to pay the full purchase price or for making any payment to EBST before it had received the full price from EET and

(5) the absence of any credible explanation for FTC’s willingness, when its information about EBST was so slight, to extend credit to EBST to the extent that it did (almost £⅔ million) in relation to its purchase of the 4000 mobile phones. These are all features to which I drew attention in my observations on the system of supply chain described by Mr Ghai’s evidence.

[65]FTC, through Miss Holtham, denies any participation in or knowledge of any scheme involving MTIC fraud whether in relation to its purchase of 4000 mobile phones from EBST on 30 September or in relation to any other transaction in which it has engaged, whether with EBST or with others. She submits, moreover, that there is nothing in the evidence, beyond a coincidence in date and the number and type of the mobile phones, to link the 4000 mobile phones which FTC was purchasing from EBST with any transactions higher up Regalway chain 63, whether or not that chain leads to Regalway. She submits that there is nothing sinister in 50p (or any other round sum) mark-ups per item in transactions of the kind in which FTC was involved. She relies heavily on the ability of the main supplier where a chain of supply is involved and where the goods are deposited with a freight forwarder such as Interken, to withdraw the goods from the chain if it has not been paid. She submits that the goods were withdrawn in the instant case because the requisite payment was not made. Indeed, she points to the short payment by her own client and to the evidence of difficulties which, on any view, EBST faced following the making of the freezing order. She submits that no sinister implication arises from the fact that FTC has engaged in a number of transactions for high value with EBST. She submits that, in the nature of the wholesale trading in which FTC is engaged, transactions are of high value and are negotiated speedily. She places reliance on the steps taken by FTC to ensure that those entities with which FTC dealt were duly registered for VAT. She points to the fact that FTC has repaid to EET what EET had earlier paid to it for the goods - a step FTC would hardly have taken if it thought that its sale to EET had indeed completed. She submits that the liquidator is seeking to discredit FTC on the basis of guilt by association: the fact that one or more of those with whom FTC has traded have been or may be shown to be involved in MTIC fraud is not to be held against her client.

[66]The circumstances of FTC’s involvement in its acquisition of the 4000 mobile phones from EBST and their onward sale to EET, when taken with the wider matters set out in above to which my attention has been drawn, lead me to conclude that it would not be appropriate on the evidence as it stands and without the benefit of disclosure and cross-examination to vary the freezing order to enable EBST to repay to FTC the £640,250. To my mind, the evidence raises a serious question as to whether, when entering into its purchase from EBST and the immediate onward sale to EET, FTC did so as a knowing participant in MTIC fraud in which, on the evidence, there are good grounds for thinking that EBST has been involved. The apparent disappearance of the 4000 mobile phones serves only to highlight my concern over the honesty of the transaction. Of course, a thorough investigation of the circumstances may show that FTC is a wholly innocent player in all of this. I am in no position to reach any view, and do not attempt to do so at this stage, on whether that is so. It suffices to say that such are my doubts concerning the honesty of the transactions between EBST, FTC and EET that I am not willing to dispose summarily of this application.

Vita's application in respect of EBST's sale to it of 2880 computer chips

[67]This transaction was apparently entered into on 30 September 2004. According to Vita's evidence it was a Mr Fabian Thorpe who acted for Vita in the transaction and Mr Shoubaki for EBST.

[68]Vita was incorporated in August 2003 but only began trading in May 2004. Already by 31 August 2004 it had a turnover of £9.26 million. According to Mr Thorpe, Vita has a sister business called Genarique Ltd which he and a Mr Harewood set up and had been operating since October 2002 or thereabouts. Although Genarique’s primary function is said to be that of design and reprographics, it appears (according to Mr Thorpe) that from around November 2003 it moved into the wholesale trading of sim-free mobile telephones. In the meantime Vita had been acquired and, from May 2004, had begun wholesale trading in electrical products such as memory sticks, computer processing units and other items unrelated to mobile phones. Both companies trade from the same premises and appear to share the same or substantially the same staff. Mr Thorpe and Mr Harewood are directors of Genarique while Mr Thorpe is the sole director of Vita and Mr Harewood its company director. Mr Harewood owns the two issued shares in Genarique while Mr Thorpe owns all of the 100 issued shares in Vita. A Mr Marc Bryan works for Vita as its senior trader. There are others employed in Vita’s business, including an accountant (a Mr Baxter), a junior trader and a compliance/administration officer.

[69]In his first witness statement, Mr Thorpe implied that Vita came across EBST for the first time when it saw an advertisement on a website “in the third quarter of 2004”. The only screening which Vita appears to have carried out on EBST, apart from receiving a recommendation from Interken (see the first witness statement of Rebecca Reeder, Vita’s solicitor, at paragraph 3) was the receipt on or about 28 July 2004 of copies of certificates of EBST’s incorporation on a change of name and registration for VAT together, probably, with details of its bank account number and address (attached to a common form of letter from Mr Shoubaki introducing EBST to the reader) and, possibly, a company “essentials” report disclosing nothing about EBST beyond the fact that there were no county court judgments against it. In his second witness statement Mr Thorpe said that he met Mr Shoubaki at a trade exhibition in Birmingham in April 2004 when he met many other traders and companies. He also stated that he visited Mr Shoubaki at EBST’s offices in Croydon where the two of them discussed the computer commodities industry and how they might trade together. He felt that a good rapport was established between them. Their first direct trade with one another appears to take place on 2 September. It involved a sale by EBST to Vita of 4320 CPUs for just under £400,000 (inclusive of VAT).

[70]The documentation relating to the purchase of the 2880 computer chips starts with a purchase order by Vita to EBST quoting a unit price of £79.50 per chip making an overall cost, inclusive of £40,068 VAT, of £269,028. EBST's invoice to Vita is dated 30 September 2004. So also is a purchase agreement providing, inter alia, that the purchase price was to be advanced by a single payment. None of these documents carries fax transmission details except EBST's invoice which, curiously, is dated 16 October 2004. Mr Thorpe, in his evidence, believes that the invoice was sent to Vita earlier than 16 October and therefore that the invoice bearing that date was a “resending”. He speculates that Vita probably mislaid the original and mentions that it was not uncommon to request a resending of relevant paperwork. As will later be seen, however, 16 October was after EBST had notified Vita of its inability, owing to its bank account having been frozen, to make payment for goods supplied and had in effect offered to return any money paid subject to authorisation by the solicitors acting for Regalway. It was also after Vita had written to those solicitors asking for its money back. It is a little curious therefore that Vita should have asked for, and EBST should have agreed to send, a further copy of its invoice on 16 October. This is not a matter which I can resolve on this application. A fax transmission report indicates that Vita’s purchase order was sent to EBST at 1.28 pm on 1 October together with a two-page document which Mr Thorpe believes was Vita’s purchase agreement.

[71]Purportedly also on 30 September 2004, Vita entered into an agreement to sell the computer chips to Star Max International Ltd of Hong Kong for £240,480. Being an export, the sale was VAT-free. According to Vita's evidence it was again Mr Thorpe who acted for Vita and it was a Mr Rashid who acted for Star Max.

[72]Vita’s acquaintance with Star Max before selling the 2880 computer chips was at best exceedingly slight. According to Mr Thorpe, Vita was first contacted by Star Max in August 2004. It appears that Star Max rang Vita (Mr Thorpe was not certain who took the call) as a result of having seen Vita’s advertisement on a particular website. Mr Thorpe said that he later rang back and spoke to Mr Rashid of Star Max and the two then discussed the possibility of trading together. Mr Rashid indicated that Star Max’s preferred agent in the United Kingdom was Interken. Subsequently, on 27 August, Star Max sent Vita what Mr Thorpe described as Star Max's company details. Those details comprised(1) a “company introduction” letter signed by Mr Rashid explaining the nature of Star Max’s business (“a leading importer and exporter in the electronics and computer components market”),

(2) a current Hong Kong business registration certificate (mostly in Chinese),

(3) a current Hong Kong radiocommunication dealer’s licence (also mostly in Chinese) and

(4) a blank Star Max letterhead. Mr Thorpe thinks that he sent Star Max copies of Vita’s letterhead, its certificate of incorporation, its VAT certificate and its banking details.

[73]The researches of Mr Nicholson (Mr Hellard’s assistant) disclose that Star Max was incorporated on 16 July 2004 (no more than five weeks or so before Mr Rashid's initiating telephone call to Vita), has a paid-up share capital of $HK100 and that Mr Rashid, whose address (on the formal company documentation) is in Pakistan, is its director and the holder of 99% of the issued shares.

[74]The next communication, as I understand the evidence, was when Mr Thorpe rang Mr Rashid on 30 September about the 2880 CPUs. Mr Thorpe said that Vita had been offered the 2880 CPUs by EBST “on or around 30 September”, that he then telephoned around the United Kingdom market to see what kind of margins he could make, that he thereafter telephoned his international contacts (in Hong Kong, Dubai and the USA) to see what prices they would be willing to pay and that “after some haggling” Star Max offered a price of £83.50 per unit on that day which was the highest that Mr Thorpe had been offered by any potential buyer. According to Mr Thorpe, the deal was struck there and then. The price agreed exceeded by £4 a unit the price which Vita had earlier that same day agreed to pay to EBST for the stock.

[75]The following documents are relevant to this further transaction. First, there is a purchase order for the goods from Star Max. The order provides for payment for the goods to be made on inspection. Mr Thorpe states that he thinks that this would have been received either on 30 September or on 1 October. The document contains no fax transmission details. Second, there is a VAT declaration form signed by Vita, dated 30 September, which Vita sent to Star Max. The fax transmission details indicate that this document was sent to Star Max at 2.19 pm on 1 October. Third, there is a so-called sales pro-forma by Vita to Star Max giving details of the goods, the price for them and Vita's bank account and stating, “payment is due on receipt of the pro-forma invoice” and Vita’s sales agreement. These documents were faxed to Star Max on Monday 4 October at 11.33 am. Fourth, there is a sales invoice (as distinct from a pro-forma sales invoice) from Vita to Star Max, also dated 30 September. Mr Thorpe says that this was sent on 4 October, the same day apparently as the pro-forma sales invoice. For some reason this document does not have any fax transmission details. Fifth, there are shipping instructions by Vita to Interken, faxed to Interken at 11.54 am on 4 October, detailing the goods to be shipped (ie 2880 chips in eight boxes) and the name and address in Hong Kong of Star Max as the customer. The instructions request Interken to “conduct a 100% inspection” and forward the result via fax or e-mail and to “allocate to my customer and allow ship on hold”.

[76]On 5 October 2004, the computer chips were the subject of an inspection report by Aberdale Logistics Ltd. Their report was faxed by Interken, which had organised the inspection, to Vita at 7.05 pm on 6 October. At the same time Interken faxed to Vita a copy of the airway bill for the transportation of the goods to Hong Kong. The airway bill which is dated 5 October stated that Vita was the shipper and Worldwide Travel the consignee. Worldwide Travel is a freight forwarding agent in Hong Kong.

[77]The chips were airfreighted to Hong Kong on a flight which departed Heathrow on 6 October and, according to Worldwide Travel, arrived in Hong Kong on 7 October.

[78]During the early morning (London time) of 8 October, Star Max transferred £240,474 to Vita's bank account. That was the price for the goods to Star Max less a £6 banking charge. It is to be inferred that, consistently with the terms of its purchase order, Star Max, before making this payment, had inspected and was satisfied with the computer chips.

[79]Later that same morning (8 October), Vita transferred the same amount, £240,474, to EBST's bank account. That sum was £28,554 short of the full price which Vita was obliged to pay for the goods. According to Miss Simpson who appears for Vita, it was not until 12 October that Vita got wind of any difficulties over EBST's banking position. That appears to be consistent with the documentation that I have seen. That being so, it has not been explained why Vita failed in the meantime to pay the balance due to EBST (or, for that matter, why EBST did not call for the balance). According to Vita's contract with EBST, Vita was obliged to effect payment for the goods by a single payment.

[80]A major issue is whether, having made its payment for the goods, Star Max took delivery of them. According to a letter to Mr Nicholson (Mr Hellard’s assistant) dated 16 December from a Mr Sethi, manager of Worldwide Travel (see D2/115), “… the consignment was released from the airport on the 8th October 2004 and released to Star Max International Ltd the same day upon payment of the local charges…”. If that happened, there was no basis for Star Max subsequently to contend that it had not received the goods and no basis for Vita to seek to recover from EBST its payment for the goods

[81]Mr Thorpe, in his evidence, says that on 11 October (which was three days after Star Max had paid for the chips and, according to Worldwide Travel's letter of 16 December, had taken delivery of them) Star Max faxed to Vita the following letter:

“Dear Mr Fabian Still I am waiting for release of your main supplier. Please send me as soon as possible release from main supplier. If you cannot send me release please send me my money back. I am not happy with you. Best regards: Asif Rashid”

The letter is undated and unsigned. There are no fax transmission details on it. Those acting for Regalway contend that that letter did not come into Vita's possession until a rather later date. As will shortly appear, there are grounds for so thinking. Whether the letter was received by Vita on 11 October is not something which I can determine on this application. Best regards: Asif Rashid”

Best regards:

[82]I have mentioned that it was only on 12 October that Vita got wind of EBST's banking difficulties. Mr Shoubaki's letter of that date to Vita was in the following terms:

“…Due to unforeseen and unfortunate circumstances, our business account has been frozen, preventing me from paying my suppliers for the goods. I understand that you therefore may want your money returned. I have been advised by my bank manager that any release of money needs to be authorised by Moon Beever solicitors [who act for Regalway] who initiated the freezing injunction. We are in the process of taking legal action to resolve this matter immediately and would also suggest that you write a letter outlining the amounts you have paid so that the appropriate party may take it into account.”

[83]According to his second witness statement, Mr Thorpe's reaction to this was to speculate that “EBST's bank had simply decided it did not want EBST as a customer any longer and had closed its bank account”. His evidence continued:

“Whilst this would be a serious matter, it would not have had the dreadful consequences that the Freezing Injunction has had. EBST would have had to open a new bank account, but once this was achieved the money would have been transferred to EBST's supplier or returned to us … this is what I imagined had happened to EBST and why, initially, I was certain that the funds would eventually be released without too much difficulty.”

[84]Mr Thorpe goes on to say that as soon as he had heard from EBST he wrote to Star Max to explain the position . His letter is in the following terms:

“Dear Mr Rashid, I am writing to you concerning a situation that is currently affecting the transaction on reference number [given] between our two companies. We have been notified by one of our suppliers that they are under investigation by HM Customs and Excise. We view this type of action as an unfortunate part of the industry that we know affects various organisations at different times. Unfortunately, the circumstances in question may delay the release of title of the said stock to your company name. Understandably, we are rather concerned with this turn of events, as we carry out extensive due diligence on all companies that we trade with on a daily basis. In addition, we recognise that this is not a good way to develop our relationship with your organisation, as I know that you require reliable suppliers of stock, however please accept our sincerest apologies, and bear with us as we endeavour to bring about a swift conclusion to this situation. Please be assured that we are working hard to resolve this situation in a timely fashion, and we will keep you up to date with any developments. In the meantime, I can be contacted via the details provided, and I thank you in advance for your patience in this matter. Yours truly, Fabian Thorpe Director”

Two points are worth noting. First, the letter makes no reference to the letter which Mr Thorpe says he had received the previous day from Star Max. In that letter, Mr Rashid was calling for the immediate release for the goods, alternatively the return of his money. Mr Thorpe's letter, stating that a release may be delayed and making no reference to any wish on Mr Rashid's part to have his money back if a release could not be immediately effected, is difficult to reconcile with the notion that he had received that letter the previous day. Second, there is no suggestion that Vita would be seeking to call off its purchase of the goods from EBST. Fabian Thorpe Director”

Fabian Thorpe

[85]That same day, Mr Thorpe wrote to HMCE asking what Vita should do in the light of the freezing order affecting EBST's bank account and whether they had “a case to get our money already sent returned”.

[86]Another letter from Star Max, also unsigned, undated, bearing no fax transmission details and, on this occasion, not even purporting to be from any particular person, was exhibited to Mr Thorpe's second witness statement. That letter is in the following terms:

“Dear Sir, Thank you for your letter dated 12/10/04. Please could you keep me updated as to the resolution of this situation. I would like to continue working with you but I need clear answer as to whether you will be returning my money or I will have release on these goods. Regards,”

Reading that letter with the letter from Star Max said to have been received on 11 October, the impression that I have is that the 11 October letter was the later of the two to be sent, assuming it was sent. Regards,”

[87]In his first witness statement dated 14 December Mr Thorpe stated that he and (as it later appeared) Mr Bryan visited Star Max in Hong Kong as part of a ten-day business development trip planned long before the problems encountered with EBST. The trip involved prearranged meetings with a number of organisations, first in Hong Kong (between 19 and 23 October) and then in Dubai (between 24 and 29 October). He stated that the meeting with Star Max was on 21 October which was two days after arriving in Hong Kong. Curiously, Mr Thorpe said nothing in his first witness statement about what if anything was discussed at that meeting about Vita's sale of the 2880 computer chips and what if any problems were being encountered and what action was being taken. It might have been thought that if by then Star Max was asking for its money back this fact and the course of his discussions with Star Max would have figured prominently in his statement. Instead, Mr Thorpe said only this about the Star Max transaction in that statement. “I further understand that the Court may be interested in the current location of the goods. I cannot be certain of their whereabouts as they are not in Vita's control. However, from the airway bills…it can be seen that the goods were transported to Dubai [Mr Thorpe was also concerned to identify what had happened to the goods in the second of the two transactions in which it seeks relief on this application] and Hong Kong respectively in anticipation of their release to Vita's customers. Vita paid for the transportation of the goods. I believe that the goods purchased from EBST and sent for release to Star Max may now have been returned to the freight forwarder Interken … I do not have any documentation in this regard other than the airway bills. I would expect the original supplier to know the exact location of the goods.”

[88]Since it was Vita that had shipped the goods to Hong Kong and, as Mr Thorpe pointed out, had paid for their transportation, it came a matter of some surprise to me, as it did to Mr Hellard and those advising him, that Vita (in the person of Mr Thorpe) appeared to know so little and seemed so unconcerned about what had happened to the goods.

[89]Mr Thorpe also exhibited to his first witness statement the two undated letters from Star Max and his letter to Star Max dated 12 October to which I have already referred. He also exhibited a further letter from Star Max, this one bearing a date, 25 October, but again without any fax transmission details. That letter was as follows:

“Dear Sir/Madam, Respected, I want to inform you that we haven't yet received the release order from your main supplier. Now I request you that Kindly sent us release order from your supplier or you return back our money as soon as possible. Otherwise we will have the right to take legal action against you. I hope you will understand and cooperate with us. If you have any clarification kindly contact us. Best regards, Asif Rashid”

The letter made no reference to the meeting which apparently had taken place four days earlier. Asif Rashid”

[90]Prompted by this unsatisfactory evidence as to the fate of the goods, Mr Hellard arranged for Mr Nicholson to contact Worldwide Travel to discover what had happed to them. It was this approach that prompted Worldwide Travel's letter of 16 December (referred to earlier) asserting that, so far from the goods having been returned to Interken (much less to Vita as the shipper of them), they had been released to Star Max on 8 October.

[91]At one of the adjourned hearings of this application, Vita produced a letter dated 20 December which it had received from Star Max stating that Star Max had since checked the position with Worldwide Travel which, in its turn, had stated that its earlier information (as set out in their letter of 16 December) was wrong. It stated that the goods had never been delivered to Star Max “because the main supplier pulled on the deal and transfer [sic] the goods release [sic] to another buyer”. The letter attached a letter to Vita from Worldwide Travel (also dated 20 December) stating that:

“the consignee was first consigned to you on hold, but after our conversation of the enquiry by your supplier, I have gone through the records and found that the delivery had been changed to another buyer. Therefore, please inform your supplier as accordingly, and I will inform the liquidator concerned of the rectification.”

[92]There were thus conflicting accounts by the freight forwarder in Hong Kong to which the goods had been sent as to how it had dealt with the goods.

[93]The confusion over what had happened to the goods was, if anything, added to by a further letter from Mr Sethi of Worldwide Travel, also dated 20 December, this time to Mr Nicholson. Mr Sethi's further letter was as follows:

“As regards to the captioned consignment [ie of the 2880 computer chips], Star Max International called up that saying that his supplier stated that he had taken delivery of the shipment, but did not at all. After a thorough check of the file, I found that my staff had received a fax to hold the delivery to Star Max International on the 5th of October and another fax to amend the allocation to Sunny International on 12th of October and was delivered on the 13th of October upon payment of local charges . This error was due the fact that during the short conversation with you, I only read and responded with the details on the airway bill and did not realise the documents attached with it. Therefore, please rectify the information prior given to you, and contact me for any further information required.”

At the time this letter became available the faxes of 5 and 12 October referred to in it had not been produced to the court. They were eventually exhibited to Mr Thorpe's second witness statement. Interken’s fax dated 5 October addressed to Worldwide Travel was as follows:

“Please allocate to the following: Consignee: Star Max International Commodity: [details set out] Allocation date/time: 05/10/2004 11:23:26 Status: On hold Do not release until authorised by Interken Freighters (UK) Ltd”

Interken's fax to Worldwide Travel dated 12 October was as follows:

“Please allocate to the following: Consignee: In reference to the above AWB, please reallocate this stock from Star Max International to Sunny International and release accordingly [followed by 17 exclamation marks] Commodity: [details set out] Allocation date/time: 12/10/2004 16:33:34 Status: Released [followed by nineteen exclamation marks]”

The fax transmission details indicate that the document was faxed at 4.34 pm on 12 October. Consignee: Star Max International Commodity: [details set out] Allocation date/time: 05/10/2004 11:23:26 Status: On hold Do not release until authorised by Interken Freighters (UK) Ltd” Commodity: [details set out] Allocation date/time: 12/10/2004 16:33:34 Status: Released [followed by nineteen exclamation marks]”

Allocation date/time: 12/10/2004 16:33:34

[94]In his second witness statement Mr Thorpe added to his earlier account of his dealings with Star Max. At paragraph 46 he explained that he spoke with Mr Rashid many times between 12 October and his visit to Star Max's offices on 21 October and, in paragraph 47, that the visit to Star Max was unpleasant, that Mr Rashid and his assistant were “very emotional and angry” and that he, Mr Thorpe, and (I assume) Mr Bryan who accompanied him “were very uncomfortable during the visit, but we hoped that by attending Star Max in their offices we might assuage their fears…”. He then went on to state that since their visit Star Max had continued to write to Vita on a regular basis demanding repayment of their money. He then referred to the letter dated 25 October (set out above) which, it may be noted, made no reference to Vita's visit four days earlier and to letters dated 6 December, 20 December and 6 January.

[95]Quite who the “main supplier” was who had “pulled on the deal” and transferred the goods to another supplier and how he had achieved this, apparently without even informing, much less obtaining the agreement of, Vita as shipper of the goods to Hong Kong, and quite when this had occurred and who the other buyer was, were to some extent dealt with in the evidence of Mr Ghai of Interken. I have already referred to Mr Ghai’s witness statement with its explanation of how Interken handles supply chains of goods such as mobile phones and computer parts which pass through its care and the questions which that explanation raises.

[96]In his witness statement, Mr Ghai confirmed that his instructions to ship the goods to Hong Kong came from Vita and that “either Mr Ahmed [his assistant, Waleed Ahmed] or I then telephoned the Main Supplier and received its confirmation that it was acceptable to ship the Chips to Hong Kong.” He goes on to state (in paragraph 68) that:

“Unfortunately, although Star Max accepted and paid for the goods, and although Vita made payment to EBST, the goods were not released to Star Max because the funds were frozen by the liquidator of Regalway Care Ltd … in the account of EBST. Accordingly the Main Supplier did not receive its payment, withdrew the allocation and the supply chain collapsed.”

He does not state when or how he became aware of the freezing of the EBST's funds or of the other matters set out in that paragraph. He goes on to explain later in his witness statement, although on what basis is not evident, how Mr Sethi of Worldwide Travel mistakenly came to assume that the goods were released to Star Max. He then confirms that he received instructions from the main supplier to release the goods to Sunny International, refers to, but does not exhibit, the two faxes from Interken to Star Max which Mr Thorpe later obtained and exhibited to his witness statement and concludes:

“Mr Sethi confirmed to us that they had released the chips in accordance with my instructions. For the sake of clarity, I can confirm that Star Max did not receive the chips under its contract with Vita.”

[97]Mr Ghai’s witness statement does not explain who the main supplier was. Nor does it explain how Interken came to release the goods without informing (or arranging to inform)Vita or Star Max (both of whom, in his understanding, had paid for the goods) of the sudden change of destination of the goods and their diversion to an alternative buyer, if in truth this is what happened.

[98]The position is made a little more puzzling by a fax dated 21 December from Interken to Vita's solicitors stating that although the memory sticks were “only allocated for intended sale to Vita's customers and were not released to that customer”, nevertheless it was stating “for the court's information” that “the mere allocation of stock does not mean that title from that stock has passed from the seller to the intended buyer, for that to happen we would require a signed release note from the seller, (in this case Vita)” (emphasis added). The reference in that fax to the need for a release note from Vita (rather than from, for example, the main supplier) makes all the more puzzling Interken's apparent willingness to act on the instructions of the unnamed “main supplier”.

[99]How then does the matter lie? I am in effect being asked to accept that, despite Worldwide Travel's original assertion that the goods had been delivered to Star Max on 8 October, in fact already by 13 October the goods had been delivered to an altogether different purchaser and at the instruction of the unnamed main supplier. Since, according to Mr Thorpe, Vita only found out about EBST's banking difficulties on 12 October (and I have seen nothing elsewhere in the evidence to indicate any earlier full knowledge by any third party of EBST's position) it comes as a matter of considerable surprise to be informed that, in the space of, at the most, a working day, the main supplier, whoever he might be, was able to call off its sale, ignore totally the claims of its purchaser and any sub-purchasers further down the chain, find another buyer for the goods who happened to have a presence in Hong Kong, and arrange through Interken for the delivery of the goods to that buyer who was able to collect them the following day.

[100]I am being asked to accept that this happened without Worldwide Travel informing Star Max (which, as Worldwide Travel knew, was the consignee named in Interken's fax to it of 5 October) or Vita (which Worldwide Travel knew as the shipper to it of the goods) of what had happened to the goods, if only that they had been released to another. It also means that when Mr Thorpe had his meeting with Star Max on 21 October at which he endeavoured to “assuage” the fears of Mr Rashid and when Mr Rashid and wrote his letter of 25 October requesting Vita, inter alia, to “kindly send us release order from your supplier” (ie to press for the release of the goods), both were in ignorance of the apparent sale and delivery of those goods to someone else almost a fortnight earlier.

[101]I am also being asked to accept that, although it had shipped the goods to Hong Kong on Vita's instructions (and at Vita's cost), Interken did not bother to inform Vita of the main supplier's action in reallocating (ie selling) the goods to another purchaser (if this is what happened). That Vita was not, apparently, aware of this change of ultimate buyer of the goods emerges from paragraph 46 of Mr Thorpe's first witness statement (signed on 14 December) in which he says that he was under the impression that the goods had been returned to Interken. No less puzzling is the apparent lack of concern on Mr Thorpe's part, evident from that paragraph, as to what had happened to the goods. It does not seem to have occurred to him to contact Interken to find out.

[102]I have considerable doubts about whether the 2880 computer chips were not released to Star Max. Even ignoring Worldwide Travel’s letter of 16 December, the evidence as to what happened to the chips is unsatisfactory and, on any view, unclear. But if they were released to Star Max, why should Worldwide Travel and Star Max state that they were not and why should Worldwide Travel and Interken assert that, already on 12 October, the goods had been sold to another? And what, if any, was Vita’s role in all of this? This brings into question the wider course of dealing between EBST and Vita, and by Vita generally, disclosed by the evidence, and the pattern of trading that emerges from it. Before coming to those matters, I will set out the circumstances of DC UK’s application.

[103]Like the other two transactions, this transaction was purportedly entered into on 30 September 2004. I say “purportedly” since, like Vita’s purchase of the 2880 computer chips, there is no evidence that any document actually passed between DC UK and EBST on 30 September (or for that matter between DC UK and Vita in relation to the onward sale of the same goods purportedly on the same day).

[104]The participants in these transactions were Mr Shoubaki for EBST, Mr Raj Haria for DC UK and Mr Thorpe for Vita.

[105]DC UK was incorporated in February 2001 to carry on a business previously conducted through a partnership between Mr Haria and his wife which had been established in June 1998. The partnership had traded in connections (devices for connecting mobile phone users to the principal mobile telephone networks) and the retail side of mobile communications. From about the time of DC UK’s incorporation the business concentrated on wholesale trading and the distribution of mobile phones and equipment. In 2003/2004 there was another shift in business emphasis with the company moving into the wholesale trading of IT components, including CPUs, hard drives, memory sticks, computer screens and the like. This was accomplished during the final three months of DC UK’s financial year. The results are reflected in a dramatic increase in turnover. For the year to 31 March 2003, DC UK’s turnover was £431,000. This had increased to £3.68 million in the year to 31 March 2004. In the five months to 31 August 2004, turnover was £2.2 million. In the three months that followed, that is from 1 September 2004 to 30 November 2004, turnover amounted to £14 million.

[106]Mr Haria is the sole director and, effectively, DC UK’s only full-time employee. It has a paid up capital of £2 of which one share is held by Mr Haria and one by his wife.

[107]The purchase by DC UK from EBST was the second transaction entered into between these two entities and, according to Mr Thorpe, the sixth transaction (all of them in September) between DC UK and Vita (four of them having been sales by Vita to DC UK and two of them, the transactions described in this and the following paragraphs, sales by DC UK to Vita). All were transactions for substantial prices. The first of the transactions involving EBST, DC UK and Vita involved a purchase of 2750 memory sticks for the price (inclusive of VAT) of £319,893.75. It was entered into, according to the dating on the documents, on 28 September 2004. The following day DC UK immediately sold on the goods to Vita at a 50p per item mark-up. Insofar as fax transmission details appear, they are all subsequent to 28 September. EBST’s invoice to DC UK, dated 28 September, bears a fax transmission date of 16 October 2004. Mr Haria claims in his evidence that the reasonable explanation for this is that DC UK required a further copy of the invoice “which had already been sent … by EBST, but had been mislaid”. This, coincidentally, is the same explanation given by Vita for the fax details appearing on EBST’s invoice to it for the 2880 memory sticks which Vita later sold to Star Max. By a further coincidence, both replacement invoices were faxed by EBST on the same day, 16 October and at roughly the same time (05.32.24 in the case of the invoice sent to DC UK and 05.43.40 in the case of the invoice sent in respect of the wholly different transaction to Vita).

[108]Mr Bompas says that there are many indications, of which these are but two, that the documents for these transactions have been created at a date subsequent to the transaction to which they claim to relate and that this is in order, first, to give the appearance that the transactions were entered into before the month-end rather than at the start of the ensuing month (the significance of which has to do with the timing of input VAT reclaims in that a month is gained if the transaction is backdated to the previous VAT period) and, second, to create the impression of a properly documented, and therefore of an arms-length, good faith transaction. On an application of this nature I cannot say whether these contentions are well founded. I certainly cannot say that there is no substance to them.

[109]Two days later, on 30 September, according to the dates on the relevant documents, DC UK purchased the 4000 memory sticks from EBST which are the subject matter of its application to this court. The purchase was at a price, inclusive of VAT, of £465,300. The same day DC UK purported to sell the same goods to Vita again for a mark-up of 50p per item and therefore at a price, inclusive of VAT, of £467,650. That same day, 30 September, Vita claims to have sold the same goods to an entity called Sejal International of an address in Dubai for £420,000. As an export, the sale to Sejal was free of VAT.

[110]Insofar as the documents evidencing this transaction carry any fax details, they are all faxed in the afternoon of 1 October 2004 or subsequently.

[111]Very little is known about Sejal. Although apparently based in Dubai and trading under the name Sejal International, it appears to be a company incorporated in the British Virgin Islands under the name Sahil International Inc. It was incorporated on 11 March 2004. Its paid-up share capital is unknown. It appears to be run by a Mr Avinash Onkar.

[112]Mr Thorpe’s acquaintance with Sejal prior to DC UK’s sale to it of the 2750 memory sticks on 30 September was minimal. There had been, according to Mr Thorpe, an hour-long meeting between himself and Mr Onkar at an unnamed West London hotel in May 2004 prompted by Mr Thorpe’s wish to make contacts in Dubai. Quite how the meeting came about is not clear. At that meeting, according to Mr Thorpe, he and Mr Onkar discussed their respective trading backgrounds and potential future business dealings. Mr Thorpe said that he felt comfortable with Mr Onkar and was not concerned that Sejal was a new company. For some reason, Mr Onkar insisted that, if they did business together, Vita would have to use Hawks in Dubai (to which I come later).

[113]The next communication appears to have been a letter faxed by Sejal to Vita three months later, in late August. From the terms of that letter (“Dear Sir, We are pleased to provide a brief introduction of our company…”) one could be forgiven for overlooking Mr Thorpe’s statement that the author, Mr Onkar, had already spent an hour with him discussing potential trading and their respective requirements only a few weeks earlier. Be that as it may, the letter did no more than explain the nature of Sejal’s trading and provide its contact and banking details in Dubai. It enclosed Sejal’s Dubai twelve month trading licence.

[114]The next communication appears to have been when, after he had rung Mr Haria to find out whether DC UK had any memory sticks for purchase or sale, ascertained that he had 4000 for sale and “after some negotiating” had agreed a price of £99,50 for each stick (exactly 50p more than DC UK had agreed to pay to EBST for them), Mr Thorpe appears to have rung up and struck a deal there and then (for all of this apparently happened on 30 September) for the sale of the stock to Sejal at £105 per stick.

[115]DC UK seems to have undertaken no checks into EBST’s creditworthiness before trading between them began on 28 September beyond receiving on 27 September a blank copy letter dated 28 July 2004 (not addressed to anyone in particular) in the following terms:

“I would like to take this opportunity in introducing EBST. We are an IT and telecommunications company offering IT/telecommunications services and products. We can accommodate on networking offices, IT security, selling of computers and their components and maintenance and support of any IT infrastructure. We can also wholesale broker and import/export PC components and internet telecommunications products including mobile phones. Please feel free to discuss how we can be of any assistance to your requirements. May you also please fax me your details (if not already done so) so that we can begin to hopefully have a prosperous working relationship. Thank you Imad Shoubaki”

EBST’s telephone and fax numbers are supplied together with banking details and copies of EBST’s certificates of incorporation on a change of name and its VAT registration certificate. That same day DC UK sought and obtained from HMCE verification of EBST’s VAT number. It is not apparent what information DC UK supplied about itself. All of this occurred on the day before the first transaction between EBST and DC UK. Thank you Imad Shoubaki”

Thank you

[116]Mr Haria said that he was first introduced to Mr Shoubaki at a trade show in Birmingham in April 2004 (it seems to be the same show at which Mr Thorpe said that he first came across Mr Shoubaki) and that there had been a telephone conversation between them sometime in the summer when Mr Shoubaki said that he could obtain memory sticks and hard drives for DC UK. Thereafter there does not seem to have been any communication between them until on or about 27 September.

[117]Mr Haria’s business relationship with Mr Thorpe of Vita seems to have gone back to a rather earlier date. According to Mr Haria, their business relationship began with Genarique (Vita’s sister company) in connection with the trading of mobile phones and accessories. That relationship is said to have dated back to 2002. Mr Haria said that Mr Thorpe was his contact at Genarique. In mid-June 2004 Vita appears to have faxed to Mr Haria copies of Vita’s certificate of incorporation, VAT registration certificate company letterhead and banking details.

[118]By the time that Mr Thorpe states that he was doing his deals with EBST and Sejal, the 4,000 memory sticks were apparently already with Interken. By a so-called allocation instruction dated 30 September (but faxed to Interken at 3.00 pm on 1 October) Vita requested Interken to allocate the 4000 memory sticks “to my customer and allow ship on hold”. Although not disclosed as Vita’s customer by the instruction, Sejal was named on it and, it is to be inferred, was understood to be the customer. There does not however appear to have been a comparable allocation instruction in favour of Vita given by DC UK to Interken or, if there was, it was not in evidence. What there was in evidence was an instruction by DC UK addressed to Interken (to “Pus” meaning, I understood, Mr Ghai) which stated this:

“Hi Pus, Ref: stock purchased from EBST Ltd 4000 … memory sticks Please can you release the above stock which was allocated to us earlier to Vita Moderna Ltd. If you have any problems please do not hesitate to contact me on the above number. Please acknowledge this request by return fax. Regards Raj Haria”

That document is dated 1 October. I have seen no acknowledgement by return fax from Interken as requested by DC UK’s fax. Be that as it may, by this document DC UK was apparently authorising the release to Vita of £398,000 in value of memory sticks (ignoring the £69,650 VAT arising on the transaction) which it had not seen and which, absent any documentation suggesting otherwise, it had not arranged to have inspected and for which it had neither paid nor received payment. Ref: stock purchased from EBST Ltd 4000 … memory sticks Regards Raj Haria”

Regards

[119]Also dated 30 September - apparently a day earlier than DC UK’s instruction to Interken to release the goods to it - are shipping instructions by Vita to Interken. The instructions, however, were faxed to Interken on 5 October. They instructed Interken to ship the goods “ship-on-hold” to Sejal at Hawk Freight Services in Dubai (“Hawks in Dubai”). The instruction requested Interken to ensure a “100% inspection report” for completion and faxing back.

[120]According to their inspection report, Aberdale Logistics Ltd carried out an inspection of the goods on 5 October. Interken faxed to Vita a copy of the report at 7.06 pm on 6 October. Already by then, indeed by an airway bill dated 5 October, Interken had arranged for the goods to be airfreighted to Hawks in Dubai. According to the airway bill, the goods were to be freighted to Dubai by a flight leaving London on 6 October. It is not apparent from the airway bill at what time the flight to Dubai was due to take off. The airway bill specified the gross weight of the goods as 68 kgs.

[121]No payments of any kind for the goods, whether by Vita to DC UK or by DC UK to EBST and notwithstanding that DC UK had sent Interken its “release” on 1 October, were forthcoming until 7/8 October.

[122]On 7 October Sejal caused £419,996 (the price which it had agreed to pay for the memory sticks less a £4 banking charge) to be transferred to Vita’s bank account with Lloyd’s TSB. The payment reached Vita’s account in the early afternoon. The payment was presumably made on the footing that Sejal had inspected and was satisfied with the goods following their arrival in Dubai. Later evidence from Hawks in Dubai to which the goods had been sent, suggested that the goods did not in fact arrive until 10 October. If correct, Sejal made payment for the goods even before they had arrived which would seem strange. At all events, later on 7 October, Vita caused the amount that it had received from Sejal to be transferred to DC UK’s account with the Bank of Scotland. The following day it caused a further £47,654 to be transferred to DC UK’s account. Vita had thereby paid in full for the goods, including the VAT chargeable on the transaction. On or about 8 October DC UK caused £465,300 to be paid to EBST’s account with the Royal of Scotland. (In fact, the sum was not credited to EBST’s account until the following Monday, 11 October.)

[123]According to Mr Haria’s second witness statement, “on or about 13 October 2004” Mr Thorpe of Vita rang him to say that the 4000 sticks had not been released to Vita. Mr Haria goes on to say that on the same day he telephoned “Pus” (ie Mr Ghai) at Interken to ask about the release of the 4000 sticks. Mr Haria then states:

“He [ie Mr Ghai] advised me that the goods could not be released as Interken had not received a direction for release from EBST’s main supplier …”

It does not appear from Mr Haria’s statement that he enquired who the main supplier was, why the main supplier’s release was needed, why, if it was needed, the main supplier had not given his release or when the release could be expected to be forthcoming.

[124]By then, of course, the memory sticks were no longer in Interken’s custody having been shipped by Vita, through Interken, to Hawks in Dubai. It does not appear from Mr Haria’s statement at what point he became aware that the sticks had been shipped to Dubai.

[125]Mr Haria stated (see paragraph 7 of his second witness statement) that on or about 14 October he rang Mr Shoubaki to enquire why the sticks had not been released by EBST’s main supplier and was told that Mr Shoubaki “would investigate my query and get back to me”. This reply by Mr Shoubaki, if accurately recounted, would suggest that, so far as Mr Shoubaki was aware and notwithstanding the making of the freezing order on 6 October, there was no reason why the main supplier’s release should not have been forthcoming by then.

[126]Be that as it may, Mr Haria said that, following a two day absence from this country on 15 and 16 October, he next heard from Mr Shoubaki when a fax arrived at DC UK’s offices on 17 October. The fax consisted of a letter by Mr Shoubaki dated 10 October warning customers of “banking difficulties” and advising them to refrain from making any payment to EBST’s account. This was followed the next day, according to Mr Haria, by a letter from Mr Shoubaki to DC UK confirming receipt of DC UK’s payment of £465,300 but explaining that, owing to the freezing injunction, EBST was unable to pay suppliers for goods ordered and expressing an understanding that DC UK might wish to cancel the order and have its money back.

[127]Mr Haria’s reaction to this news was not apparently to contact Mr Shoubaki to find out what was going on or even to contact Interken, as he had done on 13 October but, he says, to speak to Mr Thorpe of Vita to ask what he, Mr Haria, should do to resolve the situation. It resulted in a letter that same day from him to Mr Shoubaki asking whether EBST would be in a position to pay its supplier and, if the transaction could not be completed, enquiring what the procedure was for returning to DC UK the monies that it had paid for the goods.

[128]In his first witness statement dated 14 December Mr Thorpe said practically nothing about what happened once he discovered that EBST’s banking difficulties, following the making of the freezing order, were affecting Vita’s sale of the 4000 memory sticks to Sejal. After emphasising Vita’s good faith in the transaction Mr Thorpe ventured the following (in paragraph 46):

“I believe … that the goods purchased from Direct Communications for Sejal may still be in Dubai. I do not have any documentation in this regard other than the airway bills. I would expect the original supplier to know the exact location of the goods.”

From this it can only be inferred that, very surprisingly, Mr Thorpe had not himself, nor had anyone else in Vita, taken any steps to find out either from Interken or from Hawks in Dubai what had happened to the goods. He was aware of Hawks’ role not only because it was to Hawks in Dubai that Vita had shipped the goods but also because Hawks appeared as consignee of the goods on the very airway bill of which Vita had a copy.

[129]Immediately after seeing Mr Thorpe’s first witness statement, Mr Nicholson (of Mr Hellard’s firm) took up the question of the whereabouts of the goods sold to Sejal. He did so by ringing Hawks in Dubai. Ms Sabeena Aloysius of Hawks e-mailed him on 15 December with her response to his enquiries to say that “the shipment was returned to the shipper. Kindly contact Hawk Freight, London or Interken for the same …”

[130]Mr Ghai’s witness statement was intended, in part, to answer some of the questions raised by Mr Nicholson’s communication with Hawks in Dubai (and also his enquiries of Worldwide Travel in connection with the Star Max transaction). Omitting immaterial passages, this is what Mr Ghai stated with regard to the Sejal transaction. “61. I cannot recall whether I or my assistant, Mr Waleed Ahmed, telephoned the Main Supplier to ascertain whether it was acceptable to ship the memory sticks to Dubai … As Dubai is one of the safest destinations for cargo I was confident that there would be no objection. Vita’s shipping instructions indicated that the goods should be shipped to Hawk Freight Forwarders in Dubai, with whom we have a good working relationship. The main supplier agreed to the shipment so we contacted Hawks … by telephone to advise that they should expect the memory sticks. Mr Ahmed prepared the airway bill [of which Mr Ghai supplies details] … and made the necessary arrangements with Royal Brunei Airline in order that the memory sticks could be transported to Dubai Airport from Heathrow Airport on 6 October 2004.” He then exhibits Interken’s invoice to Vita for arranging these matters. The invoice was for £1805. “62. Unfortunately, although Sejal accepted and paid for the goods, and [Vita] made payment to DC UK, who made payment to EBST, the goods were not released to Sejal because the funds were frozen by the liquidator of Regalway… in the account of EBST. Accordingly the Main Supplier did not receive its payment, withdrew the allocation (and of course did not issue a release note in favour of its own customer) and the supply chain collapsed. I do not wish to reveal the identity of the party that eventually purchased the memory sticks from the Main Supplier, but I can confirm that Sejal did not receive those goods under the contract with Vita.” Apart from not wishing to identify who the eventual purchaser was of the memory sticks or, for that matter, to name the main supplier or any other of the parties in the supply chain (other than those whose identity was otherwise known), Mr Ghai does not indicate the source of his knowledge as to what had happened to the goods. “Once the funds had been frozen and it became apparent to the Main Supplier that the deal would not complete, I received telephone confirmation from the Main Supplier that it wanted the memory sticks to be returned to it … I told Hawk in Dubai to release the goods back to the Main Supplier … The Main Supplier then took custody of the goods in Dubai.” Mr Ghai then refers to the e-mail which Mr Nicholson had received from Ms Aloysius and observed:

“64. …This must be referring to the return of the goods to the Main Supplier’s control. I note that it appears that Hawk arranged a shipment of the goods, but I do not know where the goods were sent as I was not involved. I can only confirm that we did not receive the goods back from Dubai and that the goods were not released to Sejal under its contract with Vita.”

[131]In his second witness statement Mr Thorpe took up these and other matters in Mr Ghai’s witness statement and produced a much fuller account of his dealings with Sejal following Sejal’s payment to Vita of £419,996 on 7 October. This is what Mr Thorpe states:

“24. Each business day from Friday 8 October to Wednesday 13 October, I received a call or calls from Mr Onkar of Sejal complaining that he could not get release of the goods from Hawks. On the first few days, Mr Onkar was not too anxious because he knew that the goods were safe in Hawk’s warehouse. In fact he would call me from Hawk’s warehouse to complain that the goods were not released. Eventually, by about Wednesday 13 October, Mr Onkar became extremely worried and said that he would be writing me a letter. ”

He then refers to a letter dated 16 October and continues:

“The letter indicates that Sejal is treating the contract as terminated and demands immediate payment of Sejal’s money.”

The letter after referring to the relevant sales invoice stated:

“… please note that till today we have not received the stock. We have already paid 100% of your invoice. Under this situation we wish to cancel the deal because of the delay in receiving the stock. We request you to please pay our money back to us as soon as possible. I hope you will look into the matter URGENTLY and refund the money at the earliest.”

The letter bears Mr Onkar’s name and signature.

[132]None of this had appeared in Mr Thorpe's first witness statement. His second witness statement continued:

“25. I had never experienced delays in obtaining release like this before and meanwhile I had heard from EBST on 12 October 2004 that their bank account had been frozen and so they could not make … payment to their supplier in the transaction between EBST, Vita and Starmax. I made numerous telephone calls around the market to find out whether other companies were having similar difficulties in obtaining release of their goods - they were not. Only DC UK and Vita seemed to be experiencing this problem and so it did not take much to realise that the problem with release in the UK deal must be related to the same issue as in the EBST deal [ie the transaction involving Star Max]…”

[133]Mr Thorpe then returns to the topic of his daily telephone calls from Sejal and said this:

“27. As I mentioned at paragraph 24 above, I received daily telephone calls from Sejal asking when the goods would be released. Following each call I contacted Mr Haria to ask the same question and was told that DC UK was having problems with its supplier, who I later realised was Mr Shoubaki of EBST. On 16 October 2004 I received the letter … from Sejal cancelling the deal. Upon receipt I wrote to DC UK saying that our customer had cancelled the contract and asking for immediate return of the monies.”

He then exhibits a copy of that letter. He then continued:

“The last pieces of documentation that Vita received in respect of the deal were the return allocation and shipping instructions from Interken and the signed sales agreement from Sejal which we received by fax on 18 October 2004 …”

He then exhibits the documents. “… I have checked with Mr Baxter [Vita’s in-house accountant] who has confirmed that on or around 18 October 2004, when it was quite apparent that the deal had irredeemably collapsed, he checked through the documentation we had on file and found that these documents were missing. I understand that our compliance and administrative assistant was given a ‘rocket in her ear’ and told to make sure that all the documents were in place. She then called Interken and Sejal to chase the outstanding documents and that is why these documents were sent to us on 18 October 2004. With hindsight this was neither here nor there given that the deal had already been cancelled.” It is odd that Sejal should have been willing on 18 October to sign and return its sales agreement with Vita when it had purported two days earlier to cancel the purchase and was by then, according to its letter of 16 October, seeking the return of its monies.

[134]Mr Thorpe next refers to his long projected visit to Dubai and Hong Kong which, he explains, had been planned since the beginning of 2004. The trip included a visit to Sejal’s offices. Of that visit he says this:

“29. Mr Bryan and I attended Sejal’s offices on 25 October 2004 and I think Mr Onkar gained some comfort from the fact that we had visited him and had not simply disappeared with his money. We explained to Mr Onkar everything that has happened and that we were 100% confident that we would get the money back …”

He then explains that the meeting with Mr Onkar was very uncomfortable but that the visit had been to a certain extent successful as Sejal had not yet issued legal proceedings. He then refers to having received frequent telephone calls from Mr Onkar and also to having received letters from Sejal. Those letters consisted of a re-faxing and a subsequent re-faxing of the letter of 16 October. On 25 December, Mr Onkar wrote to say that his account manager had noticed that the £420,000 had not been paid and to threaten proceedings if it was not received within fourteen days. On 21 January 2005 the letter of 25 December was re-sent endorsed “reminder”.

[135]Later in his second witness statement Mr Thorpe states that he had attended at Mr Ghai’s offices on 14 January to collect copies of the documents referred to in Mr Ghai’s witness statement made four days earlier but which, for some reason, had been omitted from it. He exhibits them to his second witness statement. They include the further faxes relating to Star Max to which I have already referred. Of relevance to the sale to Sejal is a fax which, in paragraph 50 his second witness statement, Mr Thorpe refers to as coming from the main supplier in the transaction involving Sejal. Dated 12 October and addressed to Interken, the document, according to the fax transmission details on it, was faxed to Interken on 19 October. Headed with the reference “shipment 4000 pcs. Super memory stick 512 mb sent by TNT. AWB GD 292034927 WW” the letter reads:

“Please cancel the allocation on the shipment and send it back to our warehous [sic] address …”

An address in Copenhagen is then supplied. The letter is signed Comitel International AS.

[136]Mr Thorpe’s comment on that document was as follows:

“.. the fax clearly indicates that the memory sticks were not released to Sejal or to anybody at all and were returned to the main supplier, Comitel. Mr Ghai was very reluctant to provide me with this letter but, given the seriousness of the current circumstances, he eventually disclosed it to me.”

[137]Mr Hellard, having read Mr Thorpe’s second witness statement and seen the fax from Comitel, arranged for a Mr Fairclough, a senior manager within his firm, to telephone Comitel in Copenhagen. He was aware of Comitel as a result of enquiries made in July 2004 in relation to MTIC fraud concerning a missing trader called Delhurst. (Mr Hellard had been appointed liquidator of Delhurst, hence his awareness of Comitel.) Mr Fairclough was able on 20 January to speak to a Mr Hansen of Comitel. The upshot of their conversations (there were three telephone calls in all) was that Comitel had sold a quantity of stock to an entity called SSA but that, being “ship-on-hold”, the stock was returned and reallocated as Comitel had not been paid for it. Mr Hansen was reportedly unable to supply any documents concerning Comitel's deal with SSA but stated that the goods were later sold to one of his big customers, an organisation called Nu Communications, with the reallocation occurring on 28 October. Mr Hansen said that he was unaware that the goods had been in Dubai although he did not rule out that possibility. He said that the goods had been resold to Nu-Communications for £109 per unit. That figure was £4 per unit more than the price for the 4000 memory sticks at which Vita had sold them to Sejal.

[138]Mr Hansen subsequently faxed to Mr Fairclough a number of documents concerned with the matter. The first in time, apparently dated 1 October although the date is difficult to decipher, is a TNT consignment note addressed to Interken. The goods to which the note relates are simply described as “electrical” (a designation often used in the case of computer parts) but the consignment is described as weighing 33.2 kg and with the dimensions 70 x 37 x 52 (presumably centimetres). The second document is the fax referred to earlier from Comitel to Interken dated 12 October but faxed to Interken on 19 October. It is endorsed with Interken’s stamp and appears to have been faxed to Comitel either on 19 October or (the fax date being difficult to decipher) 15 October. The third is a fax from Comitel to Interken dated 25 October requesting that Interken ship the goods (4000 memory sticks weighing 33.2 kgs) back to them. The fax gives as the reason the absence of payment from Comitel's customer. The fourth is a further fax from Comitel to Interken referring to the same 4000 memory sticks weighing 33.2 kg sent by the TNT consignment note. The fax, which is dated (and, according to the fax details, was sent on) 28 October stated: “please re-allocate and release” to Nu-Communications of an address in Croydon. The fifth is a pro-forma invoice dated 2 November 2004 and addressed to Nu-Communications for the 4000 memory sticks at a cost of £436,000.

[139]In his fourth witness statement, Mr Hellard noted that the weight of the goods shipped by Vita to Sejal, as stated in the airway bill dated 5 October prepared by Interken and addressed to Hawks in Dubai, was 68 kgs. Further there was no explanation of why the letter instructing Interken to cancel the allocation should be dated 12 October but should only be sent by Comitel to Interken seven days later.

[140]There must be a very serious doubt (to put it no higher) whether the goods to which the documents from Comitel related had anything to do with the goods sold by Vita to Sejal. A further reason for that doubt is that Comitel’s instruction dated 12 October was that the goods in question should be returned to its warehouse in Copenhagen whereas in her fax to Mr Nicholson dated 15 December Ms Aloysius of Hawks in Dubai had stated that the goods had been returned to the shipper (on the face of it Vita) but certainly not to Denmark.

[141]Given the resulting confusion over just what did happen to the 4000 memory sticks, Vita itself sought to obtain further confirmation that they had not been delivered to Sejal. It sought to do so by addressing a series of questions to Hawks in Dubai. Ms Aloysius’ replies have served only to add confusion. First, she stated that the shipment of the goods to Dubai arrived on 10 October (rather than on some earlier date). Second, she exhibited a copy of an e-mail sent by her to Interken dated 19 October timed 14.37 seeking confirmation by return that all charges for returning the shipment of goods which had been sent out to Dubai by the airway bill under which Vita was the shipper would be paid by Interken. An e-mail from Waleed (of Interken) sent to her the following day gave that confirmation; it requested that the shipment be sent back to Interken as soon as possible and that Interken should pay all the charges. Finally, there is an e-mail dated 8 January 2005 from Ms Aloysius to Mr Nicholson (of Mr Hellard’s firm) confirming that the goods in question were returned in accordance with Interken's instruction. Ms Aloysius subsequently faxed to Vita’s solicitors a copy of the relevant airway bill whereby the goods were sent back to this country. The goods are once more described as having a gross weight 68 kgs and the dimensions of the consignment are given as 120 x 80 x 80 centimetres. It is abundantly apparent that those details do not coincide with the details of the goods with which Comitel's communications were concerned. What has given rise to particular puzzlement is that, although the airway bill indicates that the goods were consigned by Hawks in Dubai to Hawk Freight Services in this country, it also appears that, by a separate document, a so-called house airway bill, the same goods were then consigned to Interken. The house airway bill has endorsed on it “notify Vita Moderna Ltd”.

[142]Vita, through Miss Simpson, denied having been notified of the return to this country of the goods although, as she pointed out, the significant point about the documentation was that the goods, wherever they might be, had not been delivered by Hawks in Dubai to Sejal.

[143]That said, there is the so-far unexplained conflict between the documentation supplied by Ms Aloysius which suggests that the goods were returned to Interken, at Interken's expense, and Interken’s assertion, through Mr Ghai, that Interken did not receive the goods back from Dubai but they were returned to the control of the main supplier who took custody of them in Dubai. I am told that further approaches to Interken to clarify what has happened to the goods have not met with any response.

The wider dealings of Vita and DC UK

[144]Information and documents available to Mr Hellard (to be found exhibited to his fourth witness statement) disclose a curious pattern of trading involving EBST, Vita and an entity called Mobilx Ltd. In particular, there are four chains, in each of which Regalway appears as the missing trader, where goods of the same quantity and description (4320 Intel Pentium 4 CPUs) are traded. Moreover, two of them appear to involve Star Max. In the first, where the transaction is dated 25 August, EBST sold to Mobilx at £79.50 per item, Mobilx sold to Vita (possibly Genarique) at £80.00 per item (a 50p per item mark-up) and Vita (or Genarique) exported to Star Max at a £4 per item uplift. (See page 52 of the exhibit to Mr Hellard’s fourth witness statement.) The sale to Star Max appears to have occurred on or around 27 August. In the next chain, the same quantity of goods appears to have been sold, on this occasion on 31 August, by EBST to Mobilx at £79 per item, and by Mobilx to Vita at £79.50 (reflecting the usual uplift of 50p per item) and by Vita to Star Max (at £83.50 per item, once more a £4 uplift). Two days later, on 2 September, Vita appears as the purchaser (of goods of the same quantity and description) from EBST (this appears to be Vita’s first transaction direct with EBST) which it sells on at £78.50 per item to Mobilx (an uplift of 50p per item over the price at which it acquired them). In the fourth chain, dated 24 September, Vita purchases the goods from EBST and sells them to Mobilx at £80.50 per item (again the usual 50p per item uplift). In relation to these two last mentioned chains it is not apparent how Mobilx dealt with the CPUs. Mobilx has not responded to requests for information from Mr Hellard.

[145]Apart from these transactions there are others in September 2004 in which the sale by Vita to its purchaser in this country involved a mark-up of 50p per time. One was a sale (dated 6 September) by Vita to DC UK (Vita having itself purchased the goods from Nu-Communications, an entity which has already featured in the evidence - see paragraph 137 above). Another is Vita’s purchase on 27 September of computer parts from EBST and their immediate sale on to Greystone International Ltd. Yet another was Vita’s purchase from DC UK dated 29 September of 2750 memory sticks (which DC UK had previously purchased from EBST).

Were the transactions genuinely negotiated?

[146]For DC UK, Miss Thornley submitted that none of the usual indications of MTIC fraud are present in the case of her client. She pointed out that DC UK has a trading history stretching back to 2001 (when it was incorporated) and before that to 1998 (when trading was conducted through the partnership between Mr Haria and his wife). Even before it moved into the wholesale trading of IT components, it had a significant turnover. The fact that turnover has increased dramatically since it moved into the wholesale trading of IT components merely reflects the fact that such trading involves large volumes of goods yielding, overall, very small profit margins. Moreover, she pointed out, there is no evidence in either this or other transactions in which DC UK was involved that it was in the habit of making payment by instalments or of following split payment instructions. DC UK, she emphasised, has endeavoured at all times to comply with Notice 726 (issued by HMCE to assist traders to avoid becoming embroiled in MTIC fraud) and has at all times cooperated fully with HMCE. It has endeavoured to ensure that all relevant documentation evidencing its transactions is present and in order. It always ensures, and did in the instant case, that it has received payment in full from its purchaser before making payment to its supplier. There is nothing sinister, she submitted, in small round-sum mark-ups in this and other like transactions: such mark-ups are a feature of trading in goods of this kind. She also pointed out that DC UK was not an exporter of the goods, that it acted in reliance on information from Interken as to the whereabouts of the goods and that, although their present whereabouts may not be known, it is scarcely likely that EBST would be willing to make repayment of the sum which DC UK is seeking (and would have effected that repayment but for the freezing order), if it thought that the 4000 memory sticks had been delivered to the intended end-purchaser. Moreover, she said, DC UK was willing to give an undertaking to secure the VAT element of the transaction by placing it in a separate account if the court thought fit to make the variation sought contingent upon such an undertaking. Last, and by no means least, she emphasised that her client denied any knowing involvement any fraudulent activities, had no reason for thinking that the others with which it had dealt had been so involved and should not be prejudiced if it should be found that those others have been knowing participants in such activities. For all of those reasons, she said, justice and convenience favoured making the variation to the freezing order which her client seeks.

[147]For Vita, Miss Simpson submitted, in support both of DC UK’s application to be repaid the £467,650 paid by it to EBST for the 4000 memory sticks (to enable DC UK in its turn to repay to Vita what Vita had paid for those goods) and of its own separate application for repayment of the £240,475 paid by it to EBST for the 2880 computer chips, that her client, in particular through Mr Thorpe, has endeavoured to respond to the various criticisms made by Mr Hellard and those advising him as the evidence has gradually unfolded. This has included approaching Interken and obtaining the evidence of Mr Ghai setting out how trading of the kind in which Vita engaged is organised. She submitted that, on a fair reading of the evidence as a whole, there is nothing to call into question Vita’s good faith in relation to either of those two transactions. They were negotiated at arms-length in the ordinary course of trading. She submitted that Vita had no knowledge of where the goods which Vita had purchased had come from and how they had been paid for beyond Vita’s immediate supplier or what subsequently happened to them beyond its immediate customer. The available evidence, she pointed out, did not indicate that Regalway had any connection with the goods. She emphasised that Vita has at all times been entirely independent of the entities of which it dealt, whether EBST and DC UK, from which Vita purchased or Sejal and Star Max, to which it sold. She submitted that, as regards the sale to Sejal, although the whereabouts of the goods in question is unclear, one thing was abundantly clear which is that the goods were not delivered to Sejal: they were sent back from Dubai. Similarly, she said, in the case of Vita’s sale to Star Max: despite the initial confusion on Worldwide Travel’s part, the evidence indicated, and Star Max has confirmed, that the goods were not delivered to it but were apparently sold to Sunny International. The fact that Mr Thorpe had a meeting with Sunny Trading International in Hong Kong on the same day as he met Mr Rashid of Star Max is neither here nor there. It has not been established that Sunny Trading International is the same as Sunny International and, even if it is, there is no reason to think that Star Max (much less Vita) was in someway instrumental in the goods being sold to Sunny International. It had not been suggested that Vita made payments for the goods it purchased by effecting transfers to persons other than its supplier (much less transfers to persons or entities outside the United Kingdom) upon which Mr Hellard placed reliance against the defendants in the main action. She pointed out that Vita had a good relationship with HMCE; its VAT returns were up-to-date and paid in full; it provided detailed information to HMCE on a monthly basis. Its offices were regularly visited by HMCE during which its paperwork was inspected and any necessary queries dealt with. She pointed to the steps taken by Vita to protect against the possibility of MTIC fraud (for example, sending regularly to HMCE for verification the VAT registration numbers of companies with which it dealt). The only exception was the obtaining of credit checks from independent third parties on those with which it dealt. Like Miss Thornley, she submitted that there was nothing sinister in the fact that the prices per unit at which Vita bought and sold were round-figure sums and, typically, involved a mark-up of 50p (in the case of transactions between entities based in this country) or that purchases and sales involved large sums of money, were effected in the course of a very short space of time and depended upon the ability of the next purchaser in the chain funding the necessary monies. She emphasised that that was a feature of trading in computer parts. Looking simply at the evidence concerned with Vita’s dealings and ignoring claims and assertions by Mr Hellard directed at the conduct of others, there was no reason not to make variation to the freezing order which Vita was seeking.

[148]As Mr Bompas has pointed out, there are, on the face of the evidence, features of DC UK’s and more especially of Vita’s dealings, of which the transactions involving the 4000 memory sticks and 2880 computer chips are but examples, which, when viewed overall, seem highly implausible if the transactions had been genuinely negotiated. They reflect the points summarised at paragraphs 36 to 39 above. The first is the apparent speed with which transactions in the chain, including those which feature in these applications, are entered into. They occur, it would seem, within the course of a single day. There is the fact that, almost without exception, the mark-up on domestic transactions (as opposed to exports) is 50p per item. It is a striking feature of the other transactions in which Vita was involved that the mark-up remained the same notwithstanding a fluctuating market in the goods in question (so that there is the same 50p mark-up whether the unit cost per item is £100 or less or £150 or more). This coincidence was not, to my mind, satisfactorily explained by Vita’s claim that “for ease and convenience” it will “always trade in round numbers in units of 10p or 25p wherever possible” and that its lowest acceptable profit is 0.25% of the transaction's value net of VAT. Likewise the (round-sum) mark-up on exports is invariably several times the “round sum” mark-up in price with the exporter has paid to its supplier. There is the puzzling willingness of participants to part with very substantial sums without the assurance of obtaining the goods in return for which the payment has been made, and without any security that, if for any reason, the chain should collapse they will be able to recover what they have paid and without, as far as I can see (at any rate in the case of the particular transactions which I have been asked to examine), any attempt to investigate the creditworthiness of the payee. That participants should be willing to trade in this way seems to me all the stranger when, as they accept, they have no knowledge of the identity of participants higher up the supply chain and are aware (and apparently accept) that at any time it is open to the main supplier (whose identity is unknown) to collapse the chain, recover the goods and, in effect, disappear. No steps are taken to insure or inspect the goods. That, apparently, is left entirely to Interken. On the contrary, steps appear to have been taken to arrange the export of the goods even before inspection has taken place.

[149]I consider that there is substance in the points which Mr Bompas makes. Having carefully reviewed the evidence I am left with a very distinct feeling of unease about the genuineness of these two transactions. It is an unease which is greatly heightened by the course of events which followed the making of the freezing order on 6 October, including the apparent silence between 6 October and 12 October when Vita says that it first heard of the making of the order and therefore of EBST’s difficulties, the apparent lack of concern over what had happened to the goods, the assumption - universally shared - that it was simply a matter of reversing the flow of payments which had been made and the muddle over what has happened to the goods and whether, despite what is now said, they did indeed reach their intended destination. As I have stated in relation to FTC’s application, there may be very good reasons for all of these matters, and the many others which I have not mentioned which are set out in Mr Hellard’s fourth witness statement, which call into question the commerciality and therefore the genuineness of these transactions. I am not persuaded therefore that it would be right, without further investigation and the opportunity to obtain disclosure and subject witnesses to cross-examination, to allow EBST to make these two very large payments, together totalling £700,000. For there can be no doubt that, once paid, this money will be paid over to Star Max and Sejal so as effectively to become irrecoverable. For these reasons I am not willing to accede either to DC UK’s or to Vita’s applications.

What is to be done?

[150]That leaves for decision how the claims of the three applicants are best dealt with given that I feel unable to dispose of them summarily. I am reluctant to direct that they be dealt with as part of the action brought by Regalway against the various defendants because, given the breadth of the matters raised in the action, there is likely to be a substantial delay before it can be brought on for trial. If it is defended, the trial may well be of considerable length.

[151]I am inclined to think, although I will listen to further submissions from counsel, that the fairest way of disposing of the three claims is to direct that they be tried separately (discrete that this from the action which Regalway has brought against the defendants) and that, for that purpose, there be service of particulars of claim and defence and directions for disclosure and the exchange of witness statements. Disclosure by Interken, and possibly others, pursuant to CPR 31.17, is likely to be appropriate. I am presently of the view that the claim by Vita and DC UK should be heard together. It may well be convenient for the claim by FTC to be heard at the same time.

[152]I was referred by counsel to the above decision reported at

[2004] 2 Lloyd’s Rep 92

. That was a case in which 7,200 CPUs had been purchased by the claimant and subsequently sold to the defendant which in turn sold them to a third party. The defendant received payment for the goods from the third party but refused to make payment for them to the claimant, contending that the claimant had entered into the contract with it for the purpose of defrauding HMCE in that the claimant had no intention of accounting for the VAT arising from the supply. The claimant, by then in liquidation, sued to recover the contract price. Field J gave the claimant judgment for the price. He held that there was insufficient proximity between the claimant’s fraudulent purpose in entering into the contract and the contract itself to render the contract unenforceable against the defendant. It was submitted that that case covered the position of the applicants before me. There is, however, a crucial difference between the defendant in that case and the circumstances of FTC, Vita and DC UK before me. In that case it was agreed for the purpose of the hearing before Field J that the defendant was unaware of any fraudulent intention on the part of the claimant. Here, by contrast, there is no agreement that FTC, Vita and DC UK were not knowing parties to EBST’s fraudulent intention: it is the very matter which Mr Hellard calls into question (along with the question whether, in any event, the goods reached their intended destination). It follows that that decision does not assist the three applicants.

EBST’s re-registration for VAT purposes

[153]Miss Simpson relied on the fact that, after a period during which EBST ceased to be registered for VAT purposes and an enquiry by HMCE had taken place into EBST’s activities, EBST was once more registered for VAT purposes. She submitted that Vita was entitled to place reliance on that fact in support of its good faith when entering into the transaction in issue.

[154]That is certainly a factor but not one which, in my view, overcomes the other questionable features of the transaction (and others into which Vita was engaged at this time) to which I have drawn attention.

[155]Likewise, I do not consider that the circumstances of the Bond House litigation (Bond House Systems Ltd v Commissioners of Customs and Excise [2003] V&DR 210) which, I am told, is before the European Court of Justice is material to my decision not to dispose summarily of Vita’s (and the other) applications.