“1. This is an application by the Applicant (“the FRC”) pursuant to Regulation 10 and Schedule 2,paragraph 2 of the Statutory Auditors and Third Country Auditors Regulations 2016 , SI 2016/649 (“SATCAR”) and paragraph 10(b) of the FRC’s Audit Enforcement Procedure (“AEP”) for an order requiring the Respondent (“SDI”) to provide the FRC with certain documents, as detailed below. This is believed to be the first application of its type to have reached the courts. 2. The FRC is a regulatory body with certain responsibilities for, among other things, the regulation of statutory auditors and audit work. Its functions include carrying out investigations into statutory auditors and audit work and imposing and enforcing sanctions. Its powers in this regard are derived from SATCAR and AEP. Schedule 2 to SATCAR provides the FRC with statutory powers of investigation, obstruction of, or failure to comply with, which may be remedied in the civil courts and/or constitute a criminal offence. 3. The FRC is presently conducting an investigation (“the Investigation”) into the conduct of Grant Thornton UK LLP (“GT”) and an individual at GT (“Subject A”) in relation to the audit of the financial statements of SDI for the year ending24 April 2016 (“the 2016 Financial Statements”). The Investigation arose out of reports about SDI’s subsidiary Sportsdirect.com Retail Ltd (“SDR”) engaging Barlin Delivery Ltd (“Barlin”) to provide delivery services to SDR’s customers. The owner and a director of Barlin during the relevant period was John Ashley, the brother of Mike Ashley. Mike Ashley is the founder of SDI and a director and majority shareholder of SDI during the relevant period. It appears that Barlin was engaged as part of a structure adopted by SDR on the advice of Deloitte LLP in an effort to ensure that SDR paid VAT on its sales to EU customers in the UK rather than in the country of each relevant EU customer (“the Enhanced Structure”). The FRC is considering, among other things, the conduct of GT and Subject A in relation to the non-disclosure of the relationship between SDR and Barlin as one between related parties in the 2016 Financial Statements. 4. To this end, the FRC has exercised its power pursuant to paragraph 1(3) of Schedule 2 to SATCARand rule 10(b) of the AEP to issue notices (“Rule 10 Notices”) to SDI requiring the provision of certain documents because they are likely to shed light on what GT understood SDI to have been advised in relation to the introduction of Barlin as part of the Enhanced Structure. The FRC contends that SDI has failed to comply with the Rule 10 Notices in certain respects, and therefore seeks an order of the court compelling compliance by SDI. SDI disputes that it has failed to comply with the Rule 10 Notices. 5. The documents which are the subject of the application are as follows: i) A fax which was sent by SDI’s Head of Finance (Herbert Monteith) to a representative of GT (David Cox) on15 July 2015 (“the Fax”)…. ii) Any documents which SDI disclosed to Grant Thornton in 2015 which record the advice Deloitte provided to SDI in or around 2015 regarding the distance and/or internet selling arrangements of SDI and/or its affiliates, the VAT implications of those arrangements and/or one or more of Etail Services Ltd, SDI (Brook EU) Ltd, SDI (Brook ROW) Ltd, SDI (Brook UK) Ltd and Barlin (“the Deloitte Material”). The Deloitte Material was the subject of a Rule 10 Notice dated5 May 2017 . The FRC contends that SDI has not complied with this Rule 10 Notice. SDI disputes this. The resolution of this dispute depends on whether or not the Rule 10 Notice required SDI to produce a group of “potentially responsive” documents which it has collated. iii) [Certain documents referred to as “the Additional Documents”].”
“Bonjour, Je vous contacte concernant les ventes à distance pour les particuliers français (site Internet: http://fr.sportsdirect.com). J’aimerais savoir qui facture les particuliers français pour les ventes par Internet: - SportsDirect.com Retail Ltd - Sportsdirect.com France S.A. FR27379062813 - Une autre compagnie Ces particuliers français payent une TVA française ou anglaise ? Vous trouverez en pièce jointe les seuils fiscaux concernant les ventes à distance. Cordialement”
“Both Deloitte and RPC were instructed to advise and assist [SDR] in preparing to: (i) respond to a likely challenge to [SDR]’s VAT arrangements from the French tax authority; (ii) minimise the risk of litigation with other tax authorities; and (iii) put [SDR] in the strongest possible position to defend any challenges that were made.” [SDR] in the strongest possible position to defend any challenges that were made.”
“28. On the advice of RPC and Deloitte, as part of [SDR’s] preparations to defend anticipated challenges to its VAT arrangements, [SDR] altered its online sales Structure in February 2015 regarding arrangements for the delivery of goods ordered by customers on [SDR’s] Website. 29. Although this enhanced structure involved new companies being introduced to [SDR’s] online sales Structure, the same principle applied as that underlying the previous Structure in that [SDI’s] group would have no involvement in the delivery of goods outside the United Kingdom, so that it would not incur any VAT obligations in other jurisdictions.” (2) Mr Burger said: “65. [SDR] also implemented an enhanced version of its online sales structure on20 February 2015 on the basis of advice from RPC and Deloitte, under which customers would contract with a different entity within the group for the purchase of the product(s) depending on whether they were customers from the UK, the EU or the rest of the world. Under the new structure, all international customers were then offered the option to contract with a company outside [SDR’s] corporate group to arrange the delivery of its purchases, which was called Barlin Delivery Limited (“Barlin”). 66. [SDR] wrote to HMRC on28 September 2015 explaining in detail the arrangement which had been put into place and seeking HMRC's confirmation that VAT would remain due in the UK.” (3) Mr Waterson said: “39. As noted at paragraphs 65 to 68 of Mr Burger’s witness statement and paragraphs 28 and 29 of Mr Monteith’s witness statement, [SDR] made alterations to the Structure in February 2015 on the advice of RPC and Deloitte as part of its preparations to defend anticipated litigation. The Responsive Documents relate to this advice (as explained below). These changes were made to the Structure for the exclusive purpose of responding to the real and present threat of litigation that was anticipated from the French tax authority and other tax authorities. The enhancements did not provide any other benefit to [SDR] (whether commercial or otherwise) as they did not involve any fundamental change in [SDR’s] tax obligations as all VAT would still fall due in the United Kingdom thereafter.”
“Deloitte prepared three reports…which sought to summarise the changes to the distance selling structure, the mechanics of how it would operate for VAT purposes and identify certain commercial and legal considerations and questions.”
“The conclusion to be drawn from the trilogy of 19th century cases to which I have referred and the qualifications expressed in the modern case-law is that communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation are privileged, but only when the following conditions are satisfied: (a) litigation must be in progress or in contemplation; (b) the communications must have been made for the sole or dominant purpose of conducting that litigation; (c) the litigation must be adversarial, not investigative or inquisitorial.”
“The object and meaning of the rule is this: that as, by reason of the complexity and difficulty of our law, litigation can only be properly conducted by professional men, it is absolutely necessary that a man, in order to prosecute his rights or to defend himself from an improper claim, should have recourse to the assistance of professional lawyers, and it being so absolutely necessary, it is equally necessary, to use a vulgar phrase, that he should be able to make a clean breast of it to the gentleman whom he consults with a view to the prosecution of his claim, or the substantiating his defence against the claim of others.”
“You cannot ask him what the information he obtained was. It may be information simply for the purpose of knowing whether he ought to defend or prosecute the action, but it may be also obtained in the shape of collecting evidence for the purpose of such prosecution or defence. All that, therefore, is privileged.”
“as you have no right to see your adversary’s brief, you have no right to see that which comes into existence merely as the materials for the brief” and Mellish LJ summarised the principle (at 658) as being that a man: “is not bound to communicate evidence which he has obtained for the purpose of litigation.” (2) In Southwark and Vauxhall Water Co v Quick(1878) 3 QBD 315 , Brett LJ (at 320) picked up what James LJ had said as follows: “it is clear that if a party seeks to inspect a document which comes into existence merely as the materials for the brief, or that which is equivalent to the brief, then the document cannot be seen, for it is privileged.” (3) In Wheeler v Le Marchant(1881) 17 Ch D 675 Sir George Jessel MR said (at 680): “The cases, no doubt, establish that such documents are protected where they have come into existence after litigation commenced or in contemplation, and when they have been made with a view to such litigation, either for the purpose of obtaining advice as to such litigation, or of obtaining evidence to be used in such litigation, or of obtaining information which might lead to the obtaining of such evidence…”
“the recognised categories of advice or information going to the merits of the contemplated litigation.”
“It seems to me that Mr Simpson is right that when a taxpayer adopts certain arrangements, a scheme or structure or whatever, with a view to achieving a particular result, the sole reason for adopting that structure is because they want to have that structure with the consequences, financial or administrative or otherwise, that they hope will flow from it; and that that remains the case however strongly they contemplate that the structure will be challenged by the tax authorities, and however strongly they are advised that putting in place this feature or that feature of the scheme would enable such an anticipated challenge to be defeated. They are not putting it in place to assist them with the litigation, they are putting the structure in place because they want the structure. In this case, SDI were putting in place the 2015 structure because they wanted to remain free from the obligation to register in other EU Member States. That is not a litigation purpose, that is a purpose of achieving another result, even if it is anticipated that litigation may be forthcoming. I think that that falls outside the requirements for litigation privilege which, as it was put by the Court of Appeal in West Ham [ie WH Holding Ltd v E20 Stadium LLP], is where one seeks information or advice to inform you as to your prospects in litigation, or evidence for use in litigation. They were not taking advice from Deloitte to inform them as to their prospects in litigation, or to be deployed as evidence in litigation; they were taking advice as to how to arrange their affairs to avoid the prospects of unsuccessful litigation. That seems to me to be a quite different thing.”