VAT, missing traders, and illegality

Any trader’s recurring nightmare is to find that somebody it has bought goods or services from in the UK or the EU has been guilty of VAT hanky-panky. The classic instance is missing trader fraud; the fraudster charges VAT, does not account for it, and vanishes. The difficulty facing the person who paid the VAT is that HMRC, suspicious gentlemen that they are, are apt to disallow the payment unless the trader making it really had no reason to smell a rat. But a little relief came today from Joanne Wicks QC, sitting in the Chancery Division, in the decision in Colt Technology Services v SG Global Group SRL [2020] EWHC 1417 (Ch). The case also gave some useful confirmation on where a debt is payable, which makes it worth a brief note.

Colt Technology, acting through its Italian arm, bought voice trading services (i.e. super-reliable and super-secure real-time voice communication facilities) from Italian company SGG, based in Rome. All went well until Colt’s auditors warned them that there seemed something fishy about SGG, which looked increasingly like a participant in a missing trader ring. Colt, no doubt concerned at its ability to sustain the relevant VAT deductions when faced with a mercenary and sceptical Revenue, suspended payments to SGG totalling, in round figures, $5 million. SGG brought proceedings in Milan for payment, which were still ongoing. But in January 2018 it took the gloves off and served a statutory demand on Colt in England.

Colt defended, and sought to enjoin presentation of a winding-up petition, on the basis that liability was disputed on substantial grounds. These grounds were based on the rules in Ralli Bros v Cia Naviera Sota y Aznar [1920] 2 KB 287 (no enforcement in England of an obligation required to be performed in a jurisdiction where performance was illegal) and Foster v Driscoll [1929] 1 KB 470 (the colourful Prohibition case making it clear that there could be no enforcement here of a contract contemplating acts in a jurisdiction where they were illegal).

They succeeded on the first ground. Arguably payment was illegal under Italian law; furthermore, since SGG were Rome-based, the presumptive rule applied that Colt as debtor had to seek out its creditor and pay it where it was. Importantly, and correctly, the judge also discounted the fact that post-contract SGG had sent invoices asking for payment in California. What mattered was the contract. True, had Colt acted on these the debts would have been discharged; but this did not affect Colt’s underlying duty to pay in Italy and there alone.

Having held for Colt on the Ralli ground, the judge expressed no view on the Foster argument, namely that the contract involved a crime in Italy (duping the Italian fisc). She did, however, observe – again correctly — that on the authorities it did not seem to be engaged, since at the time of the contract Colt had had no idea of any possible plans by anyone to commit illegality.

Colt no doubt heaved a large corporate sigh of relief. But the case shows that traders remain exposed. There is something to be said for some drafting thought here. At least in the case of debtors with decent bargaining power, there comes to mind some kind of protective clause temporarily protecting a party from liability to pay when advised (say) by a lawyer or accountant that there is a possibility of missing trader fraud, unless and until the matter is settled by a suitable court or other tribunal. Over to you, City firms.

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