Hague Plant Ltd v Hague& Ors

1. This is the fourth round of litigation between members of the Hague family. Before me is the fifteenth application in that fourth round. It is remarkable because (most commendably) the parties have reached a large measure of agreement.

2. The most significant round of earlier litigation (“Hague 1”) was conducted between David and Dianne Hague on the one hand and Martin and his wife (Jean Angela) on the other over the ownership of two of the three issued shares in MHH Contracting Limited (“MHH”) which (to put the matter loosely and neutrally) grew out of Hague Plant Limited (“HPL”). David and Dianne lost that ground of litigation and the shares in MHH were found to belong to Martin and Jean Angela. The result is that the business of MHH is conducted for the benefit of Martin and Jean Angela (and David and Dianne do not benefit from it).

3. When that result became known, David and Dianne reviewed the mutual dealings between HPL and MHH. If both businesses were in the same effective beneficial ownership their mutual dealings were of no importance. If the businesses were in different effective beneficial ownership they might be. So David and Dianne stopped all mutual dealings with effect from April 2009 and removed Martin as a Director of HPL. In these new proceedings HPL claims (to put the matter shortly) that MHH’s business is held on trust for HPL (and if that is right then David and Dianne will benefit from it not through direct shareholdings in it, but because their shareholdings in HPL will enable them indirectly to benefit). HPL’s present claim is founded on the fact that Martin was a Director both of HPL and of MHH, and HPL say that this presented him with a conflict of interest when it came to addressing business opportunities, which conflict of interest he did not properly manage.

4. The mutual dealings between HPL and MHH featured in Hague 1 as part of an attack by each side upon the credibility of other. The mutual dealings were said to involve and were found by the judge to involve fraudulent tax evasion. One of the methods used was “cross-invoicing”. The judge summarised the scheme at paragraph 20 of his judgment:- “At or near the end of the tax year a Hague Company would submit to another Hague Company a fraudulent or inflated invoice so as the reduce the profits of the first company tax. Counter invoices would be submitted by the second company at the beginning of the next tax year. This had the effect of transferring a profit into the later tax year and thus deferring the tax payable”. Each side suggested that the knowledge and participation of the other in such cross-invoicing damaged its credibility. The judge decided that everybody (apart from the accountant) was involved to a greater or lesser degree.

5. In this action the issue of cross-invoicing crops up again, but as part of the substantive defence (rather than as a matter going to credibility). In order to overcome limitation difficulties HPL has to allege that Martin was dishonest. As part of its case that Martin was dishonest HPL alleges that Martin “in deliberate and conscious breach of his fiduciary duties” procured HPL to transfer monies to MHH which were in no way referable to any goods or services provided to HPL (and it identifies categories of invoice). HPL also alleges that Martin procured HPL to provide goods and services to MHH to a value greater than the charges invoiced to MHH.

6. Martin and Jean Angela respond to these allegations by admitting (in paragraph 56(c)(i) of the Re-Amended Defence) that Martin procured HPL to transfer monies to MHH which he knew were not referable to any goods or services provided to HPL and/or which far exceeded the value of the services and goods provided, but averring that this was part of a process of cross-invoicing. They then aver (in what is now paragraph 56(c)(ii)) that exactly the same process was undertaken in reverse and that he procured MHH to transfer monies to HPL which he knew were not referable to any goods or services provided to MHH or which far exceeded the value of the services and goods provided. The present Re-Amended Defence goes on to explain (in paragraph 56(c)(iii)) that the monies travelling each way were calculated so as to balance out and to create no net cost to either company. A particular example of this is given in paragraph 56(f) and Appendix 9 relating to invoices for soil. The statement of case further alleges (in paragraph 56(c)(iv)) that cross-invoicing was a means by which each company attempted to reduce its liability for corporation tax, and that the practice was known by, consented to, authorised by and participated in by HPL, Diane and David.

7. The statement of case also contains an allegation that in addition to fictional invoices and inflated invoices which were utilised in the cross-invoicing scheme there are also some invoices which simply mis-describe the services provided and in respect of which charges were raised: but this line of defence is separate from the cross-invoicing issues. There are many other lines of defence, not least limitation.

8. The Reply (in paragraph 23 of its present form) does not admit “the alleged practice of cross-invoicing” and complains that the pleading of it is “vague and embarrassing for want of particularity”. It puts in issue that part of Jean Angela’s separate Defence in which she says that she was ignorant of any dishonesty (as alleged) of Martin.

9. It is common ground that because of an outstanding appeal as to the form of HPL’s Particulars of Claim (and in consequence two stalled applications to amend pleadings) the pleadings cannot be closed and there is no prospect of conducting the trial of this action in the 10 weeks presently allocated between 13 April and 26 June: but that use could be made of that time if a preliminary issue likely to have a significant effect upon (if not determinative of) the outcome of the case as a whole could be identified. The parties are agreed that “cross-invoicing” is such an issue.

10. There are many warnings about the dangers of selecting one issue for determination before the remaining issues are determined at trial. I heed them. I also recognise that the outcome of the case of dishonesty against Martin (and the accessory case against Jean Angela) may make examination of the cross-invoicing issue largely irrelevant. But I agree with the parties that the effort should be made. If it is made, then it is essential that the issue be defined, be related to the case as it stands on the pleadings at present, be confined in time (for it will otherwise turn into the trial of the actions asmore tangential issues are drawn in) and that the consequences of the determination of the preliminary issue are thought about in advance.

11. At the conclusion of the hearing I indicated that I was in favour of the agreed approach, but was not willing to pick and choose between the rival draft orders with which I was presented. The terms of the Order I have settled upon are appended to this judgment.