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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Abbey Forwarding Ltd (In Liquidation) v HM Revenue & Customs [2015] EWHC 225 (Ch) (06 February 2015) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2015/225.html Cite as: [2015] Bus LR 882, [2015] WLR(D) 53, [2015] EWHC 225 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Rolls Building London, EC4A 1NL
		6 February 2015

Mr Justice David Richards:


 


Introduction

1. Abbey Forwarding Limited (Abbey) applies for an inquiry as to damages on an undertaking given by Her Majesty's Revenue & Customs (HMRC) on the appointment of a provisional liquidator of Abbey in February 2009. HMRC oppose the application.
2. The undertaking, recited in the order appointing the provisional liquidator, was in the following conventional terms:

"to abide by any Order which the Court may make as to damages in case the Court shall be of the opinion that the Company shall have sustained any by reason of this Order which the Applicant ought to pay."

3. The principal evidence in support of the application for the appointment of a provisional liquidator was an affidavit of an officer of HMRC who, at paragraph 452, stated:

"I am advised by Howes Percival LLP and believe that, before appointing a provisional liquidator, the Court will require an undertaking in damages. HMRC is, of course, a Government Department, well able to satisfy liability in respect of costs and damages should an Order appointing joint provisional liquidators be made, and subsequently transpire to be unjustified. Counsel will offer such an undertaking in damages to the Court as the Court may require. I confirm that HMRC both understand and accept that, the company has apparently been a trading company and that such an undertaking in damages is potentially without limit, albeit that HMRC contends that none of that trading was "legitimate"."

4. At any time after the presentation of a winding-up petition and before the making of a winding-up order, the court has jurisdiction under section 135 of the Insolvency Act 1986 to appoint a provisional liquidator, who will carry out such functions as the court may confer on him. The grounds on which the court may appoint a provisional liquidator are not specified, but in the present case, as in most cases, a principal ground was that the assets of the company are in jeopardy and require to be secured.
5. It is well recognised by the courts that the appointment of a provisional liquidator will frequently inflict terminal damage on the company. In some cases the provisional liquidator will close the business, while in others the very fact of the appointment will destroy or undermine the willingness of others to do business with the company. As will later appear, the judge making the appointment in this case was very conscious of the likelihood that this would occur in the present case, as indeed it did.
6. For this reason, an undertaking in damages is particularly important. In HMRC v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116; [2013] BCC 419, a case to which I will later refer in greater detail, Lewison LJ at [109] referred to the extent to which the prejudice to the company may be compensated by an award of damages or enforcement of the undertaking, as one of the matters which the court will take into account when deciding whether to appoint a provisional liquidator, Even then, as he observed at [110]:

"If a business is shut down wrongly, the cross-undertaking is unlikely to provide adequate compensation to the company concerned, let alone to the employees who will have lost their jobs and to whom no cross-undertaking will usually have been offered."

Summary of the facts

7. A very brief summary of the essential facts, to which I will return in more detail, is as follows:

1) Abbey started business as a freight forwarding and warehousing business in 1971 and from 2002 operated an authorised warehouse under an excise licence granted by HMRC. This became a substantial business and in 2005 Abbey was authorised to arrange the transport of goods under bond from its warehouse.

2) As a result of investigations conducted in 2008 and early 2009, HMRC formed the view that Abbey was actively involved in the fraudulent evasion of excise duty on alcoholic goods on a very significant scale.

3) On 2 February 2009, HMRC raised, but did not serve, assessments to excise duty totalling £5,965,704. The service of these assessments would by statute create a debt, subject to appeal.

4) On 4 February 2009, HMRC presented a petition to wind up Abbey and on the same day applied, without notice to Abbey, for the appointment of a provisional liquidator. A lengthy affidavit was sworn by an officer of HMRC in support of this application and it set out in detail the allegations by HMRC that Abbey was involved in excise duty evasion. The allegedly fraudulent conduct of Abbey's business was the principal ground for the appointment of the provisional liquidator.

5) Immediately following the appointment of the provisional liquidator, counsel for the provisional liquidator applied to the same judge for a worldwide freezing order against three out of the four directors, who were also the shareholders of Abbey (the directors), in aid of misfeasance proceedings which the provisional liquidator undertook to issue. The misfeasance proceedings were based entirely on the case made by HMRC and the HMRC officer's affidavit was sworn both in the winding-up petition and in the misfeasance proceedings. Abbey, acting by its provisional liquidator, gave an undertaking in damages. HMRC provided an indemnity in respect of both the undertaking in damages and any adverse order for costs in the proceedings.

6) The business of Abbey was closed down shortly after the appointment of the provisional liquidator, as the judge making the appointment had predicted.

7) All these actions had a significant impact on the directors and one of them suffered a mental breakdown.

8) No application was made to discharge the appointment of the provisional liquidator and the winding-up petition was not opposed when it was heard on 18 March 2009 and accordingly a winding-up order was made. The provisional liquidator became the liquidator.

9) The provisional liquidator pursued the misfeasance proceedings which came on for trial before Lewison J in July 2010. After a 13 day trial, the proceedings were dismissed. The judge found that there had been no evasion of duty in respect of any of the consignments to which the assessments raised in February 2009 referred.

10) Notwithstanding the judgment of Lewison J, HMRC made clear that it would not withdraw the assessments and the liquidator, despite the efforts of the directors, refused to seek to appeal the assessments. In November 2010, the directors were given permission by the court to lodge and conduct appeals on behalf of Abbey.

11) In January 2011, pursuant to that order, the directors lodged an appeal to the First-tier Tribunal on behalf of Abbey. HMRC's response in large part repeated the evidence already presented to the court on the application for the appointment of the provisional liquidator and at the trial of the misfeasance proceedings. Abbey applied to the Tribunal for the appeal to be allowed on the basis of Lewison J's findings. HMRC stated their intention to oppose this application on the grounds that Abbey could not rely on findings made in proceedings to which HMRC were not a party.

12) A hearing of the application was fixed for August 2011 but two working days before the hearing HMRC withdrew the assessments and the appeal was allowed. HMRC were ordered to pay the costs of the appeal and ordered to make an immediate interim payment of £215,000.

13) The directors sought to remove the liquidator and appoint a new liquidator, first at a meeting of creditors in December 2011 and secondly by an application to the court in 2012. HMRC opposed the replacement of the liquidator and had sufficient votes to defeat the resolution at the meeting of creditors. The application the following year was initially opposed by the liquidator but, once certain terms had been agreed, she agreed to an order removing her in August 2012.

14) In January 2013 the new liquidator purported to assign Abbey's rights under the undertaking given by HMRC on the appointment of the provisional liquidator to the directors, but, while HMRC objected that the assignment was ineffective, they agreed to the suggestion of a mediation. The mediation took place in July 2013 but unfortunately was not successful. The present application was issued on 1 November 2013.

15) At the conclusion of the trial of the misfeasance proceedings, Lewison J directed an inquiry on the undertaking in damages given by the liquidator on behalf of Abbey. The defence of the inquiry was conducted by HMRC, in view of the indemnity which it had provided. The inquiry was heard by HH Judge Pelling QC in December 2012 and January 2013. The directors made a modest recovery but were held liable to pay the bulk of Abbey's costs. On appeal, the Court of Appeal increased the damages payable to the directors and set aside the order for costs against the directors.

16) In January 2012, the directors established a new company to carry on business as a bonded warehouse at the same site as Abbey and with many of the same staff. Pursuant to the relevant regulations, HMRC granted the necessary licenses. For that purpose, HMRC had to be satisfied that all the key persons were fit and proper to carry on such a business. The licence would have been refused if the directors had been involved in revenue non-compliance or fraud or if there were proven links between them and other known non-compliant or fraudulent businesses.

17) On the present application, HMRC say that they are not bound by the findings of Lewison J nor by their withdrawal of the assessments raised in February 2009. They submit that they are entitled to advance a case that the assessments were properly raised and that Abbey was knowingly involved in the fraudulent evasion of excise duty. For that purpose, they say that they are entitled to rely on all the evidence which was before Lewison J and also on further evidence which they would wish to put before the court.

Excise duty

8. Some explanation of the law relating to the liability of Abbey for excise duty is necessary. The provisions in question have since been superseded.
9. The legal framework for the incidence of excise duty relevant to the present case was contained in Council Directive 92/12/EEC and in the Excise Duty Points (Duty Suspended Movements of Excise Goods) Regulations 2001 made under the Finance Act 1994.
10. The overall effect of these provisions was described by Lewison J in his judgment in Abbey Forwarding Ltd v Hone at [7]:

"Alcoholic liquor produced in (or imported into) the United Kingdom becomes in principle liable to excise duty when it is produced (usually at the moment that it is put into any package or removed from the brewery) or imported. However, liability to pay the duty is delayed and arises only when the alcoholic liquor passes the "duty point". The "duty point" is usually the point at which the alcoholic liquor is released for consumption. However, the duty point may be postponed and the alcoholic liquor may remain duty suspended if it is removed to other registered premises or to an approved excise warehouse (often referred to as "bonded warehouses"). When any suspended duty movement takes place the persons concerned are required to complete an "accompanying administrative document" (known as an AAD). I will describe this later."

11. Where goods are moved from an authorised warehouse under duty suspended arrangements but do not arrive at the authorised warehouse in the UK or elsewhere in the EU to which they were consigned, and there has been an irregularity, the warehouse keeper which consigned the goods or, if different, the person responsible for their transport is liable to pay the excise duty on the goods. It is important to note that this liability arises irrespective of any fault on the part of that person.
12. A duty-suspended movement of goods from an authorised warehouse in one member State to an authorised warehouse in another had to be documented by an "accompanying administrative document" (AAD) in a form prescribed by a Commission Regulation. It contained various information, including the consignor, the warehouse of destination, the nature of the goods and the transporter. Each AAD had four copies. The first was retained by the consignor. The second was retained by the consignee. The third was to be receipted by the consignee and, if required, by the fiscal authorities of the destination member State, and then returned to the consignor. The fourth was retained by those fiscal authorities. The second, third and fourth copies had to accompany the goods while they were in transit. The Directive envisaged that the liability of the consignor would be discharged by the receipt of the receipted third copy.
13. Fraudulent evasion of excise duty occurs when duty-suspended goods are dispatched from an authorised warehouse and then diverted for sale on the black market without the payment of the excise duty. This is commonly referred to as the "slaughter" of the goods. There are a number of ways in which these frauds can be carried out.
14. First, excise duty may be evaded by "outward diversion fraud". This occurs when the consignment of goods is diverted and sold on the black market in the UK before it has left the country. The empty lorry then proceeds to the Continent and the third copy of the AAD is fraudulently receipted, either with or without the involvement of the receiving warehouse. This may involve either the fraudulent application of stamps to the AAD by unauthorised persons or the collusion of the receiving authorised warehouse.
15. Secondly, "inward diversion fraud" may take place. Duty suspended goods are consigned from an authorised warehouse in a member state to an authorised warehouse in the UK, accompanied by a genuine AAD. Assuming that it is not stopped by HMRC on entry to the UK, the same AAD can be used for subsequent inward consignments. Each consignment will be slaughtered in the UK. Apart from the first consignment coming from the authorised warehouse abroad, each subsequent consignment will be purchased at a cash and carry warehouse abroad, with excise duty being paid at a lower local rate than the rate applicable in the UK.
16. Thirdly, there is a variation involving "borrowed loads". The consignment of duty suspended goods from an authorised warehouse in the UK is slaughtered in the UK and the empty vehicle proceeds to the Continent. Once in France or elsewhere, an identical load is purchased from a cash and carry warehouse with duty paid at the local rate. The vehicle then proceeds to the receiving warehouse where the third copy of the AAD is receipted. This load is then collected from the French warehouse, duty at the local rate is paid and the load is returned to the cash and carry warehouse where it was purchased. One of the HMRC officers who gave evidence at the trial before Lewison J said that he had come across this variation perhaps 10 or 20 times a year.
17. If they have grounds to believe that excise duty is due, HMRC are empowered by section 12(1A) of the Finance Act 1994 to raise assessments against those liable to pay it. Section 12(3) provides:

"Where an amount has been assessed as due from any person and notified in accordance with this section, it shall, subject to any appeal under section 16 below, be deemed to be an amount of the duty in question due from that person and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced."

An appeal against an assessment lies to the First-tier Tribunal where the burden of proof lies on the appellant taxpayer.

Facts

18. The facts and history which form the background to the present application are as follows.
19. Abbey was incorporated in 1971 and carried on a freight forwarding and warehousing business under the control of William George Owen and his family. Mr Owen died in 2001 and his two sons, William and Patrick, took over ownership and control of Abbey.
20. In 2002 Abbey was granted an excise license, entitling it to operate an authorised warehouse which it did in addition to its existing business. Abbey employed 23 people and operated from a warehouse with an area of 52,677 sq feet leased from a separate company owned by the Owen brothers.
21. Richard John Hone, who had previously run his own haulage business, joined Abbey and from November 2003 the directors were the two Owen brothers and Mr Hone, each owning approximately one third of Abbey's shares, and Richard Mills.
22. In 2005 Abbey obtained a movement guarantee from Barclays Bank for £250,000 which enabled it to arrange the transport of goods under bond from one authorised warehouse to another, whether in the United Kingdom or anywhere else in the European Union. The Owen brothers had in turn given personal guarantees to support the bank guarantee, secured by charges over their personal assets.
23. The business was conducted on a substantial scale. In an average month there were 300 movements into and out of the warehouse, equating to some 7,000 trailers a year. Abbey did not itself undertake haulage, but for many of its customers it arranged haulage by a haulier drawn from a pool regularly used by it, while some of its customers chose their own hauliers.
24. As a result of investigations undertaken by HMRC in 2008 and early 2009, HMRC formed the view that Abbey was knowingly involved in the fraudulent evasion of excise duty and VAT on alcoholic goods on a large scale. In particular, they concluded that it was involved in outward diversion fraud and suspected that it might well also be involved in inward diversion fraud.
25. The principal focus of HMRC's concerns was on dealings involving three companies which had accounts with Abbey: Glenn & Co Essex Limited, SAS Wines Limited (SAS) and Way2Wine Limited (W2W). HMRC believed that alcohol apparently sold by Glenn to SAS and W2W and apparently destined for export to authorised warehouses in France was fraudulently diverted within the UK. In all or most of these cases the haulier was a firm called MH Forwarding and the stock was apparently to be delivered to one of two authorised warehouses in or near Calais, MT Manutention and Wybo. In each case the ultimate purchasers were said to be one of three cash and carry operations in France called Calais SARL, Boissons Extra and Davedas.
26. In early February 2009, HMRC put into effect a carefully prepared litigation strategy, involving a number of steps designed to take effect simultaneously and without notice to Abbey or its directors. In addition, co-ordinated steps were to be taken by the proposed provisional liquidator, once appointed.
27. First, on 2 February 2009, HMRC raised but did not serve two assessments against Abbey in an aggregate sum of £5,965,704 for excise duty in respect of 301 separate movements of duty suspended alcohol. In the case of all these movements, Abbey had been named in the AADs as the consignor and also as the provider of the movement guarantee. Under section 12(3) of the Finance Act 1994 to which I have earlier referred, the amount of these assessments would, subject to an appeal, be deemed to be due from Abbey and recoverable accordingly, once the assessments were notified to Abbey.
28. Secondly, on 4 February 2009, HMRC presented but did not serve a petition to wind up Abbey. It was explained to the court on the application to appoint the provisional liquidator that HMRC were petitioning in their capacity as contingent or prospective creditors of Abbey arising under the assessments which, once notified to Abbey but not before, would create an actual liability, subject to any appeal. (The position was, however, mis-stated in the petition which alleged that Abbey owed £5,965,704 in respect of unpaid excise duty assessments made on dates between January 2007 and January 2008 and that Abbey had not paid the outstanding sums. The amounts shown for each month were in fact the vehicle movements on which the assessments dated 2 February 2009 were based.)
29. Thirdly, on 4 February 2009, HMRC applied without notice for the appointment of a provisional liquidator of Abbey. The application was made by leading and junior counsel instructed by HMRC and it was supported by a 110 page affidavit sworn by an HMRC officer, Peter Edward Smith, with six exhibits running to many hundreds of pages. Similar applications were made in respect of SAS, W2W and a company called A&S Drinks Limited, which were supported by further substantial affidavits. For the sake of completeness, although those further affidavits were read by the judge hearing these applications simultaneously, they did not form part of the evidence for the application in respect of Abbey. Contrary to what has been said before me by HMRC, I have been unable to find any express or other adoption by Officer Smith in his affidavit sworn in the application concerning Abbey of those other affidavits. Moreover, both the order appointing the provisional liquidator and the worldwide freezing order made on the provisional liquidator's application refer only to Officer Smith's affidavit as the evidence on the applications for those orders.
30. On the application, HMRC had to show not only that they had standing to petition for the winding-up of Abbey, but also that circumstances existed which would justify the relatively unusual step of appointing a provisional liquidator. This it did by reference to its case and evidence that Abbey had been and continued to be involved in substantial and fraudulent evasion of excise duty and VAT. The 301 vehicle movements on which the two assessments were based all involved alleged outward diversion fraud, although the affidavit also set out at length in 96 paragraphs HMRC's grounds for believing that Abbey might also be involved in inward diversion fraud.
31. Officer Smith's affidavit contained a number of important and serious allegations concerning Abbey. Paragraphs 219-314 of the affidavit contained detailed evidence of a number of duty-suspended consignments dispatched from Abbey's warehouse between November 2006 and February 2008 in vehicles which were found to be empty on interception. As regards the 301 vehicle movements on which the assessments were based, Officer Smith said:

"127. Outward Diversion Fraud ("ODF") is the unlawful diversion of Duty suspended excise products onto the UK home market. In the Abbey case HMRC is currently aware of and has assessed for three hundred and one consignments supposedly transported via French Bonded Warehouses to French cash and carries which HMRC maintains were not received at their stated destination.

128. I believe that as part of this fraudulent activity Abbey has allowed its Movement Guarantee to facilitate the movement of excise products which, it is HMRC's case, have in all likelihood been fraudulently diverted before leaving the UK en route to the French Bonded Warehouse. It should be noted that in all instances where movements have been assessed Abbey have produced the AAD's required to accompany duty suspended movements from its warehouse and have named itself as guarantor and transporter on those AADs quoting their own Movement Guarantee under its unique number 986M.

129. As a consequence of this fraudulent use of the Movement Guarantee, Abbey has caused or been a party to the reckless creation of false AADs which, it is HMRC's case, have, in all likelihood, been fraudulently and/or recklessly authenticated by the French Bonded Warehouses without any checks being made. As to the modus operandi of one of the French Bonded Warehouses used by UK Owners, namely MT Manutention ("MT Manut"), it appears that MT Manut has stamped AADs sent to MT Manut from the UK owners (via Abbey) to show that goods have been received. However, in reality, the loads that it has verified as being received cannot have arrived with it, as the vehicles allegedly carrying the loads were empty when leaving the UK (see Section 7 below).

130. It is my belief that Abbey has facilitated the excise products to be released from Bond without payment of the Duty. It is HMRC's position, for the reasons set out in this Affidavit, that those excise products have been released for home consumption in the United Kingdom; the fraudulently and/or recklessly authenticated AADs having been produced on each occasion when Abbey has facilitated the excise products to be released from Bond."

32. The application was heard by Blackburne J. After a careful review of the evidence and a hearing which, together with reading out of court, took most of the day, he was satisfied that it was a proper case in which to appoint a provisional liquidator. He appointed an experienced insolvency practitioner, Louise Brittain, as the provisional liquidator. HMRC offered and the Judge accepted the undertaking to which this application relates. He also appointed her as the provisional liquidator of SAS, W2W and A&S Drinks Limited.
33. Having read the transcript of the hearing, I must pay tribute to the very careful and probing way in which the judge approached the application. It was very far from a push-over for HMRC's counsel. Nonetheless, the task faced by a judge when confronted with the mass of evidence and allegations involved in this case is daunting. At the start of the hearing, the judge informed counsel that their estimate for pre-reading of three to four hours was "really wholly unrealistic". He said that he had looked at one or two of the sample movements "but I have not had a chance to look at the underlying documentation, and I confess I found all that extremely puzzling, so you are going to have to take me in some detail to the movements …". On a complex application of this sort, made without notice to the respondent and therefore heard without the benefit of contrary submissions, there is with the best will in the world a severe limit to the extent to which the evidence can be probed and challenged.
34. As he made clear in exchanges with counsel for HMRC, Blackburne J was fully aware of the almost inevitable consequence of the appointment. When he put to counsel that it would "kill the business", counsel agreed, although counsel added that if Abbey had "a strand of legitimate business", the provisional liquidator "can and no doubt would try and preserve it".
35. As the skeleton argument of counsel stated, and as Mr Nathan QC for HMRC on the present application confirmed, HMRC's purpose in applying for the appointment of a provisional liquidator was two-fold: first, the usual purpose of preserving and protecting the company's assets but, additionally, bringing to an end what it believed to be the fraudulent business of Abbey.
36. Immediately following her appointment as provisional liquidator, Ms Brittain applied for a worldwide freezing order against the directors of Abbey in aid of anticipated misfeasance proceedings against them. The alleged breaches of duty were the conduct of Abbey's business for the purpose of the fraudulent evasion of duty, that is to say, the very grounds on which the appointment of the provisional liquidator was made. The evidence in support of the application was the same affidavit sworn by Officer Smith in support of HMRC's application for the appointment of the provisional liquidator.
37. The application by the provisional liquidator was co-ordinated with HMRC. An agreement was made on 2 February 2009 between HMRC and Ms Brittain which provided that HMRC would give an indemnity to her in respect of the proceedings and any freezing orders that she obtained and that HMRC would lend to Abbey a sum equal to the amount of its movement guarantee for her fees and disbursements and for use in her claims against the directors. Counsel and solicitors instructed by Ms Brittain were present in court throughout the hearing of HMRC's application for her appointment. Paragraph 1 of the skeleton argument of counsel for HMRC stated that the application for the appointment of a provisional liquidator would, if successful, be followed immediately by an application by the provisional liquidator for a freezing order against the directors. Officer Smith's affidavit was sworn in both sets of proceedings. The skeleton argument of counsel for the provisional liquidator submitted that this evidence "overwhelmingly demonstrates participation of [Abbey] in substantial outward diversion fraud", leaving it subject to an assessment for approximately £5.96 million.
38. There has been debate between the parties on the present application as to whether the decision to bring misfeasance proceedings and apply for the freezing orders was effectively taken by HMRC and dictated by them to Ms Brittain. I am not satisfied on the evidence before me that Ms Brittain did anything other than, as required by her duties as a provisional liquidator, decide for herself that it was appropriate to bring these proceedings. It is, however, clear that those proceedings and the application for a freezing order were co-ordinated with HMRC and could not have been brought without the evidence and financial support of HMRC.
39. Blackburne J granted the freezing order against the Owen brothers and Mr Hone. On behalf of Abbey, the provisional liquidator gave an undertaking in damages and HMRC gave an indemnity to Abbey in respect of it.
40. Blackburne J was correct in his forecast of the consequences of the provisional liquidator's appointment. Ms Brittain closed down the entire business, dismissing the 23 employees and the directors as employees. So far as the bonded warehouse was concerned, Ms Brittain had in any event little choice because as a result of and with effect from her appointment as provisional liquidator, HMRC imposed conditions on the operation of the warehouse which made it in practice impossible to operate as an authorised warehouse.
41. The assessments and the winding-up petition were duly served on Abbey and the freezing order was served on the directors.
42. The grave impact of these proceedings and orders on the directors, both personally and as owners and controllers of Abbey, can easily be understood. I shall have to look at this in a little detail later in this judgment but I will mention now that on 18 February 2009 Mr Hone was made a compulsory patient under the Mental Health Act 1983 after attempting suicide, as he describes it "out of despair at what had happened, the overwhelming sense of injustice I felt and the effects on me of seeing the distress of my family". He was subject to supervision for a further two months.
43. The winding-up petition was listed for hearing on 18 March 2009 and was not opposed by the provisional liquidator or by the directors and shareholders. A winding-up order was made and Ms Brittain became the liquidator.
44. Ms Brittain pursued the misfeasance proceedings against the directors. She was supported by HMRC, who, in addition to providing the indemnity against any liability under the undertaking in damages, provided an indemnity against any adverse costs orders. They also made loans of some £337,000 towards the costs of the liquidation, at least some of which was used to fund the litigation. Abbey's own costs were the subject of a conditional fee agreement.
45. Particulars of claim were served on 5 March 2008, alleging dishonesty against Mr Hone and the Owen brothers and negligence against Mr Mills. The alleged loss amounted to £6,464,922, comprising £5,965,704 in respect of the assessments as regards the 301 vehicle movements, £416,933 in respect of an assessment raised in January 2008 on a consignment by Glenpark International Limited (the Glenpark assessment) and £83,285 in respect of an assessment raised in October 2008 on a consignment to Lauvie F. Distribution in France (the Lauvie assessment).
46. It was pleaded in the particulars of claim that:

"7. Between January 2007 – January 2008, 301 consignments of duty suspended alcohol were purportedly transported by Abbey from its warehouse to an Approved EU Warehouse in France for purported onward supply to customers of SAS and W2W. In each instance the AAD in respect of the consignment contained the information set out in paragraphs 5 and 6 above.

8. Each of the 301 consignments referred to in paragraph 7 were not received at their stated destinations and were instead delivered to unknown alternative destinations in the United Kingdom.

…

14. In breach of the duties at paragraphs 13.1 – 13.3, the 1^st, 3^rd and 4^th Defendants have knowingly and dishonestly caused the Company to be a party to the creation of false AAD creating the fiction of duty suspended movement of alcohol to Approved EU Warehouses.

15. It was at all material times known to the 1^st, 3^rd and 4^th Defendants that:

15.1 the 301 consignments, referred to at paragraphs 7 and 8 above and the consignments referred to at paragraphs [97-101] below were not intended to be delivered to an Approved EU Warehouse;

15.2 they were instead were [sic] intended to be (and were) diverted to unknown destinations in the UK;

15.3 and if not delivered in accordance with the AAD would give rise to an excise duty point; and

15.4 would give rise to the Company suffering a liability for the excise duty pursuant to Regulation 7(1) DSMEG.

16. In the alternative, the 1^st, 3^rd and 4^th Defendants turned a blind eye to the risk that the consignments would not be delivered to the Approved EU Warehouse."

47. This was essentially the case made by HMRC on their application for the appointment of a provisional liquidator, as set out in Officer Smith's affidavit. A substantial part of the particulars of claim was taken up with detailed allegations concerning the intercepted movements set out in Officer Smith's affidavit. In respect of all except three of these movements, no assessments had been raised by HMRC and no claim was made in the misfeasance proceedings.
48. The misfeasance proceedings were very largely dependent on evidence provided by HMRC. Consistently with the evidence in support of the appointment of the provisional liquidator, the particulars of claim were based on allegations of outward diversion fraud. Very shortly before the trial, the liquidator applied for permission to amend to include allegations of inward diversion fraud but, in view of the close proximity of the trial, this was refused on an application heard by me.
49. The trial of the misfeasance proceedings took place over 13 days in July 2010 before Lewison J. Most of the evidence called by Abbey acting by Ms Brittain as its liquidator was from four HMRC officers. The principal witness was Alan Duxbury who fully adopted the evidence in Officer Smith's affidavit. Officer Smith had been and remained a member of his team and subject to his supervision. The defendants called a number of witnesses and themselves also gave evidence. Lewison J found some of Mr Hone's evidence to be untruthful, and also found Officer Duxbury's evidence to be "unsatisfactory" on a number of occasions (paragraph 75).
50. By the time of the trial, there had been significant changes to or clarification of the allegations of evasion of excise duty.
51. First, it was no longer alleged that the receiving warehouses in France were complicit in any fraud or that any of their stamps on the AADs had been forged or fraudulently applied. As Lewison J commented in his judgment at [22], the case was quite different from the one on which HMRC relied for the appointment of the provisional liquidator.
52. Secondly, it was alleged at the trial and in evidence served shortly before the trial, in response to the defendants' evidence refuting the allegations of forged or fraudulently applied stamps by the French warehouses, that the evasion of excise duty had been achieved by the use of borrowed loads, as described earlier in this judgment. As to this, Lewison J said at [24]:

"It is right to say that this variety of fraud did not form part of HMRC's case on the application for the appointment of the provisional liquidator. Nor did it form part of Abbey's pleaded case. Nor, indeed, did it feature in the first round of evidence served on behalf of Abbey. It first surfaced in Officer Duxbury's witness statement of 21 June 2010, which was served in reply to the defendant's evidence; and then only as generalised hearsay."

53. Thirdly, it became clear that of the 301 vehicle movements on which the assessments in February 2009 had been based, only three had in fact been intercepted. In his judgment, Lewison J said at [108]:

"Officer Smith gave evidence of many examples of interceptions of vehicles where the physical evidence of the vehicle and its load did not correspond with the paperwork in the AAD. However, most of these interceptions were not notified to Abbey at the time; and only three of them were covered by the assessments on which the petition debt was based. Three out of some 3,600 movements over the same period is about 0.08 per cent. Officer Duxbury explained how the remaining 298 consignments had been selected for inclusion in the assessment. The criteria were that (a) the owner of the goods was either SAS or W2W; (b) the receiving warehouse was either MT Manut or Wybo; (c) the haulier was MH Forwarding, and (d) the movement had taken place within the year preceding January 2008. In other words the movements covered by the assessments were extrapolated from the three interceptions."

54. I have read the affidavit of Officer Smith and the transcript of the hearing before Blackburne J and I can find no explanation that the 298 vehicle movements were included in the assessment by the process of extrapolation described by Lewison J. As the Judge records, it was Officer Duxbury who explained this in his evidence at trial. I do not suggest that Blackburne J was deliberately misled but I do consider that this is something which should have been fully set out in the evidence and explained to the Judge.
55. Lewison J dismissed the claim. In doing so, he positively found that all the 301 loads had arrived at the bonded warehouse in France and, in reaching that conclusion, he rejected the "borrowed load" case put forward by Officer Duxbury in his evidence shortly before the trial. As regards the smaller claims based on the Glenpark and Lauvie assessments, he held that the liquidator had failed to establish that the goods in question did not arrive at the bonded warehouses in France.
56. As to SAS, W2W and the French cash and carry businesses, Lewison J found that there was no reason to suppose that anyone at Abbey was aware, if it was the case, that those companies were knowingly engaged in fraudulent activity. As he commented at [106], Abbey's concern was that duty suspended goods arrived at the receiving warehouse. It was not concerned with what happened to those goods thereafter.
57. With the agreement of HMRC, the liquidator did not seek permission to appeal against the dismissal of the claim.
58. The premise of the assessments raised in February 2009 against Abbey was that the goods in question had not arrived at the bonded warehouses in France. Notwithstanding the finding by Lewison J that the 301 loads had arrived at bonded warehouses in France, HMRC did not withdraw the assessments.
59. The liquidator refused to appeal the assessments. HMRC made clear that they would oppose any appeal and the liquidator did not have available to her funds to meet the costs of an appeal or an adverse order for costs should one be made. Moreover, she assessed that there was little likelihood of any return to unsecured creditors and that therefore even a significant reduction in the overall amount of unsecured liabilities which would result from a successful appeal would not in fact confer any benefit on creditors. On 20 October 2010, the Owen brothers and Mr Hone applied for an order that they should be given conduct of appeals against the assessments before the First-tier Tribunal. The liquidator was prepared to consent to such an order provided that the terms of a secured indemnity could be agreed. An indemnity was agreed and on 9 November 2010 Warren J made an order giving the applicants conduct of appeals against the assessments issued in February 2009 and other assessments, including the Glenpark assessment and the Lauvie assessment.
60. A significant difference between the proceedings before Lewison J and an appeal to the First-tier Tribunal is that in the former the burden of proof lay on the claimant to prove that the loads had not arrived at their legitimate destinations, whereas on an appeal the burden lay on the appellant to prove that the loads had arrived.
61. Appeals were lodged on behalf of Abbey in January 2011.
62. In June 2011 HMRC served their evidence in response to the appeals, which was substantially the same evidence provided by HMRC witnesses in the proceedings before Lewison J. On receipt of this evidence, an application was made by Abbey to the First-tier Tribunal for the appeal to be allowed on the basis of res judicata or abuse of process. The application was listed for hearing on 9 August 2011.
63. HMRC opposed the application, and served a skeleton argument in support of its position.
64. However, on 4 August 2011, HMRC consented to the application, agreed that the appeal should be allowed and withdrew all the appealed assessments, including those raised in February 2009.
65. On 12 September 2011, the tribunal (John Walters QC) ordered HMRC to pay Abbey's costs of the appeal and to make an interim payment of £215,000. In giving its reasons the tribunal stated, after referring to the history of the proceedings, that:

"these facts show that the Appellant's business was closed down and the former directors (and others) deprived of their livelihoods by the Respondents on the basis of allegations which could not be substantiated in the misfeasance proceedings and which the Respondents have chosen not to defend in appeal proceedings before the tribunal. This indicates prima facie a serious injustice to the Appellant and its former directors."

66. The shareholders of Abbey took steps to replace Ms Brittain as liquidator. Although HMRC were no longer creditors in respect of the withdrawn assessments, they relied on assessments raised on 27 March 2009, after the winding-up order had been made, in a total sum of £456,068 successfully to resist a resolution to remove Ms Brittain as liquidator at a meeting of creditors held on 14 December 2011.
67. In May 2012, the shareholders applied to the court to remove Ms Brittain. This was resisted by Ms Brittain but in August 2012 she agreed to her removal on the basis that she did not accept the allegations made against her in the evidence in support of the application. On 30 August 2012, she was replaced by the present liquidator, Jeremy French.
68. Mr French as the new liquidator had a significant task in assimilating the "vast amount of documentation involved in this liquidation", as Ms Brittain had described it in her initial opposition to her removal. It took several weeks for the documentation to be provided to Mr French, and even then he did not receive all the documents to which he was entitled. In January 2013 he purported to assign Abbey's right to apply to enforce the undertaking to the Owen brothers and Mr Hone. Their solicitors sent a letter of claim to HMRC on 28 March 2013 and in their reply dated 29 April 2013, HMRC objected to the purported assignment. They did however pick up on the suggestion made for a mediation, which took place in July 2013 but was not successful. The liquidator sent a letter of claim to HMRC and arranged the funding for the present application, which was issued on 1 November 2013.
69. The appeals against assessments, which were allowed following their withdrawal by HMRC, did not concern two assessments to excise duty and VAT which had been raised by HMRC on 27 March 2009, after the making of the winding-up order. Those assessments were for a total of £456,068 (the Extant Assessments). These assessments were received at the liquidator's office, which by then was Abbey's registered office, on 30 March 2009 but do not seem to have come to the attention of Ms Brittain. It appears that she became aware of them only when HMRC lodged a proxy as creditors in respect of them for the meeting of creditors in December 2012. They did not form any part of the claims made in the misfeasance proceedings. Mr French as liquidator lodged an appeal against these assessments in August 2013 but, as I understand it, it has yet to be determined.
70. At the conclusion of the misfeasance proceedings, Lewison J had on 30 July 2010 directed an inquiry as to damages on the undertaking given by Abbey when the freezing orders were made. Because HMRC had indemnified Abbey against any liability on the undertaking in damages, they assumed conduct of the defence of the application, with their solicitors and counsel being instructed in the name of Abbey. When Mr French replaced Ms Brittain as liquidator of Abbey, HMRC were on their application joined as parties to the proceedings.
71. The application against Abbey was heard by HH Judge Pelling QC who gave two judgments in December 2012 and January 2013: [2012] EWHC 3525 (Ch); [2013] Ch 455 and [2013] EWHC 1141 (Ch). It was something of a pyrrhic victory for the Owen brothers and Mr Hone. They were awarded £8,000 each as general damages and £3,436 was awarded to Patrick Owen as special damages but they were ordered to pay Abbey's costs, less £10,000, to be assessed on the standard basis up to 21 August 2012 and thereafter on the indemnity basis. They appealed, with permission granted by the Court of Appeal.
72. The Court of Appeal allowed the appeal in part: [2014] EWCA Civ 711; [2014] 3 WLR 1676. The sum payable by way of general damages was increased to £15,000 for each of the appellants and they were collectively awarded special damages of £9,300. As to costs, the judge's order was set aside and the appellants were awarded 25% of their costs in the High Court. There was no order for the costs of the appeal.
73. The judgments in the Court of Appeal were critical of HMRC and highly critical of the conduct of the proceedings against the directors, particularly in relation to the freezing orders, by Ms Brittain. I will refer later to these latter criticisms. At [139] McCombe LJ said that:

"Abbey and HMRC had made no attempt whatsoever to recognise the consequences of their ill-judged litigation until two years after Lewison J's judgment."

74. The final matter in the recital of facts is that the Owen brothers and Mr Hone have successfully established a new company, Purland House Limited, which is carrying on exactly the same business as Abbey, from the same premises and with many of the same staff. It started trading immediately after the grant of a bond licence and other authorities by HMRC in January 2012, pursuant to the Warehouse Keepers and Owners of Warehoused Goods Regulations 1999.
75. As one would expect, HMRC carefully vet applications and, the guidance issued by HMRC states:

"Only when HMRC is satisfied the business is a genuine enterprise, commercially viable, with a genuine need for authorisation and all key persons are fit and proper to carry on such a business, will HMRC process the application." (emphasis added)

The guidance goes on to state the reasons for refusing an application may include "the legal entity (this includes the directors) or any of its key employees have been involved in revenue non-compliance or fraud" and "there are proven links between the legal entity/key employees with other known non-compliant or fraudulent businesses".

76. HMRC must therefore have been satisfied that the Owen brothers and Mr Hone were fit and proper persons, who had not been involved in revenue non-compliance or fraud, before they issued the licence and approvals to Purland House Limited.

The present application

77. The present application was issued on 1 November 2013. It was supported by an affidavit sworn on 31 October 2013 by Mr French, as liquidator of Abbey, in which he set out the grounds for the application. First it was said that the evidential basis for the application for the appointment of the provisional liquidator had been shown to be unfounded. In this respect, Mr French referred to and relied on the judgment of Lewison J. He commented correctly that the misfeasance proceedings were substantially based on the same matters as were relied on in support of the appointment of the provisional liquidator. He stated:

"46. It can be seen from the Judgment that HMRC's contention that there had been large scale evasions of excise duty on duty suspended alcohol that had been stored in and subsequently removed from Abbey's bonded warehouse did not withstand scrutiny.

47. The failure of the misfeasance proceedings, for the reasons given by Mr Justice Lewison, coupled with the subsequent withdrawal of all of the Assessments upon which the application for the appointment of a Provisional Liquidator was based, of themselves, show that there was no valid foundation for the making of the Order appointing a Provisional Liquidator on the basis of the material put forward to the Court by HMRC."

78. It can therefore be seen that Mr French was relying both on the dismissal of the misfeasance proceedings for the reasons given by Lewison J and also on the withdrawal by HMRC of the assessments raised in February 2009 on which the application for the appointment of a provisional liquidator and the petition for winding up had been based.
79. Secondly, Mr French relied on allegations that HMRC had failed to make full and frank disclosure to the court of all material matters in accordance with its duty on making an application without notice.
80. HMRC responded with an application that the court determine, as a preliminary issue, whether Abbey was entitled as against HMRC to rely on Lewison J's judgment, in light of the different parties to the two sets of proceedings. HMRC had not been a party to the misfeasance proceedings and had not been in control of them. This essentially was the same preliminary issue which HMRC had sought to have determined in the appeal against the assessments in the First-tier Tribunal but which they had abandoned when they withdrew the assessments.
81. An order was made by consent on 22 January 2014 for the determination of the preliminary issue sought by HMRC and for directions for the conduct of the application in the light of the outcome on that issue, particularly in relation to disclosure. Abbey had issued applications for specific disclosure and for an order requiring HMRC to file its evidence in response to the main application.
82. It was the position of HMRC that, if they succeeded on the preliminary issue, there would on the application for an inquiry as to damages be in effect a new trial, not only on the evidence which had been before Lewison J (on which they said that the judge had made the wrong findings) but also on further evidence to show that Abbey and its directors had been engaged in the fraudulent evasion of excise duty on the 301 consignments giving rise to the assessments raised in February 2009. They said that some of this evidence had not been available at the time of the trial before Lewison J. HMRC made clear that they had serious criticisms of the way in which Abbey's case had been put before Lewison J and that there were additional allegations of fraudulent evasion of excise duty which they would advance.
83. All these applications were listed before me on 7 July 2014. I took the view that the agreed preliminary issue did not focus on important and prior issues which, if determined in favour of Abbey, could or would result in an order for an inquiry, irrespective of whether Abbey would have been entitled to rely on the findings contained in Lewison J's judgment. It seemed to me that the time of the court and of the parties was potentially going to be wasted in hearing and determining the preliminary issue. The force of this was all the greater, given the attitude of HMRC that there did not arise for consideration at the hearing of the preliminary issue the effect of their own withdrawal of the assessments raised in February 2009. I therefore declined to hear the agreed preliminary issue and there followed discussion as to the issues which should be identified for determination.
84. As a result of the discussions on 7 July 2014, an order in agreed terms was made on 23 July 2014. By paragraph 3 of the order, Abbey's application dated 1 November 2013 was adjourned for hearing in November 2014 and paragraph 1 provided:

"1. That the issues to be tried at the hearing directed by paragraph 3 below are:

A. Should the Court make an order for an Inquiry as to damages, having regard to:

a) The failure of the Liquidator's misfeasance claim against the former directors of the Company;

b) The withdrawal of the two Assessments by HMRC in 2011 upon which the winding-up petition was founded, in support of which petition the application for appointment of a provisional liquidator was made;

c) The delay on the part of the Company in applying for the Order it seeks;

d) Other relevant factors (other than any facts found by Lewison J. in his Judgment in the Misfeasance Proceedings dated 30 July 2010), being:

(i) The winding-up order made in relation to the Company on 18 March 2009, which discharged the appointment of the Provisional Liquidator,

(ii) The absence of any application to set aside the appointment of the Provisional Liquidator and/or any opposition to the winding-up petition.

B. If such an Inquiry is to be ordered, upon what factual basis is the loss recoverable in the Inquiry to be assessed? In particular is the loss to be assessed on the footing that (as in fact occurred) the Company would have been wound up on the return date of the petition?"

Summary of the parties' cases

85. Ms Mulcahy QC for Abbey made a straightforward case for an inquiry as to damages. HMRC gave an undertaking in damages without which it would not have obtained the order for the appointment of a provisional liquidator. It can now be seen that the order was wrongly made, both because the assessments on which the winding-up petition was based and which gave HMRC their standing as creditors were withdrawn and because the allegations of fraud on which HMRC relied in their application for the appointment were dismissed by Lewison J at the conclusion of the trial of the misfeasance proceedings. In determining whether the order was wrongly made, the court uses the full benefit of hindsight and asks itself in effect whether in the light of subsequent events it can be seen that the order was wrongly made. The court is not asking itself whether the order was wrongly made in the sense of whether, on the evidence and submissions available at the time, the judge making the order was then wrong to do so. Nor is an order for an inquiry in any sense dependent on the existence of any fault on the part of the applicant at the time. It is a matter of justice that where there has not been a final determination of the matters on which the order is made the applicant should compensate the respondent in the event that it transpires that the order was wrongly made. In the absence of special circumstances, the undertaking is to be enforced, and no special circumstances exist in this case.
86. HMRC resists an inquiry on a number of grounds. The principal ground is that the appointment of the provisional liquidator was followed by the order to wind up Abbey. The making of the winding-up order was not opposed and it has not been appealed. The appointment of the provisional liquidator was an interim measure which came to an end with the final order on the petition, namely the winding-up order. Just as an undertaking in damages given on the grant of an interim injunction will come to an end if a final injunction is granted at trial, so the undertaking in damages given on the appointment of a provisional liquidator comes to an end if a winding-up order is made. HMRC additionally relied on other factors: delay, prejudice and the public interest.

General principles

87. The parties were agreed as to the general principles applicable to undertakings in damages and their enforcement. These may be summarised as follows:

1) The undertaking is given to the court, not to the respondent. It does not found a cause of action but it enables the respondent to apply to the court for compensation

2) The undertaking is required as the "price" of an interim order.

3) The undertaking is intended to provide a means of compensating the respondent if it subsequently appears that the injunction was wrongly granted. Given that the facts and legal position have not been finally determined, the undertaking is dictated by considerations of fairness and equal treatment.

4) Whether an order was "wrongly" made is judged retrospectively, with the benefit of hindsight. It is not a question whether the order was wrongly made in the light of the circumstances known to the court at that time.

5) Once it is established that the order was wrongly made, the court will ordinarily order an inquiry as to damages, unless there exist special circumstances.

88. Although there are many cases concerned with the enforcement of undertakings in damages given on the grant of an interim injunction, counsel have been unable to find any authority concerned with the enforcement of an undertaking given on the appointment of a provisional liquidator.

The temporary nature of the undertaking

89. In the ordinary case of an interim injunction, the question whether it was properly granted for the purposes of an undertaking in damages will generally be answered by whether a final injunction to similar effect is granted at trial, leaving aside any question of the court being misled on the application or non-disclosure of material matters. HMRC submit that the appointment of a provisional liquidator is an analogous order. The liquidator's appointment is provisional until a winding-up order is made or refused. If a winding-up order is made, the provisional liquidator will be replaced by a liquidator empowered to conduct the liquidation. Just as the appointment of the provisional liquidator ceases to have effect, so does the undertaking in damages. If a winding-up order is refused and the petition is dismissed on the merits, the order for the appointment of a provisional liquidator will for the purposes of the undertaking have been wrongly made.
90. Mr Nathan QC on behalf of HMRC accepted that different principles may apply where the injunction does not replicate the final relief sought but is in aid of the proceedings, most obviously search and freezing orders. In such cases, the claimant may be successful in the proceedings in obtaining judgment for a debt or damages but the freezing order may have been wrongly made, in which case the court would be entitled to enforce the undertaking. But, Mr Nathan submits, for the reasons summarised above, the appointment of a provisional liquidator is not analogous to such cases but is analogous to the interim injunction which anticipates the relief to be sought at trial. Mr Nathan relied on the distinction drawn by Potter LJ in Yukong Ltd v Rendsburg Investments Corporation [2001] 2 Lloyd's LR 113 at [32]:

"Whereas the usual practice in respect of interlocutory injunctions is not to order an inquiry into damages on the cross-undertaking until the merits of the action have been finally decided at trial, in cases where a Mareva injunction is involved, a defendant or other party bound in respect of whom the injunction is discharged at any stage may seek, and be granted, an inquiry into damages on the basis that, regardless of the ultimate merits of the action, the injunction was "wrongly granted"."

91. I would accept that in the case of an anticipatory interim injunction, the usual test for whether the injunction was wrongly granted is whether a final injunction in similar terms is granted at trial. I do not however accept that it is the only test for determining whether there should be an inquiry as to damages. There are a number of reasons for this.
92. First, attention must be paid to the terms of the undertaking which I set out at the start of this judgment. It is expressed in general language. It is not expressed to be dependent on one event, such as the refusal of a final injunction or, in a case such as this, the dismissal of the winding-up petition. The court is given a discretion to make an order as to damages if it is of the opinion that the company has sustained any damages "by reason of this order which the applicant ought to pay". These are very general words in an undertaking required so as to protect the respondent and do justice in the case. They are in my judgment to be interpreted so as to meet the justice of the case, rather than to fit a particular formula. That an inquiry as to damages would normally be ordered if the winding-up petition were dismissed does not mean that the dismissal of the winding-up petition is a pre-condition to an order for an inquiry as to damages.
93. The breadth of the court's discretion in deciding whether to order an inquiry as to damages is made clear in the authorities. In Cheltenham & Gloucester Building Society v Ricketts [1993] 1 WLR 1545, the Court of Appeal reviewed the authorities and at 1551 Neill LJ extracted the following guidance from those authorities:

"(1) Save in special cases an undertaking as to damages is the price which the person asking for an interlocutory injunction has to pay for its grant. The court cannot compel an applicant to give an undertaking but it can refuse to grant an injunction unless he does. (2) The undertaking, though described as an undertaking as to damages, does not found any cause of action. It does, however, enable the party enjoined to apply to the court for compensation if it is subsequently established that the interlocutory injunction should not have been granted. (3) The undertaking is not given to the enjoined but to the court. (4) In a case where it is determined that the injunction should not have been granted the undertaking is likely to be enforced, though the court retains a discretion not to do so. (5) The time at which the court should determine whether or not the interlocutory injunction should have been granted will vary from case to case. It is important to underline the fact that the question whether the undertaking should be enforced is a separate question from the question whether the injunction should be discharged or continued. (6) In many cases injunctions will remain in being until the trial and in such cases the propriety of its original grant and the question of the enforcement of the undertaking will not be considered before the conclusion of the trial. Even then, as Lloyd L.J. pointed out in Financiera Avenida v Shiblaq, The Times, 14 January 1991; Court of Appeal (Civil Division) Transcript No.973 of 1990 the court may occasionally wish to postpone the question of enforcement to a later date."

94. In the same case Peter Gibson LJ said at 1554:

"This appeal raised an important point affecting the practice of the court on the enforcement of undertakings as to damages given by the successful applicant for an interlocutory injunction when subsequently the injunction is shown to have been wrongly granted. The practice of requiring an undertaking in damages from the applicant for such an injunction as the price for its grant was originated by the Court of Chancery as an adjunct to the equitable remedy of an injunction. There is an obvious risk of unfairness to a respondent against whom an interlocutory injunction is ordered at a time when the issues have not been fully determined and when usually all the facts have not been ascertained. The order might subsequently prove to have been wrongly made but in the meantime the respondent by reason of compliance with the injunction may have suffered serious loss from which he will not be compensated by the relief sought in the proceedings. The risk of such injustice is the greater when the interlocutory injunction has been granted ex parte. The risk is particularly great with Mareva injunctions, granted as they are almost invariably ex parte, and frequently imposing severe restrictions on the respondents' right to spend their money or otherwise dispose of their assets: such injunctions can have the effect of ruining a thriving business or of otherwise causing substantial loss to the respondent and were vividly described by Donaldson L.J. in Bank Mellat v Nikpour [1985] F.S.R.87, 92 as being, with the Anton Pillar order, one of the law's "two 'nuclear' weapons." The courts are properly concerned lest these weapons are used inappropriately and the undertaking in damages provides a salutary potential deterrent against their misuse."

95. Commenting on the usual form of undertaking, Peter Gibson LJ importantly said at 1554-55:

"The form of the undertaking indicates that the court has a discretion whether to enforce it at all and that discretion is not limited in any way."

96. He went on to cite from the judgment of Lloyd LJ in Financiera Avenida v Shiblaq (7 November1990):

"Two questions arise whenever there is an application by a defendant to enforce a cross-undertaking in damages. The first question is whether the undertaking ought to be enforced at all. This depends on the circumstances in which the injunction was obtained, the success or otherwise of the plaintiff at the trial, the subsequent conduct of the defendant and all the other circumstances of the case. It is essentially a question of discretion."

97. Although that case concerned a freezing order, Peter Gibson LJ commented at 1555G:

"Nevertheless it is also clear that [Lloyd LJ] considered that the court had a general discretion whether to enforce the undertaking, and that this required consideration of all the circumstances of the case."

98. The point made above about the nature of an interim injunction being "wrongly" granted was very clearly explained by Lewison J in SmithKline Beecham plc v Apotex Europe Ltd [2005] EWHC 1655 (Ch); [2006] 1 WLR 872 at [44]:

"There is another piece of judicial shorthand which also requires some explanation. Judges have said from time to time that a cross-undertaking is needed to guard against injustice that might result if at trial it is decided that the interim injunction was granted "wrongly" or "in error", or "improvidently". These and similar adverbs do not, in my judgment, imply that the court's decision to grant an interim injunction was wrong or unjust when it was made. If it was, then it could have been the subject of a successful appeal. Rather, what is meant is that with the benefit of hindsight and after investigation of all the facts, the court at trial may decide that the claimant (in whose favour the injunction was granted) is not entitled to the relief that he claimed. Had it known all the facts when it made the order for the interim injunction it would have refused the injunction; but equally it would not have exacted the cross-undertaking. The cross-undertaking is an integral part of the whole package. The package as a whole cannot fairly be described as erroneous or wrong. The Points of Claim describe the injunctions as the "Wrongful Injunctions" but that, in my judgment, is a misconception."

99. Mr Nathan relied on this paragraph, emphasising the use by Lewison J of the words "at trial" twice in that passage. In my view, this reliance is misplaced. Lewison J was addressing the typical case, but there is nothing in his judgment to suggest that it is only if the claim to a final injunction fails at trial that an inquiry as to damages on the undertaking given on the grant of the interim injunction can be granted.
100. That this is so is made clear not only by the statements of principle from the authorities which I have cited above but also from the approach of the court to ordering inquiries as to damages where freezing or search orders have been made. There are cases where the claim succeeds but it is shown that the freezing or search order should not have been granted. For example, it may be established that there was no or no sufficient threat of dissipation of assets to justify the grant of a freezing order. That is not a matter which would arise for determination at trial. Whether an inquiry as to damages should be ordered would be an issue independent of the result at trial and could well be a matter to be decided at a separate hearing either before or after the trial.
101. Mr Nathan submitted that the appropriate analogy for the appointment of a provisional liquidator was the grant of an ordinary interim injunction, anticipating the result at trial, rather than the grant of a freezing order. I do not agree. First, the appointment of a provisional liquidator is sui generis and it is not necessarily helpful to attempt to find the closest analogy. Secondly, to the extent that an analogy may be drawn, it seems to me that the analogy with a freezing order is closer. Like a freezing order, the appointment of a provisional liquidator is usually made in order to safeguard the assets of the company, for example in particular because of alleged threats of misapplication by those in control of the company, whether through fraudulent trading or otherwise. The appointment of a provisional liquidator may cause loss to the company and hence to its creditors and shareholders, even if subsequently a winding-up order is made. In such cases, if subsequently it can be seen that the circumstances did not justify the appointment, there is no reason in principle why an inquiry as to damages should not be ordered. Just as the allegations of a risk of dissipation may well not be relevant at the trial of a claim in which a freezing order has been made, so in many if not almost all cases of winding-up petitions, the allegations of fraud or other risks on which the appointment of a provisional liquidator was made will not be a matter for determination at the hearing of the winding-up petition.
102. All this illustrates, in my view, that the right approach is that stated by the Court of Appeal in Cheltenham & Gloucester Building Society v Ricketts, providing for a broad discretion to be exercised judicially, in keeping with the general terms of the usual form of undertaking.
103. In my judgment, it follows that the undertaking given on the appointment of a provisional liquidator does not automatically terminate on the making of a winding-up order, so as to deprive the court of jurisdiction to enforce the undertaking by ordering an inquiry as to damages. The court retains its discretion to order an inquiry if the circumstances make it just. The fact that a winding-up order has been made will in all cases be a highly relevant factor, as also may be the absence of any opposition to the making of the order, but these factors are not determinative.
104. Having decided that the court retains jurisdiction to enforce the undertaking in damages notwithstanding the making of a winding-up order, the issue is whether in its discretion it should do so. Leaving aside the special features and particular circumstances of this case on which HMRC rely and to which I will come, the key feature of this case to my mind is that the winding-up petition was presented, and the application for the appointment of a provisional liquidator was made, on the basis that HMRC were creditors in the sum of a little under £6 million under the two assessments raised on 2 February 2009. The deemed debt created by notification of those assessments to Abbey was by the terms of section 12(3) of the Finance Act 1994 subject to appeal. When Abbey finally did appeal, not only were the appeals allowed but HMRC withdrew their assessments without a hearing. This meant that HMRC abandoned the only standing that they claimed for the presentation of the petition and the appointment of the provisional liquidator. Subsequent events therefore show that the entire foundation of their case did not exist. As already discussed, whether an interim order was "wrongly" made is for these purposes decided with the benefit of hindsight. Leaving aside the special features, including as I have indicated earlier the fact that an order was made and that there was no opposition to that order, the case for ordering an inquiry on this ground appears to me to be almost overwhelming.
105. It is important to distinguish two separate elements in HMRC's case for the appointment of a provisional liquidator which have not always been kept separate in their submissions and evidence. These elements are, first, their claim to be a creditor in respect of the two assessments raised on 2 February 2009 and, secondly, their allegations that the Owen brothers and Mr Hone were deliberately involving Abbey in the fraudulent evasion of excise duty. The first is not dependent on the second. As explained earlier in this judgment, Abbey could be liable for the excise duty on consignments despatched from its warehouse without any fault on its part. In raising the assessments and in resisting any appeal, HMRC did not need to make any allegations of fraud or default against Abbey or its directors. Its case could be confined to a diversion of the consignments and their non-arrival at the French warehouses.
106. The second element, the allegations of misconduct against the directors, is dependent on Abbey becoming liable for excise duty in respect of these diverted consignments. The case was that they caused Abbey to incur those liabilities through their misconduct. If the liabilities did not arise, because the consignments were not diverted but did arrive at their warehouses of destination, there could be no relevant misconduct on the part of the directors. For that reason, Lewison J had to address and determine whether the consignments had indeed arrived at the French warehouses. On the evidence and case put before him, he found as a fact that the consignments had arrived.
107. Whether or not on the present application HMRC would be bound by the findings of Lewison J that the consignments had arrived at the French warehouses, and that therefore there was no basis for the assessments, is not a matter for decision on this application. The critical point is whether, having abandoned the assessments in the face of the appeal against them by Abbey, HMRC can any longer contend that nonetheless the consignments did not arrive and that Abbey was liable for the excise duty in respect of them. In my judgment, it is clear that HMRC cannot do so. It is HMRC themselves that repeatedly state, both in this case and in other cases, that the appropriate forum in which to determine the validity of assessments is appeal proceedings in the Tribunals. I need only quote from the skeleton argument of leading and junior counsel for HMRC for the hearing before the First-tier Tribunal fixed for 9 August 2011:

"it is not an abuse of process for the Commissioners to resist the Appeals, notwithstanding the Misfeasance Claim.

23.1 The High Court, in which the Misfeasance Claim was heard, is not a competent court in which to challenge the Assessments. The Assessments must be challenged through the exclusive statutory appeals process in the First-Tier Tribunal, and not in the High Court.

23.2 The Commissioners were not a party to the Misfeasance Claim. The Commissioners provided an indemnity in respect of the Misfeasance Claim and various officers of HMRC provided evidence in the Misfeasance Claim, but the Misfeasance Claim was brought by the Appellant acting by its Liquidator. The Liquidator had separate legal representation in respect of the Misfeasance Claim and did not instruct the Commissioners' solicitors, Howes Percival, prior to judgment in those proceedings. Furthermore the Commissioners had no right to appear in the Misfeasance Claim.

23.3 In the Misfeasance Claim, Lewison J took the burden of proof to be on the Claimant, the Appellant. In the Appeals the legal burden of proof is on the Appellant. So, whilst in the Misfeasance Claim Lewison J took the view that it was for the claimant to prove that irregularities occurred in the Assessed Movements, in the Appeals it is for the Appellant to prove that irregularities in the Assessed Movements did not occur.

24. In the light of the matters identified in the paragraph immediately above permitting the re-litigation of issues would not bring the administration of justice into disrepute. On the contrary, it would be manifestly unfair to the Commissioners to prevent them from resisting an appeal by reason of a previous set of proceedings, to which they were not parties, in which the burden of proof was different, and which would not be a proper forum to decide whether the Assessments should stand. Further, it would be a miscarriage in the administration of justice to prevent the Commissioners from participating in the statutory procedure which is long established as the procedure under which assessments are challenged and justified, by reason of a decision in a forum which it is long established is not the appropriate forum in which to determine whether assessments should stand."

108. The position there stated is entirely consistent with the position regularly taken by HMRC in proceedings before the courts. The High Court is not a competent court in which to challenge assessments; they "must be challenged through the exclusive statutory appeals process in the First-tier Tribunal". Proceedings before the tribunal are "the statutory procedure which is long established as the procedure under which assessments are challenged and justified", while the High Court "is not the appropriate forum in which to determine whether assessments should stand". If, as here, HMRC choose to abandon assessments in the course of appeal proceedings under the statutory procedure, it would by a parity of reasoning be an abuse of process for HMRC subsequently to contend in court proceedings that the assessments had been properly raised. They cannot avoid the consequences of their own actions.
109. In these circumstances, it is unnecessary to consider whether the allegations of fraudulent conduct made by HMRC in their application for the appointment of a provisional liquidator were soundly based, or whether the findings of Lewison J put an end to the matter. As the assessments were not properly raised, the allegations that three of the directors had fraudulently conducted the business of Abbey so as to expose it to liability for those assessments have no purpose or substance.
110. Nonetheless, I would comment as follows. It was never intended that HMRC would themselves bring any claim based in fraudulent breach of duty or on similar grounds against some or all of the directors. Apart possibly from a claim for damages in conspiracy, it is not easy to see any basis on which HMRC as creditors of Abbey would have standing to do so. As the events on 4 February 2009 made clear, it was always intended that the claim for breach of duty would be made initially by the provisional liquidator, and subsequently by the liquidator if a winding-up order were made, on behalf of Abbey as the company to which the relevant duties were owed. Such proceedings would be brought for the benefit of the creditors, chief amongst whom were HMRC who represented some 87% in value of the claims of creditors.
111. The application before Blackburne J proceeded on the basis that the case of fraudulent breach of duty made in Officer Smith's affidavit would be advanced in the misfeasance proceedings. No-one, including the judge, supposed that they would be pursued in any other proceedings or forum. Not only that but, as I have earlier observed, Officer Smith's affidavit was sworn not only in the winding-up proceedings but also in the intended action to be brought by Abbey acting by its provisional liquidator. His evidence was evidence in those proceedings, and was expressly adopted by Officer Duxbury when he gave oral evidence at trial. The evidence before the court at trial was in large part provided by HMRC and, with their great experience and expertise in these matters, it is simply fanciful to suppose that the liquidator would not depend on HMRC for the provision of evidence and the identification of the means by which excise duty had been evaded. For example, the suggestion that loads had been borrowed to make it appear that the 301 consignments had arrived at their warehouses of destination was a suggestion which could realistically only come from HMRC and only HMRC could provide the relevant evidence.
112. The evidence filed on behalf of HMRC in these proceedings contains lengthy criticisms of the conduct of the proceedings by the liquidator and her legal team. I have to say that I take these criticisms with more than a pinch of salt. It is a commonplace for unsuccessful parties in litigation, and those standing behind them, to criticise the conduct of the litigation or the court, rather than to accept that their case did not stand up. In the light of the many criticisms made with hindsight by HMRC, I find it revealing that in a letter dated 18 June 2014 Moon Beever, Ms Brittain's solicitors throughout the misfeasance proceedings, should say:

"There were significant difficulties in obtaining information and resource from HMRC under 236 or generally, to counter evidence and arguments put by the directors' new solicitors Bark & Co towards the end of the case. However any suggestions made by HMRC (as alleged by Banks Kelly) that HMRC would have run the litigation differently were also news to us given that HMRC were indemnifying, providing witness evidence and reviewing pleadings as a condition of continuing the indemnity."

113. Given that the application for the appointment of the provisional liquidator clearly proceeded on the basis that the allegations of fraudulent breach of duty would be pursued in the action to be brought in the name of Abbey by the provisional liquidator and that it was equally clearly not envisaged that HMRC would themselves independently pursue any such proceedings, I take the view that the case made before Blackburne J both by HMRC and by the provisional liquidator was determined by the decision of Lewison J. It is not a question of whether the findings of Lewison J would be binding or even admissible in proceedings between HMRC and the company. In deciding whether to order an inquiry as to damages, the court is entitled to have regard to the fact that the allegations of fraud which were an essential element in the application for the appointment of a provisional liquidator have been considered and rejected in the one set of proceedings in which it was always envisaged that they would be determined.

Special features

114. I turn now to the special features on which HMRC rely. The general position is that an undertaking as to damages ought to be enforced but it has long been accepted that special circumstances may make it inappropriate to do so: see Graham v Campbell (1877) 7 Ch D 490 at 494.

Lack of opposition to the winding-up petition

115. HMRC rely on the failure on the part of the company or its shareholders to apply to the court for the discharge of the appointment of the provisional liquidator or to oppose the winding-up petition. In the absence of extraordinary circumstances, it is unrealistic to expect that the provisional liquidator herself would have taken steps either to discharge her own appointment or to oppose the making of a winding-up order, particularly in circumstances where she was, on the basis of a very substantial affidavit made by Officer Smith, alleging fraud against the directors. It was, however, open to the Owen brothers and Mr Hone to oppose the winding-up petition either as directors on behalf of Abbey (see Re Union Accident Insurance Co Ltd [1972] 1 WLR 640) or as shareholders and therefore contributories of Abbey.
116. The absence of an application to discharge the appointment of a provisional liquidator and the absence of any opposition to the winding-up petition cannot, in my judgment, be an automatic bar to a subsequent enforcement of the undertaking in damages. These are relevant factors in deciding whether to enforce the undertaking and it would generally be right to expect the existence of good reasons for any failure to oppose the petition. It is bound to weigh heavily with the court if those in control of the company have simply sat back and failed to put before the court evidence which would or could well have resulted in the petition being dismissed. Whether that is an appropriate description of what occurs in any particular case will depend on an examination of the relevant circumstances.
117. In the present case, the directors and shareholders of the company were hit shortly after 4 February 2009 with both the appointment of the provisional liquidator and the commencement of misfeasance proceedings and a worldwide freezing order against them. They were immediately excluded from Abbey's premises and excluded from direct access to its documents and records. They were deprived of access to Abbey's funds in order to finance opposition to the petition and they were heavily restricted by the terms of the freezing order on the use that they could make of their own personal resources. I have earlier referred to the serious impact of these events on the health of Mr Hone, who HMRC considered to have been most closely connected with Abbey's business as a bonded warehouse. Reference may also be made to the evidence given by the Owen brothers and by Mr Hone accepted by HH Judge Pelling QC and set out in the judgment of McCombe LJ ([2014] 3 WLR 1676) at [111]-[113].
118. With a very large volume of evidence served by HMRC and with little or no financial resources available to resist the winding-up petition, it is not in my view in the least surprising that the directors and shareholders decided to give priority to resisting the misfeasance proceedings which, if successful, would almost certainly have bankrupted them.
119. There is more than an element of unreality in the submissions made on behalf of HMRC as to the steps which the directors could realistically have taken to oppose the winding-up petition.
120. First, it is said that they could have supplied to the provisional liquidator, or themselves put forward, evidence that Abbey was not liable for the excise duty which was the subject of the assessments raised in February 2009. Whether Abbey was liable in respect of such assessments did not depend on matters within the knowledge of the directors but depended on whether there had been a diversion of the consignments after they left Abbey's premises and on whether they had reached their warehouses of destination in France. The only evidence available to the directors was the receipted copies of the AADs but it was HMRC's case that those had either been forged or collusively receipted by the French warehouses. To gather the evidence sufficient to show even a genuine dispute on substantial grounds that the consignments had in fact reached the French warehouses would require a significant evidence-gathering exercise of the sort which was in fact undertaken by the directors and their solicitors before the misfeasance proceedings came to trial in July 2010. It is wholly unrealistic to imagine that the directors, without financial support and therefore without legal assistance, could in a short period assemble such evidence.
121. Secondly, it is unrealistic to suppose that the provisional liquidator would herself have been inclined to accept evidence put forward by the directors. On the basis of the evidence provided by HMRC, she was alleging fraud against those directors and on that basis had obtained the freezing orders. On 5 February 2009, after service of the orders made the previous day, she emailed those involved to thank them, adding:

"In terms of disruption I think we will have had made an impact and assisted in stopping a large fraud."

122. On 24 February 2009, Officer Duxbury emailed her to tell her that time for appealing the assessment dated 2 February 2009 had expired and therefore "should close Abbey down on return date for petition", she replied "Excellent thanks Alan". When, later in 2009, the directors produced evidence from one of the French warehouses, Ms Brittain was not impressed and her solicitors wrote:

"Please ask your clients to think very carefully whether they intend to adhere to this line? We shall expect it to be covered in your clients' evidence and doubtless you will remind them of the reason for the statement of truth."

123. Thirdly, it is clear that the directors were unable to access any funds to enable a case to be made on behalf of Abbey. Abbey's own funds were under the control of the provisional liquidator and there is no reason at all to suppose that she would have been willing to allow any part of those funds to be used for this purpose. The directors were not, by the terms of the freezing order, entitled to use their own funds for this purpose. The freezing order was subject only to the usual qualifications, that the directors could use their funds for living expenses up to a set limit, a reasonable amount of legal expenses and the conduct of business in the ordinary course. The legal costs which they were entitled to incur in a reasonable amount were the costs of defending the misfeasance proceedings, not costs in advancing Abbey's case on the winding-up petition.
124. It is clear that the provisional liquidator would have strongly resisted any attempt by the directors to use their own funds to oppose the petition. The Court of Appeal and HH Judge Pelling QC were highly critical of the manner in which Ms Brittain and her solicitors had policed the freezing order. The details are contained in their judgments and need not be repeated here. In the Court of Appeal, McCombe LJ said at [77]:

"For my part conducting the same review as the judge, I find it difficult to express with sufficient moderation my disapproval of the approach taken by the Liquidator's solicitors to some of the day to day administration of this freezing order. Apart form other matters, they took wholly unjustifiable approaches to the questions of living expenses and legal costs. At one stage they suggested that the ceiling for legal costs provided for by the order was a mere £5,000 (when it did nothing of the sort) (letter 6 July 2009) and at another they even indicated that they would unilaterally advise that the fund-holding banks be notified that a mere £500 per month living expenses should be permitted, notwithstanding the court's order permitting very significantly larger expenditure for such purposes (letter 1 September 2009)."

At [152] Vos LJ said:

"I would wish also to make clear that I regard this as a bad case. The liquidator's conduct was, at times, inexcusable, and the adverse effects of the injunction were far reaching and life-changing for each of the appellants."

125. It is nothing to the point that in some other cases where similar steps have been taken by HMRC, the directors have sought to oppose the winding-up petition. Each case must be judged on its own facts and, in my judgment, the reasons why there was no opposition in the present case are entirely understandable and in the circumstances almost inevitable.

Delay

126. HMRC relies on what their counsel described as the "egregious delay" in making the application for an inquiry as to damages. Ms Mulcahy for Abbey accepts that delay is a relevant factor in deciding whether to order an inquiry and may be a ground for refusing an inquiry, even where the delay has not caused prejudice.
127. Mr Nathan submitted that an application to enforce an undertaking in damages "must be made promptly". But I agree with Ms Mulcahy that the authorities do not go so far as to impose promptness as a mandatory condition. The approach to delay was authoritatively established by the Court of Appeal in Re Hailstone; Hopkinson v Carter (1910) 102 LT 877. In deciding whether to refuse an inquiry on the grounds of delay, regard must be had to all the circumstances of the case: see Cozens-Hardy MR at p.880. At p.881, Farwell LJ said:

"Then it also follows, I think, from what I have said, that, as the undertaking was given to the court, it is within the judicial discretion of the court whether, and to what extent, and when it shall be enforced. Each case must depend in a great measure on its own circumstances; and it may be that the delay – which is certainly a circumstance to be considered – might be so great … as to preclude the success of the application at all. But that is for the court to determine."

The judgment of Kennedy LJ was to the same effect.

128. Mr Nathan cited and relied on the judgment of Sir George Jessel MR in Smith v Day (1882) 21 Ch D 421, but that judgment was for all relevant purposes disapproved by the Court of Appeal in Re Hailstone.
129. In Barratt Manchester Ltd v Bolton Metropolitan BC [1998] 1 WLR 1003, the Court of Appeal had to consider an application to dismiss an inquiry which had been ordered on the grounds of inordinate and inexcusable delay. The decision at first instance to allow the inquiry to proceed was affirmed on appeal. In giving the lead judgment, Millett LJ considered the relevance of delay both to the decision whether to order an inquiry and to the subsequent conduct of the inquiry. At p.1009, he said:

"Since there is no cause of action there is no period of limitation either; but the cross-undertaking cannot be enforced without the leave of the court, which may be withheld if not applied for promptly: see Smith v Day (1882) 21 Ch.D. 421 and Ex parte Hall; In re Wood (1883) 23 ChD 644. As those cases show, the court does not inquire whether the other party has been prejudiced by the delay. The only question is whether the applicant has behaved with reasonable despatch."

130. Millett LJ there refers to Smith v Day and it is perhaps unfortunate that the court was not referred to Re Hailstone, but Millett LJ is careful to say that the application for an inquiry "may be withheld if not applied for promptly." It is a question of discretion in each case, on the particular facts of the case, whether any delay is such as to make it inappropriate to order an inquiry. The existence or otherwise of good reasons for the delay will clearly be a material factor, as also will be any prejudice caused by the delay, although as previously stated the court may refuse to order an inquiry even where no prejudice has been shown. At p.1012 Millett LJ says that:

"The enforcement of the cross-undertaking should be regarded as being conditional on the inquiry being applied for promptly and prosecuted with reasonable diligence. This would allow for a desirable degree of flexibility. Just as the court may decline to enforce the cross-undertaking if the plaintiff does not apply to enforce it with reasonable promptitude, so it ought to be willing to discharge it where the plaintiff does not conduct the enforcement proceedings with reasonable diligence."

I do not read this passage as suggesting that promptness is a pre-condition to an order for an inquiry. Millett LJ repeats that "the court may decline to enforce the cross-undertaking" and refers to "reasonable promptitude" which necessarily requires an examination of the circumstances of the particular case.

131. The initial submission of Mr Nathan was that the delay in this case amounted to 4 years 8 months, from 4 February 2009 to 1 November 2013. He submitted that this delay was sufficient of itself to debar any inquiry as to damages. In the course of his submissions, Mr Nathan was inclined to accept that the period of delay could not reasonably be taken as starting before August 2011 when HMRC withdrew its assessments. Clearly, as it seems to me, there was no period of unreasonable delay before Lewison J gave judgment in July 2010. The passage of time between then and August 2011 was in part explained by the refusal of Ms Brittain, supported by HMRC, to lodge an appeal against the assessments and by delay on the part of HMRC in withdrawing its assessments, a decision not taken until August 2011. It hardly lies in the mouth of HMRC to say that if Abbey had appealed the assessments earlier, they would have withdrawn the assessments earlier. The fact is that HMRC maintained the assessments until they were faced with the prospect of an imminent Tribunal hearing. In any event it should be noted that the appeal was lodged with the Tribunal in January 2011 and the period from then until August 2011 was no more than the period in which it took to get the matter before the Tribunal for a hearing.
132. The next period which arises for consideration is from August 2011 when HMRC withdrew the assessments to 30 August 2012 when Mr French replaced Ms Brittain as the liquidator. Most of that period was taken up with the attempts by the shareholders to replace Ms Brittain, first by convening a meeting of creditors and secondly by an application to the court. HMRC wanted Ms Brittain to remain in office and voted against her removal at the meeting of creditors held in December 2011. As to this period of delay, HMRC say that it was the decision of Ms Brittain as liquidator of Abbey not to seek to enforce the undertaking and, whether taken for good reasons or bad, Abbey is bound by that decision. The reasons for the decision are of no concern to HMRC.
133. HMRC are, of course, correct to say that any decision not to apply to enforce the undertaking was a decision taken by Ms Brittain on behalf of Abbey. But, in my view, that is insufficient to preclude further inquiry as to whether the delay caused by that decision is such as to bar any subsequent application to enforce the undertaking. The court is exercising a discretion and must look at the reality of the circumstances. The reality is that not only was Ms Brittain without funds in order to mount an application to enforce the undertaking but she had been appointed on the application of HMRC and HMRC continued to support her appointment. That is not to say that she was HMRC's nominee or that she was under their control but the reality is that she was very unlikely to take proceedings against HMRC. In all the circumstances I do not consider that it would be a proper exercise of the court's discretion to refuse an inquiry as to damages on account of the delay in the period before Ms Brittain was replaced by Mr French as liquidator.
134. Mr French replaced Ms Brittain as liquidator on 30 August 2012. He faced a very substantial task in assimilating the large amount of information available about Abbey and its liquidation. Indeed, Ms Brittain herself had given, as one of her reasons for resisting the application to remove her as liquidator, that there were over 940 boxes of records held in storage by her firm, not taking into account in excess of 60 boxes of documents held by her solicitors. As she commented, there was "a vast amount of documentation involved in this liquidation and I do not consider that a seamless transition to a new liquidator is capable of taking place." Mr French was given access to the records held in storage on 19 October 2012 but even then there were several boxes missing and no access was given to the former liquidator's files. Despite Mr French pressing Ms Brittain and her firm for access for the release of remaining records, this took a considerable amount of time. Even then, access was not given to communications between Ms Brittain and her solicitors and counsel relating to a number of matters, nor was Mr French provided with communications between Ms Brittain and her legal advisors on the one hand and HMRC and their legal advisors on the other. Mr Nathan accepted in submissions that Mr French needed two to three months to assimilate the relevant information. In my view, he needed at least that amount of time, probably rather more.
135. In January 2013, Mr French as liquidator purported to assign Abbey's right to apply to enforce the undertaking to the Owen brothers and Mr Hone. On 28 March 2013 their solicitors sent a letter of claim to HMRC. HMRC's solicitors responded on 29 April 2013, objecting that the purported assignment was not effective.
136. In their letter dated 28 March 2013, the solicitors acting for the Owen brothers and Mr Hone suggested mediation, a proposal which HMRC's solicitors accepted in their reply dated 29 April 2013. They stipulated that the acceptance of mediation was conditional on Mr French, on behalf of Abbey, agreeing to mediate Abbey's claim at the same time. They stated that they would expect that the mediation could take place within the following two to three months, in other words not later than the end of July 2013. A mediation did take place in July 2013 but regrettably was not successful. The present application was issued on 1 November 2013 which, given the amount of time required to prepare the application and to arrange funding, does not seem to me to have been a period of undue delay.
137. I do not consider that the period between the appointment of Mr French as liquidator and the issue of the present application involved any unreasonable delay on the part of Mr French or Abbey. For the reasons already given, I do not consider that the earlier periods amount to unreasonable delay. Accordingly, although of course 4 February 2009 to 1 November 2013 is a long time, the delay on analysis does not in my judgment amount to unreasonable delay such as, of itself, to debar an inquiry as to damages.

Prejudice

138. There is no dispute between the parties that if delay in applying for an inquiry as to damages has caused the respondent real prejudice, it is a highly material factor in the exercise of the court's discretion whether to order an inquiry. The obverse may also be true. The absence of prejudice may make it appropriate to order an inquiry or, if an inquiry has already been ordered, to permit it to proceed notwithstanding delay: see Barratt Manchester Ltd v Bolton Metropolitan BC (supra). It is for the respondent to identify and demonstrate the existence of prejudice.
139. HMRC relies on three types of prejudice.
140. First, they assert that they withdrew the assessments in the belief, which they say was supported by legal advice without waiving privilege in relation to it, that the undertaking had come to an end on the making of the winding-up order and that an inquiry as to damages could not therefore be ordered. I am bound to remark that I find it surprising that, if HMRC believed that there were good grounds for assessments totalling nearly £6 million, the absence of any perceived risk of an inquiry as to damages should play a material part in the decision to withdraw the assessments. Be that as it may, it cannot be said that Abbey in any way encouraged HMRC in this belief. HMRC did not consult Abbey before they announced their decision to withdraw the assessments. They did not, for example, seek an assurance from Abbey that it would not be pursuing an application for an inquiry. Ms Brittain was clearly not aware of any belief on the part of HMRC that an application for an inquiry could not be made, because she emailed HMRC's solicitors on 9 August 2011, only two working days after HMRC had withdrawn the assessments, to say "it would be good to include in the mediation any claim which the directors consider the company would have for damages as a result of these assessments falling away." The directors had asked her for a meeting and she suspected that they wished to discuss "the action the company can bring for damages in relation to the assessments raised now withdrawn." In any event, if HMRC choose to act on legal advice which later transpires to be incorrect, it cannot be held against Abbey.
141. Secondly, HMRC rely on the fact that most of their personnel who were most closely involved in the investigations into Abbey in 2008-09 have either left HMRC or moved on to other posts. Additionally, the passage of time means that those individuals will have very imperfect recollections of events and, in accordance with HMRC's policy, their email accounts were permanently deleted when they left HMRC.
142. I have great difficulty in understanding the relevance to the issues on an inquiry as to damages, if ordered, of the evidence which these HMRC officers could give. The subject of the inquiry would be the loss suffered by Abbey. That suggests, as Ms Mulcahy submitted, that the focus of the inquiry would be on the value and financial performance of Abbey, not the allegations of the evasion of excise duty which formed the subject of HMRC's inquiries and formed the basis of the application for the appointment of a provisional liquidator and of the misfeasance proceedings.
143. In his oral submissions, Mr Nathan said that on the inquiry HMRC would give evidence as to the facts which made the assessments correct and the judge would have to decide whether the court would have wound up the company, presumably on those assessments. With great respect to Mr Nathan and his clients, this submission involves a basic misconception. The assessments have been withdrawn by HMRC. They have no validity at all. Because they were withdrawn and Abbey's appeal against them allowed, the deeming effect of section 12(3) of the Finance Act 1994 has ceased to have effect and cannot now be revived. The premise of the inquiry would be that the assessments in February 2009 were not validly raised and that therefore the provisional liquidator would not have been appointed.
144. I should further add that, given the heavy involvement of Officer Duxbury and others in the investigations and at the trial, I am not satisfied that, if it were relevant, they could not give evidence as to the events in 2008-09. HMRC can hardly rely on the deletion of electronic records which occurred in December 2012 and September 2013, when it was clear to HMRC that Abbey was seriously considering taking steps to enforce the undertaking.
145. Thirdly, HMRC asserts that so far as evidence of Abbey's own trading is concerned, the liquidation of Abbey and the passage of time will necessarily have led to a degradation of the evidence which would be available. In large part, the evidence in support of this assertion is not directed to the particular records of Abbey but is based on non-specific hearsay evidence given about companies in general by a forensic accountancy expert retained by HMRC. It is, I think, sufficient to say that I am satisfied that the evidence given by Mr French in paragraph 40 of his third witness statement dated 9 October 2014 deals with this point completely.
146. I am accordingly satisfied that there is no significant prejudice to HMRC if an inquiry were now to be ordered, notwithstanding the passage of time since February 2009.

Public interest

147. HMRC assert that, since the decision of the Supreme Court in Financial Service Authority v Sinaloa Gold plc [2013] UKSC 11; [2013] 2 AC 28, it has not been the practice of the court to require an undertaking in damages from HMRC on the appointment of a provisional liquidator in a winding-up petition presented by it in its capacity as a creditor. They accept that before that decision, given in February 2013, it was the practice of the court to require an undertaking in those circumstances and that it was in accordance with that practice that HMRC offered and the court accepted the undertaking in damages in the present case. They submit that the introduction of the suggested new practice, and the reasons behind it, raise a public interest against the enforcement of the undertaking. HMRC do not suggest that this is a determinative factor in the present case but they do put it forward as a relevant factor in the exercise of the court's discretion.
148. HMRC raised this point at the hearing before me on 7 July 2014 but, by the time that the terms of my order made on 23 July 2014 were finalised, they had abandoned it. It is not therefore included in that order as one of the matters to be decided on the present application. Nonetheless, at the hearing of this application HMRC wished to revive it and, as it does not depend on any evidence, Abbey did not object.
149. In my judgment, there is a short answer to this point. There is a strong public interest in the enforcement of undertakings freely given to the court, all the more so I would have thought when given by a public authority. Parties to litigation, and public authorities are no exception, should be held to their word. HMRC readily accepted before Blackburne J that the undertaking was the price for the appointment of a provisional liquidator and that, by implication, the appointment would not have been made without such undertaking. I am not saying that there cannot ever be circumstances in which there would be an overriding public interest against the enforcement of an undertaking, but I think it would be an exceptional case. The suggested change in the practice of the court since February 2013, four years after the undertaking was given in this case, provides in my judgment no special circumstance suggesting that the undertaking should not be enforced.
150. I am not in any event satisfied that there has been or should be the change of practice which HMRC suggests. Since this was fully argued, I should address it.
151. FSA v Sinaloa Gold plc concerned an application for a freezing injunction by the FSA under section 380(3) of the Financial Services and Markets Act 2000 (the 2000 Act) in aid of proceedings to restrain and obtain compensation from parties alleged to have been involved in the unauthorised sale of shares contrary to the provisions of the 2000 Act. The FSA was a public authority established by statute and charged with responsibilities in relation to, amongst other things, the proper functioning of the financial markets. In support of those general functions, it was given powers to bring court proceedings to enforce the provisions of the 2000 Act and regulations made under it. Its purpose and these powers were conferred solely to enable the FSA to fulfil its statutory functions in the public interest. It was fulfilling a public law function and duty. In the light of the nature of the proceedings and the statutory scheme under which they were brought, the Supreme Court unanimously confirmed the decision of the Court of Appeal that the FSA was not required to give an undertaking in damages on the grant of the freezing injunction in favour of either the defendants or innocent third parties.
152. In addressing this issue, Lord Mance who gave the sole judgment, drew and analysed the distinction, already drawn by the House of Lords in F. Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295, between private litigation and public law enforcement action. He said:

"30. … In private litigation, a claimant acts in its own interests and has a choice whether to commit its assets and energies to doing so. If it seeks interim relief which may, if unjustified, cause loss or expense to the defendant, it is usually fair to require the claimant to be ready to accept responsibility for the loss or expense. Particularly in the commercial context in which freezing orders commonly originate, a claimant should be prepared to back its own interests with its own assets against the event that it obtains unjustifiably an injunction which harms another's interests.

31. Different considerations arise in relation to law enforcement action, where a public authority is seeking to enforce the law in the interests of the public generally, often in pursuance of a public duty to do so, and enjoys only the resources which have been assigned to it for its functions. Other than in cases of misfeasance in public office, which require malice, and cases of breach of the Convention rights within section 6(1) of the Human Rights Act 1998, it remains the case that English law does not confer a general remedy for loss suffered by administrative law action. That is so, even though it involves breach of a public law duty. In the present context, the fact that an injunction is discharged, or that the court concludes after hearing extended argument that it ought not in the first place to have been granted, by no means signifies that there was any breach of duty on the public authority's part in seeking it."

153. Importantly, at [36] Lord Mance observed that the case before the Supreme Court was one "of a public authority seeking to enforce the law by the only means available under the governing statute." He continued:

"The FSA was acting under its express power to seek injunctive relief conferred by section 380(3). It was acting in fulfilment of its public duties in sections 3 to 6 of FSMA to protect the interests of the UK's financial system, to protect consumers and to reduce the extent to which it was possible for a business being carried on in contravention of the general prohibition being used for a purpose connected with financial crime."

He also drew attention to the fact that under the 2000 Act the FSA could freeze the assets of an authorised person without an application to the court and without any statutory requirement to compensate that person or third parties in the event that it transpired that the freezing action was unjustified.

154. The position of HMRC, as the public authority charged with the responsibility for assessing persons to tax and collecting tax due, was not considered in FSA v Sinaloa Gold plc. They may be thought to occupy a middle ground between law enforcement action as discussed in that case and purely private litigation. The fact that the Crown is the claimant does not of course mean that it cannot bring what is essentially private litigation. If for example it brings proceedings for breach of contract and seeks a freezing order against the defendant on the grounds of a threat of dissipation of assets, it would I think be treated as in the same way as an ordinary private litigant, even though the contract may itself have been made pursuant to the exercise of public law functions. HMRC are in a different position, because when they bring proceedings they do so in order to collect tax, which is essentially a public function. However, HMRC do not do so as a public law enforcement agency. Assessments to tax, when notified to the taxpayer, are deemed to create debts which HMRC then collect as a creditor. It was in the capacity as a contingent or prospective creditor that HMRC presented the winding-up petition in the present case. The bringing of proceedings which in ordinary litigation would require the giving of an undertaking in damages is not the only means open to HMRC to fulfil this function. They can enforce payment in the usual way, by serving the assessment on the taxpayer and, subject to an appeal to the First-tier Tribunal, exercise their statutory rights of enforcement and/or bring court proceedings either to obtain judgment or to wind up or make bankrupt the taxpayer.
155. The basis of the submission that there has been a change in the court's practice on this matter on applications for the appointment of a provisional liquidator are decisions of Hildyard J and Sir William Blackburne in Re Parkwell Investments Ltd [2014] EWHC 3381 (Ch); [2014] BCC 721. HMRC presented a winding-up petition on 18 March 2014 based on unpaid assessments for VAT raised and served in October 2013 and interest totalling nearly £7.765 million. A further claim for nearly £2.17 million of VAT was made on a contingent or prospective basis, presumably because assessments for that amount had not been notified to the company. On the same day Hildyard J appointed a provisional liquidator on an application made without notice by HMRC.
156. I have been provided with a note of the hearing before Hildyard J prepared by the solicitors instructed by HMRC both on that application and in the present case. The note records that counsel for HMRC, relying on the decision in FSA v Sinaloa Gold plc, submitted that it was not appropriate to require an undertaking in damages and informed Hildyard J that on other applications heard by three other judges of the Chancery Division, either no undertaking at all had been required or an undertaking had been required that any undertaking subsequently required by the court, when the application came back before the court on notice to the company, would be backdated to the appointment of the provisional liquidator, if the court so required. Hildyard J required the latter undertaking to be given. The note records him as saying that, although he was being told "that the chances of a cross undertaking being found necessary is unlikely" he required the undertaking "given the draconian nature of the relief, given that no-one is here for Parkwell and the prejudice suffered if the court is wrong could be significant".
157. As to the undertaking in damages, Hildyard J's judgment is recorded as follows:

"The last matter I need consider is the question of a cross undertaking. In the case of a private litigant invariably, quid pro quo for any order made, an undertaking to the effect that if the court thinks it should not have intervened, any loss or damage the court thinks appropriate is to be paid. In this case, HMRC act in protection of the public purse as they see it and in accordance with their statutory remit. The Supreme Court last year said in Sinaloa Gold that the presumption is that no cross undertaking is required of a public body acting in that way. It is only a presumption. The discretion to impose an undertaking is kept. The Judge indicated that the previous exchanges demonstrated his concern within this regard as the draconian nature of a PL is made the more so as pre indicated if the Court does not have the fall back of the cross undertaking. Rochdale Drinks confirms that it is not the ordinary practise to require a cross undertaking. I do not think the circumstances of this matter are so exceptional such as to require a cross undertaking in this case. Subject to one point, the strength of the case militates in favour of adopting the presumptive course. However, and I am grateful for HMRC's assistance, I consider that a limited undertaking should be provided and understand will be offered to the effect that should the Court on a subsequent occasion consider that a cross undertaking should be offered, that cross undertaking should relate back to capture this and subsequent events prior to that event. This is to ensure if the court considers that such an exceptional order should be made, its effect will not be lessened by the decision today."

158. The statement in that passage "Rochdale Drinks confirms that it is not the ordinary practice to require a cross undertaking" is not correct. It may be that in this respect the terms of the judgment have been wrongly recorded. It is important to refer to the decision of the Court of Appeal in HMRC v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116; [2013] BCC 419. HMRC alleged the fraudulent evasion of VAT and presented a winding-up petition and obtained the appointment of a provisional liquidator on the same day. As recorded by Rimer LJ at [29], HMRC offered an undertaking in damages and it was accepted. There is no further discussion in the judgment of Rimer LJ on the question of an undertaking in damages and no suggestion at all that it was inappropriate either for HMRC to offer it or for the court to accept it.
159. It is clear from the separate judgment of Lewison LJ that he regarded the undertaking in damages as a matter of very considerable importance. Rimer and Pill LJJ expressly agreed with his judgment save as to one matter which is not relevant. Lewison LJ said:

"109. The appointment of a provisional liquidator is, as the phrase suggests, an interim remedy. It takes place before the facts have been found. Not only is it an interim remedy, it is one of the most intrusive interim remedies in the court's armoury. In many, if not most, cases its effect will be to stop the company trading; and to cause the company's employees to lose their jobs. In deciding whether to grant or refuse an interim remedy the overriding principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. Among the matters which the court may take into account are the prejudice which the claimant may suffer if the remedy is not granted or the defendant may suffer if it is; the likelihood of such prejudice actually occurring; the extent to which it may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the remedy will turn out to have been wrongly granted or withheld, that is to say, the court's opinion of the relative strength of the parties' cases: see National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16; [2009] 1 WLR 1405 [17], [18].

110. If a business is shut down wrongly, the cross-undertaking is unlikely to provide adequate compensation to the company concerned, let alone to the employees who will have lost their jobs and to whom no cross-undertaking will usually have been offered. In addition once a provisional liquidator has been appointed the company's books and records will pass into his control; and will no longer be accessible, as of right, to the company's directors. This latter consequence may hamper the company and its directors in defending allegations made in the petition. I agree, therefore, with Lord Justice Rimer ([76]) that the appointment of a provisional liquidator requires the most anxious consideration."

160. Lewison LJ went on to discuss briefly the distinction between a public law enforcement proceeding and a petition presented by HMRC as creditors. He said at [114]:

"114. Lastly, it is important to recall that the petition in this case is a creditor's petition. There is power under section 124A of the Insolvency Act 1986 to present a winding up petition on the ground that it is expedient in the public interest that a company should be wound up. But the power to present such a petition is reserved to the Secretary of State alone. At times it seemed to me that HMRC's appeal to the public interest trespassed into forbidden territory. Given the fact that, as Rimer LJ points out (§ 75), section 135 does not prescribe criteria which must be satisfied before a provisional liquidator is appointed, the approach in the case of a public interest petition may differ from the approach in the case of a creditor's petition. That question will have to be decided in a case in which it matters."

161. Returning to Re Parkwell Investments Ltd, the company applied to discharge the appointment of the provisional liquidator and to dismiss the winding-up petition or stay it pending resolution of its appeals against the assessments on which the petition was based. It also sought an order that HMRC be required to provide an undertaking in damages dating back to the appointment of the provisional liquidator. These applications came before Sir William Blackburne and were heard over five days in June 2014, at the end of which the judge refused the applications. He subsequently gave his reasons in writing: [2014] EWHC 3381 (Ch); [2014] BCC 721. At [13]-[15], the judge referred to and cited from the judgment of Rimer LJ in HMRC v Rochdale Drinks Distributors Ltd. This was in the context of the guidance given in that case as to the proper approach of the court to an application for the appointment of a provisional liquidator.
162. Sir William Blackburne addressed the question of an undertaking in damages at [93]-[100]. At [95] he said:

"The court is naturally cautious about appointing a provisional liquidator to a trading company where the consequence is almost inevitably to bring the company's trading to an end. In some cases (for example, where the trading is believed to be in fraud of the public) this may be the object of the appointment, but the importance of treading warily is just the same. The need for caution was a matter to which in Rochdale Rimer LJ (at [76]) and Lewison LJ (at [109]) both referred. In cases where such an appointment is to be made, the court's inclination will be to want to provide the company with some kind of protection in the event that it turns out that the appointment should not have been made. Extracting from the petitioner an undertaking in damages to the company as a term of the appointment is the obvious step to take and, in my experience, the course usually followed. In other cases, especially where there is nothing to suggest dishonesty on the part of those who control the company, the court will explore whether some lesser remedy, for example a freezing injunction or an order for the production of documents, may suffice."

163. At [96], Sir William Blackburne identified the distinction between proceedings brought in the public interest and private litigation and posed the question whether the practice of not normally requiring an undertaking in damages from a public authority discharging a public function or duty:

"should apply to HMRC acting as collectors of the public revenue, and even if it otherwise should whether it should apply where the interim relief claimed is likely to have (and has had) such a terminal effect on the company's trading."

164. At [97]-[99], the judge cited extensively from the judgment of Lord Mance in FSA v Sinaloa Gold plc, including passages which I have cited.
165. Sir William Blackburne expressed his conclusion at [100]:

"When appointing a provisional liquidator on 18 March Hildyard J did not consider the circumstances to justify departure from the usual practice and therefore declined to require an undertaking. As I have indicated, he qualified that in case a contrary view should be reached on a challenge to his order and there should be a wish that the undertaking capture events that had occurred since the appointment had been made. Despite having now heard from Mr Lilly and been taken to rather more evidence than was before Hildyard J, I have reached the same conclusion as he did. In any event, the main thrust of the argument which Mr Lilly advanced was that HMRC should be treated like any private litigant petitioning for the winding-up of a company for non-payment of a debt and that other, lesser, interim remedies should have been considered. I do not accept that when petitioning to recover unpaid tax HMRC should be treated like any private litigant. When suing to enforce a claim for unpaid tax HMRC are exercising a public function; they are a public authority bringing a claim in the public interest. Any recovery is for the public benefit since it goes to increase the general revenue without which the modern state cannot function. Nor, for the reasons explained earlier, is it the case that lesser remedies would have sufficed."

166. I acknowledge the force of the points made and relied on by Sir William Blackburne. As I earlier observed, plainly HMRC as collectors of tax are not in the same position as an ordinary private litigant. Nor, however, for the reasons which I have also given are they in the same position as a public law enforcement agency such as the FSA or the Secretary of State when presenting a petition in the public interest under section 124A of the Insolvency Act 1986. The judgments of the Court of Appeal in HMRC v Rochdale Drinks Distributors Ltd spell out clearly not only the existence of a practice of requiring an undertaking in damages from HMRC on an application to appoint a provisional liquidator but also spell out the reasons for that practice.
167. The basis for departing from that practice relied on by Sir William Blackburne and apparently put before other judges of the Chancery Division has been the decision of the Supreme Court in FSA v Sinaloa Gold plc. However, that decision did not involve any departure from the existing practice that undertakings in damages were not required in public law enforcement proceedings, as established by the majority decision of the House of Lords in F. Hoffmann-La Roche Co AG v Secretary of State for Trade and Industry. So far as relevant to applications for the appointment of a provisional liquidator, the decision in FSA v Sinaloa Gold plc adds little to the position existing before then save to re-assert the decision in Hoffmann La-Roche and to make clear that undertakings in damages are also not required to protect the position of innocent third parties. In my judgment, it is not a decision which can justify the departure from the well established practice of this court on applications by HMRC for the appointment of provisional liquidators, the correctness of which was clearly affirmed by the Court of Appeal in HMRC v Rochdale Drinks Distributors Ltd. While it may be said that hard cases make bad law, it appears to me that the facts of the present case underline the importance of the requirement for an undertaking in damages.

Conclusion on whether the court should order an inquiry as to damages

168. I am satisfied for the reasons given above that this is an appropriate case in which to order an inquiry as to damages on the undertaking given by HMRC. The position was succinctly, and in my view correctly, stated by counsel for Abbey in their skeleton argument:

"Had it been known either that the allegations of fraud which were the justification for seeking the PL Order would fail (as they ultimately did, as did the allegations of negligence against the former directors), or that the Assessments upon which the winding-up petition was founded were not valid (which is the inevitable conclusion given their withdrawal by HMRC and decision not to seek to justify them), it is inconceivable that the Order would have been made. Taken together, there would have been no basis whatsoever for the Order."

Factual basis for the inquiry

169. The parties, particularly HMRC, were anxious that I should decide on this application, if an inquiry as to damages were ordered, whether it would proceed on the basis that a winding-up order was made on HMRC's petition. If that were to be assumed, it would greatly reduce the preparation for the inquiry and the length of the hearing, and would almost certainly reduce very significantly the damages which might otherwise be recoverable by Abbey. If Abbey had been ordered to be wound up, it is highly likely that the business would have come rapidly to an end, either because the liquidator would have closed it or because HMRC would have imposed conditions on its trade which made it impractical to continue or because Abbey's lease of the warehouse premises would have been terminated. Any damages would therefore be restricted to any loss incurred in the short period between 4 February 2009 and the date of the winding-up order. If, however, damages were ordered on the basis that the winding-up order would not have been made, Abbey may well be entitled to recover the value of its business as a going concern on or immediately before 4 February 2009: see Johnson Control Systems Ltd v Techni-Track Europa [2003] EWCA Civ 1126.
170. HMRC's submission is set out in the skeleton argument of counsel at paragraph 69:

"Any Inquiry on any cross-undertaking must, inevitably and as a matter of the obvious meaning of the words, proceed on a single hypothesis: that the specific order supported by the cross-undertaking was never made. It is HMRC's contention that this must be the only hypothesis upon which the court proceeds. All other acts must be considered as they actually were and are in the real world. If it were otherwise, the chain of hypotheses and the arguments that would result about what would or might have happened given particular events will rapidly become completely unmanageable and increasingly absurd."

171. In the following paragraph, counsel for HMRC point out that there was no undertaking in relation to the winding-up order, which represented a final judgment on the relief claimed in the petition and brought the appointment of the provisional liquidator to an end. They continue:

"Plainly, therefore, the Court must proceed upon the hypothesis that the winding-up petition was presented on the date it was presented but no PL was appointed: that is the premise of the cross-undertaking itself. The question is then whether it is permissible for Abbey to go further, piling hypothesis upon hypothesis, and assert that, if there had been no PL, there would or might have been no winding-up order and that Abbey would have successfully appealed the Duty Assessments (and indeed the rest of the Original Assessments, and the Extant Assessments) and continued in business."

172. In my judgment, this submission is flawed for two reasons.
173. First, as previously discussed, the question whether there should be an inquiry as to damages proceeds with the benefit of hindsight. There are many areas of the law in which the courts use hindsight in order to determine loss. These include the assessment of damages for breach of contract (Golden Strait Corp v Nippon [2007] UKHL 12; [2007] 2 AC 353); the assessment of statutory compensation (Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Water Works Co [1903] AC 426); the assessment of damages in negligence (Whitehead v Searle [2008] EWCA Civ 285; [2009] 1 WLR 549), the assessment of damages for patent infringement (Virgin Airways v Zodiac [2013] UKSC 46; [2014] AC 160); and the valuation of contingent claims in insolvency (Stein v Blake [1996] C 243).
174. We now know that HMRC did not seek to sustain the assessments on which the winding-up petition and the application of the appointment of the provisional liquidator were based. Instead, once challenged on appeal, they withdrew the assessments and consented to the appeal. This removes the basis of HMRC's winding-up petition, just as much as it removes the basis of its application for the appointment of the provisional liquidator. The court cannot use hindsight to conclude that the appointment of the provisional liquidator was wrongly made but at the same time decline to use hindsight and say that, even though the order appointing the provisional liquidator was wrongly made, the winding-up order is an unchallengeable fact. On an inquiry as to damages, the two have to go together.
175. Mr Nathan submitted that the winding-up order made the issue res judicata. He submitted that it was not open to Abbey, on the inquiry as to damages, to deny that the winding-up order would have been made or to submit that it was in any way flawed. He went further and submitted that the order gave rise to a cause of action estoppel both on the validity of HMRC's claim as a creditor under the assessments raised on 2 February 2009 and on the insolvency of Abbey.
176. I do not accept this submission. Of course, the winding-up order is a fact, just as the appointment of the provisional liquidator is a fact. But the inquiry as to damages proceeds on the basis that the appointment of the provisional liquidator was wrong and in that context the subsequent winding-up order cannot, for the reason just given, be treated as estopping Abbey from contending that, but for the appointment of the provisional liquidator, the winding-up order would not have been made. In any event, I do not think it right that the winding-up order creates the suggested cause of action estoppel. This is plainly so in relation to HMRC's position as a creditor. It is always open to a company in liquidation, through appropriate proceedings such as, in this case, an appeal to the First-tier Tribunal, to establish that the petitioner's debt is not well founded, even after a winding-up order has been made on that creditor's petition. Whether Abbey was insolvent and, if so, to what extent is a matter which will have to be considered on the inquiry. A winding-up petition does not involve a cause of action at all in the ordinary sense. It is a class claim for a collective remedy which may be sought by any creditor with a claim not disputed on substantial grounds.
177. Secondly, on the evidence before the court, I am satisfied that if a provisional liquidator had not been appointed and the directors had remained in control of Abbey and its funds, Abbey would have successfully opposed the winding-up petition. As HMRC accept, the burden on Abbey would have been to demonstrate that there was a genuine dispute on substantial grounds as to its liability for the sums assessed. Abbey had consistently, and often successfully, challenged earlier assessments and there is no reason at all to believe that the directors would not have challenged the assessments raised on 2 February 2009. Abbey would have been in a position to gather evidence, particularly from the French warehouses, to show that it had a reasonable prospect of success on an appeal against the assessments. The fact that HMRC did not themselves seek to sustain the assessments in the proceedings before the First-tier Tribunal, when the burden of proof lay on Abbey, would make any other conclusion almost perverse.
178. As the citation from their skeleton argument shows, HMRC also rely on the other original assessments and the extant assessments. None of the original assessments survived Abbey's appeal to the First-tier Tribunal. They were all withdrawn by HMRC. As for the extant assessments, they were raised after Abbey had gone into liquidation and, it appears, were not noticed or dealt with by the liquidator. She has given evidence that she accepts that the assessments were served but they apparently did not come to her attention. Abbey is now seeking to appeal against those assessments out of time. Given that these assessments were raised after the making of the winding-up order, I am uncertain as to their relevance to the present issue, which is whether Abbey would have been wound up on HMRC's petition. That would have been determined by reference to the assessments on which the petition was based and, perhaps, such other assessments as existed at the date of the hearing. In any event, I am satisfied that if the directors had remained in control of Abbey, they would have caused Abbey to challenge the extant assessments. Given the fate of the other assessments, Abbey may well have been able to demonstrate that there was a genuine dispute on substantial grounds as to these assessments and, if not, it may well have been able to raise the funds required to pay them. There is no evidence on this application on that point, but if it has any relevance it is a matter which may be investigated at the inquiry.
179. HMRC's submissions drive them to some surprising further submissions. At paragraph 71 of the skeleton, it is stated:

"Abbey cannot have its cake and eat it: if in the hypothetical world the winding-up order is taken away so must the resulting proceedings including the directors' victory in the Misfeasance Proceedings. Abbey will have to show that in 2009 it would have succeeded in the First-tier Tribunal without the benefit of the decision by Lewison J and in light of all the evidence that would or might have been filed by the parties on the hypothesis that those proceedings were fully contested (although they were not)."

They go on to say that this "would involve investigating fully all the material which was before Lewison J on the misfeasance proceedings, together with any other material which the Company or HMRC produces now."

180. I have earlier commented on this submission in a different context. It is in my view wholly misconceived. As I said earlier, the assessments have been withdrawn in proceedings before the tribunal designated by statute as having responsibility for dealing with them. There can now be no hearing on the merits of the assessments. Once again, HMRC do not seem to appreciate that the fundamental ground for an inquiry as to damages is that those assessments were withdrawn and Abbey's appeal allowed. That fact not only underpins the order for an inquiry but is also an unchallengeable fact in the inquiry.
181. I think both sides agree that if the appropriate measure of loss is the value of Abbey's business on or immediately before 4 February 2009, expert evidence will be required. HMRC complain that this valuation exercise will involve a number of hypotheses and uncertainties, but no more so in my view than many such retrospective valuation exercises.

Conclusion

182. For the reasons given in this judgment, I shall order an inquiry as to damages suffered by Abbey as a result of the appointment of the provisional liquidator on 4 February 2009. I shall further direct that the inquiry is to proceed on the basis that Abbey would not have been wound up on HMRC's petition presented on 4 February 2009.
183. This is a worrying case. I have earlier cited a passage from the judgment of McCombe LJ in Abbey Forwarding Ltd v Hone (No.3) that "HMRC had made no attempt whatsoever to recognise the consequences of their ill judged litigation until two years after Lewison J's judgment." I am concerned that HMRC remain reluctant to recognise those consequences. It has already cost HMRC some £2.5 million and it seems to me that, if this has not already been done, their position should be considered at a very high level within HMRC.