Introduction

HMRC have a range of powers available to them under Schedule 36 of the Finance Act 2008 (“Schedule 36″) to require persons to produce documents and information and to inspect premises.  These powers are subject to important restrictions, foremost among which is that, under paragraph 18, a person cannot be required to produce a document which is not in their “possession or power“. 

The Civil Procedure Rules (“CPR”), which provide the procedural framework for Civil Litigation in England and Wales in the High Court and Court of Appeal, contain an analogous provision whereby parties can only be required to disclose in proceedings documents that are within their “control“.  This is defined in CPR Part 31.8, which provides that: 

“…a party has or had a document in his control if –

 (a) it is or was in his physical possession;

 (b) he has or had a right to possession of it; or

 (c) he has or has had a right to inspect or take copies of it.”    

The meaning of control in this context was considered in a recent Court of Appeal decision, North Shore Venture Limited v Anstead Holdings Inc [i]

Facts

In 2003 North Shore agreed to loan Anstead $50m.  The loan was guaranteed by the appellant judgment debtors, Mr Formichev and Mr Peganov (“the Appellants”).

 In August 2008, following a failure to repay the loan as agreed, North Shore issued a claim against Anstead and the Appellants and, in March 2009 obtained worldwide freezing orders against the Appellants.  In June 2010 North Shore obtained judgment against the Appellants for over $50m, which was subsequently reduced on appeal to around $20m.  Very little of the judgment sum was paid. 

In April 2009, following the grant of the freezing orders, both Appellants filed witness statements explaining that they had only minimal assets, having recently settled virtually all their assets into discretionary family trusts for their wives and children.  The Appellants were beneficiaries of the trusts.  

In June 2010 a High Court Judge made an order under CPR 71.2 for the Appellants to attend court to be questioned about their means.  Shortly before the Appellants’ cross-examination, listed for a date in July, the trustees of the family trusts obtained injunctions against the Appellants preventing them from answering questions about the trusts. 

In October 2010 North Shore applied for an order that the Appellants be required to produce certain documents related to the trusts. 

The production order

The High Court granted North Shore’s application, and ordered the Appellants to produce documents relating to the trusts.  The documents were split into two lists: the first comprised a variety of documents, and was subject to restriction that the Appellants were only required to produce the documents insofar as they were “within their knowledge, possession, custody or control“; the second comprised core trust documents, and included no such restriction, the judge taking the view (in an ex tempore judgement) that “the court can in certain circumstances simply require a party to produce a document“.     

The appeal 

The Appellants appealed against the second part of the production order, requiring them to produce core trust documents (apparently notwithstanding whether these were within their control).    

In advance of the appeal hearing, the Appellants filed further witness statements in which they: (1) denied having copies of nearly all of the core trust documents; (2) stated that they had sought copies from their Russian lawyers without success, and (3) stated that they were no longer beneficiaries of the trusts, having been removed by the trustees on 1 September 2010.  Both denied having any control over the trustees. 

They submitted that the High Court Judge had: (1) wrongly taken the view that he could order the production of documents outside of their control, and (2) misdirected himself as to the meaning of control, wrongly equating this with the ability to obtain documents, rather than an immediately enforceable legal right. 

North Shore submitted that: (1) looking at the reality of the trust arrangements, the High Court Judge had been entitled to conclude that the documents were within the Appellants’ control and (2) as beneficiaries or former beneficiaries under the trust the Appellants had in any event sufficient legal rights over the trust documents to entitle the High Court Judge to make the order.

Control 

The court considered that the circumstances in which the Appellants’ family trusts were set up were “undoubtedly suspicious” and that the “circumstantial evidence gave reasonable grounds to infer that there was in truth some understanding or arrangement between the appellants and the trustees by which they were to shelter the appellants’ assets“.  The High Court Judge had therefore been entitled to find that the documents were within the Appellants’ control, within the meaning of CPR Part  31.8.  

The court noted that where a third party held a document as agent for a litigant, that party would clearly have a right to possession of the document for the purposes of CPR Part 31.8(2)(b).  Such an agency situation could arise where the litigant had de facto control over a third party who had been entrusted with money for the principal purpose of sheltering it from creditors. 

However, the court went on to comment that, even where there was no right to possession of a document in the strict legal sense, this did not preclude the finding that the document was within a litigant’s control within the meaning of CPR Part 31.8.  This is because satisfaction of one of the three criteria in subparagraphs (a)-(c) of CPR 31.8(2)  (ie. possession, a right to possession, or a right to inspect or take a copy) is sufficient, but not necessary, for the conclusion that a document is within a litigant’s control.      

Conclusion

This decision confirms that the disclosure obligation can extend beyond documents which a litigant possesses or to which he has a strict legal right over.  The Court of Appeal took the view that where, as a matter of fact, a person can obtain a document, then it is within his control.  

HMRC may seek to adopt a similar view in relation to the meaning of “power and possession in Schedule 36.  As such, it would be prudent for taxpayers to consider documents that: (1) they possess; (2) have a legal right to, and (3) in practice could obtain (notwithstanding the absence of a strict legal right), as potentially within the scope of a Schedule 36 information notice.  Equally, arrangements whereby a taxpayer attempts to put documents out of reach of HMRC by artificially divesting himself of possession and the legal right to those documents, may in the future be subject to increasing challenge by HMRC.