The High Court has rejected an application for a payment out of court to fund all of the defendants’ legal fees in a “gargantuan” tax fraud case.
While ordering that some of the fees could be covered, Mr Justice Foxton said it would not be appropriate to order a payment which would cover the entire amount due to the defendants’ lawyers under a conditional fee agreement (CFA).
“This would have the effect of immediately consuming that amount, regardless of the reasonable value of the work done to date.”
The sums in court are monies in which both claimant and defendants claim a proprietary interest.
Foxton J said limiting the money paid out reduced the risk of funds claimed by the Danish tax and customs service, Skatteforvaltningen (SKAT), “being consumed by payments of legal fees exceeding those reasonably incurred to date”.
The judge described the SKAT litigation as “one of the largest and most complex pieces of litigation to be heard in the Commercial Court”.
The amount at stake has been estimated at over £1.5bn and the case centres on Sanjay Shah, a London financier now living in Dubai, and his firm Solo Capital Partners.
The High Court heard in Skatteforvaltningen (The Danish Customs And Tax Administration) v Solo Capital Partners LLP & Ors  EWHC 1624 (Comm) that Mr Shah and a group defendants for whom his lawyers also acted, the ‘Sanjay Shah defendants’, applied for an order that a substantial sum currently held in court should be paid out to cover their legal fees to the end of the case.
Foxton J said: “SKAT claims it has been the victim of a huge fraud perpetrated by the Sanjay Shah defendants, among others, and wishes to maximise its prospects of recovering the proceeds of that fraud.
“It is therefore reluctant to allow monies in which it claims a proprietary interest to be spent on the defendants’ legal expenses.”
He went on: “The Sanjay Shah defendants deny the allegations of fraud, but say that their ability to defend those allegations and vindicate themselves is being severely impaired by steps taken to seize what they say is their property, both in this action and in criminal and regulatory investigations outside it, and that if they are prevented from using property to which SKAT has only an arguable proprietary claim, their ability to defend themselves will be severely compromised.”
The judge said it was common ground that that the Sanjay Shah defendants had “very substantial assets” which were not claimed by SKAT, but they were subject to “criminal restraints which prevent their use”.
Mr Justice Andrew Baker, the designated judge for the case, gave directions last month for the main trial of the case to take place in Hilary Term 2023, concluding by Easter 2024.
Before that, a ‘revenue rule trial’ was scheduled for March 2021, to consider the defendants’ arguments that SKAT’s claims must fail because they involve an attempt by a foreign state to recover tax or revenue.
Foxton J said the defendants had retained their legal team on a CFA under which an agreed total discounted base fee would be paid for representation for the entire trial.
If 35% of the total was not paid by October this year, the legal team could terminate the agreement, or if the balance was not paid by 1 March 2021.
The defendants argued that the amounts payable under the CFA fell substantially below the reasonable value of the work. Foxton J said that “may very well be right” but there remained the possibility that the litigation may not run its full course.
The defendants’ QC, Nigel Jones QC, had informed the court that “if the £5m figure was not paid when due under the CFA, then the legal team would be exercising their right to terminate the CFA”.
The judge ruled that a payment out of court should be ordered to cover the defendants’ outstanding fees as at 25 June 2019, the defendants’ costs for High Court hearings in June and July this year, the defendants’ estimated legal costs calculated on a conventional charging basis for the period up to 31 January 2021 and a further sum for disbursements.
He concluded: “The order which I have made provides funds for the Sanjay Shah defendants to be legally represented for the next six months, but also acknowledges SKAT’s legitimate interest in minimising the extent to which funds in which it claims an interest are used to defend the proceedings it has brought.”
He said he did not know what effect this order would have on the willingness of the Sanjay Shah defendants’ legal team to continue working under the existing terms of the CFA.
“However, that of itself is not a matter which leads me to conclude that the balance of the interests I have sought to strike is an unfair one. The terms of the CFA are an unconventional mechanism to funding High Court litigation.
“Mr Jones QC made it clear that when the CFA was agreed, those involved were alive to the fact that it was likely to be necessary to make applications to the court to use assets over which SKAT asserted a proprietary claim as the source of the payments to be made.
“The contractual terms agreed between the Sanjay Shah defendants and their representatives cannot be allowed to trump the court’s decision on the issue of whether the Sanjay Shah defendants should be permitted to use funds to which SKAT claims a proprietary interest to meet their legal expenses.”
Andrew Baker J last month strongly criticised witness statements prepared for an application for summary judgment in the SKAT litigation, saying far too much time and money was spent on them.