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Colt Technology UK has won a High Court injunction preventing an Italian company allegedly suspected of being involved in a VAT carousel fraud from issuing a winding-up order over an unpaid – and hotly disputed – £3.8m debt.

After Colt's UK auditors PricewaterhouseCoopers (PwC) "raised concerns" over SG Global Group's business activities, Colt and SGG ended up at legal loggerheads. SGG had evidently threatened to issue a winding-up petition that would have caused serious headaches for Colt unless the British not-quite-a-telco coughed up millions in unpaid invoices.

Colt, however, claimed in court to have a good reason for not paying: its auditors had discovered that SGG looked like it could be a vehicle for tax fraud. So it applied for an injunction to prevent SGG issuing the petition on the grounds that it would be an abuse of legal process.

Until PwC raised the alarm, a VoIP interconnect contract between Colt Italy (a subsidiary of Colt UK) and SGG for comms traffic to and from Italy and Africa had been running smoothly since 2016. SGG received around €40m (£35.5m) from Colt – until PwC began sniffing around, and the court heard evidence about SGG's unconventional structure.

SGG's current sole director and shareholder, Jamie Johnston, bought the company for just €100 in 2017. The court also heard that SGG's margin on its VoIP services which were resold from a third party, New Energy Corporation Srl, were "between 0.27 per cent and 0.35 per cent."

"I agree with Colt UK that the picture which Mr Johnston paints of the financial health and activity of SGG sits uncomfortably with the sale of the shares in SGG from [previous sole shareholder] Mr Biscaioli to Mr Johnston for the low, if not nominal, price of €100," said deputy High Court judge Joanne Wicks QC [1]in her judgment , presiding over Colt's application hearing.

Alarmed by PwC's flagging of "anomalies" including "the absence of corporate filings", Colt managers began to wonder if SGG "was not the true supplier of the services under the Agreement, but was a shell company acting as a front for another supplier and was engaged in a form of VAT 'missing trader' fraud," as the judge summarised it. On 2 March 2017 Colt UK wrote to SGG saying it had "serious doubts that SG is trading in its own right, and in accordance with all applicable laws."

VAT carousel fraud explained

Europol, the EU police force, [2]explains VAT carousel fraud as follows: "More complex cases of VAT fraud are typically known as carousel frauds. As part of these fraud schemes, goods are imported and sold through a series of companies before being exported again. The first company in the domestic chain charges VAT to a customer, but does not pay this to the government, becoming what is known as a 'missing trader'. The exporters of these goods claim and receive the reimbursement of VAT payments that never occurred."

Colt Italy stopped paying SGG's invoices on the grounds it would commit a crime under Italian law by giving cash to suspected criminals. Unimpressed, and denying illegal behaviour, in 2017 the Italian firm sued Colt in Milan – and the following January it served a statutory demand against Colt UK, Colt Italy's parent company, for £4.1m including interest. After Colt UK tried and failed to have itself ruled out of the Italian proceedings, SGG doubled down with a second statutory demand in the UK in December 2019.

Alarmed by the way things were heading, Colt asked London's High Court to grant an injunction preventing SGG from serving a winding-up petition. Such a petition would not only force Colt to pay the disputed invoices but would more or less erect a giant neon sign over its UK HQ saying "financial trouble here", whether or not that was true.

Both sides' lawyers, arguing over Colt's application in front of Judge Wicks, highlighted a previous High Court judgment about winding-up petitions. That judgment included the sentence: "It is an abuse of process to present a winding-up petition against a company as a means of putting pressure on it to pay a debt where there is a bona fide dispute as to whether that money is owed."

Colt then successfully invoked a legal precedent called the Ralli Bros principle, which says that English courts will not uphold contracts where performance of the contract would result in a crime being committed abroad.

"I consider that Colt UK has a properly arguable illegality defence to the sums claimed by SGG," concluded Judge Wicks, who added: "The reason why Colt UK has not paid SGG's debt is because that debt is disputed, not because it cannot do so."

Nothing in the judgment indicated how Colt Italy had managed to sign such a large contract with SGG in the first place without noticing its ownership structure through routine due diligence.

The Italian proceedings against Colt are continuing in that country's appeal courts. ®

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[1] https://www.bailii.org/ew/cases/EWHC/Ch/2020/1417.html

[2] https://www.europol.europa.eu/crime-areas-and-trends/crime-areas/economic-crime/mtic-missing-trader-intra-community-fraud

[3] https://go.theregister.com/tl/1956/-8471/google-security-whitepaper?td=wptl1956