Colt Technology Services v SG Global Group SRL

Colt Technology Services v SG Global Group SRL [2020] EWHC 1417 (Ch) was an application by Colt Technology Services, a UK telecommunications company, for an injunction to restrain SG Global Group SRL, an Italian company, from presenting a winding-up petition.

In 2016, Colt UK and SGG had entered into a “bilateral voice over internet protocol interconnect agreement” under which SGG had agreed to provide Colt UK with voice trading services. In the agreement Colt UK nominated another member of its group, an Italian company, Colt Technology Services SpA, to receive the services and to be invoiced for them. The agreement was governed by English law and gave exclusive jurisdiction to the courts of England and Wales.

Thereafter SGG provided Colt Italy with services under which SGG granted Colt Italy’s business customers access to its overseas networks outside Italy, mainly in Africa. Invoices for €40 million were rendered and paid.

However, in January 2017, Colt UK’s auditors raised concerns as to whether SGG was the real supplier of the services: they suspected they were being provided by a shell company acting as a front for another supplier so as to give rise to “missing trader” VAT fraud; so Colt UK stopped paying.

In 2017 SGG brought proceedings in Milan against Colt Italy for payment of the invoices. Colt UK intervened which had, by the time of the hearing, reached an appeal stage.

In 2018 SGG served a statutory demand on Colt UK claiming US$5,108,227 but an undertaking was given not to issue any petition on that statutory demand without notice. In December 2019, following a first instance decision in the Milan proceedings, SGG served a further statutory demand claiming $5,442,768.05.

Colt UK’s application was made on the basis that the sums claimed by SGG were bona fide disputed on substantial grounds. Colt UK claimed that the obligation to pay was unenforceable for illegality: there were significant indications that SGG was part of a scheme to defraud the Italian tax authorities of VAT, and payment of the invoices would mean committing a criminal offence under Italian law. It relied on the principle in Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287 that a contractual obligation will not be enforced where doing so would require the obligor to commit a criminal offence in the place where the obligation falls to be performed. Alternatively, it relied on the principle ex turpi causa non oritur actio (preventing a party from seeking relief through the courts for something tainted by its own illegal act), SGG, it claimed, having entered into or performed the agreement so as to defraud the Italian tax authorities.

SGG resisted the application on the basis that the invoiced sums were due in that Colt UK did not dispute that it had received the services. It submitted that Colt UK’s reliance on the Ralli Bros principle was misplaced and that it had not adduced adequate evidence of any illegal conduct. SGG strongly contested the allegation that it had been involved in fraud It relied, as evidence of its bona fides on an offer it had made whereby Colt UK would pay the invoiced sums to SGG’s Italian lawyers on an undertaking that SGG would pay the total VAT to the Italian tax authorities and only release the net sum to SGG after the VAT liability had been calculated by an independent accountant.

The deputy judge, Joanne Wicks QC, went through the principles applicable where an injunction was sought to restrain presentation of a petition enunciated by Hildyard J in Coilcolour Ltd v Camtrex Ltd [2015] EWHC 3203, [2016] BPIR 1129 (paras. 31-42). She noted counsels’ agreement that if Colt UK could show that the debts were unenforceable on the Ralli Bros principle, SGG would have no standing as a creditor to present a petition. The question for the court, she decided, was whether that argument had a rational prospect of success (Re A Company (No 0012209) [1992] 1 WLR 351 at 354B).

The deputy judge decided:

“It is not for me to determine whether or not SGG is guilty of any offence in Italy as a consequence of being involved in a missing trader fraud. On this application the relevant question is whether the debt alleged to be due from Colt UK to SGG is bona fide disputed on substantial grounds and therefore whether Colt UK’s allegations against SGG have a rational prospect of success. I bear in mind that Colt UK bears the burden of proof of showing illegality under Italian law and that that burden, involving a very serious claim of fraud, is a heavy one. I also take into account the offer that SGG made on 24 March, as evidence of its current willingness to ensure payment of the VAT on the invoiced sums to the Italian authorities. Nevertheless it seems to me that I cannot say that Colt’s allegations are without a rational prospect of success, when fully investigated with the benefit of cross-examination of relevant witnesses”.

Having found that Colt UK had an arguable illegality defence on the Ralli Bros principle, she decided that it was unnecessary to deal with the ex turpi causa issue. The case was, in the judge’s view, similar to Coilcolour in that the insolvency jurisdiction was being used to put pressure on a company the solvency of which was not in real doubt and where there was a dispute as to the indebtedness. Service of a statutory demand was, in her words, “a clear attempt to shortcircuit the Milan appeal proceedings […] The presentation of a winding-up petition against Colt UK would be an abuse of process and in all the circumstances it is right to restrain SGG from taking that step. I will therefore grant the application”.

Whilst it is true that the application asserted that the debt was unenforceable owing to fraud which would have a high burden of proof, the case is an illustration that rarely are substantive issues of liability suitable for determination by the insolvency process. Time and again the courts warn that the insolvency is a collective regime to ensure that the assets of insolvent entities are realised for the benefit of all creditors. It is not appropriate for creditors to attempt to use the insolvency processes as either a pressure tactic or as an alternative means of debt collection.