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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> HM Revenue and Customs v The GKN Group [2012] EWCA Civ 57 (31 January 2012) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2012/57.html Cite as: [2012] STC 953, [2012] EWCA Civ 57, [2012] BTC 35, [2012] WLR(D) 15, [2012] 3 All ER 111, [2012] STI 217, [2012] CP Rep 20, [2012] 1 WLR 2375

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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
SIR ANDREW PARK
HC03C02223 and Others

		Royal Courts of Justice Strand, London, WC2A 2LL
		31/01/2012

Lord Justice Aikens :

1. In March 2001 the Court of Justice of the European Communities, ( known since the Lisbon Treaty as the Court of Justice of the European Union ("ECJ")) handed down its judgment in Metallgesellschaft Ltd v Inland Revenue Commissioners and Hoechst AG v Inland Revenue Commissioners^[1] ("the Metallgesellschaft case"). The ECJ held that a UK tax regime which required that Advance Corporation Tax ("ACT") to be levied on dividends of UK resident subsidiaries which were paid to their non-UK resident parent companies but which did not require it to be levied when such dividends were paid to UK-resident parent companies was contrary to Community law. The ECJ also held that any company that had been obliged to make an advance payment of tax contrary to Community law was entitled to recover a sum equivalent to the interest that would have been earned on the sums foregone. Since that decision potentially affected ACT and "mainstream corporation tax" ("MCT") paid by any UK-resident companies with EU or other non-UK resident subsidiaries and could affect companies' Corporation Tax liabilities since the UK became a member of what was then the EEC in 1972 and/or the introduction of the ACT regime in 1973, a large scale litigation war was unleashed between companies that have had to pay UK Corporation Tax and Her Majesty's Revenue and Customs ("HMRC").
2. The war has been fought on a large number of fronts but this appeal concerns only one part of a particular skirmish. The current respondents ("GKN") and other companies obtained an order (dated 19 May 2009) from Sir Andrew Park, sitting as a deputy judge in the Chancery Division, that HMRC should make an Interim Payment to them in the context of a much larger piece of Group Litigation. HMRC argue on this appeal, brought with the permission of Jacob LJ, that Sir Andrew erred in law in making this Interim Payment order. We heard argument in the case on 29 November 2011 and reserved judgment.

The background to the Group Litigation and the application for an Interim Payment

3. To understand the Group litigation of which the present appeal is a part I should state some rules about the UK law concerning the system of ACT, which was instituted in 1973 and abolished effectively from 5 April 1999 (by section 31 of the Finance Act 1998). The basic rule of UK Corporation Tax is that it is payable by UK resident companies in accordance with the specific statutory provisions in schedules setting out what income or gains will be taxed. Income on foreign dividends falls within Case V of Schedule D, (known as "DV"), although this has always been subject to various deductions. At the relevant time UK resident companies were not subject to Corporation Tax on dividends received from other UK resident companies; however, dividends received from companies resident outside the UK were subject to Corporation Tax but carried the right to a credit equal to the amount of any foreign tax paid, but capped at the UK rate.
4. Prior to 6 April 1999 a UK resident company had to pay ACT on dividends which it paid to its shareholders, unless the payment was within a group of companies and a group income election had been made. However, a UK resident company could obtain a credit against its liability to ACT by reference to the amount of dividends it received from a UK resident company. If the credit was obtained those dividends were known as "franked investment income" or "FII". But a UK resident company could not obtain the same credit for any dividend income which it received from a non-UK resident company. So ACT had to be paid on those dividends, with the consequence that UK resident companies receiving dividends from non-UK resident companies built up substantial "surpluses" of unutilised ACT, ie. ACT which had been paid but which could not then be set against any liability to pay Corporation Tax. This problem of unused ACT surpluses became notorious and the regime was changed in 1994, so that thereafter UK resident companies could elect to designate dividends received from non UK resident companies as "foreign income dividends" or "FIDS", in respect of which ACT would be repaid if not utilised to pay Corporation Tax.^[2] In these proceedings the UK resident company receiving a dividend directly from a company resident outside the UK has been referred to as a "UK water's edge company" and the company resident in a Member State which has remitted the dividend to the UK water's edge company has been called an "EC water's edge company".^[3]
5. The present appeal arises as part of the "Franked Investment Income" ("FII") Group Litigation, which was begun following a Group Litigation Order ("GLO") made by Chief Master Winegarten on 8 October 2003. The FII Group Litigation Order ("FII GLO") claimants are companies that belong to groups of companies which have UK resident parents and foreign subsidiaries in both the EU and elsewhere. The lead or test claimants in the proceedings are companies in the BAT Group. The broad purpose of the litigation is to determine a number of common or related questions of law arising out of the taxation treatment of dividends paid by UK resident parent companies out of profits received from non-UK resident subsidiaries, when ACT was payable, by comparison with dividends received from UK resident subsidiaries, when no ACT was payable, by comparison with dividends paid out of profits received from UK resident subsidiaries when no ACT was payable. The claimants allege that these differences in the taxation of the dividends depending on their origin were unjustified and in breach of the provisions of Articles 43 and 56 (freedom of establishment and movement of capital respectively) of the EC Treaty and its predecessors.
6. Various selected test claims in the FII Group Litigation advanced as far as a trial before Park J in June 2004. It then became apparent that there had to be a preliminary reference of issues of law to the ECJ. The ECJ gave its judgment on the reference in December 2006.^[4] It was then ordered that the test claims should proceed to trial on all the issues in the FII GLO, including the issue of any liability for restitution, "save in so far as those issues concern causation and quantification".
7. The trial of the test claims took place before Henderson J in July 2008 and he delivered his reserved judgment on 27 November 2008. It runs to 450 paragraphs and has been aptly described as a tour de force.
8. There are two broad questions considered in Henderson J's decision that became relevant to the subsequent application for Interim Payments before Sir Andrew Park, which are summarised at [4] and [5] of Sir Andrew's judgment of 19 May 2009. The first question was whether the requirement of HMRC that Corporation Tax under Case V of Schedule D be paid by a UK resident parent company on dividends received from a subsidiary resident in another Member State was contrary to Community law. The second question concerned cases where the non-UK resident subsidiary had itself paid whatever corporate tax was payable in its own Member State of residence and then the UK-resident company receiving the dividend from that non-UK resident subsidiary paid onward dividends based (at least in part) on the revenue it had received by way of dividend from its subsidiary. HMRC required the UK-resident parent to pay ACT on the onward distribution of all the dividends received from the non-UK resident subsidiary, whatever corporate tax may have been paid on that sum.^[5] Again, the issue was whether that regime was contrary to Community law.
9. Henderson J held, on the first question, that as a result of the ECJ's decision in Case C-446/04, (ie. the reference that had been made by Park J in this Group Litigation) the requirement that the dividends received from the non-UK subsidiaries be subject to UK Corporation Tax under Case V of Schedule D was contrary to Community law. He held that the UK resident parent was entitled by way of a restitutionary claim to recover (a) the unlawfully levied Corporation Tax and (b) interest on it. On the second question, Henderson J held that to the extent that the UK-resident parent company had paid a greater amount of ACT on the onward dividends than it would have done had the incoming dividends been treated as FII, the levy of that additional ACT was contrary to Community law and was, in principle recoverable by a restitutionary claim.
10. There are, however, two further aspects of Henderson J's decision which were important to the claim for an Interim Payment before Sir Andrew Park and are central to the appeal to this court. The first concerns the "Foreign Income Dividend" system or "FID" system, which Henderson J described as the third of the four broad issues that he had to decide.^[6] As noted above, the FID system was operated for dividends paid by non-UK subsidiaries to UK resident parent companies between 1 July 1994 until ACT was abolished with effect from 5 April 1999. As I have said, during that period a UK resident company could elect to treat dividends that it paid out of distributable foreign profits as "Foreign Income Dividends" or "FIDs". If the dividend paying company could show that the dividend distribution was attributable to foreign profits received which carried credit for underlying tax paid overseas that was equivalent to the UK corporation tax rate that UK-resident parent company could, under the FID system, receive a repayment of ACT^[7] on any dividends paid to its shareholders. Under this system the ACT paid would be repaid on the next MCT liability date. This repayment could be anything between 8 ½ to 17 ½ months after the ACT had been paid.
11. In the ECJ's decision in Case C-446/04 following the reference by Park J, it held that UK tax law's requirement that a UK resident company had to account for ACT under the FID system offended Community law, even though the taxpayer was subsequently entitled to repayment of the ACT. The ECJ also held that the taxpayer was entitled to a repayment of the value of the loss of cashflow. Henderson J held that the ECJ had decided that the FID regime was in breach of Articles 43 and 56 of the EC Treaty in relation to dividends received from other Member States.
12. The second further aspect of Henderson J's decision concerns the remedies which he said must be available to the FII GLO claimants in respect of the losses that they had suffered as a result of the UK Corporation Tax regime being in breach of Community law. First, he held that Community law required the repayment of unlawfully levied tax and associated interest. But, secondly, he held that Community law required that there be a remedy for loss of the ability to use the money wrongly paid to HMRC.^[8] Thirdly, he held that Community law principles of "equivalence" and "effectiveness" required that English law provide two restitutionary remedies for these so-called "San Giorgio claims". He identified these remedies as being, first, one similar to that established in Woolwich Equitable Building Society v Inland Revenue Commissioners^[9] (recovery of tax paid unlawfully) and, secondly, a restitutionary remedy for tax paid by mistake. Lastly, the judge held that domestic limitation provisions^[10] were incompatible with Community law so that they could not be relied on by HMRC to prevent a claimant from bringing "mistake-based" claims to recover tax paid as far back as 1972.
13. The application for an Interim Payment order was made after Henderson J had given his judgment and before the appeal from his judgment was heard and the Court of Appeal's decision was given. However, I think it sensible to set out now the relevant points on which the Court of Appeal allowed HMRC's appeal from Henderson J's decision, because they are relevant to the issues that arise on the present appeal.
14. The first relevant point of decision was that, contrary to the view of Henderson J, the Court of Appeal considered the question of the compatibility with Community law of the UK's regime of taxing foreign dividends was not acte claire; therefore the matter had to be referred back to the ECJ.^[11] The second point was that, contrary to the conclusion of Henderson J, the UK statutory provisions concerning ACT could be read in a manner which made them compatible with the Community law as it had already been declared by the ECJ in Case – C446/04. This could be done by reading words into section 231 of the Income and Corporations Taxes Act 1988 ("ICTA") so as to make it clear that UK resident companies could claim a credit under that section in respect not only of qualifying distributions made by resident companies (ie. domestic source income) but also distributions made by other companies (ie. foreign source income) to the extent that Community law required such a tax credit to be given in respect of that income also.^[12] The third point was that, contrary to Henderson J's view, the application of section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 were not contrary to the Community law principles of "effectiveness", "equivalence", "certainty" and "legitimate expectations". The Court of Appeal therefore concluded that English law did provide a remedy in accordance with "San Giorgio" principles in the form of the Woolwich remedy, which was unaffected by sections 320 and 107. Accordingly, claimants could not rely on a restitutionary remedy based upon mistake to recover sums (whether as principal or interest) beyond the six year limitation period.^[13]
15. For completeness I should add that the Supreme Court refused permission to appeal on the first of these three conclusions of the Court of Appeal. That issue has therefore been remitted to the ECJ and it will hear the case on 7 February 2012. The Supreme Court has extended the time for seeking permission on the second point as that will depend on the decision of the ECJ on the first one. However, the Supreme Court granted permission on the third point and it is to hear argument on it on 21 February 2012.

The application for Interim Payments before Sir Andrew Park

16. The present applications for Interim Payment orders, pursuant to CPR Pt 25.7(1)(c) were made by several of the claimants within the FII Group Litigation Order. They were the BAT Group; the GKN Group (ie. GKN as I have called it) and the Corus Group. HMRC opposed all the applications. The present appeal concerns only the GKN Interim Payment order made by Sir Andrew.
17. The application of GKN was in respect of ACT and FID ACT which it said had been overpaid by two GKN water's edge UK companies, viz. GKN Holdings plc (called "PLC" in the evidence) and GKN Industries Limited (called "Industries" in the evidence). The application was supported by a witness statement of Mr Michael John Shaw, GKN plc's Head of Tax. This statement exhibited evidence setting out details of dividend income received from non-UK resident subsidiaries within Member States, the local tax computations, the UK Corporation Tax returns and computations of Corporation Tax of GKN Holdings plc and GKN Industries Limited, the relevant tax computations of subsidiaries, including ACT which it said had been unlawfully levied. The conclusion of Mr Shaw's witness statement was that, in the light of Henderson J's decision in the FII case and pending an appeal, GKN was entitled to a "minimum" Interim Payment of £5,180,256 consisting of £1,438,563 for the GKN Holdings plc claim and £3,741,693 for the GKN Industries claim, "on account of restitutionary payments which the court may order HMRC to make". The application included one for sums relating to periods outside the six year limitation period.
18. HMRC responded to the evidence of all the claimants with a document entitled "Objections to Interim Payment Application". This advanced numerous objections concerning GKN's evidence. But, as Sir Andrew Park commented at [23] of his judgment, most of those objections "evaporated in the light of careful replies by the tax managers of the claimant groups". In GKN's case the reply was in the form of a further witness statement from Mr Shaw. The judge said that the result was that there were only two remaining objections of fact, which he dealt with and dismissed in his judgment. Only one of those, concerning the calculation of interest, is relevant to this appeal.
19. CPR Pt 25.7(1)(a), (b) and (c) and (4) provide as follows:

"Interim payments – conditions to be satisfied and matters to be taken into account

25.7

(1) The court may only make an order for an interim payment where any of the following conditions are satisfied –

(a) the defendant against whom the order is sought has admitted liability to pay damages or some other sum of money to the claimant;

(b) the claimant has obtained judgment against that defendant for damages to be assess or for a sum of money (other than costs) to be assessed;

(c) it is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial amount of money (other than costs) against the defendant from who he is seeking an order for an interim payment whether or not that defendant is the only defendant or one of a number of defendants to the claim;

……..

(4) The court must not order an interim payment of more than a reasonable proportion of the likely amount of the final judgment".

20. Sir Andrew stated that the application required him to consider three questions: (i) did the court have power to make an Interim Payment order at all; (ii) if so, should it exercise that power; and (iii) if so, what amount or amounts of Interim Payment should the court direct to be made? He answered those questions as follows: (i) yes; (ii) yes; and (iii) the amount of Interim Payment should be approximately 85% of the amounts which the companies have calculated to be, in their understanding, their present entitlement.
21. In dealing with the first question, Sir Andrew held that the fact that the application had been made after Henderson J had given judgment and before the appeal (for which Henderson J had given permission) had been heard was not, of itself, a bar to the exercise of the power contained in CPR Pt 25.7(1)(c). The judge held that the court hearing the Interim Payment application had to put itself in the position of imagining a trial was taking place on the state of the law as expounded in the judgment that had been given, not on the basis of what might happen on an appeal.^[14]
22. On the second question, the judge concluded that the general approach should be that, where the court has power to order an Interim Payment it should do so unless there was a sufficient specific reason not to do so. In the present cases, Sir Andrew considered that there were powerful specific reasons in favour of making an order, viz. (a) the fact that the litigation might go for years before being finalised; (b) potential interest in favour of the claimants will be running at the government's borrowing rate, which was a good deal lower than the rate at which the claimants were themselves able to borrow.^[15] Sir Andrew also concluded that there were no specific reasons not to order Interim Payments. In that respect the judge rejected the argument advanced by counsel for HMRC that no Interim Payment order should be made because there were many difficult questions concerning the quantification of the relief that was ultimately due to the claimants on the basis of Henderson J's decision.^[16]
23. On the third question, Sir Andrew noted that ultimately there were only two specific arguments put forward by HMRC on the question of the amount that should be awarded as an Interim Payment. The first concerned the interest content of the amount sought by the claimants, which was a substantial element of the total. The claimants contended that interest should be computed on a compound basis, relying on statements of the House of Lords in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v IRC.^[17] HMRC argued that the computation should be made as simple interest only. The second point concerned how unlawfully levied ACT should be allocated to MCT, part of which was, itself, not actually owed as a result of ECJ decisions. I need not explain that point further because, in the light of developments since the Court of Appeal's decision, the point does not arise on this appeal.
24. The upshot of Sir Andrew's decision was that he ordered that HMRC make an Interim Payment of £4,400,000 to GKN plus interest. The principal sum comprised £1,221,689 in relation to ACT paid by GKN Holdings plc and £3,184,402 in relation to ACT paid by GKN Industries Ltd. GKN Holdings plc did not pay any relevant ACT within six years of the issue of GKN's claim, which had been issued on 13 June 2003. Other sums were paid to the other claimants.
25. Following the subsequent judgment of the Court of Appeal allowing the appeal from Henderson J on various issues, GKN voluntarily repaid £2,933,603 of the Interim Payment to HMRC which included interest. The sum repaid represents the "cashflow loss" on amounts which were paid by GKN as "standard" ACT earlier than six years before GKN issued its current proceedings. This was repaid because of the Court of Appeal's decision that section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 do not contravene Community law and apply to "mistake" claims. Therefore GKN accepted, for the purposes of the Interim Payment application and this appeal, that it should repay that part of the Interim Payment sum awarded.
26. The sum of just under £1,500,000 which is the part of the Interim Payment that GKN has retained, represents GKN's "cashflow loss" on "water's edge ACT" paid under the FID system in force from 1994 to 1999, although this claim also only relates to the sums paid within the six year limitation period, ie. from 14 July 1997 until 14 July 1999. GKN has calculated that the principal sum to which it is entitled (using compound interest with monthly rests in accordance with the Sempra decision) is £1,312,530.73. GKN has calculated that the interest payable on that principal sum, from the date of repayment of the ACT until the date of the Interim Payment order (viz. 9 July 2009), using a simple interest basis and bank rate plus 1%, is £665,104.87. The grand total of those sums is therefore £1,977,635,60. GKN has actually retained only £1,490,932. The "discount margin" is thus £486,703.60 or 24.6% of the total.
27. For the purposes of the appeal before us, HMRC did not contest these calculations. However, it maintained that, as a matter of principle, GKN was not entitled to any Interim Payment at all.

The arguments of the parties on the appeal

28. Mr Rupert Baldry QC, on behalf of HMRC, submitted that where a first instance decision obviously raised difficult issues of law, as was manifest in this case, then it was wrong in principle for a court to make an Interim Payment order. He submitted that the absurdity of the position was demonstrated in this case by the fact that the Court of Appeal had reversed the decision of Henderson J on several issues which GKN had had to accept had a major effect on the amount it could obtain by way of Interim Payment. The significance of the change in position following the Court of Appeal's decision was magnified in this case because the application for an Interim Payment was made by a group that was a party to the GLO. Mr Baldry argued that the structure of the GLO was such that issues of principle on liability were to be determined first and issues of causation and quantification were to be considered only when all liability issues had been finally determined. The practical consequence of this was, he submitted, that HMRC has not had disclosure, particularly from non-test claimants such as GKN, of material that was important in relation to the Interim Payment application. Thus HMRC was not in a position effectively to challenge the extensive evidence submitted by GKN in support of the Interim Payment application to the judge.
29. Mr Baldry also tentatively submitted that the judge did not sufficiently take into account the fact that the Interim Payment application was made in the context of a GLO and, in the case of GKN, was being made by a non-test claimant. However, that point was not open to Mr Baldry. It had been the subject of an application for leave to amend HMRC's Grounds of Appeal, which had been refused by Lloyd LJ. In any event, as I shall explain below, I think that it is a bad point.
30. Mr David Cavender QC, for GKN, submitted that the judge's approach was correct in principle and that there was no basis on which this court could hold that the sum of £1,490,932 now retained by GKN was improper as an Interim Payment. He submitted that it was clear, on the footing of the Court of Appeal's judgment, that, in respect of the FID ACT part of GKN's claim (within the limitation period), GKN would recover at trial a sum which was notably more than the figure retained.

Issues for decision on appeal.

31. In my view the following issues arise for decision on this appeal:

i) What is the correct construction of the "conditions" set out in CPR Pt 25.7(1)(c) that must be satisfied before the court can consider making an Interim Payment; and have they been fulfilled in this case?

ii) If the conditions are fulfilled in this case, is there any other bar to the court making an Interim Payment order in this case, in particular because (a) the claimant is a non-test claimant in a GLO action; and (b) the case raises difficult issues of law; and (c) the judge was reversed on several issues on appeal?

iii) If there is no bar to the court exercising its discretion, how should it approach the question of ascertaining a "reasonable proportion of the likely amount of the final judgment"?

Issue One: The conditions in CPR Pt 25.7(1)(c)

32. The judge was correct to focus on paragraph (c) of the rule and the parties did not argue that either paragraph (a) or (b) applied in this case. Paragraph (c), when read with the opening words of Pt 25.7(1) requires the court, before it can make an Interim Payment order, to be satisfied that "…if the claim went to trial, the claimant would obtain judgment for a substantial sum of money….against the defendant from whom he is seeking an order for an interim payment….". (My emphasis). Three points of construction arise. First, what is meant by "…it is satisfied that…"; secondly, what is meant by "…if the claim went to trial the claimant would obtain judgment for…."; and, thirdly, what is meant by "…a substantial amount of money….".
33. On the first point, it is obvious that the claimant seeking the Interim Payment has the burden of satisfying the court that the necessary conditions have been fulfilled for it to consider exercising the power to grant an Interim Payment order. An Interim Payment order is one that is obtained in civil proceedings. Whatever conditions have to be satisfied must be to the usual standard of proof in civil proceedings unless there is an express indication in a statute or rule of court to the contrary. Here there is none.^[18] Therefore the claimant has to satisfy the court that the requisite conditions have been fulfilled to the civil standard, which is upon the balance of probabilities. Since the House of Lords' decision in Re H^[19] it is well established that there is only one civil standard of proof on a balance of probabilities. In the case of an application for an Interim Payment order under CPR Pt 25.7(1)(c), of course, the claimant has to satisfy the court on a balance of probabilities about an event that has not, in fact, occurred; that is, that if the claim went to trial, he would obtain judgment (and for a substantial amount of money).
34. In Heidelberg Graphic Equipment Ltd v Commissioners for HM Revenue and Customs^[20] Henderson J, who was dealing with an application for an Interim Payment in another GLO action and having considered statements made by this court in British and Commonwealth Holdings Plc v Quadrex Holdings Inc,^[21] ("the Quadrex case") concerning the equivalent provision in the former Rules of the Supreme Court, said at [14]:

"It follows, therefore, that the burden, although the usual civil standard of proof applies, is a high one, and the court needs to be satisfied that the plaintiff [sic] will^[22] succeed; it is not enough that it merely thinks it likely that the plaintiff will succeed".

35. I will come on to deal with what it is that the court has to be satisfied about. But, with great respect to Henderson J, I think that this passage is in danger of mixing two concepts, ie. the burden and standard of proof and it may not have sufficiently taken account of the law on standard of proof in civil proceedings as understood following Re H. The burden of proof is on the claimant. The standard of proof to which the court must be satisfied by the claimant in respect of the conditions set out in CPR Pt 25.7(1)(c) is that of the balance of probabilities.^[23]
36. That leads on to the next and more important question: of what does the claimant have to satisfy the court? To which the answer is: that if the claim went to trial, the claimant would obtain judgment for a substantial amount of money from this defendant. Considering the wording without reference to any authority, it seems to me that the first thing the judge considering the Interim Payment application under paragraph (c) has to do is to put himself in the hypothetical position of being the trial judge and then pose the question: would I be satisfied (to the civil standard) on the material before me that this claimant would obtain judgment for a substantial amount of money from this defendant?
37. In the present case, there had been a trial before Henderson J of all issues other than causation and quantification prior to the application being made. But there is nothing in the wording of CPR Pt 25.7(1)(c) which requires that an application for an Interim Payment order can only be made before there is any trial of any issues before a judge; nor is there any prohibition in making an application after the trial of certain issues before a judge. The fact that there has been a trial of certain issues (but not all those that would lead to a judgment for a sum of damages) is, on my construction of the paragraph, no bar to the exercise of the court's power contained in paragraph (c).
38. The second point is what precisely is meant by the court being satisfied that, if the claim went to trial, the claimant "would obtain judgment for a substantial amount of money"? In my view this means that the court must be satisfied that if the claim were to go to trial then, on the material before the judge at the time of the application for an Interim Payment, the claimant would actually succeed in his claim and furthermore that, as a result, he would actually obtain a substantial amount of money. The court has to be so satisfied on a balance of probabilities. The only difference between the exercise on the application for an Interim Payment and the actual trial is that the judge considering the application is looking at what would happen if there were to be a trial on the material he has before him, whereas a trial judge will have heard all the evidence that has been led at the trial, then will have decided what facts have been proved and so whether the claimant has, in fact, succeeded. In the latter case, as Lord Hoffmann makes plain in Re B,^[24] if a judge has to decide whether a fact happened, either it did or it did not: the law operates a "binary system" and there is no room for a finding that it might have happened. In my view the same is true in the case of an application under CPR Pt 25.7(1)(c). The court must be satisfied (to the standard of a balance of probabilities) that the claimant would in fact succeed on his claim and that he would in fact obtain a substantial amount of money. It is not enough if the court were to be satisfied (to the standard of a balance of probabilities) that it was "likely" that the claimant would obtain judgment or that it was "likely" that he would obtain a substantial amount of money.
39. Next there is the question of what is meant by "a substantial amount of money". In my view that phrase means a substantial, as opposed to a negligible, amount of money. However, that judgment has to be made in the context of the total claim made. What is a substantial amount of money in a case where there is a comparatively small claim may not be a substantial amount when the claim is for a much larger claim. It may be that in very small claims an applicant could never satisfy the court that, even if it obtained judgment, the amount of money it would obtain would be "substantial". But that is not this case and each must be decided on its facts.
40. Counsel did not refer us to any cases in this court which have considered the construction of CPR Pt 25.7(1)(c). So far as I have been able to research, there have not been any reported Court of Appeal decisions on the construction of this provision. I have already mentioned that we were referred to the Heidelberg case. As Henderson J noted in that case, there was an authoritative consideration of the equivalent provision in the Rules of the Supreme Court in this court's decision in the Quadrex case.^[25] In that case there had been an application for summary judgment under RSC Order 14 and, in the alternative, an application for an Interim Payment under what was RSC Order 29 rule 10 and 11(1)(c). The power to grant an Interim Payment was formerly contained in RSC Order 29 rule 10. The conditions that had to be fulfilled were set out in rule 11. The relevant wording of rule 11(1)(c) was as follows:

"If, on the hearing of an application under rule 10 in an action for damages, the court is satisfied - …(c) that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against that respondent or, where there are two or more defendants, against any of them, the court may, if it thinks fit…order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the court are likely to be recovered by the plaintiff".

41. The relevant wording of that provision, viz. "the court is satisfied…that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages…" is very close to that of CPR Pt 25.7(1)(c). I therefore think it is helpful to see how the court construed that wording in the Quadrex case.
42. The leading judgment was given by Sir Nicholas Browne-Wilkinson V-C.^[26] He reviewed earlier Court of Appeal authorities which had taken very different views on the construction of Rule 29(11)(1)(c). He held that the correct construction was that the court had to be satisfied that the claimant will succeed at trial. He described "the burden" on the plaintiff/claimant as being a "high one". As I have already noted, I think that this expression unfortunately tends to mix two concepts: the burden of proof and the standard of proof. I think it better to keep them separate. The case also ante-dates the House of Lords' decision in Re H.
43. In the Quadrex case, the court had to consider whether an Interim Payment order could be made when, on the summary judgment application, it had held that the defendant could have "conditional" leave to defend. There is no longer such a concept under the CPR and there is therefore no need to comment on that part of the judgment. But it is clear from the main part of Browne –Wilkinson V-C's analysis in Quadrex that the construction adopted by the court to the very similar wording of RSC Rule 29(11)(1)(c) is the same as the one I think must be adopted for CPR Pt 25.7(1)(c).
44. Have the conditions in Pt 25.7(1)(c) been fulfilled by GKN in relation to this application? In my view they have. The repayment that has been made by GKN following the decision of the Court of Appeal in the main action means that GKN is only applying for an Interim Payment order in respect of one particular part of its claim which relates to the loss of use of FID ACT during the period July 1997 to July 1999. There was no particular challenge by Mr Baldry to GKN's analysis of its right to recover at least £1,490,932 in respect of the FID ACT claim, as set out in the Appendix to GKN's Skeleton Argument on this appeal. The sum of £1,490,932 claimed as an Interim Payment comprises the two elements to which I have already referred above.
45. I should note that in respect of the second element, which represents interest on the principal sum from the date of the repayment of the FID ACT until the date of the Interim Payment order on 9 July 2009, it might have been argued by GKN that interest should be calculated on a compound basis. As I read his judgment, Sir Andrew took the view that such interest would be on a compound basis.^[27] But GKN has not attempted to recover compound interest; it has calculated its interest on the "principal sum" at the rate of bank base rate plus 1% on a simple interest basis. In his submissions to us Mr Baldry did not challenge that basis of claiming simple interest, although he did argue that compound interest on the principal sum would not be recoverable.
46. Therefore, I am satisfied, on the material before us, that if this particular claim went to trial, GKN would obtain judgment on it. I am also satisfied that GKN would recover the figure of £1,490,932. In my judgment that sum constitutes a substantial amount of money, even though the total amount sought by GKN is very much larger.

Issue Two: If the conditions in CPR Pt 25.7(1)(c) are fulfilled, are there any reasons why the court should not exercise the power to make an Interim Payment order in this case, in particular because: (a) the claimant is a non-test claimant in a GLO action; (b) the case raises difficult questions of law; and (c) Henderson J was reversed on several issues on appeal.

47. I agree with Sir Andrew Park's general proposition that if the court is satisfied that the conditions in Pt 25.7(1)(c) have been fulfilled then the court should order an Interim Payment to be made unless there is a sufficient specific reason not to do so. The only specific reasons not to do so that were advanced by Mr Baldry are the three identified above. As to the first, in my view it is irrelevant that the application for an Interim Payment was made in the context of a GLO and that the present application and appeal concern a non-test claimant. Nothing in Pt 25.7(1) prevents a party to a GLO from making an application for an Interim Payment order. I appreciate that there may be terms of particular GLOs that could prevent such an application being made, but, so far as this court is concerned in relation to this particular application, there is nothing to prevent it being made. Similarly, the fact that GKN is a non-test claimant in the FII GLO cannot, of itself, be a bar to the grant of an Interim Payment application if the conditions in Pt 25.7(1)(c) are otherwise fulfilled. Again, there may be particular terms of particular GLOs that might preclude the court making an Interim Payment order but that is not so in the present case.
48. It is evident that the FII GLO litigation generally raises difficult questions of law. But there are none that impinge on the present application. If there were then it would be impossible to conclude that GKN could satisfy the condition that it would obtain judgment if this particular part of its claim went to a trial. The wording of Pt 25.7(1) is sufficiently wide and general to enable a claimant to make an application for an Interim Payment order in respect of a part of its total claim. That is what GKN is, effectively, doing now with its restricted claim to retain the sum of £1,490,932. No difficult question of law or indeed any question of law arises in relation to that part of the claim on the basis of the Court of Appeal's decision.
49. The fact that Henderson J was reversed on appeal is also irrelevant to the present application. The present claim, relating as it does solely to the FID ACT within the six year limitation period, has been moulded so it does not raise any of the controversial issues.
50. Accordingly, in agreement with the judge, I would hold that this court should exercise its power to grant an Interim Payment order.

Issue Three: How should the court approach the question of ascertaining a "reasonable proportion of the likely amount of the final judgment"?

51. If the conditions in Pt 25.7(1)(c) have been satisfied then the court will have concluded that the claimant would, if the claim went to trial, obtain judgment for a substantial amount of money. In reaching that conclusion the court will often have had to decide, on the material before it, what sum it thinks the applicant would obtain at trial, in order that the court considering the Interim Payment application can conclude whether or not the judgment amount would be a "substantial amount of money". If that is the correct approach, then it seems to me that in many cases it is unlikely that there will be very much more (if anything) that a court will have to do for the purposes of deciding what the "likely amount of the final judgment" will be for the purposes of Pt 25.7(4). I appreciate that there may be cases where it is clear that the claimant would obtain judgment on the claim and it would be for a "substantial amount", but on the material available at the time of the Interim Payment application it is not entirely certain what, precisely, that sum might be. In such a case the judge has to take a view, based on the material before him, on the "likely amount of the final judgment" in order to decide what would constitute a "reasonable proportion" of that "likely amount" so as to make the Interim Payment order.
52. The judge decided that in this case a "reasonable proportion" would constitute 85% of the amounts which the companies calculated to be, in their understanding, their present entitlements. With respect, I think that is not quite the correct formulation to be adopted. It is not the claimant's calculation of its entitlements that matters, but the court's assessment of the "likely amount of the judgment".
53. However, I think it makes no difference in this case. On the calculation of GKN set out in the Appendix to its Skeleton Argument on appeal, which has not been challenged by HMRC, the figure retained which GKN says should now be the subject of the Interim Payment order constitutes 75.4% of the total amount of its FID ACT claim figures. In my view this court is entitled to take the total sum set out in that calculation, viz. £1,977,623.60, as being the "likely amount of the final judgment" for this particular part of GKN's total claim. On that basis, I would hold that the figure of £1,490,932 constitutes a "reasonable proportion" of the "likely amount of the final judgment" which can therefore be awarded as an Interim Payment.

Conclusion and disposal

54. For the reasons I have given I would reject all the arguments advanced by Mr Baldry on behalf of HMRC. I would therefore dismiss this appeal. However, the judge's order for an Interim Payment will have to be amended so as to reflect the fact that it is now only for £1,490,932.

Lord Justice Lewison.

55. I agree.

Lord Justice Ward.

56. I also agree.

Note 1   Joined cases C-397 and C-410/98: [2001] Ch 620.    [Back]

Note 2   The FID system was introduced by what became sections 246A-246Y of the Income and Corporation Taxes Act 1988.    [Back]

Note 3   This summary is based on the judgment of the Court of Appeal in the main litigation out of which the present application and appeal arise: Test Claimants in the Franked Investment Group Litigation v Commissioners of the Inland Revenue and Commissioners of Her Majesty’s Revenue and Customs [2010] EWCA Civ 103 at [1] – [5].    [Back]

Note 4   Case C-446/04: Test Claimants in the FII Group Litigation v CIR [2006] ECR I-11753 [2007] STC 326) – “Case C-446/04”.    [Back]

Note 5   In contrast to the position with dividends from UK resident subsidiaries, where the dividend on which ACT had been paid by the subsidiary could be treated as “Franked Investment Income” or FII.    [Back]

Note 6   [7] of the judgment of Henderson J.    [Back]

Note 7   ACT was levied at 25% of the amount of the dividend. It was paid 14 days after the end of the quarter in which the dividend was paid, ie. on 14 January, 14 April, 14 July or 14 October as applicable.    [Back]

Note 8   The last was said by Henderson J to be an application of the principles set out by the ECJ in Amministrazione delle Finanze dello Stato v SPA San Giorgio [1983] ECR 3595, which the judge dubbed as “the San Georgio principle” and claims under that principle “San Giorgio claims: see [224] of his judgment.    [Back]

Note 9   [1993] AC 70    [Back]

Note 10   In particular those introduced by section 320 of the Finance Act 2003 and section 107 of the Finance Act 2007, whose effect was, retrospectively, to create a statutory limitation period of six years for the recovery of unlawfully levied tax or associated sums (including interest), even when the claim was based on “mistake”.    [Back]

Note 11   [25]-[43] of the CA’s judgment.    [Back]

Note 12   [107] of the CA’s judgment.    [Back]

Note 13   [229] of the CA’s judgment.    [Back]

Note 14   See [15] of Sir A Park’s judgment.    [Back]

Note 15   See [21] of Sir A Park’s judgment.    [Back]

Note 16   See [23] of Sir A Park’s judgment.    [Back]

Note 17   [2008] AC 561.    [Back]

Note 18   Compare an application for contempt of court in civil proceedings where the contempt has to be proved to the criminal standard, viz. beyond reasonable doubt.    [Back]

Note 19   [1996] AC 563; see particularly the speech of Lord Nicholls of Birkenhead at 586-7. See also In re B [2009] AC 11 in particular the speeches of Lord Hoffmann (passim) and Baroness Hale of Richmond particularly at [70]. In the latter case Lords Rodger of Earlsferry and Walker of Gestingthorpe agreed with the speeches of both Lord Hoffmann and Baroness Hale. Lord Scott of Foscote agreed with Baroness Hale.    [Back]

Note 20   [2009] STC 2334; [2009] EWHC Ch 870 at [14]    [Back]

Note 21   [1989] 1 QB 842 at 865-6.    [Back]

Note 22   The judge’s emphasis.    [Back]

Note 23   To be fair to Henderson J, I suspect his formulation was much influenced by the way that Browne-Wilkinson V-C had stated the matter in the Quadrex case at 866A, where he had described the “burden” as a “high one”.     [Back]

Note 24   [2008] AC 561 at [2]    [Back]

Note 25   [1989] 1 QB 842.    [Back]

Note 26   Woolf and Staughton LJJ agreed with his judgment.    [Back]

Note 27   See [31] of Sir Andrew Park’s judgment.    [Back]