Illegality - seller entering into contract with intention to defraud Customs & Excise - buyer unaware of dishonest intention - dishonest intention too remote to render contract unenforcable

21st Century Logistic Solutions Ltd (In Liquidation) v Madysen Ltd: QBD (Mr Justice Field): 17 February 2004

The claimant entered into a contract for the sale of goods whereby the defendant agreed to sell the goods on directly to a third party.

The claimant intended to defraud Customs & Excise by not accounting for or paying VAT arising on the sale.

The defendant was unaware of that intention.

Sale and delivery took place and the defendant received payment from the third party.

The claimant invoiced the defendant in the sum of 905,220 including VAT of 134,820.

In the claimant's later liquidation Customs & Excise ranked as a preferred creditor for the VAT due on the supply of the goods to the defendant.

The claimant, suing by its liquidator, claimed the price of the goods.

The defendant did not dispute delivery or quality of the goods, but contended that it was not liable for the price on grounds of illegality.

John Briggs (instructed by Boyes Turner, Reading) for the claimant; Gerard McMeel (instructed by Simon F H Holmes, Bristol) for the defendant.

Held, giving judgment for the claimant, that the claimant's fraudulent intention was too remote from the contract to render the contract unenforcable on grounds of illegality; that the VAT element in the price paid for a supply was not held on trust for Customs & Excise by the supplier; that a taxable supplier's only material obligations under VAT legislation were to account for VAT and to keep proper records; that the use of the VAT element of sale proceeds for some purpose other than payment of VAT was not unlawful; that the claimant's acts such as acquiring VAT registration and issuing a VAT invoice were not unlawful; that the contract itself was lawful and merely provided the opportunity for the individual behind the intended fraud to profit from it; that the intention that the contract should be part of a fraudulent design was insufficient for the defence of illegality to be made out; and that, accordingly, the claimant would have judgment for the sum of 905,220.