Phones 4u Ltd & Anor, Re

Confidentiality alone does not justify a private hearing. The court must assess the nature and importance of the information, the likely damage from disclosure, and whether protective measures short of a private hearing are practicable.

For VAT purposes, contractual payment mechanisms must be understood in their commercial and economic context. Where advance payments are retained and later adjustments merely calculate further remuneration, the adjustments do not constitute refunds or mutual set-offs. VAT is then chargeable on the net cash payments actually received, with no reduction of consideration requiring regulation 38(6) treatment.

The joint office-holders of nine companies in the Phones 4U group applied for directions and declarations under section 112 of the Insolvency Act 1986 and paragraph 63 of Schedule B1 to that Act. The application concerned the VAT treatment of commission payments under contracts with EE Limited and Vodafone Limited.

The contracts provided for payments on account followed by complex adjustments. The central issue was whether those adjustments involved refunds and mutual set-offs, or instead formed part of a calculation mechanism producing the agreed remuneration. The court also considered whether the hearing should be conducted in private because the contracts contained commercially sensitive information.

1. Private hearing. The court accepted that CPR 39.2(3)(c) did not create an automatic right to a private hearing whenever confidential information was involved. Following the approach in Re Shuldham [2012] EWHC 1420 (Ch), the court considered the nature and importance of the information, the likely commercial damage from disclosure, and the practicality of protecting confidentiality through more limited measures. The hearing was properly conducted in private because the pricing structure was central to the submissions and it was impracticable to move repeatedly between private and public sessions. The order also required written submissions on redactions before publication.
2. Economic reality and VAT. The court adopted the approach that VAT analysis requires a realistic appreciation of the transactions and proper regard to economic realities, as explained in Revenue and Customs Commissioners v Loyalty Management UK Limited [2013] UKSC 15. The contractual wording had to be considered together with the commercial purpose and the way the arrangements operated in practice.
3. Construction of the payment arrangements. The EE and Vodafone contracts created a pre-estimated payment stream and a final payment stream. The initial payments were retained by Phones 4U and were not unwound or repaid. The later adjustments were a calculation mechanism producing additional deferred consideration for the earlier services. The references to set-off did not create mutual debts or separate payments capable of independent enforcement.
4. VAT consequence. Because there was no refund or reduction of consideration, regulation 38(6) of the VAT Regulations did not arise. VAT was chargeable only on the net cash payments actually received during the administration or liquidation. The applicants were therefore entitled to the declarations sought, and the court made an order in the terms of the draft.

not stated in the judgment.