BEACHAM HOLDINGS LTD V COMMISSIONER OF INLAND REVENUE HC NAP CIV-2010-441-000355

BEACHAM HOLDINGS LTD V COMMISSIONER OF INLAND REVENUE HC NAP CIV-2010-441-000355 4 February 2011IN THE HIGH COURT OF NEW ZEALANDNAPIER REGISTRYCIV-2010-441-000355UNDER THE TAX ADMINISTRATION ACT 1994IN THE MATTER OF THE INCOME TAX ACT 1994 AND THEINCOME TAX ACT 2004BETWEEN BEACHAM HOLDINGS LTDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 2 February 2011Counsel: R J Cullen for PlaintiffH L Dempster for DefendantJudgment: 4 February 2011 15:30:00I direct the Registrar to endorse this judgment with a delivery time of 3.30pm on the 4th day of February 2011.RESERVED JUDGMENT OF MACKENZIE J[1] The defendant applies for further and better discovery by the plaintiff in these proceedings.[2] The proceedings are a challenge to the Commissioner's assessment of theplaintiff for the 2005, 2006, and 2007 tax years. The issue is whether the plaintiff is able to offset losses incurred by an associated company, Beacham Independent Jaguar Specialists Limited. The ability to offset losses is dependent upon the two companies having the necessary commonality of shareholding. Both companies arefamily companies owned by a husband and wife. At issue is the respective proportions in which the husband and the wife owned the shares in the plaintiff company. In October 2000 the husband owned 99 per cent and the wife owned one per cent. That did not give the required level of commonality. They contend that a transfer by the husband to the wife, so that each held 50 per cent of the shares, was executed in October 2000, but the documentation was lost and not recorded in the share register. In 2006, the husband and wife were advised to enter into a relationship property agreement to record the transfer of the shares in 2000 and lawyers were instructed. The relationship property agreement failed to specify that the transfer had taken place in October 2000. There were subsequent resolutions of the shareholders and directors of the plaintiff agreeing to a rectification of the share register to record the transfer in October 2000, and in 2008/09 there were Family Court proceedings to declare the ownership of the shares.[3] In these proceedings, the plaintiff contends that the October 2000 transfer is effective. The defendant sought discovery. An affidavit of documents was filed and, following objection taken to the form of the affidavit, a further affidavit was filed.That further affidavit did not meet the defendant's concerns and the presentapplication was filed.[4] The first three items sought relate to discovery of relevant documents held bythe plaintiff's solicitors, accountants, and tax adviser. I consider that there is force in Mr Dempster's submission that neither of the affidavits filed gives sufficient particulars of the steps taken to fulfil the plaintiff's obligations under the discoveryorder in respect of those categories of documents. The initial affidavit included a general statement that the deponent had diligently searched for all documents required to be discovered, but did not specifically refer to these categories of files, and disclosed only limited documentation. The plaintiff's response, incorporatedinto the second affidavit, was to invite the defendant to inspect the relevant files, in essence to make its own assessment as to relevance. An informal process such as that apparently envisaged by the plaintiff does not, unless accepted by the defendant,meet the plaintiff's discovery obligations. The responsibility is on the party givingdiscovery to make its own assessment of the relevance of particular documents, having regards to the well established Peruvian Guano test. The discovery processstarts with a process of self assessment by the party giving discovery. That imposes a heavy responsibility on that party. The self assessment will be respected by the Court and will not be disturbed without reason being shown. The nature of the process is such that the particulars which are required to be given of the steps taken to fulfil the discovery obligations, form an important part of the process. I consider that, in this case, particulars of the steps taken to obtain and search the files of the solicitors, accountants, and tax adviser, for the purpose of determining what relevant documents there may be on those files is a necessary part of the discovery process in this case. Those are such an obvious potential source of relevant documents that they must be properly inspected and assessed and a statement on oath that this has been done is required. Obviously, any relevant documents found must be disclosed in the list.[5] The next category of documents is those relating to any claims made by the plaintiff or the shareholders against its accountants alleging breach of duty in respect of the failure to arrange a transfer of shares. Again, this is an obvious source of inquiry as to the existence of any relevant documents. The affidavit should make clear that this potential source has been investigated. The relevance of any documents falling within that category will, as with the other documents, be a matter for self assessment by the plaintiff.[6] Counsel for the defendant also takes issue with the way in which claims for privilege have been raised. Issues of privilege can arise only in respect of relevant documents, since irrelevant documents are not to be discovered. It seems that there may be potential claims for privilege for both legal advice privilege and litigation privilege. The plaintiff in the affidavit has sought to limit the offered inspection offiles to those preceding the date of the Commissioner's notice of proposed notice ofadjustment. No artificial date range can be imposed on the files which must be considered for discovery purposes. All relevant documents must be discovered, without limitation as to date. Whether or not privilege, whether legal advice privilege or litigation privilege, can be claimed depends upon an assessment of the particular document against the relevant test for privilege, and this task must be undertaken by the party giving discovery.[7] The plaintiff has claimed confidentiality in respect of certain documents, on the basis of the order made in the Family Court proceedings as to non publication and, in the affidavit, notes that the claim for confidentiality for the specifieddocuments "is only to the extent that this spirit of the order by the Family Court as toconfidentiality by preserved to the extent that it can be preserved in this proceeding". Mr Dempster submits that that formulation is insufficient to state the restrictions imposed, in terms of r 8.20(2)(e). In the circumstances, I consider that it is sufficient for the plaintiff to draw attention to the existence of the Family Court order. It will be for the defendant to ensure that it is not in breach of the terms of that order.[8] In the light of the foregoing, I consider that the defendant is entitled to the orders sought in para 1.1 of the application. The affidavit must expressly state that the potential sources of documents referred to in para 1.1.1 to 1.1.4 have been reviewed. Any claim for privilege should be made as specified in paragraph 1.5. There will be an order in terms of para 1.1 of the defendant's application. I do not consider that any order is required in respect of paragraph 1.2, unless the plaintiff seeks some confidentiality which goes beyond that already attaching to the Family Court proceedings.[9] The defendant is entitled to costs on this application, on a 2B basis."A D MacKenzie J"Solicitors: R J Cullen, Barrister, Wellington for plaintiff(Instructing Solicitor: Brett Carpenter, Barrister and Solicitor, Hastings)Crown Law, Wellington, for defendant