THE COMMISSIONER OF INLAND REVENUE V CHESTERFIELDS PRESCHOOLS LIMITED AND ORS CA CA607/2008

THE COMMISSIONER OF INLAND REVENUE V CHESTERFIELDS PRESCHOOLS LIMITED AND ORS CA CA607/2008 13 October 2008IN THE COURT OF APPEAL OF NEW ZEALAND CA607/2008 [2008] NZCA 420BETWEEN THE COMMISSIONER OF INLAND REVENUE Appellant AND CHESTERFIELDS PRESCHOOLS LIMITED First Respondent AND D J HAMPTON Second Respondent AND CHESTERFIELDS PARTNERSHHIP Third Respondent AND CHESTERFIELDS PRESCHOOLS PARTNERSHIP Fourth Respondent AND ANOLBE ENTERPRISES LIMITED Fifth Respondent Hearing: 10 October 2008 (By telephone conference) Court: O'Regan, Robertson and Arnold JJ Counsel: E Aspey for Appellant M Andrews for Respondents Judgment: 13 October 2008 Reasons: 17 October 2008 at 3 pm Reissued: 28 October 2008 Effective date of judgment: 13 October 2008JUDGMENT OF THE COURTWe make an order staying execution of the order made by the High Court on 30 September 2008 in Chesterfield Preschools Ltd v Commissioner of Inland Revenue HC CHCH CIV 2004-409-001596 pending determination of the appellant's appeal to this Court against that order. REASONS OF THE COURT(Given by O'Regan J) [1] On 13 October 2008 we granted the stay sought by the Commissioner of Inland Revenue in these proceedings. We indicated that we would give reasons at a later date. This judgment sets out those reasons. [2] The Commissioner and the respondents are involved in tax litigation in the High Court. An application for judicial review on behalf of the respondents is to be heard by the High Court next week. This is the second judicial review application to the High Court. [3] A Mareva injunction in favour of the Commissioner was granted by the High Court in 2005, but was subsequently discharged in 2007 and replaced by an undertaking by Ms Sisson, one of the partners in the second respondent and third respondent. However, in a judgment issued on 28 August 2008, Fogarty J made a new order freezing any dealings by the respondents with their assets pending the outcome of the judicial review proceeding (i.e. an order in the nature of a Mareva injunction). At the same time he adjourned an application by the respondents for approval of a proposal to borrow $150,000 secured on some of the property subject to the freezing order.[4] The application for approval of the proposed loan was subsequently modified (the amount was reduced to $108,500, including $18,500 of prepaid interest) and Fogarty J issued a minute on 8 September 2008 in which he said:Consent for the new reduced financing proposal from Basecorp Finance Limited will not be approved until the Court is satisfied that Basecorp Finance Limited know that the money advanced is intended to be used to meet continuing legal fees and general reasonable living expenses in addition to the cause of aggregation of titles. I am concerned that the figure of $108,500 and it would appear that only $20,000 of this is for the "proposed subdivision of proposed property security".[5] Having heard from counsel again on 30 September 2008, Fogarty J reconsidered the Basecorp proposal. He noted that the proposal was for finance from "a third tier lender", that the sum was $108,500, and that this involved a six month capitalised interest term at an interest rate of 15.75 per cent with a lender's fee of $8,000 and a broker's fee of $2,500, which meant that the actual cost of finance was in the order of 30 per cent per annum. [6] Having heard the Commissioner's objections, he decided that the proposed loan should be approved, notwithstanding its very high cost. He noted that up to $35,000 would be used for legal fees in relation to the respondents' judicial review action against the Commissioner and that the balance was intended to be used for title consolidation (aggregating the titles to properties subject to the freezing order), which would enhance the value and saleability of those properties. He mentioned in particular his concern that money should be provided to pay some of the outstanding legal fees to "give some kind of equality of arms between the parties in this litigation". He noted that the respondents' lawyers were owed $30,000 and that a further invoice for $25,000 was imminent. Thus the $35,000 would still leave about $20,000 owing to the lawyers, with the judicial review action itself still to be argued. [7] The Commissioner has appealed to this Court against the Judge's decision. He sought a stay from Fogarty J preventing the drawdown of the loan until after the appeal had been dealt with by this Court. The Judge heard from counsel by telephone on 3 October 2008. He determined that it was not appropriate for the High Court to stay the order approving the loan. He did, however, note that counsel for the Commissioner had flagged an application for further directions to ensure that ifthe loan was drawn down, the money would be applied to the aggregation of titles. He decided that was "an entirely appropriate application" but noted that it could not be heard immediately because counsel for the respondents had not had a chance to obtain instructions. The Judge therefore issued a judgment on 3 October in which he dismissed the application for stay but granted a limited stay until Friday 10 October or until this Court had earlier heard an application for stay. [8] In his judgment of 3 October 2008, Fogarty J indicated at [7] that he had doubts as to whether there was a right of appeal to this Court against his decision to approve the proposed loan from Basecorp. Neither party sought to argue that point in the telephone conference, but, without expressing a concluded view, we consider that it is likely that a right of appeal does exist. [9] Immediately after Fogarty J issued his judgment on 3 October 2008, the Commissioner filed an application for a stay in this Court. Given the imminent termination of the High Court stay order, this Court heard from counsel by telephone on Friday 10 October 2003. During that telephone hearing we indicated to counsel that we were minded to decline the Commissioner's application for a stay, so long as arrangements were put in place to provide assurance that the money drawn down from Basecorp was used only to pay legal fees and for the costs associated with the proposal to amalgamate titles of properties subject to the freezing order. [10] As already noted, the Commissioner had already signalled that he would be seeking assurances of that kind in the High Court. We granted a further stay until 5 pm on Monday 13 October 2008, to allow counsel for the respondents to obtain instructions and to provide undertakings which gave the assurance sought by the Court. [11] Counsel for the respondents filed a memorandum, as required, by 13 October 2008. But it did not contain undertakings of the kind sought by the Court. Counsel noted that he and the respondents had agreed on the terms of a proposed undertaking. But the principal respondent, Mr Hampton, had simultaneously advised counsel that he intended to lodge an appeal to the Supreme Court on behalf of the respondents on the basis that the conduct of the Commissioner on bringing the appeal was unlawfulas the Commissioner had failed to disclosed to the Court conduct concealing relevant information. He said that this was not a new concern of the respondents and that it would, to an extent, be traversed in the judicial review proceedings in the High Court next week. He said he had advised the respondents of this and the fact that the issue was not justiciable before this Court or the Supreme Court. [12] However, counsel said he had been advised by Mr Hampton that the appeal would be lodged once this Court's stay decision was available and, in those circumstances, counsel could not logically give an undertaking as this Court had made it clear during the telephone conference on 10 October that any undertaking would be a condition of the application for the stay being dismissed. He also noted that he could not be sure that the respondents would practically allow him to meet the terms of the proposed undertaking (which would require his firm to receive the loan money and ensure it was disbursed only for the authorised purposes). Counsel said that he had advised the respondents of the need for him to explain to this Court why an undertaking could not be given, and that they had advised their understanding of the position and consented to him disclosing these matters to the Court. [13] This left the Court in the position that it had no assurance that the money to be borrowed from Basecorp would be used only for the purposes of paying legal fees and paying for the amalgamation of titles, which were the purposes for which the loan was authorised by the High Court. In those circumstances we accept the Commissioner's submission that it would be wrong to allow the loan money to be drawn down in circumstances where there appear to be valid reasons for the Commissioner to appeal against the decision allowing the loan without safeguards as to the use of the loan money, and the failure to grant a stay would render that appeal right nugatory. We have to say we are surprised by the turn of events, because we anticipate that the sort of assurances we were seeking as a condition of refusing a stay and allowing the loan to be drawn down were very similar to those which the High Court would have been asked to impose in any event.[14] It was for these reasons that we granted the stay order sought by the Commissioner.Solicitors: Crown Law Office, Wellington for Appellant Minter Ellison Rudd Watts, Wellington for Respondents