COMMISSIONER OF INLAND REVENUE v W A WALLACE and C W MANCER, as executors of the Estate of KRIS McPHERSON ROBERTSON [2019] NZHC 1820

COMMISSIONER OF INLAND REVENUE v W A WALLACE and C W MANCER, as executors of the Estateof KRIS McPHERSON ROBERTSON [2019] NZHC 1820 [30 July 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-000194[2019] NZHC 1820UNDER Subpart 6, Part 6, Property Law Act 2007BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND WAYNE ANDREW WALLACE andCLIFFORD WILLIAM MANCER, asexecutors of the Estate of KRISMcPHERSON ROBERTSONFirst DefendantsAND BIANCA CAFÉ LIMITED (PreviouslyCOFFEE DISTRIBUTION NZ LIMITED)Second DefendantAND KAFFEE ESPRESSO NZ LIMITEDThird DefendantHearing: 29 July 2019Appearances: S Kilian for the Defendants (Applicant)N Malarao and J Mara for the Plaintiff (Respondent)Judgment: 30 July 2019Reissued: 31 July 2019REISSUED JUDGMENT OF ASSOCIATE JUDGE MATTHEWSThis judgment was delivered by me on 30 July 2019 at 3.30 pm pursuant to Rule 11.5Of the High Court RulesRegistrar/Deputy RegistrarDate:Introduction[1] The Commissioner of Inland Revenue seeks orders against each of thedefendants under s 348(2)(b) of the Property Law Act 2007 directing that each paysthe sum of $678,724 to a trustee for the benefit of the creditors of Coffee SuppliersLimited, which went into liquidation on 25 July 2012 by shareholders' resolution, andis now struck off the Register of Companies.[2] Section 348 is in Subpart 6 of Part 6 of the Property Law Act 2007, which istitled "Setting aside dispositions that prejudice creditors". It provides:348 Court may set aside certain dispositions of property(1) A court may make an order under this section –(a) on an application for the purpose (made and served in accordancewith section 347); and(b) if satisfied that the applicant for the order has been prejudiced bya disposition of property to which this subpart applies.(2) The order must do 1, but not both, of the following:(a) vest the property that is the subject of the disposition in theperson (for any applicable purpose) specified in section 350:(b) require a person who acquired or received property through thedisposition to pay, in respect of that property, reasonablecompensation to the person (for any applicable purpose)specified in section 350.(3) If the order does what is specified in subsection (2)(a), it may alsorequire a person who acquired or received property through thedisposition to physically restore some or all of that property that istangible personal property to 1 or more persons specified in the order.(4) Person who acquired or received property through the dispositionmeans a person who acquired or received property –(a) under the disposition; or(b) through a person who acquired or received property under thedisposition.(5) The order must not have effect so as to increase the value of a securityheld by a creditor over the debtor's property.(6) Subsection (5) overrides subsection (2) and section 350.(7) This section is subject to section 349.[3] Mr K M Robertson, whose executors are the first defendants, was at materialtimes a director of Coffee Suppliers Ltd (CSL), and two other companies, the secondand third defendants, Coffee Distribution NZ Limited, now Bianca Café Limited(Bianca) and Kaffee Espresso NZ Limited (Kaffee Espresso). On 3 October 2011 theCommissioner issued a statutory demand to CSL for a debt in respect of taxation whichthen stood at $355,076.78. CSL applied to this Court to set aside this statutorydemand, and the Commissioner opposed that application. Prior to that theCommissioner had declined to enter into an instalment arrangement for payment ofCSL's outstanding income tax. In January 2012 CSL applied to this Court for a judicialreview of that decision. The application to set aside the statutory demand was stayedby consent to allow for the review application to be decided. While these twoproceedings remained extant CSL, through the directorship of Mr Robertson, enteredinto two deeds, the first with Mr Robertson and Kaffee Espresso, and the second withMr Robertson and Bianca.[4] Both related to a debt which Mr Robertson owed to CSL on current account,which stood at $678,724.[5] The Commissioner pleads that by the Kaffee Espresso deed Mr Robertsonassigned his current account debt to Kaffee Espresso in repayment of a debt of $61,105that CSL owed Kaffee Espresso. On the same day Mr Robertson entered into a loanagreement with Kaffee Espresso recording that he owed that sum to that company.[6] The Commissioner pleads that by the Bianca deed Mr Robertson also assignedhis current account debt, this time to Bianca, in repayment of a debt of $613,992 thatCSL owed to Bianca. On the same day Mr Robertson also entered a loan agreementwith Bianca recording that he owed that company the same sum.[7] Both deeds were signed on 26 May 2012, as were the corresponding loanagreements. On 31 May 2012 CSL withdrew its judicial review proceeding, and theCourt set a new hearing date for its application to set aside the Commissioner'sstatutory demand. On 25 July 2012 Mr Robertson as the shareholder of CSL placedCSL into liquidation. At that date the Commissioner was owed $330,687.22.[8] The effect of the transactions was that Mr Robertson no longer owed his currentaccount debt to CSL.[9] The liquidator's first report on CSL showed available assets of $8,970, butsubstantial creditors' claims leading to an estimated deficit in return to unsecuredcreditors of $355,974. Despite being prompted by the Commissioner to do so theliquidators did not take any legal action against Mr Robertson, Bianca or KaffeeEspresso under the Companies Act 1993. No distribution was made to any creditor.CSL was struck off the Register of Companies on 25 February 2013.Application to strike out[10] The defendants apply to strike out this proceeding. The grounds stated in theirapplication are sparse and manifestly inadequate. They simply state that "the groundson which each order is sought are the plaintiff's cause of action is an abuse of processof the court." This is said to be "based on the principles of law set out in Part 16 ofthe Companies Act" and the application is said to be supported by an affidavit ofMr K Botes. It is also stated that the application is "made in reliance on inherentjurisdiction of the court and r 15.1 of the High Court Rules". Nothing in thisapplication, apart possibly from the reference to Mr Botes' affidavit, could give theCommissioner or the Court more than the merest hint of the basis upon which thedefendants might seek the intervention of the Court to prevent this applicationproceeding. The Commissioner took this point in her notice of opposition, as didMr Malarao in his written submissions.[11] Some illumination was cast on the basis on which the defendants bring theircase by the submissions of counsel for the defendants dated 3 July 2019 which werefiled on 18 July 2019.[12] Three arguments were relied on in support of the application:(a) The Commissioner cannot succeed, as the liquidators of CSL decided notto exercise their rights under the Companies Act in relation to thetransactions in issue;(b) Section 345(1)(b) of the Property Law Act is a complete answer to theCommissioner's case;(c) In any event debts owed by CSL to Bianca and Kaffee Espressorespectively are secured and rank above the Commissioner's debt, so theproceeding will not achieve the outcome the Commissioner seeks.[13] The issues to be decided in this case are whether any of these propositions iscorrect.Principles to be applied on a strike-out application[14] Rule 15.1 of the High Court Rules provides that a court may strike out a claimwhere the relevant pleading discloses, inter alia, no reasonably arguable cause ofaction, is frivolous or vexatious, or is otherwise an abuse of the process of the court.1[15] The principles on strike out are well-established. They were summarised bythe Court of Appeal in Attorney-General v Prince & Gardner as follows:2(a) Pleaded facts, whether or not admitted, are assumed to be true but do notextend to pleaded allegations which are entirely speculative and withoutfoundation.(b) The causes of action must be "so clearly untenable that they cannotpossibly succeed".(c) The jurisdiction is to be exercised sparingly and only in cases where theCourt is satisfied it has all the requisite material (but the fact that a strike-out application raises difficult questions of law, and requires extensiveargument, does not exclude the jurisdiction).1 High Court Rules 2016, r 15.1.2 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267, approved in Couch vAttorney-General [2008] NZSC 45, [2008] 2 NZLR 725 at [33] (Couch) and Carter Holt HarveyLtd v Minister of Education [2016] NZSC 95, [2017] 1 NZLR 78 at [10] (Carter Holt).[16] In the Supreme Court case of Couch v Attorney-General, Elias CJ (with whomAnderson J concurred) stated that it is inappropriate to exercise the strike-outapplication unless the court can be certain that a cause of action cannot succeed.3 HerHonour said:4 The case must be "so certainly or clearly bad" that it should be precludedfrom going forward. Particular care is required in areas where the law isconfused or developing [17] As established by the Court of Appeal in Attorney-General v McVeagh, thecourt is entitled to receive affidavit evidence on a strike-out application but willnormally not consider evidence that is inconsistent with the pleaded facts. Evidencedisputing pleaded facts will only be admissible where it shows that "an essentialfactual allegation is so demonstrably contrary to indisputable fact that the matter oughtnot to be allowed to proceed."5[18] The abuse of process ground for striking out captures instances of misuse ofthe court's process such as a proceeding that has been brought with an improper motiveor is an attempt to obtain a collateral advantage, beyond that legitimately gained froma court proceeding.6 The onus in establishing grounds for strike-out rests on the partyalleging abuse of process. The applicant must show that the proceeding was broughtfor an improper purpose.7 The courts have described this onus as being "a heavy one"and one that is to be exercised only in exceptional circumstances.8First issue : Can the Commissioner succeed given the liquidators of CSL did notimpugn the transactions under the Companies Act?[19] Mr Kilian for the defendants says that the Companies Act 1993 containsprovisions which enable liquidators to challenge transactions by companies inliquidation within certain periods and on certain grounds. He says that these3 This approach was more recently affirmed by the Supreme Court in Body Corporate No 207624v North Shore City Council [Spencer on Byron] [2012] NZSC 83, [2013] 2 NZLR 297 at [4].4 Couch v Attorney-General, above n 24 at [33]. See also at [40].5 Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.6 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR679, (2013) 26 NZTC 21-007, [2013] NZCCLR 10 at [89].7 Wallersteiner v Moir [1974] 1 WLR 991, [1974] 3 All ER 218 (EWCA Civ) at p 243 per LordJustice Buckley and p 252 per Lord Justice Scarman.8 Williams v Spautz (1992) 174 CLR 509 (HCA) at 529 cited in Merisant Company, Inc v FlujoSanguineo Holdings Pty Ltd [2018] NZCA 390, [2018] NZAR 1550, at [24].provisions include the grounds on which the Commissioner relies in the presentproceeding. Because the Commissioner raised her concerns about the transactions inquestion with the liquidator, and because the liquidator did not take any steps inrelation to the transactions in question, Mr Kilian submits that the matters now raisedhave already been dealt with under the Companies Act. He says that theCommissioner, by her actions or omissions, has accepted that the liquidators havecompleted their obligations under the Companies Act.[20] Mr Kilian goes on to say that the use of the Property Law Act provisions onwhich the Commissioner now relies is an attempt to undo and/or override and/orextend the provisions of the Companies Act and the powers of the liquidators, and hesubmits that the intention of the legislature, in passing the provisions of the PropertyLaw Act on which the Commissioner now relies, was not to create an overlap betweenthe two sets of provisions. From this he goes on to submit that the Commissioner isnow attempting to use the Court's inherent jurisdiction to override the powers whichthe legislature specifically and unambiguously gave to liquidators, under theCompanies Act, to avoid transactions.[21] It is not necessary to undertake a comparison of the provisions in theCompanies Act and the Property Law Act in order to dispose of this argument. Theplain position is that the Property Law Act contains provisions enabling a creditor inthe position of the Commissioner to bring a proceeding such as the present one, andto succeed on it if each of the necessary elements giving grounds for relief isestablished in evidence. The pleading adequately sets those out, and establishing eachof them is a matter for trial. The inherent jurisdiction of this Court is not invoked, noris it in any way relevant. Nor is it relevant that the liquidators of CSL failed to takeany action in relation to the transactions in question. That was an issue for theliquidators to decide. There is little evidence before the Court on why the liquidatordecided not to take proceedings under the Companies Act, but even if there were itwould not be relevant to the present case.9 Mr Kilian's criticism that theCommissioner has failed to identify how s 348(2)(b) of the Property Law Act overridesthe powers and duties of a liquidator under Part 16 of the Companies Act is entirely9 In their final report the liquidators of CSL say they discussed the position with "the shareholder"of CSL and were satisfied with the explanations given by him.without foundation. The two sets of statutory provisions are separate and are notinterrelated. The Commissioner is entitled to proceed under the Property Law Actnotwithstanding the decision of the liquidators, for their own reasons, not to takeproceedings under the Companies Act.Second issue : Is s 345(1)(b) of the Property Law Act a complete answer to theCommissioner's case?[22] Section 345(1)(b) provides that a disposition of property is not made withintent to prejudice a creditor if it is made with the intention only of preferring onecreditor over another.[23] Mr Kilian's argument is that the transactions recorded in the deeds wereintended to prefer Bianca and Kaffee Espresso over the Commissioner of InlandRevenue, so are within s 345(1)(b).[24] A decision on whether s 345(1)(b) applies hinges on whether the disposition ofproperty (Mr Robertson's current account) was made with the intention only ofpreferring one creditor over another. Section 345(1)(b) does not provide a bar to reliefif such an intention, whilst present at the relevant time, was not the only intention. InMcIntosh v Fisk,10 it was argued that a disposition of monies by Ross AssetManagement Limited prior to its liquidation had been made only with the intention ofpreferring one creditor over another, in terms of s 345(1)(b). The Supreme Courtrejected this argument:We do not accept that preferring one creditor over another was the only intentof the making of the payment to the appellant in this case. Another intent, anda much more important intent, was the continued concealment of the existenceof the Ponzi scheme, thereby deferring the inevitable detection of the existenceof the scheme. Accordingly s 345(1)(b) does not apply in this case.[25] Mr Malarao says that at trial the Commissioner will argue that CSL's actionshindered, delayed and defeated the ability of the Commissioner to recover debts owingto the Commissioner on liquidation. It will also be argued that the disposition ofMr Robertson's debt went beyond a mere preference of one creditor over another. Itwill be argued that Mr Robertson intended his debt to be transferred to other companies10 McIntosh v Fisk [2017] NZSC 78 at [39].under his control in order to avoid paying his debt to the Commissioner. Mr Malaraosubmits that this is precisely the kind of prejudice to which an order under s 348 isdirected.[26] I agree with Mr Malarao's submission that the question of whether or nots 345(1)(b) applies is an issue for trial. The intention of Mr Robertson cannot beestablished, as Mr Kilian seeks to do, on an application of the present kind. It is plainthat the effect of the assignment was as Mr Malarao submits. The debt ceased to be arecoverable asset in the hands of CSL and then its liquidators, realisation of whichwould have made funds available to the liquidators to distribute to creditors pursuantto the Companies Act. Intentions held at the time are for evidence and findings at trial,not speculation on an application to strike out.Third issue : Is the ranking of debts to the Commissioner, Bianca and KaffeeEspresso relevant?[27] Mr Kilian says that the debts owed by Kaffee Espresso and Bianca at the dateof liquidation were secured by General Security Agreements, whereas theCommissioner's claim is an unsecured debt. On that basis, even if the Commissionerwere to succeed, and funds were paid to CSL (CSL having been restored to the Registerof Companies), nothing would be available to be paid to the Commissioner of InlandRevenue in any event.[28] This submission cannot succeed on the facts as presently before the Court.Neither the deeds by which the transactions were effected, nor any security documents,are in evidence. There is reference in paragraphs 25 and 40 of the defendants'statement of defence to Kaffee Espresso and Bianca being secured creditors, butwithout any particulars of the security either says it holds.[29] It follows that the facts before the Court do not establish the position for whichMr Kilian contends.[30] Quite apart from that, even if after discovery of documents it is clear that thedebts to each of the defendants were secured, that does not necessarily mean that thiscase cannot succeed. This is because any such security agreements may well be thesubject of review under Subpart 6 of Part 6 of the Property Law Act 2007. Unders 345(2) a disposition of property includes the grant or creation at law or in equity ofa mortgage or charge. Whilst the Commissioner's claim does not presently involve anapplication to set aside any security that might be held, the pleading could be amendedat a later point. It is plain that a case should not be struck out if by amendment anydefect in it can be cured. That is not to say that there is presently any defect in theCommissioner's case: this would simply be an amendment after discovery should adifferent position emerge from that which was before the Commissioner when thiscase was commenced.Outcome[31] The defendants have failed to establish that the Commissioner's case is soclearly untenable that she cannot succeed. The application to strike out is dismissed.[32] The Commissioner is entitled to an award of costs against the defendants.Mr Malarao sought an uplift in scale 2B costs of 50 per cent. He produced to the Courta letter written without prejudice save as to costs. In the letter the arguments presentedat the hearing, and which have prevailed, were fully set out. All the defendants wereput on notice that if they did not withdraw the application, and they failed, increasedcosts would be sought.[33] I am satisfied that an uplift in costs is appropriate. I am unable to discern anymerit in any of the arguments presented for the defendants. It is fair to describe themas misconceived.[34] Mr Malarao assured me that actual costs exceed scale 2B costs with a 50 percent uplift. I am satisfied that award at that level is appropriate and I so order. Thedefendants will also pay disbursements._______________________J G MatthewsAssociate JudgeSolicitors:Kilian & Associates, AlbanyMeredith Connell, AucklandSolicitors: