BNZ INVESTMENTS LIMITED AND ORS V COMMISSIONER OF INLAND REVENUE HC WN CIV 2006 485 697

BNZ INVESTMENTS LIMITED AND ORS V COMMISSIONER OF INLAND REVENUE HC WN CIV 2006 485 697 7 December 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2006 485 697UNDER The Judicature Amendment Act 1972 AND UNDER Part VII of the High Court Rules IN THE MATTER OF The Tax Administration Act 1994 BETWEEN BNZ INVESTMENTS LIMITED First Plaintiff AND BANK OF NEW ZEALAND Second Plaintiff AND BNZ INTERNATIONAL LIMITED Third Plaintiff AND COMMISSIONER OF INLAND REVENUE Defendant Hearing: 7 August 2006 Counsel: A R Galbraith QC, A S Butler and A S Olney for the Plaintiffs R A Dobson QC and R Ellis for the Defendant Judgment: 7 December 2006JUDGMENT OF WILD J Introduction[1] I regret that the parties have not long ago had a decision on this application, argued on 7 August. [2] For decision is an application by the defendant (the CIR), seeking orders for limited discovery in this proceeding.[3] This proceeding is an application by the plaintiffs (the BNZ) for judicial review of a decision by the CIR on 9 May 2006 declining to give a binding ruling under s91E Tax Administration Act 1994 (TAA) on a structural financing transaction entered into by the BNZ with a foreign counterparty(ies). [4] That transaction is similar to the six transactions in issue in the three proceedings I consolidated in the judgment I delivered yesterday in BNZ v CIR WN HC CIV 2004 485 1059; CIV 2005 485 1045 and CIV 2006 485 1028 (2004, 2005and 2006). [5] The transaction in issue here is AIG 2. The date of AIG 2, 24 January 2002, puts it after the Gen Re 1, CSFB, Gen Re 2, Rabo 1 and Rabo 2 transactions in chronological sequence, but before the Lehmans transaction. It is also after the AIG 1 and Morgan Stanley transactions in respect of which the BNZ obtained binding rulings from the CIR, as to some components. [6] Unlike the six transactions in issue in 2004, 2005 and 2006, AIG 2 was tax positive at the New Zealand end. [7] On 25 March 2002, two months after entering into AIG 2, the BNZ sought a binding ruling from the CIR. [8] What followed is pleaded in paragraphs 20-60 of the BNZ's amended statement of claim of 13 June, pleadings substantially (but not wholly) admitted. In short, after four years, payment of $87,213.33 in application fees, incurring over $200,000 in legal fees, and a great deal of correspondence with, and submissions and representations to, the CIR, the CIR declined to give a ruling. The BNZ is, understandably, annoyed. [9] Against that background, the BNZ seeks: a) An order in the nature of mandamus requiring the CIR to make a ruling under s91E.b) Declarations that the CIR is not entitled to decline to rule under ss 91E(3)(b), (4)(a) and (4)(j) or 91EF, and that his declinature was unlawful. c) Damages equating to the application and legal fees incurred by the BNZ. [10] That relief is sought upon five causes of action: a) Illegality: None of the statutory provisions relied on by the CIR as grounds for declining to rule apply here. This challenges the CIR's interpretation of the relevant statutory provisions, as he applied them to this case. b) Irrelevant considerations/improper purposes: In declining to rule, the CIR was unduly influenced by the potential impact of a ruling (obviously, one which favoured the BNZ) on the CIR's position in his litigation with the BNZ and other trading banks over similar structured finance transactions. Alternatively, the CIR declined to rule for the improper strategic purposes of that litigation. c) Acting under dictation: The CIR made his decision acting under the dictation or influence of members of the Corporates Unit or Litigation Management Unit in the Inland Revenue Department (IRD) who lacked delegated authority to determine the BNZ's application. d) Legitimate expectation: From its four years of communications with the IRD between its application and the CIR's decision to decline to rule, there arose a legitimate expectation on the BNZ's part that the CIR would rule on its application and would not decline to rule. e) Delay (ultra vires): In unreasonably delaying the application and then declining to give a ruling the CIR acted outside his power and unlawfully.Discovery principles[11] Counsel agree that ordering discovery in a judicial review proceeding is in the Court's discretion. Section 10(2) Judicature Amendment Act 1972 empowers the Judge presiding at the r10 conference to:(i) Require any party to make discovery of documents [12] Beyond that, there was some disagreement about current discovery principles as they apply to judicial review. For the CIR, Mr Dobson contended that "a more limited approach" had the endorsement of at least three Judges of this Court in the last few years, namely:• Priestley J in Air New Zealand Limited v Auckland International Airport Limited (2001) 16 PRNZ 783.• Hammond J in Wellington International Airport Ltd v Commerce Commission CP151/02, High Court Wellington, 23 July 2002 (WIAL).• MacKenzie J in Powerco Ltd v Commerce Commission CIV 2005 485 1066, 10 March 2006, particularly [7] and [20]. [13] Mr Dobson relied particularly on these passages in Hammond J's judgment inWIAL v Commerce Commission:[44] And Judges in the difficult area of judicial review in significant public interest litigation have an even greater responsibility to see that issues are narrowed, and that only what is truly required is laid before the court. An illustration of the sort of constraints that courts have thought appropriate to apply here, are the restriction on rights to cross-examination on affidavits (see Roussel Uclaf v Pharmac [1997] 1 NZLR 650). To put this another way, what is "necessary" has to be understood in the modern context of judicial review. [45] it follows that the question which has to be asked in this instance, is this: can this court fairly and effectively adjudicate upon the issues raised on these pleadings without the additional material which is sought by this application for discovery?[14] Mr Dobson suggested some doubt had recently been cast over the extent to which judicial review by its nature requires limits to be put on the tools available to the parties and the Court. He referred to my own judgment in Powerco Ltd v Commerce Commission WN HC CIV 2005 485 1066 9 June 2006 and to the judgment of Asher J in Qiong v Minister of Immigration WN HC CIV 2005 404 5202 24 July 2006. Since Mr Dobson made that submission, the Court of Appeal has allowed the Commerce Commission's appeal from my judgment in Powerco, ruling out cross-examination. In doing so, the Court re-affirmed, as a relevant aspiration, what Cooke P had said in Minister of Energy v Petrocorp Exploration Ltd[1989] 1 NZLR 348 at 353 as to the desirability of s10 being amended to enable a Judge to give all necessary or appropriate preliminary directions:" in order to fulfil the purposes of judicial review as a relatively simple untechnical and prompt procedure "[15] That is an up-to-date reminder that judicial review is still intended to be a comparatively simply process of testing that public powers have been exercised after a fair process, and in a manner which is both lawful and reasonable. I read it as strongly endorsing what Hammond J said at [44] in WIAL about the responsibility resting on Judges dealing with judicial review to narrow the issues, and reduce the material placed before the Court to the necessary minimum. [16] Mr Galbraith took issue with Mr Dobson's suggestion that a more limited approach to discovery was appropriate in a judicial review proceeding such as this. He referred to the earlier judgment of Master Gendall in WIAL, reported at (2003) 16 PRNZ 895. From the authorities, Master Gendall gathered at [26] the general principles he considered applied to discovery in judicial review proceedings:1. Discovery is available in these proceedings. 2. The decision whether to grant discovery in judicial review proceedings should be made according to the same principles of relevance that apply in normal litigation. 3. However the nature of judicial review proceedings will mean that discovery is sometimes inappropriate.[17] Mr Galbraith then referred to Hammond J's statement at [40] in WIAL that:[40] The scope of discovery is therefore generally determined by a liberal construction of the pleadings.Discovery in this case[18] Mr Dobson started by summarising the BNZ's five causes of action, in much the same way as I have done in [10] above. He categorised the first four causes of action as simply seeking, upon different grounds, the overturning of the CIR's 9 May decision. The fifth cause of action sought an order that a (lawful) ruling then be issued. Mr Dobson indicated that, should the Court hold that the CIR could not lawfully decline to rule, with the consequence that his decision to decline to rule was unlawful, then the CIR would concede that an order in the nature of mandamus requiring him to give a ruling was appropriate. [19] In paragraph 58 of his 4 July 2006 statement of defence to the BNZ's amended statement of claim, the CIR pleads that he personally made the impugned 9 May decision. Mr Dobson indicated that the CIR will therefore give evidence at the substantive hearing of this proceeding as to the background to and the reasons for that decision, which was communicated to the BNZ by letter dated 22 May 2006. Mr Dobson advised that, depending on the nature of the BNZ's affidavit evidence, the CIR may also file an affidavit from a member of the IRD's Rulings Unit relating to the course of conduct that it alleged to found the BNZ's fourth cause of action (legitimate expectation). [20] On that basis, Mr Dobson advised that the CIR accepts that he must discover documents relevant to: a) His 9 May decision. b) The course of conduct that allegedly gave rise to the BNZ's "legitimate expectation". [21] Expanding on those two categories, Mr Dobson accepted that the CIR's discovery should encompass:a) Any material the CIR took into account in making his 9 May decision. In addition to documents the CIR specifically referred to in his decision, or saw in the course of reaching it, Mr Dobson accepted that all documents recording meetings attended by the CIR at which the AIG 2 application was discussed should be discovered. b) All documents comprising or evidencing communications between the BNZ and the CIR which may contradict or differ from the detail of those communications pleaded by the BNZ in support of its legitimate expectation cause of action. c) Any other documents which the CIR proposes to rely on at the substantive hearing. [22] Mr Dobson suggested that approach was an entirely orthodox one. He explained that the CIR had applied for discovery orders because the BNZ had, through its solicitors, advocated a more expansive view as to the appropriate scope of discovery. [23] In its notice of opposition to the CIR's discovery application, the BNZ listed seven categories of documents, the discovery of which it contends is necessary for the proper and expeditious determination of this proceeding. I intend dealing in turn with each of these categories. I will set out the category, summarise the opposing arguments and give a ruling on it. [24] The first category is:List of filesA list of all files held by IRD that contain documents specifically concerning the Application. This list should include the name of the person or the Unit who/that is the fileholder, and the date upon which the file was opened (if known) and/or closed (if known). If the precise date of creation/closure of the file is unknown, please provide as close an approximation as possible (eg month, year).[25] Mr Galbraith submitted that this list is relevant to the BNZ's first, second and third causes of action. It is necessary to determine who within the IRD considered the application and when. In particular it is necessary to understand who, within the separate Rulings, Corporates and Litigation Management Units of IRD, considered the application and when. A particular aspect is the consideration of the provisions of the TAA relied on by the CIR. It is also necessary to understand when the CIR himself became involved with the application. Mr Galbraith submitted that this information is important because the Rulings Unit was the body to which the CIR had delegated the task of determining the application. It will enable the BNZ to establish the fact and nature of the internal disagreement within the IRD over the application, and the timing of the CIR's intervention in that disagreement. [26] Mr Dobson submitted that the list of files has no obvious bearing on the CIR's decision and that discovery of it is not therefore appropriate. [27] The BNZ's first three causes of action impugn the CIR's decision on the grounds of its legality and correctness (causes of action 1 and 2) and on the ground that it was made under dictation, or under undue influence from improper quarters (the third cause of action). [28] If the CIR's decision is to survive review, the Court must be satisfied that the CIR correctly understood and applied the law and that he did not factor in extraneous considerations. Equally, the Court must be satisfied that the CIR's decision was his own, and not one dictated to him, or unduly influenced, by some unauthorised person(s). The particular allegation here is that the CIR's decision was in fact made by, or was at least unduly influenced by, the Corporates and/or Litigation Management Units of the IRD, whereas it was the Rulings Unit which had the delegated authority to give a ruling. Although there is no application to strike out the third cause of action, I observe that it seems to me a bold if not inappropriate one where the CIR has himself made the decision. Such an allegation is more appropriate, or at least more usual, in a situation where the allegation is that a person senior to the decision maker dictated the decision. Such an allegation was made, for example, in Edwards v Toime (No 2) [2005] NZAR 228.[29] On that basis, all documents recording or evidencing the CIR's knowledge of or involvement in the BNZ's AIG 2 application, and considered by the CIR in making his 9 May decision, are relevant and must be discovered. This seems to me to coincide with the categories of discoverable documents contended for by the CIR: [20]-[21] above. But I cannot see that documents evidencing the views of personnel in the Rulings, Corporates and Litigation Management Units of IRD which were neither known to nor communicated to the CIR, can be relevant. [30] For example, assume IRD officer X in the Rulings Unit (or, for that matter, in either the Corporates or Litigation Management Units) had a particular view of the facts relevant to the application and/or the law applicable to it, and of the appropriateness of giving a binding ruling. And assume that X's views were neither known or communicated to the CIR. X's views, whatever they might be, cannot be relevant to the legality and correctness of the CIR's 9 May decision. It is the CIR's own understanding and assessment of the relevant facts and considerations, and of the applicable law which will be in issue. Still less could X be said to have influenced, let alone dictated to, the CIR. [31] In paragraph 20 of its amended statement of claim, the BNZ alleges its application was allocated to Mr Bruce Young, Manager in the Rulings Unit. The CIR admits that. Mr Galbraith's oral submissions inferred that the BNZ had been disadvantaged when Mr Young (expert and knowledgeable about the AIG 2 transaction) did not rule on the BNZ's application, but the CIR (neither expert nor knowledgeable) did. Mr Galbraith mentioned that AIG 2 was identical to a similar transaction previously ruled on by the IRD positively. I think that refers to either AIG 1 or Morgan Stanley. [32] Mr Galbraith submitted that if Mr Young had made the decision, then all the material the CIR now says is not discoverable would have been discoverable. Any IRD decision must be justifiable on the basis of the knowledge of the whole IRD, and not just that of the CIR himself. The BNZ is entitled to have: a) All the information relevant to the ruling.b) Everything showing whether the CIR took that information into account. c) Everything indicating whether the CIR correctly understood that information. [33] Thus, reiterated Mr Galbraith, the BNZ is entitled to discovery of everything it would have been entitled to if Mr Young had made the decision. Mr Galbraith hammered this home by pointing out that the BNZ has paid ($87,213.33 + GST) for all that information. [34] If this is a submission that the BNZ is entitled to discovery of all documentation relevant to establishing what the CIR knew about or saw, relevant to his 9 May decision, then I have already indicated that I accept that. [35] If it is submitted that the BNZ is entitled to all discoverable material in any part of the IRD that might have some relevance to the banks' (or just the BNZ's) structured finance transactions, and disagreement within the IRD as to the correct tax treatment of them, then I do not accept that. Discovery of that magnitude would be as oppressive as it is irrelevant to the issues in this proceeding. Such wide ranging discovery has not in my experience been routinely ordered in judicial review proceedings. [36] It may well be that a disagreement within the IRD as to the correct tax treatment of AIG 2, and/or the appropriateness of giving a s91E ruling on AIG 2 given the litigation between the banks and the CIR over similar transactions, was a factor (factors) in the CIR deciding that he should make the decision himself, and in the decision he made. If so, then discoverable material relevant to the CIR's knowledge and consideration of those matters must be discovered. But not otherwise. [37] I am unable to see the relevance of the list to the BNZ's first, second and third causes of action. I therefore rule against the BNZ on discovery of the first category of documents.[38] The second category is:Documents evidencing relevant delegationsDocuments evidencing the relevant delegations granted to the persons involved in determining the Application and, in particular, of the person who made the decision to decline to rule on the Application.[39] Mr Galbraith submitted that documents showing the relevant delegations are relevant and necessary for the following reasons: a) First cause of action: to determine which person(s) within the IRD was or were entitled to determine the application over the four years during which it was under consideration by the IRD. b) Second and third causes of action: to determine whether other units within the IRD who considered the application had the necessary authority to do so. In particular, it is necessary to determine who was in charge of managing this process, given the conflicting views within the IRD. [40] I do not accept these arguments. In my view, Mr Dobson is correct in submitting that the fact that the CIR personally made the decision renders any delegations irrelevant. Obviously, that would not be so had the decision been made by a person in the IRD's Rulings Unit, who the BNZ alleged lacked the requisite delegated authority. I rule against the BNZ on the second category of documents. [41] The third category is:Communications referred to in the amended statements of claim and defenceThe communications referred to in the amended statement of claim and any further communications referred to in the amended statement of defence, or records of them.[42] There is no issue here. Mr Dobson indicated that the CIR accepts that all documents relevant to the BNZ's claimed legitimate expectation are relevant and discoverable.[43] The fourth category is:Documents recording consideration given to the applicationDocuments recording the consideration given by the Rulings Unit, the Corporates Unit, the Litigation Management Unit, the Commissioner, and the delegate (if any) who made or would have been empowered to make the decision to decline to rule on the Application to: (aa) The Application; (bb) The relevance of sections 91E(4)(a), 91E(4)(j), 91E(3)(b) and/or 91EF to the Application; and/or (cc) The impact that a ruling on the Application may have on disputes related to the Other Transactions.[44] The submission for the BNZ is that discovery of all documents recording the consideration given to the application over the four years by any part of the IRD is relevant and necessary to all five causes of action. In essence, the BNZ alleges that the CIR made his decision after four years for improper strategic litigation purposes and as a means of avoiding having to determine an internal difference of view as to the application, between the Rulings Unit on the one hand and the Corporates and Litigation Management Units on the other hand. Accordingly, the documents sought are relevant and necessary to show that the CIR had undue regard for the effect that a binding ruling might have on the position being taken on his behalf by the Corporates and Litigation Management Units in other proceedings concerning issues in relation to other transactions. [45] Mr Dobson's submission for the CIR is that only those documents recording consideration given to the application that were personally considered by the CIR when making his 9 May decision are discoverable. [46] These opposing viewpoints are much the same as those which I outlined and ruled upon in relation to category 1 above. For the reasons I gave in relation to that category, I rule against the BNZ on this fourth category of documents also.[47] The fifth category is:Submissions made to the Rulings Unit and CIR regarding the applicationSubmissions, representations and other material received or recorded by the Rulings Unit, the Commissioner and the person who held delegated authority to make the decision to decline to rule on the Application, for consideration in the context of determining the Application. This would include submissions made by the Corporates Unit referred to in the amended statement of claim.[48] The opposing positions are much the same in this category also. The BNZ submits that all submissions, representations and other discoverable material received or recorded by the Rulings Unit, the CIR and any delegate, are relevant and necessary to all the causes of action. The CIR counters that only those documents considered by him in making his 9 May decision are discoverable. [49] For the reasons already given, I rule against the BNZ on this category also. [50] The sixth category is:Documents recording the CIR's analysis of certain binding rulings obtained by the plaintiffsDocuments recording the CIR's analysis of the applications for binding rulings BR Previous 96/154, BR Previous 96/155, BR Previous 97/273, and BR Previous 03/76 including consideration of sections 91E(4)(a), 91E(3)(b) and/or 91EF in the context of those applications for binding rulings.[51] The BNZ submits the documents recording the consideration of the four binding rulings referred to (all of which relate to BNZ transactions) including consideration of the provisions in the TAA referred to in the context of those applications, are relevant and necessary to all its causes of action. In particular, the BNZ contends for relevance and necessity in order to show that: a) The CIR considered ruling applications for similar transactions. b) Those similar transactions involve questions of fact.c) The CIR dealt with those issues by making the ruling subject to certain conditions and assumptions rather than declining to rule. d) Accordingly, that the only explanation for the CIR having declined to give a ruling in this case is that the CIR was seeking to avoid a situation where the Rulings Unit had arrived at an interpretation of certain tax laws that conflicted with that being relied on by the Corporates and Litigation Management Units in litigation on other transactions. [52] The CIR again submits that only those documents considered by him in making his 9 May decision should be discovered. [53] Again, I rule against the BNZ, and for the reasons I have already given. The BNZ is perfectly entitled to put the four other binding rulings in evidence, in fact they are surely capable of admission by consent, reserving for submissions the issue of their relevance. But it seems to me those rulings, particularly as to the conditions and assumptions upon which they were given, speak for themselves. The detailed consideration that went into them in my view has no relevance to the issues in this proceeding. [54] The seventh and final category is:Documents recording the CIR's policy regarding the use of conditions and assumptionsDocuments held by the IRD which record the IRD's general policies as to the use of conditions and assumptions in the context of considering applications and assumptions in the context of considering applications for binding rulings that raise issues in connection with sections 91E(4)(a), 91E(4)(j), 91E(3)(b) and/or 91EF.[55] The CIR submits that general policy statements can have no bearing on any of the BNZ's grounds of challenge to the CIR's 9 May decision. Discovery of them is not therefore appropriate.[56] The BNZ had three submissions on this final category of documents. First, the type of policy statements sought is limited to a clearly defined class. Second, that class relates directly to a number of the matters in issue, namely the CIR's improper reliance on the exceptions to ss 91E(4)(a) (questions of fact) and 91EF (assumptions about future events). Third, s6 requires the CIR to protect the integrity of the tax system, including by acting fairly and impartially and with regard to taxpayers' perceptions of the integrity of the tax system. [57] Although I have some doubt as to the relevance of any policy statements, I rule in the BNZ's favour on this category. I accept that they are potentially relevant, at least to the BNZ's second cause of action. A further consideration is that I accept Mr Galbraith's submission that the class of documents sought is tightly and clearly defined; there is not here the objection of oppressively wide-ranging discovery that applies to some of the other categories.Result[58] I order that the CIR is to discover documents in the following categories: a) Any documents taken into account by the CIR when making his 9 May 2006 decision. That includes all documents specifically referred to by him in his decision, or seen by him in the course of considering it and all documents recording or evidencing meetings attended by the CIR at which the BNZ's AIG 2 application was discussed. b) All documents evidencing communications between the BNZ and the CIR relevant to disputed aspects of the communications pleaded by the BNZ in support of its fourth (legitimate expectation) cause of action. c) Documents recording the CIR's policy regarding the use of conditions and assumptions in the context of considering applications for binding rulings that raise issues in connection with ss 91E(3)(b), (4)(a) and (j) and/or 91EF.d) Any other documents which the CIR proposes to rely on at the substantive hearing of this proceeding.Costs[59] The CIR has substantially, but not wholly, succeeded with his application to limit discovery. I allow him 80% of 2B costs on his application.Solicitors: Russell McVeagh, Wellington for the Plaintiffs Crown Law Office, Wellington for the Defendant