COMMISSIONER OF INLAND REVENUE v DYMOCK & ANOR [2013] NZHC 3016

COMMISSIONER OF INLAND REVENUE v DYMOCK & ANOR [2013] NZHC 3016 [14 November 2013]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2013-485-8675[2013] NZHC 3016UNDER Companies Act 1993 and Parts 18 and 32of the High Court Rules 2009IN THE MATTER OF an interlocutory application without noticefor freezing orderBETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND MARCUS SEYMOUR DYMOCKFirst DefendantCHARLOTTE JANE DYMOCKSecond DefendantHearing: On the papersCounsel: P H Courtney for PlaintiffJudgment: 14 November 2013JUDGMENT OF WILLIAMS J[1] The Commissioner of Inland Revenue seeks a without notice freezing order under Part 32 of the High Court Rules in relation to a portion of the funds held by the defendants in their personal bank accounts.[2] On 1 November 2013, the Commissioner assessed the income tax liability of two related companies, Cheshirecom Ltd and Cheshirez Ltd in respect of the 2014 year. The assessment totalled $462,018.92. This resulted from the sale by each of the companies of two properties in Auckland. The Commissioner says the proceeds from such sale were assessable as taxable income. The first defendant is the soledirector and shareholder of these companies. The second defendant is his wife. The assessments were due to be paid on 4 November 2013.[3] Both companies went into voluntary liquidation on 26 June 2013. The proceeds from the sale of the Auckland properties was transferred to the accounts of each of the companies but (and although they were in liquidation) the first defendant retained control of the accounts and (it seems) the liquidator inexplicably allowed the first defendant to transfer the sale proceeds from the companies in liquidation to the personal bank accounts of himself and his wife on 1 August 2013.[4] The Commissioner argues that the transfers were completed prior to theIRD's assessment of the companies for income tax with a view to avoiding creditors.The funds may therefore be clawed back by a creditor in accordance with the terms of s 301 of the Companies Act 1990 if a person in the first defendant's position hasbreached his duty, or a trust in relation to the company. The Commissioner argues that the transfer creates a constructive trust, or alternatively because of the firstdefendant's knowing participation in a dishonest attempt to evade creditors, sufficient to create a remedial constructive trust.[5] The Commissioner says there is a real risk that those funds will be dissipated. He says that is because the defendants are currently located in the Netherlands, theytransferred the sale proceeds out of the companies' control and subsequently used atleast some of those funds for their own purposes, and the first defendant has a history of non-compliance, both personally and through his related companies.[6] An affidavit was filed by a senior investigator from the Department. The affidavit comprehensively set out the background to the transactions, the transfersand, the liquidation and the Commissioner's subsequent income tax assessment ofthe companies.[7] Freezing orders can be granted under Part 32 if:(a) the Commissioner can establish that she has a good arguable case against the two companies so as to warrant the making of a freezing order;(b) there are available assets to which the orders can attach, and clear connections between the defendants and the companies;(c) there is a factual basis upon which a prudent, sensible, commercial person might properly infer a danger that the defendants may dissipate or dispose of assets to defeat a judgment against them;(d) the interests of justice must fall on the side of the need to protect the creditor and against any prejudice or hardship to the defendants.[8] The Court can grant a freezing order against a third party if it is possible to establish a link between assets purportedly owned by the third party or parties in question and the party with whom the plaintiff has a claim that needs to be satisfied. I am satisfied that such a link can be established. As stated, the first defendant is the sole director and shareholder of the companies.[9] I am satisfied that there is a good arguable case that the transfers were made in order to avoid creditors, and that by the various mechanisms referred to in theapplicant's submissions, those funds may be clawed back by the Commissioner tomeet the companies' tax liabilities. I am satisfied that there are funds in the relevantaccounts of the defendants to which the orders may attach. I am also satisfied that the transfer from the companies to the defendants personally, and their current location in the Netherlands, would entitle a prudent, sensible, commercial person to infer that there was a danger of dissipation.[10] Finally, I am satisfied that the interests of justice weigh in favour of protecting the Commissioner and that any prejudice or hardship to the defendants (at least as I am presently informed) will be limited. Any other matters that the defendants may wish to bring before a court can be addressed adequately in the leave provisions of any order issued.[11] Ordinarily an applicant for a freezing order is required to provide an undertaking that it will comply with any order for the payment of damages to compensate the respondent for any damage sustained in consequence of the freezing order.1 However, the court has a discretion whether or not to require an undertaking if there are special circumstances.2 I agree with the Crown's submissions on thisissue. I see no practical purpose in requiring an undertaking.[12] As the Crown has indicated, a freezing order must not prohibit the defendants in this case from accessing their assets to pay ordinary living expenses, legal expenses or disposing of assets and making payments in good faith in the ordinary course of business.[13] The Crown indicates that there is ample other capital from which to meet expenses I have described here. At this stage I am prepared to rely on that indication on the basis that the cap on the value of the deposits frozen by this order is less than the monies held on account. If for any reason, the defendants wish to argue that point, they of course have leave to do so, and there may be costs implications for the Crown if it is found that the indication given was incorrect.[14] I make the following orders:(a) the draft freezing order filed by the plaintiffs is granted;(b) the freezing order will remain in place until the matter can be further heard on notice on a date to be fixed by the Registrar on an urgentbasis hearing of the Commissioner's application for continuation ofthe freezing order; and(c) the first and second defendants are to be served in the manner outlinedin the plaintiff's interlocutory application without notice for directionsas to service dated 8 November 2013.1 High Court Rules, r 32.2(5).2 Rule 32.6(4).___________________________Williams JSolicitors:Crown Law, Wellington