J A REID AND ORS V COMMISSIONER OF INLAND REVENUE HC AK CIV 2006-404-4222

J A REID AND ORS V COMMISSIONER OF INLAND REVENUE HC AK CIV 2006-404-4222 19 December 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-4222BETWEEN JOHN ANTHONY REID First Plaintiff AND HUGH MILLOY Second Plaintiff AND MILLOY REID WONG & COMPANY LIMITED Third Plaintiff AND COMMISSIONER OF INLAND REVENUE Defendant Hearing: 27 September 2006 Appearances: C Walker and R Patterson for the Plaintiffs J Pike and H Ebersohn for the Defendant Judgment: 19 December 2006 at 11.30amJUDGMENT OF ANDREWS JIn accordance with r540(4) I direct that the Registrar endorse this judgment with the delivery time of 11.30am on 19 December 2006..Deputy/Registrar Date: .. Solicitors: Gilbert Walker, PO Box 1595 Auckland Crown Law Office, PO Box 2858 WellingtonIntroduction[1] At the heart of this proceeding are transactions entered into in 1995 and 1996 in relation to investments in Digi-Tech Limited ("Digi-Tech") and New Zealand Investments Limited ("NZIL"). In both cases investors (all of which were Loss Attributing Qualifying Companies ("LAQCs")) purchased shares over a ten-year period, with more than 80% of the purchase price payable in Year 10. [2] Investors also took out "loss of profits" insurance policies. Almost the entire cost of the insurance premiums was funded by a limited recourse loan from an offshore bank. The LAQCs claimed the insurance premiums and interest on the loans as deductible expenses against their otherwise taxable income. [3] The investment scheme had been introduced to clients of an accounting firm. Those clients who were interested were then introduced to a firm of merchant bankers, who owned Digi-Tech and NZIL. The first and second plaintiffs were directors and shareholders of the merchant bank. [4] The accounting firm had always intended that the Inland Revenue Department ("the Department") would scrutinise the scheme. Initially, this scrutiny was to be directed at whether the full amount of the insurance premium could be expended in Year 1, or whether it had to be accrued across the life of the policy. [5] As the Department's scrutiny of the scheme continued, the partners of the accounting firm developed a perception that they may be exposed to claims by their clients in the event that their clients suffered a loss consequent upon the tax deductibility of the insurance premium being set aside. The senior partner then made a complaint to the Serious Fraud Office ("the SFO"), to the effect that the plaintiffs had misled the firm and, as a result, the firm's clients. [6] Later, the Commissioner of Inland Revenue also made a complaint to the SFO.[7] The plaintiffs were subsequently charged with two counts of conspiracy "by deceit, falsehood and other fraudulent means, to defraud both members of the public and the Commissioner of Inland Revenue". One charge related to Digi-Tech, the other to NZIL. The prosecution was heard before Fogarty J in September and October 2004. On 14 October 2004 all accused were acquitted on both counts. The above background information is summarised from His Honour's Reasons for Judgment, delivered on 22 October 2004, and reported as R v Connolly (2004) 21 NZTC 18,844. [8] On 20 July 2006 the plaintiffs issued this proceeding, in which they allege misfeasance in public office by the defendant, the Commissioner of Inland Revenue. The defendant seeks an order under r 186 of the High Court Rules striking out the plaintiffs' proceeding on the grounds that the statement of claim discloses no reasonable cause of action, and is an abuse of process.Principles applicable to a strike out application[9] The principles are well established: a) A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true, whether or not they are admitted. b) The Court may only strike out a proceeding if the cause of action is so clearly untenable that it cannot possibly succeed. c) The jurisdiction is to be exercised sparingly and only in a clear case where the Court is satisfied that it has the requisite material. d) The fact that applications to strike out raise difficult questions of law and require extensive argument does not exclude jurisdiction.Attorney-General v Prince & Gardner [1998] 1 NZLR 262 at 267, per Richardson P (CA).[10] In determining this application, I am required to decide whether the plaintiffs' claim of misfeasance in public office "cannot possibly succeed" on the basis of the facts pleaded in the statement of claim, on the assumption that they are true.The tort of misfeasance in public office[11] To establish a claim, the plaintiffs must show that: a) The defendant is a public officer. b) The defendant was purporting to exercise powers conferred on him for the benefit of the public or a section of the public. c) The defendant either – i) Acted for an ulterior or improper motive, with intent to injure another; or ii) Knew that he was acting outside his powers or was recklessly indifferent thereto and that this was likely to injure the plaintiff; and iii) This caused damage to the plaintiff. See Rawlinson v Rice [1997] 2 NZLR 651 (CA); Three Rivers District Council & Ors v Governor & Company of the Bank of England (No. 3) [2003] 2 AC 1 (HL), at 191 (Lord Steyn); Hobson v The Attorney- General (CA 74/05 and CA 238/05, 17 May 2006), per William Young P.The statement of claim[12] The factual allegations supporting the misfeasance claim can be summarised under five headings.Inland Revenue Department Investigation[13] Ten named employees of the Department carried out an investigation into the claimed tax deductions. It is alleged that they: a) Sent the offshore bank a document for comment, comprising the front page of one of the bank's loan agreements, with the balance being an agreement from another lender. b) Later referred to the bank's response that it did not recognise the document, without noting that an incorrect document had been sent to it for comment. c) Sought to avoid or delay disclosing what had been sent to the bank. d) Ignored or gave little weight to sworn statements provided, attesting to the bona fides of various parties involved in the transactions, confirming payment of insurance premiums and the issue of policies. e) Further, the team leader for the investigation first acknowledged that the insurer could meet its obligations in the event of a claim, then created a file note purporting to record an acknowledgement by the first plaintiff that the Digi-Tech transaction was circular.Statements of Position ("SOPs")[14] In July and August 2000 the defendant issued SOPs to investors in Digi- Tech. In the SOPs the defendant: a) Quoted the bank's statement that it did not recognise the loan documents, but did not say that the defendant had sent the bank an incorrect document;b) Contended that the LAQCs had not received loan funds from the bank, so had not incurred the claimed interest expenditure, or the expenditure on the interest premiums; c) Stated that no source documents supporting the transactions or other evidence had been provided to the Department to substantiate the explanations given regarding insurance; d) Either failed to refer to one of the sworn statements, or referred to it only to say that it was "insubstantial and uncorroborated"; e) Stated that payment of insurance premiums could not be verified and that there was insufficient evidence that the premiums had been paid.Complaints to the SFO[15] The Department's director of litigation made fraud complaints to the SFO in respect of Digi-Tech and NZIL. The information set out in the complaints continued the alleged errors and omissions already referred to.Notices of Proposed Adjustment ("NOPAs")[16] On 28 March 2002 the defendant issued NOPAs to investors in NZIL who had not yet conceded their positions.Explanations and advice given to the Department by the first plaintiff[17] The defendant ignored explanations given by the first plaintiff in relation to: a) The incorrect loan document sent to the offshore bank; b) The ability of the insurer to meet claims; c) The nature of the transactions and the validity of the investors' claims for tax deductions.[18] The plaintiffs also allege that: a) An employee of the Department, despite undertaking to pass on the first plaintiff's explanations to the SFO, either failed to do so, or ignored the explanation. b) The defendant refused to issue corrections of errors in the SOPs and NOPAs, when the first plaintiff pointed out those errors. c) The defendant subsequently issued denials when the first plaintiff wrote to investors setting out the errors and reporting concessions. d) Generally, the defendant sought to avoid or delay disclosing documents to the first plaintiff.The plaintiffs' pleading of misfeasance in public office[19] The plaintiffs' pleading is set out in paragraphs 92-95 of the statement of claim and is as follows:92. The defendant and his employees are public officers. 93. The actions of the defendant and his employees pleaded above were a purported exercise of their public powers. 94. The defendant and his employees exercised these powers for an improper motive, with intent to injure the plaintiffs. The defendant's motivation was to encourage investors to concede their tax disputes and to deter promoters in comparable investment schemes. As particularised above, the defendant and his employees made accusations against the plaintiffs and initiated and supported a criminal prosecution of the first plaintiff knowing that these were unjustified or being recklessly indifferent as to whether they were justified, out of a desire to achieve these objectives. 95. The misfeasance by the defendant and his employees caused damage to the plaintiffs.Can the Defendant be held liable for the actions of employees of, or contractors to, the Department?[20] Mr Pike for the defendant argued that the plaintiffs' claim could not possibly succeed, because there are no facts pleaded that support misfeasance in office by the defendant. The allegations all relate to actions of people who were either employees of the Department, or contractors to the Department. He submitted that the defendant cannot be vicariously liable for those persons' actions, because the Crown, not the defendant, employed them. [21] Mr Pike referred to Bainbridge and Anor v The Postmaster-General and Another [1906] 1 KB 178, where the Court held that the defendant was not vicariously liable for wrongful acts of his subordinates. This was because there was no employment relationship between the defendant and the subordinates. The Crown, not the defendant, employed them. [22] Bainbridge has been applied in New Zealand. In Crispin v Registrar of the District Court [1986] 2 NZLR 246, at 255, Cooke P said:Claims in tort based on actions or omissions of Crown servants can be put forward in three ways. First, there can be an action against the Crown, commonly represented by the Attorney-General, under the Crown Proceedings Act 1950, alleging vicarious liability on the part of the Crown. Secondly there can be an action against the individual employee or employees alleged to have committed the tort: This would be against them personally, named as individuals, although it would often be the case that the Crown as a good employer would stand behind them financially. Thirdly, where a statute or subordinate legislation so permits, there may be an action against the holder of an office simply as such holder: a class of case in which the legislation authorises the holder of the office for the time being to be sued eo nomine. What cannot be done, however, is to sue a senior Crown servant on the footing that at common law he is vicariously liable for the torts of his subordinates. For this well-settled principle, see for instanceBainbridge v Postmaster-General [1906] 1 KB 178.[23] Central to Mr Walker's argument on behalf of the plaintiffs was his submission that their claim is not founded on vicarious liability. This was notwithstanding the references to the defendant and "his employees" in paragraphs 92-95 of the statement of claim. He submitted that all of the actions referred to inthe statement of claim were actions of the defendant, done by and through the named persons. Accordingly, the defendant is directly liable. He argued: a) The defendant has an overall duty as to the collection of taxes. b) The defendant, alone, is empowered by the Tax Administration Act 1994 ("the Act") to issue SOPs and NOPAs, and to make referrals to the SFO. c) The fact that other persons may have assisted the defendant in preparing them does not alter this. He can be held liable if, after trial, the Court is satisfied that the allegations of misfeasance in public office are made out.Can the Commissioner be held directly liable?[24] The general nature of the defendant's role is set out in s 6A(2) of the Act:The Commissioner is charged with the care and management of the taxes covered by the Inland Revenue Acts and with such other functions as may be conferred on the Commissioner.[25] The defendant may, in writing, delegate any or all of his powers either generally or particularly (s7(1)). Any officer of the Department (defined as any person employed in the service of the Department) to whom powers are delegated may exercise those powers in the same manner and with the same effect as if they had been conferred directly and not by delegation (s 7(2)). Every officer who purports to act under a delegation is presumed to be acting in accordance with the terms of the delegation in the absence of proof to the contrary (s 7(3)). [26] Mr Walker submitted that the whole scheme of the Act is that the defendant is charged with the duty (the "care and management of the taxes") and is given the power to carry it out. Whether formally or informally, as a matter of practicality the defendant must have people acting on his behalf. There is no question of vicarious liability, he submitted. The plaintiffs are not seeking to hold the Commissioner liable for the actions or omissions of the named persons, they seek to hold theCommissioner liable for his own acts or omissions, committed, however, by those persons. Mr Walker did not cite any authority for his contention that the Commissioner could be held directly liable on this basis. The Court's own research has not disclosed any such authority. [27] Under the law of agency, the principal is held directly liable for the actions of the agent. However, Mr Walker did not suggest that his submission was based on agency principles. Further, the principles of agency (being based on the principal/agent contract) are of limited application with respect to the law of tort. [28] Some support for the plaintiffs' position may perhaps be derived from the judgment of the High Court of Australia in George v Federal Commissioner of Taxes(1952) 86 CLR 183. There, the Court dismissed a taxpayer's appeal against the lower Court's refusal to order the Commissioner to give particulars of the person or officer who had formed an opinion as to his income, leading to the issue of an amended assessment. [29] In its recital of the facts, the High Court noted that it had been ascertained "by or on behalf of the Commissioner" that the taxpayer's income was considerably higher than stated in his return of income. The Court then noted that the Commissioner "using that term to include his officers" then assessed the taxpayer's income (see at 199). [30] The High Court was in no doubt that it was part of the Commissioner's function of assessing taxpayers to form an opinion as to whether a return was satisfactory. It commented (at 206) that "any other view would make it impossible to carry on the work of the Department of Taxation." [31] In my judgment I could not exclude, at this early stage of the proceeding, the possibility of the plaintiffs' succeeding in arguing that the defendant can be held directly liable for actions of others, carried out in his name. At the very least, I am not satisfied that it is so unarguable that the plaintiffs' claim should be struck out on the grounds that it "cannot succeed".Could a claim for vicarious liability succeed against the Attorney-General?[32] Mr Pike acknowledged that it would be open to the plaintiffs to take the first course described by Cooke P in Crispin and proceed against the Attorney-General under the Crown Proceedings Act. However, he further submitted that in the event that this course was taken, their claim would face insurmountable obstacles. These were that none of the named persons held "public office", and none of them were "acting in the exercise of public office". Both need to be established for the tort of misfeasance in public office.Do the Department's employees hold "public office"?[33] While acknowledging that the Commissioner holds "public office", Mr Pike argued that whether a claim is brought on the basis of direct or vicarious liability, it is necessary for the plaintiffs to establish that the people said to have carried out the Commissioner's functions also hold "public office". He argued that none of the persons named in the statement of claim, other than the defendant, held public office. He submitted that the mere carrying out of a statutory provision would not give rise to public office. Accordingly, the plaintiffs would fail to establish the first element of the tort. [34] A person holding public office is one who is appointed to discharge a public duty, generally paid out of public funds (see Henley v Mayor and Burgesses of Lyme(1828) 5 Bing 92, 107; 130 ER 995, 1001). Further that person, in the discharge of that public duty, must owe duties to members of the public as to how the duty is exercised (see Tampion v Anderson [1973] VR 715, 720). [35] I am not able to conclude that the plaintiffs cannot succeed in their allegation that the named persons held public office. They were carrying out a public duty, being the Commissioner's duty of assessment and collection of taxes. They were paid out of public funds. Whether they owed duties to members of the public as to how their duty was exercised could only be determined in relation to the individuals concerned. However it cannot in my view be said, as a matter of law, that none of the named persons held public office.[36] In a different context, the question whether the Department's officers hold public office was considered by Laurenson J in Shaw v Commissioner of Inland Revenue (2004) 24 FRNZ 1. In that case, the plaintiff had refused to pay child support. The defendant had commenced proceedings against him, and the plaintiff had made use of the various objection and appeal procedures available. Eventually, although he had paid the actual arrears, he was faced with payment of accumulated penalties. [37] Before Laurenson J, the plaintiff argued misfeasance in public office on the part of two persons employed by the Department to recover child support arrears. Having set out the elements of the tort of misfeasance in public office (referring toRawlinson v Rice and Three Rivers), His Honour held (at [104]) that the two officers held public office. The judgment does not set out his reasons for so holding. [38] In light of the finding set out at [35], above, it is not necessary to consider whether the plaintiffs have to prove that the named persons are "public officers" if proceeding against the defendant on the basis of direct liability.Were the actions complained of "in the exercise of public office"?[39] Mr Pike then argued that the actions complained of had not been carried out in the exercise of public office. The second element of misfeasance in public office is that the public officer was acting in the exercise or purported exercise of some power or authority with which he or she is clothed by virtue of the public office: seeRawlinson v Rice. [40] Mr Pike argued that there was no pleading that any of the named persons had any independent statutory powers under the Act that were exercised, or that they neglected to exercise. He submitted that as no relevant statutory power was being exercised, the defendant could not be held liable. [41] The statement of claim does not plead specific statutory powers given to either the defendant or the named persons. Mr Walker referred in argument to s 6Aof the Act, and the specific statutory powers in relation to SOPs, NOPAs and referrals to the SFO.SOPs and NOPAs[42] The defendant's power to issue SOPs and NOPAs is provided in ss 89M(3) and 89B respectively. In both cases the power is accompanied by a requirement as to the information to be included. In the case of SOPs there must be "sufficient detail to fairly inform" (s 89M(4)). In the case of NOPAs there must be "sufficient detail to reasonably inform" (s 89F). [43] Mr Walker noted that the defendant had admitted in his statement of defence that he is a public officer. In issuing SOPs and NOPAs the defendant is clearly exercising statutory powers. It is in my view at least arguable that any person assisting the defendant in the preparation and issue of a SOP or a NOPA is likewise acting in the course of the exercise of a statutory power and in the course of public office.Referrals to the SFO[44] Section 81 of the Act requires all officers of the Department (that is, all persons employed in the service of the Department) to maintain secrecy in all matters relating to the Inland Revenue Act. Section 81(4)(c) provides an exception, to the effect that the defendant is not prohibited from "divulging or communicating any matter or thing to the Serious Fraud Office that the Commissioner considers desirable for the purposes of any investigation " [45] In divulging or communicating matters in respect of which he must otherwise maintain secrecy, the defendant is exercising a statutory power. He is therefore acting in the course of public office. Again it is arguable that any person who assisted the defendant in the referrals (Mr Walker noted the defendant's admission that the Department's director of litigation had made the referrals "on behalf of the defendant") was exercising the same power and also acting in the course of public office.Plaintiffs' allegations as to the conduct of the investigation[46] Mr Pike argues that there was no statutory or other duty or power on the defendant or the named persons to convey information to the SFO, make file notes, or correct errors. Accordingly, he submitted, it could not be said that the defendant, or the named persons, were acting in the course of public office when they did (or failed to do) these things. [47] That argument, in my view, takes too narrow a view of the definition of public office referred to earlier. The focus is on the manner in which a power is exercised (see Tampion v Anderson). [48] I have already found that it is arguable that the defendant can be held directly liable for the actions of people who exercise his powers and carry out his functions. Among the powers and functions is the general "care and management of taxes". In my view it is arguable that in exercising the power to "manage taxes" the Commissioner is acting in the exercise of a power with which he is clothed by virtue of his public office. The "manner in which he exercises his power" arguably includes the manner in which he conveys information to other agencies, makes notes, and deals with information and explanations given to him. [49] In exercising the defendant's duties (or acting on his behalf) in relation to the care and management of taxes the named persons were also, arguably, acting in the exercise of public office. The judgment of Laurenson J in Shaw v Commissioner of Inland Revenue that two officers of the Department were acting in the exercise of public office lends support to that proposition. [50] Accordingly I am not satisfied that the plaintiffs "cannot succeed" on the grounds that the acts or omissions complained of were not in the exercise of public office.The defendant's intention[51] One of the grounds for strike-out put forward by Mr Pike was that there was no pleading that the defendant or the named persons knew that they were acting outside the power, or were recklessly indifferent thereto, and that this was likely to injure the plaintiffs. [52] It is helpful to set out paragraph 94 of the plaintiffs' statement of claim once again:94. The defendant and his employees exercised these powers for an improper motive, with intent to injure the plaintiffs. The defendant's motivation was to encourage investors to concede their tax disputes and to deter promoters in comparable investment schemes. As particularised above, the defendant and his employees made accusations against the plaintiffs and initiated and supported a criminal prosecution of the first plaintiff knowing that these were unjustified or being recklessly indifferent as to whether they were justified, out of a desire to achieve these objectives.[53] Mr Walker's response to Mr Pike's argument was that the defendant had misconstrued paragraph 94. He submitted that it was clear from the first sentence that the plaintiffs do not rely on the second limb of the tort of misfeasance in public office, as set out at [11](c)(ii) above. The plaintiffs rely on the first limb, as set out at [11](c)(i). [54] In light of the plaintiffs' pleading, it is not necessary to consider the defendant's argument on this point. [55] Mr Pike then argued that the defendant's alleged "improper motive", to "encourage investors to concede their tax disputes and to deter promoters in comparable investment schemes" was intra vires, so could not found the tort. This is because the defendant must at all times use his best endeavours to protect the integrity of the tax system (s 6(1)). He argued that the alleged motive in fact promoted the integrity of the tax system.[56] Mr Walker accepted that the defendant was charged with protecting the integrity of the tax system, but pointed to s 6(2), which provides that (without limiting its meaning) the integrity of the tax system includes the matters set out in s 6(2)(a)-(f). He referred specifically to ss 6(2)(a) ("taxpayer perceptions of that integrity"), 6(2)(b) ("the rights of taxpayers to have their liability determined fairly, impartially, and according to law"), and 6(2)(f) ("the responsibilities of those administering the law to do so fairly, impartially, and according to law"). [57] He submitted that the "improper motive" lay in the means by which the defendant sought to induce taxpayers to concede disputes and deter others from promoting comparable schemes. It could not be by illegitimate means. The alleged illegitimate means were set out in the second half of paragraph 94. He submitted that paragraph 94 must be read as a whole. [58] It would seem to be stating the obvious to say that it would be "improper" for the defendant to use illegitimate means to achieve the objective of protecting the integrity of the tax system. Whether the actions pleaded by the plaintiffs were illegitimate, and whether (if so) they constituted an improper motive for the exercise of the defendant's powers are questions that can only be determined at trial. I am not persuaded that the plaintiffs' claim should be struck out on the basis that no "improper motive" has been pleaded.Is the plaintiffs' claim really a claim of malicious prosecution?[59] Mr Pike's final argument was that the plaintiffs' claim was, in reality, an allegation of malicious prosecution. He said it was a "central feature" of the plaintiffs' claim that the defendant allegedly "initiated and supported a criminal prosecution against the plaintiffs". The essence of the plaintiffs' case was that they sought a remedy for a prosecution. They could not bring a proceeding for malicious prosecution against the defendant, because the prosecution was brought by the SFO. Further, he argued that by being brought as a claim for misfeasance in public office, the plaintiffs' claim was an abuse of process.[60] Mr Walker answered this argument quite simply, by saying that the allegations cannot be, and are not, a claim of malicious prosecution. An essential element of a claim for malicious prosecution is that the defendant prosecuted the plaintiff. The prosecution referred to at [7], above, was brought by the SFO, not the defendant. [61] Mr Walker submitted that the defendant had misconstrued the words "initiated and supported a criminal prosecution of the first plaintiff" as being an attempt to plead malicious prosecution. He submitted that the words were simply a reference to the actions already pleaded: that is, the referrals to the SFO, creation of a false file note and failing to take notes of meetings that might have assisted the plaintiffs in their defence of the prosecution. [62] Mr Walker also noted that neither the defendant nor any officer of the Department gave evidence at the criminal trial. Further, no complaint is made in the plaintiffs' proceeding in respect of any act of preparation to give evidence at trial. [63] In the circumstances, I accept Mr Walker's submission that the plaintiffs' claim is not "in reality" a claim for malicious prosecution. [64] In argument on this point, both counsel referred to the judgment of the House of Lords in Darker v Chief Constable of the West Midlands Police [2001] 1 AC 435. Mr Pike submitted that it provided only a limited exception to the principle expressed by the Court of Appeal in Silcott v Commissioner of Police of the Metropolis (1996) 8 Admin LR 633. In that case, the Court held that the tort of misfeasance in public office did not apply in areas covered by the tort of malicious prosecution. [65] I accept Mr Walker's submission that their Lordships went further than to permit a claim for misfeasance in public office only where the conduct was so grave, if proved, that a remedy was required. Each of their Lordships held that a proceeding for misfeasance in public office could be brought in relation to the acts of police officers in the course of an investigation even if a prosecution followed. Each made the distinction between pre-trial, investigatory, work and preparation for andgiving evidence in Court. The appellants' proceeding for misfeasance (which related to alleged acts in the course of the investigation) was not struck out.Conclusion[66] The plaintiffs' submissions that the defendant has misconstrued and misunderstood the plaintiffs' pleading would suggest that the statement of claim might well be amended, so as to make the plaintiffs' pleading clear. [67] However, I am not persuaded that the plaintiffs' claim should be struck out. The defendant's application is dismissed. [68] The plaintiffs are entitled to costs. Counsel have not addressed the issue of the appropriate costs category. In the event that they cannot agree, brief memoranda are to be filed within 15 days of this judgment being delivered. _____________________________ Andrews J