THE COMMISSIONER OF INLAND REVENUE V CHESTERFIELDS PRESCHOOLS LIMITED AND ORS CA CA156/2010

THE COMMISSIONER OF INLAND REVENUE V CHESTERFIELDS PRESCHOOLS LIMITED AND ORS CA CA156/2010 30 March 2010IN THE COURT OF APPEAL OF NEW ZEALAND CA156/2010 [2010] NZCA 113BETWEEN THE COMMISSIONER OF INLAND REVENUE Appellant AND CHESTERFIELDS PRESCHOOLS LIMITED First Respondent AND DAVID JOHN HAMPTON Second Respondent AND CHESTERFIELDS PARTNERSHIP Third Respondent AND CHESTERFIELDS PRESCHOOLS PARTNERSHIP Fourth Respondent AND ANOLBE ENTERPRISES LIMITED Fifth Respondent Hearing: 29 March 2010 (by teleconference) Court: O'Regan, Arnold and Ellen France JJ Counsel: M S R Palmer for Appellant D J Hampton in person for Respondents Judgment: 30 March 2010 at 3 pm Reasons: 1 April 2010JUDGMENT OF THE COURT We grant a stay of execution of the order made by the High Court inChesterfields Preschools Limited & Ors v Commissioner of Inland Revenue HC Christchurch CIV-2008-409-000722 on 16 March 2010 pending the hearing ofthe appellant's appeal against that judgment or such later date as the Court which hears that appeal may determine.____________________________________________________________________REASONS OF THE COURT(Given by O'Regan J) [1] The applicant (the Commissioner) applied for a stay of execution of an order made by Fogarty J on 16 March 2010 1 until his appeal against the judgment in which the order was made is heard. Fogarty J himself granted a stay of execution of the order pending the determination of this present application. The stay granted by Fogarty J expired on 30 March 2010. We heard the parties by telephone on 29 March 2010. We granted the stay on 30 March 2010 and said our reasons would follow. These are those reasons.Factual background[2] The Commissioner and the respondents have been involved in ongoing tax litigation, and this Court is due to hear three appeals by the Commissioner against decisions of the High Court in favour of the respondents on 25 – 27 May 2010. [3] The High Court granted a freezing order in favour of the Commissioner in 2005, but this was subsequently discharged in 2007. At that time the High Court accepted an undertaking from Ms Sisson, one of the partners in the third respondent and the fourth respondent, as to the steps which would be taken to preserve the assets of the respondent pending the outcome of the litigation. However, on 28 August 2008, the High Court made a new order freezing any dealings by the respondents with their assets pending the outcome of the litigation. 2 The order, made by Fogarty1 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008- 409-000722, 16 March 2010.2 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008- 409-000722, 28 August 2008.J in the High Court, directed all of the respondents and Ms Sisson against any further dealing with the properties owned by the respondents without prior notification to the Court and to the Commissioner of Inland Revenue. The Judge made it very clear that the word "dealings" was to be interpreted broadly. [4] This is not the first stay application that the Commissioner has brought to this Court. On 13 October 2008, this Court granted a stay of execution of an order made by Fogarty J approving a financing proposal involving the borrowing of $150,000 on the security of a property subject to the freezing order. 3 The Court initially indicated a tentative intention to refuse a stay, so long as it was given some assurance that the money to be borrowed would be used only pay legal fees and costs associated with a proposal to amalgamate titles of properties that were subject to the freezing order (which will, the Court was told, increase the value of those properties). However, the respondent would not provide any assurance to that effect and accordingly the Court granted the stay sought by the Commissioner. [5] On 25 August 2009, this Court granted a stay of execution of orders made by Fogarty J in judicial review proceedings and a costs order which followed those proceedings. 4 The latter judgment contains a useful summary of the litigation between the parties to date, which we do not need to repeat here.The present proposal[6] The proposal for which approval was given in the High Court is the borrowing of $75,000 over the security of the property at 67 Augusta Street, Christchurch held in the name of Ms Sisson as trustee for the fifth respondent. Details are: (a) The proposed lender is Papprill Hadfield & Aldous, Solicitors Nominee Co. Limited; (b) The amount of the loan is $75,000;3 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2008] NZCA 420.4 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2009] NZCA 373.(c) The security is a first mortgage over 67 Augusta Street; (d) The term is two years; (e) The interest rate is 10 per cent per annum; (f) The establishment fee is $1,000; (g) The brokerage fee is $1,000. [7] Although the principal sum of the loan is $75,000, $15,000 of this is to be retained by Papprills for the purpose of paying the fees and interest accruing during the term of the loan and about $21,000 is required to repay an earlier advance made on the security of the Augusta Street property by Goldband Finance Limited. The Commissioner says that the Goldband advance was itself a breach of the freezing order, but Fogarty J made no finding on that point and neither do we. [8] After deduction of the amount required to repay Goldband and the capitalised interest, about $38,000 is then available to the respondents, and the purpose of the borrowing of that amount is as follows: (a) Funding the instalment of costs of education fees at Glasgow University for Mr Hampton (who intends to undertake a doctorate at that university): $10,000; (b) Return air tickets to and from Scotland for Mr Hampton: $3,000; (c) Purchase of a motor vehicle: $5,000; (d) Living expenses for four months at $1,800 per month: $7,200; (e) Preparation of outstanding tax returns: $5,000; (f) Cost of preparing and filing a new title for aggregation of land at 67 Augusta Street: $7,000.High Court decision[9] Fogarty J recorded that the purpose of the application was to provide for living expenses for Mr Hampton who now lives most of his time in Edinburgh where he has a new partner and has enrolled as a PhD student at university. [10] Fogarty J recorded that there were three principal grounds of opposition by the Commissioner. The first was that Ms Sisson had failed to report regularly to the Courts so neither the Court nor the Commissioner had an adequate picture of the financial affairs of the respondents. He appears to have rejected that ground. [11] The second was that the respondents were insolvent and should not therefore be permitted to draw any more funds from the assets. Fogarty J accepted that there may well be insolvency but said that this turned on the value of the real estate and there was a substantial discrepancy on the affidavits between the parties as to the value of the real estate. Similarly there was uncertainty about the amount of the indebtedness which would eventually be owed to the Commissioner. [12] The third ground of opposition was that the Goldband loan had been drawn down in breach of the freezing order. Fogarty J did not make any finding about that. [13] Fogarty J was satisfied that, viewed in the round, the loan advance was a small amount of the total value of the assets subject to the freezing order and therefore granted the application.Grounds for stay[14] In this Court Mr Palmer for the Commissioner advanced five grounds in support of the stay. We will deal with each of these, and Mr Hampton's response to them, in turn. [15] The first ground was that the Commissioner did not have adequate information about the financial resources of the respondents because of the failure of Ms Sisson to honour the undertaking given to the Court to regularly report both tothe Commissioner and the Court. Mr Palmer pointed out that Fogarty J had noted the inadequacy of the performance of the undertakings in his judgment of 28 August 2008 and, as a consequence of that inadequacy, had re-imposed freezing orders. [16] Mr Hampton acknowledged the failings identified by Fogarty J but said that these had resulted from misunderstandings as to the scope of the freezing order. [17] We do not see this point as significant in the context of the stay: as it is essentially a complaint of historic conduct rather than current conduct. [18] The second point raised by Mr Palmer was the Goldband loan: he said this was a clear breach of the freezing orders and it was notable that much of the loan to be drawn down was to be used to repay this funding. He said the failure to abide by the freezing order in relation to the Goldband loan illustrated the lack of credibility of the respondents. He queried the real purposes for which the loan was being drawn down and suggested that the Court could not rely on Mr Hampton's evidence on that issue. He said the loan should not be permitted until some reliable evidence as to the use of the funds was provided. [19] Fogarty J made no finding as to the question as to whether the Goldband loan was in breach of the freezing order. On the face of it, the loan appears to be a breach, but we do not have all the facts at our disposal so we make no finding on this point either. [20] The third point was that the respondents were insolvent and should not be permitted to further encumber assets which will be the only source from which the Commissioner will be able to draw money to pay the amount owing to the Commissioner. The amount which will eventually be owing to the Commissioner is hard to estimate. The actual amount will depend on the outcome of the appeals against the judicial review proceedings and, if those appeals fail, the outcome of the reconsideration of the tax assessments which Fogarty J ordered. However, whatever the outcome, the amount owing will be substantial.[21] Mr Palmer pointed out that the evidence before Fogarty J from an IRD investigator, Mr Doubleday, was that there were insufficient assets in the hands of the respondents to meet their debts even excluding the amount owing to the Commissioner. Mr Doubleday also noted that none of the respondents had any income earning ability to speak of. [22] Mr Hampton said much of the information contained in Mr Doubleday's affidavit was disputed, and pointed out that one of the major debts of the respondents (to Minter Ellison Rudd Watts for legal fees of over $170,000) was subject to appeal and to a counterclaim. Nevertheless he did not dispute that there were substantial debts owed by the respondents, nor did he dispute their lack of income earning capacity. [23] The fourth ground of opposition pursued by Mr Palmer was that the purposes for which the loan was to be used were not appropriate uses of money which may well be required to meet the obligations of the respondents to the Commissioner once the litigation is resolved. He said it had not been established that there was any urgent need for the money, and argued that the draw-down should not be permitted until the Commissioner's appeal has been dealt with. He accepted that the use of money to fund the necessary steps to amalgamate the titles at Augusta Street (and thereby enhance the value of that land) was legitimate, but queried the use of money for the payment of educational fees and flights to and from Scotland for Mr Hampton. He said that the loan offer from Papprills recorded that Papprills had been advised that the funds were to be borrowed "for business or investment purposes" yet that did not square up with the purposes identified in the High Court judgment. He queried the lack of any evidence as to why travel to and from Scotland was required and why payment of fees for Glasgow University was required urgently. [24] Mr Hampton said it was necessary to travel to Glasgow to enrol for his doctorate and this could not be done remotely. He said that the fees were payable to Glasgow University imminently, but the only evidence we had on that topic was in his affidavit: there was no exhibit showing the requirements set by the University itself.[25] We share the Commissioner's unease about the genuineness of the urgency for the funds required for Mr Hampton to pursue his doctorate and the need for him to travel imminently. [26] Mr Hampton accepted that the respondents did not have sufficient income to enable them to repay the advance when it became due, and that it would need to be refinanced with a further advance on the security of the Augusta Street property. But he argued that the amalgamation work on that property would increase its value so that the amount remaining available to the Commissioner would not diminish.Decision[27] We accept the Commissioner's submission that there may be grounds for appeal against the consent given by the High Court, and that a failure to give a stay of the order giving consent will render the Commissioner's appeal nugatory. That is a significant factor in favour of the stay. [28] On the other hand the evidence before us from Mr Price, a broker engaged by the respondents, was that the grant of a stay would lead to the withdrawal of the financing from Papprills, and that it would be difficult to replace it. We accept that is a factor against the granting of a stay, but we balance it against the fact that the Commissioner's appeals are to be heard in less than two months time, and there is no reason why the present appeal could not be heard at the same time. Thus the stay will be in place only for about eight weeks, and we would be surprised if it was not possible to have the loan offer remain open for that period or to replace it with a similar loan offer if the Commissioner's appeal fails. [29] Nor are we convinced that the funds to be drawn down are required urgently by Mr Hampton. He told us that the end of university year at Glasgow year was the end of May, and that he would need to pay the fees by then or he could lose his place for the following year. That may be so, but the stay would not extend past the end of May or at least could be revisited at that time when the Court hears the appeals. Mr Hampton accepted there was no pressing need to repay Goldband and/or to pursue the amalgamation of titles for Augusta Street.[30] In those circumstances, we do not see the detriment to the respondents from the granting of a stay as being outweighed by the benefit to the Commissioner of granting a stay, namely the preservation of the Commissioner's appeal rights for the eight week period until the appeal can be dealt with. [31] On balance we see a reasonably strong case for the granting of a stay in order to preserve appeal rights. It is for these reasons that we determined on 30 March 2010 to grant a stay. [32] We direct that the Commissioner's appeal against the order stayed by this judgment be heard at the same time as the other appeals in the litigation between the parties on 25 – 27 May 2010.Solicitors: Crown Law Office, Wellington for Appellant