COMMISSIONER OF INLAND REVENUE V NEWMARKET TRUSTEES LIMITED AS TRUSTEES IN THE SOUTHERN LIGHTS TRUST HC AK CIV-2010-404-3913

COMMISSIONER OF INLAND REVENUE V NEWMARKET TRUSTEES LIMITED AS TRUSTEES IN THE SOUTHERN LIGHTS TRUST HC AK CIV-2010-404-3913 3 August 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-3913IN THE MATTER OF the Companies Act 1993 BETWEEN COMMISSIONER OF INLAND REVENUE Plaintiff AND NEWMARKET TRUSTEES LIMITED AS TRUSTEES IN THE SOUTHERN LIGHTS TRUST Defendant Hearing: 3 August 2010 Counsel: Ralph W Elika for Commissioner Douglas B Hickson for Defendant Judgment: 3 August 2010[ORAL] JUDGMENT OF HUGH WILLIAMS J [on application for liquidation of company]Introduction[1] These liquidation proceedings come before the Court at this juncture, having followed an unfortunate course. In order to explain that somewhat cryptic remark, it is necessary to explain a little of the background.Background[2] Newmarket Trustees is a corporate trustee company incorporated by the legal firm Castle/Brown on 1 April 1998 as a corporate trustee for trusts associated with its clients. As a result of their wide clientele, Newmarket Trustees is currently a corporate trustee for 118 different client trusts, and the registered proprietor of145 different properties in that capacity. It also holds both listed and unlisted shares in its name for clients. [3] One of those clients or former clients was a trust called the Southern Lights Trust which is a trust set up by a former client of the firm, a Mr Goh. [4] It is of importance to note that as with all the trusts Newmarket Trustees operates, it effectively leaves the day-to-day management of the assets subject to a trust to the client, not to the partners of the firm who are also directors of Newmarket Trustees. That, as remarked to Mr Hickson during this argument, potentially leaves the firm exposed to actions taken by their clients in the name of the trust of which Newmarket Trustees is a trust, and the repercussions can be – as this case illustrates – considerable. [5] It now appears that on 26 March 2009 the Commissioner wrote to Mr Goh or the Southern Lights Trust concerning failure on their part to pay substantial amounts of tax. As a matter of completeness, it may have been preferable had the Commissioner sent a copy of his letter to Castle/Brown. But he did not do so for about 8 months after it was initially sent and, as Mr Elika, counsel for the Commissioner, pointed out there is no obligation on the Commissioner to advise the trustees under s 57 of the Goods and Services Tax Act. [6] However, on 30 October 2009 the Commissioner advised Newmarket Trustees that it, too, was liable for the unpaid tax, and advised that a statutory demand for the amount due would shortly be sought. [7] That was issued on 16 November 2009, seeking payment of the amount with penalties and interest then owing of $293,251.23 for unpaid GST and income tax. Newmarket Trustees applied to set aside that statutory demand but, in a reserved judgment delivered on 14 April 2010, Associate Judge Faire dismissed that application. [8] It is of some importance to the present position to note the Associate Judge expressly recorded the concessions by Mr Hickson, counsel for Newmarket Trustees,that his client did not assert that there was a substantial dispute concerning the debt owing, or that the company had a counterclaim, set-off or cross-demand – that is to say, the application before him to set aside the statutory demand was wholly based on s 290(4)(c) of the Companies Act 1993, namely that the demand should be set aside on "other grounds". Accordingly the application to set aside the statutory demand was wholly an appeal to the discretion reposed in the Court by s 290(4)(c). [9] The Associate Judge recorded the approach to such applications as set out by the Court of Appeal in Commissioner of Inland Revenue v Chester Trustee Services Limited1 and then reviewed the background. In particular, the Associate Judge rehearsed the fact that Castle/Brown had permitted Mr Goh to operate very much on his own without contact to or from Newmarket Trustees and certainly without intervention or oversight on the part of the company or the partners as directors. [10] At the conclusion of the Associate Judge's consideration however, he refused the application to set aside the statutory demand. Because the parties, especially Newmarket Trustees, wished to have the opportunity of perhaps resolving the matter without further litigation, the Associate Judge directed Newmarket Trustees to pay the debt demanded in the statutory demand within 20 working days of the date of his decision, and said that in default of payment the Commissioner might make an application to liquidate the company. 2[11] The Commissoner issued liquidation proceedings on 21 June 2010, the statutory demand not having been met and, of course, not having been set aside. [12] Because of the repercussions both for Castle/Brown and for the practice of the profession throughout the country in relation to corporate trustee companies run by solicitors, on 13 July 2010 Newmarket Trustees applied to this Court to restrain advertising of the liquidation proceedings and to stay them, together with consequential orders.1 Commissioner of Inland Revenue v Chester Trustees Services Limited [2003] 1 NZLR 395 at 397.2 At [23].[13] In support of that application, Newmarket Trustees filed a substantial affidavit by one of the partners in Castle/Brown setting out the repercussions both for that firm and more generally for the practice of the profession in New Zealand in relation to corporate trustees. That application and affidavit were served on the Commissioner on the day they were filed, 13 July 2010, and accordingly under the Rules the Commissioner had until 27 July 2010 to file a notice of opposition and supporting affidavit. [14] Most unfortunately, through oversight in the Commissioner's office arising from the fact that the matter was being dealt with by different officials, the Commissioner advertised the winding-up proceedings in the "New Zealand Herald" and the "New Zealand Gazette" on 22 July 2010. Mr Elika has apologised both to Newmarket Trustees and to the Court for the egregious error on the Commissioner's part in advertising the liquidation proceedings when he knew there was an undetermined application before the Court to restrain that advertising and stay the proceedings. [15] As a result of that, Mr Hickson advised that Castle/Brown had been contacted by a considerable number of worried clients who were obviously concerned that the corporate trustee in which they were involved was under the possibility of liquidation. Castle/Brown has also been contacted by a number of lawyers who run corporate trustee companies for their clients, concerned at the prospect of liquidation for unpaid tax or other liabilities of their clients. [16] As perhaps something aside, it must be noted that it would appear that quite a proportion of legal firms in New Zealand currently set up corporate trustees as part of their service to their clients and presumably allow the clients to operate them much as Castle/Brown appears to have done through Newmarket Trustees in relation to Mr Goh and the Southern Lights Trust. Whether that is an appropriate service for legal firms to offer their clients is another matter, but nonetheless if such companies are operated in a widespread fashion in the way in which Castle/Brown operated in this instance, clearly those legal firms are, by their actions or inaction, exposing their corporate trustee companies to the possibility of significant liability whether for taxor more generally at the hands of their clients. That may reflect on the partners of the firm as directors of the corporate trustee companies. [17] That leads on to the next matter which is, as noted, that the application to Associate Judge Faire to set aside the statutory demand in these proceedings was based wholly on an appeal to the discretion conferred on the Court under s 290(4)(c). The Associate Judge noted in his judgment that there was a dearth of evidence on a number of critical aspects which he might have found useful in deciding whether to exercise his discretion to set aside the statutory demand. Those lacunae would appear, in large part at least, now to be overcome by the significant affidavit filed by Mr Brown in support of the stay and restraint application. [18] That notwithstanding, there has been no appeal lodged against Associate Judge Faire's decision, nor has there been any application to him for a re-hearing based on the additional evidence now on the Court file. That comment is not to indicate that any such application or appeal would necessarily succeed, but nonetheless in a situation with wide repercussions for Castle/Brown and possibly repercussions just as wide for the New Zealand legal profession as a whole, one might have expected some challenge to the Associate Judge's decision to be lodged. Mr Hickson, however, made it clear that Castle/Brown decided that they would not challenge Associate Judge Faire's decision but would provide the additional evidence – as they have – to support a stay and restraint application or in opposition to the liquidation proceedings as a whole. [19] To compound the Commissioner's error in advertising this liquidation when there was an application to stay such advertising extant, the Commissioner filed no notice of opposition to the stay and restraint application until Mr Elika handed a notice of opposition to the Court during this hearing on 3 August. Even now, the Commissioner has filed no affidavit in support of his notice of opposition and Mr Elika indicates it may be as much as another fortnight before that affidavit will be filed - all of that, against the fact that any opposition was due to be filed and served on 27 July 2010.[20] The question now is what should be done in relation to the liquidation proceedings at this stage. [21] Mr Hickson sought to convert Newmarket Trustees' stay application to an application to strike out the liquidation proceedings on the basis that, the Commissioner advertising the liquidation claim knowing there was an application to stay that advertising extant, was abusing the process of the Court and flouting the High Court Rules. Mr Hickson submitted striking-out would be the appropriate course, both as a discipline for the Commissioner in relation to the breaches just outlined, and also as a mark of the Court's disapproval in accordance with its inherent jurisdiction at what had occurred. [22] On the other hand, Mr Elika made the point that were the liquidation proceedings to be struck out, the Commissioner would immediately issue a further statutory demand and further liquidation proceedings. It may be that such proceedings would meet a res judicata objection, the success of which cannot presently be gauged, but nonetheless the certainty that the Commissioner would take further proceedings was made plain. [23] Secondly, Mr Elika pointed to the concessions made by Newmarket Trustees before Associate Judge Faire that the debt was undisputed, not under challenge, and not the subject of a counterclaim or set-off. As mentioned, the application to Judge Faire was solely based on discretion. Mr Elika pointed to the fact that not only is there a statutory trust for the payment of GST but the Commissioner is statutorily bound to endeavour to collect all tax properly payable by taxpayers. Accordingly, he submitted there was an obligation on the Commissioner to press on with these proceedings if permitted, or to press on with new proceedings against Newmarket Trustees if the present proceedings are struck out and, possibly, to issue similar proceedings against other solicitors' corporate trustee companies if they have permitted their clients to accrue unpaid tax. [24] Looking at the matter overall, in light of the Commissioner's statutory obligations, there seems little point in converting Newmarket Trustees' application for stay to one of striking-out and granting that application. What the Commissionerdid in relation to advertising was wrong and Mr Elika has, on the Commissioner's behalf, apologised for the actions taken. But inevitably it would seem the matters at issue in these proceedings will come before a Court again and there seems little point in those circumstances in striking the matter out at this juncture. [25] What is, however, appropriate is first to impose a timetable order for the completion of the papers in this matter. The Commissioner has filed a notice of opposition during this hearing and is to file and serve any supporting affidavit by20 August 2010. Newmarket Trustees is then to have until 3 September 2010 to file any affidavit in reply, and the matter is then to be called in an appropriate Associate Judge's list as soon as convenient thereafter. [That phrasing is used because Associate Judge Abbott, in whose list this matter was originally called, will not preside over a further list until 12 October 2010 and it would be preferable that this matter advances before that date]. [26] Apart from compliance with that timetable, however, it is appropriate that the proceeding be stayed in consequence of the Commissioner's advertising error. Any rescission of the stay should be conditional on the Commissioner meeting Newmarket Trustees' costs involved in the matter to date. Mr Elika did not hazard an estimate as to what the appropriate costs would be but, given that the order needs to reflect in part wasted time and cost (although much of what Castle/Brown has done would be valuable in any subsequent hearing) and given that there is an element of the disciplinary use of the Court's inherent jurisdiction in the matter, the order is that the proceedings be stayed and any rescission be conditional on the Commissioner paying costs of $5,000 and any disbursements relevant to the matter to Newmarket Trustees before rescission occurs. .................................................................HUGH WILLIAMS J.Solicitors:R W Elika, Inland Revenue Department, P O Box 76 198 Manukau Emal: Ralph.elika@ird.govt.nz D B Hickson, P O Box 56613 Dominion Road, Mt. Eden, Auckland Email: dhickson@clear.net.nzCopy for:Mel.Libre@justice.govt.nz