THE COMMISSIONER OF INLAND REVENUE v HAYES - LIQUIDATOR [2013] NZHC 2120

THE COMMISSIONER OF INLAND REVENUE v HAYES - LIQUIDATOR [2013] NZHC 2120 [20 August 2013]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYCIV-2013-419-275[2013] NZHC 2120BETWEEN THE COMMISSIONER OF INLANDREVENUE, WellingtonPlaintiffAND NICHOLAS JOHN HAYES -LIQUIDATOR, HamiltonDefendantHearing: 13 August 2013Appearances: Mr N Malarao for PlaintiffMr D Hayes for DefendantJudgment: 20 August 2013JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on21.08.13 at 2 p.m, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateCounsel:Meredith Connell Solicitors, P O Box 2213, AucklandMr D Hayes, P O Box 9323, HamiltonBackground[1] There are two applications before the Court, that of the plaintiff for summary judgment against the defendant and the application which the defendant has brought to join third parties to the proceedings. The third parties are a Mr and Ms Jensen who were directors of the company which the defendant was appointed liquidator of,Smartcare Services Group Limited ("Smartcare"). I mention, as a matter ofbackground, that the defendant has also issued proceedings in the name of thecompany against the Jensens alleging that they breached their duties as directors ofthe company because they permitted it to trade while insolvent. An application hasbeen made in which the defendant in this proceeding seeks to consolidate the otherproceeding to which I have just made reference with the proceeding in which thesummary judgment is sought and which is now under consideration. Thatapplication however has been deferred for future consideration in terms of theMinute which Associate Judge Faire issued 24 June 2013.[2] The defendant was appointed liquidator of Smartcare on 31 August 2011.The plaintiff was a preferential creditor of the company. The plaintiff filed a claimin the liquidated estate of the company on 20 September 2011. The company owed$305,113.99 to the plaintiff, $112,465.61 of that being preferential. Despite thatpreferential status, the defendant as liquidator distributed $87,890.16 to the Jensens.He apparently did so because the Jensens had a general security agreement with thecompany over all its present and after acquired property. The plaintiff wrote to thedefendant about this payment. The defendant responded that the Jensens had priorityover any unsecured claims regardless of preference. The plaintiff then notified thedefendant that he had failed to comply with his duties as liquidator under s 286 ofthe Companies Act 993. The defendant admitted he had made a mistake in a letterdated 19 October 2012.The issues[3] As the case has developed, it has become clear that the defendant has raised two principal points of opposition to the summary judgment application. He has raised what might be termed defences in the strict sense of that term. In addition alarge part of the opposition centred on the proposition that the Court ought not to grant summary judgment as part of the exercise of the residual discretion it has to decline to do so, for the reason that the defendant wishes to join the directors of the company as third parties in this proceeding.[4] The plaintiff opposes the grant of leave to join the third parties and submits that it ought now to be able to proceed to obtain summary judgment.[5] In the course of argument, counsel for the defendant advanced a number of grounds that were put forward as supporting an arguable defence. Mr Malarao did not oppose such matters being raised even though they were not referred to in the notice of opposition.[6] In more detail the defences which the defendant puts forward in answer to the summary application are as follows:a) The summary judgement proceedings are an abuse of process;b) The plaintiff ought not to be able to obtain summary judgment because to do so would entail it receiving a windfall. This point was stated in the notice of opposition to be a defence that the plaintiff had not mitigated its loss. The defendant argued the plaintiff will receive a benefit of tax impost from the third party on taxation of $87,890.16;c) The plaintiff was required to conduct itself as a Model Litigant, and by proceeding with the summary judgment application rather than attempting to explore other ways of recovering the amount owed to it, it was in breach of that obligation;d) The plaintiff had also breached the foregoing duty because one of its officers had given misleading information;e) The defendant was unable to pay the amount of the judgment and therefore the Court in its discretion ought to decline summary judgment.f) Generally, the plaintiff ought not to be able to proceed to summary judgment in the absence of the Jensen as third parties, an application having been made to join them in that capacity.[7] So far as the third party point was relevant to the summary judgment application, the defendant argued that it should be open to him to pass on to the directors the amount of any judgment that might be entered against him. To proceed with the summary judgment application in circumstances where that was not possible would be unjust.[8] The defendant submitted there is jurisdiction to permit him to issue a third party notice to seek a contribution or indemnity from the directors of the company, which was based upon a claim that they had been unjustly enriched.[9] The defendant also asserted that the Court ought to exercise its jurisdictionunder s 284 of the Companies Act 1993 to reverse his decision to pay out to theJensens the proceeds of the accounts receivable. The effect of the Court giving sucha direction, it was stated, would be to reverse the payment which the defendant hadmade with the apparent consequence that the Court would also order the directors torepay the relevant sum to the company. This would render redundant any claim bythe plaintiff that the defendant had breached his obligations as liquidator of thecompany pursuant to ss 253 and 312 of the Act.[10] In this part of the judgment an assessment of the arguable defences will be undertaken. The first objective will be to enquire whether there is in fact an arguable defence available to the defendant against the plaintiff. The second objective will be to analyse whether the claim which the plaintiff brings against the defendant has any common elements with the proposed claim which the defendant would bring against the third party if leave to join the latter was granted.Abuse of process[11] It is alleged that the conduct of the Commissioner in commencing and prosecuting proceedings seeking a judgment against the defendant is an abuse of process. I understand that the argument is that a more sensible approach would be toallow the defendant to take steps to recover the disputed sum from the directors of the plaintiff company.[12] I am unable to accept that the steps which the plaintiff is taking can be aptly characterised as an abuse of process. The Commissioner is attempting to recover a debt and the proceedings which she has brought are unambiguously linked to that objective. She is not pursuing the proceedings for some ulterior purpose which is a paradigm case of abuse of process.1 The criticisms which Mr Hayes made of theCommissioner's conduct raises the issue of the "Model Litigant" policy which, thedefendant claims, the plaintiff has breached for the same reasons advanced in support of an argument that her proceedings represent an abuse of process. I shall deal with that aspect of the argument next.Model litigant[13] The submission was made for the defendant that the Commissioner wasrequired to act in the present proceedings as a Model Litigant. That proposition wasnot accepted for the Commissioner. I shall explain the Commissioner's position inmore detail subsequently.[14] The reference to Model Litigant obligations reflects a reference which Winkelmann J made in the extradition litigation Dotcom v Attorney General.2 In that case questions about whether the prosecution had cooperated in the unauthorised communication of information to the overseas party seeking extradition were thesubject of a passing reference, the Judge stating that:3The Crown is held to the standards of the model litigant, yet to take such anaction would be to defeat at least part of the purpose of the plaintiffs'application to the District Court, and also render futile, at least part of the District Court determination.[15] Counsel traced an earlier reference to the decision of the full High Court inSolicitor General v Miss Alice.4 The respondent was a lawyer who had been charged1 Grainger v Hill (1838) 132 ER 769, discussed in Gordon v Treadwell Stacey Smith [1996] 3 NZLR 281 at 290-293 (CA).2 Dotcom v Attorney General [2012] NZHC 1494.3 At [143].4 Solicitor General v Miss Alice [2007] 2 NZLR 783 (HC).with contempt. The contempt arose because he had dealt with material madeavailable to him, subject to certain conditions, otherwise than in compliance withthose conditions. He had published the material widely, because he considered thatan injustice had been done to his clients. The injustice was said to have come aboutbecause a government department, the Army, had allegedly provided misleadinginformation to the coroner who had enquired into an accident. The coroner hadgiven a verdict that the causes of the accident and the death of a person using thebridge had been due to the property owners' failure to maintain the bridge, ratherthan to shortcomings in the design or construction of the bridge which had been builtby the Army. The respondent considered the coroner had been influenced to come toa wrong conclusion. In the course of the judgment, the Court made reference tooverseas authorities which emphasized the fact that the Crown, as the source andfountain of justice, is bound to maintain the highest standards of probity and fairdealing.5 The full Court made reference to a further dictum of Lord Bingham ofCornhill in the following terms:[47] In Tweed v Parades Commission for Northern Ireland [2006] UKHL 53, in the analogous sphere of disclosure in judicial review, Lord Bingham has recently stated:"31 [There is an] obligation resting on a publicauthority to make candid disclosure to the court of its decision making process, laying before it the relevant facts and the reason behind the decisionchallenged "[16] After referring to these authorities the Court continued:[48] The theme overall is that the Crown as Executive must be an exemplar of high standards of conduct in litigation before the courts. That includes the Coroner's Court.[49] There is no justification for any lower standard of Crown conduct in New Zealand. On the contrary, it is the responsibility of the Crown as Executive, here the Army, as of the Crown as judiciary, to give effect to the right to the observance of the principles of natural justice conferred on the citizen by s 27 of the New Zealand Bill of Rights Act 1990.[17] I was referred to a statement of "Model Litigant policy" which wasapparently adopted by the Commerce Commission which required the Commission5 Sebel Products Limited v Commissioners of Customs and Excise [1949] 1 CH 409 at 413 (CHD).to act as a Model Litigant in the conduct of litigation. Specific requirements of the policy were to take an even handed approach in the handling of litigation and toconsider the possibilities for, and to initiate where appropriate, alternative means ofavoiding or resolving litigation, including by cooperation or agreed resolution.Another requirement was to not "seek to take inappropriate advantage of animpecunious opponent".[18] Mr Malarao properly referred me to a statement released by the Attorney-General's office6 in July 2013 which contains provisions which are substantially thesame as those contained in the Commerce Commission statement. Included in theAttorney-General's statement is the requirement that the Crown:5.6 Not take inappropriate or unfair advantage of an impecunious or unrepresented opponent.[19] Mr Malarao drew to my attention that included in the statement of values is a pronouncement that they have no legal effect and are not enforceable in any Court.[20] Therefore if the defendant is to gain any support for a Model Litigant typeapproach, it will have to be found either in an existing statement of the law or by arecognition that the law now imposes such an obligation. There is of course somesupport for the existence of Model Litigant – type duties to be found in the Solicitor-General v Miss Alice case to which reference has already been made. The defendantis unable to rely upon the Commerce Commission document because the CommerceCommission is not a party to this litigation and neither can it mount such a case onthe Attorney-General statement because that document explicitly recognises that thepolicy stated therein does not have legal effect and is not enforceable in any Court.[21] Even if the point has now been reached where the Crown does haveobligations which could be described as those of being a "Model Litigant", which Iwill assume is the case for the purposes of argument, two difficulties stand in thedefendant's path. The first is the terms in which such a generalised obligation wouldtranslate into the specific context of this case. It would be hard to find an objectionto a statement of obligation that the Crown is not to behave itself in such a way as to6 Attorney-General's Values for Crown Civil Litigation.undermine the case which an opposing litigant is bringing in the Courts in other litigation.7 As well, few would quarrel with the idea that when the Crown is appearing as a party at a coronial inquest it should not provide information which is misleading or incomplete. However, what the defendant in this case submits for is an obligation which constrains the Commissioner from proceeding to judgment against the defendant and instead requires her to allow him to take steps to recover from a third party an amount equivalent to what he is being sued for.[22] There is no doubt that the core responsibilities of the Commissioner includean obligation to recover amounts which ought to have been paid to her but which, inbreach of statute law, were paid to someone else other than the Inland Revenue.There is no doubt either that the Commissioner is required to bring to bear the fullrange of legal remedies available to any other litigant. Of course a vexatious ordisproportionate pursuit of a taxpayer whether by means of curial remedies orotherwise ought not to be contemplated. In my view, that point is a long way distantin the present case. The steps which the Commissioner is taking in bringing thissummary judgment application and not agreeing to defer action while the defendanttakes proceedings against the directors of the company are not exceptionable or opento criticism.[23] A key part of the defendant's submission was that he is impecunious and thatit would be wrong, and futile, to pursue him. The short answer to that point is thathe has given no evidence of his financial position. Nor, as Mr Malarao pointed out,has he made any mention of the existence or non-existence of indemnity insurancethat might be available to him and which it would be expected that a professionallycompetent, well-organised insolvency practitioner would arrange.[24] For the foregoing reasons, in my view the "Model Litigant" approach doesnot assist the defendant.The windfall point[25] The argument which counsel for the defendant, Mr Hayes, put forward can be summarised in the following way. The distribution of the proceeds of accounts7 Which appears to have been the case alleged in the Dotcom decision, above n 3.receivable to the directors which the liquidator carried out in breach of his obligations under ss 253 and 312 of the Companies Act has resulted in a position where the plaintiff has received some advantage which needs to be brought to account. The alleged advantage arises because, it is submitted, any payment out to the directors of the company would be taxable in their hands as a deemed dividend.[26] Mr Malarao submitted that even if it were open to the defendant to claim that the Commissioner was required to give credit for tax that had been generated as a result of the mis-application by the liquidator of the funds of the company - a proposition which the Commissioner disputed - the factual basis for the proposition upon which the argument rested was false. The directors were of course creditors ofthe company and that is why they took a GSA over the company's undertaking.They would be entitled to have the funds that they received from the liquidator, the $86,000, treated as repayment of the debt which would not attract any assessment of income tax.[27] In my view, Mr Malarao is on firm ground in making this submission. There is no evidence put forward that the Commissioner has the ability to levy tax of this kind or has any intention of doing so. Nor was any detailed legal argument put to the Court which would establish that there was some aspect of the income tax legislation which required the Court to ignore the common sense position which Mr Malarao put forward and instead to adopt the proposition which the defendant'scounsel advances. In the result, this proposition does not give rise to an arguable defence.Impecuniosity[28] Through his counsel the defendant also puts forward the proposition that there was no point in taking proceedings against him because he would not be able to meet the amount of any judgment. The point made in response by the Commissioner was that impecuniosity is not a defence to a legal claim.[29] Counsel for the defendant did not refer to any authority which lent support to the proposition that a defendant could rely on impecuniosity, whether as a ground forexercising the residual discretion to decline summary judgment which the Court undoubtedly has, or otherwise.The s 284 Companies Act point[30] Mr Hayes for the defendant further submitted that it would be possible for his client to seek a direction pursuant to s 284(1)(b) Companies Act, the effect of which is to "confirm, reverse, or modify an act or decision of the liquidator".[31] Mr Hayes said the Court could reverse the decision which his client had taken to pay out the $87,890.16 to the directors of the company. The effect of that would be to negate the debt which the defendant owed to the plaintiff.[32] Mr Malarao on the other hand submitted that even if a direction were to be given of the kind proposed, it would not have any effect at all on the central fact which was that funds had been paid out to the directors when they ought not to have been. The direction under s 284 of the kind proposed could not be viewed as having the result that the Court would "deem" that the money had not been paid to thedirectors when in truth it had.[33] I agree with the submissions for the Commissioner. The act of the defendant in paying the money out to the directors cannot now be recalled or revoked. The proposed direction under s 284 it would make no difference to the situation.The third party application[34] Where a summary judgment claim has been brought, r 4.4(3)(a) High Court Rules provides that a third party notice cannot be issued other than with the leave of the Court. It is implicit in that rule that the normal entitlement of the defendant to add a third party to whom it can pass on all or part of the liability incurred to the plaintiff is not available on an unrestricted basis. The Court may or may not decide that in the circumstances of the case such an outcome is just.[35] The reasons why the third party procedure is only conditionally available in cases where the plaintiff has brought a summary judgment claim were described bySmellie J in Thomson v Woolford.8 In that case, Smellie J granted summaryjudgment for a plaintiff (vendor) and refused an application by the defendant (thepurchaser) for leave to issue a third party notice against his solicitor. His Honoursaid:9Turning specifically to the question of the application for leave to issue a third party notice. The Plaintiffs rely upon Thorne v Seel [1878] WN 215 where it was held that a statement by a defendant that he is entitled to be indemnified by a third party is no answer to the plaintiff's claim, unless the third party has discharged the plaintiff's claim. Reference was also made to Helicopter Equipment Limited v Marine Insurance Co. Limited [1986] 1 NZLR 488. In that case in response to the plaintiff's application for summary judgment the defendant indicated to the Court that it would be seeking indemnity from a third party. The Court took the view that one of the grounds on which a third party notice can be set aside is that it would unduly delay the plaintiff. Summary judgment cases aside, it is of course well established that the Court's discretion to grant or refuse leave to issue a third party notice can be decisively influenced by the issue as to whether the plaintiff will be unreasonably delayed if leave is granted.In this case, as I have already recorded, the breach is acknowledged and the damages fall out almost automatically as a result of the precise provisions of the sale and purchase agreement. I am unable to see, therefore, that there could be any real argument in any claim the defendants may make for contribution or indemnity against their solicitors that the result vis-a-vis the plaintiffs and the defendants in relation to both liability and quantum could have been other than in terms of the summary judgment that I have entered. In addition of course it is immediately apparent that the defendants' allegation of professional negligence or breach of fiduciary duty against the solicitors acting at the time of the sale arises out of a completely separate contractual or fiduciary relationship and is quite distinct from the issue of primary liability between the plaintiffs and the defendants.In all the circumstances therefore I reached the firm conclusion that the plaintiffs' right to summary judgment should not be frustrated by this unrelated claim for contribution or indemnity. That claim in my view will not be prejudiced by the summary judgment if it has to be pursued at a later stage independently of the plaintiffs' action against the defendants.[36] In Druids Friendly Society v Westpac Merchant Finance Limited,10Master Thomson said:11It is apparent from the authority that where a plaintiff in a summary judgment application has a clear case to obtain judgment against a defendant then a defendant will not be permitted to apply for a third party to be joined simply to obtain contribution or indemnity from such third party, and with the prime view of putting off the day when he will be required to meet his obligations to the plaintiff. In other words the Court will not allow a defendant to delay the plaintiff the fruits of a judgment when liability is clear: to effect grant the defendant a stay while issues of liability, indemnity, or contribution are determined by the Court as between the8 Thomson v Woolford [1987] 1 NZLR 604 (HC).9 At 608, line 23.10 Druids Friendly Society v Westpac Merchant Finance Limited (1996) 9 PRNZ 644 (HC).11 At 647.defendant and a third party.[37] Among the matters considered by Master Thomson were:12a) delay;b) the strength of the plaintiff's case;c) the prospect of separate proceedings and the defendant's ability to issue proceedings against the proposed third party.[38] .It is my firm view that leave ought not to be granted to join a third party. Inthe first place, the plaintiff's claim is a strong one. The question is whether thedefendant breached his obligation as liquidator pursuant to s 259 of the Act. By thatsection the defendant was required to take possession of, protect, realise, anddistribute the assets, or the proceeds of the realisation of the assets, of the companyto its creditors in accordance with the Act. He was also required to ensure that thepreferential creditors were paid such sums as were due and owing to them under theAct. In the course of an exchange of correspondence between himself and theCommissioner dated 13 December 2012, the defendant did not deny that he hadbreached that obligation although, to be fair, he did say that "you will understandthat this point I must deny liability for legal reasons but I am willing to work withyou on this."[39] Further, the claim which the defendant would propose bringing against thethird party would allege breaches of director's duties on their parts. Such a claim is quite unrelated to the claim which the plaintiff brings against the defendant. Whilethe defendant's action against the Jensens does concern the money which is at issue in this proceeding, the added dimension of breach of director's duties separates the two. This is further a factor which Smellie J identified in the Thomson decision as telling against the grant of leave to issue a third party notice. As well, consistent with the decision in the Druids case, there is no reason to suppose that the defendant would not be able to pursue the directors in other proceedings.12 At 647.[40] It would appear to be implicit in the fact that the defendant wishes to issue a third party claim that he would hope to delay the entry of any summary judgment until he was in a position to simultaneously pass on any judgment that might be entered against him to the third party. The following passage from Pemberton v Chappell shows that this is not appropriate:13The general object of the rules about summary judgments is clear. It is to enable a plaintiff to obtain judgment where there is really no defence to the claim made and so put an end to the spectacle of a worthless defence being raised and pursued for the purposes of delay. It has been expressed in various ways all amounting to the same thing. In Wallingford v Mutual Society(1880) 5 App Cas 685, 693 Lord Selborne LC said that "the means should exist of coming by a short road to a final judgment, when there is no real bona fide defence to an action. But it is of at least equal importance, that parties should not in any such way, by a summary proceeding in Chambers, be shut out from their defence, when they ought to be admitted to defend". Two years earlier in Anglo-Italian Bank v Wells (1878) 38 LT 197, at p 199, Sir George Jessel MR said of the English rule then in force that "It isintended to prevent a man, clearly entitled to money, from being delayedwhere there is no fairly arguable defence to be brought forward".(emphasis added).Summary[41] The defendant has no defence to the summary judgment application. I am unable to accept that the steps taken by the Commissioner amount to an abuse of process. Even assuming that the model litigant standard applies to the Commissioner, its application does not assist him. The Commissioner is entitled to make use of the full range of legal avenues open to her and has a responsibility torecover amounts which should have been paid to the IRD. The Commissioner'sapproach is not open to criticism. Impecuniosity of the defendant is not a ground onwhich to decline summary judgment. The defendant's argument that theCommissioner will receive a windfall in the sense of taxation on the amount received by the Jensens does not give rise to an arguable defence. As well, the proposed direction under s 284 Companies Act would not alter the plaintiff's right to summaryjudgment against the defendant and thus does not give rise to an arguable defence. This is not a case where the residual discretion to decline summary judgment should be used.13 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 2.[42] Leave ought not to be granted to join a third party to the proceedings because the plaintiff has a strong claim and the action against the Jensens concerns allegedbreaches of directors' duties, which is different in substance from this proceeding.The defendant is not prevented from pursuing the Jensens in other proceedings. It is implicit that the application for leave to join a third party is motivated by an intention to delay the summary judgment proceeding.Result[43] The defendant's application for leave to join a third party is declined. There shall be judgment for the plaintiff as follows:a) judgment in the sum of $87,890.16; andb) interest on that amount pursuant to the Judicature Act 1908 from 5 April 2012 until 13 August 2013, being $5,959.16 .[44] The parties should confer on the issue of costs and if they are unable to agree are to file memoranda not exceeding five pages on each side within 15 working days of the date of this judgment being issued._____________J.P. DoogueAssociate Judge