MAWHINNEY v THE COMMISSIONER OF INLAND REVENUE [2014] NZHC 3067

MAWHINNEY v THE COMMISSIONER OF INLAND REVENUE [2014] NZHC 3067 [3 December 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2012-404-3985[2014] NZHC 3067IN THE MATTER of the Goods and Services Tax Act 1985and the Tax Administration Act 1994BETWEEN PETER WILLIAM MAWHINNEY ASTRUSTEE OF THE FOREST TRUSTPlaintiffAND THE COMMISSIONER OF INLANDREVENUEDefendantHearing: 1 December 2014Appearances: Plaintiff in personD K Lemmon and S J Osborne for DefendantJudgment: 3 December 2014JUDGMENT OF BREWER JThis judgment was delivered by me on 3 December 2014 at 3:15 pmpursuant to Rule 11.5 High Court Rules.Registrar/Deputy RegistrarSolicitors: Crown Law (Wellington) for DefendantCopy to: Plaintiff in personIntroduction[1] Mr Mawhinney is a trustee of the Forest Trust. He has, in that capacity, pursued litigation against the Commissioner of Inland Revenue in respect of theCommissioner's decision to disallow a GST refund of $67,011.65.[2] An application brought by Mr Mawhinney for judicial review was heard by Cooper J and determined in a judgment issued on 23 December 2013.1 His Honour found against the Forest Trust (in the person of Mr Mawhinney).[3] Mr Mawhinney, in these proceedings, seeks a great deal of money from the Commissioner. He has filed three statements of claim, including one in February of this year which is 188 pages long and which added an additional cause of action purporting to be a challenge under Part 8A of the Tax Administration Act 1994("TAA") to the disallowance of the GST refund.[4] The Commissioner applied to strike out the new cause of action ("the fourth cause of action"). He applied also for further security for costs. These matters were determined by Associate Judge Christiansen who delivered his judgment on 4 July 2014.2 The Associate Judge concluded that the fourth cause of action had been decided already by Cooper J and for that reason is prima facie vexatious. He struck it out.[5] The Associate Judge ordered security for costs in the sum of $40,000 to be paid into Court and to be held pending determination of the proceeding. He stayed the proceeding until lodgement of the payment.[6] Mr Mawhinney now applies for review of these decisions of Associate Judge Christiansen.1 Mawhinney v Commissioner of Inland Revenue [2013] NZHC 3564.2 Mawhinney v Commissioner of Inland Revenue [2014] NZHC 1554.Review[7] An application for review of a decision by an Associate Judge in these circumstances proceeds as a rehearing. This means that my approach to it is essentially appellate. Mr Mawhinney has the burden of persuading me that theAssociate Judge's decision is wrong; that is to say, that he based his decision on an incorrect view of the facts and/or applied wrong principles of law. Because his order for security for costs was the exercise of a discretion, Mr Mawhinney has to show that the Associate Judge acted on a wrong principle or failed to take into account some relevant matter or took into account some irrelevant matter – or was otherwise plainly wrong.Mr Mawhinney's submissions[8] Mr Mawhinney has filed comprehensive written submissions with supporting documentation. However, his oral submissions were quite concise and focused.Strike out[9] Mr Mawhinney submits that the Associate Judge erred in holding that the fourth cause of action was duplicitous in the sense that it had already been decided by Cooper J. In his submission, on the facts, which he submits are obvious, the disputes procedure set out in Part 4A of the TAA has been concluded. The decision of Cooper J was that the dispute should be determined by a challenge under s 138B(1) of the TAA. The Associate Judge made his decision on the basis of it being determined under s 138B(3). Accordingly, because a notice is required under s 138B(3), the Associate Judge erred by striking out the fourth cause of action on the basis that no challenge notice had been issued and therefore the disputes procedure under Part 4A had not been completed.[10] Mr Mawhinney distinguishes the Supreme Court decision in Allen because that was a decision under subs (3) of s 138B, not subs (1).3 In his submission, the Associate Judge erred in his interpretation of that decision.3 Allen v Commissioner of Inland Revenue [2006] NZSC 19, [2006] 3 NZLR 1.[11] In Mr Mawhinney's submission, if the Part 4A disputes procedure has cometo an end then it is up to the taxpayer to choose the forum for a challenge under Part 8A. The taxpayer can choose either the Taxation Review Authority or the HighCourt as a venue for the taxpayer's challenge.[12] Mr Mawhinney submitted that adding a fourth cause of action in a second amended statement of claim was an appropriate response to Cooper J's decision thatthe issue as to whether or not the Commissioner's notice of response was out of timeis an issue to be dealt with under the statutory procedures. Accordingly, there was no ground for striking out the fourth cause of action.Security for costs[13] As to security for costs, Mr Mawhinney submits the primary issue is that the Associate Judge erred by focusing on the ability of the Trust to pay any award of costs for the purposes of the threshold test in r 5.45 of the High Court Rules. The Associate Judge, in Mr Mawhinney's submission, should have focused on whetherMr Mawhinney, as plaintiff, was able to pay costs.[14] Mr Mawhinney's position here is based on the premise that a Trust is not in itself a legal person. It can act only through trustees and if a Trust has costs awarded against it then the trustee is liable to pay them personally. Of course, a trustee can seek to be indemnified from the assets of the Trust but that, in Mr Mawhinney'ssubmission, is a private matter between the trustee and the Trust.[15] Mr Mawhinney submits that the Associate Judge was aware that Mr Mawhinney is a registered proprietor of land with a net value of at least $3 million. Upon hearing this submission, I pointed out to Mr Mawhinney that he was recently made bankrupt and asked whether this interest in land was used to pay Mr Mawhinney's creditors. His response was that the land was not at that time owned by him. It is owned by him now, he told me, because it is property belonging to a Trust (not the Forest Trust) and he has become a trustee of the Trust. He is a registered proprietor. However, Mr Mawhinney said that equity in the Trust property is available to be used for paying costs.[16] Mr Mawhinney went on to submit that even if security for costs should have been ordered, the Associate Judge should not have directed that the security be paid into Court in money. He should have provided for security by other means. In his submission, it is up to the plaintiff as to how security for costs should be satisfied. In this case, Mr Mawhinney says that a second mortgage security is available over the Trust property to which I have referred. The first mortgage, Mr Mawhinney told me, secures a total amount of about $1.5 million, leaving millions of dollars in equity to cover the $40,000 security for costs.The Commissioner's submissionsStrike out[17] On the point that the Associate Judge erred in considering s 138B(1) as opposed to subs (3), Mr Lemmon for the Commissioner points out that subs (3) applies to a situation where the taxpayer is the initiator of the dispute. In this case, the taxpayer, the Forest Trust, is the initiator of the dispute and so subs (3) is the one that must apply.[18] In response to Mr Mawhinney's point that the fourth cause of action canstand because it relates to a challenge under Part 8A where the taxpayer can choose the forum, Mr Lemmon submitted that Cooper J held that the Part 4A procedure must be determined by the statutory processes before any challenge under Part 8A arises. Accordingly, no cause of action purporting to invoke Part 8A can stand.Security for costs[19] Mr Lemmon then addressed Mr Mawhinney's major point under the securityfor costs issue that the Associate Judge erred in not looking at the assets available to Mr Mawhinney personally. He made two short points. The first is that the Associate Judge was correct to look to the assets of the Trust because the Trust is the plaintiff. Mr Mawhinney is not acting in his personal capacity but in his capacity as trustee and it is to the assets of the Trust that the Commissioner would look for costs. Since the Trust has no assets, security for costs was appropriate. The second point is that even if a trustee is personally liable, the fact that he would have to have recourse tothe assets of a third party (the other Trust) for security might in itself suggest that a security is appropriate. He cites the judgment of Kós J in Highgate on Broadway Ltd v Devine.4[20] On the complaint by Mr Mawhinney that the Associate Judge should, having decided that security for costs is necessary, have left it up to Mr Mawhinney as to how security should be given, Mr Lemmon refers to r 5.45 which says that an order can be to give security by way of payment or by some other means. The Associate Judge was entitled to prefer cash.DiscussionStrike out[21] I have no doubt that the Associate Judge was right to strike out the fourth cause of action. Mr Mawhinney's criticisms of the Associate Judge's analysis cannotstand against the simple fact that Cooper J held that the issue of the assessment of GST which is the subject of the fourth cause of action is to be decided within the statutory disputes and challenge procedures in the Act.5 Mr Mawhinney is bound by that decision (he has filed an appeal with the Court of Appeal, but that does not at this time affect the force of Cooper J's judgment).[22] Mr Mawhinney cannot lever his argument into a new High Court proceeding by asserting that the Part 4A procedure has concluded. That assertion is not accepted by the Commissioner and is itself a matter for the Part 4A process.[23] This ground of review fails.Security for costs[24] Rule 5.45 of the High Court Rules allows a Judge, if it is just in all the circumstances, to order the giving of security for costs if (in this case) there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful. Security can be given by paying the security sum into4 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017.5 Mawhinney v Commissioner of Inland Revenue, above n 1, at [45].Court or by giving "to the satisfaction of the Judge or the Registrar" some other formof security.[25] The Court of Appeal in AS McLachlan Ltd v MEL Network Ltd restated the approach to be used:6[13] Rule 60(1)(b) [r 5.45] High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, "theCourt may, if it thinks fit in all the circumstances, order the giving ofsecurity for costs". Whether or not to order security and, if so, the quantumare discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing"principles" from the facts of previous cases.[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a checklist of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.[26] In this case there is no doubt that the plaintiff, the Forest Trust, could notmeet an order for costs out of its own resources. I agree with the Associate Judge's analysis of the plaintiff's position. The threshold was crossed.[27] The Associate Judge took into account also Mr Mawhinney's submission thathe could meet personally any order for costs because he is a registered proprietor of land which has a substantial value above and beyond the debts for which it is security or for which it is liable:7Mr Mawhinney says he together with Waitakere Forest Trust Limited is the registered proprietor of a land lot in which he says there is an equity of $3.2M; that the subject land has a valuation rating of $4.5M; that although that lot is subject to two registered mortgages the first of those is owed about $1.2M only whilst the second is held by himself and another as mortgagee. Therefore he says there is an equity of not less than $3.2M in that property.6 AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).7 Mawhinney v Commissioner of Inland Revenue, above n 2, at [57].[28] In reaching his decision, the Associate Judge considered the apparent meritsof the plaintiff's case and decided that it faces significant hurdles. He concluded:8It is not sufficient for Mr Mawhinney to claim he would meet costs. Hiscontention does not allay the Court's concerns of the ability ofMr Mawhinney to meet costs from his superannuitant's income. Regardingthe value in the land, it is clear that property is not owned by the Trust and that Mr Mawhinney has a connection to it by virtue of his being a mortgagoralong with another company. The Court only has Mr Mawhinney'scalculations of value and an insufficiency of material to evaluate those.[29] I infer that Mr Mawhinney did not put before the Associate Judge the option of security by way of second mortgage over the land in question.[30] In reaching his decision, the Associate Judge had to balance the interests of the plaintiff with the interests of the defendant. It is often the case that, because thepoint of ordering security for costs is to guard the defendant against the plaintiff'simpecuniosity, the making of the order brings the proceeding to a halt. That is likely to be the result here. Access to the Courts for a genuine plaintiff is not lightly to bedenied and should only occur when the plaintiff's claim has little chance of success.[31] Here, Mr Mawhinney has now offered a form of security (a second mortgage over the land of a third party) and submits that a plaintiff has a right to choose how he gives security for costs. That is not wholly correct. Rule 5.45 leaves it up to the Judge to decide whether security should be given by paying a sum into Court or by giving some other security. In the former case, a plaintiff can choose how he raises the sum required and in the latter case he can choose how he provides the required security – although the form of it must still meet the satisfaction of the Judge or the Registrar.[32] In this case, I share the Associate Judge's view of the merits of the plaintiff'scase. I fear that Mr Mawhinney is motivated more by passion than objective assessment.8 At [73].[33] I do not find that the Associate Judge made any error in the exercise of his discretion. He considered the matters he was required to consider and the decisions he made were open to him.Decision[34] The application for review is dismissed.[35] The Commissioner is entitled to costs and I award these on a 2B basis. They can be calculated by the Registrar if the parties cannot agree.Addendum[36] My task was to review the Associate Judge's decisions. If I am right in myassumption that Mr Mawhinney did not submit to the Associate Judge that security for costs could be provided by a second mortgage over the property he referred to then he can apply to the Associate Judge to vary his order. Of course, he would have to satisfy the Associate Judge that the second mortgage would be a proper security. This would entail, at least:(1) Providing proof that there is sufficient equity in the property.(2) Providing the written, and informed, consents of the registered proprietors to the granting of the mortgage.(3) Providing the written, and informed, consents of the existing second mortgagees to yielding priority.(4) Satisfying the Associate Judge that the granting of the second mortgage as security for costs is within the legal powers of the registered proprietors if they are not so registered as beneficial owners.________________________________Brewer J