PROPHET INVESTMENTS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC WN CIV-2005-485-313

PROPHET INVESTMENTS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC WN CIV- 2005-485-313 24 February 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2005-485-313IN THE MATTER OF the Income Tax Act 1994 and the Tax Administration Act 1994 BETWEEN PROPHET INVESTMENTS LIMITED Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 14 October 2005 And Memoranda from Counsel dated 14 October 2005, 16 November 2005 and 28 November 2005 Appearances: G. Pearson for Plaintiff M. Deligiannis and G. Withers for Defendant D. McKay for Mrs K. Wyman Judgment: 24 February 2006 In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 9.30am on the 24th day of February 2005.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] The defendant applies for further and better discovery in this proceeding. [2] The application is opposed by the plaintiff. [3] This matter originally came before me on 14 October 2005.[4] It relates to challenge proceedings which the plaintiff has brought against the defendant, prompted by the issue in September 2004 of a special taxation assessment against the plaintiff made under s44 Tax Administration Act 1994. [5] Subsequent to the hearing on 14 October 2005, counsel for each party have filed various memoranda which indicate that a number of the discovery issues argued on 14 October 2005 have now been resolved. A request was made that I should delay providing my judgment in this matter. [6] Since that time, counsel for the defendant has filed a further memorandum dated 16 November 2005 and counsel for the plaintiff a memorandum dated 28 November 2005. These indicate that my decision is required now only with respect to some of the matters argued before me on 14 October 2005. (The remaining matters are now resolved).Background Facts[7] The plaintiff company was incorporated on 26 August 2002. Linda Louise Wyman ("Mrs Wyman") is the sole shareholder/director of the company. [8] Mrs Wyman is the wife of Glen Lindsay Wyman ("Mr Wyman"). Until recently, Mr Wyman headed fourteen companies involved in developing commercial property and/or holding commercial property to derive rental income. Of Mr Wyman's fourteen companies, eight are now in liquidation. The remainder are either in receivership or have no assets. [9] During 2004, as I understand it, Mr Wyman was declared bankrupt. The defendant has indicated that it is currently prosecuting Mr Wyman for failing to provide information required under a statutory notice issued to him. This offence apparently relates to $4.4m in GST inputs claimed in a GST return filed for one of Mr Wyman's companies.[10] The background to the present challenge proceedings brought by the plaintiff relates to the issue in September 2004 of a special assessment to the plaintiff under s44 Tax Administration Act 1994. [11] The defendant took the step of issuing a special assessment in this case because the defendant Commissioner believed at the relevant time that the plaintiff was about to discontinue business in New Zealand, strip itself of its assets and leave behind a large tax debt that it never intended to pay. [12] That special assessment was issued by the defendant partially through an income tax year and was followed by a demand for payment of the tax assessed. [13] The special assessment assesses as taxable the gains on the sale of a commercial property at Upper Hutt upon the grounds that the plaintiff company was associated with particular persons who were at the relevant time in the business of dealing in or developing land. Those parties, it is claimed, include:(a) Linda Wyman and Glen Wyman in partnership (b) Glen Wyman (c) Lambie Properties Limited (d) Torgem Properties Limited (e) Jiff Properties Limited (f) Littoral Developments Limited (g) Balmie Properties Limited (h) Lambie Properties No. 5 Limited (i) Lambie Properties No. 7 Limited (j) Amnis Investments Limited[14] In the present proceeding the plaintiff broadly challenged both the validity and the substance of this special assessment.The Application before me for Decision[15] The present application is made under Rule 300 High Court Rules. Under this Rule the applicant must establish grounds for belief that the respondent is in possession of or has been in possession of a document or class of document that is relevant and should have been discovered, and that discovery is necessary at the time. [16] There are four principal components to Rule 300. These are: a) Grounds for belief – this may be established from evidence or from the nature or circumstances of the case, or from any document filed. b) Plaintiff is or has been in possession of a document or group of documents – the documents sought must be described with some specificity. c) Relevance – the documents in question must be relevant in terms of the wide Peruvian Guano test. d) Necessity – any order is subject to the requirement that it is necessary at the time it is made. [17] Subsequent to the original hearing of this matter on 14 October 2005, counsel for the defendant filed a memorandum dated 16 November 2005 indicating that this discovery application needed to be re-addressed and the documents sought on discovery refined down, consequent upon the plaintiff filing a draft amended Statement of Claim which it had signalled. [18] In light of this, the defendant in counsel's 16 November 2005 memorandum indicated that only some of the documents for which discovery had originally been sought were now required. Details of the documents sought and those no longer required were set out in the following way:1.0 Linda Wyman's signed original income tax returns as e-filed by Oak Chartered Accountants for the income tax years ended 2000 to 2004 – no longer required. 2.0 All statements for bank accounts for the period 29 October 1991 to October 1998 into which rents from the following properties were banked: Flat 2, 6 Pine Avenue, Lower Hutt; Flat 2, 10 Pukeko Street, Paraparaumu; Flat 1, 10 Pukeko Street, Paraparaumu; Flat 2, 12 Pukeko Street, Paraparaumu; 16 Te Pari Pari Road, Pukerua Bay; 58 Arahura Crescent, Porirua; Unit S, 217 The Terrace, Wellington – these documents are still required. 3.0 The plaintiff's signed original tax income returns as e-filed by Oak Chartered Accountants for the income tax years ended 2003 to 2004 – no longer required. 4.0 All of the plaintiff's bank statements on all bank accounts operated since incorporation – still required. 5.0 All of the plaintiff's financial statements and ledgers, including shareholders current accounts since incorporation – no longer required. 6.0 All of the plaintiff's minute book entries (directors and shareholders minutes) since incorporation – still required. 7.0 All of the above documents noted at paragraphs 4.0, 5.0 and 6.0 for Tara Property Investments Limited – no longer required. 8.0 All lease agreements for 173-179 Main Street, Upper Hutt for the period when the plaintiff was the landlord – still required. 9.0 All communication with tenants, including the letters that went out when the plaintiff purchased the building in October 2002 – still required. 10.0 Any loan agreements between Tara Property Investments Limited and/or Linda Wyman and the plaintiff – no longer required. 11.0 All correspondence between the plaintiff and James Winton of Valleywide Realty in relation to the sale of 173-179 Main Street, Upper Hutt to Logan Central Properties Limited or nominee – no longer required.12.0 All correspondence between the plaintiff/Tara Property Investments Limited and James Winton in relation to the purchase of ex-Vance Vivian Building, 110 High Street, Lower Hutt – no longer required. 13.0 The Duncan Cotterill file relating to the plaintiff's selling of 173- 179 Main Street, Upper Hutt – no longer required. 14.0 The Duncan Cotterill file relating to the plaintiff/Tara Property Investments Limited purchase of ex-Vance Vivian Building, 110 High Street, Lower Hutt – no longer required. 15.0 The Duncan Cotterill file relating to the plaintiff's purchase of 173- 179 Main Street, Upper Hutt – no longer required. 16.0 The Duncan Cotterill file relating to the plaintiff's/Tara Property Investments Limited purchase of 146 Main Street, Upper Hutt – no longer required. 17.0 All correspondence between the plaintiff and/or its agent regarding negotiation of the Restaurant Brands lease – still required. 18.0 All files relating to Linda Wyman's and/or the plaintiff's attempted purchase of 19-25 Seaview Road, Seaview from Jiff Properties Limited, including dealings with R. Stadniczenko and all dealings with Contributory Mortgages Limited during October to December 2003 – still required. 19.0 All documents relating to the plaintiff's dealings with Westpac Bank in relation to the loans in respect of 173-179 Main Street, Upper Hutt – no longer required. 20.0 All files relating to the lease between Gee-Two Limited as lessor and Libertas Investment Limited as lessee including Duncan Cotterill and/or Peter Connor's notes on the lease. The lease was entered into on 15 February 2002 – still required. 21.0 All files relating to the lease between the plaintiff as lessor and Libertas Investment Limited as lessee including Duncan Cotterill and/or Peter Connor's notes on the lease. The lease was entered into on 18 October 2002 – still required. 22.0 Complete print outs of the plaintiff's and Tara Property Investments Limited trust accounts with Duncan Cotterill relating to the sale of 173-179 Main Street, Upper Hutt to the purchase of 110 High Street, Lower Hutt, and to the purchase of 146 Main Street, Upper Hutt – no longer required.[19] The defendant states that discovery of the documents noted in the preceding paragraph [18] under subparagraph numbers 1.0, 3.0, 5.0, 7.0, 10.0, 11.0, 12.0, 13.0, 14.0, 15.0, 16.0, 19.0 and 22.0 is no longer required given the plaintiff's withdrawal of its challenge to the validity of the defendant's s44 Special Assessment and the concession that Mr Wyman is associated to the plaintiff.[20] My decision on the defendant's further and better discovery application is therefore required only in respect of the documents noted in paragraph [18] under subparagraphs 2.0, 4.0, 6.0, 8.0, 9.0, 17.0, 18.0, 20.0 and 21.0. I now set out that decision.Decision[21] The first two components set out in r.300 are that the applicant must show reasonable grounds for belief, or at least a prima facie indication that the documents concerned are or have been in the plaintiff's possession or control – Beecham Group Ltd v Bristol-Myers Co (1979) VR 273 at page 279, and Astra-National Productions Ltd v Neo-Art Productions Ltd (1928) WN 218. [22] As to whether the documents in question are in the control of the plaintiff, this is not to be restricted to those documents in its immediate possession, but is to include documents that are held by agents and others on behalf of the plaintiff. It is also to include documents to which the plaintiff has access under, for example, the Privacy Act – Xuan v Wu (unreported, HC AK, 14 October 2003, Heath J). [23] The nature of the documents now sought by the defendant falls into the following broad categories: a) Financial records – including bank records, and loan applications and loan documentation. b) Correspondence – in relation to business and real estate transactions involving the plaintiff and/or Mrs Wyman and/or companies closely associated with Mrs Wyman. c) Documentation – the plaintiff's minute book entries, lease documentation and communication with tenants, including specifically the Restaurant Brands lease arrangements.[24] The defendant contends that these documents are likely to have been either created by or for the plaintiff and/or Mrs Wyman and/or companies closely associated with Mrs Wyman. On the basis of the material before the Court, I accept that there is substance in this argument and that the documents sought by the defendant above are also described with sufficient specificity in terms of r.300. [25] I am satisfied, too, on the basis of documents before the Court, including the plaintiff's Statement of Claim, the Agreed Statement of Issues, and the plaintiff's Notice of Opposition to the present application, that the defendant has established that proper grounds exist for the belief that the plaintiff is in or has had possession or control of the documents which the defendant now seeks. [26] The next issue relates to relevance. The documents in question need to be relevant in terms of the wide Peruvian Guano test. As to this test, the words of Brett LJ in the Peruvian Guano case (Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 (CA)) at p63 are still relevant today:It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may - not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words 'either directly or indirectly' because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of those two consequences:(emphasis added) [27] Here, the defendant contends that the documents sought are relevant in the sense that they relate to matters in question in this proceeding including matters which are set out particularly in paragraph 13.1 of the Agreed Statement of Issues between the parties filed in this Court on 3 October 2005. This paragraph 13.1 deals with an association issue described as:13. The position in relation to each of the parties identified as being associated is: 13.1 Linda Wyman and Glen Wyman in partnershipThe plaintiff contends that there has never been such a partnership; alternatively that no such partnership existed at the material date. The Commissioner contends that at the material date, such a partnership existed.[28] I turn now to consider the specific documents sought by the defendant as outlined in the relevant numbered subparagraphs of paragraph [18] of this judgment. [29] Paragraph 2.0 – the bank account statements for the various rental properties noted in paragraph 2.0 are requested by the defendant on the basis that paragraph 13.1 of the Agreed Statement of Issues noted above is still a live issue. The defendant's position is that Mrs Wyman and Mr Wyman were in partnership, and that the partnership was either in the business of dealing in land or in the business of developing or dividing land into lots. The various properties specified in this paragraph 2.0, according to the defendant, were bought and sold by the Linda and Glen Wyman Partnership between 29 October 1991 and October 1998. [30] Counsel for the defendant argues that the request for bank account statements sought here is completely new, it differed from the requests in the defendant's application, and it was not argued at the oral hearing on 14 October 2005. That may be so, but as I see it, this is a matter properly dealt with in the present proceeding. He also questions the relevance of these bank statements, given the period for which they are sought. Notwithstanding this, I take the view that in terms of the widePeruvian Guano test, these are documents that are relevant here, in that they relate to the issue of whether Mrs Wyman and Mr Wyman were in partnership at particular times, which is a remaining live issue. I find, therefore, that these documents should be discovered by the plaintiff. [31] So far as the documents sought in paragraph 4.0 are concerned (plaintiff's bank statements on all bank accounts operated since incorporation), again, the defendant contends that these are relevant to matters in issue in the proceeding including the association issue noted in paragraph 13.1 of the agreed statement of issues. [32] The defendant, in response, claims that there is nothing in the plaintiff's bank accounts that illuminates the issue of whether Mrs Wyman and Mr Wyman were inpartnership. Further, the plaintiff claims that, in any event, the defendant has powers to obtain these documents from the bank at any time, and should pursue this avenue. [33] Again, notwithstanding these contentions, I accept that the application is properly made here, and I accept the defendant's argument that these bank statements are relevant to the association issue, and may well be relevant to the association issue in terms of the wide Peruvian Guano test. Therefore, they should be discovered. [34] So far as the documents sought in paragraph 6.0 are concerned (the plaintiff's minute book entries since incorporation), again, the defendant contends these are broadly relevant to the matters in issue in the proceeding and to the possible association issue question set out in paragraph 13.1 of the agreed statement of issues. [35] In response, the plaintiff contends that no minutes relate to the association between the plaintiff and the partnership of Mr and Mrs Wyman, and if there had been, they would have been discovered. Notwithstanding this contention, again, I accept the defendant's submission that if indeed minute book entries exist, then they are relevant in terms of the wide relevance test for discovery purposes and should be discovered. [36] So far as to the documents sought in paragraph 8.0 are concerned (all lease agreements for 173-179 Main Street, Upper Hutt), again, I accept the defendant's contention that these are relevant to matters in question in this proceeding and to the broad association issue outlined in paragraph 13.1 of the agreed statement of issues. [37] The defendant in turn did maintain that if there was some relevant information in the lease agreements in question, then these documents would have been discovered already. Although that may prove to be the case, it still does not prevent a discovery order being made where, as here, it is appropriate. I accept, therefore, that these documents are relevant, particularly given that they relate to the commercial property in question for which the defendant has issued his assessment. I find, therefore, that these documents accordingly should be discovered.[38] So far as the documents sought in paragraph 9.0 are concerned (communication with tenants when the plaintiff purchased the building in October 2002), again, I accept the relevance of these documents to matters in question in this proceeding and to the possible association issue in paragraph 13.1 of the agreed statement of issues. [39] The defendant had maintained that these documents cannot relate to the suggested partnership of Mrs Wyman and Mr Wyman and they are, in any event, not relevant here. I reject this. Again, they relate to the plaintiff's commercial property in question and the approaches and dealings of the parties directly related to this proceeding. [40] So far as the documents in paragraph 17.0 are concerned (correspondence between the plaintiff and/or its agent regarding negotiation of the Restaurant Brands lease), again, I accept the defendant's contention that these documents are relevant to matters in question in this proceeding and to the possible association issue in paragraph 13.1 of the agreed statement of issues. Further, the defendant notes that Mrs Wyman's affidavit dated 7 October 2005 at paragraphs 6 and 7 specifically states first, that she has documents "with Glenn's (Mr Wyman's) name on them" relating to the negotiation of the Restaurants Brands lease and secondly, that she has no objection to giving the defendant a copy of these documents. [41] Notwithstanding this comment in Mrs Wyman's affidavit, counsel for the plaintiff endeavoured to contend that these documents relating to the lease negotiation are not relevant, and if there was relevant information in them, they would have been discovered. I reject this contention. An order for discovery of these documents is to follow. [42] As to the documents sought in paragraph 18.0 (files relating to the attempted purchase of 19-25 Seaview Road, Seaview, including related dealings), the defendant contends that these are relevant to the association issues referred to not only in paragraph 13.1 of the Agreed Statement of Issues, but also with respect to association issues set out in paragraph 13.3 (which concerns association between the plaintiff and Lambie Properties Limited, Torgem Properties Limited and JiffProperties Limited, Littoral Developments Limited, Balmie Properties Limited, Lambie Properties No. 5 Limited, Lambie Properties No. 7 Limited and Amnis Investments Limited). [43] The response from the defendant is again a contention that these documents are not relevant, as they have nothing to do with the partnership of Mr and Mrs Wyman, and if there was some relevant information, then it would already have been discovered. Again, I reject this contention from the defendant. Files concerning an attempted purchase and dealings with agents and mortgage companies may well in terms of the Peruvian Guano test assist the defendant in advancing its case with respect to the general association question. I find that these documents are relevant and should be discovered. [44] As to the documents specified in paragraph 20.0 (files relating to leases), again, I accept the defendant's contention that these are relevant to matters in question in the proceeding, including possibly association issues specified in paragraph 13.1 of the agreed statement of issues. Again, they concern relevant commercial property and the possible web of parties the defendant claims have an appropriate association with the plaintiff here. [45] Finally, as to the documents specified in paragraph 21.0 (files relating to lease with Libertas Investment Limited), again, I accept the defendant's contention that these documents are relevant to matters in question in the proceeding, including possibly association issues specified in paragraph 13.1 of the agreed statement of issues. Again, they concern relevant commercial property and the possible web of parties the defendant claims have an appropriate association with the plaintiff here. [46] And I turn now to the final requirement. This is that for any discovery order to be made, the order must be appropriate and necessary at the time it is to be made. On the basis of the material before the Court I am satisfied that it is both appropriate and necessary for the discovery orders sought by the defendant to be made now. The information sought would not require disclosure of confidential information, and I am satisfied that the discovery sought is reasonable in terms of the test outlined inKrone NZ Technique Ltd v Connect Assistance Ltd (1988) 2 PRNZ 627.Conclusion[47] For the reasons I have outlined above, the defendant's application for further and better discovery with respect to the documents sought as specified in paragraph [18] above is successful. [48] An order is now made that: (1) The plaintiff is within 28 days of the date of this judgment to provide further and better discovery to the defendant of the documents which are, or have been in its possession or power relating to any matter in question in this proceeding, and in particular: (a) The plaintiff is to file an amended affidavit of documents listing: (i) All documents, correspondence or other recorded information held by the plaintiff relating to any matter in question in this proceeding. (ii) All relevant correspondence and documents held by third parties for the plaintiff. (iii)All file notes and memoranda. (iv) All other relevant correspondence and documents. (b) The plaintiff's amended affidavit of documents is to include the following specific documents: (i) All statements for bank accounts for the period 29 October 1991 to October 1998 into which rents from the following properties were banked: Flat 2, 6 Pine Avenue, Lower Hutt; Flat 2, 10 Pukeko Street, Paraparaumu;Flat 1, 10 Pukeko Street, Paraparaumu; Flat 2, 12 Pukeko Street, Paraparaumu; 16 Te Pari Pari Road, Pukerua Bay; 58 Arahura Crescent, Porirua; Unit S, 217 The Terrace, Wellington (ii) All of the plaintiff's bank statements on all bank accounts operated since incorporation. (iii) All of the plaintiff's minute book entries (directors and shareholders minutes) since incorporation. (iv) All lease agreements for 173-179 Main Street, Upper Hutt for the period when the plaintiff was the landlord.(v) All communications with tenants, including the letters that went out when the plaintiff purchased the building in October 2002. (vi) All correspondence between the plaintiff and/or its agent regarding negotiation of the Restaurant Brands lease. (vii) All files relating to Linda Wyman's and/or the plaintiff's attempted purchase of 19-25 Seaview Road, Seaview from Jiff Properties Limited, including dealings with R. Stadniczenko and all dealings with Contributory Mortgages Limited during October to December 2003. (viii) All files relating to the lease between Gee-Two Limited as lessor and Libertas Investment Limited as lessee including Duncan Cotterill and/or Peter Connor's notes on the lease. The lease was entered into on 15 February 2002. (ix) All files relating to the lease between the plaintiff as lessor and Libertas Investment Limited as lessee including Duncan Cotterill and/or Peter Connor's notes on the lease. The lease was entered into on 18 October 2002. [49] Costs are reserved. If the parties are unable to resolve the issue of costs between them, then counsel are to file appropriate memoranda on the costs issue, andin the absence of a request from either party to be heard, I will decide the costs question on the basis of the material filed. __________________________Associate Judge D.I. GendallSolicitors:Duncan Cotterill, Wellington for Plaintiff Crown Law Office, Wellington for Defendant