APN Holdings NZ Limited v Commissioner of Inland Revenue
[2016] NZHC 244
•23 February 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-6982
CIV-2013-404-2571 [2016] NZHC 244
UNDER The Tax Administration Act 1994 IN THE MATTER
of the Income Tax Act 2004 and the
Income Tax Act 2007BETWEEN
APN HOLDINGS NZ LIMITED Plaintiff
AND
COMMISSIONER OF INLAND REVENUE
Defendant
CIV-2013-404-2561
CIV-2013-404-5231
CIV-2015-404-1804
BETWEEN WILSON & HORTON LIMITED Plaintiff
ANDCOMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 22 February 2016 Appearances:
L McKay and E S Scorgie for the Plaintiff
J B Smith QC for the DefendantJudgment:
23 February 2016
JUDGMENT OF MUIR J
This judgment was delivered by me on Tuesday 23 February 2016 at 1.30 pm
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
APN HOLDINGS NZ LIMITED v COMMISSIONER OF INLAND REVENUE [2016] NZHC 244 [23
February 2016]
Introduction
[1] The plaintiff seeks adjournment of a three week trial scheduled to commence on 29 February 2016 in which it claims declarations that certain deduction assessments and shortfall penalty assessments made by the Commissioner of Inland Revenue (the Commissioner) are incorrect.
[2] The main issue in the proceedings is whether an arrangement entered into by Wilson & Horton Ltd (WHL) involving issue by it of mandatory convertible notes (MCNs) is a tax avoidance arrangement to which SBG 1 of the Income Tax Act 2004 and the Income Tax Act 2007 apply.
[3] The MCNs have a face value of $349.5m of which WHL has paid interest of approximately $310m. That interest has been treated as deductable for income tax purposes.
[4] The Commissioner disagreed with that treatment. She argues that $216m of
$310m paid was a non-deductable repayment of principal. She invoked the anti- avoidance provisions within the Act to treat the $216m amount as non-deductable.
Background to application and submissions
[5] On 18 December 2015 the Commissioner obtained a Trans Tasman subpoena against Royal Bank of Scotland NV and RBS Group (Australia) Pty Ltd (together RBS) as successors to ABN AMRO NV (ABN AMRO). ABN AMRO was the transaction counterparty.
[6] In response to the subpoena, RBS delivered 3,300 pages of documents to the
High Court on 5 February 2016. These were, in turn provided to the parties on
9 February 2016. They comprise 554 discrete documents of which the Commissioner claims 59 are potentially relevant. The plaintiffs say their preliminary review indicates that there are 130 in that category including:
(a) several presentations made to APN Group by ABN AMRO containing original proposals for the transaction;
(b)numerous versions of a financial model of the proposed transactions apparently developed by ABN AMRO;
(c) notes of and references to meetings and/or conversations with APN Group representatives including those APN Group witnesses the plaintiffs intend to call in the proceedings; and
(d)internal ABN AMRO correspondence and other documents including reports relevant to ABN AMRO’s internal credit approval and risk management processes.
[7] The plaintiffs say that to a varying extent the material refers to the taxation consequences of the transaction at issue and as such the documents are likely to be relevant to an inquiry into the objective purpose or effect of the transaction, being the central inquiry in these proceedings.
[8] Mr McKay referred me to two specific documents by way of example. The first is on an internal ABN AMRO memorandum likely prepared on or around 15
November 2004 which contains the following passages.
From the presentation we understand that the company?s (sic) business rational (sic) for this transaction is cheap funding, but as we understand from the structure the coupon on the NZD 330 mln MCN payable by W&H to the SPC (step 7 in the diagram) must be high as the SPC would need to be able to pay P&I on the NZD 220 mln funding, from that coupon. So please explain why this is funding at low cost.
The funding is at low cost because W&H will be able to receive a tax deduction for interest on the NZD330 mln face value of the MCN
bondrather than just the NZD220 mln net borrowing amount. Also, there is no tax on capital gain applicable to APN group for the MCN transfer and share conversion.
We were previously informed that this structure was tax driven, but there is no mention of this in the presentation, please explain/comment.
[9] The second is one version of the financial models which refers among other things to “principal reductions”, the “tax effect” and the “cumulative net NPV for year”.
[10] The plaintiff’s principal witness is its former chief financial officer Mr Peter Myers. He is said to have been the person primarily responsible for the negotiation and implementation of the transaction. He is now employed as chief financial officer of Billabong International Ltd (Billabong). His brief of evidence was filed on 10
July 2015. Although that was not before the Court, it is common ground that it addresses at length the objectives of the transaction which are said by Mr Myers to have been primarily driven by what are described as “Treasury” concerns to mitigate various foreign currency exposures resulting from the acquisition by Australian based APN International Pty Ltd (APNI) of NZ based WHL.
[11] The Commissioner says that this evidence may in part breach the proscription on subjective statements of purpose and effect identified by the Court of Appeal in Alesco.1 Nevertheless she intends that Mr Myers be cross-examined on the basis of those ABN AMRO documents suggestive of other purposes apart from the Treasury imperatives that Mr Myers identifies. There is no doubt that in its characterisation of interest payments as in part “principal reduction” the documents will be relevant to
the assessment of objective purpose and effect.
[12] The difficulty from the plaintiffs’ perspective is that Mr Myers is, on account of particularly pressing commitments to Billabong, unable to consider the new documents in any detail until his scheduled arrival in New Zealand on the evening of
2 March 2016. I have reviewed correspondence from Mr Myers addressing these issues. His unavailability in the latter part of February has in fact been a matter of record since 2 April 2015 when application was made to delay the originally scheduled trial date which was earlier in February. The plaintiffs therefore say that unless the trail is adjourned:
(a) they will be required to proceed to trial and open their case without the opportunity to understand what their principal witness says about
a material portion of the documentary record; and
1 Alesco New Zealand Ltd v Commissioner of Inland Revenue [2013] NZCA 40, [2013] 2 NZLR
175 at [27].
(b)the plaintiffs will be deprived of the ability to advance considered evidence in chief from Mr Myers in relation to the subpoenaed documents.
[13] They say that the interests of justice favour an adjournment on the basis:
(a) that Mr Myers is an essential factual witness and they have no control over his lack of availability which is in any event justified and unavoidable; and
(b)the Commissioner could have sought to subpoena the relevant documents at any time from receipt of the plaintiff’s affidavits of documents in January 2015 and that the delay in doing so coupled with the Commissioner’s knowledge of Mr Myers’ unavailability in February means that any detriment suffered by the defendant as a result of an adjournment is of her own making.
[14] Mr McKay emphasises not only the comprehensive discovery obligations imposed on the parties in the proceedings but the antecedent obligations to like effect under the objection procedures. He says that the plaintiffs could rightly expect that when Mr Myers prepared his evidence he did so against the full record relevant to the case.
[15] They also say that any financial detriment to the defendant as a result of the delay will, in the event the defendant is successful, will be compensated by the continued accrual of use of money interest.
[16] They emphasise the dispute is of a very long standing, concerning matters occurring over a decade ago, and that any additional delay is outweighed by the prejudice to the plaintiff ’s interests in a fair trial.
[17] The defendant opposes the adjournment. The Commissioner says that the plaintiffs overstate the time required for Mr Myers to familiarise himself with the documents, and that there is only a limited number which are relevant. It says
further that the relevant documents raise one real issue only, namely whether the transaction was “tax driven” or not and that there is no reason to suggest Mr Myers needs to be “sequestered for weeks” for solicitors and counsel to be adequately briefed. Mr Smith QC submits that the interests of justice would be adequately met if Mr McKay opened on a limited basis and if the case then stood adjourned until 3
March for instructions to be taken. He submits that Mr Myers has already been briefed – that he has nailed his colours to the “Treasury” mast and that it is now for him to defend that position in the face of potentially contradictory documents or acknowledge error. The defendant also says that there is nothing unusual or inherently prejudicial about production of documents on subpoena at the start of or during the course of trial. It refers to the Court’s power to issue a subpoena duces tecum whereby a third party may be compelled to attend at the commencement of trial and produce documents. It says that the fact that the documents had not previously been discovered is irrelevant unless the documents were in the power or possession of the party concerned and therefore ought previously to have been discovered.
[18] In summary therefore the Commissisoner’s position is that despite the usually predictable way in which evidence is furnished in the case management context, there is always the possibility that third party documents might need to be considered shortly before or at the commencement of trial, and that their provision is not a proper basis of adjournment, particularly where, as here, the documents will have been available for nearly three weeks prior to trial.
Discussion
[19] I accept that the plaintiff cannot meaningfully brief Mr Myers before 3 March
2016. The defendant Commissioner does not seriously contend otherwise.
[20] I accept also that the documents are highly relevant to any objective assessment of purpose and effect. They can be expected to form a critical part of Mr Myers’ cross-examination given the nature of his proposed evidence. Counsel could not in my view responsibly open without an opportunity for Mr Myers to be adequately briefed in respect of the documents.
[21] Against that background I explored with counsel a range of potential options for a delay in trial commencement date until a minimum of two days after Mr Myers’ arrival in New Zealand and extension of sitting time into the Easter week. No compromise proved possible, primarily because of flow on effects with the Commissioner’s overseas experts who have other commitments. In the result, the only way that the timetable could be made to fit was if the plaintiffs were required to open (whether on a limited basis or otherwise) on 29 February, with the plaintiffs’ witness Mr Cottam called on 1 March, the case adjourned for a day on 2 March and resuming with Mr Myers on 3 March. Mr Smith submitted that is the way the case should proceed.
[22] Mr McKay strenuously resisted such a timetable on the basis that he was entitled to open fully against a proper understanding of all his clients’ evidence and that the Commissioner understated the time required adequately to brief Mr Myers having regard to the very significant number of existing documents which would need to be assessed alongside those produced by RBS on the subpoena.
[23] He emphasised, which I accept, that there is no adequate explanation before the Court as to why the Commissioner delayed until November 2015 to seek the relevant documents on subpoena (initial attempts having been frustrated by some error in the application with the result that orders were not in fact made until 18
December). In circumstances where Mr Myers’ brief was filed on 10 July 2015 that delay seems to me excessive. It is the underlying cause of the difficulties which the plaintiffs and likewise the Court now face.
[24] The relevant authorities in this context invite the Court to give broad consideration to the interests of justice, while allowing also consideration of the extent to which the administration of justice is inevitably affected by the granting of a late adjournment. I do not consider the interests of justice served by the proposals Mr Smith advances. In a case of this complexity and importance I accept that the plaintiffs should be entitled to open with full knowledge of what their principal witness says in relation to the documents critical to the trial. That the plaintiffs are unable to is not a matter for which they are responsible and its well telegraphed difficulties with Mr Myers should have alerted the Commissioner to the importance
of pursuing her subpoena at an earlier opportunity. Although ordinarily such difficulties could be met by a short delay in the commencement of trial, which the Court would have been prepared to accommodate in this case, that solution is frustrated by difficulties with the Commissioner’s own witnesses.
Decision
[25] Regrettable though it is from a scheduling point of view, I have reached the conclusion therefore that an adjournment should be granted.
[26] In the event that was my conclusion Mr Smith asks that costs be reserved. He does so on the basis that Mr Myers’ evidence as to the purpose and effect of the transaction may yet prove to be inadmissible with the result that any adjournment promised on his consideration of documents suggesting a different purpose and effect may be otiose. I accept that costs are appropriately reserved to consider that issue in due course.
Orders
[27] I adjourn commencement of the trial to 18 July 2016 or such other date as can be agreed by consultation between the parties and the Registrar. The parties are to confer with the Registrar in terms of anticipated hearing time. There was some suggestion in argument that three weeks may be unnecessarily generous.
[28] I grant leave to the plaintiff to file and serve a supplementary brief by Mr Myers limited strictly to his consideration of the documents obtained by the Commissioner on subpoena from RBS, such brief to be filed and served by 4 April
2016.
[29] Any briefs of evidence in response are to be filed and served by 2 May 2016. [30] Any amended opening by the plaintiffs is to be filed and served by 23 May
2016.
[31] Any amended opening by the defendant is to be filed and served by 13 June
2016.
[32] Costs are reserved.
Muir J
0
0
1