Commissioner of Inland Revenue v Chesterfields Preschools Ltd

[2009] NZCA 373

IN THE COURT OF APPEAL OF NEW ZEALAND

CA607/2008
CA800/2008
CA271/2009
[2009] NZCA 373

BETWEENCOMMISSIONER OF INLAND REVENUE

Appellant

ANDCHESTERFIELDS PRESCHOOLS LIMITED

First Respondent

ANDD J HAMPTON

Second Respondent

ANDCHESTERFIELDS PARTNERSHIP

Third Respondent

ANDCHESTERFIELDS PRESCHOOLS PARTNERSHIP

Fourth Respondent

ANDANOLBE ENTERPRISES LIMITED

Fifth Respondent

Hearing:18 August 2009

Court:Glazebrook, Robertson and Ellen France JJ

Counsel:E Aspey for Appellant

D J Hampton in person for First, Second and Fifth Respondents
T A Sisson in person for Third and Fourth Respondents

Judgment:25 August 2009 at 2.30 pm 

JUDGMENT OF THE COURT

AOrder staying execution of the orders made by the High Court on 25 November 2008 in Chesterfield Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,148 and the orders made by the High Court on 1 May 2009 in Chesterfield Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,504 pending the determination of the appellant’s appeals against those orders.

BThe Court will appoint an amicus to assist the Court on the broader issues of principle arising in the judicial review appeal.

CThe application for a stay of further proceedings in the High Court is dismissed.

DCosts are reserved.

REASONS OF THE COURT

(Given by Ellen France J)

Introduction

[1]       This is an application for a stay of execution pending appeal.

Background

[2]       The litigation between the parties has been protracted and involves numerous taxpayers’ accounts.  For present purposes, we need only set out a brief description of the relevant background. 

[3]       In May 2004 the Commissioner of Inland Revenue, the appellant, began debt recovery action against the first to fourth respondents.  Those proceedings were adjourned pending the hearing of judicial review proceedings brought by the respondent taxpayers in July 2004.  Those proceedings challenged the way in which the Commissioner dealt with their tax liability.  That liability was largely the consequence of failures to make returns on time and to pay tax on the due date.  By November 2006, just prior to delivery of the judgment in the judicial review proceedings, the taxpayers’ liability was about $4 million of which over $900,000 reflected the core assessments and the balance, late payment penalties and interest.

[4]       In a judgment of 15 December 2006 now reported as Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21,125 (HC),  (“the first judgment”), Fogarty J found there was no error in the Commissioner’s approach to s 183A of the Tax Administration Act 1994 (remission of penalties) which applied to the post 1 April 1997 debt.  However, the Commissioner was directed to reconsider various matters and, in particular, the Judge said that the Commissioner should consider remission of some penalties and interest because of lengthy delays in determining the availability of GST refunds that the fifth respondent expected to receive.

[5]       The Commissioner reconsidered these various matters and did give the respondents some relief.  But the respondents were dissatisfied with the outcome.  Further judicial review proceedings followed.  In a judgment delivered on 25 November 2008, ((2009) 24 NZTC 23,148) (“the second judgment”), Fogarty J set aside the relevant determination, redirected the Commissioner to act upon the Court’s earlier judgment, ordered that various “sham” issues be set down for hearing in the High Court if not resolved within a month of judgment, and reserved leave to apply to open up a discovery issue for further argument in the High Court.

[6]       In a judgment delivered on 30 September 2008 ((2009) 24 NZTC 23,032) Fogarty J approved a proposed loan transaction on the application of the respondents (“the third judgment”).  This Court granted a stay of execution pending appeal of that order on 13 October 2008: (2009) 24 NZTC 23,034.

[7]       The next step we need to refer to is the judgment of Fogarty J, delivered on 1 May 2009, in which the Judge awarded costs against the appellant in relation to the earlier proceedings and declined the Commissioner’s application for a stay (“the fourth judgment”). 

[8] The Commissioner has appealed against the second and third judgments and against the costs award in the fourth judgment. We refer to the appeal against the second judgment as the “judicial review appeal”. On 15 June 2009, this Court issued a minute directing that the three appeals be consolidated. We note also Mr Hampton has been permitted to act on behalf of all of the respondents: [2009] NZCA 334.

[9]       The other factual matter we need to note relates to various steps which have the effect of, broadly speaking, “freezing” the respondents’ assets.  In a judgment of 13 September 2005, now reported at (2005) 22 NZTC 19,500, Fogarty J granted Mareva injunctions on the Commissioner’s application but declined to grant pre-judgment charging orders.  An undertaking from Ms Sisson was also obtained.  In a judgment delivered on 19 December 2006, a pre-charging order was made over the respondents’ properties on the application of the Commissioner.  However, in a judgment delivered on 31 October 2007, Fogarty J discharged the Mareva injunctions and replaced them with an extended undertaking by Ms Sisson.  In very broad terms, that undertaking restricts the ability to deal with the various properties without the consent of the Court and there is an associated reporting requirement.

[10] Against this background, the Commissioner seeks a stay pending appeal of the orders made in the second and fourth judgments. This Court made an interim order staying execution on 16 June 2009: [2009] NZCA 253. That order applied until the hearing of the permanent stay application on 18 August 2009 and was further extended on 18 August until further order of the Court.

[11]     The Commissioner also sought a stay of any further proceedings in the High Court.  However, at the hearing, Mr Aspey for the Commissioner accepted it was questionable whether the Court had jurisdiction to make an order on those terms and this part of the application was not pursued.  It is formally dismissed.

The stay application

[12]     The application for a stay is made on the basis that without a stay the appeals would be rendered nugatory because the Commissioner would be required to give irreversible effect to the High Court’s orders.  The Commissioner also says the respondents are probably insolvent and there is no realistic security for repayment of costs if the Commissioner is successful.  Against this background, the Commissioner says the status quo should be preserved and third parties would not be prejudiced.

[13]     The respondents oppose the stay application.  Mr Hampton emphasises a number of factors which, he says mean this is a case where the public interest favours enabling the respondents to have the fruits of their judgment. 

[14]     First, Mr Hampton points to the adverse effect on the respondents of delays in resolving the issues between the parties.  He notes the respondents’ assets have been the subject of freezing orders since 2005.  Mr Hampton says that those orders impact on the ability of the respondents to fund the litigation and on the well-being and security of the assets.

[15]     Secondly, the respondents submit that the Commissioner’s appeals would not be rendered nugatory because Ms Sisson’s undertaking gives sufficient security for the Commissioner.

[16]     Thirdly, Mr Hampton emphasises that the Commissioner did not appeal against the first judgment.  The judicial review appeal is, he submits, a back-door means of challenging the Judge’s original findings which were not appealed.

[17]     Finally, Mr Hampton says the various factors were appropriately considered by Fogarty J in the Judge’s decision declining a stay and there is no good reason for this Court to take a different view.

[18]     Ms Sisson endorsed Mr Hampton’s submissions.  She also emphasised what Mr Hampton described as the imbalance of power between the parties in this litigation and the adverse effect of delays on the respondents.

Evaluation

[19]     As this Court has observed, an application for a stay requires the Court to balance the competing rights of the party who obtained the judgment appealed from, and the benefits of that judgment, against the need to preserve the appellant’s position against the event of the appeal succeeding: Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85.

[20]     There is no dispute between the parties as to the relevant considerations.  These matters are discussed in New Zealand Insulators Ltd v ABB Ltd (2006) 18 PRNZ 459 at [11], in which this the Court endorsed the considerations set out in Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 (HC) at [9] (HC).

[21]     The relevant question here is whether the appeals will be rendered nugatory without a stay and, if so, whether other factors, including the effect on the respondents, are to be given priority.  It is not disputed that the judicial review appeal raises arguable and important issues of principle as to taxation law.

[22]      The delay in resolving these matters is a factor weighing against a stay given the protracted nature of the proceedings.  Over the course of the hearing, we discussed with counsel and the registry the possibility of an early fixture.  The Case on Appeal (volumes A – C) has been filed so that, subject to some further discussion between counsel over volume D, the matter is ready to proceed.  However, an early fixture is not available and it now appears a fixture is not likely until March 2010.  The fact that the respondents’ assets are frozen in the meantime is also a relevant factor pointing against a stay.

[23]     However, in our view, these factors are outweighed by the factors favouring a stay. 

[24]     The judicial review appeal would be rendered nugatory because, absent a stay, the Commissioner would have to take steps in terms of the relevant statutory powers to give effect to the second judgment that could not then be undone.  It is not an answer to this point to say the Commissioner did not appeal the first judgment.  That factor appears to have been influential in Fogarty J’s decision to decline a stay.  It was however, open to the Commissioner to act on the first judgment on the assumption that reconsideration would resolve the matter.  The fact that reconsideration resulted in a further challenge does not alter the balance of convenience in the context of a stay application.

[25]     Nor does the fact of Ms Sisson’s undertaking alter the position.  Over the course of the hearing there was some discussion about the respondents’ assets and the extent to which they are encumbered.  There is material in the evidence before us on the stay application which suggests that as at late 2008, there were issues about solvency but it is difficult to get a clear picture of the current state of the assets.  In the end, this is not critical because Mr Hampton accepts that if the Commissioner’s decisions as to the tax owing are upheld on appeal the respondents will be insolvent.  In our view, the fact the costs would be paid to a party who is possibly insolvent weighs strongly in favour of a stay.  Plainly, the costs appeal too would be rendered nugatory if a stay were not granted.  The fact of the respondents’ insolvency, should the Commissioner succeed, is also relevant to the interests of third parties (creditors) which might otherwise be relevant in this context.

[26]     For these reasons, the balance firmly favours a stay.  The application is allowed.

Other matters

[27]     Mr Hampton says the loan proposal approved in the third judgment has not gone ahead.  He submits that therefore the appeal on that point is moot.  We understand that the parties will discuss how the appeal on that issue may be disposed of. 

[28]     At the hearing, the Court raised with the parties the possibility that an amicus be appointed to deal with the issues of principle raised on the judicial review, in particular, the relevance of proportionality in the context of remission of penalties and the availability of the remedies granted by the High Court.  The parties consented to this course.  An amicus will be appointed to assist the Court on these matters.

Solicitors:

Crown Law Office, Wellington