Commissioner of Inland Revenue v Elementary Solutions Ltd
[2017] NZHC 2411
•3 October 2017
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2017-409-000212 [2017] NZHC 2411
BETWEEN COMMISSIONER OF INLAND
REVENUE Plaintiff
AND
ELEMENTARY SOLUTIONS LIMITED Defendant
Hearing: 11 September 2017 Appearances:
R Lemm for the plaintiff
D F Ayers (self represented) shareholder of defendant
No appearance for defendantJudgment:
3 October 2017
JUDGMENT OF ASSOCIATE JUDGE OSBORNE [on application for discovery]
[1] The Commissioner of Inland Revenue (the Commissioner) has applied for an order putting Elementary Solutions Ltd (Elementary) into liquidation.
[2] Daniel Ayers, a shareholder of Elementary, has filed a defence.1
The discovery application
[3] Mr Ayers has filed an application for an order that the Commissioner discover
26 categories of documents (being the categories set out in Schedule A to this judgment).
[4] The Commissioner opposes the application.
1 In his capacity as shareholder, pursuant to r 31.16(2) High Court Rules.
COMMISSIONER OF INLAND REVENUE v ELEMENTARY SOLUTIONS LIMITED [2017] NZHC 2411 [3
October 2017]
The Commissioner’s pleading
[5] The Commissioner pleads that Elementary is a debtor to her in the sum of
$390,346.79, representing goods and services tax, income tax, and interest and penalties.
[6] She also pleads reliance upon findings in the judgment of Associate Judge Bell in Elementary Solutions Ltd v Commissioner of Inland Revenue (the 2017 judgment).2
The 2017 judgment
[7] The 2017 proceeding concerned the Commissioner’s statutory demand on which she relies for evidence of insolvency in this proceeding. Associate Judge Bell dismissed Elementary’s application for an order setting aside the statutory demand. The judgment was not appealed.
Elementary’s undisputed liability
[8] The judgment records that Elementary did not dispute its liability for any of the taxes (then totalling $343,182.30).3
Elementary’s Ground 1 – contractual arrangement of 8 May 2013
[9] Elementary’s first ground in its setting aside application was that the Commissioner was precluded from issuing her statutory demand because a payment arrangement, entered into between Elementary and the Inland Revenue Department (IRD) in 8 May 2013, remained on foot.
[10] Associate Judge Bell rejected that ground, finding that Elementary had not established that a contract arguably came into existence. In particular his Honour
found:4
2 Elementary Solutions Ltd v Commissioner of Inland Revenue [2017] NZHC 32, [2017] NZCCLR 3.
3 Elementary Solutions Ltd v Commissioner of Inland Revenue, above n 2, at [1].
4 Elementary Solutions Ltd v Commissioner of Inland Revenue, above n 2.
[26] On the facts in this case there is nothing in the evidence to suggest the collections officers were clothed with any ostensible authority to bind the Commissioner by arrangements for which Elementary is contending. Besides, any such arrangements were always subject to the defamation lawyers providing an appropriate undertaking.
Elementary’s Ground 2 – expectation creating estoppel
[11] Associate Judge Bell also rejected a related estoppel argument (based on expectation rather than contractual commitment). Associate Judge Bell found that any estoppel argument must fail in the light of the collection officers’ lack of ostensible authority to bind the Commissioner.5
Elementary’s Ground 3 – contractual arrangement of 17 September 2013
[12] Elementary asserted a further contract between itself and the Commissioner, being the Commissioner’s agreement on 17 September 2013 to withhold debt recovery action in return for receiving payment from the proceeds of defamation litigation which Mr Ayers was pursuing. Elementary asserted that the contract precluded the issuing of the 2016 statutory demand. The Commissioner adduced evidence of the cancellation of the arrangement by reason of defaults of Mr Ayers.
[13] Associate Judge Bell rejected Mr Ayers’ ground of application, finding “the Commissioner’s cancellation was effective and she is able to recover both historic tax debt and taxes that fell due after 17 September 2013”.6
[14] Therefore, his Honour found that there was no substantial dispute as to the debt in the demand being owing or due.7
Elementary’s Ground 4 - counterclaim
[15] Alternatively, Elementary submitted that it had a counterclaim against the Commissioner for breach of the alleged 8 May 2013 agreement through filing and serving a liquidation application in June 2013. Elementary asserted that it had thereby lost profitable trading worth in excess of the demanded sum.
[16] Associate Judge Bell dismissed Elementary’s assertion of a counterclaim on
two grounds:
· First, Elementary had not expressly asserted a counterclaim in its notice of application and had sought to introduce the argument too late (through counsels’ submissions).
· Secondly, Elementary’s evidence did not establish an arguable counterclaim to the required “clear and persuasive standard”. Fundamentally, the Court had already found that the Commissioner had not entered into a contract with Elementary in the May 2013 meeting and the Court therefore found that Elementary could have no claim for breach of such an agreement.8
· Thirdly, the Court found that the counterclaim was not reasonably arguable in relation to both causation and damage, having regard to the evidence of the personal circumstances of Mr Ayers and the financial position of Elementary. His Honour concluded “[t]he suggestion that the Commissioner caused the downfall of the company by her liquidation application is fanciful”.9
Elementary’s Ground 5 – unfairness and injustice
[17] Elementary’s final ground of application (in reliance on s 290(4)(c) Companies Act 1993) was that the difficulties which Elementary and Mr Ayers faced in paying overdue taxes and funding defamation proceedings were a direct and foreseeable consequence of the actions of IRD.10 Associate Judge Bell rejected that ground, finding:11
Any difficulties in funding both litigation and taxes were there from the time of the statutory demand of April 2013. The demand did not cause the difficulties, it exposed them. These are not the circumstances which would make it unjust for non-compliance with the demand to lead to a presumption of insolvency.
8 At [58].
Mr Ayers’ statement of defence
[18] Notwithstanding the concession of liability made in the statutory demand proceeding, Mr Ayers has here pleaded that Elementary is not indebted to the Commissioner for the sum she alleges is owed ($390,346.79) or at all.
[19] Mr Ayers further asserts that Elementary has a cross-claim which exceeds the Commissioner’s claim and that this proceeding is an abuse of process, unfair, and pursued for ulterior motives. Abuse of process is pleaded on the ground that the Commissioner is indebted to Elementary and not vice versa. The Commissioner’s proceeding is pleaded to be unfair because it is pursued while the Commissioner:
… obstructs Elementary’s attempts to obtain official information which Elementary is entitled to receive and, if the Court finds (which is denied) that Elementary is insolvent, then such insolvency was the result of the Commissioner’s criminal, tortious and illegal acts or omissions.
The Court’s approach to discovery
The procedural rules
[20] Liquidation proceedings are dealt with under Part 31 High Court Rules. [21] Under r 31.6 the Registrar allocates a date of hearing.
[22] Rule 31.22 then provides for types of interlocutory application (of which an application for discovery is not one), which may be made before the date of hearing. The Rules do not expressly prohibit the pursuit of any particular category of interlocutory application. The implication is that parties may (upon or after the date of hearing), pursue an application for discovery.
[23] Liquidation proceedings under Part 31 (and insolvency proceedings under Part 24) are not subject to case management.12 As such, the expectations in relation to discovery differ from those in ordinary and complex defended proceedings. For
those the presiding judge must make a discovery order at the first case management
12 High Court Rules, r 7.1AA(6).
event unless the judge considers that the proceeding can be justly disposed of without any discovery or there is good reason to make the order later.13
Case law in relation to liquidation proceedings
[24] In the 1928 decision in Re The Auckland Piano Agency Ltd (in liq),14 Blair J held that under the then-applicable procedural rules the Court had the power to order parties to a petition for company liquidation to make available relevant documents for inspection. His Honour made the inspection order having been satisfied that:15
... an inspection of the books and papers of the old company and the reconstructed company will materially assist the Court in deciding whether the allegations made in the petition have or have not been sufficiently established to justify the Court in saying that it is “just and equitable” that the company should be wound up by the Court.
[25] In Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd, Wallace J considered (albeit in obiter) the circumstances in which the High Court might order discovery in winding-up proceedings.16 His Honour referred to Re The Auckland Piano Agency Ltd17 and to Australian authority.18 Australian authority, up to the
1970s, tended to the conclusion that power exists in the courts to order discovery in liquidation proceedings but such power will not be exercised except in special circumstances.
[26] In Nemisis Holdings, Wallace J then distinguished two periods, one being before allocation of a fixture on a defended basis, and the other being after allocation. The then-applicable High Court Rules permitted the Court to grant leave for discovery during both periods (a situation which no longer applies by reason of the current r 31.22(1) as referred to at [22] above).
[27] Wallace J then tentatively concluded that discovery is not available in liquidation proceedings as of right:19
13 High Court Rules, r 8.5.
14 Re The Auckland Piano Agency Ltd (in liq) [1928] ELR 249 (SC).
15 At 250.
16 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC).
17 Re The Auckland Piano Agency Ltd, above n 14.
18 In particular, Re Australian Marinas (A’Asia) Pty Ltd [1975] VR 372 (SCV) at 375.
19 Nemisis Holdings v North Harbour Industrial Holdings Ltd, above n 16, at 384.
There may also be a policy question as to how readily discovery should be granted at the later stage when the proceedings are going forward on a defended basis. There is, for example, possibly a risk that defendants will endeavour to delay winding-up proceedings by seeking detailed discovery from plaintiffs, though that risk may be counterbalanced by the need to have the full facts before the Court at that juncture. Possibly the Court should retain a discretion as to whether or not to grant discovery when proceedings are defended.
[28] I am aware of only one case in which Re The Auckland Piano Agency Ltd and Nemisis Holdings were referred to, namely Westpac Banking Corp v TV3 Network Ltd (in rec).20 Counsel for the plaintiff, in seeking discovery, relied on the relevant rules under the High Court Rules and referred to those two authorities. The application for discovery was resisted, although not upon the basis that the subject- matter of discovery was inappropriate. Rather, the defendant was concerned as to the commercially sensitive nature of the information sought. The Court ordered
discovery of the requested documents with confidentiality protections.
[29] Nemisis Holdings was the most recent authority referred to in submissions in this case. It is also the most recent authority referred to in the two leading procedure texts in relation to discovery in liquidation proceedings.21 My experience of the Court’s practice over recent years is that the Court, while recognising its discretion to order discovery, reserves the exercise of the discretion to exceptional cases. For instance, in Crown Asset Management Ltd v Dunvegan Seadown Ltd,22 I dismissed an application for liquidation upon the basis that the defendant had established a genuine and substantial dispute as to the existence of the debt alleged by the plaintiff. Only one of the parties had produced relevant financial evidence. I concluded:23
... with additional discovery and/or interrogatories in the context of the trial of an ordinary proceeding, counsel for Dunvegan may be able to reinforce by reference to all parties’ financial statements its contention as to the correct construction of Clause 7.
[30] Had I applied the formulation of Blair J in Re The Auckland Piano Agency
Ltd, I might equally have stated that discovery of the financial statements would not
20 Westpac Banking Corp v TV3 Network Ltd (in rec) HC Auckland M912/91, 1 August 1991.
21 McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR31.22.03]; Sims Court
Practice (online loose-leaf ed, LexisNexis) at [HCR31.22.3].
22 Crown Asset Management Ltd v Dunvegan Seadown Ltd [2013] NZHC 3483.
23 At [40].
have materially assisted the Court in the liquidation proceeding.24 The test which the defendant has to satisfy in the liquidation proceeding did not require discovery of further financial evidence. Discovery would have become relevant and necessary to the determination of the substantive issues involved if and when those were pursued through an ordinary proceeding.
An analogy with the practice relating to originating applications
[31] The High Court Rules do not contain express provisions relating to discovery on originating applications commenced under Part 19 of the Rules.
[32] Liquidation proceedings and most originating applications share the characteristic that the parties obtain substantive judgments as to their rights. Some commonality of approach to discovery might be anticipated.
[33] In Manchester Securities Ltd v Body Corporate 172108, the Court of Appeal recognised that a conservative approach is adopted towards discovery in originating applications brought under Part 19 of the Rules.25 Manchester Securities involved an application for variation of a building repair scheme under the Unit Titles Act
1972. The High Court, at first instance, had granted aspects of the plaintiff’s application for discovery but dismissed others. The Court of Appeal, in allowing the appeal, granted additional discovery orders. The Court of Appeal first identified the issues on the originating application and then positively answered two questions:
(a) Would the documents in question be capable of supporting Manchester’s case or adversely affecting the Body Corporate’s case on a relevant issue?
(b)Would discovery be appropriate and proportionate in the circumstances (discovery having been sought of a single document or,
at most, only a very few documents)?
24 As set out in [24] above.
25 Manchester Securities Ltd v Body Corporate 172108 [2015] NZCA 29 at [15].
[34] The Court of Appeal’s observations in Manchester Securities implicitly took account of a line of High Court decisions concerning discovery on originating applications, which includes:
(a) In The Grange Ltd v City Sales Ltd, Master Kennedy-Grant had concluded that there is power on an originating application to set aside a statutory demand to make an order for discovery.26 But his Honour recorded “it will only be considered appropriate in exceptional circumstances”.27
(b)In NZI Bank Ltd v Philpott, McGechan J considered discovery orders to be appropriate for the:28
… relatively narrow band of marginal cases where an outline defence is made out, but the Court encounters genuine difficulty in determining whether or not there is no defence, and has a substantial reason to believe discovery in the proceeding will or may well assist that determination.
(c) In Shuttle Petroleum Distribution Ltd v Caltex New Zealand Ltd, Master Faire, on another setting aside application, viewed the reference to “exceptional circumstances” as an “oversimplification”, and preferred the formulation of McGechan J in relation to discovery in the summary judgment context.29 His Honour found the case to fall within that “narrow band of marginal cases” and made an order for discovery.
(d)In Katavich v Meltzer, Duffy J recognised that discovery is not generally available in proceedings brought by way of originating summons.30 Her Honour was dealing with a creditor’s application to
have liquidators replaced. She observed:31
26 The Grange Ltd v City Sales Ltd (1999) 14 PRNZ 222 (HC).
27 At [8].
28 NZI Bank Ltd v Philpott (1988) 1 PRNZ 560 (HC) at 565.
29 Shuttle Petroleum Distribution Ltd v Caltex New Zealand Ltd (2002) 16 PRNZ 126 (HC).
30 Katavich v Meltzer HC Auckland CIV-2006-404-5968, 29 May 2009 at [15].
31 At [15].
… it needs to be recognised that the procedure is used to bring a wide variety of claims before the Court. Hence, factors that militate against discovery in applications to set aside statutory demands may have less strength in other types of claims which use this procedure. Nonetheless, an examination of the relevant case law reveals that there is reluctance to order discovery, except in a narrow band of marginal cases where the Court has genuine difficulty in determining whether a party has made out its case, and where there is substantial reason to believe that discovery would or might well assist that determination: see Shuttle Petroleum Distribution Ltd v Caltex New Zealand Ltd.
(citations omitted)
[35] In a case decided after Manchester Securities, namely Madsen-Ries v Fonterra Brands (New Zealand) Ltd, the High Court rejected an originating application brought by liquidators in relation to an allegedly insolvent transaction.32
Associate Judge Christiansen observed:
[67] The fact remains that insolvent transaction proceedings are not ordinary proceedings. The effective reasons for these being originating applications must continue to apply. It follows that access to orders for discovery should occur in the rarest of cases.
The correct approach summarised
[36] I respectfully decline to follow any formulation based on the proposition that orders for discovery should be made in proceedings under Part 19 only in exceptional or the rarest of cases.
[37] I adopt these principles in relation to discovery in Part 19 proceedings: (a) The Court has a discretion to order discovery.
(b)The document sought must be capable of supporting the applicant’s case or adversely affecting the opponent’s case.
(c) Any orders for discovery should be subject to the proportionality and practicality requirements identified in r 8.2 of the Rules and should
32 Madsen-Ries v Fonterra Brands (New Zealand) Ltd [2016] NZHC 1305, [2016] NZCCLR 6.
accord with the objective of “just, speedy, and inexpensive determination” under r 1.2 of the Rules.
(d)The approach to discovery in originating applications should be conservative.
(e) Discovery will be appropriate in marginal cases where the party makes out an outline case but the Court encounters genuine difficulty in determining, without documentary evidence which is likely to assist, whether the threshold test is satisfied.
Tests for liquidation on creditor’s application
[38] The Commissioner, on her application for liquidation, invokes s 241(4)(a) Companies Act 1993, asserting that Elementary is unable to pay its debts.
[39] In Bateman Television Ltd (in liq) v Coleridge Finance Co Ltd, the Privy Council heard an appeal in relation to the winding up of two companies.33 Lord Upjohn, delivering their Lordships’ judgment, referred to the concept of “genuinely disputed debts” and observed “[i]n such cases the general rule is, no doubt, that no order will be made on a petition founded on such debts”.34
[40] That concept of “genuine dispute” has been adopted in subsequent cases,35 as
has the concept of “a substantial dispute”.36
[41] A closely-related alternative to the Court’s granting or refusing an application for liquidation is the Court’s inherent jurisdiction to stay a liquidation proceeding when the proceeding is the subject of a genuine (or substantial) dispute. As Wallace
J observed in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd:37
33 Bateman Television Ltd (in liq) v Coleridge Finance Co Ltd [1971] NZLR 929 at 932.
34 At 932.
35 See for instance Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd, above n 16, at
385.
36 See Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA), per Tipping J at [1].
37 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd, above n 16, at 385.
The decisions make it clear that the jurisdiction to stay [proceedings] is an inherent one to prevent abuse of process and that there is no inflexible rule. The governing consideration is whether the proceedings savour of unfairness or undue pressure. It is, however, a serious matter to stay winding-up proceedings so that the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which it is usually appropriate to consider on an application for an interim injunction.
Analysis - indebtedness
[42] Mr Ayers in his statement of defence pleads a bare denial in response to the allegation of indebtedness.
[43] Notwithstanding Mr Ayers’ pleaded position, Elementary’s indebtedness is as a matter of law not capable of substantial dispute or needing discovery.
[44] As noted above at [8], Elementary (under the governance of Mr Ayers), conceded in the setting aside proceeding that it was liable for the taxes demanded (at that point $343,182.30).
[45] Even had Elementary not conceded that liability, the Commissioner’s assessments would be beyond dispute in this Court by reason of s 109 Tax Administration Act 1994. The assessments have not been disputed in challenge proceedings, and accordingly Elementary is out of time to utilise the tax dispute procedures.
Analysis - counterclaim
[46] On the setting aside application, Elementary previously asserted, and Mr Ayers now pleads, that Elementary has a cross-claim which exceeds the debt owed to the Commissioner. The cross-claim is particularised in Mr Ayers’ statement of defence. It is said to arise from conduct of the Commissioner and IRD from June
2013 when the Commissioner commenced a previous liquidation proceeding against
Elementary.
[47] In this aspect of the defence, Associate Judge Bell’s 2017 judgment presents a fundamental barrier to the assertion of the counterclaim – the counterclaim is as a
matter of law unavailable to Elementary. His Honour, in refusing to set aside the statutory demand, held that Elementary had not established to the required standard a genuine dispute either as to breach or causation of damage.38 Those findings are res judicata as between the Commissioner and Elementary. As Elementary is bound by those findings, Mr Ayers is in no better position to assert claims on the part of Elementary which are inconsistent with the findings.
[48] It would be inappropriate to contemplate in the Court’s discretion an order of
discovery where the pleaded position is unavailable as a matter of law.
[49] In these circumstances, I do not need to analyse an alternative submission of Mr Lemm based on the provision under r 5.61(1) High Court Rules which precludes a defendant from advancing any set-off or counterclaim in a proceeding by the Crown for recovery of taxes, duties, or penalties. Mr Ayers submitted in response that Elementary has the benefit of the statutory set-off under s 310 Companies Act
1993, which he submits trumps the procedural provision in r 5.61.39
Analysis – abuse of process, injustice or unfairness
[50] Mr Ayers under a heading “abuse of process/unfair” pleads a range of occurrences from 2013 to date which he asserts are abusive or unfair for a number of reasons.
[51] First, Mr Ayers pleads that if Elementary is insolvent (which is denied), then the insolvency has resulted from the Commissioner’s misconduct and omissions. This pleading materially reproduces the fifth ground pursued by Elementary on the
2017 setting aside application (as set out at [17] above).
[52] Again, Associate Judge Bell’s 2017 judgment renders this ground of defence
unavailable to Elementary as a matter of law. His Honour found that the
Commissioner’s initiating of liquidation procedures, through service of the statutory
38 Elementary Solutions Ltd v Commissioner of Inland Revenue, above n 2, at [58] – [59].
39 The relationship between r 5.61 High Court Rules and s 310 Companies Act 1993 was explored in Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5 (HC), also before Associate Judge Bell, who concluded that the defendant had in any event failed to establish a set-off claim to the standard of a clear and persuasive case.
demand, did not cause Elementary’s difficulties. Rather, it exposed an already existing situation. His Honour rejected Elementary’s assertion of injustice.40 These findings are also res judicata as between the Commissioner and Elementary, Mr Ayers is in no better position to assert the same claims.
[53] An order of discovery would, therefore, similarly be inappropriate in relation to this argument.
[54] Secondly, Mr Ayers pleads that one of the Commissioner’s actual motives in commencing this proceeding is to liquidate Elementary so as to reduce the risk of a claim being brought against the Commissioner, her officers or the Crown.
[55] Associate Judge Bell’s 2017 judgment establishes that Elementary does not have a clear or persuasive basis of counterclaim. Therefore, what will be before the Court at any trial of this proceeding is an application for liquidation relating to a debt which is indisputably owed by a company presumed to be insolvent (the Court having previously found that the company does not have a substantially arguable cross-claim).
[56] Documents which might indicate that the creditor is motivated in part by seeing all assertions of cross-claim fall away (through liquidation of the company), are irrelevant to the issues before the Court. If Elementary is unable in relation to this substantial tax debt to rebut the presumption of insolvency (and it has not to this point positively asserted that it is solvent), any benefits perceived by the creditor in achieving Elementary’s liquidation will not cut across the Commissioner’s prima facie entitlement to a liquidation order.
[57] Thirdly, Mr Ayers pleads that the Commissioner has a further actual motive in commencing this proceeding, namely to improve the performance metrics of the Commissioner and her officers by reducing unresolved tax debt to the greatest extent
possible as quickly as possible.
40 Elementary Solutions Ltd v Commissioner of Inland Revenue, above n 2, at [64].
[58] The request for documentation relating to this alternative motivation fails for reasons parallel to those just identified. Documents relating to performance metrics of IRD officers or the Commissioner herself will not assist the Court to determine whether Elementary should be wound up by reason of its indebtedness and insolvency.
[59] Fourthly, Mr Ayers asserts that this second liquidation proceeding by the Commissioner (following her withdrawn 2013 proceeding), is unfair because the Commissioner has been obstructing Elementary’s attempts to obtain official information in the meantime.
[60] The fact that a party to litigation who is also subject to the Official Information Act 1982 has failed to provide information in accordance with the Act is self-evidently not sufficient of itself to justify a discovery order. A discovery order will be made if it is appropriate in terms of the tests I have identified (above at [37]).
[61] One of Mr Ayers’ stated grounds of application is:
The plaintiff was required pursuant to the Official Information Act 1982 to disclose documents to defendant, but has consistently failed or refused to do so.
[62] To the extent Mr Ayers complains of such breach, his remedies lie elsewhere (under the relevant legislation). To the extent his application for discovery covers documents which would have been (on his assertion), properly disclosed pursuant to his Official Information Act request, then it is for Mr Ayers to identify particular documents or classes of documents and establish their relevance and the appropriateness of a discovery order in this particular proceeding.
[63] In order to establish the relevance of documents which he seeks, Mr Ayers filed an affidavit identifying the categories of subject matter into which the documents might be grouped. The following are the categories listed in Mr Ayers’ affidavit:
a.Conduct of the Inland Revenue Department and dealings with vulnerable taxpayers, and
b. The 1999 Parliamentary Inquiry into the Inland Revenue
Department; and
c. Minimum Standards of Conduct for State Sector Employees; and d. Contemplation by plaintiff of litigation against defendant; and
e.Notices to plaintiff signalling likelihood of litigation by defendant against plaintiff; and
f. Corruption Criminality and Poor Governance within the Inland
Revenue Department; and
g. Steps taken by the defendant and by [himself] personally to obtain information from the plaintiff; and
h.Sustained and deliberate steps taken by the plaintiff to avoid accountability and cover up wrongdoing; and
i. Concerns of British Parliamentary Committee Regarding Attempts by Her Majesty’s Revenue & Customs to Evade Freedom of Information Legislation; and
j. Consideration of Judicial Review proceedings; and
k. Response of 8 June 2017 by plaintiff to request dated 28 March
2017.
[64] In relation to most of those topics, Mr Ayers exhibited documents which he already possesses.
[65] Mr Ayers addressed these topics broadly in his submissions. He identified the first two key issues in the liquidation proceeding as being whether the Commissioner is a creditor and whether Elementary has the basis of a counterclaim. He submitted that the Court will also need to determine whether there are grounds of “unlawful administrative conduct”. Mr Ayers invokes the Court’s inherent jurisdiction, recognised by the Court of Appeal in Fletcher Development &
Construction Ltd v New Plymouth Hotels Holdings Ltd.41 In that case Cooke P
observed:42
… the Court has an inherent jurisdiction to prevent abuse of process and will exercise that jurisdiction to restrain winding-up proceedings if, for instance, they are shown to be oppressive or unfair”.
41 Fletcher Development & Construction Ltd v New Plymouth Hotels Holdings Ltd [1986] 2 NZLR
302.
42 At 303.
[66] Mr Ayers in his submissions emphasised that he and Elementary have been actively pursuing from the Commissioner information requests (under both the Official Information Act and the Privacy Act), from 2013 to date. He submits that failures or refusals to provide information amount to a degree of obstruction from which it may be inferred that the Commissioner is hiding damaging documents. He submits that, while the Commissioner’s response to statutory information requests should be straightforward, it has not been. Mr Ayers acknowledged that discovery is not “the norm” in liquidation, but submitted that it is merited in this case.
[67] On Mr Ayers’ submission, the improper conduct on the part of the Commissioner (or her officers) is to be found in particular in the events of 2013 (when the Commissioner initially pursued Elementary’s liquidation), and again in the
2016/2017 process by which the Commissioner has taken liquidation steps once again. Mr Ayers explained that through the discovery application he is looking for “further evidence of improper administrative conduct”, which would be relevant to the Commissioner’s liability on a counterclaim. The conduct to be disclosed by such documents would amount to an “aggravating factor going to quantum” as it is, he says, egregious. Mr Ayers submitted further that such conduct is relevant in the Court’s exercise of its discretion to refuse to put Elementary into liquidation.
[68] I am not satisfied that any of the requested categories (set out at [63] above) fit within the required conservative approach to discovery. The range of applications and the individual topics indicate just how expansive is Mr Ayers’ discovery request. Some representative examples illustrate the expansiveness:
The conduct of IRD and dealings with vulnerable taxpayers (that is other than Mr Ayers).
The focus from the 1999 Parliamentary Inquiry as an aid to interpretation of the integrity of the tax system.
Standards of integrity and conduct, as published by the State Services Commissioner in 2007, as a guide to minimum standards of integrity and conduct expected of the IRD.
Report of a British Parliamentary Committee concerning Her Majesty’s Revenue and Customs as indicating that the current Commissioner was criticised by that Committee in relation to the handling of information requests.
[69] The conclusion that Mr Ayers has adopted an inappropriately and unnecessarily expansive approach to discovery is reinforced when one examines the
26 categories listed in his interlocutory application (attached to this judgment in schedule A). The later pattern of grossly-wide requests is set with item (i) which reads:
The contents of any file held by the plaintiff that pertains to Daniel Francis
Ayers and/or Elementary Solutions Limited.
It reaches perhaps its worst point with item (xx) where Mr Ayers requests:
Notes, memoranda, or any other document created during or connected with any meeting involving Inland Revenue staff, where Daniel Ayers and/or Elementary Solutions was mentioned.
[70] Mr Ayers’ application, so far as it is for documents said to relate to the “unjust or unfair” ground, must fail also on the grounds that the request does not comply with what I have set out above at [37] as the fifth principle. Mr Ayers has not established that this is one of those marginal cases where the Court will encounter genuine difficulty in determining, without documentary evidence which is likely to assist, whether the threshold test is satisfied.
[71] I take by way of example Mr Ayers’ request for documents relating to the Commissioner’s first liquidation proceedings in 2013 (items (xxiii) and (xxiv) in Mr Ayers’ application). Mr Ayers knows how he was affected by the 2013 proceedings. Mr Ayers is in a position from his personal knowledge to give evidence of the 2013 proceedings and the consequences for him without the process of discovery and access to internal documents which the IRD or Commissioner might possess. The making out of a case based on injustice, unfairness or otherwise, to the required standard, does not reasonably require discovery.
[72] A similar conclusion applies in relation to Mr Ayers’ suggestion that other categories of documents relate to the Commissioner’s allegedly unfair or unjust or abusive pursuit of this proceeding. To the extent that this ground of defence relies on matters other than the motives involved (which I have dealt with above), Mr Ayers does not reasonably require discovery to establish the circumstances which he contends render the proceeding an abuse.
[73] Discovery is not reasonably required to allow the Court to determine the issues in the liquidation proceeding.
Collateral use of documents
[74] For the Commissioner, Mr Lemm submitted that Mr Ayers’ application should be refused also on the ground that it is apparent that Mr Ayers is seeking discovery for a collateral purpose, at least in relation to many of the documents.
[75] Had the Court not been dismissing entirely the discovery application on the grounds already stated, I would nevertheless have refused a substantial number of the requested categories by reason of the collateral use rule.
[76] Rule 8.30(4) High Court Rules provides:
A party who obtains a document by way of inspection … under this rule –
(a) may use that document or copy only for the purposes of the proceeding;
…
[77] Gilbert J recognised in Dotcom v Attorney-General,43 that r 8.30(4) codifies the common law rule which prevented the use of discovered documents for collateral purposes, including in a separate proceeding. His Honour recorded:44
This protection against collateral use of discovered documents is critical to maintaining confidence in the integrity of the discovery process and helps ensure that parties comply with their discovery obligations.
[78] In that case, the applicants failed in their application for an order permitting them to use documents obtained in the civil proceeding in an extradition appeal.
[79] In this case there are repeated indications in Mr Ayers’ filed documents which identify aspects of intended collateral use.
[80] In particular, Mr Ayers suggests that the information or much of the information he seeks ought to have been provided to him pursuant to requests he
43 Dotcom v Attorney-General [2016] NZHC 2251.
44 At [9].
made under the Official Information Act 1982 or Privacy Act 1993. His grounds of application record that the reasons for such requests included: to enable him to consider whether to pursue challenges under the Tax Administration Act 1994; whether to pursue judicial review proceedings, and generally to hold the IRD and the Commissioner accountable for their conduct.
[81] In his affidavit in support of his application, Mr Ayers has deposed:
I confirm that the defendant, and I, have considered taking judicial review proceedings against the plaintiff but we do not consider that we have been able to do so without receiving further information from the plaintiff.
[82] To the extent that it is part of Mr Ayers’ intended defence that the Commissioner or the IRD have obstructed his attempts to obtain information under the Official Information Act 1982 or Privacy Act 1993, Mr Ayers already has the documentation relevant to such requests and/or refusals. He has in his application identified the categories of documents which have not been released. He will be able at the hearing of the liquidation application to make submissions as to any inappropriateness or unlawfulness in the Department’s conduct in that regard. The content of any particular documents is not necessary material for this proceeding, as the nub of Mr Ayers’ complaint lies in the withholding of documents.
[83] The Commissioner’s opposition based on the collateral use rule is accordingly valid. Mr Ayers intended to obtain the documents in order to consider his remedies, be they by way of civil claim (the consideration of which is precluded as a cross-claim in this proceeding by reason of Associate Judge Bell’s 2017 judgment), or by way of judicial review proceedings or tax challenges (for which the documents cannot be pursued through discovery in this proceeding).
[84] Having regard to my earlier conclusion that the application is to be denied in its entirety, I will not undertake an analysis of which categories of documents would have also been refused by reason of the collateral use rule. Many of Mr Ayers’ categories would have been so affected.
Proportionality
[85] Given the conclusions reached in my above analysis of the topics for which Mr Ayers pursued discovery, it is unnecessary that I determine the application by reference to requirements of proportionality.
[86] I would have found, however, that the scope of Mr Ayers’ requested discovery was disproportionate by a very substantial margin. Many of Mr Ayers’ requested categories of documents would have failed to meet even the extended test of relevance under the former Peruvian Guano45 approach to discovery. Mr Ayers’ application was never restricted to standard discovery. To the extent that Mr Ayers’
26 categories of documents might have been intended to be “tailored discovery”, the expansive nature of the categories means the request has not in fact been tailored to the needs of this proceeding.
[87] The range of documents sought by Mr Ayers includes in effect every document relating to: the Department’s and Commissioner’s dealings with Elementary and Mr Ayers and processing of matters in relation to them; the Department’s dealings with vulnerable taxpayers generally; the IRD’s policies, procedures, training materials and instructions relating to taxpayer complaints generally, and to IRD’s computer system and to incidents of taxpayer illness and applications for relief. I am satisfied that the costs of the discovery sought would be disproportionately high when compared with the matters in issue in the proceeding.
The requests would not even qualify as standard discovery.46
Outcome
[88] Mr Ayers’ application for orders of discovery fails.
[89] Costs must follow the event. It is appropriate that they be on a 2B basis.47
45 Compagnie Financiere du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 (CA).
46 Rule 8.9(a) High Court Rules applying.
47 High Court Rules, Category 2 under r 14.3(1) and band B under r 14.5(2).
Orders
[90] I order:
(a) Mr Ayers’ interlocutory application dated 15 June 2017 is dismissed.
(b) Mr Ayers is to pay to the plaintiff the costs of the application on a 2B
basis together with disbursements to be fixed by the Registrar.
Associate Judge Osborne
Solicitors:
Inland Revenue Department, Christchurch
Copy to D Ayers, Hillsborough, Christchurch
SCHEDULE A
Categories of Discovery sought by Mr Ayers
i. The contents of any file held by the plaintiff that pertains to
Daniel Francis Ayers and/or Elementary Solutions Limited;
ii.Notes of any meetings – whether internal or with any external party – concerning Daniel Francis Ayers and/or Elementary Solutions Ltd;
iii. Copies of any internal or external correspondence concerning
Daniel Francis Ayers and/or Elementary Solutions Ltd;
iv.The information required to be supplied by the plaintiff pursuant to the requests (A) – (I) made under section 23 Official Information Act on 19 June 2013 and recorded in DLN
113891683300S2;
v. The information denoted (i) – (vii) requested under section 12
Official Information Act 1982 on 19 June 2013 and recorded in
DLN 113891683300S2;
vi.Any ‘strategic plan’ that was consulted by Inland Revenue staff during the course of considering and/or preparing the department’s response to any Privacy Act and/or Official Information Act request from Daniel Francis Ayers and/or Elementary Solutions Ltd – including, without limitation, the document referred to in the department’s response dated 8 June
2017 to question 53;
vii. Any email, memorandum or other document pertaining to the instalment arrangement entered into between the plaintiff and Elementary Solutions Ltd and/or Daniel Francis Ayers;
viii. Any document pertaining to how the performance metrics, key performance indicators or other performance monitoring of the Commissioner, the Collections function or any Collections officer were, or might have been, influenced by the debt cases of Daniel Francis Ayers and/or Elementary Solutions Ltd – including,
without limitation, the effect of the instalment arrangement thereon,;
ix. Documents pertaining to incidents of serious harm or death to taxpayers during or potentially associated with the taxpayer’s dealings with Inland Revenue (including general documents not relevant to any specific taxpayer, and documents pertaining to specific taxpayers where that taxpayers identifying details have been redacted);
x. Policies, procedures, training materials and instructions relating to dealing with complaints from taxpayers;
xi. Policies, procedures, training materials and instructions relating to entry of correspondence information and meeting notes into the FIRST computer system;
xii. Policies, procedures, training materials and instructions relating to deciding whether or not a taxpayer suffers from serious illness and whether or not any such illness should influence enforcement action;
xiii. Policies, procedures, training materials and instructions relating to dealing with vulnerable taxpayers, including taxpayers who suffer from depression;
xiv. The findings of any internal review(s) of Inland Revenue’s dealings with Daniel Francis Ayers and/or Elementary Solutions Limited;
xv. The findings of any investigation(s) into the conduct of any Inland Revenue staff member or staff members connected with Daniel Francis Ayers and/or Elementary Solutions Limited;
xvi. Documents connected with any internal investigation or review of the Inland Revenue Department’s dealings with Daniel Francis Ayers and/or Elementary Solutions Ltd;
xvii. Policies, procedures, training materials and instructions relating to dealing with applications for relief from taxpayers;
xviii. Any email messages, memoranda or other document concerning the 8 May 2013 and/or 27 May 2013 meetings;
xix. Any email messages, memoranda or other document concerning Sheri Patel and/or Jessie Lowe acting in excess of or contrary to their delegated authority;
xx. Notes, memoranda or any other document created during or connected with any meeting involving Inland Revenue staff where Daniel Ayers and/or Elementary Solutions Limited was mentioned;
xxi. Any email message, memorandum or other document prepared for and/or sent to Ms Naomi Ferguson, Mr Richard Philp, Ms Marilyn Foster or any member of the Inland Revenue Senior Management Team where Daniel Francis Ayers and/or Elementary Solutions Limited was mentioned;
xxii. Any drafts of any letter, memorandum, email or other document prepared by Sheri Patel, Jessie Lowe, Whati Rameka, Bianca Fernandes, Marilyn Foster, Stephanie Martin or Richard Philp that mentions Daniel Francis Ayers and/or Elementary Solutions Limited;
xxiii. Email messages, memoranda or any other documents pertaining to the continuation or withdrawal of the first liquidation proceedings in 2013;
xxiv. Email messages, memoranda or any other documents pertaining to the decision by Inland Revenue to pay the defendant’s full costs in the first liquidation proceeding and the payment of those costs;
xxv. Email messages, memoranda or any other documents pertaining to Inland Revenue’s evaluation or reconsideration of its responses to any OIA or PA requests made by Daniel Francis Ayers and/or Elementary Solutions Limited; and
xxvi. Documents pertaining to the claim that 32.5 hours were spent preparing a response to an OIA/PA request in 2013 (including the “spread sheet of the activities each staff member attended to” that was “kept at the time”).
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