Commissioner of Inland Revenue v Giovanni Holdings Ltd HC Auckland CIV-2010-442-340

[2011] NZHC 1714

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2010-442-340

UNDER  The Companies Act 1993 and Part 18 of the

High Court Rules 2009

IN THE MATTER OF     An application under section 239R of the

Companies Act 1993

BETWEEN  COMMISSIONER OF INLAND REVENUE

Applicant

ANDGIOVANNI HOLDINGS LIMITED Second Respondent

ANDDIOR SABATINI (FORMERLY AND ALSO KNOW AS DENISE ANNE CLARK)

Third Respondent

ANDNIKYTAS NICHOLAS PETROULIAS Fourth Respondent

Hearing:         27 October 2011

Counsel:         P H Courtney and N S Delamore for Applicant

B E Hancock (as representative of Second Respondent) Third Respondent in person by telephone

Fourth Respondent in person
R Luk (Solicitor, Sydney) for Motueka Lodge (2011) Ltd
P R Loiterton (solicitor, Sydney) for Standard Capital Custodians
Reserve SA Ltd

Judgment:      15 November 2011 at 4:30 PM

I direct the Registrar to endorse this judgment with a delivery time of 4.30pm on the

15th day of November 2011.

RESERVED JUDGMENT OF MACKENZIE J

COMMISSIONER OF INLAND REVENUE V GIOVANNI HOLDINGS LIMITED HC NEL CIV-2010-442-

340 15 November 2011

Table of contents

Introduction  [1] History of the litigation  [2] The claim for a freezing order  [21] Undertaking as to damages  [36] The evidence to support the Commissioner’s contentions  [44] Where to from here?  [54] Orders  [59]

Introduction

[1]      The issue presently before the Court is whether a freezing order initially made in September 2010 should be continued.  The issue is to be determined on the basis that this is the on notice hearing provided for in r 32.7 of the High Court Rules.

History of the litigation

[2]      A description of the main steps in this litigation is necessary.  This account does not describe all of the steps which have been taken, or documents filed.  These have been numerous.

[3]      On 3 September 2010, the applicant, the Commissioner of Inland Revenue (the Commissioner) issued proceedings intituled under the Companies Act 1993 and Part 18 of the High Court Rules 2009, expressed in the heading to be an application under s 239R of the Companies Act 1993.  The respondents were Mr G S Hodgson, Giovanni  Holdings  Limited  (Giovanni),  Ms Sabatini  and  Mr Petroulias.    In  his statement   of   claim,   the   Commissioner   pleaded   that   Mr Hodgson   was   the administrator of Giovanni appointed under Part 15A of the Companies Act 1993.  He pleaded that he had made assessments of tax against Ms Sabatini and Mr Petroulias, for amounts of $6.4m and $6.3m respectively.  The Commissioner further pleaded that Giovanni is the registered proprietor of a property known as the Motueka River Lodge.      He   pleaded   that   his   investigation   discloses   that   Ms Sabatini   and Mr Petroulias have a legal and/or beneficial interest in the Motueka River Lodge property, in that funds to acquire the property had come from entities associated with

them, and that those funds were ultimately derived from fees paid by participants in a tax avoidance arrangement promoted by them.  The Commissioner further pleaded that Mr Hodgson had been appointed as administrator under s 239I of the Companies Act 1993 by the director of the company, and a creditor, and that Mr Hodgson was in a close personal relationship with Ms Sabatini and Mr Petroulias.  The application sought   an   order   under   s 239R(1)(a)   of   the  Act   removing   Mr Hodgson   as administrator of Giovanni, and appointing a replacement administrator.   No other relief (apart from costs) was sought in the statement of claim.

[4]      At the same time as he filed the statement of claim and notice of proceeding on 3 August 2010, the Commissioner filed a without notice interlocutory application for a freezing order in respect of the Motueka River Lodge.   A separate without notice application sought directions as to service in the event that the Court granted the freezing order.

[5]      The application was considered on the papers by Ronald Young J who issued a minute dated 6 September 2010.  He granted a freezing order, in terms of the draft freezing order which had been submitted with the application, but with some amendments.   The formal order, in a form approved by the Judge, was sealed on

7 September.

[6]      As required by r 32.7(1) of the High Court Rules, the freezing order was to expire on 1 October 2010 unless renewed.  As required, the form of order recorded that on that date the respondents were entitled to be heard by the Court in opposition to the continuation or renewal of the order.

[7]      Affidavits   of   service   indicate   that   the   proceedings   were   served   on Ms Sabatini at the Motueka River Lodge on 8 September 2010, by personal service. The proceedings were served on Mr Hodgson, and on Giovanni, by courier delivery to  an  address  in  Westport.    They  were  delivered  by  the  courier  company  on

8 September 2010.   On 13 September 2010 the Crown Law Office received an e- mail from Ms Lowe from Buddle Findlay, solicitors advising, that she had received from Mr Hodgson all the material sent to him. The e-mail said:

I have today received from Glen Hodgson, all of the material served upon him as administrator of Giovanni.   He has sent along with this material a final administrator’s report which indicates that he is no longer acting as administrator.

I have been asked to return this material to Crown.  What would you like me to do with this?

[8]      On 16 September, Crown Law received from Ms Lowe the documents which had been served at the Westport address.  There is no affidavit of service showing when the proceedings were served on Mr Petroulias.  It is apparent that he must have been aware of them not later than 24 September 2010.

[9]      By a memorandum, described as “memorandum by interested person under s 52 of the Evidence Act 2006” dated 17 September 2010, Ms Lowe and Buddle Findlay  raised  an  issue  as  to  certain  evidence  which  had  been  included  in Ms Edwards’ affidavit in support of the without notice application for freezing order. The   evidence   relied   on   by   Ms Edwards   included   transcripts   of   telephone conversations between Mr Petroulias and Ms Lowe.  The memorandum asserted that Ms Lowe had acted for Mr Petroulias and another at the time of the conversations in relation to other Court proceedings, and that the conversations were subject to solicitor/client privilege.  The memorandum recorded that Ms Lowe did not act for Mr Petroulias in respect of the current proceedings but was an interested person under  s 52(1)(c)  of  the  Evidence  Act  2006.     The  memorandum  addressed  a contention which had been made, in the memorandum of counsel for the Commissioner filed in support of the without notice freezing order application, that privilege did not attach.  On 22 September 2010, counsel for the Commissioner filed a memorandum (dated 21 September 2010).  In that memorandum counsel noted that the Commissioner had specifically addressed the question of whether any order was necessary to protect any privilege that might be claimed and that no order had been made by the Court.

[10]     By a memorandum filed on 24 September 2010, Mr Petroulias referred to both the memorandum filed by Buddle Findlay and the memorandum in response. In that memorandum he claimed legal professional privilege for the communications. He said that it was not for him to establish the privilege but for the Commissioner to

establish why the ordinary rule that privilege applies to communications with his solicitor does not apply.

[11]     On 28 September 2010 counsel for the Commissioner filed a memorandum, dated 27 September, seeking a continuation of the freezing order.  Counsel advised that no interlocutory application to discharge or vary the order had been filed and served by the respondent within the time frame provided for in the order, although the Commissioner had received a letter from the director of Giovanni giving notice of  the  company’s  intention  to  make  such  an  application.    The  Commissioner requested that the freezing order be continued until further order of the Court.  On

29 September, Ronald Young J made an order on the papers, in terms of that request.

[12]     The   case   was   set   for   a   first   case   management   conference   on

2 November 2010.   By an application filed on 27 October 2010, the respondents applied to set aside the freezing order.

[13]     On 1 Nov 2010, Buddle Findlay filed an application, dated 29 October 2010, for an order joining Buddle Findlay to the proceeding as an interested party.  The grounds of that application were that Buddle Findlay, and the barrister instructed by that  firm,  had  acted  for  Ms Sabatini  and  Mr Petroulias  in  relation  to  other proceedings and were owed a substantial sum in fees.  The application asserted that Buddle Findlay and Mr Clews were beneficiaries under a deed of settlement dated

24 May 2010, and that the orders sought in the proceeding by the Commissioner would impact on property which makes up the trust fund created under that deed.

[14]     On  1 November 2010,  the  Commissioner  filed  an  amended  statement  of claim.  The intituling referred to Part 18 of the High Court Rules.  Mr Hodgson was omitted as a respondent, as the Commissioner had established that the voluntary administration of Giovanni had ended.   The statement of claim, after reciting the parties,  repeats  the  allegations  as  to  the  assessment  of  the  tax  debts  against Ms Sabatini and Mr Petroulias.  It refers to s 109 of the Tax Administration Act 1994 and asserts that if Ms Sabatini and Mr Petroulias want to dispute and challenge the assessment,  they  must  issue  dispute  and  challenge  proceedings  under  Parts 4A and 8A of that Act within the timeframe provided.  The relief sought is judgment for

the amount of the tax liability.  No relief is sought against Giovanni.  There is no pleading that the Motueka River Lodge is beneficially owned by Ms Sabatini and Mr Petroulias.  That amended statement of claim remains the current pleading by the Commissioner.

[15]     The first case management conference was conducted on 2 November 2010 by telephone by Associate Judge Osborne.  He noted that Mr Hodgson was no longer a party and had been omitted from the plaintiff’s amended claim.  Associate Judge Osborne ordered the joinder of Buddle Findlay as an interested party.  He also dealt with the question of representation of Giovanni.   He noted that it is a company registered in New Zealand of which a Ms Hancock is the sole director.  He noted that Ms Hancock had purported to join the company with Ms Sabatini and Mr Petroulias in the application to discharge the freezing order.   The Commissioner opposed Giovanni’s representation by Ms Hancock and that issue was reserved for further argument.   The question was addressed in a telephone hearing before Associate Judge  Osborne  on  17 December 2010  and  he  delivered  a  reserved  judgment  on

22 December 2010.  He ordered that so long as Ms Hancock is the sole director of Giovanni, and until the Court hears and determines the interlocutory application of Giovanni for orders discharging or varying the freezing order, or until earlier order of the Court, Ms Hancock may represent Giovanni in this proceeding.  All documents filed on behalf of Giovanni to that date were to be treated as properly filed.

[16]     Giovanni,  Ms Sabatini  and  Mr Petroulias  then  applied  for  an  order  for discovery against the Commissioner, in relation to its application to set aside the freezing order.  That application was eventually heard by me on 30 May 2011 at a hearing attended in person by counsel for the Commissioner and by Ms Hancock, and  by  Ms Sabatini  and  Mr Petroulias  by  telephone.    In  a  reserved  judgment delivered on 28 July 2011, I ordered that the Commissioner give discovery of certain specified categories of documents.

[17]     On 18 August 2011, counsel for the Commissioner filed an application to recall that judgment, so far as it related to the time allowed to the Commissioner for compliance with the discovery order.  Notices of opposition to that application were filed.

[18]     I convened a telephone conference for 5 October 2011, because of concerns which I had formed as to the progress of the matter, and the way in which the proceedings had developed.  I issued a minute following that telephone conference in which I said:[1]

[1] Commissioner of Inland Revenue v Giovanni Holdings Ltd HC Nelson CIV-2010-442-340, 5 October 2011 at [2]-[4].

As I indicated, I have become increasingly concerned as to the progress of this matter and, rather than addressing the current applications which seek recall of aspects of my judgment on discovery delivered on 28 July 2011, I consider that it is necessary to re-examine the basis for the freezing order. The history is that the freezing order was initially made, on a without notice basis, on 6 September 2010, and was to expire on 1 October 2010. That limitation of the order to that date was designed to meet the requirements of High  Court  Rule  32.7.  By  memorandum dated  27  September  2010,  the Commissioner requested that the freezing order continue until further order of the Court. An order to that effect was made on 29 September 2010 on the papers and with no input from the respondents at that stage. The respondents applied  to  vary or  discharge  the  freezing order  by application  dated  27

October 2010. The focus of the proceeding since then has been on the steps necessary to ready that application for hearing. My judgment delivered on 28

July 2011 addressed discovery, in respect of that application.

As a result of that sequence of events, the stage has now been reached where the freezing order has been in place for over a year, without the merits of the application having been addressed by this Court, and without the respondent having the opportunity to be heard, as specifically provided for in r 32.7. That situation cannot be allowed to continue.

There is time available before me on Thursday, 27 October for hearing. The full day is available if necessary. I have directed that there should be a hearing, as contemplated by r 32.7, of the Commissioner’s application on that date.

[19]     At  the  hearing  on  27 October 2011,  counsel  for  the  Commissioner,  and Mr Petroulias  attended  in  person.     Ms Hancock  and  Ms Sabatini  attended  by telephone.  Shortly before the hearing, I received a request from Ms Luk, a solicitor from Sydney, for permission to attend the hearing on behalf of Motueka Lodge (2011) Ltd, whom Ms Luk advised had purchased the Motueka River Lodge from Standard  Capital  Custodians  Reserve  SA Ltd  (SCCR)  which  holds  a  registered mortgage over the property, exercising its power of sale.  At the hearing, another solicitor from Sydney, Mr Loiterton, acting for SCCR, also sought permission to

attend.

[20]     Because of the rather tortuous path which these proceedings had followed, I agreed to hear from both Ms Luck and Mr Loiterton.  An important consideration in my agreeing to this course was that I was concerned that SCCR, which holds a registered interest in the land comprising the Motueka River Lodge, had at no previous stage been served with the proceedings, or been represented.  I considered that the interests of justice required that both the mortgagee, and the purchaser claiming title through the mortgagee, should be heard, even if belatedly, though they are not formally parties.

The claim for a freezing order

[21]     The  freezing  order  applies  to  land  of  which  Giovanni  is  the  registered proprietor.   The Commissioner’s  claim,  which  the freezing order  is  intended  to protect, is a claim against Ms Sabatini and Mr Petroulias.   The Commissioner did not, in the original statement of claim, seek any substantive relief against Giovanni. The relief sought was replacement of its administrator.  In the amended statement of claim,  the Commissioner does  not  seek  any relief against  Giovanni.    He seeks judgment against Ms Sabatini and Mr Petroulias for the amounts of the tax liability assessed against them.

[22]     The fact that no substantive relief is sought against Giovanni is not a bar to the making of a freezing order, as HCR 32.4 makes clear.  In SCF Finance Co Ltd v Masri (No 1),[2] the English Court of Appeal considered the test to be applied when a freezing order is sought against assets which are nominally or apparently owned by a third party, against whom the plaintiff claiming the freezing order has no claim. Lloyd LJ summarised the position, to be applied in such a case as follows:[3]

[2] SCF Finance Co Ltd v Masri (No 1) [1985] 2 All ER 747 (EWCA).

[3] At 753.

(i)        Where a plaintiff invites the court to include within the scope of a Mareva injunction assets which appear on their face to belong to a third party, eg a bank account in the name of a third party, the court should  not  accede  to  the  invitation  without  good  reason  for supposing that the assets are in truth the assets of the defendant.

(ii)       Where the defendant asserts that the assets belong to a third party, the court is not obliged to accept that assertion without inquiry, but may do so depending on the circumstances. The same applies where

it is the third party who makes the assertion, on an application to intervene.

(iii)      In deciding whether to accept the assertion of a defendant or a third party, without further inquiry, the court will be guided by what is just and convenient, not only between the plaintiff and the defendant, but also between the plaintiff, the defendant and the third party.

(iv)      Where the court decides not to accept the assertion without further inquiry, it may order an issue to be tried between the plaintiff and the third party in advance of the main action, or it may order that the issue await the outcome of the main action, again depending in each case on what is just and convenient.

(v)       On the facts of the present case the judge was in my view plainly right to hold that he could not decide the matter without  further inquiry; for the reasons I have already mentioned he was not obliged to decide in favour of the second defendant, without further inquiry, by any rule or principle such as that suggested by counsel for the second defendant.

[23]     That approach was applied in New Zealand in Westpac Banking Corporation v Gill.[4]   In this case, I consider that the principal issue for consideration at this stage is that raised in Lloyd LJ’s first proposition.   There are two factual distinctions between SCF v Masri which make it appropriate to focus on that issue.  The first is that in that case, the trial of the plaintiff’s claim against the defendant, and the issue as to ownership of the bank account affected by the freezing order, were due within

about  two  months.    In  this  case,  there  is  no  time  fixed  for  hearing  the  tax proceedings,  and there are no  proceedings  on  foot for determining the issue of ownership of the asset.  Second, and more important, for the reasons which I give, the freezing order here raises questions as to the validity of registered interests in land, to  the extent  that  the existence of  the freezing order  creates  considerable inroads into the integrity of the land transfer system so far as it concerns title to the Motueka River Lodge.

[4] Westpac Banking Corporation v Gill (1987) 2 PRNZ 52 (HC).

[24]     Under Lloyd LJ’s first proposition, it is for the Commissioner to show that there are good reasons for supposing that the asset, Motueka River Lodge, of which Giovanni is the registered proprietor, is in truth Ms Sabatini’s and/or Mr Petroulias’ asset.  Because the property is registered in the name of Giovanni, this is not a case

where the issue discussed in the second and third proposition, whether or not to

accept  as  assertion  by  the  defendant  or  third  party  (Giovanni,  Ms Sabatini  or

Mr Petroulias), arises.

[25]     In the original statement of claim, the Commissioner’s case as to ownership

of the Motueka River Lodge was put in these terms:

12.      The second respondent is the registered proprietor of a property at

Motueka Valley Highway C/T NL 160149, Legal Description Lot 3,

2 Deposited Plan 338869 (Motueka River Lodge property).

13.The applicant’s investigation discloses that the third and fourth respondents have a legal and/or beneficial interest in the Motueka River Lodge property:

13.1Funds to acquire shares in second respondent came  from fees paid to entities associated with the third and fourth respondents by participants to enter a tax avoidance arrangement promoted by the third and fourth respondents.

13.2The deposit to purchase the Motueka River Lodge property was paid from the bank account of a company under the control of the third and fourth respondents.

13.3     The third respondent organised mortgage  funding for  the

Motueka property.

13.4The  third  respondent  instructed  the  real  estate  agent  in respect  of  the  purchase  of  the  Motueka  River  Lodge property.

13.5The vendor identified both the third and fourth respondents as purchasers of the Motueka River Lodge property.

13.6Funds  to  pay  down  the  mortgage  came  from  entities associated with the third and further respondents.

13.7 Both the third and fourth respondents used friends/acquaintances/family members to act as nominee directors on their behalf and used structures to disguise the fact that they were/are the beneficial owners of the Motueka River Lodge property.

13.8     The third respondent instructed a real estate agent to list the

Motueka River Lodge property for sale.

[26]     In the amended statement of claim, there is, as I have noted, no pleading at all which addresses the ownership of the Motueka River Lodge.

[27]     The purpose of the freezing order is to ensure that the asset will be available to meet the Commissioner’s claim against Ms Sabatini and Mr Petroulias.  I do not need to examine the basis of the Commissioner’s claim against them.  The amended statement of claim asserts that the Commissioner’s assessment is to be taken as correct, unless challenged in appropriate proceedings.  I was informed that there are challenge proceedings on foot.   I need not examine those.   I assume, for present purposes, that the Commissioner may ultimately be successful in obtaining a judgment against Ms Sabatini and Mr Petroulias for the claimed tax debt.  On that assumption, the Commissioner has a good arguable case against Ms Sabatini and Mr Petroulias for the amounts claimed, such as would satisfy the first limb of the usual test for a freezing order, if there was no basis for dispute that the assets to be frozen were owned by them.

[28]     Meeting that test does not take the Commissioner very far in establishing a case for a freezing order against the Motueka River Lodge.  To be able to enforce a judgment  against  Ms Sabatini  and  Mr Petroulias  by  executing  an  enforcement process against the Motueka River Lodge, the Commissioner will be required to show   that   the   Motueka   River   Lodge   is   the   property   of   Ms Sabatini   and Mr Petroulias.

[29]     In the course of argument, I asked Ms Courtney by what proceedings, and at what time, the Commissioner would undertake the burden, which must clearly be on the Commissioner, of satisfying the Court on this aspect.  Ms Courtney’s responses suggested that that was an issue which would be addressed after the tax assessments had  been  confirmed.     I  do  not  consider  that  it  is  appropriate  to  defer  any consideration of this issue until that point.  The Commissioner must, at this stage, formulate  his  claim  that  the  Motueka  River  Lodge  is  beneficially  owned  by Ms Sabatini  and  Mr Petroulias  in  appropriate  proceedings.    Whether  or  not  the Commissioner is able to do so is an important question to be considered in deciding whether the freezing order should remain in place, for what will likely be a considerable time before the tax dispute is finally resolved by an enforceable judgment.

[30]     The need for the issue of beneficial ownership of the Motueka River Lodge to be addressed now, and not deferred until the tax liability is finally established, is re- enforced by the fact that the asset subject to the freezing order is land, of which Giovanni is the registered proprietor.  The title to the land is now subject to a caveat, lodged by the Registrar-General of Land on 28 September 2010.   Ms Courtney confirmed that the caveat was lodged under s 211 of the Land Transfer Act 1952 (the LTA), and that the basis of the caveat was the freezing order.

[31]     Because there is no pleading which sets out the basis of the Commissioner’s claim, it is not possible to determine the precise basis of his claim.  If his claim is that Giovanni is wrongly registered as registered proprietor, because the entire transaction is a sham, then the onus will be on the Commissioner to establish that. Under s 62 of the LTA, the title of the registered proprietor is paramount, except in the case of actual fraud.   To enforce, against the land, a judgment against parties other  than  Giovanni,  the  Commissioner  must  necessarily  defeat  the  registered interest of Giovanni.  To do so, he must prove actual fraud such as would defeat the paramountcy of Giovanni’s registered title.

[32]     It may be that the Commissioner’s claim is not that Giovanni’s registered interest is affected by actual fraud, but that Giovanni, although properly registered as the legal owner of the Motueka River Lodge, holds the beneficial interest as trustee for Ms Sabatini and Mr Petroulias.  If that is the case, then it is possible that there may be no onus on the Commissioner to establish fraud such as would invalidate the registered title.  But, if that is the basis of the Commissioner’s claim, I consider that the availability of the protection provided by the Registrar General’s caveat may be open to question.  If the Commissioner’s claim is limited to a claim that Giovanni holds the legal interest upon some form of trust, then that beneficial interest would necessarily be an unregistered interest in the land.  Section 128 of the LTA prohibits any entry in the register of any notice of trust.  Accordingly, if the freezing order were intended to attach only to a beneficial interest in the land, the freezing order would not give rise to a caveatable interest in the land.

[33]     I  consider  that  the  existence  of  the  freezing  order,  supported  by  the

Registrar’s caveat, is such as to create substantial inroads into the paramountcy of

Giovanni’s title as registered proprietor.  If such an extensive inroad is to be justified, then it is incumbent on the Court to ensure that the Commissioner’s claim to an interest in the land of which Giovanni is the registered proprietor must be addressed with all possible despatch, and not permitted to remain in place for longer than is justified.

[34]     There is a further aspect of the paramountcy of title which is relevant.  There are two registered mortgages over the land.  The first is in favour of Bank of New Zealand.  It appears that has been discharged, and I need not consider it for present purposes.  The second is in favour of SCCR.  It was registered on 21 May 2008.  The mortgagee was not made a party to the freezing order proceedings.  The reason for that was addressed in the memorandum of counsel for the Commissioner dated

2 September 2010 in support of the application for a freezing order in these terms:

29.There  is  a  mortgage  registered  by  Standard  Capital  Custodians Reserve SA Ltd (“SCCRSA”) on 21 May 2008 over the Motueka property.   However, for the reasons set out in more detail at paragraphs 96-122 of the affidavit of Patrice Alison Edwards, the applicant considers that the SCCRSA mortgage either does not exist or is a sham and has been manufactured in an attempt to prevent legitimate creditors, including the applicant, from having recourse to assets.

[35]     I consider that it was not appropriate for the position of the mortgagee to have been dismissed summarily in that way by the applicant.  The mortgagee’s title is paramount, except in the case of actual fraud.   It was not appropriate for the applicant to ignore the position on the mortgagee, by making an allegation of sham. A title which is valid except in the case of actual fraud cannot be ignored simply because there is an allegation of fraud. At the very least, the allegation of fraud must be properly formulated, and the mortgagee given the opportunity to respond to it. The challenge to the mortgagee’s title ought to have been properly addressed by including the mortgagee as a party, and pleading, against it, the basis upon which its title was alleged to be affected by actual fraud.  I regard the way in which that issue was addressed as a serious deficiency in the original application.

Undertaking as to damages

[36]     Rule 32.2(5) provides as follows:

An applicant for a freezing order must file a signed undertaking that the applicant will comply with any order for the payment of damages to compensate the respondent for any damage sustained in consequence of the freezing order.

[37]     No undertaking as to damages was filed by the Commissioner in this case. The position was addressed in counsel’s memorandum dated 2 September 2010 in support of the application.  Counsel said:

41.Rule 7.45 of the High Court Rules provides that the Court has the power to make an interlocutory order subject to any just terms or conditions, including, without limitation, any condition that a party give an undertaking.

42.The  applicant  contends  that  this  is  not  a  case  in  which  it  is appropriate to require an undertaking as to damages from it.  While counsel  could  find  no  direct  authority  on  the  point,  there  is persuasive authority that it is contended should apply.

43.In The Commerce Commission v Megavitamin Laboratories (NZ) Ltd and Warren Stewart Holland J ordered an interim injunction, but not until an undertaking as to damages had been given.   He distinguished an English House of Lords case - F Hoffman-La Roche

& Co AG and Others v Secretary of State for Trade and Industry - where an interim injunction against the Crown had been granted

without an undertaking as to damages having been given.  Holland J

said:

...  I can see very strong reasons for the Court either being reluctant to, or incapable of, requiring the Crown to give an undertaking as to damages in proceedings brought by it.    The Commerce Commission is not the Crown.   I do not see any good reason to extend the reluctance of the Court to place embargoes on the Crown any further than the doctrine exists at the moment.

44.The Commerce Commission case was decided when rule 630 of the High Court Rules required that an undertaking as to damages be given with every application for an interim order.  However, that was repealed with effect from 31 January 1998 (previous r 236) and now, under rule 7.45, the Court has power to make an interlocutory order on any terms and conditions it thinks just including requiring an undertaking.

45.House of Lords' authority is not binding in New Zealand, but highly persuasive.   The question before Their Lordships in the Hoffman

case was "whether an undertaking in damages can be required of the

Crown". The case concerned an interlocutory injunction.

46.The  House  of  Lords'  reasoning  relied  on  s  21  of  the  Crown Proceedings Act 1947 (UK) ("the 1947 Act"), which is in substantially the same terms as s 17 of the Crown Proceedings Act

1950 (NZ).

47.Their Lordships said that before the passing of s 21 of the 1947 Act the general rule was that the Crown could not be required to give an undertaking as to damages.   That was laid down by the English Court of Appeal in Attorney-General v Albany Hotel Co Lord Wilberforce indicated that one of the most powerful reasons for that was likely to be that it was impossible before the enactment of the

1947 Act to sue the Crown for damages.  However, s 21 of the 1947

Act provided that in civil proceedings the Court shall, subject to the provisions of that Act, have power to make all such orders as it has

in proceedings between subjects and to give such appropriate relief

as the case may require.  Accordingly, Their Lordships considered that the justification for the distinction between what was required of the Crown and its subject had ceased to apply.

48.There is considerable discussion in the case about the circumstances in which the Crown should and should not have to give an undertaking as to damages.  It is clear that it must when it is seeking to protect its proprietary or contractual rights, eg, entitlement to a house or registered design.

49.However, if it is taking law enforcement action by way of civil proceedings, in accordance with a governing statute, to restrain a subject from breaking the law, where the breach is harmful to the public or some section of it, then Their Lordships considered that the Crown should not be required to give an undertaking as to damages. Otherwise it might be deterred from taking such action.   It would only be in an exceptional case where the prima facie case against the respondent did not appear to be strong that the Court might consider whether an injunction should be granted in the absence of an undertaking as to damages being given.

50.It is contended that collection of taxes assessed is in the public interest and action to enforce that comes within the ambit of sections

6 and 6A of the TAA.

51.While there are slight differences in the tests that apply for the grant of an interlocutory injunction and a freezing order, it is contended that should not materially affect the position.

[38]     That statement of the law is wrong.    Rule 7.45 has no application to the present case.  It provides:

A  Judge  may  make  an  interlocutory  order  subject  to  any  just  terms  or conditions, including, without limitation, any condition that—

(a)       a party give an undertaking:

(b)       the order operate only for a specified period.

[39]     Rule 32.2(5) applies here.  On the plain wording of r 32.2(5), an undertaking as to damages is a pre-requisite of the grant of an order.  It provides:

An applicant for a freezing order must file a signed undertaking that the applicant will comply with any order for the payment of damages to compensate the respondent for any damage sustained in consequence of the freezing order.

[40]     Further,  counsel’s  memorandum  is  wrong  in  saying,  at  44,  that  the requirement for an undertaking as to damages on an interim injunction had been repealed. That is not correct.  It is now contained in r 7.54, which provides:

(1)       An applicant for an interlocutory injunction under rule 7.53 must file a signed undertaking that the applicant will comply with any order for the payment of damages to compensate the other party for any damage sustained through the injunction.

(2)      The undertaking must be referred to in the order granting the interlocutory injunction and is part of it.

[41]     A question which is addressed in the memorandum, whether the Court has power to require the Crown to give an undertaking as to damages, does not arise. The requirement has been enacted by Parliament.  The relevant question is whether the Court has the power to  dispense with that requirement, or more accurately, whether  the  Court  has  power  to  issue  a  freezing  order  in  circumstances  where r 32.2(5) has not been complied with.

[42]    There was no similar mandatory requirement for an undertaking in the legislation with which the House of Lords was  concerned in  Hoffmann and La Roche.   Counsel for the Commissioner referred to Commerce Commission v Megavitamin Laboratories.[5]    That does not support the proposition for which it is cited by counsel.  The authors of McGechan on Procedure comment on that decision

in the notes to r 7.54 in these terms:[6]

In Commerce Commission v Megavitamin Laboratories (NZ) Ltd & Stewart (1987) 2 TCLR 57 Holland J held that the fact that the Commission was performing a public duty did not, in the absence of a statutory exemption, obviate the requirement to give an undertaking. An example of such an exemption is s 44 of the Unsolicited Electronic Messages Act 2007.

[5] Commerce Commission v Megavitamin Laboratories (NZ) Ltd (1987) 2 TCLR 57 (HC).

[6] Andrew Beck and others McGechan on Procedure (looseleaf ed, Brookers, updated 10 July 2009) at [HRPt14.15(1)].

[43]     For these reasons, I consider that it was not appropriate for the applicant to seek the freezing order without filing the required undertaking as to damages.

The evidence to support the Commissioner’s contentions

[44]     The evidence which was relied upon to support the Commissioner’s claim that   the   Motueka   River   Lodge   is   beneficially   owned   by   Ms Sabatini   and Mr Petroulias was for the most part contained in a lengthy affidavit of Ms Edwards sworn on 2 September 2010.  It is necessary to consider that affidavit to determine whether, in terms of the first requirement of Lloyd LJ in SCF Finance Co Ltd v

Masri,[7]   the  Commissioner  has  established  good  reason  for  supposing  that  the

Motueka River Lodge is in truth an asset of Ms Sabatini and Mr Petroulias.

[7] SCF Finance Co Ltd v Masri, at n 2

[45]     I have considerable difficulty in assessing the affidavit for that purpose.  As I have said, there is no pleading as to the basis of the Commissioner’s claim.  There is accordingly  no  way  of  relating  Ms Edwards’  evidence  to  the  Commissioner’s contentions.

[46]     One example of the difficulty that the lack of proper pleading presents is Ms Edwards’ evidence about the shareholding of Giovanni.   The essence of her evidence is that the shares were, from about 2006, owned by either the Mount Resurgensa Trust or the Serenus Trust.   Ms Edwards asserts that in either case the beneficiaries of the trust were Ms Sabatini and Mr Petroulias.

[47]     The significance of that evidence is difficult to relate to the Commissioner’s claim.  If the Commissioner’s claim is that the funds for the purchase of the Motueka River  Lodge  were  provided  by  Ms Sabatini  and  Mr Petroulias  in  circumstances which give rise to a trust, whereby Giovanni holds its registered interest in trust for

them,  then  the  ownership  of  the  shares  in  Giovanni  would  seem  to  be  largely

irrelevant.  But, on another view, evidence that the shares are beneficially owned by them is possibly significant.   It might weigh against the possible existence of a beneficial interest in the Motueka River Lodge from some form of resulting trust arising from provision of the purchase money.  The provision of funds to a company by a shareholder would not in ordinary circumstances suggest that the shareholder would obtain a direct beneficial interest in any property purchased by the company with those funds.

[48]     That   example   will   serve   to   illustrate   why   it   is   important   that   the Commissioner particularise the basis on which he claims that the beneficial interest arises,  so  that  the  evidence  can  be  properly  related  to  the  Commissioner’s allegations.

[49]     Similar  considerations  apply  to  Ms Edwards’  evidence  concerning  the transfer of the shares in Giovanni to Castix Investments Pty Ltd.  The Commissioner asserts that this was not a bona fide transaction and, as I understand it, the assertion is that no transfer of the beneficial interest in the shares took place.  In this case too, it is difficult to assess the significance of that evidence, in the absence of a clear pleading of the basis of the Commissioner’s claim.  As I have indicated, ownership of the shares is, on one view of the matter, largely irrelevant.  On the other hand, if it is alleged that that transfer is part of a wider fraudulent scheme, the basis for that contention needs to be particularised.

[50]     Ms Edwards asserts that there are reasonable grounds  to believe that the mortgage registered in favour of SCCR either does not exist or is a sham and has been  manufactured  in  an  attempt  to  prevent  legitimate  creditors  from  having recourse to assets.  She expresses the opinion that the mortgage is a sham. As I have said, it appears that the Commissioner will need, to obtain priority over the mortgage to establish that there is actual fraud involved.   Clear evidence to support the deponents’ opinion that the mortgage is a sham would seem to be necessary.

[51]     There is another aspect relevant to whether, at the time the freezing order was obtained, Ms Sabatini and Mr Petroulias had a beneficial interest in the Motueka River Lodge.  This issue has arisen since Ms Edwards’ first affidavit, and is referred

to here, in her second affidavit sworn on 19 October 2011. Ms Hancock has produced a deed, on the face of it entered into in May 2010, to which, among others, SCCR, Giovanni, Ms Sabatini and Mr Petroulias are parties. That deed seems to address a number of matters which are relevant to the Commissioner’s claim. One of the matters provided for in the deed is that Giovanni has, it would appear, purported to declare a trust of its interest in the Motueka River Lodge for the benefit of a number of lawyers, in both New Zealand and Australia, who have provided legal services to parties, apparently including Ms Sabatini and Mr Petroulias. Buddle Findlay is said to be a beneficiary under that trust. Buddle Findlay has sought and been granted party status in these proceedings, as I have noted at [15]. Ms Edwards says in her affidavit of 19 October 2011 that whether or not the settlement deed is valid needs to be considered further. Despite Buddle Findlay having been granted party status in these proceedings, they have not taken an active part. It is not clear whether or not they have been served with all the relevant papers, or whether they have elected to take no action.

[52]     In her subsequent affidavit of 19 October 2011, Ms Edwards describes the evidence in her earlier affidavit as indicating “why I was unsure as to the status of this debt instrument”, and states that she remains unsure.   Her description of her position in September 2010 as being “unsure of the status” of the mortgage does not, in my view, accurately describe the assertions made in her earlier affidavit.  There, she expresses the opinion that the mortgage is a sham.  If her later affidavit means that the statement in her earlier affidavit is properly to be interpreted as meaning that she is  unsure  whether the mortgage  is  a sham  or not,  that  would  fall  short  of evidence sufficient to establish an arguable case of actual fraud.

[53]     I have not dealt in detail with the evidence adduced by the Commissioner in support of the application, and I have not addressed at all the evidence filed in opposition.  For the reasons I have given, the lack of a clear statement of the basis of the Commissioner’s claim makes it impossible, at this stage, to assess, whether the evidence is sufficient to establish, on a basis not properly pleaded, that there is good reason  for  supposing  that  the  Motueka  River  Lodge  is  in  truth  the  asset  of Ms Sabatini and Mr Petroulias.

Where to from here?

[54]     I must consider what steps are appropriate in light of my inability to make a proper assessment of whether there is good reason for supposing that the Motueka River Lodge is in truth owned by Ms Sabatini and Mr Petroulias.  I do not consider that the freezing order can be upheld, in the present unsatisfactory state of the pleadings.   However, if I were to discharge the freezing order at this stage, the Commissioner would be deprived of the opportunity to establish that proposition.  I do not consider that the Commissioner should be deprived of that opportunity.   I consider that the appropriate course is to continue the freezing order for a short period,  sufficient  to  enable  the  Commissioner  to  properly  formulate  his  claim, against all parties who may be affected by the operation of the freezing order.

[55]    The Commissioner must, if he maintains his claim to a freezing order, commence proceedings, appropriate for asserting his claim that the Motueka River Lodge is beneficially owned by Ms Sabatini and Mr Petroulias.   The proceedings must address the registered interests of both Giovanni and SCCR, and must be proceedings in which the question of the paramountcy of their title under s 62 of the LTA can be properly determined, to the extent that the Commissioner seeks to obtain priority to the rights of the mortgagee.   The proceedings must also include, an interested party, Motueka Lodge (2011) Ltd.  The Commissioner must allege against that company any grounds that he may have (apart from a challenge to the mortgagee’s title) for any assertion that that company is not a bona fide purchaser for valuable consideration of the interest which it has purchased from the mortgagee. The proceedings must also include Buddle Findlay, as an already joined party in its capacity as one of the beneficiaries in the purported settlement deed.   The Commissioner will need to give consideration to whether the allegations which he makes in respect of that deed may require the inclusion of the other parties named as beneficiaries.   Beyond those basic requirements, the exact form and nature of the proceedings will be for the Commissioner and his counsel to determine.

[56]     As I have noted at [53], I have not addressed the evidence adduced by the respondents in opposition to the Commissioner’s contention that the Motueka River Lodge is beneficially owned by Ms Sabatini and Mr Petroulias.  Those affidavits will

need to be properly considered.  In my view, the appropriate course is to direct that the Commissioner must file, in support of any application for continuation of the freezing order that the Commissioner may make, a memorandum which addresses all possible defences known to the Commissioner which any respondent may have to the Commissioner’s claim as pleaded.   In doing so counsel for the Commissioner must address all issues raised in the respondents’ affidavits and memoranda.

[57]     As I have noted in describing the history of this litigation, an issue that was raised  at  an  early stage  was  whether  some  of  the evidence  relied  upon  by the Commissioner is the subject of legal professional privilege.  That issue needs to be properly addressed.   I do not regard the way in which that issue was addressed in counsel’s memorandum of 2 September 2010 as satisfactory.  That would enable the Commissioner to rely upon apparently privileged communications, leaving the onus on the respondents to challenge that reliance.   If the Commissioner seeks to rely upon evidence in respect of which privilege has been claimed, the Commissioner must establish a proper basis for doing so.

[58]     There is currently no undertaking as to damages.  That situation should not be allowed to continue.  The Commissioner must lodge an undertaking as to damages, as required by HCR 32.2.  The undertaking must extend to Giovanni, Ms Sabatini, Mr Petroulias, SCCR, and Motueka Lodge 2011 Ltd.

Orders

[59]     I make the following orders:

(a)      The  Commissioner  must,  on  or  before  22 November 2011,  file  an undertaking that the Commissioner will comply with any order for the payment   of   damages   to   compensate   all   or   any   of   Giovanni, Ms Sabatini, Mr Petroulias, SCCR and Motueka Lodge (2001) Ltd for any damage sustained in consequence of the freezing order;

(b)The Commissioner must, on or before 2 December 2011, commence appropriate proceedings in respect of the matters addressed in this judgment, in accordance with the indications given in [55];

(c)      The  Commissioner  must,  on  or  before  2 December 2011,  file  an application  for continuation  of the freezing order,  together with  a supporting memorandum which addresses all matters that are relevant to the making of a freezing order, including in particular all possible defences as referred to in [56];

(d)If any of the steps prescribed in (a) to (c) are not taken by the dates specified, the existing freezing order will lapse;

(e)      If all those steps are taken by the dates specified, the freezing order will continue to a date to be fixed by the registrar on an urgent basis, on the first available date for a hearing of the Commissioner’s application for continuation of the freezing order.

[60]     All questions of costs are reserved.

“A D MacKenzie J”

Solicitors:           Crown Law Office for Applicant