Commissioner of Inland Revenue v Honk Marine Ltd
[2017] NZHC 1258
•9 June 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-1338 [2017] NZHC 1258
UNDER Part 32 of the High Court Rules IN THE MATTER
of an originating application for a freezing order
BETWEEN
THE COMMISSIONER OF INLAND REVENUE
Applicant
AND
HONK MARINE LTD First Respondent
HONK BARGES LTD Second Respondent
WESTPARK MARINA LTD Third Respondent
COASTAL DREDGING AND CONSTRUCTION LTD
Fourth Respondent
WESTPARK MARINA OPERATIONS LTD
Fifth Respondent
WESTPARK SHIP CHANDLERY LTD Sixth Respondent
WESTPARK DEVELOPMENTS LTD Seventh Respondent
WESTPARK VILLAGE LTD Eighth Respondent
Hearing: 10 May 2017 Counsel:
H Ebersohn and K J Walton for Applicant (Respondent)
M T Lennard for First and Second Respondents (Applicants)Judgment:
9 June 2017
THE COMMISSIONER OF INLAND REVENUE v HONK MARINE LTD [2017] NZHC 1258 [9 June 2017]
JUDGMENT OF BREWER J
This judgment was delivered by me on 9 June 2017 at 2:30 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Crown Law (Wellington) for Applicant
Carmine Law (Auckland) for First and Second Respondents
Counsel:
MT Lennard (Wellington) for First and Second Respondents
Introduction
[1] The Commissioner of Inland Revenue (“the Commissioner”) is prosecuting Honk Marine Ltd and Honk Barges Ltd (“the Companies”) for tax evasion. The Commissioner has also required the Companies to challenge her default assessments of tax (which are based on the same allegations as underlie the prosecutions) by filing proceedings under Part VIIIA of the Tax Administration Act 1994.
[2] The Companies want to defend the criminal charges and to challenge the default assessments. Their only asset is $2,081,861.71 (“the fund”) held in the Court pursuant to consent orders made by Lang J on 25 June 2013.
[3] The Companies apply to access the fund to pay their legal fees in both proceedings. It is estimated that $10,000 will suffice for the civil challenge proceedings (which will not be progressed until the criminal proceedings are concluded). The criminal proceedings estimate is $100,000 or more.
[4] The Commissioner opposes the application. Her case is that the consent orders arose from ex parte freezing orders obtained by her. For pragmatic commercial reasons, the Commissioner agreed to the restrained property being sold on the basis that the proceeds, up to the $2,595,664.36 claimed by her, would be paid into Court and held pursuant to the terms of the consent orders. As it turned out, the sale of the property and other assets yielded less than anticipated.
[5] The Companies’ argument is that there have been relevant changes in circumstances which make it in the interests of justice to vary the orders and allow the Companies to access the fund to meet the costs of defending the criminal charges and making the required civil challenge.
[6] In response, the Commissioner submits that the fund is not available to the Companies to pay legal fees. The consent orders do not allow for that. She submits that the Companies have not raised any good grounds which would justify variation.
Issues
[7] The issues I have to determine are:
(a) Are the Companies entitled to access the fund to pay their legal fees in the tax proceedings?
(b)Are the Companies entitled to access the fund to pay the legal costs of defending the criminal proceedings?
The civil law tests
[8] Whether the Companies can access the fund for either or both these proceedings depends upon whether they can satisfy the civil law tests for varying consent orders.
[9] The relevant consent orders made by Lang J on 25 June 2013 are:
…
1.3The Fund has been preserved solely to enable payment of tax debts quantified in the reassessments made against the first to fourth respondents inclusive on 12 March 2013 and any consequential penalties and interest. No other payments will be sought to be made from the Fund.
…
1.5The Fund will remain in the Courts’ bank account until the statutory procedures have been finally determined, at which point the Court will make further orders relating to the release/payment of the Fund. If any surplus amount remains after payment of core tax, penalties and interest arising from the reassessments that will be paid to the respondents.
1.6 Leave is reserved for any party to apply on 48 hours’ notice to seek
further orders.
…
1.8 The Amended Freezing Order dated 8 April 2013 is discharged.
…
[10] The Companies’ proposed payments do not fall within the ambit of the consent orders. The consent orders clearly state that the fund will be used solely to pay the Companies’ tax debt. Paragraph 1.3 is specific: “[n]o other payments will be sought to be made from the Fund.”
[11] However, the High Court has the inherent jurisdiction to vary or set aside a consent order if the interests of justice require it and if good grounds are established to warrant that course.1
[12] The courts have traditionally interpreted good grounds as meaning “grounds that would justify setting aside a contract”.2 The Court of Appeal in Phillips v Phillips thus set aside a consent order because both parties had entered into the underlying contract based on mistake.3
[13] The Court of Appeal has since elaborated:4
[6] … Examples of such a good ground are an order that was not in fact made with the consent of the party challenging it, or an order founded on an agreement vitiated by mistake.
[14] In Kiriwai Consultants Ltd v Holmes, Courtney J varied a consent order because the plaintiff would have otherwise been adversely affected by a mistake of their counsel in the discovery process.5 Her Honour added:6
[9] Treating an agreement vitiated by mistake as merely an example of the circumstances in which a consent order may be set aside makes it clear that the jurisdiction is not limited to cases where a qualifying mistake can be shown but that it is the inherent jurisdiction, to be exercised where the interests of justice require it.
[15] I was referred to Re Kingsley Healthcare Ltd7 as an example of a case where freezing orders were discharged in favour of consent orders, and where the Judge
found the circumstances of the person whose assets were restrained so changed that
1 Butcher v Finnigan [2012] NZCA 250 at [6]; Kain v Hutton [2007] NZCA 199, [2007] 3 NZLR
349 at [230]; Phillips v Phillips [1993] 3 NZLR 159 (CA) at 172.
2 Phillips v Phillips, above n 1, at 172.
3 Phillips v Phillips, above n 1, at 167.
4 Butcher v Finnigan, above n 1.
5 Kiriwai Consultants Ltd v Holmes [2013] NZHC 3290.
6 See also Stead v The Ship “Ocean Quest of Arne” [1995] 3 NZLR 415 (HC) at 421.
7 Re Kingsley Healthcare Ltd Ch 2001 WL 1040201, 25 September 2001.
he was prepared to consider varying the consent orders. Mr Lennard and Mr Ebersohn examined the facts of this case to argue whether the Companies’ circumstances had changed sufficiently to invoke the inherent jurisdiction.
[16] In Re Kingsley Healthcare Ltd, like here, a sum of money was agreed to be set aside until further order of the Court, but the sum eventually restrained was much less than the sum anticipated. That was because the owner of the fund divorced and his share of relationship property was not great. The owner sought access to the diminished fund because that was his sole asset and he needed it to defend the substantive civil proceeding.
[17] Mr Justice Neuberger (as he then was) set out the law in terms familiar to
New Zealand Courts:8
… a consent order is a special type of order; it involves not merely a court order but also a contract and the court will not, save perhaps in exceptional circumstances, vary or interfere with the terms of a consent order unless grounds exist which would enable the court, as it were, to interfere with or vary a contract.
[18] It was not suggested to Neuberger J that circumstances had arisen which would justify interfering with a contract. But the Judge found that the terms of the consent order specifically envisaged varying or discharging them. The relevant provision was:9
Variation or discharge of the undertaking
The respondent … or anyone notified of the undertaking may apply to the court at any time to vary or discharge the undertaking or so much of it as affects that person …
[19] There is no equivalent provision in the consent orders in this case. There is only paragraph 1.6 which reserves leave for any party to seek further orders. This ties back to paragraph 1.5 which states that further orders will be made once “the
statutory procedures have been finally determined”.
8 At 3.
9 At 3.
[20] The balance of the inquiry by Neuberger J was aimed at whether, because the parties had given the Court the power to vary the consent orders, he should do so. It was in this context that Neuberger J held that the respondent would need to establish an unforeseeable change of circumstance before a variation would be considered.10
[21] Justice Neuberger decided that the respondent’s divorce was an unforeseeable circumstance leading to him not having money to defend the civil action against him. However, he declined to exercise his discretion to grant access to the fund. The Judge thought the change in circumstances to be not a strong one, the parties would, or should, have known that consent orders are more restrictive than freezing orders and, importantly, the respondent’s evidence left unresolved concerns that he might have access to other assets. There were other factors also. I do not need to refer to them in the context of this case.
[22] In my view, where a party seeks to vary a consent order, and the consent order provides generally for variation without specifying grounds, then the approach taken by Neuberger J is logical and founded in precedent.11
[23] The present case is different. There is no provision by which the parties agreed that variation could be sought. It is not suggested that this is a case where the Court would be justified in interfering with a contract. This case, in my view, has to be considered under the inherent jurisdiction to vary the consent orders if the circumstances are extraordinary. As part of that inquiry, it will be logical and sensible to examine whether the Companies’ circumstances have changed unforeseeably.
[24] There is a further point to resolve. Mr Ebersohn submits that the Companies cannot simply claim that the fund is theirs and that they should have access to it in order to gain legal representation. He submits that the Commissioner has a
proprietary interest in the fund in the nature of an equitable charge.
10 At 5.
11 Justice Neuberger cited and relied on Chanel Ltd v FW Woolworth & Co Ltd [1981] 1 WLR 485, [1981] 1 All ER 745 (CA) where the Court of Appeal refused to allow an undertaking to be revisited before trial because there had been no significant change of circumstances.
[25] Mr Ebersohn referred me to Flightline Ltd v Edwards.12 In that case, Flightline had obtained a freezing order restraining a company from dealing with its assets up to the value of £4,200,000. The freezing order was discharged by consent on the basis that £3,325,000 would be paid into a trust account pending further order of the Court. The company went into liquidation and the liquidator claimed the
£3,325,000. Flightline demurred on the ground that the circumstances in which the
£3,325,000 came to be set aside in a trust account gave it a proprietary interest in the fund. The Court of Appeal disagreed.
[26] The Court construed the wording of the undertaking given as part of the consent orders (“the March order”) to determine whether the company thereby agreed that it must satisfy any judgment obtained by Flightline out of the fund. In other words, that the company had agreed that if Flightline were successful it would be entitled to payment from the fund as a matter of right.13
[27] The wording of the March order did not, in the Court’s view, do more than
continue the interim protection “of a ‘freezing’ nature until trial or further order”.14
Freezing orders do not create a proprietary interest in the frozen assets on the part of the applicant. There was nothing on the wording agreed by the parties and incorporated in the March order that changed that position.
[28] Mr Ebersohn submits that paragraph 1.3 of the consent orders made by Lang J do create a proprietary interest. It states that the fund “has been preserved solely to enable payments of tax debts” and that “no other payments will be sought to be made from the Fund”.
[29] I accept that the Commissioner has a proprietary interest in the fund. Certainly, it came into existence because freezing orders had been obtained. But the parties agreed to discharge the freezing orders for pragmatic commercial reasons that had advantages for both sides. The Companies could dispose of assets and, save for having to create the fund, could deal with them as they chose. The Commissioner
had the fund created and set aside for her to draw on (with the permission of the
12 Flightline Ltd v Edwards [2003] EWCA Civ 63, [2003] 3 All ER 1200.
13 At [48].
14 At [49].
Court) in the event of victory in the civil tax proceedings. This is not just a continuation of the interim position created by the freezing orders.
[30] Does this matter? In my view, the consequence is that the threshold to be crossed before the Companies can access the fund to pay for legal representation is higher. Where assets are restrained by freezing orders, the Court will normally allow access to them to pay for legal representation. That is not the case for a fund created by consent orders. And if a claimant has a proprietary interest in restrained funds pursuant to consent orders, then the applicant’s task will be even more difficult. The outcome depends on the facts and the Court retains its inherent jurisdiction to vary consent orders. However, the context will include the agreement of the parties that created the proprietary interest.
[31] The ultimate inquiry must always address the interests of justice. Consent orders are “not easily disturbed”15 and the Court will regard an application to vary them “with considerable caution”.16
The tax proceedings
[32] I turn now to consider whether the Companies are entitled to access the fund to pay their legal fees in the tax proceedings. A key submission for the Companies is that although the freezing orders are discharged, I should regard the consent orders as being, broadly, a continuation of them. If I do, then I should approach the application to vary them using the principles that apply to varying freezing orders.
[33] As the discussion above presages, I do not accept this submission. The legal principles underpinning freezing orders and consent orders are quite different.
[34] A freezing order is a temporary order restraining a respondent from (broadly) dealing with assets against the claimed interests of the applicant. A freezing order can be obtained with or without notice, but either way it is a temporary measure to
preserve the applicant’s claimed position. Because of this, r 32.6(3) provides:
15 Kain v Hutton, above n 1, at [230].
16 Butcher v Finnigan, above n 1.
The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—
(a) paying ordinary living expenses; or
(b) paying legal expenses related to the freezing order; or
(c) disposing of assets, or making payments, in the ordinary course of the respondent’s business, including business expenses incurred in good faith.
[35] A consent order is very different. It gives the Court’s authority to an agreement between the parties. That is why the traditional scrutiny of an application for variation is through the lens of contract. It is for the parties to set down the terms of their agreement and the Court’s order gives them effect. There is no equivalent of r 32.6(3).
[36] In relation to the inherent jurisdiction, the Companies submit that variation is in the interests of justice due to changes of circumstances since the orders were made.
[37] The first change of circumstances identified by the Companies is that the sale of assets realised much less than expected, reducing the prospect of a surplus from which legal costs could be paid.17
[38] This is relevant to the interests of justice inquiry but not decisive. I accept the Commissioner’s submission that the consent orders had advantages to all the parties. The Companies were represented by counsel and, as the owners of the barge, made their own assessment of its likely sale price. A failure of expectation does not entitle the Companies to vary the consent orders.
[39] I do accept, because the sale of the Companies’ assets did not yield funds in excess of the amount agreed to be restrained, that if the Companies do not have access to the fund then they will not be able to pay for legal representation to challenge the tax assessments. The Courts regard access to legal representation in civil proceedings as a significant, but not unqualified, right. Further, the Companies are not natural persons and so they cannot self-represent. And, if a taxpayer
challenges the Commissioner’s assessments in a case such as this, the onus of proof
is on the taxpayer.18
[40] However, I have also accepted that the Commissioner has a proprietary interest in the fund. That interest comes from the agreement of the parties to the purpose for which the fund was created. The fact that the Companies, against their expectation, do not have monies outside the fund to pay for legal representation does not create the sort of extraordinary situation which, on an interests of justice analysis, would compel the Court to vary the consent orders.
[41] I do not give weight to the Companies’ additional submissions that they had no choice but to agree to the consent orders, and that there was delay by the Commissioner. There was a choice. The one made was, commercially, the best one. As for delay, I am afraid that is always in the contemplation of parties to civil disputes.
[42] The key point is that the threshold required to be crossed before a consent order will be varied is a high one. There is a contractual underpinning to a consent order so that an applicant for a variation must show that the agreement should be set aside to the extent of the variation sought. The threshold is higher still when the terms of the consent order create a proprietary interest in favour of the respondent. The purpose of the consent orders was to keep intact the fund against the Commissioner’s tax assessment being upheld. That there would be costs involved must have, or should have, been within the contemplation of the parties, even if the Companies expected to pay those costs from other resources. The Companies do not cross the threshold in respect of the legal costs in the tax proceedings.
Defending the criminal charges
[43] In my view, the fact that the Commissioner has now brought criminal prosecutions is a significant change of circumstances. The whole basis of the consent orders was to preserve the fund against the Commissioner’s tax assessment being upheld. Any surplus was to be returned to the Companies. There is nothing to
indicate that the consent orders were made with criminal prosecutions in contemplation.
[44] The consent orders were sealed in June 2013. More than three years later (September 2016) the charges were laid. I accept the Companies’ submissions that at the time the consent orders were agreed to, only the tax proceedings were at issue. The Commissioner points to an affidavit filed in support of the freezing order application in which factual elements of fraudulent activity were alleged. But that does not permit a conclusion that the basis for sequestering the fund included a recognition that if the Companies were to be prosecuted, they would be denied access to the fund.
[45] As it has turned out, the fund is the sole remaining asset of the Companies. The Commissioner has, three years on, laid criminal charges. That is within her discretion. But the fact that the Companies are not people does not diminish their right to defend themselves. Indeed, I find it surprising that the Commissioner exercised her discretion to bring charges while at the same time seeking to prevent the Companies from accessing the funds they need to defend the charges.
[46] I note that the Commissioner is also prosecuting the people who were the animating minds of the Companies. One, Mr Tauber, is represented by Mr Lennard, who acts also for the Companies. Mr Ebersohn for the Commissioner submits:
42.2Mr Tauber’s concern is also unlikely to be that two shell companies may be convicted. His real concern is that he may be convicted and he would prefer to have two thirds of his legal fees subsidised from the funds paid into court specifically preserved to pay the companies’ tax debts.
42.3Mr Tauber is represented in the same criminal proceedings by Mr Lennard. Ordinarily Mr Tauber would be required to fund his own defence. Mr Lennard acting simultaneously for the respondents is unlikely to materially increase his legal fees and there is no real risk that the respondents will not be represented in the criminal proceedings if the consent orders are not amended.
[47] First, I agree that the practical effect of giving the Companies access to their funds is that Mr Tauber’s legal costs will be reduced. Second, I agree that in practical terms Mr Tauber’s defence might well be indistinguishable from the
Companies’ defence. Those might have been considerations that would have given the Commissioner pause when making her decision to prosecute the Companies. But the point is that the Commissioner did choose to prosecute the Companies and they are entitled to defend themselves.
[48] Section 25(a) of the New Zealand Bill of Rights Act 1990 encapsulates the right of everyone charged with an offence to a fair trial. Section 29 of the Act applies its provisions so far as practicable to all legal persons, as well as all natural persons. The right to a fair trial generally includes the right to legal representation.19
If the Companies are to defend the charges, to have a fair trial, they must access the fund.
[49] Finally, I note that if the Companies are convicted of the offences then that would significantly, if not decisively, affect the tax assessment proceedings. Section
47 of the Evidence Act 2006 provides that in the absence of exceptional circumstances, proof that a person has been convicted of a relevant offence is conclusive proof in a civil proceeding that the person committed the offence.
[50] In my view, the interests of justice require the Companies to have reasonable access to the fund to defend themselves against the criminal charges brought by the Commissioner. Given that the Commissioner is the prosecutor, the finding that she has a proprietary interest in the fund limited to the tax proceeding does not have great weight.
Decision
[51] This case is an example of a rare or exceptional situation where variation of consent orders will be granted to some extent.
[52] The application for access to the fund to pay legal costs relating to the tax proceeding is denied.
19 If authority is needed for this most basic of propositions, see Condon v R [2006] NZSC 62, [2007] 1 NZLR 300.
[53] The application for access to the fund to pay legal costs relating to the criminal proceeding is allowed on the following conditions:
(a) The Registrar is to pay Mr Lennard’s itemised accounts for the Companies’ legal costs in defending the Commissioner’s criminal prosecution upon presentation of copies of such accounts certified by Mr Lennard to be correct.
(b)Where legal services relate to issues, appearances, matters or procedures common to the Companies and to Mr Tauber, then the charge for such services is to be apportioned as to one half to the Companies and as to the other half to Mr Tauber.
(c) Mr Lennard’s accounts must be itemised with sufficient particularity to identify the work done and whether the cost of the work has been shared by Mr Tauber.
(d)The maximum total amount that the Registrar is to pay from the fund is $100,000.
[54] Leave is reserved to the Companies to make further application to access the fund in the event that $100,000 is insufficient to pay costs. However, a key issue in any such application would be the reasonableness of the costs. The Companies are on notice that if such further application is received, I would anticipate the Commissioner being given copies of all accounts so as to be able to make submissions.
[55] My inclination is to grant costs on this application to the Companies on a 2B basis. If the Commissioner wishes to be heard on costs, then she must file her memorandum by 23 June 2017. Any reply memorandum is to be filed by 30 June
2017, and any final memorandum by 7 July 2017.
Brewer J
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