Commissioner of Inland Revenue v Mikkelsen HC Auckland CIV-2010-404-668
[2011] NZHC 463
•10 May 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-668
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Plaintiff
ANDLAWRENCE ROY MIKKELSEN Defendant
Hearing: 10 May 2011
Appearances: N H Malarao and W N Fotherby for Plaintiff
R A Smith and C P Baldock for Defendant
Judgment: 10 May 2011
(ORAL) JUDGMENT OF LANG J
[ on application to set aside judgment obtained by default]
Solicitors:
Meredith Connell, Crown Solicitors, PO Box 2213, Upper Shortland Street, Auckland 1140
Anthony Harper Lawyers, PO Box 2646, Auckland 1140
THE COMMISSIONER OF INLAND REVENUE V MIKKELSEN HC AK CIV-2010-404-668 10 May 2011
[1] On 16 April 2007 the applicant, Mr Lawrence Mikkelsen, signed a deed of guarantee under which he guaranteed a tax debt owed by a company called Rangeview Estates Ltd to the Commissioner of Inland Revenue. Rangeview was owned and/or controlled by Mr Mikkelsen‟s son, Stephen.
[2] Rangeview failed to pay the debt by the due date. As a result, the Commissioner called on Mr Mikkelsen Senior to honour his guarantee. When Mr Mikkelsen took no steps to pay the debt, the Commissioner issued proceedings against him to recover the debt in this Court. Mr Mikkelsen took no steps to defend the Commissioner‟s claim. As a result, the Commissioner obtained a default judgment against him on 26 March 2010. The judgment was for the sum of
$403,370.40 together with interest, costs and disbursements.
[3] Mr Mikkelsen has now applied for an order setting aside the default judgment. He contends that he had an arguable defence to the Commissioner‟s claim, and that he ought to be given an opportunity to have that defence examined by the Court. The Commissioner opposes the application. He contends that the evidence that Mr Mikkelsen has adduced falls far short of that required to establish an arguable defence. He, therefore, submits that the Court should allow the judgment to remain intact, and that no useful purpose would be served by setting it aside.
Relevant principles
[4] There is no dispute regarding the principles that apply to the present application. Mr Mikkelsen has brought the application under r 15.13 of the High Court Rules which provides as follows:
Judgment may be set aside or varied
Any judgment obtained by default may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.
[5] Although the touchstone is the possibility of a miscarriage of justice, the
Court will have regard to several discrete factors in determining whether it is likely
that such a miscarriage may occur. The first of these is whether the applicant has a reasonable explanation for the delay in defending the claim. The second is whether the applicant has a substantial ground of defence. The third is whether the plaintiff will suffer irreparable harm in the event that the Court sets the judgment aside.
[6] Generally speaking, the most important of these factors is whether or not the applicant has a substantial ground of defence. If an applicant has a substantial ground of defence, it will often be the case that a miscarriage of justice will occur in the event that the applicant is not able to have the defence examined by the Court. On the other hand, no worthwhile purpose will be achieved by setting a judgment aside and allowing a case to proceed to trial in circumstances where the proposed
defence has no prospect of success[1].
Reasons for delay
[1] Korochine 15 Ltd v R P Charans Investments Ltd HC Hamilton M338/94, 13 December 1994
[7] Mr Mikkelsen sets out the reasons for his delay in defending the claim in an affidavit he has filed in support of the present application. He says that he intended to defend the claim, and instructed his solicitor that that would be the case. The proceedings were served on his solicitor, and his solicitor then forwarded to him a draft copy of the proposed statement of defence. Mr Mikkelsen said that he did not realise that there was a strict time limit within which a statement of defence must be filed. For that reason he did not return the document to his solicitor as quickly as he ought to have.
[8] There are some difficulties with this explanation. This is not a case in which the defendant has received proceedings personally and failed to appreciate a time limit. Mr Mikkelsen‟s solicitors were served with the proceedings in accordance with an agreement reached with the Commissioner‟s solicitors. His solicitors ought to have appreciated that a strict time limit applied. If they did not hear from Mr Mikkelsen within an appropriate period, they ought to have immediately sought
instructions from him and taken steps to protect his position.
[9] I do not, however, consider this aspect of the matter to be decisive. What is plain is that Mr Mikkelsen deposes that he instructed his solicitors to defend the claim and that initial steps were taken to achieve that object. Ultimately, however, no defence was filed and the Commissioner obtained judgment.
[10] I regard this issue as a neutral factor in the context of the present application.
Does Mr Mikkelsen have a substantial defence?
[11] Mr Mikkelsen wishes to defend the Commissioner‟s claim utilising the defence of undue influence. He says that when he signed the guarantee he was acting under the influence of his son, and on the basis of assurances that his son gave him regarding Rangeview‟s financial position and the likelihood that Rangeview would be able to pay the tax debt. He says that those assurances have turned out to be groundless, and that he is liable to suffer serious harm as a result in the form of the judgment that the Commissioner has obtained.
The authorities
[12] There has been a great deal of case law in New Zealand and in the United Kingdom regarding the defence of undue influence. In New Zealand the authorities include Contractors Bonding Ltd v Snee,[2] Wilkinson v ASB Bank Ltd,[3] Hogan v Commercial Factors Ltd[4] and ASB Bank Ltd v Harlick.[5] In the United Kingdom they
include Barclays Bank plc v O’Brien,[6] and Royal Bank of Scotland plc v Etridge
No.2.[7]
[2] Contractors Bonding Ltd v Snee [1992] 2 NZLR 157.
[3] Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA).
[4] Hogan v Commercial Factors Ltd [2006] 3 NZLR 618 (CA).
[5] ASB Bank Ltd v Harlick [1996] 1 NZLR 655 (CA).
[6] Barclays Bank plc v O’Brien [1994] 1 AC 180.
[7] Royal Bank of Scotland plc v Etridge (No.2) [2002] 2 AC 773 (HL).
[13] The defence is primarily used in situations where one party has provided a guarantee in respect of the obligations owed by another to a third party. In Wilkinson
v ASB Bank Ltd the Court of Appeal described the defence in the following terms:
When it is said that undue influence has been exercised by the principal debtor on a guarantor (either positively by application of pressure or by taking advantage of the guarantor‟s dependency) or that the principal debtor has persuaded the guarantor to enter into the transaction by a misrepresentation, the guarantor is not asking the Court to set the transaction aside because of any unconscionable behaviour by the creditor. The guarantor does so, rather, because the creditor has taken the benefit of the guarantee with actual or constructive knowledge of what has occurred, or is presumed to have occurred, between the principal debtor and the guarantor.
[14] In Hogan the Court of Appeal suggested that cases of this type tend to throw up three issues. They are:
(a) Was the surety subject to undue influence?
(b) If so, were the circumstances as known to the creditor such as to put the creditor on inquiry as to the risk of undue influence?
(c) If so, did the creditor act in such a way as to insulate itself from the consequences of undue influence?
[15] In Hogan the Court also said:
[38] This means that a surety seeking to avoid a guarantee must establish either by presumption (in the rare cases in which one is available) or by evidence that he or she gave the guarantee as a result of undue influence. This consideration was itself decisive in the case of Mrs Etridge herself (see the speeches of Lords Hobhouse and Scott in Etridge at paras [128] and [218] – [224]). In Wilkinson this Court emphasised a need for the surety to be able to establish wrongdoing by someone (see p 691).
What must be proved to establish undue influence
[39] There is no legal presumption that a child owes a parent such a duty of trust and confidence or that undue influence is to be presumed against the child. Nor is there any evidence that Mr Murray Hogan was subject to any particular unfair behaviour or over-reaching conduct by Mr Grant Hogan or anyone else on the part of EPM. So, on what basis can he establish an arguable case of undue influence?
[40] On this point we start by referring to the speech of Lord Nicholls in
Etridge at paras [9] – [12]:
“The relationship between two individuals may be such that, without more, one of them is disposed to agree a course of action proposed by the other. Typically this occurs when one person places trust in another to look after his affairs and interests, and the latter betrays this trust by preferring his own interests. He abuses the influence he has acquired. In Allcard v Skinner (1887) 36 Ch D 145, [1886-90] All ER Rep 90 a case well known to every law student, Lindley LJ ((1887) 36 Ch D 145 at 181, [1886-90] All ER Rep 90 at 98) described this class of cases as those in which it was the duty of one
party to advise the other or to manage his property for him. In Zamet v Hyman [1961] 3 All ER 933 at 936, [1961] 1 WLR 1442 at 1444–
1445 Lord Evershed MR referred to relationships where one party owed the other an obligation of candour and protection.
[10] The law has long recognised the need to prevent abuse of influence in these „relationship‟ cases despite the absence of evidence of overt acts of persuasive conduct. The types of relationship, such as parent and child, in which this principle falls to be applied cannot be listed exhaustively. Relationships are infinitely various. Sir Guenter Treitel QC has rightly noted that the question is whether one party has reposed sufficient trust and confidence in the other, rather than whether the relationship between the parties belongs to a particular type (see Treitel, The Law of Contract (10th edn, 1999) pp 380–381). For example, the relation of banker and customer will not normally meet this criterion, but exceptionally it may (see National Westminster Bank plc v Morgan [1985] 1 All ER
821 at 829–831, [1985] AC 686 at 707–709).
[11] Even this test is not comprehensive. The principle is not confined to cases of abuse of trust and confidence. It also includes, for instance, cases where a vulnerable person has been exploited. Indeed, there is no single touchstone for determining whether the principle is applicable. Several expressions have been used in an endeavour to encapsulate the essence: trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other. None of these descriptions is perfect. None is all embracing. Each has its proper place.
[12] In CIBC Mortgages plc v Pitt [1993] 4 All ER 433, [1994] 1
AC 200 your Lordships‟ House decided that in cases of undue influence disadvantage is not a necessary ingredient of the cause of
action. It is not essential that the transaction should be disadvantageous to the pressurised or influenced person, either in
financial terms or in any other way. However, in the nature of things, questions of undue influence will not usually arise, and the exercise of undue influence is unlikely to occur, where the transaction is
innocuous. The issue is likely to arise only when, in some respect, the transaction was disadvantageous either from the outset or as
matters turned out.”
[16] As a result of the principles enunciated in these authorities, I proceed on the basis that Mr Mikkelsen may be able to advance a defence based on undue influence in one of two ways. First, by showing that his son Stephen exerted actual undue influence on him to the extent that it vitiated his consent to enter into the guarantee with the Commissioner. Second, by showing that the relationship between Mr Mikkelsen Senior and his son was such that undue influence may be presumed.
The evidence
[17] Mr Mikkelsen‟s evidence regarding the circumstances in which he came to
sign the guarantee are set out in his affidavit in the following terms:
2.1 In 2008 I was approached by my son, Mr Stephen Mikkelsen, over providing a guarantee to the Inland Revenue Department (“IRD”) in regard to Goods and Service Tax (“GST”) obligations owed by one of his companies, Rangeview Estates Limited (“REL”) a property development company.
2.2 At the time, which was in late March early April 2007 Stephen was under pressure from a number of matters, including the imminent arrival of his first born child; having to delay his wedding because of cash flow issues and the GST issue faced by REL.
2.3 Stephen assured me that the issue was a temporary one only. The development would be sold down, the funder and the IRD paid and the obligation under the guarantee would be relieved. This was to be a short term issue only.
2.4 Given Stephen‟s personal circumstances and his assurances, I did not take any further precautions such as seeking legal advice or even making an enquiry as to the solvency of REL. I am not a director or shareholder of REL. Annexed and marked “A” is a company search of REL recording Stephen as its director and a holding company SLM Management Limited (in liq) as its primary shareholder. It also notes that REL has recently been placed into liquidation. I have not loaned it any funds and have never received a copy of its financial statements. I simply took Stephen‟s word for it that the guarantee was temporary and that the liability I faced was of no consequence. Accordingly I signed the guarantee prepared by the IRD on 16
April 2008. Annexed and marked “B” is a true copy of the guarantee.
[18] Dealing with subsequent events, Mr Mikkelsen went on to say:
4.4 I have since carried out a historic property search on REL. It owned no property as at 30 July 2007. Given that IRD was in discussions with Davidson and Associates, accountants for REL, they must have had a fair idea as to REL‟s position that it could not meet its tax obligations. It appears from that correspondence that two of Stephen‟s companies were under pressure from IED, REL and Denver Holdings Limited, the latter owned Denver Avenue. I was not informed of this. I was only aware that REL had tax obligations to meet. I was led to believe extra funding raised from the equity in Denver Avenue would rsolve[sic] the issue. It did not eventuate. I heard nothing from either Stephen or IRD in the days leading up to 20
December 2007, the last day for REL to meet its tax obligations as per the guarantee. There was no warning from IRD during that period of time. I thought the issue had all been resolved. There was nothing I could to [sic] resolve the situation once 21 December 2007 passed.
4.5 How REL was ever to meet its tax obligations is beyond me and how IRD ever thought it could meet them is also questionable. Both parties had a much clearer picture than myself of REL‟s finances because I had none.
[19] I do not take from these passages any suggestion that Mr Mikkelsen‟s son exerted direct pressure on him to sign the guarantee. There is no suggestion that his son did more than ask him to sign the guarantee, and explain to him the pressures that he (his son) was under at the time. There is therefore nothing in the evidence to suggest that there could be an arguable defence based on undue pressure exerted overtly by Mr Stephen Mikkelsen on his father.
[20] For an arguable defence to arise Mr Mikkelsen therefore needs to show that the relationship between himself and his son was such that a presumption of undue influence arises.
[21] In Hogan the Court summarised this requirement as follows:
[41] On Lord Nicholls‟ approach, Mr Murray Hogan would have to show that there was a relationship of “trust and confidence, reliance, dependence or vulnerability on [his side] and ascendancy, domination or control on [the side of EPM or Mr Grant Hogan]”, as a result of which he “was disposed to agree with a course of action proposed” by Mr Grant Hogan and/or EPM, and that this relationship was exploited by Mr Grant Hogan or EPM suggesting that he guarantee EPM‟s debts.
[22] Applying these requirements to the present case, Mr Mikkelsen would need to demonstrate that he was in a relationship with his son of particular trust and confidence. Alternatively, he might demonstrate that he was in some way reliant or dependent on his son, or that he was vulnerable in some way to his son. Either way, his son would need to be in a position of ascendency, domination or control to the extent that this led Mr Mikkelsen to be disposed to agree to a course of action that his son proposed.
[23] None of the passages from Mr Mikkelsen‟s affidavit that I have set out above suggests that the relationship was of this type. The independent evidence also paints a different picture. This is demonstrated by the circumstances in which Mr Mikkelsen Senior came to sign the deed of guarantee.
[24] The evidence discloses that Mr Mikkelsen‟s son had, through his accountant, been in regular contact with the Commissioner‟s staff regarding an outstanding GST liability that Rangeview owed to the Commissioner in respect of the period ended
31 July 2005. Mr Stephen Mikkelsen‟s accountants were anxious to enter into an instalment arrangement that would give the company time to pay the debt off. The company was involved, at that time, in a property development venture. This meant that, although a capital gain might accrue in the future, nevertheless little in the way of cash flow was being generated at that time. For that reason, the company had no immediate prospect of paying the debt.
[25] The staff member from the Commissioner‟s office who dealt with the file made it clear from the outset that the Commissioner was not interested in any form of instalment arrangement unless some form of security could be provided. Ultimately, Mr Stephen Mikkelsen‟s accountants suggested that Mr Mikkelsen Senior might be prepared to provide assistance in this regard. They indicated to the Commissioner that he was aware of his son‟s situation, and that he was anxious to help his son in any way that he could.
[26] The next step was that Mr Mikkelsen Senior provided a statement of his financial position on a form presumably supplied to him by the Commissioner. Mr Mikkelsen does not describe the circumstances in which he came to prepare the document, but it recorded that he owned a number of substantial assets. These included four separate properties, together with a number of cash investments. In total the value of his assets amounted to approximately $7 million. On the other side of the ledger, he had borrowings, presumably in respect of these assets, amounting to approximately $1 million. As a result, Mr Mikkelsen Senior gave the Commissioner to believe that he owned net assets of approximately $6 million.
[27] The form also contained a space in which the person completing the form was required to state the reasons why he or she was seeking relief. In this space Mr Mikkelsen recorded:
Supporting payment of GST arrears for Rangeview Estate Ltd. Director SL Mikkelsen
If payment is not made by 20/12/2007 by Rangeview Estate I will guarantee the payment in full.
[28] The information contained in this document suggests that Mr Mikkelsen Senior was a businessman with substantial business experience. The form described his occupation as “builder/company director”. Any person who had acquired assets to that level, and borrowings to the level of approximately $1 million, would ordinarily be regarded as somebody with significant business acumen and experience.
[29] Mr Stephen Mikkelsen is also clearly a businessman in his own right. He had a number of companies that were involved in property development projects. There is no suggestion that the business affairs of the father and the son were intertwined at all, let alone to the extent that one party was dependent or reliant on the other. Neither does it appear that either party was vulnerable to the other, or that any other aspect of the relationship between them was such as to suggest that theirs was a relationship in which presumptive undue influence could arise.
[30] I take the position in the present case to be similar in some senses to that in ASB Bank Ltd v Harlick.[8] In that case the Court of Appeal paraphrased the evidence as follows[9]:
[8] Above n [4].
[9] At 660
Back in 1989, before the documents were signed, Margaret and Rodney approached us about the loan. They said that they wanted to borrow some money from the bank. The loan was something to do with a bread run, which Margaret and Rodney then had in Hamilton. I remember Margaret and Rodney telling my wife and I that the loan would be fore about $30,000 and would be for 3 months only. They wanted us to give a mortgage over our property so that the bank would loan them the money. Rodney said not to worry because he could always sell the car if anything happened.
From what Margaret and Rodney said, I had it in my mind that the loan and mortgage were only going to be for 3 months, and that after that it would all be over.
We were more than happy to help Margaret and Rodney in this way. We thought that Margaret and Rodney had lots of money, because a year or so earlier they had won a first division lotto prize of about $300,000. They were driving around in a flash car at the time, and had recently had a trip
overseas, and a new truck. We did not think there was any risk to our house, or to our own financial position.
[31] The Court concluded in Harlick that the defence of undue influence was not available. The Court said[10]:
There was no evidence that the Harlicks lived other than independently, making their own decisions and relating quite normally to their children. The assessment of them as naïve and vulnerable may have been assisted by the manner in which they gave their evidence but they were not asked and did not say that their relationship with their daughter and son-in-law was such that they did not feel they could refuse the request or that they relied totally upon them in the handling of their affairs. We are unable to find in the evidence any greater element of trust or confidence or reliance than is to be expected between parents and adult children and that is not sufficient to raise the presumption of undue influence.
[10] At 662
[32] I consider that the evidence discloses the same situation in the present case. I take Mr Mikkelsen Senior to be a person entirely independent of his son, but who was nevertheless prepared to assist his son in a time of personal and financial need.
[33] I do not consider that an adequate factual foundation has been laid to establish either actual or presumptive undue influence. For that reason I do not consider that the proposed defence can succeed.
Was the Commissioner on inquiry?
[34] In case I am wrong on that point, however, I briefly turn to consider the second limb. This is whether the Commissioner was on inquiry regarding the guarantee. The factual background to which I have already referred is of importance in relation to this issue also.
[35] The Commissioner dealt from the outset with financial advisors who suggested that Mr Mikkelsen Senior was prepared to assist his son. The statement of financial position that Mr Mikkelsen Senior then completed confirmed that he had substantial assets that would more than meet any indebtedness by Rangeview. It also demonstrated a positive desire by Mr Mikkelsen Senior to assist his son pay the tax debt. It demonstrated that he was aware of the nature of the obligation that he was
undertaking, because he undertook to pay the amount outstanding in full in the event that Rangeview had not paid it by December 2007.
[36] It is also of note that, before Mr Mikkelsen Senior signed the deed of guarantee the Commissioner sent a letter to him indicating that he should take independent legal advice in relation to the matter. Although Mr Mikkelsen does not acknowledge receiving that letter, nevertheless he does not deny that he received it. He was obviously prepared, however, to sign the letter notwithstanding the fact that he had not taken legal advice about it.
[37] When all of the above factors are considered, I do not consider that the circumstances were such to place the Commissioner on inquiry.
Result
[38] For these reasons I am satisfied that Mr Mikkelsen has failed to establish that he has a substantial defence to the Commissioner‟s claim. No miscarriage of justice will therefore arise by allowing the judgment to stand. The application to set aside the judgment is accordingly dismissed.
Costs
[39] I award costs to the Commissioner on the application on a category 2B basis together with disbursements as fixed by the Registrar.
Lang J
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