Commissioner of Inland Revenue v Wallace
[2019] NZHC 1820
•30 July 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-000194
[2019] NZHC 1820
UNDER Subpart 6, Part 6, Property Law Act 2007 BETWEEN
COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
WAYNE ANDREW WALLACE and CLIFFORD WILLIAM MANCER, as
executors of the Estate of KRIS McPHERSON ROBERTSON
First Defendants
AND
BIANCA CAFÉ LIMITED (Previously
COFFEE DISTRIBUTION NZ LIMITED)
Second DefendantAND
KAFFEE ESPRESSO NZ LIMITED
Third Defendant
Hearing: 29 July 2019 Appearances:
S Kilian for the Defendants (Applicant)
N Malarao and J Mara for the Plaintiff (Respondent)
Judgment:
30 July 2019
Reissued:
31 July 2019
REISSUED JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
This judgment was delivered by me on 30 July 2019 at 3.30 pm pursuant to Rule 11.5 Of the High Court Rules
Registrar/Deputy Registrar Date:
COMMISSIONER OF INLAND REVENUE v W A WALLACE and C W MANCER, as executors of the Estate of KRIS McPHERSON ROBERTSON [2019] NZHC 1820 [30 July 2019]
Introduction
[1] The Commissioner of Inland Revenue seeks orders against each of the defendants under s 348(2)(b) of the Property Law Act 2007 directing that each pays the sum of $678,724 to a trustee for the benefit of the creditors of Coffee Suppliers Limited, which went into liquidation on 25 July 2012 by shareholders’ resolution, and is now struck off the Register of Companies.
[2] Section 348 is in Subpart 6 of Part 6 of the Property Law Act 2007, which is titled “Setting aside dispositions that prejudice creditors”. It provides:
348 Court may set aside certain dispositions of property
(1)A court may make an order under this section –
(a) on an application for the purpose (made and served in accordance with section 347); and
(b) if satisfied that the applicant for the order has been prejudiced by a disposition of property to which this subpart applies.
(2)The order must do 1, but not both, of the following:
(a) vest the property that is the subject of the disposition in the person (for any applicable purpose) specified in section 350:
(b) require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.
(3)If the order does what is specified in subsection (2)(a), it may also require a person who acquired or received property through the disposition to physically restore some or all of that property that is tangible personal property to 1 or more persons specified in the order.
(4)Person who acquired or received property through the disposition
means a person who acquired or received property –
(a) under the disposition; or
(b) through a person who acquired or received property under the disposition.
(5)The order must not have effect so as to increase the value of a security held by a creditor over the debtor’s property.
(6)Subsection (5) overrides subsection (2) and section 350.
(7)This section is subject to section 349.
[3] Mr K M Robertson, whose executors are the first defendants, was at material times a director of Coffee Suppliers Ltd (CSL), and two other companies, the second and third defendants, Coffee Distribution NZ Limited, now Bianca Café Limited (Bianca) and Kaffee Espresso NZ Limited (Kaffee Espresso). On 3 October 2011 the Commissioner issued a statutory demand to CSL for a debt in respect of taxation which then stood at $355,076.78. CSL applied to this Court to set aside this statutory demand, and the Commissioner opposed that application. Prior to that the Commissioner had declined to enter into an instalment arrangement for payment of CSL’s outstanding income tax. In January 2012 CSL applied to this Court for a judicial review of that decision. The application to set aside the statutory demand was stayed by consent to allow for the review application to be decided. While these two proceedings remained extant CSL, through the directorship of Mr Robertson, entered into two deeds, the first with Mr Robertson and Kaffee Espresso, and the second with Mr Robertson and Bianca.
[4] Both related to a debt which Mr Robertson owed to CSL on current account, which stood at $678,724.
[5] The Commissioner pleads that by the Kaffee Espresso deed Mr Robertson assigned his current account debt to Kaffee Espresso in repayment of a debt of $61,105 that CSL owed Kaffee Espresso. On the same day Mr Robertson entered into a loan agreement with Kaffee Espresso recording that he owed that sum to that company.
[6] The Commissioner pleads that by the Bianca deed Mr Robertson also assigned his current account debt, this time to Bianca, in repayment of a debt of $613,992 that CSL owed to Bianca. On the same day Mr Robertson also entered a loan agreement with Bianca recording that he owed that company the same sum.
[7] Both deeds were signed on 26 May 2012, as were the corresponding loan agreements. On 31 May 2012 CSL withdrew its judicial review proceeding, and the Court set a new hearing date for its application to set aside the Commissioner’s statutory demand. On 25 July 2012 Mr Robertson as the shareholder of CSL placed CSL into liquidation. At that date the Commissioner was owed $330,687.22.
[8] The effect of the transactions was that Mr Robertson no longer owed his current account debt to CSL.
[9] The liquidator’s first report on CSL showed available assets of $8,970, but substantial creditors’ claims leading to an estimated deficit in return to unsecured creditors of $355,974. Despite being prompted by the Commissioner to do so the liquidators did not take any legal action against Mr Robertson, Bianca or Kaffee Espresso under the Companies Act 1993. No distribution was made to any creditor. CSL was struck off the Register of Companies on 25 February 2013.
Application to strike out
[10] The defendants apply to strike out this proceeding. The grounds stated in their application are sparse and manifestly inadequate. They simply state that “the grounds on which each order is sought are the plaintiff’s cause of action is an abuse of process of the court.” This is said to be “based on the principles of law set out in Part 16 of the Companies Act” and the application is said to be supported by an affidavit of Mr K Botes. It is also stated that the application is “made in reliance on inherent jurisdiction of the court and r 15.1 of the High Court Rules”. Nothing in this application, apart possibly from the reference to Mr Botes’ affidavit, could give the Commissioner or the Court more than the merest hint of the basis upon which the defendants might seek the intervention of the Court to prevent this application proceeding. The Commissioner took this point in her notice of opposition, as did Mr Malarao in his written submissions.
[11] Some illumination was cast on the basis on which the defendants bring their case by the submissions of counsel for the defendants dated 3 July 2019 which were filed on 18 July 2019.
[12]Three arguments were relied on in support of the application:
(a)The Commissioner cannot succeed, as the liquidators of CSL decided not to exercise their rights under the Companies Act in relation to the transactions in issue;
(b)Section 345(1)(b) of the Property Law Act is a complete answer to the Commissioner’s case;
(c)In any event debts owed by CSL to Bianca and Kaffee Espresso respectively are secured and rank above the Commissioner’s debt, so the proceeding will not achieve the outcome the Commissioner seeks.
[13] The issues to be decided in this case are whether any of these propositions is correct.
Principles to be applied on a strike-out application
[14] Rule 15.1 of the High Court Rules provides that a court may strike out a claim where the relevant pleading discloses, inter alia, no reasonably arguable cause of action, is frivolous or vexatious, or is otherwise an abuse of the process of the court.1
[15] The principles on strike out are well-established. They were summarised by the Court of Appeal in Attorney-General v Prince & Gardner as follows:2
(a)Pleaded facts, whether or not admitted, are assumed to be true but do not extend to pleaded allegations which are entirely speculative and without foundation.
(b)The causes of action must be “so clearly untenable that they cannot possibly succeed”.
(c)The jurisdiction is to be exercised sparingly and only in cases where the Court is satisfied it has all the requisite material (but the fact that a strike- out application raises difficult questions of law, and requires extensive argument, does not exclude the jurisdiction).
1 High Court Rules 2016, r 15.1.
2 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267, approved in Couch v Attorney-General [2008] NZSC 45, [2008] 2 NZLR 725 at [33] (Couch) and Carter Holt Harvey Ltd v Minister of Education [2016] NZSC 95, [2017] 1 NZLR 78 at [10] (Carter Holt).
[16] In the Supreme Court case of Couch v Attorney-General, Elias CJ (with whom Anderson J concurred) stated that it is inappropriate to exercise the strike-out application unless the court can be certain that a cause of action cannot succeed.3 Her Honour said:4
… The case must be “so certainly or clearly bad” that it should be precluded from going forward. Particular care is required in areas where the law is confused or developing …
[17] As established by the Court of Appeal in Attorney-General v McVeagh, the court is entitled to receive affidavit evidence on a strike-out application but will normally not consider evidence that is inconsistent with the pleaded facts. Evidence disputing pleaded facts will only be admissible where it shows that “an essential factual allegation is so demonstrably contrary to indisputable fact that the matter ought not to be allowed to proceed.”5
[18] The abuse of process ground for striking out captures instances of misuse of the court’s process such as a proceeding that has been brought with an improper motive or is an attempt to obtain a collateral advantage, beyond that legitimately gained from a court proceeding.6 The onus in establishing grounds for strike-out rests on the party alleging abuse of process. The applicant must show that the proceeding was brought for an improper purpose.7 The courts have described this onus as being “a heavy one” and one that is to be exercised only in exceptional circumstances.8
First issue : Can the Commissioner succeed given the liquidators of CSL did not impugn the transactions under the Companies Act?
[19] Mr Kilian for the defendants says that the Companies Act 1993 contains provisions which enable liquidators to challenge transactions by companies in liquidation within certain periods and on certain grounds. He says that these
3 This approach was more recently affirmed by the Supreme Court in Body Corporate No 207624 v North Shore City Council [Spencer on Byron] [2012] NZSC 83, [2013] 2 NZLR 297 at [4].
4 Couch v Attorney-General, above n 24 at [33]. See also at [40].
5 Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.
6 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679, (2013) 26 NZTC 21-007, [2013] NZCCLR 10 at [89].
7 Wallersteiner v Moir [1974] 1 WLR 991, [1974] 3 All ER 218 (EWCA Civ) at p 243 per Lord Justice Buckley and p 252 per Lord Justice Scarman.
8 Williams v Spautz (1992) 174 CLR 509 (HCA) at 529 cited in Merisant Company, Inc v Flujo Sanguineo Holdings Pty Ltd [2018] NZCA 390, [2018] NZAR 1550, at [24].
provisions include the grounds on which the Commissioner relies in the present proceeding. Because the Commissioner raised her concerns about the transactions in question with the liquidator, and because the liquidator did not take any steps in relation to the transactions in question, Mr Kilian submits that the matters now raised have already been dealt with under the Companies Act. He says that the Commissioner, by her actions or omissions, has accepted that the liquidators have completed their obligations under the Companies Act.
[20] Mr Kilian goes on to say that the use of the Property Law Act provisions on which the Commissioner now relies is an attempt to undo and/or override and/or extend the provisions of the Companies Act and the powers of the liquidators, and he submits that the intention of the legislature, in passing the provisions of the Property Law Act on which the Commissioner now relies, was not to create an overlap between the two sets of provisions. From this he goes on to submit that the Commissioner is now attempting to use the Court’s inherent jurisdiction to override the powers which the legislature specifically and unambiguously gave to liquidators, under the Companies Act, to avoid transactions.
[21] It is not necessary to undertake a comparison of the provisions in the Companies Act and the Property Law Act in order to dispose of this argument. The plain position is that the Property Law Act contains provisions enabling a creditor in the position of the Commissioner to bring a proceeding such as the present one, and to succeed on it if each of the necessary elements giving grounds for relief is established in evidence. The pleading adequately sets those out, and establishing each of them is a matter for trial. The inherent jurisdiction of this Court is not invoked, nor is it in any way relevant. Nor is it relevant that the liquidators of CSL failed to take any action in relation to the transactions in question. That was an issue for the liquidators to decide. There is little evidence before the Court on why the liquidator decided not to take proceedings under the Companies Act, but even if there were it would not be relevant to the present case.9 Mr Kilian’s criticism that the Commissioner has failed to identify how s 348(2)(b) of the Property Law Act overrides the powers and duties of a liquidator under Part 16 of the Companies Act is entirely
9 In their final report the liquidators of CSL say they discussed the position with “the shareholder” of CSL and were satisfied with the explanations given by him.
without foundation. The two sets of statutory provisions are separate and are not interrelated. The Commissioner is entitled to proceed under the Property Law Act notwithstanding the decision of the liquidators, for their own reasons, not to take proceedings under the Companies Act.
Second issue : Is s 345(1)(b) of the Property Law Act a complete answer to the Commissioner’s case?
[22] Section 345(1)(b) provides that a disposition of property is not made with intent to prejudice a creditor if it is made with the intention only of preferring one creditor over another.
[23] Mr Kilian’s argument is that the transactions recorded in the deeds were intended to prefer Bianca and Kaffee Espresso over the Commissioner of Inland Revenue, so are within s 345(1)(b).
[24] A decision on whether s 345(1)(b) applies hinges on whether the disposition of property (Mr Robertson’s current account) was made with the intention only of preferring one creditor over another. Section 345(1)(b) does not provide a bar to relief if such an intention, whilst present at the relevant time, was not the only intention. In McIntosh v Fisk,10 it was argued that a disposition of monies by Ross Asset Management Limited prior to its liquidation had been made only with the intention of preferring one creditor over another, in terms of s 345(1)(b). The Supreme Court rejected this argument:
We do not accept that preferring one creditor over another was the only intent of the making of the payment to the appellant in this case. Another intent, and a much more important intent, was the continued concealment of the existence of the Ponzi scheme, thereby deferring the inevitable detection of the existence of the scheme. Accordingly s 345(1)(b) does not apply in this case.
[25] Mr Malarao says that at trial the Commissioner will argue that CSL’s actions hindered, delayed and defeated the ability of the Commissioner to recover debts owing to the Commissioner on liquidation. It will also be argued that the disposition of Mr Robertson’s debt went beyond a mere preference of one creditor over another. It will be argued that Mr Robertson intended his debt to be transferred to other companies
10 McIntosh v Fisk [2017] NZSC 78 at [39].
under his control in order to avoid paying his debt to the Commissioner. Mr Malarao submits that this is precisely the kind of prejudice to which an order under s 348 is directed.
[26] I agree with Mr Malarao’s submission that the question of whether or not s 345(1)(b) applies is an issue for trial. The intention of Mr Robertson cannot be established, as Mr Kilian seeks to do, on an application of the present kind. It is plain that the effect of the assignment was as Mr Malarao submits. The debt ceased to be a recoverable asset in the hands of CSL and then its liquidators, realisation of which would have made funds available to the liquidators to distribute to creditors pursuant to the Companies Act. Intentions held at the time are for evidence and findings at trial, not speculation on an application to strike out.
Third issue : Is the ranking of debts to the Commissioner, Bianca and Kaffee Espresso relevant?
[27] Mr Kilian says that the debts owed by Kaffee Espresso and Bianca at the date of liquidation were secured by General Security Agreements, whereas the Commissioner’s claim is an unsecured debt. On that basis, even if the Commissioner were to succeed, and funds were paid to CSL (CSL having been restored to the Register of Companies), nothing would be available to be paid to the Commissioner of Inland Revenue in any event.
[28] This submission cannot succeed on the facts as presently before the Court. Neither the deeds by which the transactions were effected, nor any security documents, are in evidence. There is reference in paragraphs 25 and 40 of the defendants’ statement of defence to Kaffee Espresso and Bianca being secured creditors, but without any particulars of the security either says it holds.
[29] It follows that the facts before the Court do not establish the position for which Mr Kilian contends.
[30] Quite apart from that, even if after discovery of documents it is clear that the debts to each of the defendants were secured, that does not necessarily mean that this case cannot succeed. This is because any such security agreements may well be the
subject of review under Subpart 6 of Part 6 of the Property Law Act 2007. Under s 345(2) a disposition of property includes the grant or creation at law or in equity of a mortgage or charge. Whilst the Commissioner’s claim does not presently involve an application to set aside any security that might be held, the pleading could be amended at a later point. It is plain that a case should not be struck out if by amendment any defect in it can be cured. That is not to say that there is presently any defect in the Commissioner’s case: this would simply be an amendment after discovery should a different position emerge from that which was before the Commissioner when this case was commenced.
Outcome
[31] The defendants have failed to establish that the Commissioner’s case is so clearly untenable that she cannot succeed. The application to strike out is dismissed.
[32] The Commissioner is entitled to an award of costs against the defendants. Mr Malarao sought an uplift in scale 2B costs of 50 per cent. He produced to the Court a letter written without prejudice save as to costs. In the letter the arguments presented at the hearing, and which have prevailed, were fully set out. All the defendants were put on notice that if they did not withdraw the application, and they failed, increased costs would be sought.
[33] I am satisfied that an uplift in costs is appropriate. I am unable to discern any merit in any of the arguments presented for the defendants. It is fair to describe them as misconceived.
[34] Mr Malarao assured me that actual costs exceed scale 2B costs with a 50 per cent uplift. I am satisfied that award at that level is appropriate and I so order. The defendants will also pay disbursements.
J G Matthews
Associate Judge
Solicitors:
Kilian & Associates, Albany Meredith Connell, Auckland
Solicitors:
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