Commissioner of Police v Taylor

[2013] NZHC 3226

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2011-470-1040 [2013] NZHC 3226

BETWEEN  THE COMMISSIONER OF POLICE Applicant

ANDPAUL FREDERICK TAYLOR First Respondent

HOLLAND BECKETT TRUSTEE NO. 5

LIMITED

Second Respondent

CHEM-BLAST EXTERIOR CLEANERS LIMITED

Third Respondent

Hearing:                   31 October 2013 and by subsequent memoranda

Appearances:           G C Hollister-Jones for Applicant

W T Nabney for first and third respondents

P Mabey QC for second respondent (abides decision of Court) Judgment:      4 December 2013

JUDGMENT OF LANG J

[on application for variation of restraining orders]

This judgment was delivered by me on 4 December 2013 at 4 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

COMMISSIONER OF POLICE v TAYLOR [2013] NZHC 3226 [4 December 2013]

[1]      Mr Taylor is serving a sentence of four years imprisonment after pleading guilty to a charge of cultivating cannabis.  The charge was laid in November 2011, after the police found a very large plot containing more than 9000 cannabis plants. Through  his  guilty  plea  Mr  Taylor  accepted  that  he  was  one  of  the  persons responsible for cultivating those plants.

[2]      In this proceeding the Commissioner of Police has applied for civil forfeiture orders under the Criminal Proceeds (Recovery) Act 2009 (“the Act”) in respect of the proceeds of criminal activity undertaken by Mr Taylor.   The case for the Commissioner will be that between 10 June 2004 and 26 March 2007 Mr Taylor and the second respondent, a trust with which he has a close association, acquired ten properties in Tauranga.    Mr Taylor was able to acquire these properties notwithstanding the fact that his annual taxable income between 2005 and 2007 amounted to just $16,503.57. As at 1 July 2009, the properties had a combined value of approximately $3.5 million.

[3]      Not surprisingly, the Commissioner will argue that the cannabis plot that the police discovered in November 2011 represents the tip of the iceberg so far as Mr Taylor’s cannabis offending is concerned.  The Commissioner will contend that Mr Taylor  could  only have  acquired  the  ten  properties  through  significant  criminal activity,  and  that it is  probable that he was  engaged in  growing cannabis on a commercial scale between 2004 and 2011.  The Commissioner will also rely on the fact that Mr Taylor was convicted of cultivating cannabis and sentenced to a lengthy prison term in 1998.  That sentence related to a large commercial cannabis growing operation that the police had discovered in February 1995.

[4]      The Commissioner obtained restraining orders in respect of the properties owned by Mr Taylor and the second respondent.  Most if not all of the properties have now been sold.  The Official Assignee holds the net proceeds of sale, which total approximately $400,000.

[5]      Mr Taylor now seeks a variation of the restraining orders so as to enable funds to be released to satisfy several debts that he and his company, the third

respondent Chem-Blast Exterior Cleaners Ltd (“Chem-Blast”), incurred prior to the date upon which the restraining orders were made.  The Commissioner opposes the variation sought by Mr Taylor.

The debts

[6]      The debts owing by Mr Taylor are as follows:

(a)       a loan facility obtained by Mr Taylor from GE Finance and Insurance

(“GE Finance”) in the sum of approximately $20,000; and

(b)income tax payable to the Inland Revenue Department in the sum of approximately $3,500 plus accrued interest and penalties.

[7]      The debts owing by the third respondent, Chem-Blast, are as follows:

(a)       GST  payable  to  the  Inland  Revenue  Department  in  the  sum  of approximately $3,200;

(b)a debt owing to Staples Rodway, Chartered Accountants, in respect of accounting services in the sum of approximately $340; and

(c)       GST  payable  to  the  Inland  Revenue  Department  in  the  sum  of approximately $3,200.

Jurisdiction

[8]      Section 28(1)(c) of the Act permits the Court to authorise payments from restrained property to meet specified expenses.   Section 28 relevantly provides as follows:

28     Conditions on restraining order

(1)     A court may make a restraining order subject to any conditions the court thinks fit including, without limitation, conditions that provide for the following to be met out of a respondent's restrained property:

(a)     the reasonable living costs of the respondent and any of his or her dependants:

(b)     the reasonable business expenses of the respondent:

(c)     the payment of any specified debt incurred by the respondent in good faith:

(d)     any other expenses allowed by the court. (2)  …

(3)    In determining whether or not to make a restraining order subject to a condition, the court must have regard to the ability of a respondent to meet the reasonable living costs, expenses, or debt concerned out of property that is not restrained property.

…

The debts incurred by Chem-Blast

[9]      As I have already observed, the funds that are subject to the restraining orders represent the sale proceeds of assets belonging to Mr Taylor and the second respondent.    They do  not  relate  to  assets  owned  by Chem-Blast.    I  accept  the submission for the Commissioner that the restrained funds are not available to meet the debts incurred by Chem-Blast because it is not a respondent in this context.

[10]     I accept that it may be arguable that the debts incurred by Chem-Blast are debts incurred by Mr Taylor in operating his business.  Even if jurisdiction therefore exists under s 28(1)(b), however, I would not be prepared to exercise my discretion under s 28 so as to authorise the payment of Chem-Blast’s debts out of the restrained funds.  Chem-Blast continued to operate its business for a considerable period after the restraining orders were made.   Funds were deposited into Chem-Blast’s bank account on a reasonably regular basis.   Chem-Blast has been in possession of sufficient funds to meet the debts that are the subject of the current application since the date the orders were made.  It has chosen to order its priorities so as to use the funds for purposes other than the payment of these debts.  In those circumstances, I see no reason why the debt should be paid from the restrained funds.

[11]     In considering whether to authorise the payment of debts from restrained property, the Court is required to have regard to the ability of the respondent to pay

those debts out of property that is not restrained.1    This factor is also relevant in

1      Criminal Proceeds (Recovery) Act 2009, s 28(3).

relation to the application so far as it relates to Chem-Blast, because Chem-Blast owns assets that are capable of being realised to meet the debts.   These comprise equipment that Chem-Blast formerly used in conducting its business.   Now that Chem-Blast has ceased to carry on business, there is no reason why it cannot sell these assets and apply the sale proceeds towards its debts.

[12]     The application is therefore declined so far as it relates to the debts incurred by Chem-Blast Limited.

The debts incurred by Mr Taylor

[13]     Mr Taylor advances this aspect of the application under s 28(1)(c) of the Act. He contends that he incurred both debts in good faith, and that the restraining orders should therefore be varied so as to enable the debts to be paid.

The meaning to be applied to “good faith” in this context

[14]     There is no direct authority on the meaning to be applied to the term “good faith” in the present context.  I record my gratitude to counsel for providing me with supplementary submissions  following  the  hearing  regarding  this  issue,  which  is central to determination of the present application.

[15]     The phrase “good faith” is found in a wide variety of statutes, and has been interpreted in a variety of ways.  As always, however, context is everything.   For present purposes it is necessary to interpret the phrase having regard to the nature and purposes of the legislation in which it appears.

[16]     The purpose of the Act is set out in s 3, which provides:

3       Purpose

(1)     The  primary  purpose  of  this  Act  is  to  establish  a  regime  for  the forfeiture of property—

(a)     that  has  been  derived  directly  or  indirectly  from  significant criminal activity; or

(b)     that  represents  the  value  of  a  person's  unlawfully  derived income.

(2)     The criminal proceeds and instruments forfeiture regime established under this Act proposes to—

(a)     eliminate the chance for persons to profit from undertaking or being associated with significant criminal activity; and

(b)     deter significant criminal activity; and

(c)     reduce  the  ability  of  criminals  and  persons  associated  with crime or significant criminal activity to continue or expand criminal enterprise; and

(d)     deal with matters associated with foreign restraining orders and foreign forfeiture orders that arise in New Zealand.

[17]     Counsel for Mr Taylor submits that the phrase should be given a relatively narrow interpretation.  He contends that the Court should only find that a debt has not been incurred in good faith where the transaction in question has been entered into with a view to reducing the amount that will ultimately be available to the Crown  if  it  succeeds  in  obtaining  an  order  for  the  forfeiture  of  the  restrained property.

[18]     Counsel for the Commissioner agrees with counsel for Mr Taylor that a debt will not be incurred in good faith for present purposes if the debtor thereby intends to deplete  the  pool  of  assets  available  to  satisfy  a  forfeiture  order.    He  submits, however, that the phrase should be given a wider interpretation.   He argues that a debt will also fall foul of the section if it is incurred to fund significant criminal activity of a type that the Act is designed to deter.   Similarly, if it is designed to reduce the equity in an asset so as to reduce the level of equity thereby exposed to the forfeiture provisions of the Act.  I accept that the first of these situations would fall outside the interpretation for which counsel for Mr Taylor contends.  I consider the latter, however, to be an example of a transaction that would fall within that interpretation.

[19]     A preliminary issue arises as to the perspective from which the issue of good faith must be judged.  On one view, the section is designed to enable the Court to ensure that bone fide creditors who have no notice of a debtor’s criminal activity are not unfairly penalised by the legislation.  Another view, however, is that the debtor should not be permitted to repay a debt where it has been incurred for a purpose that runs counter to the purposes of the Act.  On this issue Parliament appears to have

favoured the latter point of view.  The words “incurred by the respondent in good faith” make it clear that the issue of good faith must be determined from the perspective of the respondent.   Whether or not the creditor advanced funds or provided services in good faith is therefore not an issue that the Court is required to determine.   In this respect the legislation differs significantly from the approach taken  in  the  Insolvency  Act  2006,  in  which  the  issue  of  good  faith  must  be

determined from the perspective of the creditor.2    For that reason, I do not find the

cases cited by counsel in respect of the approach taken under the insolvency legislation to be of any real assistance.

[20]     It is neither necessary nor desirable for present purposes to attempt to provide an all-encompassing definition of when a debt will be incurred in good faith for the purposes of s 28(1)(c).   In general terms, however, I consider that a debt will be incurred in good faith for the purposes of the section where the debtor obtains it for a purpose that is not contrary to the purposes of the Act.  This means that most debts genuinely incurred for personal or domestic purposes will be incurred in good faith for the purposes of s 28(1)(c).

[21]     Commissioner of Police v Dotcom3 provides an example of such an outcome. In that case Mr Dotcom had guaranteed the obligations of the tenant under a lease agreement in respect of a residential property that he and his family occupied.  The tenant was a company connected to Mr Dotcom.  After the assets of the company and Mr Dotcom’s assets were restrained, the company failed to meet its obligations under the lease.   Mr Dotcom then incurred two debts.   First, he arranged for an acquaintance to pay the sum of $250,000 towards arrears of rental.   He thereby became liable to repay that sum to the acquaintance.  Secondly, he remained liable as guarantor of the lease to pay the balance of the outstanding arrears.  Potter J found that these debts were incurred in good faith.

[22]     As counsel for Mr Taylor accepts, a debt will obviously not be incurred in good faith if the debtor incurs it for the express purpose of defeating the forfeiture

provisions of the Act.  Those who acquire or derive assets from significant criminal

2      Insolvency Act 2006, ss 199, 208 and 214.

3      Commissioner of Police v Dotcom [2012] NZHC 2190 at [113] – [121].

activity will usually be aware that their assets may be subject to forfeiture in the event that the criminal activity is detected.  This may occur even if the perpetrator of the activity is never prosecuted for, or convicted in respect of, that activity.4   Persons who are involved in significant criminal activity may therefore take steps to reduce the pool of assets potentially available to satisfy forfeiture orders made under the Act.  A person who incurs a debt for that purpose will not be acting in good faith regardless of whether or not restraining orders are in existence or in contemplation at the time of the transaction.  That is not, however, the situation in the present case.

There can be no suggestion that Mr Taylor incurred the debt so as to reduce the pool of assets available for forfeiture.   Instead, the Crown submits it is likely that Mr Taylor used the funds to further his criminal activities.   Alternatively, the Crown submits that he may have used the funds to improve property acquired as a result of significant criminal activity.

[23]     It is therefore necessary to consider, firstly, whether a loan obtained for use in criminal activity can nevertheless be incurred in good faith for the purposes of s

28(1)(c).  The transaction itself is likely to be at arm’s length, in the sense that the debtor will often obtain the loan on commercial terms from a commercial lender. The debtor will also generally intend to repay the loan in accordance with those terms.  Moreover, the effect of the loan may be to increase rather than decrease the overall pool of assets liable to forfeiture.

[24]     I am satisfied, however, that such a loan would not constitute a debt incurred in  good  faith  for  the  purposes  of  s  28(1)(c).  Any  other  interpretation  would inevitably encourage those involved in criminal activity to obtain loans to invest in such activity knowing that the loans will be repaid in the event that their property is subsequently restrained.  That would be contrary to several of the purposes set out in s 3 of the Act.  In particular, it would be contrary to the purpose of eliminating the chance for persons to profit from undertaking or being associated with significant

criminal activity. 5  It would also be contrary to the purpose of deterring significant

criminal activity,6  and reducing the ability of criminals and persons associated with

4      Criminal Proceeds (Recovery) Act 2009, s 15.

5      Ibid, s 3(2)(a).

6      Ibid, s 3(2)(b).

crime or significant criminal activity to continue or expand criminal enterprise.7

Even if I am wrong on this point, the same factors would inevitably persuade the

Court to exercise its discretion against authorisation of repayment of the debt.

[25]     I am also satisfied that the same result follows, and for essentially the same reasons, in  respect of debts incurred to enhance the value of property acquired through significant criminal activity.   It can be argued that such debts ultimately increase the pool of assets available to satisfy a forfeiture order.  That will only be the case, however, if the Commissioner becomes aware of such property, and takes steps to restrain it before the property is sold and thereby removed from reach.

[26]     Persons engaged in significant criminal activity may well be encouraged to obtain loans to improve or increase the value of property acquired through such activity if they know that the loans are likely to be repaid in the event that the property is restrained.  If that was to be the case, such persons would be placed in an advantageous position.  If they were able to sell the property in question before the Commissioner became aware of its existence, they would keep any profit derived from the sale.  If they did not, they would know that the loan would be repaid from the restrained property. That result would obviously be contrary to the Act’s stated purpose of eliminating the chance for persons to profit from undertaking or being

associated with significant criminal activity.8

[27]     With those principles in mind, I now consider the debts that Mr Taylor seeks to have repaid in the present case.

The income tax debt owing to the Inland Revenue Department

[28]     Mr Taylor incurred this debt in respect of the 2011 and 2012 financial years as a result of income that he earned lawfully during those years.

[29]     The  Commissioner  does  not  suggest  that  Mr  Taylor  incurred  this  debt otherwise than in good faith, and payment of the debt would clearly not be contrary

to  the  purposes  of  the  Act.    The  only  issue  to  be  determined  is  whether  the

7      Ibid, s 3(2)(c).

8      Ibid, s 3(2)(a).

application should be declined because Mr Taylor has the ability to pay it from assets that are not restrained property.

[30]     Counsel for the Commissioner points out that Mr Taylor has assets totalling approximately $13,000 that could be used to pay the tax debt.   These include a Nissan van that is currently registered in the name of Mr Taylor’s brother, but which Mr Taylor now accepts he owns.  Mr Taylor says that the van is worth approximately

$8,000.  Mr Taylor also owns a trailer said to be worth about $4,000, and boating equipment worth about $1,500.   All of these assets are currently subject to the restraining orders, but they are not currently in the custody of the Official Assignee. The Commissioner is prepared to permit the assets to be released from the existing restraining orders so that Mr Taylor can sell them.  He can then use the proceeds of sale to pay the tax debt.

[31]     I accept the logic of the Commissioner’s argument on this point.  Mr Taylor currently has no use for the assets, and there is no reason why they cannot be sold. He knows where the assets are, and it should not be difficult for him or someone acting on his behalf to sell them.  Once that has been done, any resulting shortfall in the tax debt can be paid from the restrained property.

The GE Finance facility

Payment of $5177.90 to Harvey Norman

[32]     The evidence suggests that the GE Finance facility originally had a credit limit of approximately $12,000.  In March 2007, Mr Taylor used the facility to make a payment in the sum of $5,177.90 to Harvey Norman.

[33]     The use of the facility to pay this debt occurred during the same month in which Mr Taylor purchased four properties situated in Gate Pa, Tauranga.  Mr Taylor has not provided any details of the use to which he put the goods that he obviously purchased from Harvey Norman at this time.   In the absence of any explanation, there must be a real possibility that Mr Taylor used the loan to acquire furnishings or other items for one or more of the newly acquired properties.  If that is the case, the loan would not have been incurred in good faith.  Rather, it would have assisted Mr

Taylor to improve the value of property that may have been acquired through significant criminal activity.  It would also be contrary to the purposes of the Act for the loan now to be repaid from the restrained property.

Cash advance of $5,500

[34]     Mr Taylor used the GE Finance facility to obtain a cash advance in the sum of $5,500 on 29 February 2008.  Mr Taylor says that this was a personal loan, and that he made payments of principal and interest in respect of it through the second respondent and latterly through his stepfather.  He does not say what the purpose of the loan was.

[35]     In the absence of any explanation regarding the purpose of the loan, Mr Taylor cannot satisfy me that it was for a purpose unrelated to the criminal activity that the Commissioner alleges he was engaged in at this time.  For that reason I am not prepared to authorise payment of this debt from the restrained property.

Cash advance of $11,000 on 18 March 2010

[36]     On 3 March 2010, GE Finance agreed to increase the credit limit of the facility to $20,000.  On 18 March 2010, Mr Taylor withdrew the sum of $11,000 in cash.  He told his accountant that he used the sum of $8,000 to pay rates owing in respect of his properties for the 2010-2011 financial year.   When the police made enquiries with the relevant local authority, however, they discovered that the rates payable in respect of those properties had been paid by cheques drawn on the second respondent’s bank account.

[37]     Once again, the funds were withdrawn in cash during the period in which the Commissioner alleges Mr Taylor was engaged in significant criminal activity.  In the absence of a convincing explanation as to how Mr Taylor used the  cash, there remains the realistic possibility that he used it to fund his criminal activity or to improve property he had acquired through such activity.  For that reason Mr Taylor cannot satisfy me that he incurred the debt in good faith, and it would be contrary to the purposes of the Act to permit the debt to be repaid using restrained property.

Result: Orders

[38]     I vary the existing restraining orders so as to release from them the assets referred to at [30] of this judgment.

[39]     In the event that the sale of those assets does not realise sufficient funds to enable the income tax debt to be paid in full, counsel for Mr Taylor has leave to seek an order that the shortfall be paid from the restrained property.

[40]     The balance of the application is declined.

Lang J

Solicitors:

Ronayne Holloster-Jones Lellman, Tauranga

Beach Legal, Mt Maunganui
Counsel:

W T Nabney, Tauranga