Enterprises Lakeview Ltd v Commissioner of Inland Revenue HC Hamilton Civ-2007-419-1727

[2008] NZHC 2677

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2007-419-1727

BETWEEN  ENTERPRISES LAKEVIEW LTD Applicant

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:         13 October, 3 November 2008

Appearances: D G Hayes for the applicant/plaintiff

M Deligiannis and L du Claire for the respondent/defendant

Judgment:      13 November 2008

RESERVED JUDGMENT OF GENDALL J

This judgment was delivered by the Hon. Justice Gendall on 13 November 2008 at 2.30pm

pursuant to r 540(4) of the High Court Rules

Registrar/Deputy Registrar

Date:

[1]      These proceedings were described as an application for judicial review “and civil causes of action”.   The outcome depends upon the lawfulness of deduction notices  (“the  Deduction  Notices”)  issued  to  debtors  under  s 157  of  the  Tax Administration Act 1994 (“the TAA”).  These were aimed to recover outstanding tax debts  owed  by  defaulting  taxpayers  Geoffrey  Martin  Smith,  and  a  company controlled by him, Trellis and Fencing Warehouse Ltd, trading with a partnership of

himself and his wife, Barbara Jennifer Smith.

ENTERPRISES LAKEVIEW LTD V COMMISSIONER OF INLAND REVENUE HC HAM CIV-2007-419-

1727  13 November 2008

[2]      The proceedings relate in particular to a deduction notice issued on 2 October

2007 to the company Solid Energy, a creditor of the defaulters.  The essential thrust of the plaintiff’s case is that the Commissioner of Inland Revenue was not lawfully able to issue a notice to a debtor said to be of the plaintiff where the notice related to tax owed by “another person” than the plaintiff, it being an unlawful exercise of the statutory power.  Counsel said that to say that the notice had been issued “against the plaintiff” but that does not precisely describe the position – the plaintiff is not referred to in the notice which is “against” the named defaulting taxpayers. Essentially, counsel argued that a s 157 deduction notice “against one entity” could not be used against “another”.

[3]      The Commissioner’s contention is that the plaintiff was an entity established by Mr Smith to avoid the operation of a s 157 notice, a view formed after taking into account  reasonable  and  relevant  considerations,  and  that  money payable  by the debtors, the subject of the Deduction Notice, was in reality payable and due to the named taxpayers and not the plaintiff.

Background facts

[4]      Mr Smith and his wife (Barbara Jennifer Smith) operated a business listed as building supplies and wholesaling, but essentially selling kindling wood and trellis fencing.  It was registered as a partnership with the Inland Revenue Department for GST and income tax on 1 August 1998.  As a result of investigations in early 2004, it became clear that large amounts of suppressed income on the part of Mr and Mrs Smith and the partnership, as well as PAYE required to be deducted in respect of employees, was not accounted for.   Amounts in excess of $220,000 in respect of both Mr and Mrs Smith were reassessed for income tax GST in excess of $250,000 and PAYE in excess of $110,000 was assessed.

[5]      The couple were charged with offences under the Act.  After a jury trial, they were found guilty on 20 February 2008.  Mr Smith was sentenced to two and half years’ imprisonment which sentence he is still serving.  Mrs Smith was sentenced to nine months home detention.

[6]      After the informations had been laid, Mr Smith signed an application for an IRD number to be allocated for Trellis and Fencing Warehouse Ltd.  He signed it as director.    The  shareholding  of  the  company  was  with  a  further  company,  In Obscurity Ltd.  The shares of this company were held by Mr Smith’s accountant said to be holding those on trust for Mr and Mrs Smith.  That company failed to file tax returns and default assessments were issued for both GST and PAYE.

[7]      On 2 October 2007, a s 157 Deduction Notice (“the Deduction Notice”) was issued to a company Solid Energy (which did a substantial amount of business with Mr  and  Mrs  Smith).    The  Deduction  Notice  referred  to  taxpayers’  liability  as follows:

Geoffrey Martin & Jennifer Barbara Smith partnership trading as Trellis and

Fencing Warehouse Ltd.

And also Trellis and Fencing Warehouse Ltd (referred to as “the defaulters”)

for the sum in default of $27,525.46.

[8]      Thereafter, Solid Energy made payments direct to the IRD amounting to:

a)        $7,317.00 on 8 October 2007;

b)        $4,390.20 on 30 October 2007;

c)        $10,975.50 on 12 November 2007; Total: $22,682.70.

Those funds were the subject of invoices rendered to it for kindling wood supplied. The  payments  were  applied  by  IRD  to  the  outstanding  PAYE  arrears  by  the defaulting taxpayer.

[9]      On the same date that the Deduction Notice was given to Solid Energy, Mr Smith entered into an arrangement purporting to be acting on behalf of Trellis and Fencing Warehouse Ltd.  He prepared an agreement for sale of the “buisness” [sic] to Ms Elizabeth Parker.  The document he used was a Real Estate Institute of

New Zealand Agreement for Sale and Purchase of Real Estate, altered to provide for the sale of:

The buisness [sic] of supplying kindling wood to Solid  Energy and  the manufacture of trellis.

[10]     The  purchase  price  was  described  as  $25,000  to  be  paid  by  25  equal payments of $1,000 and the special conditions of sale provided:

Plant and equipment [comprising four described saws].

And:

The purchaser shall have the use of the premises at 163 Te Kauwhata Road until February 2008 free of charge.

The vendor will help and support the purchaser to set up company, learn what is required to do with the processes, open new bank account and any other help the purchaser may require, as she has had no buisness [sic] experience.

[11]     The document is signed by Mr Smith as the vendor and Ms Parker as the purchaser.

[12]     On 8 October 2007 the Commissioner received payment from Solid Energy of amounts in invoices rendered on 2 and 3 October 2007.  Thereafter, on 10 October

2007, an invoice for supply of kindling wood to Solid Energy was sent in the name of “Lakeview Enterprises, PO Box 102, Huntly”.  The invoice, including GST, was for $4,390.20.   Handwritten on the invoice was a Westpac bank account number, being the bank account of a trust called “Mustang Family Trust”.  That Trust has, as its trustee, a company of which the director and shareholder is Mr Smith.  He has sole cheque signing authority for its bank account.  The address of the Trust is given as 163 Te Kauwhata Road, RD2, Te Kauwhata, that is Mr Smith’s address.  The next day, on 11  October 2007, the Trust opened a post office box  at Huntly,  being PO Box 102.

[13]     Because  the  invoice  sent  to  Solid  Energy  contained  a  purported  GST reference number which did not exist, that company was advised by IRD that it was not a valid tax invoice.  So a further invoice was sent at a later date and received by Solid Energy on 18 October 2007.  That invoice is said to be from:

Lakeview Enterprises, PO Box 102, Huntly, with a GST registration number

098:122:613.

[14]     In the meantime, the plaintiff company was incorporated on 17 October 2007. It was created online and has a registered office and address for service at 12 Sir Tristram  Avenue,  Hamilton.    Its  director  and  sole  shareholder  being  Elizabeth Parker, having 100 shares.  Mr Smith’s evidence was that he became sole director, although not yet registered as such, because of events that later occurred.

[15]     The address of the registered office is the address of the plaintiff’s barrister (and also separately the accountant) according to the evidence of Mr Smith.  That barrister confirmed to the investigator from the IRD on 18 October 2007 that:

I have no knowledge of this company or its director Elizabeth Parker.

[16]     Accordingly,  on  19  October  2007,  two  investigators  of  the  IRD  visited Ms Parker.   Their evidence was generally confirmed by Ms Parker when she was cross-examined as to the details of the purported acquisition of the business.   She was vague  and had no real knowledge of the business  or what  she  supposedly bought.  She said that the nature of the business was the supply of kindling wood to Solid Energy and she got involved through her friend, Mr Smith.  When asked how the business was financed she said that she was not sure.  She said the investigators would have to speak with Mr Smith.  He was then telephoned and he advised the investigators that the business would operate from an old milk treatment plant at Huntly that was being set up.  It would be providing kindling to one major client, Solid Energy.   He said the accountant was Mr N Hayes of Hamilton, that taxable supplies were likely to be around $10,000.00 every two months and that Ms Parker would provide the labour.

[17]     After that conversation ended Ms Parker was asked if she understood exactly what was going on.  She responded that she would have to “sit down with Mr Smith and discuss the matter”.  When asked why that was necessary, she replied that the business was Mr Smith’s and now she was “taking it over”.  She said she did not know why Mr Smith was stopping the business, and did not know the registered office.  When asked why she did not know whether it was her “company”, she said she would have to speak again with Mr Smith.

[18]     When cross-examined in the Court, Ms Parker said that she:

Made an arrangement with Mr Smith to [make] payments regularly, I think

25 payments of $1,000 lots, I’m not sure of the amount, but as business got on its feet I would pay the payments off.

[19]     The Agreement for Sale and Purchase document was prepared by Mr Smith. Ms Parker did not have a lawyer or any advice in respect of it.  No deposit was paid, nor any amounts at all.   She said that after the visit from the IRD inspectors she spoke to Mr Smith and asked him “what was going on with Inland Revenue”.  Her evidence was that she did not wish to get involved and did not want to carry on with this business and that “he said he would take it back and no money was paid at all”. That was on about 19 October 2007.  She said that the purchase price contained in the agreement was decided by Mr Smith and she did not see any accountant and:

I had very little ideas of running the business and Geoff [Smith] was actually going to help me and teach me how to run the business.

[20]     The business at that time was being conducted at the premises of Mr Smith in Te Kauwhata and it continued to be operated from those premises by Mr and Mrs Smith.  Ms Parker said that after 2 October she received nothing from the business in any of the weeks of operation and Mr Smith was going to organise bank accounts and “the outgoings and ingoings”.  She said she issued no invoices to Solid Energy, did not run the business and had no knowledge of running it.  She said she had no idea, when she purchased the business how much money it made, but knew it was “quite a bit”.   When asked who was Enterprises Lakeview Ltd her answer was “I have no idea, I’m not sure” and as events turned out she “never took over the business and is continued to be run by Mr and Mrs Smith like it always had been run”.

[21]     Following the interview with Ms Parker, the investigator from IRD sent a fax to Solid Energy on 19 October 2007, saying:

It is our opinion that Lakeview Enterprises is merely an agent for either Mr and Mrs Smith or Trellis and Fencing Warehouse Ltd.  There is no evidence that the money is payable to anyone else other than Mr and Mrs Smith or Trellis and Fencing Warehouse Ltd.

Therefore please pay the funds to us in accordance with the s 157 notices.

[22]     At that time, an employee of Solid Energy advised the investigator that he had received a telephone call from Mr Smith advising Solid Energy that payment “could be made to IRD”.

[23]     On 22 October 2007, Ms Parker met with Mr Smith.  She demanded that the purported  sale  be cancelled.    On  23  October  2007  the  GST  registration  of  the plaintiff company was cancelled.  Thereafter, on 31 October 2007 the IRD received direct from Solid Energy $4,390.20 relating to the invoice submitted in the name of “Lakeview Enterprises, PO Box 102, Huntly” on 10 October 2007.   This was the invoice referring to the bank account of “Mustang Family Trust” and an erroneous GST registration number.  That invoice apparently was re-sent, although still dated

10 October 2007, containing a GST registration number 09-812-2613.

[24]     On  31  October  2007,  Mr  Smith  (said  to  have  been  by  a  shareholders’ resolution) appointed a liquidator for Trellis and Fencing Warehouse Ltd.   He advertised the liquidation in the Waikato Times on 13 November 2007.   In the meantime, invoices were sent by him on 1 and 7 November 2007 to Solid Energy (with consecutive invoice numbers).   They purported to come from “Enterprises Lakeview Ltd, PO Box 102, Huntly” for $8,780.40 (recording GST number 09-812-

2613) and $2,195.10 (no GST number given).   On 12 November 2007 the IRD received a payment of $10,975.50 direct from   Solid Energy relating to those invoices.  On 13 November 2007, when the advertising of the liquidation of Trellis and Fencing Warehouse Ltd took place, these proceedings together with an application for interim relief were filed.

[25]     On 28 November 2007, Mr Smith and his wife obtained signing authority on the bank account of Enterprises  Lakeview  Ltd  with  the  National  Bank  of New Zealand.   The supply of kindling to Solid Energy and trellis fencing to other customers continued to occur.  Who was doing this?  The Commissioner said it was Mr and Mrs Smith.   Bank records show credits of $4,390.20 and $4,267.50 being credited  on  30  November  2007  to  the  account  in  the  name  of  the  plaintiff. Automatic teller machine debits (four in total) totalling $1,960 are recorded on 3

December 2007.  There is evidence of an invoice dated 4 December 2007 issued in the name of “Trellis and Fencing , PO Box 102, Huntly” for $765.40 (the GST

number of 09-812-2613) and a credit of that amount was entered on 20 December

2007 in the personal account of “Geoffrey Martin Smith (as Trellis and Fencing

Warehouse Ltd)” at Credit Union, Waikato.

[26]     Throughout this time Mr and Mrs Smith were being investigated for large amounts of suppressed income and PAYE unaccounted for over a period.   The charges were laid on 27 July 2006 and they were found guilty after trial by jury on

20 February 2008.

The plaintiff’s contentions

[27]     The  main  argument  advanced  on  behalf  of  the  plaintiff  was  that  the Deduction Notice could not be “used against the plaintiff”, because it was not named in it and debts due to it could not be the subject of the notice.   Further, counsel contended that, whilst the Deduction Notice might be applicable to Trellis and Fencing Warehouse Ltd (if indeed that company was a defaulter), the description of Mr and Mrs Smith as “Geoffrey Martin and Jennifer Barbara Smith Partnership trading as Trellis and Fencing Warehouse Ltd” did not exist “as a matter of law or fact”.   Counsel said the partnership was wrongly described, with no surname for Mr Smith, and Mrs Smith’s Christian and middle names were reversed.   In any event, he said that that entity has no IRD number so, it was argued, the Deduction Notice only applied to money owed to Trellis and Fencing Warehouse Ltd.

[28]     There was no substance to the latter point.  The notices were issued in respect of  two  entities  with  separate  IRD  numbers.    They  were  referred  to  as  “the defaulters”.  One entity is the partnership, trading under a particular name, the other a company.

[29]     It  is  not  disputed  that  Mr  and  Mrs  Smith  and/or  Trellis  and  Fencing Warehouse Ltd were tax defaulters.  Their liability ran into several hundred thousand dollars.  Trellis and Fencing Warehouse Ltd, having failed to file tax returns, was subject to default assessment.  The sort of technicality concerning the description of the defaulter or “entity” does not avail the plaintiff.  The defaulters for the purposes of the recipient of the Deduction Notice issued to the debtor, namely the debtor Solid

Energy, are sufficiently described so as to require it to deduct or extract the sums set out in the notice from payment that it is to make to any of the defaulters.

[30]     Counsel for the plaintiff argues that the payments due to Solid Energy were owing to Enterprises Lakeview Ltd as the creditor, which was not the defaulting taxpayer.   Counsel submitted that it was not open to the Commissioner to regard Enterprises Lakeview Ltd as the “agent” of Mr and Mrs Smith or Trellis and Fencing Warehouse Ltd.  He said that, even in the plaintiff were to be an agent, it was the partnership who had a tax liability and not Trellis and Fencing Warehouse Ltd.

[31]     Essentially, counsel argued that a s 157 deduction notice “against one entity could not be used against another”, and that the law did not prevent a taxpayer starting a new business because the old company was jeopardised in its trading by the notice requiring deflection of funds due to it.

[32]     Counsel submitted that the “agency” proposition was flawed as it required a lifting of the corporate veil.   Counsel submitted further that any tax liability or default was that of Trellis and Fencing Warehouse Ltd at worst, which had ceased trading and was required to be dealt with by the liquidator.  Counsel submitted that the Commissioner erred in giving advice to Solid Energy that money “owed under the Deduction Notices” not be paid to the plaintiff, because there was no statutory power for the money to be deducted.

[33]     At this stage I note that the statutory power exercised by the Commissioner is the issue of the notice which requires the debtor to pay money to the IRD.  The letter requesting those funds (said to be claimed by another named creditor), to be paid to the IRD rather than Enterprises Lakeview Ltd, was simply advice as to the Commissioner’s view.  If it was unlawfully given in the exercise of a statutory power it will be reviewable.  As was the case in Commissioner of Inland Revenue v ANZ Banking Group (NZ) Limited (1998) 18 NZTC 13,643 the debtor could refuse to pay if it challenged the appropriateness of deduction from a certain account or fund.

[34]     The plaintiff accepts that its civil claims are dependent upon finding that the

Deduction Notice, or its use,  was unlawfully issued.  The proceedings heard in this

Court were only the judicial review application, with affidavit evidence and cross- examination.  If civil proceedings are to be pursued, they must take the usual course required under the Rules.  They cannot be simply “tacked on” to a judicial review application.  But, obviously, if the Commissioner has acted lawfully, the underlying foundations of the plaintiff’s claim will be flawed.

Discussion

[35]     If there was no jurisdiction or lawful authority to issue the Deduction Notices then the exercise of that power is subject to judicial review.   The Notices were issued, not only to Solid Energy but also to other debtors of the defaulting taxpayers, under s 157 of the Tax  Administration Act 1994 and/or s 43 of the Goods and Services Act 1985 and/or s 46 of the Student Loan Scheme Act 1992.

[36]     They variously record the IRD numbers of Mr and Mrs Smith trading as a partnership, Mr Smith trading as Trellis and Fencing Warehouse Ltd, and Trellis and Warehouse Ltd.  The Notices were not issued as “against” Enterprises Lakeview Ltd. It was not a defaulting taxpayer.  No doubt that was because, apart from many other reasons, it did not exist as at 2 October 2007.   Indeed, it was incorporated by Mr Smith on 17 October 2007 when he was described neither as a shareholder or director.  By that time Solid Energy had paid $7,317 in response to the Deduction Notice.

[37]     The   challenge   or   contest   appears   to   be   that   the   plaintiff   says   the Commissioner had no statutory or other power to advise and require Solid Energy or the other recipients of the s 157 Deduction Notices to make any payments to reduce the liability of the named defaulter’s debtors.  It was not precisely argued how it was unlawful for the IRD to advise the debtors of the Commissioner’s belief that the issuing of invoices in the name of “Lakeview Enterprises” or “Lakeview Enterprises Ltd” was an agency or device so as to obtain the benefit of payments due to the defaulters by the debtor (Solid Energy).   Counsel says if an agency existed, the notice had to be issued to the agent Lakeview Enterprises Ltd.   That is rejected because it was not the debtor owing money for products supplied.  But if the advice was unreasonably or improperly given, that act would be reviewable.  So too, if the

Commissioner unlawfully exercised a power to require deductions then that would be subject to judicial review.  But the Deduction Notice itself was lawfully issued to the debtors.  In determining whether a request that payments, said to be due by Solid Energy to a different entity, were in fact due to the defaulters, is a question of fact. The lawfulness of the Commissioner’s actions would depend on factual matters and whether the Commissioner acted ultra vires, or unreasonably, or took into account irrelevant considerations.

[38]     So, despite these being judicial review proceedings, I have had to decide factual issues based upon the affidavit evidence, cross-examination and documentary trial.   That is something which has to be undertaken even in judicial review proceedings, where the facts are controversial, e.g. see Stratford Racing Club Inc v Adlam [2008] NZAR 329, at [63].

[39]     Turning first to the purported sale of the business.  It is clear that this was an artifice or device created by Mr Smith.   It was done to escape the impact of the Deduction Notices.   Having heard him give evidence, I was left with the clear impression that he was evasive and gave implausible explanations designed to avoid what he knew to be the case.  Namely that the funds the subject of the Deduction Notices were intended to be deflected by him for his ultimate benefit, at the expense of the Inland Revenue.   I regret to have to say that I did not find his evidence credible and I reject it as unworthy of belief.  In a very amateurish way, he sought to use various devices that he thought (wrongly) were legally impregnable so as to defeat the IRD.

[40]     Having reviewed the affidavit evidence and contemporaneous documents, and having had the advantage of hearing Ms Parker and Mr Smith give evidence, it is abundantly clear that Ms Parker did not acquire the shareholding, goodwill or assets of Trellis and Fencing Warehouse Ltd.  The purported transfer was amateurish in the extreme, and its terms, such as they purport to be on the handwritten document, never came into operation.  She bought, and got, nothing.  Yet the supposed assets of Trellis and Fencing Warehouse Ltd somehow ended up with the plaintiff company. However Mr Smith describes it, the sale did not happen.

[41]     The evidence establishes that Mr Smith did not really sell the business or the shares in the company.  As it happened, nothing changed.  Mr and Mrs Smith still ran the business and to the outside world and to Solid Energy they were, in truth, still the owners.   The  aborted  arrangement  with  Ms  Parker  was  an  artifice with  no legitimate purpose other than to try to avoid the impact of the Deduction Notice given to a trading customer.

[42]     The  factual  position,  on  the  evidence  before  the  Court,  was  simply that Mr Smith  registered  a  company  on  line  providing  details  of  a  director  and shareholder (not being him) which were simply to cloak what he was doing.  His oral evidence under cross-examination was entirely unsatisfactory.  Ms Parker was clear, at least in one respect, that she had nothing to do with the company, may still have been recorded as a shareholder but did not see herself as such, did not believe herself to be a director and had nothing to do with the company at all, having withdrawn from the purported device or transaction originally created by Mr Smith.

[43]     I am satisfied that Mr Smith was continuing to trade under various guises. What he endeavoured to engage Ms Parker in was no more than an artifice, which unravelled.   He had signing authority for the various entities that he had created. Common addresses were used.  For example, 163 Te Kauwhata Road was given as his  address  for  him  personally,  and  also  Trellis  and  Fencing  Warehouse  Ltd, Mustang Family Trust and Enterprises Lakeview Ltd.  He had sole signing authority on the Mustang Family Trust and, together with his wife, on Enterprises Lakeview Ltd.   There was a common box number used for some entities, namely PO Box

1202, Huntly.   It appears to have been opened or acquired by the entity Mustang

Family Trust on 11 October 2007.  That box number appears on an invoice issued on

10 October 2007 purportedly by “Lakeview Enterprises Ltd”.   It is also used by “Trellis and Fencing” on 4 December 2007 as the address on a tax invoice for trellis panels supplied.

[44]     Mr Smith claimed that that part of his operations was quite separate from the kindling supply business.  PO Box 102, Huntly is also given as the address of the liquidator in Mr Smith’s advertisement of his appointment for Trellis and Fencing Warehouse Ltd dated 13 November 2007.   Further, the invoices of “Enterprises

Lakeview Ltd” issued to Solid Energy on 1 and 7 November give that box number as its address.

[45]     An invoice of 10 October 2007 originally issued in the name purportedly by “Enterprises Lakeview Ltd” gives to Solid Energy a Westpac bank account number (and an unknown GST number) of Mustang Family Trust on which Mr Smith had sole drawing ability.  I was told by Mr Smith that the beneficiaries of the trust were interests of Ms Parker, but the full Trust Deed was not introduced into evidence.

[46]     The “Mustang Family Trust” has as its trustee a company called Splinter Trustees Ltd, which is under the control of Mr Smith, he operating its bank accounts, and the shareholding is held in trust for the benefit of Mr Smith.   Mr Smith’s explanation for cash withdrawals from an ATM totalling $1,960 on 3 December

2007 I find to be implausible.  These were from the National Bank account on which the only drawing authorities are Mr and Mrs Smith.  I accept Ms Parker’s evidence in cross-examination that she retired as being named a director on 18 October 2007, and had nothing to do with the company since or, in reality, earlier, and Mr Smith’s claim in evidence that the ATM withdrawals of cash from the National Bank account were “probably” done by Ms Parker as she “had an ATM card”, is not credible and unsupported by any evidence.

[47]     The purported transfer from Trellis and Fencing Warehouse Ltd to Ms Parker and the device of the plaintiff company sending invoices fall into the category of “evasion” that was described in Gilchrist v R [2007] 1 NZLR 499 (SC) as bearing the taint of “an underhand scheme to ensure payment of the client debts to him rather than to the IRD” under the s 157 Deduction Notice.

[48]     Where  a  corporate  entity  is  a  sham  or  façade  designed  to  conceal  a shareholder or another’s involvement in a particular matter, then it has long been recognised that that is a fraudulent use of corporate entity, and will not be countenanced.  The Courts will not allow the corporate form to be used for purposes of fraud or as a device to evade legal obligations where advantages of incorporation are used and intended to deprive others of their rights.  The Courts have no difficulty in refusing to play along.  A legal entity may be acting as an agent of an individual

and in fact doing his business and not its own at all.  The evidence establishes that was the case here.  It is a question of fact in every case, and the plaintiff company on the evidence before me was simply a front obviously carried on by Mr Smith for the purpose of evading the tax implications.

[49]     The  Commissioner  was  justified  in  reaching  the  view,  and  telling  Solid Energy that the true creditor was one or more of the defaulting taxpayers.   The evidence that originated from the interview by the investigators with Ms Parker was telling.   That,  together  with  the contemporaneous  documents,  fully justified  the Commissioner in coming to the conclusion that the debtor (Solid Energy) should properly pay monies for invoices sent to it by any of  the  entities  under  which Mr Smith traded or had created, to the Department.

[50]     As was said by Randerson J in Raynel & Anor v Commissioner of Inland

Revenue [2004] 21 NZTC 18-583 at paragraph [71]:

… the Commissioner was quite entitled and indeed obliged, to have regard to  the  integrity  of  the  tax  system  and  the  importance  of  promoting compliance with the Inland Revenue Acts.  This was a case where taxpayers were entitled to expect that the Commissioner would take a firm line, both of the partnership and company debt.  Effectively, [R] was continuing to trade under a variety of enterprises  established by him while continually failing to meet his obligations to file returns in a timely manner,  failing to  make appropriate deductions … and failing to pay the relevant taxes as they fell due.

[51]     Heron J said in King v Leary [1988] 10 NZTC 5067, the predecessor to s 157 was designed to charge all persons who in any paying capacity had control of funds which were to go to the taxpayer.  Here, it was entirely open for the Commissioner to assert to the debtor that the funds, the subject of the invoices, were in fact aimed to go to the defaulting taxpayers in the guise of Mr Smith.

[52]     I do not think this is strictly a case of “lifting the corporate veil” in the sense of ignoring a company’s separate entity.  Rather, it is a case where, on the facts, the debtor (Solid Energy) owed money to the defaulting taxpayers, however the latter chose to hide the true position.   The Court can look at the real nature of the transaction, and it does not matter that the transaction appears to be, or is described by the one party to it as being, something different.   The defaulting taxpayer(s)

supplied the product and were the real creditors to whom Solid Energy had to pay, and they had so arranged that they would receive such payment, belying various denials.  The corporate entity of Enterprises Lakeview Ltd may have existed because of operation of law, but any purported transfer of business to it – which on the facts I find not to have occurred in any event – and issue of invoices using its name in order to  defeat  or  avoid  the  impact  of  the  s 157  Deduction  Notice,  does  not  enable Mr Smith  or  his  earlier  entities  to  deflect  the  rights  of  the  Commissioner  by purporting to deflect payments due to them from trade debtors.

[53]     This was not the type of case where monies are held in a joint account and are sought to be payable in relation to the taxpayer, such as in Commissioner of Inland Revenue v ANZ Banking Group (NZ) Limited (supra).   There a bank held monies in a joint account of a husband and wife and the Court held that the bank was not required to pay to the Commissioner monies held in that joint account without the wife’s consent, because the taxpayer was the husband.   That is very much a different situation because here the debtor (Solid Energy) is not, and did not resist payment of monies that it owed in reality to the defaulting taxpayers, the subject of the Deduction Notice.

[54]     The plaintiff company claims that it is not named in the s 157 Deduction Notice, nor is it the defaulting taxpayer, and on this basis simply claims to be entitled to receive the payment from the debtor (Solid Energy) as supplier of the goods.  As a matter of fact I find that to be unsustainable.

[55]     I  am  satisfied  by  a  wide  margin  that  the  Commissioner’s  actions  on

19 October 2006 in requiring that payments be made direct to it by Solid Energy were fully justified, reasonable and not in excess of the Commissioner’s jurisdiction. But all the evidence satisfied me beyond reasonable doubt that the creation of Enterprises Lakeview Ltd was a device or artifice set up by Mr Smith to avoid the implications of the Deduction Notice.  This was a view that was open to a reasonable Commissioner based upon the available clear evidence.

[56]     Where judicial review is sought, it is enough for the defendant to show that the  view  communicated  to  Solid  Energy  requiring  compliance  with  the  s 157

Deduction Notice was one reasonably open to the Commissioner.  There is nothing at  all  in  the  material  produced  or  the  evidence  given  to  suggest  that  the Commissioner was moved from his proper task by any improper purpose.

[57]     I  endorse  the  comments  of  Randerson  J  in  Raynor  v  CIR  (supra)  at paragraphs [73]-[74]:

Finally, I wish to say a word about the availability of judicial review in cases such as this.   Given the broad managerial responsibilities given to the Commissioner and officials of the Inland Revenue Department, this Court will be slow to interfere with the proper exercise of their statutory duties and discretions in relation to the recovery of outstanding taxation revenue. Decisions in this field essentially involve the exercise of judgment within the statutory framework and this Court will not lightly interfere with decisions of that kind.

It is important to emphasise the proper function of judicial review.  It is to ensure, in a broad sense, that statutory powers and duties are exercised in accordance with law.   In the present context, the grounds for review will generally be very limited.

[58]     To summarise: First, the issue of s 157 Deduction Notice to Solid Energy was lawful.  Secondly, the Commissioner acted reasonably and within his lawful powers and duties in instructing the debtor to make payment of the funds direct to it to reduce the defaulting taxpayers’ liability.  The debtor could have declined, but did not do so.  The action in giving such advice to Solid Energy was not unlawful.  It was entirely reasonable, understandable and proper given the artifice that Mr Smith was endeavouring to be effected.  Solid Energy was required to pay its debt and it was entitled to conclude, and accept, the advice of the Commissioner that it was Mr Smith trading under one or other of his guises.

[59]     These proceedings brought against the Commissioner by the plaintiff based upon s 157 Notices issued to Solid Energy Ltd are misguided, and the judicial review application cannot succeed.

The “Civil Causes of Action”

[60]     The plaintiff’s amended statement of claim relates to five pleaded causes of action (conversion, constructive trust – breach of fiduciary duty, money had and

received in which damages are sought).  All of these matters, if to be pursued, can only proceed on the basis of a normal civil action.  They cannot be merged into this judicial review application by the plaintiff.  Such claims must be the subject of the usual procedure under the High Court Rules so as to involve (if the parties wish), discovery, interrogatories, trial in the usual way involving consideration of mode of trial (Rule 481), allocation of a fixture to properly provide for the time required for trial, the giving of evidence orally (Rule 496) unless by affidavit by agreement, and all other usual procedural and legal requirements including the onus of proof resting upon the plaintiff.

[61]     So the plaintiff cannot incorporate that sort of civil claim into the judicial review application.   To that extent the causes of action as pleaded under “Civil Claims” under the amended statement of claim are not dealt with but simply adjourned.  If the plaintiff wishes to proceed with them then it may do so bearing in mind the Court’s findings as to the lawfulness of the actions of the Commissioner as they are relevant to the judicial review application.   Those findings may provide certain difficulties to the plaintiff’s civil claim.

[62]     As  Harrison  J  observed  in  his  minute  of  14  November  2007,  there  are apparent and fundamental deficiencies in the statement of claim, as it relates to purported civil claims.  The parties will be aware no doubt that the amounts claimed place the civil claims within the jurisdiction of the District Court.

[63]     Consequently,  the  application  for  judicial  review  is  dismissed.     The respondent is entitled to costs which are fixed on a Category 2 basis.  If the parties cannot agree, counsel may submit memoranda.  The plaintiff’s other causes of action as pleaded remain extant to be pursued, if it wishes, for determination in the usual way.

“J W Gendall J”

Solicitors:

Brook Law, P O Box 9600, Hamilton for the applicant (Counsel: [email protected]) Crown Law Office, Wellington for the respondent ([email protected])