Exfc 16 Ltd (in liquidation) (Formerly Federation Clothing Limited) v New Zealand Customs Service
[2017] NZHC 577
•28 March 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI-2016-404-435 [2017] NZHC 577
BETWEEN EXFC16 LTD (IN LIQUIDATION)
(FORMERLY FEDERATION CLOTHING LIMITED)
EXPG16 LTD (IN LIQUIDATION) (FORMERLY PUBLIC GALLERY LTD) EXOFY16 LTD (IN LIQUIDATION) (FORMERLY ONLY FOUND YOU LTD) Appellants
AND
NEW ZEALAND CUSTOMS SERVICE Respondent
Hearing: 21 March 2017 Appearances:
T Molloy for Appellant
J Blythe for RespondentJudgment:
28 March 2017
JUDGMENT OF LANG J [on appeal against sentence]
This judgment was delivered by me on 28 March 2017 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
EXFC16 LTD (in liquidation) (formerly Federation Clothing Ltd) v NEW ZEALAND CUSTOMS SERVICE [2017] NZHC 577 [28 March 2017]
[1] The three appellants in this proceeding are all companies in liquidation. Each was found guilty of offences under the Customs and Excise Act 1996 (the Act) at a formal proof hearing before Judge Field on 9 September 2016.1 The offending involved the importation of goods from overseas using false documentation in the form of import entries. These understated the value of the goods imported and thereby reduced the appellants’ liability to pay customs duties and Goods and Services Tax (GST). On 23 November 2016, Judge Dawson fined the appellants and ordered them to pay solicitors costs and Court costs.2
[2] The three companies now appeal against the fines the Judge imposed on the basis that the fines were manifestly excessive having regard to their respective financial situations.3 Federation Clothing Limited (Federation) and Public Gallery Limited (Public Gallery) also appeal against the Judge’s refusal to make an order under s 236(2) of the Act restoring to them a payment that they made to the New Zealand Customs Service (Customs) in order to obtain the release of a container of goods that had been seized by Customs when it entered the country.
Background
[3] The appellants, as well as another company called Minti Design Limited (Minti), were all involved in the bulk importation of garments from China. They on- sold these to customers in New Zealand. All three appellants had the same directors, Ms Jenny Joblin and Mr Nicholas Clegg. Ms Joblin was also the sole director of Minti.
[4] The charges were laid after Customs became aware that the companies were using a double invoicing system in order to evade the payment of customs duties and GST. This involved the Chinese exporters issuing two sets of invoices to the companies in respect of each shipment of goods. The first recorded the actual purchase price paid for the goods. The second invoice recorded that the companies
had paid reduced purchase prices for the imported goods. The companies would
1 New Zealand Customs Service v Federation Clothing Ltd [2016] NZDC 17794.
2 R v Federation Clothing Ltd [2016] NZDC 24718.
3 At the time of the hearings in the District Court the appellants were called Federation Clothing Ltd, Public Gallery Ltd and Only Found You Ltd. For convenience I shall refer to them by those names in this judgment.
provide the second invoice to Customs, and this enabled them to pay reduced customs duties and GST in respect of the goods.
[5] Between 2010 and 2014 the appellants imported 112 shipments of garments into New Zealand from China. They submitted import entries to Customs in respect of these that undervalued the goods they had imported by approximately $2.8 million. As a result, the appellants were able to evade the payment of custom duties and GST amounting to approximately $680,000.
[6] When Customs became aware of the offending, it seized a container of goods that had been imported by Federation Clothing Limited (Federation), Public Gallery Limited (Public Gallery) and Minti. This contained garments having a value of
$432,728.86. Of these, Federation owned garments having a value of $311,065.18, Public Gallery owned garments having a value of $43,212.29 and the remaining garments, worth $78,450.30, had been imported by Minti.
[7] The appellants and Minti wanted to secure the release of the container so they could sell the garments within it to their New Zealand customers. In order to do so, they borrowed a sum equivalent to the value of the goods in the container from ASB Bank Limited (ASB). They then paid this sum to Customs and thereby secured the release of the container.
[8] The appellants subsequently paid a significant portion of the total customs duties that they had evaded. The sum of $190,111.06 now remains outstanding to Customs in respect of unpaid customs duties. Of this, the sum of $163,158.74 is owed by Federation and $19,256.52 is owed by Public Gallery. Only Found You owes the balance of $7,695.80.
[9] The appellants were placed in voluntary liquidation by way of special resolutions passed by their shareholders on 10 February 2016. Messrs Peri Finnigan and Boris van Delden were appointed as liquidators. By that stage Customs had laid the charges against the appellants. On 11 May 2016, Woodhouse J made an order under s 248(1)(c)(i) of the Companies Act 1993 (The Companies Act) permitting
Customs to continue with the prosecutions on the basis that it was in the public interest for that to occur.4
[10] Ms Joblin and Mr Clegg pleaded guilty to charges laid against them in their capacities as directors of the companies, as did Minti. The liquidators were required to consider whether they should cause the appellants to defend the charges or plead guilty to them. They ultimately elected to take no steps in relation to the charges. They did not enter guilty pleas because they were concerned they could expose themselves to claims by creditors in the event that they did so. In addition, they were not aware of the facts underpinning the charges.
[11] Customs proved the charges by way of formal proof evidence given before Judge Field on 9 September 2016. The liquidators then instructed counsel to appear when the appellants were sentenced on 23 November 2016. The liquidators have similarly caused the appellants to advance the present appeal.
[12] Customs continues to hold the funds that Federation and Public Gallery paid to it in order to obtain the release of the container.
The sentencing decision
[13] After setting out the facts and concluding that the gravity and culpability of the offending was high, the Judge noted that it involved 112 erroneous import entries and spanned a period of over four years. He considered there was an abuse of trust involved in the offending because Customs relies on the honesty of importers and their agents to provide full and correct particulars. In addition, offending of this type is difficult to detect and involves a high degree of premeditation.
[14] Taking these matters into account, the Judge fined Federation the sum of
$450,000. He also ordered Federation to pay solicitors costs of $3,000 and Court costs of $130.
4 New Zealand Customs Service v EXFC16 Ltd (in liq) HC Auckland CIV-2016-404-742, 11 May
2016 Minute of Woodhouse J.
[15] The Judge fined Public Gallery the sum of $45,000, and ordered it to pay solicitors costs of $3,000 and Court costs of $130. He fined Only Found You the sum of $20,000.
[16] At sentencing the liquidators sought an order under s 236(2) of the Act ordering the restoration to Federation and Public Gallery of the funds held by Customs. The Judge refused that application.
Grounds for appeal
[17] The appellants advance two grounds of appeal:
(a) The Judge imposed fines that were manifestly excessive in regard to their impecuniosity.
(b)The Judge erred in principle in failing to order restoration of the funds held by Customs to Federation and Public Gallery.
Approach on appeal
[18] One thing that became quickly apparent during the hearing was that it is not possible at this stage to ascertain with any certainty the practical effects of any orders that the Court might make in determining the appeal. By way of example, neither counsel was able to advise me whether any fine that the appellants might be required to pay would be a preferential debt in the liquidation.
[19] Secondly, counsel were at odds regarding the likely beneficiary of any order that the Court might make requiring the funds held by Customs to be restored to Federation and Public Gallery. Mr Molloy for the appellants advised me that the liquidators consider ASB would have first claim on those monies by virtue of the general security agreement it has registered over the companies’ assets. Ms Blythe for Customs took issue with this. She said Customs believed it would be entitled to priority in respect of those funds because the payment of customs duties is a preferential payment under the Companies Act.
[20] Resolution of these issues, should they become relevant, is obviously a matter for formal determination in another forum. I note, however, that the position appears to be that fines stand outside the liquidation regime prescribed by the Companies Act. Section 308(a) of that Act provides that nothing in the Act “limits or affects recovery of a fine imposed on a company, whether before or after the commencement of the liquidation of the company, in respect of the commission of an offence”. The same applies to costs ordered to be paid by the company in relation to
proceedings for the offence.5
[21] As a result, s 308 permits a prosecuting agency to use such means as may be at its disposal to enforce payment of fines and costs orders made against a company notwithstanding the fact that the company is in liquidation. Furthermore, it will not be necessary for the agency to obtain leave of the Court under s 248(1)(c)(i) of the Companies Act before doing so.
[22] In practice, however, there are limited means of enforcing payment of a fine once a company is placed in liquidation. This is no doubt why Heath J observed in Mobile Refrigeration Specialists v Department of Labour that a fine imposed on a company in liquidation will “rarely be recovered subsequently”.6
[23] The likely impact of fines on creditors in the present case is a matter of speculation at this stage. I therefore propose to determine both issues raised by the appeal on the basis of conventional principles and without regard for the practical consequences that might follow.
Were the fines manifestly excessive?
The arguments
[24] Mr Molloy acknowledged that all of the fines were within an appropriate range other than for the fact that each of the appellants is insolvent. He pointed out that s 40 of the Sentencing Act 2002 requires the Court to take into account the financial capacity of a defendant to pay any fine that might be imposed. Mr Molloy
contended that the material provided to the Judge at sentencing made it clear that the appellants would be unable to pay fines of any magnitude, and he should therefore have reduced the fines significantly to take account of that fact.
[25] Prior to sentencing, the liquidators filed and served a detailed affidavit setting out the financial positions of each of the appellants. Each has ceased trading, is insolvent and has claims by creditors that greatly exceed the limited assets currently held by the liquidators. As at sentencing, the liquidators held the sum of $70,472 on behalf of Federation. Mr Molloy advised me from the bar that that sum has now been reduced to approximately $17,000 by virtue of costs charged by the liquidators since sentencing. The liquidators have received outstanding creditor claims in Federation’s liquidation amounting to approximately $1.125 million. Of this sum, ASB is owed the sum of approximately $587,000 whilst Customs is owed approximately $163,000. Unsecured creditors are owed approximately $363,000.
[26] The liquidators depose that they were holding the sum of approximately
$6,300 in the liquidation of Only Found You. That sum has now reduced to $3352. The liquidators have received creditor claims in this liquidation amounting to approximately $14,000. Of this sum, approximately $7,700 is owed to Customs and the balance is owed to unsecured creditors.
[27] The liquidators were holding the sum of $605 in the liquidation of Public Gallery. They now hold the sum of just $79 in respect of that liquidation. They have received creditor claims totalling approximately $680,000, of which the sum of
$587,000 is owed to ASB. Public Gallery owes Customs the sum of approximately
$19,000 and the balance of approximately $75,000 is owed to unsecured creditors.
[28] Mr Molloy relied for his submission on the approach taken by this Court and the District Court in R v Burr7 and Commerce Commission v Frozen Yoghurt Ltd.8 In R v Burr, a company in liquidation had pleaded guilty to a charge laid under the Health and Safety and Employment Act 1992. Brown J declined to impose a fine on the defendant. In reaching that conclusion he said:
[73] In the present case, the fact is that PBCL is in liquidation. The charges against it in this Court were withdrawn prior to trial. The reality is, as Mr Temm's submission states, that PBCL is not able to pay a fine. In those circumstances I consider that it would be a futile step to impose a fine on PBCL in liquidation which would not be recovered.
[29] In Commerce Commission v Frozen Yoghurt Ltd, two companies in liquidation were prosecuted under the Fair Trading Act 1986 for making false statements whilst in trade. In reducing the fine that would otherwise be payable the sentencing Judge observed:
[24] Both defendants have been placed into liquidation. There is no evidence before the Court as to the exact financial position of the defendants and of their means to pay the fines imposed on them.
[25] It is clear that the representations were transmitted through a franchising arrangement and individuals may have relied (as did their customers) upon the representations coming from the parent companies. Accordingly it is likely in terms of the liquidation that there are considerable claims from the persons who had paid to be involved in the Frozen Yoghurt Franchise. This needs to be taken into account in imposing a fine in order that the pool of unsecured creditors is not swamped to the point where they are unable to pursue legitimate economic redress because of the quantum of fines that are required in respect of the defendant companies’ conduct.
[30] These factors prompted the Judge to reduce the fine to be imposed on each defendant from the sum of $135,000 to $35,000.
[31] Ms Blythe acknowledged these authorities, but relied upon the approach taken by Heath J in Mobile Refrigeration Specialists Ltd v Department of Labour.9
In that case two companies had been prosecuted and fined for offending under the Health and Safety in Employment Act 1992. The companies appealed on the basis that the sentencing Judge had not given sufficient weight to their respective financial capacities.
[32] Heath J did not accept that the sentencing Judge had erred in imposing the fines. In doing so he observed:
[54] There are dangers in interpreting the Sentencing Act in a manner that allows corporate offenders to readily escape financial penalties on grounds of alleged impecuniosity. For example, a company may be incorporated with no working capital of its own, to undertake a particular venture. If that
9 Mobile Refrigeration Specialists Ltd v Department of Labour, above n 6.
venture were to go wrong and harm was caused to its employees, the absence of liquid funds might tell against a fine. Yet, if that same company had been funded during its trading life through the provision of shareholder advances, it would not be unjust to put the shareholder to the choice of providing funds to pay the fine or leaving the company to go into liquidation. Similarly, if a parent company stood to gain significant taxation advantages from losses incurred by a subsidiary, it would seem wrong in principle for those benefits to be retained by the parent to the exclusion of the company's obligation to pay the fine. Again, the parent company could make a decision whether to advance moneys to pay the fine or to place the company in liquidation.
[55] Those considerations suggest that, in the case of a company, the Court should require clear evidence of financial incapacity, supported by appropriate disclosure of all material facts (most of which will be in the exclusive possession of the offender), before imposing a sentence below that appropriate to mark the offending. Disclosure would need to address issues such as any benefits accruing to a parent company through the insolvency of a subsidiary. In contrast to a human offender, a fine imposed on a company, while not a provable debt in a liquidation, will rarely be recovered subsequently. A company is not usually revived from liquidation. An individual who is adjudged bankrupt remains liable to pay a fine, even after discharge from bankruptcy.
[56] The need for full disclosure is supported by R v Khan. The Court of Appeal observed that it was “essential, wherever a Court determines to deal with a matter by way of monetary penalty, that there is clear and unequivocal material as to what is realistic before the course of action is pursued”. When reduction of an otherwise appropriate fine is sought, that “material” will generally be in the exclusive possession of the corporate offender.
…
[58] While, generally, a Court should impose a fine within the offender's ability to pay, there is authority for the proposition that, in appropriate cases, fines may be imposed at a level beyond the company's apparent means. An instructive example is R v F Howe & Son (Engineers) Ltd. Scott Baker J, delivering the judgment of the Court of Appeal, expressed the view that “there may be cases where the offences are so serious that the defendant ought not to be in business”.
…
[60] In my view, applying Khan, there was no “clear and unequivocal material” before Judge Spear to demonstrate that a fine above a particular level could not be paid. While the possibility of liquidation of each company was an unspoken premise on which counsel proceeded at sentencing, nothing was put before the Judge, in concrete terms, to suggest that consequence would necessarily follow, in respect of either Icepak or MRS. In the absence of material, supported by full disclosure of the reasons why historical support of shareholders to the operation of the company would not be continued to enable any fine to be paid, the Judge was entitled to proceed on the basis that the fine should reflect the amount required to denounce the conduct of each offender and to provide general deterrence.
[33] Ms Blythe also relied on the approach taken by the Federal Court of Australia in Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 2).10 In that case the Court observed that the need for general deterrence in certain cases will require a financial penalty to be imposed on a corporate defendant regardless of the capacity of the defendant to meet the penalty. In this context “general deterrence will depend more on the expected quantum of the penalty for the offending conduct, rather than on a past offender’s capacity to pay a previous penalty”. The Federal Court made further observations to similar effect in Federal Commission of Taxation v Arnold (No 2).11
[34] Furthermore, in Mobile Refrigeration Heath J referred12 to Australian Communication and Media Authority v Clarityl Pty Ltd (No 2).13 In that case Nicholson J in the Federal Court endorsed observations in an earlier case that a reduction of the quantum of a fine might be justified if it had the potential to put a
company out of business and thereby damage the position of employees and creditors.14 That was qualified, however, by saying that “different considerations apply when it seems…the practical reality is that the corporation is going out of business anyway”.15
Conclusion
[35] In Burr and Frozen Yoghurt the sentencing Judges accepted that the insolvency of a corporate defendant meant that imposition of a fine would either be futile or that it would have a negative impact on creditors. In neither case, however, did the court consider whether the imposition of a fine was necessary to promote the principle of general deterrence. In Mobile Refrigeration, however, Heath J accepted that the sentencing Judge was entitled to impose fines reflecting the need to
denounce the offending conduct and to provide general deterrence.16 The issue in
10 Australian Competition and Consumer Commission v Leahy Petroleum (No 2) [2005] FCA 254, (2005) 215 ALR 281at [9].
11 Federal Commission of Taxation v Arnold (No 2) [2015] FCA 34, (2015) 529 at [200].
12 Above n 6, at [59].
13 Australian Communication and Media Authority v Clarityl Pty Ltd (No 2) [2006] FCA 1399, (2006) 155 FCR 377.
14 At [41].
15 At [41].
16 Above n 6, at [60].
the present appeal is whether the Judge was correct to adopt the approach taken in
Mobile Refrigeration.
[36] The offending in the present case was undoubtedly very serious. It occurred over a period of more than three years and involved more than 120 separate instances in which false import entries were deliberately presented to Customs for the purpose of obtaining a financial advantage. By this means the appellants were able to evade the payment of customs duties and GST totalling more than $600,000. Furthermore, offending of this type is sophisticated and difficult to detect because it requires the complicity of a supplier who is prepared to provide false invoices to enable the fraud to be perpetrated. When the rewards are great and the risk of detection is low there must be a temptation on the part of others to engage in similar conduct. I consider these factors place this case firmly within the category of cases in which the principle of general deterrence required significant fines to be imposed regardless of the fact that they might never be collected.
[37] It follows that I do not accept the Judge was required to reduce the fines to reflect the fact that the appellants were in liquidation. This aspect of the appeal fails as a result.
Did the Judge err in declining to order restoration of the funds held by
Customs?
[38] Section 225 of the Act provides that goods in respect of which an offence against specified provisions of the Act has been committed shall be forfeited to the Crown. Customs officers are empowered under s 226 of the Act to seize forfeited goods or goods that they have reasonable cause to suspect are forfeited. Upon conviction, s 236(1) provides that forfeited goods are condemned to the Crown “without suit or judgment”. Section 237 provides that goods may be sold after they have been condemned.
[39] Section 236(2) provides the Court with a discretionary power to order the restoration of goods forfeited to the Crown where offences have been committed under the Act. It provides as follows:
236 Condemnation of seized goods on conviction
…
(2) Where the Court imposes a sentence on any person on the conviction of that person for an offence to which subsection (1) of this section applies, the Court may, if it thinks fit, order the restoration of the goods forfeited to the person from whom the goods were seized and, where such an order is made, the conviction does not have effect as a condemnation of those goods.
[40] As I have already recorded, Customs initially seized the container of imported garments. It then released the container upon payment of a sum equivalent to the value of the garments in the container. Customs substituted the garments for the payment of cash under s 229 of the Act, which provides:
229 Delivery of goods seized on deposit of value
(1) Where any goods have been seized as forfeited, the Chief Executive may, at any time before their condemnation, deliver the goods to the owner or other person from whom they were seized, on the deposit with the Customs of a cash sum equal,—
(a) In the case of imported goods, to the Customs value of the goods; or
(b) In the case of goods manufactured in a Customs controlled area, to the excise value of the goods as determined in accordance with Schedule 4 to this Act,—
together with any duty to which the goods may be liable as determined by the Chief Executive.
(2) The money deposited is deemed to be substituted for the goods seized, and all the provisions of this Part of this Act so far as they are applicable extend and apply to the money accordingly.
[41] The leading authority in respect of the manner in which s 236(2) is to be interpreted and applied is the judgment of Wild J in New Zealand Customs Service v Brereton.17 In that case the Judge summarised the principles to be applied as
follows:18
[57] For the future, I summarise what I consider to be the correct approach:
17 New Zealand Customs Service v Brereton [2008] NZAR 119 (HC).
18 At [57].
a)There is a presumption that goods in respect of which an offence has been committed should be forfeited and condemned. That presumption exists, in part, to deter evasion of Customs and Excise duty and assist in the enforcement of the Customs legislation.
b)Before ordering restoration, the Judge must be satisfied that the circumstances or factors favouring restoration outweigh the presumption that a conviction should result in the condemnation of the goods in question. This means the counter-considerations must be compelling to justify restoration.
c)Without attempting exhaustively to list them, the circumstances or factors that may support restoration include disproportionate hardship to the offender and/or harm to innocent third parties. Depending on the circumstances of the case and the nature of the forfeiture, it may also be possible to argue that the goods in question were only of limited or indirect significance to the offending, or that the offender had a legitimate purpose for part of the goods.
d)The issue of forfeiture and restoration should not be allowed to skew the sentencing exercise. The scheme of the Act expressly contemplates both the imposition of penalties and the forfeiture and condemnation of goods.
[42] Notably, Wild J rejected a submission for the respondents in Brereton that the
Court has a wide discretion under s 236(2) in the following paragraphs:19
[47] I view the lack of any guidance in s 236(2) as to the way in which the discretion should be exercised as acceptance by Parliament that it could never provide for all the circumstances in which it may be appropriate to restore goods (or, conversely, inappropriate that they be condemned). That does not mean that the discretion is an unfettered one. It is fundamental law that it must be exercised in a way which promotes the policy and objects of the Act: Padfield v Minister of Agriculture, Fisheries and Food [1968] AC
997.
[48] The structure and policy of the Act, and s 236 in particular, is that condemnation follows automatically and immediately a person is convicted of an offence and goods have been seized in connection with that offence. That policy reflects the long-established aim of deterring potential offenders, because otherwise the Customs laws are notoriously difficult of complete enforcement. The “drastic and far reaching” force of the forfeiture and associated provisions of the Customs legislation common to Australia, Canada and the United Kingdom was accepted by the High Court of Australia in Burton v Honan (1952) 86 CLR 169 per Dixon CJ at 178-179, and more recently by Richardson J in the New Zealand Court of Appeal in Williams v Attorney-General [1990] 1 NZLR 646 at 677-678. In Williams Richardson J referred to the judgment of James LJ in The Annandale (1877)
2 PD 218 at 220 describing the return of forfeited goods as “merciful
consideration”. Richardson J noted that the Minister of Customs when
introducing an amendment recasting s 287 in substantially its present form
19 New Zealand Customs Service v Brereton, above n 17.
referred to return of forfeited goods as “an act of clemency” (368 New
Zealand Parliamentary Debates, at p 3534).
[43] Judge Dawson declined the application for restoration in the following passage of his sentencing remarks:20
[11] There has been an application for the restoration of the funds held by Customs. Wild J has dealt with a similar case in New Zealand Customs Service v Brereton in the High Court of Nelson, and his summary of the discretion under s 236(2) is that there was a presumption that goods in respect of which an offence had been committed should be forfeited and condemned, and that presumption exists in part to deter evasion of Customs and excise duty and to assist the enforcement of Customs legislation. Submissions have been made for the liquidators that the sums held should be restored. I am not persuaded of that at all, and I am of the view that it is appropriate for forfeiture. I therefore order forfeiture of the
$311,065,18 plus interest held by Customs, and the application for restoration is declined.
[44] Both counsel agree that Judge Dawson erred in one respect when dealing with the issue of restoration. The Judge appears to have been under the impression that the funds held by Customs could be applied in the payment of the fines imposed on the appellants and also in payment of outstanding customs duties. This is evident
from the following observations in the Judge’s sentencing remarks:21
[12] It would appear appropriate the amount forfeited should be applied first in payment of the current debt owed to Customs and any balance then to be applied to Court costs and solicitors’ fees and fines in that order.
…
[15] It is apparent that the fines, solicitors’ costs and Court costs all exceed the funds available by Customs and by the liquidators. I am not at this stage able to quantify the amounts available, so I am imposing the fines and costs on the basis as if those funds were available. Any balance that is unable to be paid after those fines and costs are met will ultimately need to be written off by the Justice Department.
ADDENDUM
[16] For the avoidance of any doubt, if the order of payment to be made from the funds forfeited is in any doubt then it gets paid to the Crown and it can be paid to each Government department in the order that is applicable. I have simply suggested a way of doing it to make it easier for everyone to follow but if it is incorrect in any way the money still goes to the Government, it just goes under a different heading.
20 R v Federation Clothing Ltd, above n 2.
21 R v Federation Clothing Ltd, above n 2.
[45] Mr Molloy’s written submissions also proceeded on the basis that the Court might only order partial restoration of the funds, and that Customs should be permitted to retain sufficient funds to pay the outstanding customs duties. It now appears to be common ground that the seized funds cannot be used for that purpose or to pay outstanding fines. Rather, the liquidators must apply any funds that are restored to the appellants in accordance with the regime prescribed by ss 312 and
313 of the Companies Act 1993.
[46] Mr Molloy advanced the appellants’ argument in relation to this ground of appeal on the basis of the prejudice that will be suffered by the companies’ creditors if the funds are not restored. He contended that the creditors are innocent third parties in terms of the principles referred to by Wild J in Brereton. Mr Molloy focussed in this context particularly on the position of ASB, no doubt because the liquidators consider ASB will be the principal beneficiary of any order for restoration. Mr Molloy contended that ASB had made the loan to the appellants on the basis of misleading representations made by the companies’ directors. He submitted that ASB will suffer loss in the event that an order for restoration is not made.
[47] I am not convinced that any of the companies’ creditors, including ASB, fall within the description of innocent third parties as Wild J intended that phrase to be understood. I consider that Wild J was referring in this context to innocent third parties whose property rights are affected as a result of the seizure and forfeiture of assets under the Act. It is not difficult to imagine situations in which this could occur. By way of example, goods may be seized as a result of offending by the purchaser in circumstances where they have not been paid for and remain the property of the vendor. In that event the vendor might properly be regarded as an innocent third party, provided of course it has no complicity in the offending.
[48] That is not the position here. Neither ASB nor any of the appellants’ other creditors owned the garments in the container. Rather, ASB advanced the appellants funds to enable the container to be released. It did so no doubt because it wished to assist the appellants to obtain the benefit of the profit to be made from selling the goods in New Zealand. Furthermore, the appellants presumably sold the goods
before they went into liquidation. ASB had the opportunity at that point to ensure it obtained the benefit of any sale proceeds.
[49] In reality, the liquidators (and no doubt ASB) view the seized funds as a means by which the appellants’ creditors, and ASB in particular, can be paid. Some may view the payment of creditors as being a more worthwhile use of the funds than their condemnation and retention by the Crown. I do not consider such an outcome to be consistent, however, with the principles to which Wild J referred in Brereton. It is certainly insufficient to rebut the strong presumption that goods in respect of which an offence has been committed should be forfeited and condemned. Furthermore, it does not amount to a compelling circumstance or factor outweighing the legislative policy that conviction for an offence should result in forfeiture and condemnation of goods involved in the commission of the offence.
[50] It follows that I do not consider the Judge erred in declining to order restoration of the seized funds to the appellants.
Result
[51] The appeal is dismissed.
Lang J
Solicitors:
Crown Solicitor, Auckland
Spencer Legal, Auckland
Counsel:
T Molloy, Auckland
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