FAF Holdings Limited (in liquidation) v Bethune
[2016] NZHC 1595
•14 July 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2015-412-000080 [2016] NZHC 1595
BETWEEN FAF HOLDINGS LIMITED (IN
LIQUIDATION) First Plaintiff
AND
V J MADSEN-RIES AND H D LEVIN
as liquidators of FAF Holdings Limited (InLiquidation) Second Plaintiffs
AND
R J BETHUNE Defendant
AND
COMMISSIONER OF Inland Revenue
Non-Party
Hearing: 8 July 2016 Appearances:
P R Cogswell for Plaintiffs
A Goosen for the CommissionerJudgment:
14 July 2016
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
14.07.16 at 3:00pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
FAF HOLDINGS LIMITED (IN LIQUIDATION) v V J MADSEN-RIES AND H D LEVIN, R J BETHUNE [2016] NZHC 1595 [14 July 2016]
The application
[1] The defendant (Mr Bethune) applies for orders requiring disclosure by the Commissioner of Inland Revenue (the Commissioner) to advise whether certain named documents are in the Commissioner’s control and if so to make those available for inspection.
Background
[2] Mr Bethune was the sole director and shareholder of FAF Holdings Limited (FAF), a company placed into liquidation on 11 December 2014 when the second plaintiffs were appointed liquidators of FAF.
Liquidators claim against Mr Bethune
[3] On 23 June 2013 the liquidators filed a claim in the Dunedin High Court. That claim referred to associated companies of FAF (including The Town Ball Limited) (Town Ball) that Mr Bethune is or was a director of. The liquidators claimed that during tax periods in 2013 and 2014 FAF defaulted on its tax obligations by failing to pay GST, student loan employer contributions, Kiwi saver employee deductions, PAYE tax deductions, and employer superannuation contributions. The liquidators claim FAF failed to pay a total of $534,577.89 due to the Inland Revenue Department.
[4] The liquidators say the financial statements for FAF prepared for the financial year ending 31 March 2010 (2010 financial statements) noted FAF had a working capital deficit of about $12,000 largely due to unpaid GST, and operated with a net asset surplus of $635,600 – which was a result of the inclusion of two related party loans.
[5] On 29 April 2015 the liquidators issued a demand on those associated companies for payment of accounts owed to FAF. Shortly after Mr Bethune advised the liquidators there was an error in the 2010 financial accounts and that the amounts in question were not owed to those companies by FAF.
[6] The liquidators assert that the assets recorded in the 2010 financial statements in the form of related party loans owed to FAF did not represent assets available to FAF to meet its debts and did not have an actual value to FAF equivalent to their recorded book value. Rather the liquidators say the actual financial position of FAF as at 31 March 2010 showed a working capital deficit of $12,828 and operated with a net liability in that amount.
[7] The liquidators say that from at least 31 March 2013 FAF was unable to pay its debts and had liabilities greater than assets and was therefore insolvent.
[8] The liquidators say that Inland Revenue is the only creditor in FAF’s liquidation. Its claim exceeds $538,000. They apply therefore to recover the salaries paid to Mr Bethune as a director of FAF since February 2013.
[9] The liquidators’ claims against Mr Bethune are numerous. They include:
(a) Recovery of the sum of $136,399.90 paid to him as salary in the period 1 April 2013 to 31 August 2014.
(b)That he breached his director’s duties by allowing FAF’s business to be carried on in a manner likely to cause serious loss to creditors; by incurring obligations without reasonable belief that those could be performed; and failing to exercise the care, diligence and skill that a reasonable director would.
(c) His failure to keep adequate accounting records that would correctly record and explain FAF’s transactions, and enable the financial position of FAF to be determined with reasonable accuracy at any time.
(d)His failure to ensure compliant financial statements were retained and which could readily and properly be audited.
(e) His failure to comply with generally acceptable accounting practice.
[10] The liquidators claim that as a result of Mr Bethune’s breaches of duty FAF suffered loss or damage including the loss to FAF’s creditors represented by Inland Revenue’s claim in the liquidation in the sum of $538,213.28; together with the costs of liquidation (including liquidators fees and disbursements), in a sum yet to be determined.
[11] The liquidators say the last financial statements prepared for FAF were the
2010 financial statements and that apart from its bank statements and some miscellaneous work papers, no financial accounts or financial statements of FAF were provided that related to the period from 1 April 2010 to liquidation. The liquidators say therefore they have endeavoured to construct FAF’s accounts using FAF’s bank statements for the period from 1 April 2010.
[12] By this proceeding the liquidators seek a declaration under s 300(1) of the Companies Act 1993 that Mr Bethune is personally liable for such part of the debts of FAF and the costs of the liquidation that the Court considers just.
Mr Bethune’s defence
[13] By his statement of defence Mr Bethune denies claims of breach of director duties. He says draft accounts were prepared for FAF for the year ending 31 March
2011 and that the GST liability was not due and payable as at 31 March 2010. He asserts FAF’s financial position did not materially deteriorate until 31 March 2013 and until that date FAF met all of its creditor’s debts as they fell due.
[14] Regarding claims of breach of directors duties Mr Bethune asserts FAF was never insolvent when it entered into a heads of agreement with Town Ball on or about 12 August 2012 by which FAF was to be responsible for the employment agreements and all employment responsibilities, obligations, liabilities and rights in respect of staff to be employed in the businesses operated by Town Ball. He says FAF’s financial difficulties did not commence until April 2013.
[15] He admits he was an employee of FAF from November 2010 but denies that
the payments to him were “Directors Salary” and says the payments to him and
received by him were pursuant to the heads of agreement from which PAYE was deducted before he received those payments. He said Town Ball paid FAF for his services and hence FAF recovered any payment made to him from Town Ball and suffered no loss. Mr Bethune claims an in-house accountant was employed by FAF throughout and also provided accounting services to FAF’s entities. That accountant he said had day to day control and responsibility for FAF’s finances including its tax affairs and the preparation of all required in-house accounting documentation. Mr Bethune says at no time was any debt to Inland Revenue or to any other creditor reported as being in the 90 day plus category.
[16] Mr Bethune pleads that it was not until December 2013 he became aware of any problems with FAF’s finances and then he says he took immediate action to address matters by advising Inland Revenue of the discovery of financial problems, and altering the business structure of FAF’s entity Town Ball in an effort to alleviate cash flow difficulties. He says he began winding down FAF’s business and ceased trading in order to prevent further losses. Mr Bethune says all relevant accounting records were kept but the final accounts could not be prepared while Inland Revenue were auditing the accounts of a related company, which audit was not completed until after the commencement of FAF’s liquidation proceedings in 2015.
[17] Mr Bethune says FAF’s accountant attended to all reporting obligations.
Mr Bethune’s application for orders for particular discovery against Inland
Revenue Department
[18] The application was filed in accordance with Rule 8.27 of the High Court
Rules.
[19] Mr Bethune’s application asserts, inter alia:
(a) There are grounds to believe that Inland Revenue is in control of documents generated or sent or received by Inland Revenue concerning the solvency of FAF including, but not limited to:
(i)correspondence from or to Inland Revenue concerning the solvency of FAF and advice from Mr Bethune or his agents as to FAF’s solvency;
(ii)un-redacted Inland Revenue file notes of discussions and contact with Mr Bethune or his agents concerning the solvency of FAF and advice from Mr Bethune as to that solvency;
(iii)internal memoranda generated by Inland Revenue concerning the solvency of FAF and advice from Mr Bethune or his agents as to FAF’s solvency;
(iv)internal memoranda generated by Inland Revenue concerning potential claims against Mr Bethune;
(v)all correspondence between the Inland Revenue and the liquidators, both before and after liquidation of FAF, touching on the solvency of FAF and any claims against Mr Bethune; and
(vi) all other documents relevant to the claims in this proceeding.
(b)Mr Bethune and/or his agents corresponded with the Inland Revenue about FAF’s solvency from around November 2013, including advising the Inland Revenue of the discovery of FAF’s financial problems.
(c) The documents in question are directly relevant to the issues in the
Inland Revenue’s proceeding.
[20] In his affidavit in support Mr Bethune deposes that in the course of his dealings with Inland Revenue he had several contacts with them and numerous exchanges of correspondence. He says he could see some of those in the liquidators’ initial disclosure bundle filed in court. He describes these however as examples only of those that have been provided and asserts:
However, given the extensive, but partial, disclosure of relevant documents in the Initial Disclosure Bundle by the plaintiffs, I believe that it is reasonable to require Inland Revenue to now give full discovery of the documents set out in the application.
The Commissioner’s opposition
[21] The application is opposed by the Commissioner on grounds, inter alia:
(a) Pursuant to s 81(1) of the Tax Administration Act 1994 (TAA) Inland Revenue officers must maintain secrecy of all matters relating to the legislation described in subsection (1)C, and must not communicate any such matter, except for the purpose of carrying into effect that legislation, or a matter contained in subsection (1)B.
(b)Pursuant to s 81(3) of the TAA, without limiting the generality of subsections (1) and (1B), no officer of the Department shall be required to produce in any Court or Tribunal any document or to devolve or communicate to any Court or Tribunal any matter or thing coming under the officer’s notice in the performance of the officer’s duties as an officer of the Department, except when it is necessary to do so for carrying into effect:
(i) The Inland Revenue Act; or
(ii) The listed Accident Compensation Legislation; or
(iii) Any other enactment imposing taxes or duties payable to the
Crown; or
(iv)The powers, duties and functions of the Commissioner under the New Zealand Superannuation Act 1974.
(c) Unless an exception applies then under s 81(1) and (3) of the TAA, the Commissioner is prohibited from disclosing information in relation to, or producing (and may not be compelled to produce) the
information or documents that the defendant requests the Court to order the Commissioner to produce.
(d)The information and documents sought by the defendant do not fall within the exceptions contained in s 81(4) of the TAA, and the Commissioner is accordingly not bound to comply with discovery obligations under the High Court Rules.
[22] On behalf of the liquidators an affidavit of documents was sworn by Mr Joshi a senior analyst employed by Deloitte. He deposed:
[5] In order to fulfil these obligations, I have diligently searched for all documents required to be discovered under the Discovery Order. The documents I have searched include pre-liquidation documents of FAF provided to the plaintiffs at the commencement of and during the liquidation. In providing discovery of the pre-liquidation documents the plaintiffs have relied on the documents provided. Although I and the plaintiffs are not aware of any specific documents not provided, for completeness I note there may be other documents which were previously in the control of FAF prior to liquidation but which were not provided to the plaintiffs.
[23] Mr Joshi then referred to the schedule of documents attached to his affidavit. Of those he referred to documents in the plaintiffs control and for which the plaintiffs claim neither privilege nor confidentiality; documents in the plaintiffs control for which privilege is claimed; documents in the plaintiffs control and for which the plaintiffs claim confidentiality; documents that are not in the plaintiffs control and when each ceased to be in the plaintiffs control and the persons who now have control of those; and documents that have never been in the plaintiffs control but that he knows would be discoverable if the plaintiffs had control of them.
Submissions supporting requirement for disclosure
[24] Rule 8.25 of the High Court Rules permits a Judge to order particular discovery against a non-party if it appears the non-party may be or may have been in control of documents that it would have been liable to discover if it was a party to the proceeding and may require that person to file an affidavit stating whether the documents are or have been in the persons control and if no longer in that persons
control to require that person to depose when they ceased to be in the persons control and who now had control of them.
[25] Mr Cogswell for Mr Bethune submits Inland Revenue has provided some documents only to the liquidators and in providing that which they did to the liquidators upon the liquidators request, they have waived the restraint provisions of s 81 of the TAA.
[26] Mr Cogswell submits Mr Bethune has deposed there are other documents which were within the control of Inland Revenue which have not been discovered. He refers to Mr Bethune’s evidence in that regard (which has been summarised in paragraphs [13] to [17] herein. Mr Bethune says there are other documents which have not been disclosed and therefore there is more available for discovery.
[27] Mr Cogswell submits the purpose of non-party discovery is to ensure equity and fairness when such considerations are being ignored.
[28] Mr Cogswell submits s 81 which is relied upon by the Commissioner in defence of Mr Bethune’s non-party discovery application permits disclosure of the type sought by this application. He refers to s 81(4)(l) which provides that nothing shall be deemed to prohibit the Commissioner from:
(l) Permitting a copy of, or details of and from, any document or information (including details of taxes and duties paid and payable), in the possession of, or obtained by, or on behalf of, the Commissioner for the purposes of any of the Inland Revenue Acts, including all Acts (whether or not repelled) at any time administered by or in the department, or for the purpose of any other function lawfully conferred on the Commissioner, to be given to the person from whom, or on behalf of whom, or in relation to whom such document or information is held or was obtained, or to the legal personal representative of that person or to the agent of that person or of that legal personal representative authorised in a manner as the Commissioner prescribes in that behalf.
Provided that no information shall be given under this paragraph unless the Commissioner –
(i) is satisfied that such information is readily available in the department; and
(ii) considers it reasonable and practicable to give that
information…
[29] Mr Cogswell submission is that provision permits release of documents to the person on whose behalf they are held.
[30] Mr Cogswell submits it is equitable to require all documents Mr Bethune has requested be provided because he remains a director of FAF even though it is in liquidation. It follows, Mr Cogswell submits that Mr Bethune has residual authority to request those documents; that it should follow that a sole director can require those to be released to him.
[31] Mr Cogswell relies on the fact that in response to a s 261 TAA notice delivered by the liquidators to Inland Revenue, Inland Revenue has (as was earlier noted of Mr Joshi’s affidavit) provided discovery.
[32] Mr Bethune believes partial compliance only has been provided.
[33] Mr Cogswell submits that whilst FAF is in liquidation Mr Bethune remains its sole director and therefore it is within his authority as such to request the full disclosure he says has not been provided.
Assessment
[34] While Mr Bethune remains a director of FAF it is clear because that company is in liquidation that Mr Bethune no longer represents FAF. Although s 81(4) contains a number of specific defined exceptions to the Commissioner’s duty to maintain secrecy, none of those exceptions apply in this case. As earlier noted s 81(4)(l) permitted the giving of information to the person on whose behalf it was held or obtained provided the Commissioner was satisfied such information was readily available and that it was reasonable and practicable to give that information.
[35] Mr Bethune does not fit within that category of person for although he remains a director of FAF he has no power or authority on its behalf to request that
information. Regardless, it is clear from the affidavit of Mr Joshi that full and appropriate discovery has been provided.
[36] It is clear under s 81 of the TAA that the Commissioner has a duty to maintain secrecy of matters relating to the legislation Inland Revenue administers; and that Inland Revenue officers have significant constraints in that regard when performing their duties; but that they cannot be required to produce in any Court or Tribunal any document or to divulge or communicate to any Court or Tribunal except when it is necessary to do so for carrying into effect the Inland Revenue Acts or other defined legislation.
[37] As Richardson J noted in Knight1 it is about whether any disclosure which has come to an officer’s notice is necessary by reference to the functions, powers and duties of the Commissioner. In that context the Court does not agree that the production of documents to a defendant in proceedings taken by liquidators under the Companies Act 1993 against a former director could be said to be necessary for carrying into effect the Inland Revenue Acts. The Companies Act by definition is not an Inland Revenue Act.
[38] Further, and as Mr Goosen for the Commissioner submits, the fact that the Commissioner has lodged a claim in the liquidation of FAF is irrelevant. The tax liability of FAF is not an issue in the current proceeding and is not able to be put in issue. The proceeding against Mr Bethune has been brought by the liquidators in the performance of their duty to collect the assets of an insolvent company and to
distribute them according to law.2 The duties of the liquidators arise under the
Companies Act 1993. They are not the Commissioner’s duties and the litigation between the liquidators and Mr Bethune do not require the Commissioner to produce documents for the purpose of carrying into effect the Inland Revenue Acts.
[39] This view of matters has been enforced by the Court of Appeal decision in
Commissioner of Inland Revenue v E R Squibb & Sons NZ Limited3. In that case the
Court of Appeal considered the secrecy provision then contained in s 13 of the
1 Knight v Commissioner of Inland Revenue [1991] 2 NZLR 30 (CA).
2 Section 253 Companies Act 1993.
3 (1992) 14 NZTC 9, 146(CA).
Inland Revenue Department Act 1974. In refusing to grant discovery against the Commissioner in respect of certain documents containing confidential information about other tax payers Richardson J held:
… Section 13(1) imposes absolute secrecy obligations on all departmental officers. Section 13(4) carefully defines and limits the outside bodies to which information may be disclosed and s 13(3) reinforces the general obligation under s 13(1) by excusing officers from obligations to disclose documents or information in Court proceedings where, but for the statue, disclosure might be compelled.
In terms of s 13(3) it is only where and to the extent that it is necessary for the purpose of carrying into effect the Inland Revenue Acts that disclosure of tax payer information may be made to a Court or Tribunal…
[40] In ANZ National Bank v Commissioner of Inland Revenue4 Wild J held that the obligation to discover arises under High Court Rules and that s 81(3) operates as an exception to the general rule of confidentiality and permits the Commissioner to discover in tax litigation because that litigation is for the purpose of carrying into effect the Inland Revenue Acts. Further that it is well established that compliance by the Commissioner of the High Court Rules as to discovery and inspection is contained within the s 81(3) exception. Mr Goosen submits and the Court accepts that it follows that if an exception does not apply then there is no obligation to discover.
[41] The Supreme Court decision in BNZ Investments Limited v Commissioner of Inland Revenue reinforces the right of tax payers to have their affairs treated as confidential. The Court noted that s 81(3) created a privilege from being required to produce material otherwise subject to compulsory disclosure in Court proceedings. Primary consideration is given to whether or not disclosure is necessary for the purpose of relevant statutes and therefore it follows there is no obligation to provide in absent of there being an exception to do so. Ultimately it is all about whether or not it is reasonably necessary for the performance by the Commissioner of her statutory functions.
[42] In this case Mr Bethune seeks the production of documents which are not held on his behalf but on behalf of FAF his former company, now in the control of
4 (2007) 23 NZTC 21,032 (High Court).
the liquidators. The documents Mr Bethune seeks are documents relating to FAF in liquidation and not to himself. Therefore the Court agrees that s 81(4)(l) does not authorise the Commissioner to provide tax payer information to Mr Bethune. It is clear from s 248(1)(b) of the Companies Act 1993 that when a company is placed into liquidation directors remain in office but cease to have powers, functions or duties other than those permitted by Part 16 of the Companies Act 1993. Those powers do not include the power to obtain documents from the Commissioner relating to FAF.
Conclusions
[43] Mr Bethune’s perceptions of inadequate disclosure do not identify the existence of specific documents. Rather he expresses in general terms his belief that other documents exist. By contrast, the evidence of Mr Joshi does not suggest a lack of disclosure of all available documentation to the liquidators.
[44] The liquidators’ obligations of disclosure in their proceeding against Mr Bethune include reference to documents not only in their possession but by their knowledge in the possession of others. The application from Mr Bethune for further discovery does not specifically identify the existence of other documentation. Nor as counsel advises, has any request been made by Mr Bethune to the liquidators to provide that documentation he says has not been discovered by Inland Revenue. It is after all the liquidators’ obligation to discover to Mr Bethune all it can by its claims against him, and s 81(4) will assist the liquidators to do this for him.
[45] If the liquidators considered the Commissioner held documents or information relevant to the proceeding then they could request the Commissioner to provide them with that. The Commissioner is permitted to provide that documentation or information pursuant to the exception contained in s 81(4)(l). However there is no similar provision in the TAA allowing for Mr Bethune to request that information about FAF for himself.
[46] The Court accepts Mr Goosen’s submission that the production of the
documents sought by Mr Bethune is not necessary for carrying into effect the Inland
Revenue Acts, or the other Acts referred to in s 81(3); and that, under s 81(3), the Commissioner is protected by the privilege created by the section and she is not required to comply with discovery obligations under the High Court Rules.
[47] Mr Cogswell had submitted that the Commissioner had not complied with a s 261 Companies Act 1993 application for further information. However the Court does not accept in this case that the Commissioner has not complied with the liquidators request for documents. Mr Bethune has not been specific regarding the documents he says the Commissioner has withheld. Nor does he give reasons why he considers there are more relevant documents in the Commissioner’s possession. He simply says he has received “extensive, but partial disclosure of relevant documents”.
[48] In short there is no evidence Mr Bethune has requested the liquidators to ascertain from the Commissioner whether the liquidators comprehensive request for documents under s 261 has been fully complied with.
Result
[49] The application for non party discovery is dismissed.
[50] Mr Bethune shall pay the Commissioner’s costs on a 2B basis together with
disbursements approved by the Registrar.
Associate Judge Christiansen
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