Gibson v Official Assignee
[2018] NZHC 1077
•16 May 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2014-404-3355
[2018] NZHC 1077
UNDER Receiverships Act 1993 s 34(1) and s 284(1) of the Companies Act 1993 IN THE MATTER
Of Capital + Merchant Finance Limited (in receivership and liquidation)
BETWEEN
BRENDON GIBSON and GRANT GRAHAM
Applicants
AND
OFFICIAL ASSIGNEE
First Respondent
FORTRESS CREDIT CORPORATION (AUSTRALIA) II PTY LIMITED
Second Respondent (discontinued)
PERPETUAL TRUST LIMITED
Third Respondent (discontinued)
Hearing: 16 May 2018 Appearances:
M D Arthur and H Wham for the Applicants
R O Parmenter on instruction from D Nielsen for the First Respondent
Judgment:
16 May 2018
ORAL JUDGMENT OF MUIR J
Counsel/Solicitors:
R B Stewart QC, Barrister, Auckland. M D Arthur and H Wham, Chapman Tripp, Auckland R O Parmenter, Barrister, Auckland. D Nielsen, Nielsen Law, Hamilton
GIBSON v OFFICIAL ASSIGNEE [2018] NZHC 1077 [16 May 2018]
Introduction
[1] The applicants, who are receivers of Capital + Merchant Finance Limited (in receivership and liquidation) (CMF), apply for discovery in the context of an originating application brought by them and a cross-application brought by CMF both of which are currently set down for hearing in August 2018. The time pressures which now apply in relation to this litigation mean that there is a premium on prompt delivery of judgment.
Background
[2] The background to the originating application is complex but for present purposes can be adequately summarised as follows:
(a)In 2014 the Official Assignee (OA) as liquidator of CMF entered into a settlement of claims against the company’s former auditors in the amount of $18.5 million. Such settlement was on a basis GST inclusive, if any. It was at least in part funded by the auditors’ insurers to the apparent knowledge of the OA.
(b)An issue has now arisen in terms of whether CMF has a liability to the Commissioner of Inland Revenue (the Commissioner) to account for GST on that settlement.
(c)The OA currently holds, pursuant to consent orders of this Court made on 26 February and 9 March 2015, the sum of $1.75 million which, apart from the unresolved GST issue, is now payable to the receivers pursuant to such orders. The receiver’s application seeks payment accordingly.
(d)As a result of the Commissioner’s claim, the OA seeks by way of cross application orders varying or amending the consent orders on the basis that, if CMF has any liability to the Commissioner, it is appropriately recovered from the funds held on deposit as “salvage costs” in a manner
similar to the OA’s recovery of the costs associated with the litigation
against CMF’s auditors.
(e)As against the Commissioner, however, the OA’s primary position is that it is not liable for GST on the settlement.
(f)Whether it is will at least in part turn on proper interpretation and application of s 5(13) of the Goods and Services Tax Act 1985 (the Act), and in particular whether CMF was a “registered person” who “receive[d] a payment under a contract of insurance”.
(g)The receivers say that CMF was a “registered person” having elected, with effect from 1 January 2005, to become registered under the provisions of s 20F of the Act. In broad terms this permitted finance companies to recover input credits to the extent (calculated in percentage terms) their borrowers were GST registered.
(h)If it was a “registered person” then its liability to account for GST will likely turn on whether the payment which the OA received was made “under a contract of insurance”. The OA’s essential argument is that the payment was made by CMF’s auditors and that because there was no contract between CMF and its auditors’ indemnifiers, the payment cannot be considered to be “under a contract of insurance”.
(i)The Commissioner’s claims and CMF’s defence are currently being resolved through the “NOPA” procedure. Resolution is not imminently expected.
(j)The OA’s application to vary the settlement agreement proceeds on the premise that, if there is a liability to the Commissioner, the agreement which resulted in the consent orders is vitiated by a mistake.
(k)In response the receivers say that the agreement is not capable of being set aside under Part 2 subpart 2 of the Contract and Commercial Law Act 2017 because:
[i]there was no qualifying mistake;
[ii]in exercise of the relevant discretions under that Act, the Court should decline to grant relief.
(l)The second of these arguments is premised on the allegation, that in entering into the relevant settlement with the auditors, the OA acted negligently, either as a result of:
[i]failing to take advice in terms of CMF’s liability for GST; or
[ii]taking advice on the erroneous assumption that CMF was not a registered person and/or was GST exempt; or
[iii]ignoring advice that was received.
[3]The receiver’s discovery application is directed particularly to these defences.
What documents are sought by the receivers?
[4] The application seeks documents in four defined categories which I summarise as follows:
(a)the OA’s own internal records of the GST status of CMF on and from its appointment;
(b)documents up to and including 26 February 2015 (being the date of the first consent order) which demonstrate what if any advice the OA received in relation to the GST status of CMF or the GST implications of the auditor settlement;
(c)documents recording the OA’s “contact” with insurers of the auditors or knowledge of their role; and
(d)the settlement agreement reached between CMF and its auditors.
[5] Shortly prior to the hearing, the OA agreed to provide the settlement agreement to the receivers.
Relevant legal principles
[6] The receivers’ substantive application is under Part 19 of the High Court Rules. In a number of cases the Courts have acknowledged that, within the context of originating applications, discovery applications are to be approached with caution so as not to undermine the intention of Part 19 to provide a relatively speedy and inexpensive mechanism for resolving applications.1
[7] In the most recent decision Commissioner of Inland Revenue v Elementary Solutions Limited, Associate Judge Osborne helpfully reviewed the authorities, concluding that it would be inappropriate to restrict the jurisdiction only to exceptional, or what in Madsen-Ries v Fonterra Brands (New Zealand) Ltd2 Associate Judge Christiansen called, “the rarest” of cases.3 He concluded that, in respect of Part 19 proceedings:4
(a)The Court has a discretion to order discovery.
(b)The document sought must be capable of supporting the
applicant’s case or adversely affecting the opponent’s case.
(c)Any orders for discovery should be subject to the proportionality and practicality requirements identified in r 8.2 of the Rules and should accord with the objective of “just, speedy, and inexpensive determination” under r 1.2 of the Rules.
1 Madsen-Ries v Fonterra Brands (New Zealand) Ltd [2016] NZHC 1305, [2016] NZCCLR 6; Manchester Securities Ltd v Body Corporate 172108 [2015] NZCA 29; Katavich v Meltzer HC Auckland CIV-2006-404-5968.
2 Madsen-Ries v Fonterra Brands (New Zealand) Ltd [2016] NZHC 1305 at [67].
3 Commissioner of Inland Revenue v Elementary Solutions Limited [2017] NZHC 2411.
4 At [37].
(d)The approach to discovery in originating applications should be conservative.
(e)Discovery will be appropriate in marginal cases where the party makes out an outline case but the Court encounters genuine difficulty in determining, without documentary evidence which is likely to assist, whether the threshold test is satisfied.
[8] I respectfully adopt this as a helpful summary of the principles to be applied. Although discovery should be far from routine in Part 19 proceedings, each case is necessarily assessed on its own facts.
The central issues in the proceedings
[9]In my view the central issues on the current pleadings are as follows:
(a)Whether there was a qualifying mistake for the purposes of Part 2 subpart 2 of the Contract and Commercial Law Act 2017.
(b)If so whether the OA should be denied relief on account of his or his advisor’s negligence in establishing the GST status of CMF and/or assessing the GST implications of the settlement.
Discussion
[10] Against that background I now address each of the categories of documents that are sought by reference to [4] above.
Category (a)
[11] In respect of this category Mr Arthur confines himself to the OA’s internal records (which the receivers assume will be electronic) either made at the time of his appointment or subsequently updated recording the GST position of the company. In my view these are relevant to the issues referred to above for the reason that if the status is incorrectly recorded it will inform the negligence allegation. Responsibly in my view, Mr Parmenter does not oppose an order limited to such internal records. I order discovery accordingly.
Category (b)
[12] The OA opposes discovery of documents within Category (b) on the following bases:
(a)the documents are likely to be privileged and, in the context of the conservative jurisdiction which I have identified, the OA should not be put to the cost of producing a list of documents which will or may be otiose given the fact a privilege against production can be asserted.
(b)it is likely that the present proceedings will have to be adjourned pending the outcome of the OA’s opposition to the Commissioner’s assessment, that the application is therefore premature and depending on the outcome of the OA’s opposition, may again involve him in unnecessary work and expenditure.
[13] I am sympathetic to Mr Parmenter’s submission that the most efficient course may be to delay hearing of the originating application until the Commissioner’s assessment is resolved. At the moment the OA is in the position of arguing firstly that the assessment is incorrect because there was no GST liability but alternatively and in the context of these proceedings, that if there was such a liability the subsequent settlement agreement with the receivers was entered into on the basis of material mistake. If the OA is correct in his primary argument then (except possibly in relation to recovery of costs on defence of the Commissioner’s claim from the $1.75 million fund) the issues raised on the originating application will be self-resolving.
[14] However, although the parties may ultimately consider that an adjournment of the fixture is warranted (a matter in respect of which Mr Arthur is currently taking instructions), I am required to determine the application before me on the premise the matter is proceeding to trial.
[15] Mr Parmenter says the receivers already have sufficient information to be able to assert negligence and that it will be for the OA in his affidavits in opposition to advance evidence of any advice which was received and which may negative such an implication.
[16] However, at this stage the OA has not (in correspondence from his solicitors or in affidavit evidence) acknowledged either that he took (or failed) to take advice either in respect of GST status or the GST implications of the settlement.
[17] In my view documents that may disclose whether such advice was taken are sufficiently capable of supporting the applicants’ case or adversely affecting the OA’s case that they are appropriately discovered. They relate directly to whether the allegation of negligence is made out against the receivers and it is not in my view appropriate that the receivers should be reliant on such account the OA may choose to give (based on information exclusively in his power and control) about whether advice was taken.
[18] I accept that if advice was provided by solicitors or counsel there may be issues as to privilege. It may, however, be that advice was received from non-privileged sources, either internally or from the accounting profession. In any event resolution of privilege claims is potentially a matter for another day.
[19] Moreover, as Mr Nielsen acknowledges in the written submissions to which Mr Parmenter spoke, a list of documents will of itself identify as a matter of fact whether advice was sought and/or provided and to that end informs the current pleadings, even absent production of the advice itself.
[20] I also regard as relevant to the privilege point that if the liquidator’s response to the allegation of negligence is that he acted on advice, then it is inevitable that consideration will need to be given to whether privilege is waived.
[21] I accept Mr Arthur’s submission that, in terms of the expert evidence the receivers must necessarily brief on the negligence issue, it is essential to know whether such advice was sought and to the extent that it is not privileged, the advice that was given.
[22] I accept also his submission that in the context of a claim for $1.75 million the focused and limited discovery which is sought in this category is proportionate to the issues involved.
[23] Although I am mindful that my jurisdiction is conservative I am therefore satisfied that discovery is appropriately ordered in relation to documents as identified in paragraph 1.1.(b) of the application.
Category (c)
[24] This issue has been substantially resolved. In his written memorandum Mr Nielsen records (paragraph 37) that:
There is no issue that the First Respondent [OA] was aware that BDO Spicers had the benefit of insurance and that the insurers were involved in a settlement negotiation between the first respondent and BDO Spicers.
[25] There has been recent correspondence from the receivers, to which there is not as yet any response, seeking certain additional information in respect of that concession. In particular, the receivers seek confirmation that, prior to the February 2015 consent orders, the OA knew that the auditors held insurance and that the insurer was in part funding the settlement which occurred in June 2014.
[26] It is anticipated that this issue can be resolved by agreement. In the absence of such agreement I reserve leave to the receivers to apply for a telephone conference at which the appropriateness of any further discovery in this category can be reviewed and, if necessary, orders made.
Category (d)
[27] As already indicated, the settlement agreement has been provided and no further orders are required.
Costs
[28] These follow the event and are payable on a 2B basis to the receivers. In the event that quantum cannot be resolved between the parties a memorandum may be filed. I note that the receiver’s written submissions were not extensive and the overriding principle that scale costs cannot exceed actual.
[29]I record this morning’s appearance as 0.2 of a day.
Next event
[30]I list this matter for mention in the Duty Judge list for 24 May 2018 when:
(a)the receivers are to advise whether they agree an adjournment of the August 2018 fixture is appropriate; or
(b)if not, the terms of a revised timetable to trial can be settled (including
for provision of the OA’s list of documents if not prior provided).
[31]The parties are to confer with a view to a joint position if possible.
Muir J
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