Reid v Commissioner of Inland Revenue
[2013] NZHC 206
•15 February 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV2006-404-004222 [2013] NZHC 206
BETWEEN JOHN ANTHONY REID First Plaintiff
AND HUGH MILLOY
Second Plaintiff (granted leave to discontinue)
ANDMILLOY, REID, WONG & COMPANY LIMITED
Third Plaintiff
ANDCOMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 25 September 2012
Appearances: J A Reid, first plaintiff in person
Mr Arthur for second plaintiff (attendance excused) K Gould for third plaintiff
H Ebersohn and T Lamb for defendant
Judgment: 15 February 2013
(RESERVED) JUDGMENT (NO. 4) OF ANDREWS J
[Defendant’s application for order for
security for costs]
This judgment is delivered by me on 15 February 2013 at 3:00pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Solicitors: J A Reid, c/o CMW & Company Limited [email protected] Christopher Taylor, Auckland [email protected] Crown Law, Wellington [email protected]
Counsel: K F Gould, Auckland [email protected]
Copy to: Chapman Tripp, Auckland [email protected]
Meredith Connell, Auckland [email protected]
REID & ORS V COMMISSIONER OF INLAND REVENUE HC AK CIV 2006-404-004222 [15 February
2013]
Table of Contents
Introduction ............................................................................................................[1] This proceeding ......................................................................................................[5] The application for security for costs ...................................................................[15] The factual background ........................................................................................[19] The allegations of misfeasance ............................................................................[33] The tort of misfeasance in public office ...............................................................[36] The issue to be determined...................................................................................[50] The merits of the plaintiffs’ case ..........................................................................[57] Introduction ..........................................................................................................[57] Did the IRD officials act in bad faith? .................................................................[59] (i) “False loan agreements” ...........................................................................[60] (ii) “False allegations of fraudulent misrepresentation” ...................................[73] (iii) “The IRD and SFO agreed not to make records of dealings with each other” ..[82] (iv) “False Matthews file note” .........................................................................[88] (v) “Support of SFO prosecution – breach of Court summonses” .....................[97] Commissioner’s remaining submissions.............................................................[106] Should an order be made for security for costs? ................................................ [110] Result.................................................................................................................. [118]
Introduction
[1] The defendant (“the Commissioner”) has applied for an order under r 5.45 of the High Court Rules that the first and third plaintiffs (“the plaintiffs”)1 pay security for costs, and that the proceeding is stayed until such time as security has been paid. The application is made on the grounds that:
(a) It is common cause that the plaintiffs will not be able to meet an award of costs, in the event that such an award is made against them after trial;
(b) The plaintiffs have a limited (if any) prospect of succeeding at trial;
and
(c) This is a complex case which has already been protracted, in particular by the plaintiffs’ refusal to proceed with a six-week trial scheduled to begin on 12 March 2012.
[2] The Commissioner seeks an order for security in the sum of $200,000, on the basis of costs for a six-week trial on a 2C basis.
[3] The plaintiffs oppose the application on the grounds that:
(a) If security is ordered, they will be unable to pay it and thus will be prevented from continuing with the proceeding;
(b) They have a strong case against the Commissioner; and
(c) The case is not as complex as the Commissioner maintains, and will require no more than a ten-day trial.
[4] The plaintiffs contend that costs, should the Commissioner succeed at trial, will be no more than $55,000, based on 2B costs for a ten-day trial.
This proceeding
[5] The Commissioner is correct to say that this proceeding has been protracted. It was begun by a statement of claim filed by Mr Reid (first plaintiff), Mr Milloy (second plaintiff), and Milloy, Reid Wong & Co Ltd (third plaintiff, a merchant bank) on 20 July 2006. Put very briefly, the plaintiffs allege misfeasance in public office against the Commissioner and employees of the Inland Revenue Department (“the IRD”) in the course of investigations into two investment schemes promoted by the plaintiffs, and complaints of fraud made to the Serious Fraud Office (“the SFO”). The plaintiffs seek a declaration as to liability, an inquiry as to damages, and costs.
[6] The Commissioner applied for an order striking out the plaintiffs’ proceeding on the grounds that the statement of claim disclosed no reasonable cause of action, and was an abuse of process. That application was heard before me on 27 September
2006 (“the strike-out hearing”). In a judgment delivered on 19 December 2006 (“the strike-out judgment”), I dismissed the Commissioner’s application.2 The Commissioner appealed and on 13 December 2007 the appeal was dismissed.3
[7] On 3 March 2010 Associate Judge Christiansen directed that a six-week trial be allocated, but not before June 2011. His Honour also made pre-trial directions, in terms agreed between counsel for the Commissioner and the plaintiffs’ then counsel, as to filing briefs of evidence and a bundle of documents. On 8 March 2010 the proceeding was set down for trial for six weeks, beginning 12 March 2012.
[8] Since February 2011, Mr Reid has acted on his own behalf, and Mr Gould has acted for the third plaintiff.
[9] Although Associate Judge Christiansen recorded on 3 March 2010 that discovery had been completed, there have been ongoing issues concerning discovery
and claims to privilege.
2 Reid v Commissioner of Inland Revenue (2007) 23 NZTC 21,194 (HC).
3 Commissioner of Inland Revenue v Reid [2007] NZCA 576, (2008) 23 NZTC 21,783 (CA).
[10] On 17 June 2011 Mr Reid applied for orders for particular discovery to be given by the Commissioner and for non-party discovery to be given by the SFO, and for ancillary orders. The orders sought included an order that “unmasked” copies of discovered documents be provided to the Court for the determination of privilege claims. That application was heard before me on 27 July 2011. Orders on the
application were set out in my judgment given on 3 August 2011.4 Orders as to
privilege claims and “masking” were set out in my Minute of 5 August 2011.
[11] At a case management conference before me on 18 November 2011 Mr Ebersohn, for the Commissioner, advised that none of the plaintiffs had provided briefs of evidence, which had been due on 28 October 2011, and that the plaintiffs had given no indication as to when briefs of evidence could be expected. Although Mr Ebersohn then proposed an amended timetable, which would have allowed the trial to begin on 12 March 2012 as scheduled, Mr Reid advised that he could not have a brief of evidence ready in time for trial, there was no prospect of the plaintiffs being ready for trial by March 2012, and he would not, in any event, be in a position to meet the daily Court hearing fees. Mr Gould confirmed that the position was the same for the third plaintiff. The trial fixture was therefore vacated. A replacement trial fixture as not been allocated.
[12] On 29 March 2012 I ordered the plaintiffs to pay the Commissioner $15,000 for “wasted costs” as a result of the trial being vacated. I am advised that Mr Reid has paid those costs.
[13] On 4 May 2012 Mr Reid filed an amended statement of claim which, while making the same allegations of misfeasance, includes detailed particulars of the alleged acts of misfeasance, including extracts from letters, emails, file notes, and other documents. Filed with the amended statement of claim was an 81-page schedule of further particulars.
[14] The Commissioner has not as yet filed a statement of defence to the amended statement of claim, opting to await the outcome of the application for security for costs.
The application for security for costs
[15] The Commissioner’s application for security for costs was made on 22 June
2012. It is supported by substantial affidavits sworn by:
(a) Mr M T Lennard, formerly Director of Litigation, IRD;
(b) Mr J L Matthews, investigations manager, Assurance, IRD; (c) Mr P T Gallagher, investigator, Assurance, IRD;
(d) Ms P Edwards, tax investigator, IRD; and
(e) Ms P A Eaton, investigation team leader, Assurance, IRD.
[16] Reply affidavits were sworn by Mr Matthews, Mr Gallagher, and Ms
Edwards.
[17] Mr Reid filed a notice of opposition to the application on 16 July 2012. Apart from a substantial affidavit sworn by himself, the opposition is supported by an affidavit sworn by Mr K B Dobson, an accountant.
[18] Both Mr Ebersohn and Mr Reid filed lengthy written submissions, together with a briefer written summary. Both also made oral submissions. Mr Gould made brief submissions for the third plaintiff, supporting Mr Reid’s submissions.
The factual background
[19] The IRD investigations concerned schemes for investment in two companies, Digi-Tech Ltd (“Digi-Tech”) and New Zealand Investments Ltd (“NZIL”). The structure of each scheme was not in dispute. The Digi-Tech scheme was first in
time. The third plaintiff had acquired a 50 per cent interest in Digi-Tech in 1991, for
$250,000. Mr Reid and Mr Milloy were directors of Digi-Tech.
[20] In 1995 and 1996 agreements were entered into to sell 75 million $1 shares in Digi-Tech, with payment deferred over a ten year period. Investors were, in the main, introduced by a firm of accountants, Gosling Chapman. Where an investor purchased one million shares (which was most commonly the case) the investor was required to pay an initial deposit of $95,000 on signing the purchase agreement, then annual payments of $10,000, with a final payment of $835,000 payable on 31 March
2005.
[21] All but one of the investors took up an offer of a loss of profits insurance policy. If the shares could not be sold for at least $3 a share after completion of payment, a claim could be made under the policy. The insurance premium was
$1,000,000 for one million shares. Investors paid for the insurance by way of a cash payment of $40,000 and a non-recourse loan of $960,000 repayable, with interest, in year ten. The final amount payable in year ten on a $960,000 loan was $2.8 million.
[22] In each case the investor was a $100 loss attributing qualifying company,
(“LAQC”) incorporated by the individual investing.
[23] A claim could only be made on the insurance policy after the investor had completed the purchase of the shares, and after the shares had then been resold for less than $3 a share. However, the share purchase could only be completed by repaying the insurance premium loan. Accordingly, before an investor holding one million shares could claim $3,000,000 on the insurance policy, the investor had to repay the loan of $2.8 million, and complete the final payment of $835,000 to purchase the shares, a total outlay of $3.65 million, excluding the initial payments for the shares and insurance, and the annual instalments on the share purchase price.
[24] However, investors saw a considerable tax advantage in the scheme, in that the shareholder of the LAQC which had purchased one million shares would have incurred expenditure of $135,000 ($95,000 for shares and $40,000 for insurance), but could offset against that the loss incurred by the LAQC, which could claim a
deduction for the entire insurance premium of $1,000,000, that loss being attributed to the shareholder. At the then prevailing tax rate (33 per cent) the shareholder’s tax benefit or saving would be $330,000 for a payment of $135,000.
[25] The NZIL scheme was established in 1997, and purchases of shares were made between March 1997 and March 1998. In all material respects, the structure was the same as that for Digi-Tech.
[26] In both schemes, the insurer was based off-shore, as was the insurance premium lender. For Digi-Tech, the insurer was Epicharmus Vastgoed BV (“Epicharmus”), and for NZIL the insurer was Euro Indemnity BV (“Euro Indemnity”), which was wholly owned by Epicharmus. Epicharmus is based in the Netherlands. For Digi-Tech, loan agreements for the insurance premium were entered into (for tranches 1-3 of the scheme) with the Bank of New York Inter Maritime Branch Geneva (“BNYIMBG”), or (for tranches 4 and 5) Armour Fidelity Ltd (“Armour Fidelity”). All loan agreements in the NZIL scheme were with Armour Fidelity. The registered office of Armour Fidelity is in the Bahamas, and its director and shareholder are resident in the British Virgin Islands.
[27] IRD officers began an investigation into the Digi-Tech scheme in about 1998. The investigation was later extended to the NZIL scheme. The investigation involved the collection and examination of documentary evidence, and interviews with Mr Reid, together with many others. A considerable number of IRD officers were involved in the investigations, including all who swore affidavits in support of the Commissioner’s application for security for costs.
[28] In July and August 2000, the Commissioner issued Statements of Position, under s 89M of the Tax Administration Act 1994 to investors in Digi-Tech in relation to tax disputes with those investors. In March 2002, the Commissioner issued Notices of Proposed Adjustment to investors in NZIL who had not conceded their positions as to liability.
[29] On 11 November 2000 Mr Lennard, then director of litigation at IRD, referred the Digi-Tech transaction to the SFO for investigation, pursuant to s 81(4)(c)
of the Tax Administration Act, on the grounds that he suspected that offences had been committed under the Crimes Act 1961 in relation to tax imposed or payable, and that an effective investigation of suspected serious offending against IRD was necessary to promote the integrity of the tax system. Around 24 August 2001, Mr Lennard referred the NZIL scheme to the SFO.
[30] The SFO began its own investigation, leading to charges being laid against Mr Reid and three others in March 2002. The accused were charged on two counts in an indictment relating, respectively, to Digi-Tech and NZIL. Each count charged that the accused “... conspired by deceit, falsehood and other fraudulent means to defraud both members of the public investing through a loss attributing qualifying company and the Commissioner of Inland Revenue in relation to an investment in [Digi-Tech or NZIL].”
[31] The charges were heard before Fogarty J in the High Court at Auckland in a five-week trial (“the fraud trial”) during September and October 2004, at the conclusion of which all four accused were acquitted. His Honour found that the prosecution had failed to prove a dishonest agreement by two or more of the accused to defraud investors in the Digi-Tech and NZIL schemes.
[32] His Honour’s reasons were set out in a judgment delivered on 22 October
2004 (“the fraud trial judgment”).5 As noted at [200] – [204] of his Honour’s judgment, the trial was run entirely on the basis of an allegation of fraud against the investors, not a conspiracy to deceive the Commissioner. The prosecution had not called any evidence from IRD. While not being satisfied that there had been fraud against the investors, his Honour was in no doubt that the Digi-Tech scheme was designed to reduce the incidence of tax otherwise to be paid by the shareholders of
the LAQC, and was tax avoidance.6
5 R v Connolly (2004) 21 NZTC 18,844 (HC).
6 At [143].
[33] The allegations of misfeasance are set out at paragraphs 175 to 178 of the amended statement of claim, and are as follows:
175 The defendant and his employees are public officers.
176The actions of the defendant and his employees pleaded above were a purported exercise of their public powers.
177The defendant and his employees exercised these powers for an improper motive, with intent to injure the plaintiffs. The defendant’s motivation was to illegitimately encourage investors to concede their tax disputes and to deter promoters in comparable investment schemes. As particularised above, the defendant and his employees made accusations against the first and third plaintiffs and initiated and supported a criminal prosecution of the first plaintiff knowing that these were unjustified or being recklessly indifferent as to whether they were justified out of a desire to achieve these objectives.
Particulars: See attached schedule.
178This misfeasance by the defendant and his employees caused damage to the first plaintiff.
[34] The particulars to the amended statement of claim, at [61], state that the Commissioner intended to injure Mr Reid by subjecting him to accusations, initiating and supporting a criminal investigation and prosecution, and by withholding documents relevant to his defence. The accusations against Mr Reid are particularised as including:
(a) Casting doubt on the authenticity of a sworn statement submitted by
Epicharmus;
(b)Statements made in the Statement of Position that were false, including statements regarding the BNYIMBG loans, payment of insurance premiums and interest on the loans, Epicharmus, and underwriting of the insurance;
(c) Statements made in Mr Lennard’s complaints to the SFO that were
false, including statements regarding implementation of the schemes,
the ability of the schemes to deliver tax benefits, the payment of insurance premiums, and the ability of the insurer to meet claims;
(d)Statements made by Mr Matthews in a letter to Mr G Clews (a barrister instructed by Gosling Chapman), and in a file note of a telephone discussion with Mr Reid; and
(e) A statement by Mr Lennard that the summary of facts prepared by the SFO in relation to the Digi-Tech transaction was correct in all material respects, including a statement that Mr Reid had deceived investors by concealing the inter-related and circular nature of the Digi-Tech scheme from investors, was correct.
[35] Mr Reid summarised the plaintiffs’ claim as being that the Commissioner (through his officers) used “illegitimate means to achieve the objective of protecting the integrity of the tax system”. He submitted that the illegitimate means included:
(a) the creation of false loan agreements;
(b) the making of false allegations of fraudulent misrepresentation;
(c) reaching agreement with the SFO to not make records of their dealings;
(d) the creation of a false file note purporting to record admissions by Mr
Reid when no such admissions were made; and
(e) the ongoing support of the criminal prosecution by withholding relevant discoverable documents in breach of Court orders.
[36] To succeed in a claim of misfeasance in public office a plaintiff must prove, on the balance of probabilities, that: 7
(a) The defendant is a public officer;
(b)The defendant was purporting to exercise powers conferred on him or her for the benefit of the public or a section of the public;
(c) The defendant either –
(i)acted for an ulterior or improper motive, with intent to injure another (described as “targeted malice”) or
(ii)knew that he or she was acting outside the power conferred, or was recklessly indifferent thereto, and that this was likely to injure the plaintiff (described as “non-targeted malice”); and
(d) this caused damage to the plaintiff.
[37] In Garrett v Attorney-General the Court of Appeal said:8
The plaintiff, in our view, must prove that the official had an actual appreciation of the consequences for the plaintiff, or people in the general position of the plaintiff, of the disregard of duty or that the official was recklessly indifferent to the consequences and can thus be taken to have been content for them to happen as they would. The tort has at its base conscious disregard for the interests of those who will be affected by official decision making. There must be an actual or, in the case of recklessness, presumed intent to transgress the limits of power even though it will follow that a person or persons will be likely to be harmed.
...
7 See Rawlinson v Rice [1997] 2 NZLR 651 (CA); Garrett v Attorney-General [1997] 2 NZLR
332 (CA) at 344; Three Rivers District Council v Governor & Company of the Bank of England
(No 3) [2003] 2 AC 1 (HL) at 191 (per Lord Steyn); and Hobson v Attorney-General [2007] 1NZLR 374 (CA) at [88] – [91] (per Hammond J) and [131] (per William Young P).
8 Garrett v Attorney-General, above n 7, at 349–351.
The common law has long set its face against any general principle that invalid administrative action by itself gives rise to a cause of action in damages by those who have suffered loss as a consequence of that action. There must be something more. And in the case of misfeasance of public office that something more, it seems to us, must relate to the individual who is bringing the action. While the cases have made it clear that the malice need not be targeted there must, as we have said, be a conscious disregard for the interests of those who will be affected by the making of the particular decision.
[38] In Three Rivers District Council v Governor & Company of the Bank of England (No 3), the House of Lords approved of the Court of Appeal’s judgment in Garrett. Lord Steyn commented:9
The case law reveals two different forms of liability for misfeasance in public office. First, there is the case of targeted malice by a public officer, ie conduct specifically intended to injure a person or persons. This type of case involves bad faith in the sense of the exercise of public power for an improper or ulterior motive. The second form is where a public officer acts knowing that he has no power to do the act complained of and that the act will probably injure the plaintiff. It involves bad faith inasmuch as the public officer does not have an honest belief that his act is lawful. ...
These decisions laid the foundation of the modern tort; they established the two different forms of liability; and revealed the unifying element of conduct amounting to an abuse of power accompanied by subjective bad faith.
[39] In the same case, Lord Hutton said:10
My Lords, I consider that dishonesty is a necessary ingredient of the tort, and it is clear from the authorities that in this context dishonesty means acting n bad faith. In some cases the term “dishonesty” is not used and the term “in bad faith”, or acting from “a corrupt motive”, or “an improper motive” is used, or the term “in bad faith” is used together with the term “dishonesty”.
...
But whether the public officer is sued in respect of an act or an omission, it must be a deliberate one involving an actual decision and liability will not arise from injury suffered by mere inadvertence or oversight.
[40] Lord Millett said:11
The tort is an intentional tort which can be committed only by a public official. From this two things follow. First, the tort cannot be committed negligently or inadvertently. Secondly, the core concept is abuse of power. This in turn involves other concepts, such as dishonesty, bad faith, and improper purpose. These expressions are often used interchangeably; in
9 Three Rivers, above n 7, at 191.
10 At 227.
11 At 235.
some contexts one will be more appropriate, in other contexts another. They are all subjective states of mind.
[41] Lord Millett also expressed the view that the two “limbs” of the tort of
misfeasance:12
... are merely different ways in which the necessary element of intention is established. In the first limb [targeted malice, acting with intent to harm the plaintiff], it is established by evidence; in the second [acting without that intention, but in the knowledge that in the knowledge that conduct will harm the plaintiff] by inference.
[42] As William Young P observed in Hobson,13 the Three Rivers analysis is well settled in the New Zealand jurisdiction.
[43] At the strike-out hearing the plaintiffs’ counsel advised that the plaintiffs’ pleading of misfeasance is of “targeted malice”. Mr Reid confirmed this at the hearing of the application for security for costs.
[44] In the strike-out judgment I considered a submission for the Commissioner that the plaintiffs’ claim could not possibly succeed, for the reason that all the actions referred to were those of employees of, or contractors to, the IRD. It was submitted that the Commissioner could not be held vicariously liable for those persons’ actions because they were employed by the Crown, not the Commissioner. That submission was responded to by counsel for the plaintiffs by contending that all the actions referred to were done on behalf of the Commissioner, so no question of vicarious liability arose. The plaintiffs sought to hold the Commissioner liable for his own acts or omissions, committed by other persons. It was not suggested that this submission was based on agency principles, which are of limited application in the law of tort, and no authority was cited. I concluded that I could not exclude, in a strike-out application, the possibility of the plaintiffs’ succeeding in arguing that the Commissioner could be held directly liable for the actions of others, carried out in
his name.14
12 At 235.
13 Hobson v Attorney-General, above n 7, at [132].
14 Reid v Commissioner of Inland Revenue, above n 2, at [20]–[31].
[45] The submission that the Commissioner could not be vicariously liable for acts of employees was repeated in Mr Ebersohn’s submissions for the Commissioner in the present application. He submitted that under s 6(1)(a) of the Crown Proceedings Act 1950 liability for a tort in respect of an act or omission of a servant or agent of the Crown shall not lie unless that act or omission would have given rise to a cause of action against the servant or agent. Mr Reid submitted that “the Commissioner is directly or vicariously liable for the relevant acts”.
[46] The point was not further traversed in oral submissions. For present purposes I accept (without deciding the point) that the Commissioner could be held liable. However as, in this proceeding, the plaintiffs allege “multiple acts by multiple actors” (as Mr Ebersohn put it), I accept Mr Ebersohn’s submission that the plaintiffs will have to prove that each “actor”, individually, had the specific intention of causing injury.
[47] Referring, then, to the elements of the tort of misfeasance in public office, as set out above, the plaintiffs (in effect, Mr Reid) will have to prove on the balance of probabilities that:
(a) Each of the persons whose acts are complained of was a “public officer” either directly or by delegation;
(c) Each of those persons was purporting to exercise the powers conferred on him or her for the benefit of the public or a section of the public; and
(d)Each of those persons acted in bad faith (that is, dishonestly, or with a corrupt motive) with the specific intention of injuring Mr Reid and Milloy, Reid, Wong.
[48] As noted by Lord Millett in Three Rivers, the third element of intention is considered subjectively, not objectively, and must be proved by evidence as to the
individual actor’s intention.15
15 Three Rivers, above n 7, at 236.
[49] Further, the plaintiffs will have to prove on the balance of probabilities that each of the steps taken by each person, either individually or in combination, caused the alleged loss to the plaintiffs.
The issue to be determined
[50] Rule 5.45 of the High Court Rules gives a Judge power to order a plaintiff to give security for costs. As relevant to the present application, r 5.45 provides:
5.45 Order for security of costs
(1) Subclause (2) applies if a Judge is satisfied on the application of a defendant,—
...
(b) that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is
unsuccessful in the plantiff’s proceeding.
(2) A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
...
[51] As noted earlier there is, in the present case, no dispute as to whether the plaintiffs will be able to meet an award of costs, should they not succeed at trial. One of the plaintiffs’ grounds for opposing the Commissioner’s application for an order for security was that they would not be able to comply with an order to give security. At a case management conference on 9 May 2012, Mr Reid submitted that the application for security for costs would be heard on the assumption that the plaintiffs would not likely be able to meet an award of costs, should the Commissioner succeed at trial. No submission to the contrary was made at the hearing.
[52] The issue for determination is, therefore, whether “it is just in all the circumstances” to order the plaintiffs to give security for costs. This requires the exercise of a discretion. As the Court of Appeal said in AS McLachlan Ltd v MEL Network Ltd (in relation to the previous formulation of r 5.45):16
[13] Rule 60(1)(b) High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to
16 AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13]–[16].
believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.
[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a checklist of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation particularly where it is over-complicated and unnecessarily protracted.
[53] The “careful assessment of the circumstances” clearly involves some assessment of the merits of the plaintiffs’ case. I have been assigned to be the trial Judge in this case. In its judgment in Ambrose v Pickard, the Court of Appeal held that the High Court Judge’s decision to decline to assess the merits of the case, on the ground that he was to be the trial Judge, was wrong.17 The Court said that the defendant’s entitlement “to a proper assessment of an application for security cannot depend on whether the judge hearing the application is also to be the trial judge”.18
The Court went on to say that as the High Court Judge had not undertaken such an assessment, it was required to do so.19
[54] For both the Commissioner and the plaintiffs, the evidence (affidavits and documentary exhibits) and submissions focused on the merits of the plaintiffs’ case.
17 Ambrose v Pickard [2009] NZCA 502.
18 At [32].
19 Ibid.
[55] Before turning to the merits of the plaintiffs’ case, it is necessary to observe that the assessment is different from that which is undertaken when considering an application to strike out a proceeding or cause of action. An application to strike out proceeds on the assumption that the facts pleaded in the statement of claim are true, whether or not they are admitted, and a proceeding or cause of action will be struck out only if it is so untenable that it cannot possibly succeed. The jurisdiction is to be exercised sparingly and only in a clear case.
[56] However, when considering an application for security for costs, there is no such assumption as to the truth of the allegations. The circumstances of the case, and the plaintiff’s chance of success, are assessed, and the interests of the defendant are weighed. On this point, I note that Mr Reid appeared to rely on certain comments concerning the alleged facts in the strike-out judgment, and the Court of Appeal’s judgment on the Commissioner’s appeal against that judgment. Any such reliance for the purposes of the application for security for costs would be misplaced.
The merits of the plaintiffs’ case
Introduction
[57] The Commissioner’s submission on the merits of the plaintiffs’ case may be summarised as being that the plaintiffs have little chance of succeeding, for the following reasons:
(a) The plaintiffs cannot prove (and it is very unlikely to be the case) that all (or any) of the IRD officials whose actions are complained of acted in bad faith and unlawfully.
(b) The actions of the IRD officials were reasonable.
(c) Mr Lennard’s actions in referring the Digi-Tech and NZIL schemes to the SFO for investigation were reasonable.
(d)The plaintiffs (in particular, Mr Reid in his submissions) rely on a variety of secondary documents, which have emanated from a lengthy and complex investigation, and which may or may not have expressed views shared by other officials, or even be consistent with that official’s views at a different stage of the investigation.
(e) The plaintiffs cannot establish that actions by the IRD officials were causative of any of the claimed losses, as those losses were caused by the plaintiffs’ creation and promotion of a “crude tax avoidance arrangement” (in Mr Ebersohn’s words), and by the creation of false correspondence in order to create the appearance of “commerciality” in the arrangement.
(f) Many of the actions complained of by the plaintiffs can have no causative link to the claimed losses. For example, a file note made by Mr Matthews and alleged to be false could not be causative of any loss, as Mr Matthews was not called by the SFO to give evidence at the fraud trial. Further, any alleged failure to disclose documents could not be causative of any loss, given that Mr Reid was acquitted on the charges brought by the SFO.
[58] I now turn to discuss these submissions, and Mr Reid’s responses.
Did the IRD officials act in bad faith?
[59] Mr Reid submitted that the IRD officials used illegitimate means (acted in bad faith/dishonestly) to pursue the legitimate objective of protecting the integrity of the tax system.20 Mr Reid submitted that the Commissioner’s “bad faith” was demonstrated in a meeting on 11 May 2000, in which it was suggested that the IRD should focus on “cleaning out the promoters” of tax schemes. Mr Reid relied on five
alleged acts, any of which, he submitted, supported a finding of misfeasance.
20 Section 6 of the Tax Administration Act 1994 provides that “... every officer ... having responsibilities ... in relation to the collection of taxes ... [is] at all times to use their best endeavours to protect the integrity of the tax system.
(i) “False loan agreements”
[60] The plaintiffs allege that an IRD official, Ms Edwards, created two false loan agreements and sent them to BNYIMBG for perusal and comment. They further allege that Ms Edwards created a third false loan agreement, which was retained on IRD files. The plaintiffs allege that, in reliance on the bank’s response, IRD officials asserted that the loans and associated insurance transactions had not taken place.
[61] Ms Edwards’ affidavit evidence was that the loan documents in the Digi-Tech scheme were identical, whether the lender was named as BNYIMBG or Armour Fidelity, except that for the Armour Fidelity loans, the name of BNYIMBG as lender was crossed out and the words “Armour Fidelity Ltd” stamped or handwritten on top.
[62] Because of that similarity, Ms Edwards wrote to BNYIMBG on 20 October
1999, asking the bank to peruse a loan agreement and advise, among other things, whether the loan had been made by the bank in Geneva, or by a branch of the bank in Hong Kong, and what relationship, if any, there was between BNYIMBG and Armour Fidelity. Ms Edwards’ evidence is that she intended to enclose a copy of a loan agreement in which the name of BNYIMBG (as lender) on the cover page had been crossed out, and “Armour Fidelity Ltd” handwritten above it. In addition, at certain points in the agreement itself, references to BNYIMBG had been crossed out and replaced with references to Armour Fidelity. However, other references to BNYIMBG had been left unchanged.
[63] Ms Edwards’ evidence is that instead of attaching the correct cover page for the loan agreement, she attached the cover page for another loan agreement completed by the same LAQC investor for a previous loan. On that cover page, the name of BNYIMBG remained unaltered, although the amendments in the body of the loan agreement remained. The bank responded on 22 November 1999 that it did not recognise the document as having been issued by it.
[64] Ms Edwards also says that the copy of the agreement she retained on her file as having been sent to BNYIMBG was a copy of the Armour Fidelity loan agreement with the LAQC investor, with the correct cover page.
[65] Ms Edwards denies that she deliberately inserted the wrong cover page, for the purpose of obtaining BNYIMBG’s denial that it had participated as a lender in the Digi-Tech scheme. She says she does not know how the incorrect cover page became attached to the loan agreement sent to the bank. She speculates that the cover pages became confused in the process of copying and masking documents.
[66] Ms Edwards further says that she wrote to BNYIMBG again on 3 December
1999, pointing out that the loan agreement forwarded with her earlier letter had had certain names deleted and others inserted in their place. Ms Edwards’ evidence is that she made another error in respect of a loan agreement enclosed with this letter, in that a cover sheet (dated “13 March 1995”) for one LAQC investor was attached to a loan agreement (dated “10 March 1995”) for a different LAQC investor. On this occasion, the bank responded on 8 December 1999 that it would contravene their laws to respond further.
[67] Again, Ms Edwards is unable to explain how the wrong cover page was attached, but speculates that the loan agreement documents were already mixed up on the files, and she merely copied a “mixed-up” document.
[68] Ms Edwards goes on her evidence to say that she was never able to complete her inquiries of BNYIMBG as to its involvement as lender, and relationship with Armour Fidelity, as investors declined to provide the necessary authorisations.
[69] Ms Edwards further says that she did not learn that she had attached the wrong cover page onto the loan agreement sent to BNYIMBG on 20 October 1999 until May 2003. At that time she took over matters handled by her team leader, following his death. She found a complaint about the correspondence with BNYIMBG, then wrote to the bank asking it to verify what documents had been sent to it. The bank responded on 21 May 2003, attaching a copy of what had been sent. Ms Edwards says this was she first became aware of the mistake.
[70] Mr Reid was highly sceptical of Ms Edwards’ evidence. He submitted that the chances of two separate independent and innocent mistakes occurring in communications with BNYIMBG (a party of real significance to the investigation), six weeks apart, “must be infinitesimal”. He also submitted that Ms Edwards is wrong to say she was not aware of her “mistake” until May 2003, and that the IRD “must have known” that the loan agreements Ms Edwards send to BNYIMBG on 20
October and 3 December 1999 were false.
[71] I am conscious that Ms Edwards has not been cross-examined on her evidence. Nevertheless, her evidence that it was not until May 2003 that she became aware of having attached the wrong cover page to the loan agreement sent on 20
October 1999 is supported by the bank’s response to her letter sent at that time.
[72] The requirement for the plaintiffs to prove subjective bad faith/dishonesty must be kept in mind. On my assessment of the evidence at this stage, including Mr Reid’s evidence on the point, I consider that the plaintiffs would struggle to prove, on the balance of probabilities, bad faith/dishonesty on the part of Ms Edwards. I further consider that the plaintiffs would struggle to prove bad faith/dishonesty on the part of any other IRD officials in relation to the correspondence with BNYIMBG. I conclude that the plaintiffs have no more than a slight chance of succeeding in proving misfeasance in this regard.
(ii) “False allegations of fraudulent misrepresentation”
[73] The plaintiffs allege that the Commissioner made false allegations of fraudulent misrepresentation when referring the Digi-Tech and NZIL schemes to the SFO. Both complaints were signed by Mr Lennard, but Mr Reid submitted that at least five IRD officials were involved in drafting one or both complaints. He submitted that the key false allegation in referring the Digi-Tech scheme to the SFO was to say:
I refer this transaction to you, under delegated authority, because in a vital respect the scheme was not implemented in the way in which it was represented to the investors that it would be and had been implemented. This was that a series of transactions (a loan, the proceeds of which was to pay an insurance premium, which in turn was to be deposited on trust)
simply did not take place. An elaborate system of side transactions was used to give the false impression to investors that loans had been drawn down on their behalf.
[74] The plaintiffs allege that the same false allegation was made in the referral of the NZIL scheme.
[75] Mr Reid submitted that Mr Lennard would have known that his allegation that Mr Reid had made false representations was false, having attended at a meeting with Mr Reid in May 2000 at which the insurance was discussed, on the basis of statements made by Mr Reid at that meeting. He further submitted that the Commissioner had no evidence to support the allegations of fraudulent misrepresentation, and that making such false allegations, knowing they were false (or being recklessly indifferent) amounts to misfeasance.
[76] Mr Ebersohn submitted that Mr Lennard’s statements were reasonable. He submitted that a referral to the SFO is passing on suspicions, not guaranteeing the correctness of the statement: it is merely saying that in the complainant’s opinion the matter is worth investigating.
[77] Mr Lennard’s affidavit evidence is that when he referred the Digi-Tech scheme to the SFO he considered, on the basis of all the information that he and the IRD were aware of, that the scheme had not been implemented in the manner in which it was disclosed in the documents, in that no loan had been drawn down, investors’ funds had been misappropriated, the insurer had not been paid in a meaningful way, and the trust (in which insurance premiums were to have been deposited) held nothing of value. He considered that an elaborate system of side transactions had been used to create a false impression to investors that loans had been drawn down, and that there might have been, as a result, a fraud on the revenue. Mr Lennard’s evidence is that he acted on proper grounds and in good faith in referring the Digi-Tech scheme to the SFO.
[78] Mr Lennard then expands on his grounds for referring the scheme to the SFO, by pointing to a number of factors, including conflicting correspondence as to the involvement of the insurer, the “crude” substitution of Armour Fidelity for
BNYIMBG in loan documents, evidence that Armour Fidelity was a shell company controlled by an associate of Mr Reid, and the existence of circular funding mechanisms. Mr Lennard further notes that the SFO conducted its own investigation.
[79] Mr Ebersohn submitted that a fraud investigation by the SFO was inevitable, given Mr Reid’s own conduct. He submitted that a referral is not a direction to the SFO to prosecute, as the SFO conducts its own investigation. Mr Reid had the opportunity to make his own submissions to the SFO concerning the referrals. Mr Ebersohn further submitted that the investors had also laid a complaint against Mr Reid, and that it was the SFO who decided on the charges and ran the prosecution.
[80] Again, I am conscious that the plaintiffs’ case is to be assessed on the evidence in its present state, in the absence of cross-examination. However, the plaintiffs’ case can only be described as weak. The following comments of Fogarty J in his judgment after the fraud trial are persuasive:21
[143] Looking at the insurance policy loan agreement, mortgage etc as being the overt acts by which the DigiTech scheme was implemented, including the provision for the purpose trust, one can be left in no doubt that the insurance policy made no commercial sense but was there in order to generate an “expenditure” to satisfy section 104 and thereby to reduce the incidence of the tax otherwise to be paid by the shareholders of the LAQC. In short applying the Newton predication test the scheme was avoidance whether or not there was a real loan or a real insurance premium.
[174] In the background behind the correspondence between Reid and McGrath [a partner of Gosling Chapman] there were letters written between Connolly [a businessman resident in London] and Reid. These letters purported to be Mr Reid passing on Mr McGrath’s queries to Mr Connolly and receiving Mr Connolly’s replies and then forwarding them on by way of [a Milloy Reid Wong] letter to Gosling Chapman. Mr Connolly and Mr Reid both said in their voluntary interviews to the SFO that this correspondence was essentially a façade. All the letters that Mr Connolly wrote were dictated to him or the gist of them given to him in advance by either Mr Reid, Mr Currie [a solicitor in Hong Kong] or perhaps Mr Darvell [a barrister in New Zealand]. Mr Connolly spoke to nobody else and knew only as much about the structure as these gentlemen told him. I accept those statements are true. Mr Reid said that he had been advised by Mr Darvell to introduce Mr Connolly as an apparent intermediary in order to make it more difficult for investors
21 R v Connolly, above n 5, at [143], [174]-[175], and [180].
to sue Mr Reid if anything went wrong. This correspondence stayed on the [Milloy Reid Wong] files, and was not passed directly over to Gosling Chapman, though Gosling Chapman was informed that there was this other party.
[175] I am satisfied that this façade of correspondence was written either as a pre-emptive paper trail to protect Mr Reid from any future claim by investors (as claimed) or to mislead the Commissioner of Inland Revenue. ... But in this context, I am satisfied that there is more than a reasonable doubt and it was essentially not proved that these letters were written to deceive the investors into entering into the scheme.
[180] For anyone with any knowledge of tax avoidance schemes all of this behaviour has one obvious reason. It is to disguise from the Inland Revenue Department the fact that the parties had entered into the arrangement for the purpose of avoiding tax. ...
[81] On the present state of the evidence, I conclude that the plaintiffs have little chance of succeeding in an allegation that Mr Lennard, or any other IRD official, acted in bad faith or dishonestly in referring the Digi-Tech and NZIL schemes to the SFO for investigation, and that an allegation of misfeasance has little chance of succeeding.
(iii) “The IRD and SFO agreed not to make records of dealings with each other”
[82] The plaintiffs allege that, at a meeting on 21 December 2000, it was agreed between the SFO and IRD that no records were to be made of meetings or telephone discussions between them. They further allege that this agreement was intended to prevent Mr Reid from obtaining information on discovery that might assist him. Mr Reid submitted that the agreement was contrary to the IRD’s normal operating procedures, and that the deliberate agreement not to take notes was an attempt to pervert the course of justice, and is sufficient to support a finding of misfeasance.
[83] Mr J L Matthews of IRD addresses this allegation in his affidavit evidence. His evidence is that at the meeting referred to, the then Deputy Director of the SFO made it clear to all IRD officers present that the SFO did not want staff to list all their thought processes concerning the fraud investigation while that investigation was ongoing, and that the only matters that needed to be recorded were action points for IRD officers. Mr Matthews’ evidence is that he had no reason to doubt the
instruction, so did not take notes of that meeting. (He did, however, take notes of meetings he attended on 21 January and 10 November 2001.)
[84] Further, Mr Matthews’ evidence is that Mr Reid is not correct in asserting that an agreement not to take notes was outside IRD normal operating procedures, or that the intention of the instruction was to deny Mr Reid his legal right to information and documents after the investigation was completed.
[85] Mr Lennard also addressed this allegation, in an affidavit sworn in relation to an application by Mr Reid for discovery of documents relating to the meetings between IRD and SFO. His evidence was that the SFO’s instruction to not take notes accorded with his own views, and his general practice in such meetings.
[86] Mr Ebersohn submitted that there is no substance to the plaintiffs’ allegation of misfeasance on this point. First, he submitted that IRD policy requires records of meetings with taxpayers, which are going to be used in Court proceedings, but does not require notes of strategy discussions either within the IRD or with another investigating agency. Secondly, he submitted that meetings between IRD and SFO officials had no evidential significance. What IRD staff said or thought was not admissible as evidence in the fraud trial. They had no personal knowledge of the Digi-Tech or NZIL transactions, they did not create any of the documents, and their interpretation of them would not be relevant in any criminal proceedings.
[87] With the same caveat as to the present state of the evidence, as earlier expressed, my assessment of the evidence leads me to accept Mr Ebersohn’s submissions. I conclude that the plaintiffs have little chance of succeeding in an allegation that the agreement to record only action points arising out of meetings between IRD and SFO officials was an attempt to pervert the course of justice, or made in bad faith, or dishonestly, and is misfeasance.
(iv) “False Matthews file note”
[88] The plaintiffs allege that Mr Matthews created a false file note of a discussion with Mr Reid on 13 December 2001. It is alleged that the file note records Mr Reid agreeing, or acknowledging knowing, that:
(a) the Digi-Tech and NZIL transactions were circular funding arrangements;
(b) the off shore insurer, re-insurer, and lender were all linked;
(c) the insurance company re-insured with “Swiss Underwriters Group
Ltd” which was linked to the finance company;
(d)Gosling Chapman were aware of the above matters before any of their clients invested in the scheme; and
(e) the matters set out at (a) to (c) would invalidate the investors’ claims
for tax deductions;
despite Mr Matthews knowing that Mr Reid had expressed no such agreement or acknowledgement.
[89] The plaintiffs also allege that, following receipt of Mr Reid’s own file note of the meeting, which was in conflicting terms, Mr Matthews and Mr Lennard agreed to create a false evidence trail that would falsely show that Mr Matthews first saw Mr Reid’s file note on 29 January 2002.
[90] Mr Matthews denies the allegations. His evidence is that he made a handwritten note on the date of the conversation, which was his recollection of the main points discussed. The handwritten note was then converted to a typed document. Mr Matthews annexes to his affidavit, as exhibits, copies of both his handwritten and typed file notes. They are both dated 13 December 2001.
[91] Mr Matthews further says that on 29 January 2002, Mr Lennard asked him to comment on the file note Mr Reid had made of the discussion. Mr Reid’s file note had been provided by him to the SFO, who then provided it to Mr Lennard. Mr Lennard asked Mr Reid to comment as to the accuracy of Mr Reid’s note. Mr Matthews began drafting a response. The response was never completed, and was not provided to either Mr Lennard or the SFO. Mr Matthews annexes a copy of the incomplete document as an exhibit to his affidavit. Mr Matthews also says that he was never approached by the SFO to explain his file note of 13 December 2001, nor was he briefed or called by the SFO to give evidence at the fraud trial.
[92] Mr Reid submitted that the significance of Mr Matthews’ file note lay in the fact that it was able to be used to support an allegation that he had knowingly made misrepresentations to investors about the tax effectiveness of the Digi-Tech and NZIL schemes, in a conspiracy involving a Gosling Chapman partner. He submitted that when he was arrested by the SFO on 12 March 2002, he was provided with a summary of alleged facts which closely matched the alleged admissions as recorded by Mr Matthews, and the file note was the only document that could support the Serious Fraud Office’s allegations as to circularity and inter-relatedness of parties.
[93] Mr Ebersohn submitted that Mr Matthews’ file note was completely irrelevant to any action taken by the IRD or SFO. He submitted that it formed no part of the Commissioner’s statement of position, and was not relied on by the SFO in the fraud trial. Mr Matthews’ and Mr Reid’s file notes were simply two different perceptions of the telephone discussion.
[94] The plaintiffs’ allegations against Mr Matthews are serious, and require careful assessment. Keeping in mind, as before, the present state of the evidence, I am not able to conclude that the plaintiffs have any chance of succeeding in an allegation of misfeasance based on Mr Matthews’ file note.
[95] There is no evidence to support Mr Reid’s contention that Mr Matthews created both a handwritten and typed file note falsely recording his recollection of the conversation with Mr Reid, or that he did so in bad faith or dishonestly. Further, I accept Mr Ebersohn’s submission that Mr Matthews’ file note “rings true” in that
funds did flow in a circle, and there were related offshore parties. In respect of circularity, I note Fogarty J’s finding:22
... It was always intended, at least by Mr Currie and Mr Reid, that the loan draw down and payment of the insurance premium would be effected by a circular transaction. ... It was a circular settlement, which did not need cash, as each liability to pay in cash a certain sum was matched by a counterpoint obligation.
[96] As to offshore parties being inter-related, I accept Mr Ebersohn’s submissions as to the relationships between Mr Reid, Mr Currie, Mr Connolly and companies involved in the schemes being Asian Growth Fidelity Ltd, Swiss Underwriters Group Ltd, Armour Fidelity, and Epicharmus.
(v) “Support of SFO prosecution – breach of Court summonses”
[97] The plaintiffs allege that IRD officials failed to comply (or delayed in complying) with requirements to discover documents. In particular, they allege that:
(a) IRD failed between January and November 2003 to comply with Court summonses for disclosure of documents relating to Ms Edwards’ letter of 20 October 1999 to BNYIMBG, including a failure to disclose that a “false loan agreement” had been sent to the bank.
(b)IRD failed to disclose records of internal IRD communications concerning correspondence with BNYIMBG.
(c) IRD denied disclosure of records of Mr S Bonnar, a barrister instructed by IRD to co-ordinate discovery.
(d) IRD sought to avoid or delay disclosing documents relevant to Mr
Reid’s defence.
[98] In his affidavit evidence Mr Reid set out other claims of failures relating to the discovery process, including:
22 R v Connolly, above n 5, at [30].
(a) IRD failed to disclose file notes by Mr McGrath (of Gosling
Chapman) of Digi-Tech presentation meetings.
(b)IRD failed to disclose a letter from Mr Clews to IRD concerning re- insurance and a purpose trust.
(c) IRD avoided exposing any of its officers who had knowledge of Ms Edwards’ “false loan agreement” or related undiscovered documents, to be present at inspection of documents by Mr Reid, so they would not be available to answer questions.
[99] Mr Reid submitted that IRD officers knowingly and deliberately withheld important and relevant documents from him, in order to support what was hoped would be a successful criminal prosecution. He submitted that such actions (directly or by omission) were an attempt to defeat the course of justice and constituted acts of misfeasance.
[100] The plaintiffs’ allegations are denied in the evidence filed for the Commissioner. The evidence for the Commissioner is that Mr Bonnar was engaged by Mr Lennard to co-ordinate the process of discovery. Mr Lennard’s evidence is that he was careful to ensure that all discoverable documents were discovered, and Mr Bonnar was instructed as external counsel both because it would be a large job which had to be done as efficiently as possible, and because he could see the possibility of accusations being levelled at the IRD and/or specific officers if discovery were done in-house. Mr Lennard wanted transparency, and the objectivity of external counsel’s advice.
[101] Mr Ebersohn submitted that the Commissioner requires particulars from Mr Reid as to which documents he says IRD had at the relevant time which were not provided, and the legal basis on which they were discoverable. He further submitted that if documents were not provided, the non-disclosure could have been because of secrecy obligations (the Commissioner could not be compelled to, and could not, hand over certain documents, pursuant to s 81 of the Tax Administration Act 1994),
or because claims to privilege which were not waived at the time (in relation to any communications with IRD officials who were lawyers).
[102] Mr Ebersohn acknowledged that it was possible, given that the investigations of the Digi-Tech and NZIL schemes were extensive, involving multiple files, multiple IRD officers, and numerous tax payers, that “one or two” documents which should have been discovered were not discovered. However, he submitted, a substantial effort was made to discover everything that was discoverable.
[103] Mr Ebersohn further submitted that none of the documents Mr Reid refers to could have any bearing on the SFO prosecution. In particular, Ms Edwards’ correspondence with the BNYIMBG was not relevant to the prosecution, nor were the views of any IRD employees as to the importance (or otherwise) of the bank’s response.
[104] The plaintiffs’ allegations as to discovery focus largely on Ms Edwards’ correspondence with the BNYIMBG, and related documents. I have already considered the allegation of misfeasance by Ms Edwards in relation to the “false loan agreements”. I concluded that the plaintiffs have no more than a slight chance of succeeding in proving misfeasance in that respect.
[105] In the light of Mr Ebersohn’s submissions as to the uncertainty as to exactly what was, and was not, disclosed, and the grounds on which Mr Reid could establish that undiscovered documents were discoverable, or the grounds on which the IRD could establish that they were not discoverable, it would not be appropriate to express any firm view as to the chance of the plaintiffs succeeding at trial in proving misfeasance as to discovery. However, given the engagement of Mr Bonnar, as independent counsel to co-ordinate discovery, the plaintiffs face a considerable, if not insurmountable, hurdle in establishing any deliberate and knowing withholding of material, where such withholding was in bad faith or dishonest.
Commissioner’s remaining submissions
[106] My conclusions on the five alleged acts of misfeasance are that, in each case, the plaintiffs have no more than a slight chance of establishing that any of the acts complained of constitute misfeasance. It is not therefore necessary to consider the Commissioner’s remaining submissions as to the merits of the plaintiffs’ case, as proof of an action done in bad faith or dishonestly is essential before a claim of misfeasance (under either limb) can succeed.
[107] However, for completeness, I consider the Commissioner’s submissions
briefly, before turning to consider whether to order security.
[108] Mr Ebersohn submitted that the actions of the IRD officials were reasonable. While noting that the onus of proof is on the plaintiffs to prove misfeasance, the affidavit evidence filed on behalf of the Commissioner, in my view, strongly suggests that none of the IRD officials acted for an ulterior or improper motive, with intent to injure either Mr Reid or Milloy Reid Wong. To the contrary, their actions appear to have been reasonably directed to the proper objective of protecting the integrity of the tax system, by legitimate means. The same comment applies to Mr Lennard’s actions in referring the Digi-Tech and NZIL schemes to the SFO for investigation.
[109] Mr Ebersohn also submitted that the plaintiffs could not establish any causative link between any of the actions complained of, and the plaintiffs’ alleged losses. That submission has considerable force, given that the IRD’s investigations (and thus the actions complained of) were of schemes that were clearly promoted by the plaintiffs as tax avoidance schemes. There is force in Mr Ebersohn’s submission that any losses suffered by the plaintiffs resulted from the failure of those schemes, in the end, to secure the avoidance of payment of tax.
Should an order be made for security for costs?
[110] I return to the comments made by the Court of Appeal in AS McLachlan Ltd v
MEL Network Ltd:23
(a) An order for security for costs should be made only after careful consideration and in a case in which the claim has little chance of success.
(b) The interests of the defendant must be weighed.
[111] I have concluded that the plaintiffs have no more than a slight chance of proving misfeasance against the Commissioner, in any respect. That conclusion has been made at a stage where the proceeding has been on foot since July 2006, and relates to the investigations into tax schemes promoted by 1995 and 1998. Clearly, the substantive hearing will involve consideration of events that happened many years ago.
[112] The complexity of the proceeding is easily demonstrated by the number of interlocutory matters that have required determination, the fact that Mr Reid was unable to comply with timetable directions for filing evidence and sought adjournment of the previously-allocated trial fixture, and the volume of material (affidavit evidence and exhibits) filed for the present hearing. The proceeding has already been a substantial exercise for the parties and their counsel.
[113] I do not accept the submissions of Mr Reid and Mr Gould that the trial could be completed in ten days. That assessment is unrealistic given the detail of material referred to by Mr Reid in his submissions on the application for security. Mr Ebersohn’s assessment of six weeks is much closer to the mark.
[114] On my assessment of the evidence, as it stands at present, the Commissioner is likely to succeed at trial, after having incurred considerable costs in preparing for
23 Above, n 15, at [13]-[16].
trial and the trial itself. Yet, on the plaintiffs’ admission, an award of costs in favour
of the Commissioner is not likely to be satisfied.
[115] I am conscious of the plaintiffs’ submission that it would not be able to meet an award of costs in the sum sought by the Commissioner, and the Court of Appeal’s admonishment in McLachlan that access to the Courts for a genuine plaintiff is not lightly to be denied. However, having weighed the interests of the plaintiffs and the Commissioner, I have concluded that security for costs should be ordered.
[116] Mr Ebersohn calculated that the Commissioner’s scale costs (rather than actual costs) going forward (incorporating pleading to the amended statement of claim, a further interlocutory hearing, further discovery, preparation for trial, and appearance at trial) would total in the order of $275,000 (on a 2C basis). An order for costs of $200,000 is sought.
[117] Having considered alternatives to an award in that amount, I have concluded that there are no grounds on which I should order any lesser amount. However, I have also concluded that security should be staged, with $100,000 being given within one month of the date of this judgment, and the balance of $100,000 being given no later than six months before the scheduled commencement of trial.
Result
[118] (i) The first the third plaintiffs are to pay security for costs in the amount of $200,000 as follows:
(a) $100,000 within one month of the date of this judgment.
(b)$100,000 no later than six months before the scheduled trial commencement;
(ii)The proceeding is stayed until such time as the first amount of security has been paid.
(iii)If the second amount of security is not paid as specified, the defendant may apply for an order that the trial date is to be vacated.
[119] The Commissioner seeks costs on this application. It would seem to be appropriate that costs should follow the event. If the parties are not able to agree as to costs then memoranda may be filed, that for the Commissioner within 20 days of the date of this judgment and that for the plaintiffs within a further 20 days. Unless counsel advise otherwise, it will be assumed that no hearing is required on the
question of costs.
Andrews J
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