Yandina Investments Ltd v ANZ National Bank Ltd
[2012] NZHC 1389
•20 June 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-485-2582 [2012] NZHC 1389
BETWEEN YANDINA INVESTMENTS LIMITED Plaintiff
ANDANZ NATIONAL BANK LIMITED First Defendant
ANDWESTPAC BANKING CORPORATION Second Defendant
ANDBNZ INVESTMENTS LIMITED Third Defendant
Hearing: 29 and 30 May 2012
(Heard at Wellington (Commercial List))
Counsel: C R Carruthers QC and R J Cullen for Plaintiff
M Dean QC and S Fitzgerald for First Defendant
R B Lange and P A Windeatt for Second Defendant
J A Farmer QC and A Barker for Third Defendant
Judgment: 20 June 2012
JUDGMENT OF MILLER J
YANDINA INVESTMENTS LIMITED V ANZ NATIONAL BANK LIMITED HC AK CIV-2010-485-
2582 [20 June 2012]
TABLE OF CONTENTS
Introduction ...........................................................................................................[ 1]
1982: the leveraged lease to Air New Zealand ....................................................[ 15] Maroro acquired and financed the aircraft ........................................................[ 15] Maroro leased the aircraft to Air New Zealand..................................................[ 19] Air New Zealand assumed foreign exchange risk ...............................................[ 24] The Maroro partners’ Equity Participants Agreement .......................................[ 26]
1994: the aircraft refinancing ..............................................................................[ 29] Maroro refinanced at lessee’s request ................................................................[ 29] Air New Zealand replaced Japan Leasing Corporation as lender .....................[ 30] The Maroro partners’ tax position toward lease end ........................................[ 32]
1995: Maroro partners’ interests assigned to Yandina .....................................[ 38] The parties and the proposal...............................................................................[ 39] The Deeds of Assignment ....................................................................................[ 44] Conduct post assignment.....................................................................................[ 55] Yandina’s failed attempt to offset tax losses .......................................................[ 57] This proceeding .....................................................................................................[ 60] The strikeout application......................................................................................[ 63] What was assigned? ..............................................................................................[ 66] Yandina’s claim to the balance of gross revenue................................................[ 67] Yandina’s claim to the foreign exchange loss .....................................................[ 73] Disputed accounting or tax treatment not material ............................................[ 85] Limitation ..............................................................................................................[ 89] Other matters ........................................................................................................[ 90] Decision ..................................................................................................................[ 91]
Introduction
[1] In 1982 Air New Zealand purchased a Boeing 747 aircraft, acquiring the airframe and the engines separately from their respective manufacturers, Boeing and Rolls-Royce. The airline financed the purchase by selling the aircraft, ultimately to a consortium of banks called the Maroro partnership, which leased it back to Air New Zealand for a term expiring on 4 October 1997. Rent was payable in New Zealand dollars (“NZD” or “$”). The Maroro partnership borrowed the purchase price for the airframe from Japan Leasing Corporation, in Japanese yen (“JPY”).
[2] These arrangements offered income tax advantages for the Maroro partners in the early years, but toward lease end the partners must meet significant income tax liabilities.
[3] In 1994 the Maroro partnership refinanced the aircraft at Air New Zealand’s request. Air New Zealand itself became the lender in substitution for Japan Leasing Corporation, but the loan was still denominated in JPY. The refinancing did not change the terms of the lease or the amounts that Maroro paid to the lender, but because an accruals regime had been introduced into tax law since 1982 and applied to the refinancing, it did affect some of the Maroro partners’ obligations to account for tax post-refinancing. It also crystallised a foreign exchange loss of NZD47.3m for the Maroro partners, the result of currency movements since the original loan was established.
[4] The three defendant banks were members of the Maroro partnership. In
1995 they separately assigned their interests to entities associated with the plaintiff, Yandina. This proceeding rests on these equitable assignments. Under them the three banks assigned their shares, being the net profits of the Maroro partnership for the balance of the lease term ($23.5m), together with the residual value of the aircraft (not less than $10.1m) and “all other payments” made “in connection with” the banks’ interests.
[5] Yandina paid the banks $10.87m for their interests. The apparent consideration mismatch arises because the assignments also obliged Yandina to account for tax on the partnership’s post-assignment income.
[6] In this proceeding Yandina claims that the defendant banks failed to pay all the money due to it under the assignments. Yandina admits receiving the net profit and the residual value of the aircraft. It claims two other sums.
[7] The first comprises the partnership’s gross revenue under the lease for the balance of the term, being $45.5m, less the net profit of $23.5m. In other words, Yandina says that the banks must now pay $22m, being the balance of the partnership’s gross revenue. That sum comprises that part of the rent that the partnership used to make its loan repayments.
[8] The second sum corresponds to the foreign exchange loss of NZD47.3m which the banks had deducted on the 1994 refinancing. Yandina says that this
sum can be seen as part of a prepaid expense – the balance of the airframe purchase price - which ought to have been spread over the remaining term of the lease, reducing the taxable income of the partnership by $47.3m in those years.
[9] Yandina also puts its claim to the money in another way. Under foreign exchange management agreements Air New Zealand protected Maroro by undertaking to pay any shortfall between the NZD lease payments and Maroro’s JPY loan repayments. So Air New Zealand had compensated the partnership for the foreign exchange loss of NZDS47.3m. For tax purposes Air New Zealand’s payments were deemed to be “debt remission” income in Maroro’s hands. The Maroro partners took a deduction for the foreign exchange loss at once but spread the debt remission income over the remaining lease term. Under the assignments Yandina must account for tax on this income. It says that the partnership earned, but failed to pay to it, a matching cashflow in the form of rent paid by Air New Zealand, to the extent that the partnership used the rent to repay Air New Zealand’s loan, the principal under which included the $47.3m.
[10] In the result, Yandina claims, the banks owed $92.8m but paid only
$23.5m, leaving it $69.3m out of pocket.
[11] Yandina said nothing about this alleged short payment at the time. It complained years later, after the Commissioner disallowed tax losses that Yandina had used to shelter the assigned taxable income from tax. The bare details are common ground: Yandina’s obligation to account for the partnership’s income tax during the balance of the term extended to the accruals income; Yandina did account for that income in the 1996 and 1997 income years; Yandina declared nil taxable income by setting off tax losses from unrelated transactions against the assigned taxable income; but the Commissioner of Inland Revenue disallowed the tax losses, characterising Yandina’s arrangements as tax avoidance, and further default-assessed Yandina for the 1998 year.
[12] In November 2003 Yandina launched challenge proceedings against the Commissioner. In 2010 and 2011 it tried to involve the banks in that litigation, claiming that the assignments too involved tax avoidance, so should be set
aside.[1] The Commissioner opposed these applications, which failed. Yandina capitulated in November 2011, shortly before the challenge proceedings were to be heard. It has paid, or must pay, core tax of, I am told, some $30m, plus substantial penalties and interest.
[1] Yandina Investments Ltd v Commissioner of Inland Revenue (2011) 25 NZTC 20-019 (HC);
Yandina Investments Ltd v Commissioner of Inland Revenue (2011) 25 NZTC 20-079 (HC).
[13] Yandina commenced this proceeding on 23 December 2010, 13 years after the lease ended.
[14] The banks now invite the Court to strike out Yandina’s claim, saying that it cannot succeed and is long out of time.
1982: the leveraged lease to Air New Zealand
Maroro acquired and financed the aircraft
[15] The Maroro partners (and their shares in the partnership) were Development Finance Corporation of New Zealand (7 per cent) (‘DFC”), Westpac Banking Corporation (45.5 per cent) (“Westpac”), BNZ Investments Ltd (26.5 per cent) (“BNZI”), and National Bank of New Zealand (21 per cent) (“ANZ”). Until 1990, when it went into statutory management, DFC also managed the partnership. Thereafter BNZI assumed that responsibility.
[16] On 4 August 1982 Air New Zealand sold the airframe to Japan Leasing Corporation, which sold it to Maroro Leasing Ltd, a company owned by the Maroro partners.[2] The purchase price, which was denominated in Japanese currency, was JPY15.114bn, or about NZD79.5m at 4 August 1982 exchange rates.
[2] Maroro Leasing Ltd is not party to this proceeding, but no point is taken about that. Except where otherwise noted I need not distinguish between Maroro Leasing Ltd and the Maroro partnership.
[17] Japan Leasing Corporation vendor-financed the sale to Maroro under an
Airframe Instalment Sale Agreement, pursuant to which Maroro paid semi-
annual instalments of interest and principal. I draw attention to three features of this loan. First, the principal component of each instalment increased over time. For example, the instalment of JPY151,485,900 due on 4 October 1982 was all interest, while the final instalment of JPY592,314,721 due on 4 October 1997 included interest of just JPY24,963.456. Second, the rate of interest was fixed at
8.8 per cent per annum. Third, the agreement permitted Maroro to repay the loan, for a modest break fee, on any given instalment payment date.
[18] Air New Zealand sold the engines direct to Maroro Leasing. The price, which was denominated in US currency, was USD13,487,660, or NZD21,447,850 at 4 August 182 exchange rates. Maroro received funding from International Westminster Bank PLC under what was known as “the ECGD
loan”,[3] also repayable in semi-annual instalments. Counsel paid little attention
to this loan, because Maroro repaid it before the 1994 refinancing.
Maroro leased the aircraft to Air New Zealand
[3] ECGD was the Export Credits Guarantee Department of the British Government. It procured the International Westminster Bank loan.
[19] The aircraft was leased to Air New Zealand for 15 years and two months, the term expiring on 4 October 1997. Air New Zealand paid rent semi-annually on 4 April and 4 October in each year, co-inciding with Maroro’s instalment dates under the Airframe Instalment Sale Agreement.
[20] Schedule 10 of the lease set out the amounts of each semi-annual instalment of rent, divided into three columns, A, B and Total. Column A corresponded to the Maroro partnership’s net profit, as will be seen. Column B corresponded to amounts due under the Airframe Instalment Sale Agreement and the EGCD loan, calculated using exchange rates at 4 August 1982.
[21] Air New Zealand covenanted to pay the NZD amounts in the Total column, subject to adjustment for the actual number of days for which interest was to be calculated under the Airframe Instalment Sale Agreement and ECGD
loan. Subject to such adjustments the amount of each semi-annual rent payment
was fixed. By way of illustration, the schedule included the following
payments:
RENT
Instalment Payment Date New Zealand
Dollars (000’s)
New Zealand
Dollars (000’s)
New Zealand
Dollars (000’s)
A B Total
4 October 1995 2,624.52 5,820.10 8,444.00
4 April 1996 3,790.89 4,805.36 8,596.00
4 October 1996 3,057.66 5,470.45 8,528.114 April 1997 4,272.26 4,411.50 8,683.76
4 October 1997 6,947.34 3,265.95 10,213.29
[22] In practice Air New Zealand paid column A to Maroro and column B direct to Maroro’s financiers, but this was behaviour born of convenience, for the lease and the Airframe Instalment Sale Agreement together contemplate that Air New Zealand would pay Maroro which in turn would pay the financiers. The Airframe Instalment Sale Agreement also made Maroro personally liable to pay only the money that it actually received under the lease or the foreign exchange management agreements.
[23] Finally, the lease also provided that at the term end Air New Zealand would sell the aircraft, effectively for a residual value of not less than $10.1m, which sum would be payable to Maroro.
Air New Zealand assumed foreign exchange risk
[24] As I have explained, rent was payable under the lease in NZD, while Maroro’s financing obligations were denominated in JPY and US dollars. Under separate foreign exchange management agreements Air New Zealand assumed the exchange rate risk associated with Maroro’s JPY and USD payments. I need not detail these arrangements, for they are uncontroversial. Their effect can be summarised shortly. If any given column B payment made by Air New Zealand (in NZD) was less than the amount that Maroro needed to pay the corresponding JPY instalment under the Airframe Instalment Sale Agreement, Air New Zealand
would make up the difference. Again, this was done by paying Japan Leasing
Corporation directly.
[25] As things turned out, exchange rates moved extensively against Air New Zealand after 1982, forcing it to make substantial “top up” payments under these agreements.
The Maroro partners’ Equity Participants Agreement
[26] The agreement, dated 3 August 1982, recited the transaction and provided that the Equity Participants would become partners in their respective shares. The agreement defined the partnership’s profits and losses using a “Financial Evaluation” which recorded what sum each partner would receive on each payment date during the lease term. The aggregate of those sums was the partnership profit. Each partner was entitled to its share of “the net profit after payment of all expenses”. Expenses expressly included all moneys due under the Airframe Instalment Sale Agreement, the ECGD Loan Agreement and the foreign exchange management agreements:
2.4 The periodic profits and losses of the Partnership at any time during the currency of the Lease constitute the aggregate as at that time of the profits and losses of each Equity Participant detailed in each Financial Evaluation.
(a) Subject to this Deed at any time each Equity Participant shall be entitled to the net profits after payment of all expenses of the Partnership (including all moneys due under the Airframe Instalment Sale Agreement, the ECGD Loan Agreement ..., the Mortgage and the Foreign Exchange Management Contract) and shall bear any losses of the Partnership in the respective proportion which such Equity Participant’s share of such profits or losses (as determined by reference to the amount shown opposite the relevant period in its Financial Evaluation) bears to the total profits or losses of the Partnership to the intent that the aggregate of the share of net profits of each of the Equity Participants as determined by each of the Financial Evaluations shall equal the total net profits of the Partnership in each year and the aggregate of the shares of the net losses borne by each of the Equity Participants as determined by each of the Financial Evaluations shall equal the total net losses of the Partnership in each year. (emphasis added)
[27] The agreement then provided that on receiving rent Maroro would immediately pay any amount then due to Japan Leasing Corporation and ECGD, then pay any expenses, and then pay the Equity Participants in their respective shares.
[28] The Financial Evaluations took the form of computer printouts recording the amounts payable to each bank on each six-monthly payment date during the lease term. The printouts recorded both pre-tax and post-tax cashflow for the partners. Because they included post-tax cashflow they were reissued from time to time as corporate tax rates changed, the last being issued on 3 May 1989. However, the pre-tax cashflow for each partner did not change. In BNZI’s case, for example, the Financial Evaluation included the following dates and pre-tax payments, all in NZD:
Month Pre-Tax cashflow
(000’s)
Oct 95 285.26
Apr 96 903.06
Oct 96 343.36
Apr 97 1043.51
Oct 97 3301.97
1994: the aircraft refinancing
Maroro refinanced at lessee’s request
[29] By 1994 Japanese interest rates had fallen to the point where Air New Zealand could borrow at 3.5 per cent per annum. It asked Maroro to exercise its right to prepay the balance due under the Airframe Instalment Sale Agreement. The Maroro partners agreed, in return for a fee and an indemnity designed to ensure that their after-tax return would not change. (By now the ECGD loan had been repaid.)
Air New Zealand replaced Japan Leasing Corporation as lender
[30] The refinancing took effect on 4 October 1994, by which time Maroro owed Japan Leasing Corporation JPY4.15bn under the Airframe Instalment Sale Agreement. Air New Zealand advanced that sum to Maroro Leasing by repaying Japan Leasing Corporation on its behalf. Air New Zealand thus replaced Japan Leasing Corporation as the financier. The new loan was also denominated in JPY.
[31] The parties made no changes to the aircraft lease. They amended the Equity Participants Agreement, but only by adding the words “Air NZ Loan Agreement” after any reference to the Airframe Instalment Sale Agreement. (See [26] above.) The Maroro partnership cashflows remained as they were. (The 1994 refinancing did not change the cashflows because the partnership’s loan payments had always been capped at the NZD value of the column B payments, shown at [21] above.) The net profit remained the column A payments. New foreign exchange management agreements were entered, but they had the same effect as their predecessors. Notably, the top up payments were still calculated using the 4 October 1982 exchange rate. The only change was that Air New Zealand now made the top up payments to itself.
The Maroro partners’ tax position toward lease end
[32] As noted, instalments under the Airframe Instalment Sale Agreement comprised interest when the agreement began in 1982 but substantially comprised principal by 1997. Interest was deductible to the partners. So was depreciation, deductions for which were substantial early in the lease term. Toward lease end these declining expenses ceased to shelter the partners from income tax on partnership profits.
[33] On refinancing, the Maroro partners crystallised a foreign exchange loss of NZD47.3m on the principal repayment. They deducted this loss immediately for tax purposes. Air New Zealand’s top up payments represented tax remission
income to the partnership, but tax law allowed the partnership to spread that income over the remaining term of the lease.
[34] In 1986 the legislature had introduced accrual rules for financial transactions denominated in foreign currency, such as the aircraft financing. These rules did not apply to the original transaction, since it predated them, but they did apply to the refinancing. They were governed by a determination of the Commissioner of Inland Revenue, known as Determination G9A. The determination is not before me, but I understand that it required taxpayers to treat a foreign currency loan and associated foreign exchange management arrangements as a single transaction, and to account for tax on that financial transaction in each year. The determination required a calculation that used the interest expense, exchange rate gains and losses, and debt remission income in the relevant year to derive a NZD-denominated sum, which was the taxpayer’s taxable income from the financial transaction.
[35] Post refinancing, Maroro had to value the new Air New Zealand loan each year under the accrual rules, returning any increase or decrease in value from currency fluctuations. Exchange rate losses also continued, based on the 4
October 1982 exchange rate used in the lease, so Air New Zealand continued to make top up payments and the partnership earned more debt remission income. As just noted, Maroro had to incorporate these sums, along with interest expense on the loan, in the annual G9A calculations.
[36] Finally, the eventual sale of the aircraft at lease end would deliver recovered tax depreciation, since Air New Zealand had agreed to a minimum payment of $10.1m, which would exceed the aircraft’s depreciated value. The partnership would have to also pay income tax on the recovered depreciation.
[37] In summary, following the 1994 refinancing the Maroro partners expected to account for significant taxable income before lease end. In each year that income would comprise rent plus accrual income on the financial transaction (the latter based on exchange rate fluctuation income, debt remission income, and interest expense). There would be offsetting deductions for
depreciation on the aircraft. At lease end the partnership would also earn recovered depreciation on the aircraft sale. The partners’ taxable income until lease end would exceed their cashflow. In BNZI’s case, for example, its anticipated income until lease end, calculated as at assignment date, was $20.7m, comprising gross rental income, and accrual income on the financial transaction, less depreciation deductions, plus (at lease end) recovered depreciation, but its cashflow would be $5.9m, being its share of the partnership’s net profit.
1995: Maroro partners’ interests assigned to Yandina
[38] It is not in dispute that the refinancing and the assignment were unrelated transactions, negotiations for the latter beginning after the former had been completed.
The parties and the proposal
[39] Each bank negotiated its assignment separately and at different dates in
1995, although the Deeds of Assignment were relevantly identical. DFC did not participate. Each bank assigned its interest to a separate company, respectively Rifgac Sixteen Ltd (Westpac), Rifgac Nineteen Ltd (ANZ) and Rifgac Twenty Ltd (BNZI). Yandina controlled these entities.[4]
[4] These entities are not party to this proceeding, but Yandina’s right to sue for their interest has
not been challenged.
[40] The parties disagree about who promoted the assignment. They do agree that Babcock and Brown Pty Ltd, investment bankers, served as intermediary and acquired a nominal 0.01 per cent stake through another company, Rifgac Seventeen Ltd; Yandina and Rifgac Seventeen established the Rifgac partnership, which Babcock and Brown managed; and through Rifgacs Sixteen, Nineteen and Twenty Yandina also paid Babcock and Brown substantial procuring and arranging fees totalling NZD6.3m. For Rifgac Sixteen, which is presumably typical, the fee was paid for procuring and implementing the
investment and negotiating the amount payable and the terms of the transaction
documents. A Babcock and Brown employee, Martin Greenberg, signed the
BNZI assignment as Rifgac Twenty’s attorney.
[41] Babcock and Brown negotiated the purchase price with the assignors, and did so knowing the Maroro partnership’s cashflow and taxable income. In Westpac’s case, Babcock and Brown wrote a letter of 10 February 1995 submitting “our indicative offer”. The letter recorded that the consideration for the assignment would be $6m assuming that the bank’s cashflows and taxable income were as detailed in the letter. It explained that the assignment would be
based on “the principles of Everetts case”.[5] The letter identified both the
cashflow payable to Westpac (the remaining column A payments, totalling
$13,053,050) and the taxable income, which was a much larger figure ($38,272,500) that included the accrual income. If Westpac found the proposal acceptable in principle, Babcock and Brown would present a formal proposal.
[5] Presumably Federal Commissioner of Taxation v Everett (1980) 28 ALR 179 (HC), a case dealing with the effectiveness for tax purposes of an assignment to a partner’s wife of part of his right to a share of profits.
[42] But the parties disagree about whose agent the firm was. Yandina relies on this dispute to avoid being fixed, for present purposes, with Babcock and Brown’s knowledge of the Maroro partnership. Indeed, Yandina pleads that it did not know about the fees paid to Babcock and Brown. For present purposes, then, I will assume that the banks may have mandated Babcock and Brown to sell their interests in the partnership.
[43] Yandina does not blame the banks for its failed attempt to shelter the partnership’s taxable income using tax losses from unrelated transactions. Rather, it pleads that another intermediary, Salisbury Securities Ltd, which it says was controlled by Graham Doke, agreed to find a company with available tax losses. In its challenge proceedings Yandina pleaded similarly that Mr Doke was told before the assignment that the purchasing company would need large tax losses to meet the tax liabilities that would come with the assigned partnership interests. Yandina does not claim that Salisbury was the banks’ agent. It allegedly paid fees totalling $2.8m to Salisbury Securities. I observe
that the Commissioner claimed Mr Doke is Yandina’s sole director and the
controlling mind of all parties to these arrangements, including Salisbury. If so, Yandina cannot avoid being fixed with his knowledge.[6] Perhaps for this reason, Yandina claims that Salisbury and Mr Doke had no prior experience in this market.
The Deeds of Assignment
[6] I observe that Mr Doke also signed at least one of the agreements under which Yandina
agreed to pay Babcock and Brown’s fees.
[44] I take BNZI’s assignment as the example. The deed was executed on 2
August 1995. It recited that the assignee, Rifgac Twenty (which I will treat as synonymous with Yandina), wished to take an equitable assignment of all BNZI’s equitable right, title and interest in the Equity Participation, and BNZI had agreed to it on the terms in the deed.
[45] The operative clause was 2.2. It provided that for a fee of $2.5m “the Assignor hereby agrees to equitably assign to the Assigne absolutely … all the Assignor’s equitable right, title and interest in the Equity Participation…., subject to the provisions of section 34 of the Partnership Act 1908 and of this deed.”
[46] The deed defined Equity Participation:
Equity Participation means all the Assignor’s share in the Partnership comprising its right to receive a share of the net profits (which are expected to comprise the Partnership Payments) and, on dissolution of the Partnership, a share in the net Partnership assets, in each case to which the Assignor is entitled pursuant to the Equity Participants’ Agreement which relate solely to the period commencing from and including [3 August 1995] ...
[47] That definition included other defined terms. Equity Participants Agreement was defined to include the 1994 amendment (para [31] above). Partnership Payments was defined as follows:
Partnership Payments means:
(a) the net periodic payments detailed in column 2 of schedule 1;
(b) the termination values calculated by reference to the dates specified in schedule 1; and
(c) all other payments or distributions made in connection with the Equity Participation, or made to the Assignor in its capacity as partner of the Partnership ...
[48] The net periodic payments detailed in column 2 of schedule 1 to the deed were:
Date Net Periodic Payments
$
4 October 1995 285,260
4 April 1986 903,060
4 October 1996 343,360
4 April 1997 1,043,510
4 October 1997 3,301,970
[49] These same figures appear in the pre-tax cashflow column in BNZI’s most recent (1989) Financial Evaluation (para [28] above). They represent BNZI’s share of the column A payments recorded in the lease.
[50] As noted above, cl 2.2 also referred to s 34 of the Partnership Act 1908, which provides:
34 Rights of Assignee of Share of Partnership
(1) An assignment by any partner of his share in the partnership, either absolute or by way of mortgage, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any account of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners.
(2) In case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.
[51] The deed provided that the Bank would remain a partner under the
Maroro partnership. It would receive all Partnership Payments as bare trustee
and deposit them at once into a separate bank account in the Assignee’s name, and it would separately maintain its files for the Transaction Documents and grant Yandina reasonable access to them.
[52] The deed dealt with the parties’ obligations to one another concerning tax. BNZI must supply Yandina with copies of the Partnership’s annual tax returns. Yandina must account for tax on the income it derived from the Equity Participation after the assignment:
Assignee’s tax returns: The Assignee covenants with the Assignor in respect of itself that it is and will remain a New Zealand resident for tax purposes and that it will file in a timely manner income tax returns in New Zealand for income derived by the Assignee from the Equity Participation subsequent to this equitable assignment and shall fulfil all its taxation payment obligations (if any) in relation to the Equity Participation.
[53] The deed was conditional upon a ruling “in relation to the taxation effects” of the assignment. The ruling itself is not in evidence, but it was one of two conditions inserted for the bank’s benefit, meaning that it was probably designed to ensure the assignment would relieve the bank of its future tax liability.[7] Nothing turns on the ruling for my purposes, however, since Yandina denies seeing it.
[7] The BNZI assignment provides that cl 3.1(i) was for the assignor’s benefit, but the cross- referencing is in error, for the last subclause, which contains this provision, is (h). T he Westpac assignment confirms that the tax ruling was for the assignor’s benefit
[54] Finally, the deed listed the Transaction Documents in a schedule and provided that the assignment was conditional on the Assignee getting copies of them. The list included the Equity Participants Agreement, the lease, the Air New Zealand loan agreement, the foreign exchange management agreements, and a copy of the current “computer print outs” - meaning the Financial
Evaluations - for the Equity Participation.
Conduct post assignment
[55] After the assignment the banks directed BNZI, as manager, to pass to Yandina all future payments due to them under the partnership. Before each payment date BNZI would tell Air New Zealand what was payable under the lease and the foreign exchange management agreement. Air New Zealand would then deduct from the rent the loan repayment adjusted for the top up payment, so that BNZI received the column A payment. BNZI would tell Babcock and Brown what was to be paid and that firm would respond, telling BNZI how the payment was to be distributed among the Rifgac partners.
[56] Maroro also prepared partnership accounts for the 1996, 1997 and 1998 income years, and these were given to Rifgac. The 1997 accounts, for example, reported lease rental of NZD15.2m, which was net of loan repayments, and accrual income under Determination G9A of NZD10.9m. Yandina did not query the accrual income or the lease rental. The Rifgac partnership prepared its own accounts in a consistent manner, although one of its accountants, Stephanie McLean, says that she took the unaudited Maroro accounts at face value, having none of the underlying information.
Yandina’s failed attempt to offset tax losses
[57] As noted, Yandina’s 1996 and 1997 tax returns included the partnership’s net profit plus accruals income, but that income was fully set off by tax losses, resulting in nil tax to pay.
[58] I need not say much about the scheme which Yandina set up to absorb the partnership’s taxable income. Salisbury is said to have identified Raquel Developments Ltd as a company with existing tax losses. That company duly acquired Yandina. Thereafter Raquel and Yandina invested in Coral Reef Ltd, a Nuiean company, through an intermediary, Dorset Enterprises Ltd. Yandina pleads that it “understood” Coral Reef intended to acquire loans at a discount to their face values. Yandina raised finance by issuing a promissory note, which
Salisbury Securities Finance Ltd acquired and negotiated to Salisbury International Ltd. (I observe that the Commissioner alleged these arrangements were never consummated.) For income tax purposes Yandina deducted a substantial fee that it paid to Salisbury (the Commissioner alleging that the fee was never paid either) and received loss transfers from Raquel and Dorset. Yandina pleads that the assignments were intended – presumably by all parties - to shelter the Maroro partnership’s taxable income behind losses of this kind.
[59] The Commissioner characterised Yandina’s tax loss arrangements, but not the assignments, as tax avoidance. He issued a notice of proposed adjustment which stated that Yandina had earned taxable income of $83.9m for the 1996-98 years and proposed to disallow the transfer of losses and the fees paid. As noted, Yandina has now admitted defeat vis-à-vis the Commissioner.
This proceeding
[60] The amended statement of claim concedes that Mr Doke was told the purchasing company would need to meet taxation liabilities on the assigned income using their own tax losses and alleges that Salisbury Group was to find such a company. It found Raquel Developments, which duly acquired Yandina, and it pursued additional tax losses through Coral Reef. The Commissioner began to investigate these transactions in the late 1990s and issued the notice of proposed adjustment in March 2002.
[61] However, the claim also pleads that Yandina knew nothing of many details of the partnership, including the 1994 refinancing, the nature and composition of the income assigned to it, and the fee that it paid to Babcock and Brown. Yandina claims that it never saw the Maroro transaction documents, and it treats Salisbury as an arms-length intermediary.
[62] Yandina pleads one cause of action, breach of an equitable obligation to pay sums due under the assignments. The amount claimed is $72m, but that was adjusted during the hearing to the $69.3m referred to at [10] above. The relief
sought is an order that that sum be paid with all penalties and interest on
Yandina’s unpaid tax.
The strikeout application
[63] The test is uncontroversial. The Court will strike a proceeding out only where the claim is so clearly untenable that it cannot possibly succeed.[8] It will not decide genuinely disputed questions of fact, but it may strike a proceeding out where an essential factual allegation is demonstrably contrary to indisputable fact.[9] Affidavit evidence is admissible. In this case counsel on both sides relied not only on the transaction documents but also on other contemporary documents and several affidavits.[10]
[8] Attorney-General v Prince [1998] 1 NZLR 262 (CA); Couch v Attorney-General [2008] 3
NZLR 725 (SC).
[9] Attorney-General v McVeagh [1995] 1 NZLR 558 (CA); Pharmacy Care Systems Ltd v
Attorney-General (2001) 15 PRNZ 465 (CA).
[10] The banks filed affidavits of Brian Birch (BNZI), Ian Gibbs (Westpac), and Michel Lynch
(ANZ). Yandina filed an affidavit of Stephanie McLean, one of Yandina’s accountants.
[64] In their strikeout applications the banks say that: Yandina has no reasonably arguable cause of action, for the assignments entitled it only to the net profits that the banks would otherwise have received; the amounts now claimed are not part of the net profits, as defined; and the claim is out of time.
[65] At 33 dense pages, Yandina’s notice of opposition is no model of the pleader’s art, but with the aid of Mr Carruthers’ (substantially shorter) submissions sense can be made of it. Yandina points in particular to factual issues that cannot be resolved here. I have already referred to Babcock and Brown’s role, but Yandina’s more urgent point is that the strikeout application rests on the premise that the partnership’s “cash” income was assigned, and nothing else. Yandina says that premise is wrong: the sums claimed are properly characterised as cash income, for they were payable by Air New Zealand to the partnership. Mr Carruthers recognised that the claim turns on what was assigned
– the assignments refer to “net profit”, not “cash” - but he argued that the meaning of net profit depends on the factual context. To that end, Yandina relies
on what it says is the correct accounting and tax treatment of the sums claimed.
It says that the banks improperly retained those sums, which ought to have been paid to Yandina so it could honour the partnership’s tax obligations, which it otherwise cannot meet. It says that it was ignorant until mid-2009 of the financial detail underlying the assignments, a consequence of the banks’ careful and deliberate planning. It bases that allegation on an “inference” that Babcock and Brown acted for the banks. Finally, it says that the banks held the assigned income in trust for Yandina, so no limitation period applies.
What was assigned?
[66] Yandina’s claim and the banks’ strikeout application both turn on the meaning of the deeds of assignment. Yandina has framed its claim as a breach of trust, presumably for limitation reasons, but the central allegation is that the banks still retain money to which Yandina was entitled under the assignments. Only if it is indisputable that Yandina is not so entitled should its claim be struck out.
Yandina’s claim to the balance of gross revenue
[67] The first limb of Yandina’s claim concerns the $22m that was paid to the partnership’s financier, Air New Zealand, post-assignment. I have called that the balance of gross revenue, meaning the total rent payments made by Air New Zealand less the net profits already paid to Yandina. Yandina says the balance was a “cash amount of income” that ought to have been paid to it.
[68] The deeds assigned to Yandina all of the banks’ interests in the Equity Participation. That term was defined as the banks’ share in the partnership established under the Equity Participants Agreement (that is, the Maroro partnership), comprising relevantly their “right to receive a share of the net profits”. “Net profits” was not defined in the assignment deeds, but they did provide that the net profits were expected to comprise the Partnership Payments. That term was in turn defined relevantly as the “net periodic payments” in
column 2 of schedule 1, plus all other payments or distributions made in connection with the Equity Participation.
[69] Those periodic payments were, as I have explained earlier, “net” because they expressly excluded sums payable to Air New Zealand as financier. That is beyond dispute. They are the same net sums provided for in the Financial Evaluations prepared under the Equity Participants Agreement. When aggregated they are the column A payments in the lease. The Equity Participants Agreement, as I have noted above, defined the profits of the partnership as the banks’ aggregate profits and losses detailed in their Financial Evaluations. It further provided that each bank was entitled to “the net profits after payment of all expenses of the Partnership”, and specifically identified some such expenses, relevantly “all moneys due under” the Air New Zealand loan agreement. It went on to specify that out of each rent payment Maroro Leasing would first pay the lenders, then any expenses, and only then the banks in their respective shares.
[70] In the circumstances, I find no ambiguity in “net profits” as that term is used in the assignments. It has the same meaning as it does in the Equity Participants Agreement which was the source of the partners’ entitlements. It positively excludes all sums due under the Air New Zealand loan agreement. That is of course consistent with any ordinary definition of profits.
[71] Mr Carruthers sought to meet this difficulty by pointing to the inclusion in Partnership Payments of a third limb, “all other payments” made “in connection with” the Equity Participation. I have quoted the definition at [47] above. Two things may be said about it. First, the definition begins with the specified “net” periodic payments. There was no need to define the periodic payments in that way if Yandina were to receive the gross revenue. Second, the final limb defines the sums payable by reference to the partnership established under the Equity Participants Agreement, which expressly contemplates that the partners will not receive sums payable to the partnership’s financiers. In the circumstances, I consider that the third limb merely contemplates that Yandina will receive any additional moneys payable to the partners, such as the eventual proceeds of the aircraft sale.
[72] For these reasons I am satisfied that Yandina’s claim to the balance of the partnership’s gross revenues is untenable. In my opinion, its obligation to account for the partnership’s taxable income, a much larger sum than was actually paid to it, is properly characterised as a liability associated with the partnership profits and assigned under the deeds.[11]
Yandina’s claim to the foreign exchange loss
[11] SB Properties Ltd (in liq) v Holdgate [2009] NZCA 327, (2009) 9 NZBLC 102,697.
[73] The second limb of Yandina’s claim concerns the NZD47.3m associated
with the foreign exchange loss on refinancing.
[74] Yandina must characterise the money as a payment to the partnership that might be captured by the assignment. In its claim, the notice of opposition, the affidavit of Ms McLean, and its submissions, Yandina frames its claim in different but substantially overlapping ways. The analysis is tortuous, essentially because Yandina seeks to turn expenses paid pre-assignment into net profit post-assignment, relying for that purpose on tax and accounting practice rather than the language of the assignments.
[75] Yandina begins by claiming that the money represents part of a prepaid expense of some NZD69m. It points out that the 1994 refinancing prepaid to Japan Leasing Corporation the balance of the purchase price, which would otherwise have been paid over the full term. Further, as a legal matter, Air New Zealand advanced its new loan (JPY4.150bn or NZD69m at 4 October 1994 exchange rates) to the partnership, which repaid Japan Leasing Corporation. It matters not that in practice Air New Zealand simply paid Japan Leasing Corporation direct, without passing the money through partnership bank accounts.
[76] I accept the initial premise of this argument: the refinancing strictly
involved a payment to the partnership, in the form of Air New Zealand’s loan
advance, and a payment to Japan Leasing Corporation. This may be said to
entail prepayment of the balance of the purchase price under the Airframe
Instalment Sale Agreement.
[77] However, Ms McLean then asserts that the prepayment should have been “adjusted into” the succeeding income years, so reducing the income of the partnership in those years by $47.3m.
[78] I reject that assertion insofar as it invites a different construction of the assignments. Maroro repaid Japan Leasing Corporation by taking on an identical payment obligation to a different lender, Air New Zealand, and the amended Equity Participants Agreement substituted the one lender for the other so that the net profit was expressly defined as what was left after payment to Air New Zealand of all sums payable under its loan agreement.
[79] Only by discounting the Air New Zealand loan entirely can Ms McLean posit a change in taxable income over the remaining term of the lease. That she rationalises by expressly adopting an assumption that under the assignments the Maroro partners were not entitled to make loan payments to Air New Zealand, whose loan had funded the prepayment to Japan Leasing Corporation. In the result, she says, some of the loan repayments (totalling some NZD69m when converted) ought to have been available to pay tax on the income assigned to Yandina. That is, the banks ought to have paid the $69m, or at least $47.3m of it, to Yandina.
[80] Ms McLean’s assumption is untenable, as a matter of construction of the assignments. As I have said, the banks must pay Yandina only the net profits of the partnership. For the same reasons that I have just given, money paid to Japan Leasing Corporation or Air New Zealand under their respective financing agreements cannot possibly be characterised as net profit, whenever the respective loans were repaid and whether or not the 1994 refinancing involved a prepaid expense for accounting purposes. Such repayments are expressly excluded from the partnership’s net profit, which is all that the partners were entitled to.
[81] During argument counsel confirmed that Yandina claims not the prepayment to Japan Leasing Corporation of $69m but the foreign exchange loss of $47.3m. That sum was, as the banks say, a foreign exchange loss representing the additional sum, calculated by reference to the original 4 October 1982 exchange rate and in New Zealand currency, that the partnership must pay to discharge its JPY-denominated loan. That is not in dispute. Viewed in that way, however, the $47.3m cannot possibly form part of the partnership’s net profit. It was an expense.
[82] Yandina deals with this problem by characterising Air New Zealand’s rent payments as “cash income” that the partnership used to pay that part of the Air New Zealand loan that was advanced to cover the foreign exchange loss ie
$47.3m. This income accrued over the balance of the lease term, and it ought to have been paid to Yandina. It emphasises that the banks took the foreign exchange loss as a deduction pre-assignment but carried the associated remission income forward over the remaining term of the lease, leaving Yandina to account for tax on the remission income without benefit of a corresponding deduction for the foreign exchange loss.
[83] This claim too is untenable. The loan repayments to Air New Zealand were not included in the net periodic payments in column A of schedule 10 to the lease. Far from it, they were column B payments, money paid to the partnership so it could meet its loan obligations to Air New Zealand. They are captured by the phrases “all moneys due under the ... Air New Zealand Loan Agreement” and “any amount then due to ... Air New Zealand under the ... Air New Zealand Loan Agreement” in cl 2.4(a) and cl 2.5(a) of the amended Equity Participants Agreement. Those payments must be made before the residue (the net profits) were paid to the partners. They are positively excluded from the definition of net profits.
[84] For these reasons, Yandina’s variously-expressed claim to the Japan Leasing Corporation prepayment or the Maroro foreign exchange loss of NZD47.3m or Air New Zealand’s loan repayments also has no prospects of success.
Disputed accounting or tax treatment not material
[85] I have reached these conclusions without finding it necessary to decide the correct tax or accounting treatment of the sums claimed. To allow what Yandina characterises as conventional accounting and tax practice to determine the meaning of the assignments is to put the cart before the horse. The assignments determine what the banks must pay. Yandina does not plead that the assignments guaranteed it a given tax or accounting outcome. Manifestly the assignments were not structured in that way; they passed a closely-defined amount of income and an open-ended obligation to pay tax on the interests assigned.
[86] However, I have examined the evidence to see whether anything in the commercial context might arguably alter the otherwise plain meaning of the assignments.[12] Yandina claims that if the banks are correct the outcome defies commercial common sense, for it has had to account for taxable income of more than $83m while receiving only $23.5m with which to meet that obligation. Yandina thereby invites the Court to accept that it always intended to pay tax on
the assigned income. But on the pleadings and undisputed documents it manifestly intended to pay no tax at all. That being so, the commercial context indicates rather that the banks’ interpretation of the assignments is correct.
[12] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at [22] and [24].
[87] Yandina now invites the Court to overlook its tax avoidance scheme, appealing more or less explicitly to an argument that the banks have got away with it, escaping the consequences of their own participation in a broader tax avoidance scheme. That sentiment underlies Ms McLean’s attempt to re- engineer the assignments. But Yandina unmistakeably assumed the obligation to pay tax on the partnership’s taxable income, and the banks did not create Yandina’s artificial tax losses. Salisbury did that. Nor can this proceeding address the banks’ tax affairs. As I noted earlier, the Commissioner passed up Yandina’s invitation to extend his reassessments to the banks and this Court
dismissed a joinder application in the challenge proceeding.
[88] I record that I have taken Ms McLean’s evidence about accounting and tax practice at face value for present purposes. She was a chartered accountant with the firm Curtis McLean Ltd, and as such technically competent to give opinion evidence about accounting practice. However, she did not qualify herself as an expert or proffer the required undertakings to the Court, and nowhere did she address the Commissioner’s claim, made in the notice of proposed adjustment, that she is (or was) a shareholder in Salisbury Securities Finance Ltd, which the Commissioner described as a Nuie-registered tax haven company, and held those shares as nominee for Mr Doke. In his submissions Mr Farmer also said that she still holds 50 shares in Raquel Developments. Her firm also prepared Yandina’s tax returns. In short, she and her firm appear - on the material before me - to be so closely implicated in Yandina’s tax avoidance scheme that the Court would be most unlikely to accept her as an expert at trial.
Limitation
[89] Ms Dean, who argued this part of the case for the banks, and Mr Carruthers ultimately agreed that Yandina can overcome the banks’ limitation defence only if s 21(1)(b) of the Limitation Act 1950 applies. Under that provision no statutory limitation period attaches to a claim for recovery of trust property from a trustee who still possesses it. Counsel also agreed that the proceeding could not be struck out on limitation grounds if it were arguable that the banks failed to pay Yandina money to which it was entitled under the assignments. As I have found Yandina’s claim to further sums untenable, the banks’ limitation defence must also succeed.
Other matters
[90] I record that the banks accept that through oversight a sum of $67,272.57 may not have been paid to Yandina. (Passage of time means they cannot be sure.) I have been assured that that sum will be paid, with interest. In the circumstances Yandina accepts that the issue need not affect this judgment. However, I observe that the amount of interest payable has not been agreed and
the assurance I was given fell short of an undertaking, so caution leads me to defer the orders that I propose to make for 14 days and reserve leave to apply. That will ensure the issue is resolved.
Decision
[91] The banks’ strikeout applications will be granted, this order to take effect
14 days from the date of this judgment. There will be leave to apply, confined to the issue at [90].
[92] Each of the banks is prima facie entitled to costs with provision for two counsel. I am disposed to award costs on a 3C basis. Counsel must seek agreement. They may file memoranda if costs cannot be agreed. The banks’ memoranda must be filed within six weeks and Yandina’s memorandum within a further two weeks.
Miller J
Solicitors:
Thomas Dewar Sziranyi Letts, Lower Hutt for Plaintiff Russell McVeagh, Auckland for First Defendant Simpson Grierson, Auckland for Second Defendant
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