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Commissioner of Inland Revenue v Reid [2007] NZCA 576; (2008) 23 NZTC 21,783 (13 December 2007)

Last Updated: 29 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

[2007] NZCA 576

BETWEEN THE COMMISSIONER OF INLAND REVENUE
Appellant

AND JOHN ANTHONY REID
First Respondent

AND HUGH MILLOY
Second Respondent

AND MILLOY REID WONG & COMPANY LIMITED
Third Respondent

Hearing: 24 October 2007

Court: Hammond, Ellen France and Wilson JJ

Counsel: J C Pike and H W Ebersohn for Appellant
C T Walker and P A Paterson for Respondents

Judgment: 13 December 2007 at 10am

A The appeal is dismissed.

2. The appellant is ordered to pay to the respondents jointly costs of $6,000 and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Wilson J)

Introduction

[1] On 14 October 2004, Fogarty J acquitted three businessmen, including the first respondent, Mr Reid, of two charges of conspiracy to defraud investors and a total of 19 other “laundering” charges. Mr Reid, along with the other respondents, now seeks to bring an action for misfeasance in a public office against the Commissioner of Inland Revenue in relation to the way in which employees of the Commissioner conducted the investigations which resulted in the criminal charges.
[2] The Commissioner applied to strike out the statement of claim on the basis that it disclosed no reasonable cause of action and was an abuse of the process of the Court. On 19 December 2006, Andrews J dismissed the application. The Commissioner now appeals against that decision.

Background

[3] The investigations related to two investment schemes involving the sale of shares in companies called Digi-Tech Communications Ltd (Digi-Tech) and New Zealand Investments Ltd (NZIL). Mr Reid and the second respondent Mr Milloy were shareholders in and directors of both Digi-Tech and NZIL, as well as Digi-Tech’s parent company, N-Tech Ltd, and NZIL’s parent company, St Lucia Investments Ltd. Both are also shareholders in and directors of the third respondent Milloy Reid Wong & Company Ltd, a merchant and investment bank.
[4] The Digi-Tech and NZIL schemes were structured along broadly the same lines. Each provided that investors (all of them Loss Attributing Qualifying Companies (LACQs)) would purchase shares in the companies over a ten-year period, with more than 80 percent of the purchase price payable in year 10. Investors also took out “loss of profits” insurance policies. Almost the entire cost of the insurance premiums was funded by a limited recourse loan from an offshore bank (New York Inter-Maritime Bank Geneva). The investors claimed the insurance premiums and interest on the loans as deductible expenses against their otherwise taxable income. Fogarty J expressed the view that “absent the tax advantage, the arithmetic made nonsense of the insurance policy”. He was “quite satisfied that the tax advantage was the immediate attraction for entering into these investments”: R v Conolly (2004) 21 NZTC 18,844, at [24] and [23] respectively.
[5] The majority of the investors were clients of Gosling Chapman, an accounting firm, which introduced them to the Digi-Tech and NZIL transactions and requested that the transactions be structured along these lines. Gosling Chapman had always anticipated that the investments would be scrutinised by the Commissioner. It was initially thought that this inquiry would be directed to whether the full amount of the insurance premium could be expended in Year 1, or whether it had to be accrued across the life of the policy. However, during the course of the investigation, the partners of Gosling Chapman perceived that they could be exposed to claims by their clients should the tax deductibility of the insurance premium be set aside. A senior partner complained to the Serious Fraud Office (SFO). This complaint was followed by a complaint by the Commissioner. The SFO decided to prosecute.
[6] Following a five-week trial, Fogarty J acquitted the defendants, including Mr Reid, of all charges. In his judgment of 22 October at [196], he said:

... I am satisfied that the Crown has failed to prove a dishonest agreement by any two or more of the accused to defraud the investors. On the evidence that I have seen all the accused thought they were participating in putting in place transactions which did have legal validity. None of them made any promise or misrepresentation to any of the investors that the transaction would not be circular.

[7] In July 2006, the respondents issued proceedings in the High Court alleging misfeasance in public office by the Commissioner. The factual allegations are summarised as follows in the High Court judgment:

Inland Revenue Department Investigation

[13] Ten named employees of the Department carried out an investigation into the claimed tax deductions. It is alleged that they:

(a) Sent the offshore bank a document for comment, comprising the front page of one of the bank’s loan agreements, with the balance being an agreement from another lender.
(b) Later referred to the bank’s response that it did not recognise the document, without noting that an incorrect document had been sent to it for comment.
(c) Sought to avoid or delay disclosing what had been sent to the bank.
(d) Ignored or gave little weight to sworn statements provided, attesting to the bona fides of various parties involved in the transactions, confirming payment of insurance premiums and the issue of policies.
(e) Further, the team leader for the investigation first acknowledged that the insurer could meet its obligations, then created a file note purporting to record an acknowledgement by the first plaintiff that the Digi-Tech transaction was circular.

Statement of Position (“SOPs”)

[14] In July and August 2000 the defendant issued SOPs to investors in Digi-Tech. In the SOPs the defendant;

(a) Quoted the bank’s statement that it did not recognise the loan documents, but did not say that the defendant had sent the bank an incorrect document;
(b) Contended that the LAQCs had not received loan funds from the bank, so had not incurred the claimed interest expenditure, or the expenditure on the interest premiums;
(c) Stated that no source documents supporting the transactions or other evidence had been provided to the Department to substantiate the explanations given regarding insurance;
(d) Either failed to refer to one of the sworn statements, or referred to it only to say that it was “insubstantial and uncorroborated”;
(e) Stated that payment of insurance premiums could not be verified and that there was insufficient evidence that the premiums had been paid.

Complaints to the SFO

[15] The Department’s director of litigation made fraud complaints to the SFO, [which] continued the alleged errors and omissions already referred to.

Notices of Proposed Adjustment (“NOPAs”)

[16] On 28 March 2002 the defendant issued NOPAs to investors in NZIL who had not yet conceded their positions.

Explanations and advice given to the Department by the first plaintiff

[17] The defendant ignored explanations given by the first plaintiff in relation to:

(a) The incorrect loan document sent to the offshore bank;
(b) The ability of the insurer to meet claims;
(c) The nature of the transactions and the validity of the investors’ claims for tax deductions.

[18] The plaintiffs also allege that:

(a) An employee of the Department, despite undertaking to pass on the first plaintiff’s explanations to the SFO, either failed to do so, or ignored the explanation.
(b) The defendant refused to issue corrections of errors in the SOPs and NOPAs, when the first plaintiff pointed out those errors.
(c) The defendant subsequently issued denials when the first plaintiff wrote to investors setting out the errors and reporting concessions.
(d) Generally, the defendant sought to avoid or delay disclosing documents to the first plaintiff.
[8] The allegations of misfeasance appear as follows at [92] – [95] of the statement of claim:

92. The defendant and his employees are public officers.
93. The actions of the defendant and his employees pleaded above were a purported exercise of their public powers.
94. The defendant and his employees exercised these powers for an improper motive, with intent to injure the plaintiffs. The defendant’s motivation was to 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 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.
95. The misfeasance by the defendant and his employees caused damage to the plaintiffs.

[9] The Commissioner applied to have the proceeding struck out on the basis that the statement of claim disclosed no reasonable cause of action, and was an abuse of process. Andrews J dismissed the application: Reid v Commissioner of Inland Revenue HC AK CIV 2006-404-4222 19 December 2006.
[10] Andrews J considered that she could not exclude the possibility that the respondent could successfully argue that the Commissioner should be held directly liable for the actions of others, carried out in his name. In the High Court, it was not contended that the Commissioner could be vicariously liable, but that possibility has been raised in this Court.
[11] The Judge went on to hold that it was possible that the named employees and contractors held public office and that they may have been acting in exercise of that office. She also found that it could be argued that using illegitimate means to achieve the object of protecting the tax system could constitute an improper motive and noted that whether the actions complained of were illegitimate and constituted an improper motive “are questions that can only be determined at trial”.
[12] Finally, Andrews J declined to strike out the claim on the basis that it was an abuse of process because it was “in reality” a claim for malicious prosecution.

Issues

[13] Mr Pike, for the Commissioner, submits that the present appeal raises two issues. The first is whether the respondents’ claim should be struck out as an attempt to by-pass the requirements of the tort of malicious prosecution. The second is whether the pleadings disclose an arguable basis for a cause of action of misfeasance in public office. In particular, Mr Pike submits that the respondents have not pleaded any improper motive, and that the alleged improper acts are not attributable to the appellant.
[14] Mr Walker, for the respondents, argues that their claim is an orthodox claim of misfeasance in public office, and not an attempt to avoid the requirements of the tort of malicious prosecution. He submits that improper motive has been correctly pleaded and that the appellant is directly or vicariously liable for the relevant acts.
[15] In addition, Mr Pike advanced in his written submissions, but did not develop orally, the proposition that Fogarty J’s findings in the criminal trial were that the Commissioner acted appropriately and that a Court hearing the civil proceedings would therefore be required to reverse the findings of fact made in the course of that trial to uphold the present claim. In his written reply, Mr Walker contended that Fogarty J’s findings support the respondents’ case.

The findings in the criminal proceedings

[16] We think it appropriate to address the issue of the findings in the criminal proceedings first because it relates to two preliminary matters. The first is whether the claim should be struck out as an improper attempt to relitigate a matter that has already been resolved in a criminal proceeding. The second is whether the facts as found in the criminal proceedings are inconsistent with those pleaded in the present cause of action and, if so, the extent to which the findings of the High Court in the criminal proceedings determine the facts that this Court must assume to be true. To rely on those findings would be to depart from the well-established principle that any strike-out application proceeds on the assumption that the facts pleaded in the statement of claim are true, whether or not they are admitted: Attorney General v Prince and Gardner [1998] 1 NZLR 262 at 267 (CA).
[17] Mr Pike submits that the respondent cannot support a pleading that the defendant “initiated and supported a criminal prosecution”, without offending the principles of res judicata or abuse of process. He refers to Hunter v Chief Constable of the West Midlands [1981] UKHL 13; [1982] AC 529, where the House of Lords held that the plaintiff was barred from bringing a claim that he had been assaulted by police officers, after it had been found in previous criminal proceedings, beyond reasonable doubt, that he had not been assaulted.
[18] Mr Walker protests that the present case cannot be a collateral attack on a prior finding because there were no findings against the respondents in the criminal Court.
[19] We see no reason to depart from the principle that a strike out application (unlike an application for summary judgment for the defendant) must be determined on the basis of the facts as pleaded in the statement of claim. We therefore approach the present application on that basis.

Malicious prosecution

[20] The next issue is whether the claim should be struck out as an attempt to by-pass the requirements of the tort of malicious prosecution. The appellant argues that, if the respondents have a remedy in tort, it could only be through a claim against the SFO for malicious prosecution. The respondents cannot circumvent what may well be insuperable difficulties in the way of such a claim by instead pursuing a claim of misfeasance against the Commission.
[21] The respondents say this is not what they are seeking to do. The appellant was not the prosecutor in the criminal proceedings, and therefore the claim cannot be one for malicious prosecution. Mr Walker submits that the availability of a tort of malicious prosecution cannot of itself preclude the possibility of a remedy against other parties involved in the background of criminal proceedings.
[22] The appellant may be able to argue that the elements of the tort of malicious prosecution should not be avoided or diluted by permitting a misfeasance claim to be brought in the alternative to a malicious prosecution claim. However, there may be scope for concurrent or overlapping claims. These are matters which should be addressed at a substantive hearing, rather than on a strike out application. We do not need to decide them.

Misfeasance in public office

[23] We now turn to the substance of the respondent’s claims. An application for strike out will only be granted if the cause of action on the facts as pleaded is so clearly untenable that it cannot possibly succeed: Prince and Gardner at 267. To succeed, the appellant must therefore show that one or more of the elements of the tort are clearly absent.
[24] The elements of the tort of misfeasance in public office were discussed by this Court in Hobson v Attorney General [2007] 1 NZLR 374 at [89]:

The tort is committed whenever someone holding public office has misconducted himself or herself by purporting to exercise powers which were conferred on him or her not for personal advantage but for the benefit of the public or a section of the public, either with the intent to injure another or in the knowledge that he or she was acting outside his or her powers and that this was likely to injure the plaintiff.

[25] The Commissioner claims that the respondents have failed to make out a tenable basis for establishing the three elements of the tort. First, he argues that the claim is not against “someone holding a public office”; secondly, that the claim does not relate to acts purportedly committed in the exercise of public powers; and, thirdly, that the requisite intention has not been alleged.
[26] The relevant part of the pleadings is paragraph [93], which alleges that “[t]he actions of the defendant and his employees ... were a purported exercise of their public powers”. The respondents’ elucidation of this point involves two propositions. First, the relevant acts are the primary acts of the Commissioner himself, and were therefore an exercise of a public power. Secondly, the acts were an exercise of public power because they were performed under statutory authority delegated by the Commissioner to his employees.
[27] As to the first possibility, Mr Pike submits that it is not pleaded that the Commissioner committed any of the elements of the tort, was involved in any of the relevant decisions, or was even made aware of them. Few, if any, employees were exercising statutory powers when they carried out the acts complained of. If both of these points are correct, then there can be no claim of misfeasance in public office, and the proceedings must be struck out.
[28] The question of whether the acts complained of were in exercise of a public power is informed by the issue of whether they were committed by a person holding a public office.

Holding a public office

[29] There is no question that the Commissioner holds a public office. Acts committed by the Commissioner personally therefore clearly fulfil this criterion. However, the majority of the allegations focus on the acts of employees or contractors. There is therefore an issue as to whether the employees can be said to have been holding a public office for the purposes of the misfeasance claim.
[30] The relevant part of the pleadings is paragraph [92], which pleads that “[t]he defendant and his employees are public officers”. In relation to the employees, the respondents appear to advance two possibilities. The first is that the employees were exercising the delegated powers of the Commissioner, and can therefore be said to have been acting in the public office of “Commissioner of Inland Revenue”. The second possibility is that the employees independently held public office, but that the Commissioner is nevertheless vicariously liable for their acts.
[31] The appellant submits that attributed liability is incompatible with the nature of the tort of misfeasance in public office because the consequence would be to hold a natural person liable for the combined effects of multiple acts of misfeasance by other persons. As to the second possibility, Mr Pike does not argue that the possibility of vicarious liability in relation to misfeasance in a public office is foreclosed, but only that it is “controversial”. He cites Kuddus v Chief Constable of Leicestershire Constabulary [2002] 2 AC 122 (HL) as support for the proposition that such liability is incompatible with the nature of the tort.
[32] In Mr Walker’s submission, the appellant’s arguments “miss the point”. He contends that the relevant acts are the principal acts which caused injury to the respondents, and that all of these acts were exercises of power conferred on the Commissioner by virtue of his position. The fact that he may have been assisted by his agents or employees does not alter the position.
[33] For the purposes of this strike out application, we accept this submission. The acts complained of by the respondents were all at least arguably acts of the Commissioner, or arguably acts of employees for which the Commissioner is vicariously liable.

Intention

[34] The relevant part of the pleading states:

92. The defendant and his employees exercised these powers for an improper motive, with intent to injure the plaintiffs. The defendant’s motivation was to encourage investors to concede their tax disputes and to deter promoters of comparable schemes. [T]he defendant and his employees made accusations against the 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.

[35] The appellant contends that the motivation identified is proper for the purposes of the Tax Administration Act 1994 and could therefore not in itself found the tort of misfeasance in public office. He refers to P F Sugrue Ltd v Attorney-General [2006] 3 NZLR 464 (PC) in support of this submission. Mr Pike realistically accepts however that it may not be sufficient that the Commissioner had a legitimate purpose at the outset of the investigation, if the motive subsequently changed.
[36] If the Commissioner and his employees acted with the motive alleged in paragraph 92, and for present purposes it must be assumed that they did, the intention required to establish misfeasance was present. Whether it was in fact present is an issue for trial.

Result

[37] On the basis of the allegations pleaded by the respondents, it cannot be said that a claim of misfeasance in public office could not possibly succeed. Nor can it be said that the proceedings are an abuse of the procedures of the Court.
[38] More particularly, we agree with Andrews J that whether the actions complained of were illegitimate and constituted an improper motive are questions that can only be determined at trial. It would therefore be premature to strike out the claim at this time.
[39] The claim may well face some real difficulties in establishing the requisite intention on the part of the Commissioner and his employees and the proximate cause of any damage to the respondents. But the respondents are entitled to their day in Court on those and any other issues.
[40] The appeal is therefore dismissed.
[41] The Commissioner is ordered to pay to the respondents jointly costs of $6,000 and usual disbursements.

Concluding comment

[42] Finally, we acknowledge the very high quality of the submissions which we received from both Mr Pike and Mr Walker. We have been greatly assisted by these submissions in considering the difficult issues raised by this appeal.

Solicitors:
Crown Law Office, Wellington for Appellant
Gilbert Walker, Auckland for Respondents