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Court of Appeal of New Zealand |
Last Updated: 22 January 2014
IN THE COURT OF APPEAL OF NEW ZEALAND
CA108/05
BETWEEN AMP GENERAL INSURANCE LIMITED Appellant
AND MACALISTER TODD PHILLIPS BODKINS
First Respondent
AND GRAEME MORRIS TODD Second Respondent
Hearing: 21 November 2005
Court: Robertson, Baragwanath and Doogue JJ Counsel: N A Till for Appellant
E D Wylie QC for Respondents
Judgment: 13 December 2005
JUDGMENT OF THE COURT
C In all other respects the appeal is
dismissed.
D There is no order as to
costs.
AMP GENERAL INSURANCE LIMITED V MACALISTER TODD PHILLIPS BODKINS AND ANOR CA CA108/05 13 December 2005
REASONS
(Given by Baragwanath J)
[1] The second respondent, Mr Todd, and the first respondent, the law
firm of which he is a partner, succeeded in a
claim in the High Court
against their professional indemnifier (AMP). Chisholm J held that a sum of
$72,000 paid by the firm
to settle a tax debt to the Commissioner of Inland
Revenue, together with interest and the costs incurred by the firm in
negotiating
settlement, were recoverable under their policy of insurance. AMP
appeals against the decision and submits that the judgment in
favour of the
respondents should be set aside.
Background facts
[2] Since the 1980s the firm has acted for Mr Basil Walker,
his wife and members of their immediate family. Mr Todd,
on behalf of the
firm, acted on the creation of the Walker Family Trust of which Mr Basil Walker
was the effective settlor. Under
a deed dated 20 April 1993 his brother
Lindsay and Mr Todd were appointed trustees. Mr Basil Walker, his wife and
family were named
as primary beneficiaries. As well as accepting his role as
trustee, Mr Todd assumed primary responsibility for advising and acting
for the
Trust as its solicitor; other partners and staff also provided professional
services from time to time.
[3] In April 1994 the trustees bought a property at Towne Place,
Queenstown, intending to construct seven residential units
to be registered
under the Unit Titles Act 1972. Substantial mortgage finance was provided by
the Bank of New Zealand. The mortgage
document was not produced at trial and its
terms were not proved.
[4] The trustees agreed that Mr Basil Walker should carry out the development of the Towne Place units on behalf of the trust. He undertook to attend to the necessary GST and other tax responsibilities as well as to the accounting in relation to the development. Counsel were unable to refer us to any authority permitting the trustees to delegate those functions in this way: cf Dal Pont and Chambers Equity
and Trusts in Australia and New Zealand (2nd ed) at 625:
The duty not to delegate the exercise of a trustee’s powers, authorities and discretions arising under the trust, either to the co-trustee or a third party, is a corollary of the duty to act personally (McMillan v McMillan (1891) 17 VLR
33, 38-9).
The function of accounting for GST remained the trustees’
responsibility.
[5] The trustees subsequently bought further land at Lake Hayes and at
Frankton Road, Queenstown. The trustees had expected
to be able to use the
proceeds of sale of the Towne Place units to complete the latter purchase but
because of delays they found
it necessary to arrange further BNZ funding
to settle the Frankton Road purchase.
[6] The sales of the Towne Place units were progressively settled from
March to May 1995. To facilitate the settlements BNZ
by letter of 23 March 1995
wrote to the firm stating:
...we enclose memorandum of mortgage 864045/2 as requested against your
undertaking to provide the Bank with the balance sale proceeds
of each unit on
completion of settlement.
We will return to the question whether “the balance sale
proceeds” was to include or exclude GST.
[7] During the process of settlement of the sales Mr Todd and
his legal executive, acting as solicitors for the trustees,
overlooked that GST
was payable by the trustees on each sale. The whole of the net proceeds was
paid to BNZ in reduction of
its mortgage without any provision for
the payment to the Commissioner of GST.
[8] Later developments relating to the Trust do not need to be detailed. It is common ground that the trustees were personally liable to the Commissioner for that GST debt: Goods and Services Tax Act 1985 s 57(3). As at 30 April 1995 the GST liability incurred on the sale of the Towne Place units was $50,486.10. As at
15 March 2001 the total amount of GST, other taxes, penalties and interest amounted to $278,330.
[9] In September 2001 Mr Lindsay Walker issued a proceeding against Mr
Todd alleging breach of his duty as solicitor and trustee
and seeking a
declaration that he was entitled to indemnity from Mr Todd in relation to any
tax liability. AMP took over the defence
of the proceeding and issued a
counter-claim against Mr Lindsay Walker seeking half the amount of $72,000 that
it was expected Mr
Todd would have to pay to the Commissioner to settle the tax
claim against him. In a separate proceeding Mr Todd sued the Trust’s
accountants for professional negligence.
[10] During 2002 settlement of these claims was achieved among various
parties. The Commissioner accepted $72,000 from Mr Todd
and $30,000 from Mr
Lindsay Walker in satisfaction of their personal liability as trustees,
the firm borrowing money in order
to meet Mr Todd’s liability. The
claim by Mr Todd against the Trust’s accountants was settled by their
paying $20,000.
Mr Lindsay Walker’s claim against Mr Todd was settled by
payment of $27,000 plus a share of a mediator’s fee. The firm
contributed
$20,000, being the excess under the policy, and AMP contributed the balance
required to complete this part of the settlement.
[11] The present proceeding by the firm and Mr Todd, claiming indemnity
against
AMP under their insurance policy, was issued on 4 November
2003.
The policy
[12] The policy provided:
OPERATIVE CLAUSE
AMP agrees, subject to the terms, limitations, exclusions and
conditions of this Policy to indemnify the Insured in respect of claims
first made against, or losses first discovered by the Insured after the
inception of this Policy arising out of the conduct of the Professional
Services of the Insured for
1. claims (including claimants’ costs) made against
the Insured arising out of civil liability, and losses incurred by the
Insured due to dishonesty of employees.
2. other costs and expenses incurred by the Insured in the defence
and/or settlement of claims or losses under Operative
Clause 1.
... (emphasis added)
[13] “Professional Services” carries the following
definition:
advice or services performed in the conduct of the profession, which shall
also include when acting as trustees, stated in the Schedule
by or on behalf of
the Insured or duties undertaken by the Firm or Practice as agents of other
practitioners excluding any individual
personal appointments of a present
partner, outgoing partner, sole practitioner or employee of the Firm
or Practice as
a Director or Officer unless liability arises from the
professional advice given in the capacity of the profession as stated in the
Schedule.
The profession stated in the schedule is that of solicitors.
[14] Exclusion 8 provides:
AMP shall not indemnify the insured against a claim or loss... arising from
their trading loss or trading liability incurred by a
business managed by or
carried on by the Insured.
The judgment of the High Court
[15] The Judge gave the following reasons for his decision in
favour of the respondents:
[42] In his capacity as a solicitor Mr Todd failed to exercise proper
care and skill when acting on the sale of the units. Failure
to make provision
for GST speaks for itself. Mr Todd accepts that he was negligent.
Expert evidence from Mr Mackintosh
supports that conclusion and no serious
argument to the contrary was advanced on behalf of the defendant. The firm was,
of course,
responsible for Mr Todd’s negligence.
[43] Failure to pay GST from the sale proceeds of each Towne Place unit
carried the direct, although not immediate, consequences
that the tax could not
be met from the assets of the trust and the trustees became personally liable
for the tax and penalties under
the Goods and Services Tax Act. This situation
would not have arisen if the firm (through Mr Todd) had properly discharged its
conveyancing
responsibilities when acting on the sale of each unit.
[44] Initially the trustees were hopeful that it would be possible to retrieve the situation by selling trust assets. In fact, however, despite their best efforts the trustees were unable to retrieve the situation. The trust was insolvent. Consequently the trustees faced the prospect of meeting the GST and penalties from their own pockets. This was directly attributable to the firm’s negligence. If the firm had not borrowed the money and paid the sum of $72,000 to IRD, Mr Todd would have been entitled to issue proceedings
and recover from the firm the amount that he was required to pay to IRD (in
all probability much more than $72,000). The firm’s
acknowledgement of
liability and willingness to settle with IRD to avoid an escalating claim was
plainly sensible. The insurer was
kept informed throughout and it is difficult
to imagine that the outcome would have been any different if the insurer had
been
handling the claim. It might also be added that if Mr
Walker’s claim against Mr Todd had gone the full distance it
would not
have been surprising if the trust’s accountants had taken steps to join
the firm.
[45] Mr Till maintains that there was no loss because the
trust was credited with the GST and that Mr Todd’s
loss resulted from the
absence of a solvent trust fund against which to enforce his right of indemnity.
I do not accept those submissions.
Mr Todd’s liability to pay GST and
penalties out of his own pocket was directly attributable to the firm’s
negligence.
Without that negligence there would not have been any question of Mr
Todd having to pay GST and penalties on behalf of the trust
because they would
have been met by the trust out of the sale proceeds of each unit.
[46] The underlying reality of the claim against the firm can now be
stated. In his capacity as a trustee of the Walker Family
Trust Mr Todd had a
valid claim against the firm for its negligence (so did Mr Walker). This was
acknowledged by the firm. AMP chose
not to be directly involved in the efforts
of the firm and Mr Todd to settle Mr Todd’s claim as expeditiously as
possible.
Although the settlement with IRD (funded by the firm) avoided the
necessity for Mr Todd to formally bring his claim and issue proceedings,
it does
not alter the reality that Mr Todd (and Mr Walker) had a valid claim against the
firm which fell within the operative clause
of the policy.
[47] The next issue is whether Exclusion 8 of the policy applies. This
provision excludes claims or losses “arising from
a trading loss or
trading liability incurred by a business managed by or carried on by the
Insured”. The defendant maintains
that the tax liabilities arose from the
trust’s losses and from trading managed and/or carried out by the
plaintiffs. In my
view that proposition distorts the actual situation. The claim
in this case arose from the firm’s failure to make provision
for GST when
acting on the sale of the Towne Place units. It did not arise from a trading
loss or trading liability incurred by a
business managed or carried on by the
insured. The insured was carrying on business as solicitors, not as a property
developer operating
under the name of the Walker Family Trust.
[48] In the end result I am satisfied that the first plaintiff is
entitled to indemnity under the policy in relation to the sum
of $72,000 paid by
it to IRD. Given Mr Till’s concession ..., it is my understanding that the
conclusion I have reached (and
the path by which it has been reached) means that
the defendant concedes that the first plaintiff has paid the excess under the
policy.
Even if the defendant had not made that concession I would still have
held against the defendant on the excess issue. The plaintiffs
are also entitled
to interest and to be reimbursed for the proportion of Mr Wylie’s fee that
is attributable to the settlement
with the Inland Revenue
Department.
[16] AMP submitted:
(a) the firm and Mr Todd had no duty as solicitors to pay or
make provision for payment for the GST liabilities of
the trustees of the
Trust;
(b) no loss resulted to the trustees by reason of the payment
of the proceeds of sale into the trustees’
account with the BNZ
without deduction of the GST. The trustees’ GST liability arose from
their inability to secure
indemnity because there were insufficient trust
assets;
(c) the trustees’ liability to pay GST arose from the sale of the
properties and was excluded by Exclusion 8 of the policy
as being a claim of
loss arising from a trading loss or liability incurred by the business of the
Trust managed by of carried on
by the trustees.
[17] The solvency of the trust at the time of the transactions was not
raised as an issue by AMP or advanced in argument before
the High Court. The
topic did receive some mention in oral argument in response to questions from
this Court. However the litigation
has been conducted throughout on the basis
that the trust was solvent at the relevant time, notwithstanding that it was
later found
to be insolvent.
[18] Nor was there challenge by AMP to the existence of a duty owed by Mr
Todd as solicitor to himself as trustee. We have therefore
heard no argument on
that topic.
[19] The firm and Mr Todd challenged each argument,
submitting:
(a) it was indeed their duty both to advise the trustees of the need to
pay
GST and to pay its amount not to the BNZ but to the Commissioner; (b) the trustees did sustain loss by reason of breach of such duties;
(c) the trustees’ liability to pay GST arose not from
the sale of the properties but from the firm’s
and Mr Todd’s
failure to advise the trustees of the need to pay GST and the further failure to
pay its amount to the Commissioner
rather than to the BNZ.
Discussion
Mr Todd’s two roles
[20] Mr Todd’s role in relation to the trust was 1) as a solicitor
and 2) as trustee of the Trust.
[21] Mr Todd as solicitor both failed to advise himself and his
co-trustee of their duty to account for GST when the trust sold
the property and
to deduct from the payment to the BNZ the amount of the GST. It is therefore
argued for him and the firm that
the cause of the trustees’ loss is that
failure, so he and they are liable to the trustees in their capacity as
solicitors
and such liability falls within the policy and gives rise to
indemnity.
[22] Certainly Mr Todd as trustee is personally liable for both the GST
debt to the Commissioner and the trust’s debt to
the BNZ. While the
policy covers certain liability as trustee its terms are circumscribed; the
essential question is whether the
pleaded and proved facts fall within
them.
Trustee personally responsible for payment of GST
[23] We have recorded ([8] above) that it is common ground that the
trustees were personally liable to the Commissioner for that
GST debt: Goods and
Services Tax Act 1985 s 57(3).
[24] It was observed in CIR v Chester Trustee Services Ltd [2003]
1 NZLR 395 at [37]:
... a trust is not a legal entity distinct from its trustee, who is
personally liable to its creditors for all the debts it incurs
(Ex p Garland
[1804] EngR 336; (1804) 10 Ves Jun 110, Labouchere v Tupper [1857] EngR 685; (1857) 11 Moo PCC 198,
Re Graham Pitt & Bennett, ex p Nolan & Skeet (1891) 9 NZLR
617)...
...unless personal liability expressly excluded
[25] Trustees can contract on terms that their personal contractual
liability will not extend beyond the sum for which they can
obtain indemnity
from the assets of the trust. In Re Graham Pitt & Bennett, ex p Nolan
& Skeet at 621 this Court held that:
There is no such thing recognised as that trustees have an identity different
from themselves individually, and that they themselves
do not become liable when
acting for the trust estate, unless there is an express contract to that
effect.
To similar effect are Muir v City of Glasgow Bank (1879) 4 App Cas 337; Hunt Bros v Colwell [1939] 4 All ER 406; Helvetic Investment Corporation Pty Ltd v Knight [1984] 9 ACLR 773 discussed in NZHB Holdings Ltd v Bartells (2004) 5 NZCPR
506.
Mr Todd was aware of the option of excluding personal liability but that
is not proved to have occurred
[26] Mr Todd was aware that trustees might be able to contract out of personal liability and limit their liability to a mortgagee to the amount of the trust assets. That is apparent from his adding a clause in such terms to a letter setting out the bank’s terms and conditions for a loan relating to the Frankton Road property in August 1994. But there being no evidence as to any express term to that effect in the present BNZ mortgage we must approach this case on the footing that the trustees were personally liable to the BNZ for the Towne Place borrowings.
Are Mr Todd and the firm liable for loss triggering operation of the
policy?
[27] While Mr Todd was liable for both the BNZ and the GST debts, the
claim that he and the firm are liable as solicitors (or
as trustee) for a loss
triggering the policy is more difficult. We have concluded that they
were.
[28] To explain why certain issues need first to be cleared
away.
A payment to a creditor (the BNZ) is not treated as received in trust to
the amount of any GST liability
[29] For the reasons stated by this Court in New Zealand
Refining Co Ltd v Attorney-General (1993) 15 NZTC 10,038, 10,052 moneys
paid to a creditor in payment of a debt are not to be treated in law as in part
received in trust
on behalf of the Crown for payment of GST to the Crown. McKay
J there contrasted the position of tax deductions made by an employer
from the
wages of an employee which, under s 365 of the Income Tax Act 1976, are held by
the employer in trust for the Crown.
[30] In Rob Mitchell Builder Ltd (in liquidation) v National Bank of
New Zealand Ltd (2004) 21 NZTC 18,397 Blanchard J in delivering the judgment
of this Court on the point stated:
[22] ...there is nothing in the GST Act which requires a
mortgagee receiving money under its mortgage in circumstances
where it has not
exercised a power of sale, and was not in possession of the mortgagor’s
land, to pay GST relating to those
moneys. There are no provisions comparable
to ss 5(2) and 17 under which the selling mortgagee is deemed to have made a
supply in
the course of a taxable activity (even if it is not registered for GST
purposes), and where the transaction is segregated from other
supplies and
recorded in a “special return”.
...
[28] The GST certainly does not have to be funded twice. The mortgagor is no worse off than it would be if the mortgagee had conducted the sale and accounted for GST. It is true that the mortgagor continues to have a debt to the Commissioner for the amount of GST in the present case. But it owes a reduced balance to its mortgagee. Its net financial position is the same as if there had been a mortgagee sale.
[31] It follows that, in the absence of authority from the BNZ, the firm
had no legal right to withhold from the bank the GST
payable on the
sales.
Did BNZ authorise withholding of GST?
[32] The next question is whether the BNZ gave authority to the lawyers
to deduct GST. We have reproduced the terms of the bank’s
authority ([6]
above). It is in our view expressed too generally to be construed as an
explicit authority to withhold the GST in
breach of the bank’s legal
entitlement to receive the net proceeds of sale.
[33] The high point of the submissions of Mr Wylie QC relied on the
evidence of
Mr Todd. His brief which was produced in evidence in chief
stated:
12. ...If I am acting for trustees, then I consider it my
responsibility to tell the trustees of the GST liability and advise
that if the
GST is not paid, they could become personally liable for the same...
Disbursements could include rates, possibly income
tax, any mortgage repayment,
GST commission, legal fees and any other liability triggered by the
sale...
[34] His evidence in chief continued orally:
Q. We know the payment was made by the firm to BNZ. Did you intentionally
pay GST to the BNZ... No, I don’t believe so. There
was an undertaking
that had been previously given for us to pay the net proceeds of sale to the
BNZ.
THE BENCH. Q. If you had turned your mind to it would GST be taken out to
arrive at the net proceeds of sale or not... Yes, given
that the trust was
registered for GST and the bank would have been aware of that, I would have
anticipated that would have been a
payment which would have been accepted as
part of the gross proceeds of sale before disbursement to the bank of the net
proceeds
of sale.
Q. Was your payment of the GST unintentional... Yes. (reads from para 15).
Q. At that stage did you turn your mind to the possibility that you and
Mr Walker were personally liable for the GST... No.
[35] Mr Wylie submitted that this evidence, on which Mr Todd was not cross-examined, establishes a preparedness on the part of the bank to accept the net proceeds of sale after deduction of GST.
[36] Read in isolation the evidence could perhaps be read as containing
such an implication. But Mr Till pointed to the firm’s
letter of 1
November 2000 to the Commissioner writing formally on behalf of the trustees
seeking relief from additional incremental
tax and penalties. It contains the
passage:
The debt position of the Trust was such that the money realised from sale
transactions was paid to secured creditors to reduce the
indebtedness. The
Trustees were required to do this as a condition imposed by the first mortgagee
to release their securities.
The Trustees considered at all material times
there would be sufficient equity upon sale of the home situated at Lake Hayes to
cover
the tax liability and actively pursued that option.
[37] The clear implication that the trustees were required by the bank to
pay the gross amount is simply inconsistent with the
contention advanced by Mr
Wylie. The firm’s letter was undoubtedly carefully considered and we are
unable to say that the respondents
have proved authority from the bank for the
firm to make payment to it net of GST.
[38] It thus follows that:
(a) at all material times the trustees are to be treated as having owed
personally both the GST and the bank debt;
(b) the Trustees had no right or duty to withhold payment to the bank
of the sum required to meet their GST obligation; and
(c) Mr Todd and his firm were, and are, liable as solicitors to the
trustees because of their failure to remind the trustees
that they had a GST
obligation which they had to meet and for which they were entitled to
reimbursement from the Trust.
Since the Trust is to be treated as solvent the respondents have
established that the claims/losses are covered by the policy
[39] We fully accept the Judge’s finding that in breach of duty Mr Todd overlooked the GST liability and gave no advice to the trustees of such liability. That could potentially have given rise to a “civil liability” for which the firm and
Mr Todd would be entitled to indemnity. To give rise to such liability,
beyond nominal damages for which the respondents did not
contend, the claimant
must establish not only breach of duty but loss. The question whether there was
a duty on Mr Todd as solicitor
to pay the GST was not argued before us. We
doubt that such a duty existed but leave the issue open.
[40] On the premise that the Trust was solvent, prompt and accurate
advice by Mr Todd or the firm that the trustees owed the GST
liability would
have resulted in their seeking and obtaining payment from its assets or
conceivably by recourse to further bank borrowing.
That is the basis on which
this case has proceeded ([17] above) and on which we must decide this appeal.
It follows that the
respondents have established that they committed a breach of
professional duty causing actual loss which triggers AMP’s liability
under
the policy.
Summary
[41] In summary:
(a) Since there is no evidence as to terms of mortgage it is to be
presumed that the trustees were personally liable to the
bank.
(b) They were undoubtedly personally liable to the Commissioner.
(c) There is no evidence as to the financial position of the Trust so
that the respondents have failed to discharge their onus
as plaintiffs to show
it was solvent.
(d) There is no right or duty to deflect the GST moneys from the
bank.
(e) The respondents have failed to establish that the bank gave them
authority to withhold the GST.
(f) There nevertheless remained a duty on the solicitors to remind the trustees of the GST debt to the Commissioner. Their failure to do so
meant that the trustees, when called to account for the GST, could not obtain
reimbursement from the Trust which was by then insolvent.
The failure to provide
such advice meant the firm was liable to the Trustees, including Mr Todd,
and was entitled to be
indemnified under the policy.
AMP did not assert that the Trust is to be treated as insolvent at the time
of the payments to the BNZ. The case has proceeded on
the basis that the trust
was solvent at the relevant time and the appeal must be dismissed.
[42] It is common ground that to the extent, if at all, that the BNZ authorised deduction from the sums payable to it for GST it did not exceed the figure of
$50,486.10 as we have noted at [8]. Accordingly the primary judgment for
the respondent is limited to that figure. The interest
award must be reduced
proportionately.
Result
[43] The appeal is allowed and the decision of the High Court is set
aside.
[44] The appeal has substantially failed but not for reasons advanced by
the respondents. There will be no order as to costs in
this
Court.
Solicitors:
Kensington Swan, Auckland, for Appellant
Richard Butt & Associates, Christchurch, for First and Second Respondents
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