Commissioner of Inland Revenue v Giovanni Holdings Limited HC Nelson CIV-2010-442-340 [2011] NZHC 793 (28 July 2011)

Last Updated: 3 August 2011

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

_{CIV-2010-442-340}

UNDER the Companies Act 1993 and Part 18 of the

High Court Rules 2009

IN THE MATTER OF an application under section 239R of the

Companies Act 1993

BETWEEN COMMISSIONER OF INLAND REVENUE

Applicant

AND GIOVANNI HOLDINGS LIMITED Second Respondent

AND DIOR SABATINI (FORMERLY AND ALSO KNOWN AS DENISE ANNE CLARK)

Third Respondent

AND NIKYTAS NICHOLAS PETROULIAS Fourth Respondent

Hearing: 30 May 2011

(Heard at Wellington)

Counsel: P H Courtney and N S Delamore for Applicant

B E Hancock as representative of Second Respondent (by telephone) Third and Fourth Respondents in person (by telephone)

Judgment: 28 July 2011 at 4:00 PM

_{I direct the Registrar to endorse this judgment with a delivery time of 4pm on the}

28th day of July 2011.

_{RESERVED JUDGMENT OF MACKENZIE J}

COMMISSIONER OF INLAND REVENUE V GIOVANNI HOLDINGS LIMITED HC NEL CIV-2010-442-

340 28 July 2011

[1] In September 2010 the Commissioner of Inland Revenue (the Commissioner) obtained a freezing order over a property known at the Motueka River Lodge (the Lodge), the registered proprietor of which is the second respondent (Giovanni). The Commissioner has no claim against Giovanni. He asserts no basis for obtaining a freezing order against any property which is beneficially owned by Giovanni. The Commissioner’s claim is against the third and fourth respondents, Ms Sabatini and Mr Petroulias. He seeks to recover promoter penalties assessed against them under Part 9 of the Tax Administration Act 1994 (the TAA). The Commissioner asserts that they, rather than Giovanni, are the beneficial owners of the Lodge. His claim to a freezing order is based upon that assertion.

[2] The promoter penalties which the Commissioner has assessed are currently being disputed under the disputes process in Part 4A of the TAA. The initial proceeding in which the freezing order was sought was an application under part 18 of the High Court Rules for an order removing the then first respondent, Mr Hodgson, as administrator of Giovanni. As Mr Hodgson is no longer the administrator, that Part 18 proceeding is no longer pursued. The application for a freezing order is in essence a stand-alone proceeding.

[3] The original freezing order was obtained on a without notice basis. It was continued by a further order made on 29 September 2010. By an interlocutory application 27 October 2010, Giovanni applied to vary or discharge the freezing order. By an application dated 28 March 2011, Giovanni sought (among other orders) an order that general discovery be made by the Commissioner, specifically including:

i. All the complete transcripts acquired by the Commissioner of all and complete records of relevant telephone conversations in which the fourth respondent was a participant and purported to be provided to the Commissioner by the Australian Commissioner of Taxation; and

ii. All databases from which extracts of documents are sought to be tendered, for example “Z” drive of Avowal Administrative Attorneys Ltd from which the Commissioner produced documents in reliance; and

3. All probative communications between the Commissioner and the Australian Commissioner of Taxation; and
   
4. All other probative documents, correspondence and records of interviews with any party.
   

[4] The Commissioner filed a notice of opposition on 18 April 2011. The discovery application was set down for hearing on 9 May 2011. On the application of the respondents, that hearing was adjourned by Kós J to 30 May 2011, in a minute dated 10 May 2011.

[5] At the hearing before me on 30 May 2011 counsel for the Commissioner appeared in person. The respondents attended by telephone from Australia. Ms Hancock, who had been given leave to appear for the second respondent, appeared to represent it. Ms Sabatini and Mr Petroulias represented themselves. Written submissions had been filed by both parties in the few days prior to that hearing. In view of the limited time which the parties had had to respond to that material, I gave all parties leave to file additional submissions following the hearing. All of those additional submissions have now been filed and I am in a position to give judgment.

[6] By an application dated 26 May 2011, Ms Sabatini and Mr Petroulias sought to be joined as applicants to the application to discharge the freezing order and the discovery application. Counsel for the Commissioner abided the decision of the Court. At the hearing, I granted leave to the third and fourth respondents to be heard on the discovery application. I now formally confirm that step. To the extent that this may be necessary, I further extend that grant of leave to the application to discharge or vary the freezing order. Ms Sabatini and Mr Petroulias are parties to the proceedings in which the freezing order was made, and the basis of the claim to the freezing order is that they are the beneficial owners of the Lodge. It is clearly necessary in the interests of justice that they be entitled to participate as parties in the hearing of the application to discharge or vary that order.

[7] In their submissions in support of the discovery application, both the written submissions and the oral submissions presented principally by Mr Petroulias, the respondents raise a number of issues as to the actions of the Commissioner,

including the steps taken in these proceedings, and they challenge the bona fides of the Commissioner in a number of respects. Most of those matters will be better addressed in dealing with the substantive application to discharge or vary the charging order. While I have described that as an application to discharge or vary the charging order, it also seeks orders that the proceedings be struck out as an abuse of process. Much of the material in the respondents’ affidavits and submissions is relevant to that challenge to the Commissioner’s actions. Those matters are more appropriately addressed on the substantive application than on the present interlocutory application for discovery. I will only address them to the extent that is necessary to deal with the discovery application.

[8] However, while I do not consider it appropriate to address the respondents’ submissions on these aspects, I do bear in mind that the issues on the substantive application will not be confined to the beneficial ownership of the Lodge. The allegations of abuse of process will also be in issue. The fact that those will be live issues on the hearing of the substantive application is relevant in considering the extent of discovery which may be appropriate.

[9] Ms Courtney for the Commissioner submits that the rationale for discovery is to provide information required to resolve or determine the particular issues in dispute in the application before the Court. She submits that general discovery based on the Peruvian Guano test is not appropriate in cases that as a matter of policy it is considered important to deal with swiftly, such as applications for freezing orders. I accept both of those propositions as correct, as statements of general principle. They must however be applied having regard to the particular circumstances of individual cases.

[10] In an application for a freezing order, discovery will usually be inappropriate. First, applications for freezing orders, including applications to discharge ex parte orders, must normally be determined on an urgent basis. The need for urgency is inherent in the issues involved. The potential risk for dissipation of assets will often, indeed usually, involve the granting of ex parte relief. The draconian nature of the relief will usually mean that a swift hearing, on an on notice basis, on the question of whether that order should continue will be appropriate. In such cases, the delays

involved in further interlocutory processes such as discovery will be inappropriate. Second, the issues involved in an application will not usually be such as to require discovery. The usual onus on the applicant is to show that it has a good arguable case, and that there is a risk of dissipation. The applicant must fully and frankly disclose all material facts, including any possible defences known to the applicant. That obligation will generally preclude the need for discovery at that stage.

[11] The present case is different. In this case, the essential issue on the respondent’s application to discharge the order will be whether or not Ms Sabatini and Mr Petroulias are the beneficial owners of the property registered in Giovanni’s name. The Commissioner’s evidence in support of the assertion that they are is extensive, and relies upon a considerable amount of documentary evidence. That assertion is contested, and the proper vehicle for the resolution of that issue is the application to discharge the freezing order. So, the issue on the application for discharge will necessarily involve an inquiry wider than whether the Commissioner has an arguable case that the second and fourth respondents are the beneficial owners of the Lodge. Discovery would normally be available if that issue arose in other proceedings. The fact that it arises in the course of the freezing order proceedings does not alter the need for discovery. Any presumption against discovery in such proceedings is outweighed in this case by the nature of the issues involved. Further, the urgency which normally attaches to freezing order proceedings does not, in this case, weigh against discovery. The principal interest in having the application to discharge the freezing order heard and determined urgently is that of the respondents. The Commissioner’s position is protected so long as the order remains in place. The Commissioner is not able to pray in aid the delay which discovery may cause to resist the discovery sought.

[12] For these reasons I do not accept the Commissioner’s submission that there

should be a presumption against the grant of discovery in this case.

[13] The Commissioner also submits that the information the Commissioner considers to be relevant has been disclosed under s 81(1) of the TAA and the key documents relevant to the case have been annexed to the affidavits filed in support of the freezing order. The proposition that the key documents have been annexed to

affidavits would not generally provide a basis to resist discovery. Documents produced in evidence are normally only a subset of relevant documents. Not all discoverable documents will usually be produced. As a general rule, a submission by counsel that all relevant documents have been produced will not be sufficient. The party should be required to verify that assertion, by giving discovery in the usual way. If all relevant documents have in fact been produced, the affidavit of documents will verify that.

[14] Under s 81, the production of documents by the Commissioner may not be required “except when it is necessary to do so for the purpose of ... carrying into effect the Inland Revenue Acts.” In Knight v CIR1 the Court of Appeal held that the Commissioner was discharging statutory functions in conducting all litigation in which he was a party. As discovery was a necessary element of litigation, it came within the scope of that exception. That principle was affirmed by the Supreme Court in BNZ Investments Ltd v CIR.2 The obligation to give discovery is subject to the usual conditions that the documents discovered must be relevant, and that, where appropriate, production of discovered documents may be withheld where a proper claim of privilege is available.

[15] The Commissioner claims that public interest immunity may attach to some of the documents of which discovery is sought. In BNZ, the Supreme Court held that s 81 itself addresses comprehensively the conflicting principles of taxpayer recovery and the interests of justice, and sets the basis upon which they are to be reconciled.3

The respondents accordingly submit that no issues of public interest immunity, such

as those discussed by the Court of Appeal in CIR v ER Squibb & Sons (New Zealand) Ltd,4 can arise. I need not, at this stage, address this point in detail. To the extent (if any) that claims of public interest immunity may be possible, they do not fall to be determined on the present application. The ultimate decision on a claim for public interest immunity, if one were made, is for the Court, not the Commissioner. If necessary, the Court will inspect the documents to determine whether public

_{interest immunity applies. It is therefore not appropriate to take such a claim into}

1 _{Knight v CIR [1991] 2 NZLR 30.}

2 _{BNZ Investments Ltd v CIR [2008] 2 NZLR 709 at [36].}

3 _{At [71].}

4 CIR v ER Squibb & Sons (New Zealand) Ltd (1992) 14 NZTC 9146.

account in deciding whether discovery (as distinct from production) should be ordered. The appropriate course would be to require the Commissioner to give discovery, leaving all claims to privilege, or other claims to resist production, to be made in the affidavit of documents and dealt with by the Court as necessary.

[16] For these reasons, I consider that there is no presumption against discovery in this case. I am of the view that discovery is potentially available. I therefore turn to consider the specific categories of potentially relevant documents set out in the respondents’ application.

[17] The first category of documents of which discovery is sought is transcripts of telephone conversations in which Mr Petroulias was a participant while he was in prison. These transcripts were obtained by the Commissioner from the tax authorities in Australia under the mutual assistance provisions. Counsel for the Commissioner submits that the respondents have failed to establish the relevance of this category of documents. I do not accept that submission. The Commissioner has relied upon, and produced in the affidavits, material from some of these transcripts. That in itself raised the possibility that other transcripts may be relevant. If discovery is ordered, the Commissioner will have to make an assessment of the relevance of individual documents falling within this category. I consider that the Commissioner’s use of some of this material provides a sufficient basis for requiring the Commissioner to undertake that exercise in respect of all of the transcripts.

[18] The second category sought is the databases from which documents used by the Commissioner in evidence have been obtained. In particular, discovery is sought of the Z drive of Avowal Administrative Holdings Ltd (Avowal). That Z drive has been the subject of much litigation. It is a computer hard drive seized by the Commissioner during a search of the premises of Avowal under powers in the Tax Administration Act, following a request by the Australian Tax Office under article 26 of the double tax agreement between the two countries. The legality of that search

_{was upheld in this Court and the Court of Appeal.}5 _{The Z drive was the subject of}

5. Avowal Administrative Attorney Ltd v District Court at North Shore [2010] 2 NZLR 794 (HC); [2010] 3 NZLR 661 (CA).

further litigation in this Court.6 Avowal sought access to the Z drive. The seizure had been effected by the Commissioner cloning the Z drive at Avowal’s office, and the drive itself remained at the office and under the control of Avowal. The Z drive was later, in circumstances not explained to Venning J, taken from New Zealand so as to be no longer available. Avowal sought an order that a cloned copy of the Z drive be made available to it. That was declined. Venning J said:7

Although at first sight it might seem a simple enough thing for the Commissioner to clone a further copy of the Z drive and make that available to the applicants, the Commissioner resists doing so. Mr Pike explained the Commissioner resists doing so because at the time the search was undertaken and before the cloning commenced, the Commissioner understands that attempts were made off-site to corrupt the Z drive. The cloned copy the Commissioner has discloses what was corrupted and what was not corrupted. The Commissioner is concerned that if a copy of the cloned copy is made available to the applicants, that information will facilitate further avoidance which the Commissioner suspects the applicants are still engaged in.

There is no direct evidence on this issue from either party. In the absence of evidence I am not prepared to make any findings.

The position the Court is left in is this. The Z drive belonged to Avowal. It was left by the Commissioner’s officers in the possession of Avowal. Mr Clews was not able to properly explain (I mean no criticism of counsel by recording this) how the Z drive came to be removed from New Zealand. There is no evidence before the Court about that or how it can be said that the Z drive, which was under the control of the applicants, is no longer available to them. In the circumstances I decline to make any order requiring the Commissioner to provide a further cloned copy of the Z drive to the applicants.

[19] The question before me is different from that before Venning J. I must decide whether the Commissioner should give discovery of any relevant documents on the cloned copy of the Z drive. I consider that discovery should be required of any relevant documents on the cloned copy of the Z drive. There is nothing in the circumstances in which that copy came into the possession of the Commissioner which provides any basis for a departure from the ordinary rule.

[20] The Commissioner submits that discovery would be unduly burdensome because of the number of documents contained on the hard drive. I do not accept

_{that submission. I consider that there are potentially two ways by which that may be}

6 Avowal Administrative Attorney Ltd v District Court at North Shore HC Auckland CIV-2006-

_{404-007264, 21 December 2009.}

7 At [21]-[23].

avoided. First, the Commissioner might make available a copy of the Z drive, so that the respondents may make their own inspection. The respondents are willing to take discovery in this form. Disclosure in that form does seem to be a possibility. Mr Petroulias and Ms Sabatini were parties to the earlier proceedings before Venning J. Mr Petroulias is apparently now the sole director and shareholder of Avowal. There is therefore no reason, on the face of it, why disclosure could not be made in that way. I am not, on the present application, prepared to direct that course. I am not aware whether the grounds on which that was opposed before Venning J remain operative. There is no evidence before me which establishes that this course is not potentially available.

[21] The second way in which undue burden on the Commissioner could be avoided is by use of a key word search of the hard drive to locate potentially relevant documents, so as to limit the number of documents of which the relevance must be assessed. Counsel for the Commissioner suggested that, if discovery were ordered, the Court should fix a list of key words. I do not consider it appropriate to do that. The Court is not sufficiently familiar with the issues, or the likely content of the Z drive, to give a direction in this way. A key word search may be an appropriate means of ensuring that discovery is practicable. It will be for the Commissioner to decide what key words are likely to locate all potentially relevant documents. If this method is adopted, the Commissioner should set out in the affidavit the basis upon which the search has been conducted, including the key words used, so that the adequacy of the search can be examined if it is challenged.

[22] The third category of documents sought is all probative (which I take to mean relevant) communications between the Commissioner and the Australian Tax Office. The Commissioner resists that, on the grounds that the information sought is the subject of incomplete investigations that are on foot in both New Zealand and Australia and to disclose that information at this point in time would prejudice the maintenance of the law, including the presentation, investigation, and detection of offences. Ms Lyons, an Investigations Team Leader with IRD, has sworn as affidavit to that effect. She states that the public interest in the information being disclosed in the proceedings is outweighed by the public interest in withholding the information. I do not regard this as or sufficient ground not to order that discovery of relevant

documents be given. My earlier discussion of s 81 is relevant to this category. As I have earlier noted, the ultimate decision whether public interest immunity is justified is for the Court, not for the Commissioner. The appropriate way for this issue to be tested is to require the Commissioner to give discovery. If a claim for privilege or public interest immunity is made for any relevant documents, that claim can be made in the affidavit of documents, and examined in the context of particular documents, not in the abstract. That might include having the documents made available to the Court for assessment.

[23] The fourth category is all other probative (which again I interpret as relevant) documents, correspondence and records of interviews with any party. I do not consider that there is any proper basis in which discovery of this category may properly be resisted. Any claims for privilege, or other reasons for non-disclosure, should be made in an affidavit of documents in the usual way.

[24] There will accordingly be an order that the Commissioner, within 20 working days, give discovery by affidavit of all documents in the categories set out at [3] which are or have been in his control relating to a matter in question in the Commissioner’s application for a freezing order in respect of the Lodge, or the respondents’ application to vary or discharge that freezing order.

[25] The respondents are self represented. To the extent that they may be entitled to costs, I would award costs on a 2B basis. The parties may submit memoranda if

_{they are unable to agree in the light of this indication.}

Solicitors: Crown Law for Applicant

“A D MacKenzie J”