Chesterfields Preschools Limited v Commissioner of Inland Revenue [2012] NZHC 1532; (2012) 25 NZTC 20-131 (29 June 2012)

Last Updated: 20 December 2012

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2008-409-000722 [2012] NZHC 1532

BETWEEN CHESTERFIELDS PRESCHOOLS LIMITED

First Plaintiff

AND DAVID JOHN HAMPTON Second Plaintiff

AND CHESTERFIELDS PARTNERSHIP Third Plaintiff

AND CHESTERFIELDS PRESCHOOLS PARTNERSHIP

Fourth Plaintiff

AND ANOLBE ENTERPRISES LIMITED Fifth Plaintiff

AND COMMISSIONER OF INLAND REVENUE AND OTHERS Defendants

Hearing: 27 June 2012

(Heard at Auckland)

Appearances: D J Hampton (In Person)

S M Kinsler and M M Burr for Commissioner of Inland Revenue

Judgment: 29 June 2012

_{JUDGMENT OF FOGARTY J}

This judgment was delivered by Justice Fogarty on

29 June 2012 at 4.30 p.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Crown Law Office, PO Box 2858, Wellington 6140

D J Hampton, Edgeware Law Centre, PO Box 21-319, Christchurch 8143

CHESTERFIELDS PRESCHOOLS LIMITED V COMMISSIONER OF INLAND REVENUE AND OTHERS HC CHCH CIV-2008-409-000722 [29 June 2012]

Introduction

[1] The Court of Appeal has directed the High Court to reconsider its judgment awarding costs to the successful plaintiffs in the two judicial review applications.1 I awarded costs to the plaintiffs arising from two judicial review applications in a judgment delivered on 1 May 2009.2

[2] The Commissioner appealed the second judicial review judgment and the costs judgment. The Court upheld most of the High Court’s findings, but restored certain parts of an officer of the Commissioner’s decision (Mr Budhia) which, in its view, did correctly implement the first judicial review. In the 1 May 2009 judgment I had awarded costs to the plaintiffs as follows.

[3] For the first judicial review, I allowed an uplift of 50 per cent from band C on account of the complexity of the proceedings (applying r 14.6(3)(a) of the High Court Rules) which was discounted by 20 per cent in recognition of the Commissioner’s partial success. No increase costs award on account of unreasonableness was made with respect to the first judicial review and the plaintiffs did not appeal.

[4] For the second judicial review, I allowed an uplift of 75 per cent from band C (applying r 14.6(3)(b)(i) and (ii) and r 14.6(3)(d)) having found that the Commissioner had failed to comply with the decision of the Court on the first judicial review and so caused, unnecessarily, the second review.

[5] The Court of Appeal directed the High Court to reconsider its decision on

costs in the light of the Court of Appeal’s judgments, the key points of which were:

(a) That there may be no blanket band C classification, it being necessary to justify why each particular step should be band C.3

1 _{Commissioner of Inland Revenue v Chesterfields Preschools Limited [2010] NZCA 400.}

2 Chesterfields Preschools Limited v Commissioner of Inland Revenue HC Christchurch CIV 2008-

_{409-722, 1 May 2009.}

3 Chesterfields Preschools above n1 at [161].

(b) That costs cannot be awarded for periods when the taxpayers were unrepresented by counsel. It was not clear from the judgment whether this has happened, but needed to be readdressed on review.4

(c) The onus is on the taxpayers to show why there should be a band C

classification.5

(d) It was an error to place reliance on the actual costs incurred.6

(e) If band C is to be justified in respect of the first judicial review under r 14.6(3)(a) the complexity must be demonstrated.7

(f) If these are to be justified under r 14.6(3)(b)(i) and (ii) with respect to the second judicial review, the extent to which any failure of the Commissioner to act reasonably (as distinct, in particular, from any such failure by the taxpayers) contributed to the time and expense the proceedings must be shown to be demonstrated.8

[6] The plaintiffs on 21 February 2011 applied formally to the High Court seeking:

(a) The costs reconsideration to commence. (b) Indemnity costs.

(c) That the Court read certain affidavits allegedly relevant to indemnity costs.

[7] At the first hearing on the application on 12 September 2011, I explained to

Mr Hampton that a claim for indemnity costs was not part of the costs consideration exercise, essentially, that the Court was functis officio with respect to that issue as I

4 _{At [162].}

5 _{At [164].}

6 _Ibid.

7 _{At [161].}

8 At [165].

had rejected indemnity costs sought in the second judicial review in my judgment of

1 May 2009.9 The plaintiffs have appealed that direction to the Court of Appeal.

[8] At a further hearing on 30 November 2011, in Ashburton, the Court sought the assistance from the Crown in determining the appropriate classification for costs with respect to each step in each proceeding. Crown counsel agreed to provide this assistance, particularly having regard to the fact that Mr Hampton is not a legal practitioner.

[9] I wish to record this Court’s appreciation for Crown counsel agreeing to undertake this exercise, and for the manner in which it has been done. Not only has Mr Kinsler, assisted by Mr Burr, endeavoured to follow faithfully the Court of Appeal’s directions, but on behalf of the Commissioner they have taken a very fair approach resolving many doubts in favour of the plaintiffs.

[10] The result is that the costs issues between the parties have narrowed considerably.

[11] I divide the remaining issues into two categories:

1. Applications by the plaintiffs which are beyond the scope of this review; and

2. Disputes within the scope of this review.

Applications by the plaintiffs which are beyond the scope of this review

Indemnity costs

[12] I say nothing further on the subject of indemnity. That matter is now pending before the Court of Appeal. If that appeal is successful, then, of course, the question of indemnity costs will have to be considered either by that Court or this Court. This judgment does not for that reason create any issue estoppel or res judicata,

preventing indemnity being pursued. That said, this judgment proceeds on the basis that there is no entitlement to indemnity costs.

Further affidavits

[13] I turn to the application to read further affidavits. These are the affidavits by

Mr Palmer of Buddle Findlay, of 16 October 2008, Mr Hampton, of 9 September

2008 and Ms Sisson of 15 May 2010. They are all on the subject of the consequences to the plaintiffs of the late discovery of the Aronsen notes. This Court has consistently refused to read the affidavit of Mr Palmer in the judicial review proceedings, as did the Court of Appeal in the hearings before it. It has not read the other affidavits.

[14] I agree with the Crown’s submissions that it is not possible in this review to introduce further evidence. The task this Court is now undertaking is to review the evidence before the High Court from the original hearing on costs, but following the directions from the Court of Appeal as to how the criteria in the High Court Rules should be applied to that evidence. It is not a new original hearing. Rather, it is an exercise to give effect to the judgment of the Court of Appeal.

[15] In a recent judgment of this Court by myself, upholding a decision of Associate Judge Osborne not to strike out the malfeasance pleadings, I have discussed the relevance of Mr Palmer’s affidavit to malfeasance pleadings and its irrelevance to the judicial review proceedings.10 Further, all three affidavits argue that the dispute could have been settled, penalties reduced, and enforcement hearings avoided if the notes had been discovered promptly.

[16] In the course of the hearing Mr Hampton agreed not to pursue his application that I read these affidavits. This was after I had explained the distinction between the function of judicial review, which is to hold Government to the rule of law, as distinct from malfeasance proceedings, which are to provide remedies, including damages, for deliberate or reckless breach of the law when a person is exercising a public power, thereby causing loss to the plaintiffs. Further, inasmuch as the late

discovery imposed costs on the enforcement proceedings, they may be relevant there, but not here.

Interest

[17] The plaintiffs seek an award of interest from the time that costs were incurred in addition to the entitlement under the Judicature Act 1908 to interest from the date of judgment. There is no doubt that the Court of Appeal has the power to do that. Some decisions of the High Court, without the benefit of argument, have done so. Asher J, in his decision in Fullers Bay of Islands Ltd v Otehei Bay Holdings Ltd11 records these decisions which have so awarded interest, and the special power of the Court of Appeal to award interest, and, in an analysis with which I agree, concludes that there is no jurisdiction in the High Court to award interest on costs prior to there being an order to pay a specific amount for costs.

[18] In further written submissions following the day of the hearing, Mr Kinsler advised he had been unable to identify any general power conferred by the Court of Appeal (Civil Rules) for the High Court to assume the Court of Appeal’s powers in a review such as this. Furthermore he submitted that the issue cannot be removed back to the Court of Appeal. I accept those submissions.

[19] I note that, very properly, Mr Kinsler has acknowledged that there is merit in the argument for interest. The plaintiffs are entitled to a substantial award of costs, and always have been. The only issue has been as to the quantum, since the judgment of the Court of Appeal on 31 August 2010. Had the appeal against the High Court decision of 1 May 2009 been resolved by the Court of Appeal rather than sent back to the High Court, the Court of Appeal had the power to award interest at certain dates, when the costs arose.

_{[20] Mr Kinsler has advised the Court:}

11 Fullers Bay of Islans Ltd v Otehei Bay Holdings Ltd HC Auckland CIV-2009-404-7207, 21

Recognising difficulties with interest and the length of time since the May

2009 costs judgment, the Commissioner offered to settle on a generous basis by letter of 5 April 2012.

[21] It may well be that this particular issue can still be resolved on the merits between the Commissioner and the plaintiffs. Alternatively, Mr Hampton has a right of appeal against my finding, following Asher J, that this Court has no power to award such interest.

Disputes within the scope of this review

[22] Coming to the hearing the parties had agreed costs not in dispute be fixed in accordance with agreed schedules totalling $44,480. But the disputes were then confined to certain matters in appendix 7 relating to the first review; costs in respect of an application to set aside the Mareva injunction, appendix 10; applications to

implement finance transactions authorised by the 31 October 200712 judgment,

covered by appendix 11; and finally, an argument as to whether or not there should be an uplift from band C of allegedly unreasonable failure to comply with the first judicial review decision.

[23] The Crown helpfully submitted what sums it considered should be fixed. So my method in this judgment is where I add days, I am adding them at the rate of

$1,600 per day to the amounts effectively conceded by the Crown at the outset. To summarise what those concessions are, the Crown is arguing that the costs in dispute be fixed at:

(a) $64,000 for the first judicial review (appendix 7);

(b) $7,200 for the application to set aside the Mareva injunction

(appendix 10);

(c) $8,000 for the applications to implement financial transactions authorised by the judgment of 31 October 2007, acknowledging band

_{C but with no uplift for complexity; and}

12 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2004-409-

(d) $44,240 for the second judicial review, accepting it is all band C, but with no uplift, covered by appendix 22.

Appendix 7 – First judicial review

[24] The Commissioner accepts that the steps in the first judicial review warrant a band C classification or a total of 28 days. The Commissioner argued the figure of

$64,000 is for a total of 40 days. The additional days reflect the Commissioner’s resolution of the various disputes. The parties came into the argument with the Commissioner contending 40 days for the judicial review and the plaintiffs contending 60.4 days. I am going to work through the judgment by taking each disputed step and where it is allowed adding the result to the Commissioner’s opening number of 28 days. This largely follows the approach of the Commissioner in terms of sorting out the calculations.

[25] There is a generic question here as to whether or not there can be any uplift from band C on any step in this review on the part of complexity: r 14.6(3)(a). As already noted, the original High Court judgment on costs rejected a general uplift on that ground. No reasons were given. I refer to my judgment of 1 May 2009, at [26] where having referred to schedules prepared by the plaintiffs endeavouring to collect the work done against items in Schedule 3, I concluded:

Perusal of those schedules has reassured me that this is a case where band C should apply. I did mistakenly think that there might be a case for going beyond band C based on r 46(3)(a) [actually r 14.6(3)(a)]. But I do not pursue that.

[26] Mr Hampton endeavoured to get me to re-open that issue in this review. This was opposed on the grounds that it was not that I had made my decision in the High Court and the matter had not been re-opened in the Court of Appeal.

[27] Mr Hampton invited me to examine and endeavour to discern my reasons behind these last two sentences of paragraph [26]. That paragraph appears in the course of a discussion on costs for the second review, which begins at paragraph [16]. I was examining Mr Andrews’ submissions seeking increased costs relying on r 14.6(3). This was an application for an overall lift in costs. It was based on

Mr Andrews’ argument that the second judicial review proceedings were not needed and occurred because the Inland Revenue Department officers had failed to comply with the directions of the first judgment. I discuss that in paragraphs [23], [24] and [25] of the High Court judgment.

[28] It is obvious that r 14.6(3)(a) could not apply to meet Mr Andrews’ argument. He was not arguing for an uplift on the basis of complexity. And any argument on complexity would have to look at each step at a time. That is why I would have rejected subparagraph (a) as justifying a general uplift in the second review.

[29] It does not follow, however, that on the first review I cannot consider complexity against individual steps. I have not made a ruling against that. The Crown submitted that subparagraph (a) had not been relied upon in the appeal. But it would not naturally have been relied upon by Mr Hampton in the appeal because he was endeavouring to maintain a blanket uplift.

[30] Because of the direction of the Court of Appeal that I should consider each step at a time, I consider I am entitled to consider complexity arguments under subparagraph (a) where they arise, provided it is step by step, and in respect of each review.

Step 1 - Second amended statement of claim

[31] The plaintiffs apply for a band C classification for five days for preparation of the amended statement of claim filed by Minter Ellison Rudd Watts on

28 February 2006. This statement of claim followed the original statement of claim filed by Buddle Findlay in 2004 and an intervening first amended statement of claim (of 121 pages) filed by Mr Hampton personally.

[32] At the end of the hearing Mr Kinsler, continuing his assistance to the Court, volunteered to compare the content of the original statement of claim of Buddle Findlay with the content of the Minter Ellison statement of claim to examine the merit of a band C classification for this second amended statement of claim. He had originally argued that there is no basis in the schedule for fees for amended

statements of claim. That is correct. If an amended statement of claim is simply repairing defects in a poorly drawn first statement of claim, there is no reason why a party should get an additional award of costs. However r 14.5(1)(b) provides for allowance of a time determined by analogy with the schedule if Schedule 3 does not apply.

[33] On the day following the hearing I received a memorandum from the Crown advising:

Having reviewed the documents ... it is clear they are different in emphasis and form. For that reason, the Commissioner now accepts the plaintiffs’ claim for five days at band C ($8,000) ought to be allowed.

I received an e-mail from Mr Hampton accepting this.

[34] Mr Kinsler went on to argue that a further uplift of five days on account of complexity was not warranted. Mr Kinsler did note that five days ($8,000) was all the plaintiffs originally claimed for the step in 2009. I do not think there is any basis for an uplift. This claim is allowed, and five days are added to the 28, now the total is 33 days.

Steps 4.5, 4.6 and 4.7 (three times) - Discovery

[35] The Commissioner now accepts that the plaintiffs may claim for step 4.5 (list of documents) and 4.6 (production of documents) on the account of Mr Hampton, that Mr Hampton was then represented by Mr Palmer of Buddle Findlay. This adds nine days – total now 42 days.

[36] The main dispute is as to 4.7 (inspection of documents). The difficulty for the Crown has been a finding by Associate Judge Christiansen in his 11 February

2010 judgment that Mr Hampton did initial formal discovery and inspection himself, whereas Minter Ellison offered assistance with informal applications for further and

_{better discovery.}13

13 Minter Ellison Rudd Watts v Chesterfields Preschools Ltd HC Christchurch CIV-2009-409-1700, 11

February 2010.

[37] Mr Hampton advises the Court from the bar, and I accept his evidence, that what happened was that he personally inspected the files discovered by the Commissioner and took from that inspection copies of a large number of documents to Buddle Findlay where the documents, he presumes, were read by Mr Palmer and his assistant, Ms Rowe. Knowing the thoroughness of these practitioners I have no doubt that that is a correct statement on the probabilities. With that explanation it is plain that Buddle Findlay did in a practical sense conduct inspection. It is not possible to verify their time because of the earthquake. Neither the Commissioner nor Buddle Findlay have access to all their files. There appears to be no access to the time-keeping records of Buddle Findlay. This topic is resolved as follows: I classify the inspection of documents step as band C which adds another six days. The total now is 48.

[38] The Commissioner agrees that discovery was complex and considers an uplift of 30 per cent is warranted for which the Commissioner allowed a recovery of 12 days which appears to me to be about one-third of the Commissioner’s figure of 37 days for discovery. I have allowed another six days on top of that, a total of 43 days, of which one-third is 14 days. Accordingly, another 14 days is added so that the running total is 48 + 14 = 62 days.

Steps 4.10 and 4.11 (case management conferences)

[39] I reserve leave to the parties to argue these issues if the points cannot be settled. The Commissioner has made an offer that if the plaintiffs can supply minutes recording the telephone conferences, the Commissioner will likely accept them on a band C basis applying the benefit of the doubt.

Steps 4.12, 4.14 and 4.15 (interlocutory applications)

[40] These steps do not appear in the plaintiffs’ claim for costs argued in 2009. The Commissioner said they do not appear to be part of the judicial review proceedings. Oral argument teased out that they are related steps obtaining stay of debt recovery proceedings by the Commissioner. They are not part of these proceedings and so no costs can be awarded in respect of them in these proceedings.

Step 8 (preparation for hearing)

[41] Originally claims were made based on Schedule 3 item 7.1 and 7.2 (preparation of affidavits in case the case does not proceed). But it did. Step 8 causes a problem because at some stage prior to the trial Minter Ellison had ceased to act. The Commissioner accepts now that some recovery, however, is warranted under Step 8 in the light of evidence that there were two days of background assistance by Minter Ellison prior to the trial, analogous with item 9 (assistance during the trial).

[42] The Commissioner agrees in giving the benefit of the doubt to the plaintiffs and allow recovery for ten days of “background assistance” at band C. Mr Hampton did not attempt to improve on what I think is a very reasonable approach taken by the Commissioner. Ten days is added to the prior running total of 62 which becomes

72 days.

Step 9

[43] The Commissioner has accepted a generous recovery on Step 8. I agree that Minter Ellison’s background assistance at trial is better recovered and has been recovered under Step 8.

Summary

[44] The total days for the first review is 72 days, which at $1,600 per day is

$115,200.

Appendix 10 (plaintiffs’ costs Schedule B): Application to set aside Mareva injunction

[45] The Crown accepts that the complexity of this application warrants band C. Under the Schedule, preparation time tracks the hearing time. The hearing took half a day. The plaintiffs claim an increase on this step (Step 4.14) from half a day to 9.5 days on account of complexity.

[46] The hearing only took half a day because it was heard before me and I was fully acquainted with the issues. The application for the Mareva injunction was consequential upon Mr Andrews’ (from Minter Ellison) analysis of Mr Budhia following the first judicial review. Having written the first judicial review judgment I was able to assimilate rapidly the argument that the Budhia decision had not followed the requirements of the first judicial review decision. That said, Mr Andrews from Minter Ellison had done a very good job identifying the departures. The result was I was able in broad strokes to outline in a judgment, delivered the same day, the likely errors of law by Mr Budhia.

[47] It has long been recognised there is a problem inasmuch as the schedule assumes that preparation time tracks hearing time. In fact it is often quite the reverse. A well prepared set of papers for a Banco hearing enables the hearing time to be short, precisely because of the critical and valuable analytical work done by counsel in identifying the issues, refining them and demonstrating the decision that needs to be made in response.

[48] The Commissioner has again been realistic. The Commissioner’s analysis is that the work could reasonably have been completed in four days. I agree, therefore, with the Commissioner’s proposal of allowing a total of 4.5 days, $7,200. I do not think the work would have taken 9.5 days. In forming this judgment I have taken into account Mr Andrews’ mastery of the case prior to his withdrawal before the first judicial review hearing. I gained the clear impression during the first judicial review hearing that I was seeing the fruits of his analysis when engaged in the issues presented by that case. Therefore the Commissioner’s allowance of $7,200 remains.

Appendix 11 – (plaintiffs’ costs schedule C, D and E)

[49] Appendix 11 deals with the applications to implement transactions authorised by the judgment of 31 October 2007. In October there were issues as to the ability of some of the plaintiffs to sell some property. The 31 October 2007 judgment authorised some transactions under a degree of supervision by the Court. Subsequent to 31 October judgment there were a series of telephone conferences as the plaintiffs attempted to obtain finance. There was a suggestion in a memorandum

of contempt on the part of the Commissioner because the Commissioner did not adhere to some of the safeguards the Court had indicated should be followed. In the decision dated 14 October 2009, Chisholm J held there was no prima facie case against the Commissioner and no useful purpose would be served by allowing the contempt issue to proceed any further and ended with a finding there will be no order for costs.

[50] The Crown accepts that the two applications to implement transaction authorised by 31 October 2007 judgment should get costs on a band C classification, but with no uplift. I agree. Accordingly, the sum of $8,000 is allowed.

Second judicial review – uplift on the basis of unreasonableness under r

14.6(c)(3)(b)(i), (ii)

[51] The parties have agreed scale costs on a band C basis for these proceedings. That calculation produced scale costs at 37.65 days or $44,200. The issue now is whether or not there should be any uplift by reason of the paying party acting unreasonably.

[52] The Court of Appeal noted at [166]:

Finally, we do not agree that the IRD officers considered themselves free to ignore the reasons underpinning the directions in the first judicial review. In our view, they did understand their duties in this regard. They had merely misunderstood the requirements of the first judicial review judgment. This was, in our view, understandable, given, as Fogarty J noted, the complexity of that judgment and the fact that aspects of it were open to interpretation. This will need to be taken into account in any reconsideration of the costs position.

[53] This finding causes considerable difficulties to justify an uplift beyond an existing agreement that the parties agree costs on a band C basis. There is no impropriety involved. My criticism of Mr Budhia in the second judicial review judgment was based on what I thought was a misunderstanding on his part that he was entitled to ignore the reasoning underpinning the directions of the first review and revert back to normal Inland Revenue policy as to the exercise of discretion, rather than follow the reasoning in the first judicial review judgment which recognised the predicament of the plaintiffs as somewhat extraordinary because of

the failure of the audit office to reach a decision on the sham questions on the GST claims. Taking the Court of Appeal’s findings in [166] into account that the conduct of the Commissioner’s officers should be categorised as “merely” misunderstanding the requirements of the first judicial review judgment, and keeping in mind the very complexity and extraordinary character of this dispute, I do not think I can make a finding of failure on behalf of the Commissioners to comply with those rules nor taking or pursuing an unnecessary step or argument that lacks merit. For these reasons I am not going to order an uplift under r 14.6(3)(b)(i) or (ii). Therefore the figure of $44,240 remains.

Conclusion

[54] The costs in dispute are fixed at:

(a) $115,200 for the first judicial review;

(b) $7,200 for the Mareva injunction application;

(c) $8,000 for the financial transactions appendix 11; and

(d) $44,240 for the second judicial review. A subtotal of $174,640.

[55] To this sum is added the sum of $44,480 – costs not in dispute and the sum of

$41,969.20 for the undisputed disbursements. A total of $261,089.20. Judgment is awarded to the plaintiffs in that sum.

[56] Leave is reserved to make further application for additional disbursements. [57] Leave is reserved to apply to correct any arithmetical mistakes.

[58] Leave is reserved to pursue argument on case management conference attendances.

[59] Leave is reserved for any interparty applications as to allocation of the judgment sum among the plaintiffs.

[60] Costs of this dispute are reserved.