Shaw v Globe Holdings Limited [2014] NZHC 1360 (17 June 2014)

Last Updated: 23 July 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-000708 [2014] NZHC 1360

IN THE MATTER	of the Companies Act 1993
BETWEEN	NEIL STANLEY SHAW Plaintiff
AND	GLOBE HOLDINGS LIMITED Defendant

Hearing:	13 June 2014
Appearances:	D J G Cox for Plaintiff T J Herbert for Defendant
Judgment:	17 June 2014

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

This judgment was delivered by me at 3.00 pm on 17 June 2014 pursuant to Rule 11.5 of the High Court Rules.

_{Registrar/Deputy Registrar}

SHAW v GLOBE HOLDINGS LTD [2014] NZHC 1360 [17 June 2014]

[1] Mr Shaw is a chartered accountant. In November 2008 he and Globe Holdings Limited (Globe) entered an engagement agreement by which he would provide his professional services to Globe, three other named companies also directed by the director of Globe, Mr Fawcet, and such other entities as Mr Fawcet may require from time to time. From that time on Mr Shaw provided various services, as sought, and rendered invoices to Globe, which until 2011 were paid.

[2] Mr Shaw says that in February 2011 Globe instructed his firm to provide professional taxation consulting services in relation to an audit of Mr Fawcet’s companies by the Inland Revenue Department. The firm did so between February and July 2011 and on 31 July 2011 issued an invoice for $20,314.75.

[3] Mr Shaw says that in August 2011 Globe instructed his firm to provide taxation consulting services in relation to the dismissal of an employee. This work was carried out that month and on 31 August the firm issued an invoice for $1,265.

[4] At July 2011 Mr Shaw was owed fees by Globe in the sum of $3095.50. After the two invoices I have described were rendered, the indebtedness of Globe rose to $24,675.25. In October and December 2011 Globe made payments of $4,000 and $5,000 respectively leaving a balance due of $15,675.25.

[5] In May and June of 2012 Mr Shaw sent a statement and emails to Mr Fawcet seeking payment but did not receive any response. In December 2012 and January

2013 there was further correspondence between Mr Shaw and Mr Fawcet in which the latter, according to Mr Shaw, made a vague suggestion that one of Mr Shaw’s employees had given him incorrect advice. Mr Shaw sought details of this but did not receive a response. In September and October 2013 Mr Shaw’s office manager sent emails seeking payment but again, no response was received. Mr Shaw therefore issued a demand for payment under s 289 of the Companies Act on

25 February 2014. The demand was not met, nor was there any further contact from

Mr Fawcet. This application therefore followed.

[6] Globe now applies for an order restraining advertising of this application, and staying the proceeding, under r 31.11of the High Court Rules.

[7] Mr Fawcet says that at his request Mr Shaw gave advice to one of his companies, Seaside Haven Limited (Seaside), and that advice was wrong resulting in Seaside incurring interest on unpaid GST, and penalties, amounting to $26,555.56. He says that Globe has a claim against Mr Shaw for this amount which exceeds Mr Shaw’s claim for fees, so the application to liquidate Globe should not proceed.

[8] Rule 31.11 provides that an application for a restraint on advertising and for a stay must be treated as though it were an application for an interim injunction. If the Court makes the order sought it may do on whatever terms it thinks just.

[9] In Commissioner of Inland Revenue v Onsite Roofing and Cladding Ltd,¹

Associate Judge Bell said:²

[8] Applications under r 31.11 are usually directed at the first issue – that is, whether the plaintiff can claim to be a creditor of the company. The standard approach under r 31.11 is that if there is a proper basis for disputing the debt asserted by the plaintiff, then a liquidation application is not usually an appropriate proceeding in which to determine the liability, if any, of the company. The use of a liquidation proceeding when there is a dispute as to liability can bring improper pressure to bear upon the company. For those reasons such proceedings may be regarded as abusive and the court may well order a stay.

[9] The Courts do not lightly order stays. That can be seen in the judgment of Woodhouse P and McMullin J in Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [[1984] 2 NZLR 249 (CA) at 251-252]:

[T]he right to have a winding-up petition determined, being a right conferred by statute, ought not to be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where the challenge can on appropriate grounds be made to the petitioning creditor’s status as such. If a challenge were allowed in circumstances short of this, the Court would in effect be refusing to give effect to the very right which the statute has conferred upon a creditor to have the petition itself considered. In bringing his petition the creditor is doing no more than asserting the right which the statute entitles him to do. In our opinion a creditor’s right in this respect ought not to rest simply on the balance of convenience considerations which may be relevant to an application for an interim injunction. Something more than that is required.

The judgment of Wallace J in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd [(1989) 1 PRNZ 379 (HC) at 385 and 388] is to similar effect.

¹ _{Commissioner of Inland Revenue v Onsite Roofing and Cladding Ltd [2013] NZHC 2487.}

² At [8]-[9].

Is there a serious question to be tried?

[10] From the evidence and the submissions of counsel I identify the following matters relevant to this question. First, the only issue raised in relation to Mr Shaw’s invoices is a statement by Mr Fawcet that it, and other invoices rendered by Mr Shaw, should have been rendered against the various companies for which works were performed, in this case Seaside as to part, and Globe as to part. The practice of Mr Shaw, however, has been to render all invoices against Globe and the practice of Globe has been to pay them. How Globe treats them internally, after that, is a matter between Globe and the various other companies involved in its operation. This accords with the original letter of engagement by Mr Fawcet as a director of Globe. It provides that the services of the firm will be performed on the instruction of Mr Fawcet of Globe and the firm’s advice is intended to be used solely by them. The letter expressly states that no responsibility is accepted to any other person for any advice resulting from the engagement.

[11] Globe paid two significant sums on account of the invoices.

[12] I am satisfied that the invoices were properly rendered against Globe. No issue is taken in relation to the amount of the invoices.

[13] Secondly, the loss which is referred to by Mr Fawcet is an obligation of Seaside to pay penalty tax and interest. Mr Herbert accepts that only that company could sue to recover that loss. He accepts that it could not sue Mr Shaw. He says it would need to sue Globe, on the basis that Globe passed onto it the advice said to have been given by Mr Shaw, and Globe would then sue Mr Shaw for the loss it would have incurred to Seaside.

[14] It follows that there are two steps in the process to seek recompense from Mr Shaw. There is no evidence that either step has been taken to date. Further, it is by no means clear that Globe could recover from Mr Shaw under the scenario outlined by Mr Herbert, as the letter of engagement specifically provides that services are carried out exclusively for the benefit of Globe, and he does not accept responsibility to any other person for any advice resulting from the engagement. This, of course, is only a preliminary view expressed on an interlocutory application,

but it is a factor to be taken into account in determining whether there is a serious question to be tried.

[15] Thirdly, there are two issues raised in relation to whether Mr Shaw would have any liability to Seaside, were it to sue. First, although Mr Fawcet maintains that Mr Shaw gave advice which led to a GST position being taken which has subsequently been rejected by the Inland Revenue Department, Mr Shaw says that he did not do so. Mr Fawcet says he received an email giving the advice, but cannot now locate it. Apart from his personal statement, the only documentary thread is a document said to be a copy of the general ledger of Seaside, which shows credits in relation to GST on the sales of five allotments, and then an entry “Reversal of GST as per Shaw Tax - $355,000”. This sum almost exactly equates the credits for GST into this account for the sections, and is the sum which was not returned for GST purposes. Although the GST was put aside in respect of these sales, it was not paid, but rather was reversed from its general ledger account. Mr Fawcet says that the notation “... as per Shaw Tax” is a reference to advice from Shaw Tax not to include these sections in its return, and account for GST of $355,000.

[16] Mr Cox for Mr Shaw says this could just as easily mean that a payment recommended by Shaw Tax was reversed. He points out references in the adjudication report from the office of the Chief Tax Counsel at the Inland Revenue Department, which became available on 7 March 2014, which specifically record that Seaside did not have independent taxation advice on the issue, and that its in- house accountant was aware of the sales which occurred. He appears (from the fact that the sales were originally included in the tax calculations) to have considered the GST consequences of the sales and nonetheless to have not returned them for GST purposes.

[17] Mr Cox also questions why the Inland Revenue Department would not have been specifically informed that the sections were omitted from the GST return in question on the advice of the company’s independent accountant if that was in fact the position.

[18] Again, on an interlocutory application, it is not possible or necessary to make a definitive finding on this point. It is, however, a point which reflects adversely on the strength of the case that Globe says it has.

[19] The second difficulty for Seaside on this point is that even if it can establish that Mr Shaw gave the advice alleged, there is no evidence that the advice was given negligently. Mr Herbert argues that as Mr Shaw was specifically engaged to give advice on GST matters, and did so, it speaks for itself that if the advice was wrong it must be negligent. He notes that the position taken by the taxpayer as a result is assessed in the adjudication report as gross carelessness. He notes that Mr Shaw does not say that the advice was in fact correct. This point adds nothing to his argument as Mr Shaw says he did not give the advice in question.

[20] I accept that on an application of this kind there is limited time to prepare evidence in support of an application. However, had Globe sought time to brief an independent accountant to give advice on whether the advice alleged to have been given by Mr Shaw was negligent, it would seem likely that time would have been allowed, given that Globe’s defence relies entirely on an allegation that Mr Shaw gave negligent advice.

[21] Weighing up all these factors, I am not satisfied that Globe has established that there is a serious question to be tried.

Balance of convenience

[22] In case I am wrong in that conclusion I will next discuss whether, in any event, the balance of convenience would favour the making of the orders sought. On this point, Mr Herbert emphasised that advertising this application will damage the reputation of Globe. I accept that that is a realistic prospect, as it frequently is in cases where it is proposed to advertise an application to liquidate a company which is still trading.

[23] Mr Cox points out that Mr Shaw is a chartered accountant in practice, and there is no suggestion that he could not meet a judgment of the District Court for some $26,000, if a successful claim were brought against him. Mr Herbert says

there is no evidence of Mr Shaw’s solvency but I find little strength in the suggestion that a chartered accountant in practice may not be able to meet a judgment at that level.

[24] Mr Cox points out that although his client could now sue in the District Court to recover his fees, the sum is relatively small, the suggestion that there may be a set- off for a claim in damages has only been made in this proceeding for the first time, and that even now Globe has not issued a proceeding as it says it intends to do. He notes that Globe took no steps to set aside the statutory demand, and the alleged advice was not mentioned to the Inland Revenue Department. On this basis the balance of convenience may be seen to favour Mr Shaw.

[25] Mr Herbert says, however, that a claim could not be brought against Mr Shaw until the adjudication report was released in March this year. Mr Fawcet says he has been considering suing in relation to the advice since late 2011.

[26] I see no reason why Mr Shaw could not have been informed as long ago as late 2011 that his advice was in issue as an incorrect GST return had been filed on the basis of it. It is material to note that the assessment of GST resulted from Seaside having filed a voluntary disclosure on 3 June 2011, accepting that the sales of the properties I have referred to should have been returned for GST. That would appear to be the point in time when Mr Shaw could have been challenged in relation to his advice, but that did not occur. In fact, the adjudication report records that in the voluntary disclosure Seaside stated:

Found discrepancy in historical GST returns. Do not know why the omissions occurred. Returns were filed by previous [in-house] accountant.

It is self-evident that this statement is manifestly at odds with the position taken almost three years later in relation to Mr Shaw.

[27] In contrast, although it cannot be said that Mr Shaw has enforced payment of his outstanding account with any degree of haste, he has, to Globe’s knowledge, maintained throughout that his fees are owing.

[28] In my view, the overall justice of the case directs that the application should be dismissed, save only for allowing a very short time to Globe to pay the sum claimed before advertising can take place. On the evidence presented on this application, Globe’s case is tenuous, at best, for the reasons I have discussed. The sum claimed is extremely modest, and I think there is little, if any, risk to Globe in an outcome which requires it to pay the sum claimed if it wishes to avoid advertising of the application for adjudication, and the ongoing process towards adjudication which is underway. Conversely, Mr Shaw would be out of pocket for his fees while a complicated claim for alleged professional negligence is filed and then processed through the court system to trial. Finally Globe’s claim has not been raised before, and contradicts its own position taken on an Inland Revenue audit, an exercise in which it is fair to assume Globe would have made out its best case to avoid penalties.

Outcome

[29] The application to stay the proceeding is dismissed.

[30] The application to stay advertising is dismissed, but this order will lie in court until 5.00 pm on Friday, 20 June to allow time for the debt and costs to be paid, if Globe so elects.

[31] Mr Herbert asks that should I reach the conclusion I have recorded in this judgment, I make an order extending the time for the filing of a statement of defence. I gather that it is his intention to defend any ensuing application to liquidate Globe on the same basis as he has sought to set aside the statutory demand and stay the proceeding.

[32] I am not prepared to accede to this request. Notwithstanding this application, a statement of defence could have been filed in time, and no substantive reason has been given for this step not having been taken. If Globe seeks to defend the proceeding it will be necessary for it to bring a separate application on notice for an extension of time to do so.

[33] Globe will pay costs on a 2B basis plus disbursements to be fixed by the

_Registrar.

J G Matthews

Associate Judge

Solicitors:

Rennie Cox, Auckland.