Trade A Home Limited v Oktillion Chartered Accountants [2014] NZHC 712 (8 April 2014)

Last Updated: 23 June 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-5087 [2014] NZHC 712

IN THE MATTER OF	the Companies Act 1993
BETWEEN	TRADE A HOME LIMITED Applicant
AND	OKTILLION CHARTERED ACCOUNTANTS Respondent

Hearing:	8 April 2014
Appearances:	Daniel Grove for Applicant Miles Beresford for Respondent
Judgment:	8 April 2014

_{ORAL JUDGMENT OF ASSOCIATE JUDGE BELL}

Solicitors:

Grant Shand, Christchurch, for Applicant

Simpson Dowsett Mackie (Kelvin Mackie) Auckland, for Respondent

TRADE A HOME LIMITED v OKTILLION CHARTERED ACCOUNTANTS [2014] NZHC 712 [8 April 2014]

[1] Trade A Home Ltd applies under s 290(4) of the Companies Act 1993 for an order setting aside a statutory demand under s 289 of the Companies Act requiring it to pay Oktillion Chartered Accountants Ltd $31,916.52 alleged to be due for accountancy services Oktillion provided Trade A Home Ltd during 2013.

[2] As its name suggests, Oktillion carries on business in public practice as chartered accountants. The accountant behind the company is Mr Peter Wilson. While Oktillion has an office in Auckland, it also operates out of an office in Queenstown.

[3] Trade A Home Ltd is a property trader and developer. The two men behind the company are Mr Bryan Staples and Mr Victor Cattermole. Mr Staples is the director. Mr Cattermole was the general manager. Each man had a family trust which owned half the shares in the company. Mr Wilson of Oktillion is a friend of Mr Cattermole.

[4] Trade A Home Ltd was incorporated on 3 April 2013. Oktillion arranged the incorporation of the company. Oktillion began work for Trade A Home Ltd even before incorporation. Nothing turns on the fact that work began before incorporation. Oktillion has been paid for that work already. Oktillion charged Trade A Home Ltd for accountancy services, including tax advice, in dealing with its tax affairs. The work was carried out from March 2013 to October 2013. Trade A Home paid Oktillion for the work carried out in March, April and May. It came to

$15,597.85. Trade A Home Ltd has not paid Oktillion for the rest of the work. The charges for that come to $31,916.52 including GST and disbursements.

[5] Trade A Home Ltd gives these grounds for disputing Oktillion’s statutory

demand:

(a) There is a genuine and substantial dispute as to the debt because the services provided were inadequate in that Oktillion gave erroneous

advice and failed to furnish the Inland Revenue Department with information and subsequent invoices are unjustified or attributable to the fault on the part of Oktillion; and

(b) Trade A Home Ltd has a counterclaim that exceeds the amount in the statutory demand.

[6] In response, Oktillion broadly says that Trade A Home Ltd has not established that the debt is the subject of a substantial dispute. It says that it gave information required by the Inland Revenue, and denies that Trade A Home Ltd has suffered any loss in relation to GST returns.

[7] The parties agreed on the test for setting aside a statutory demand under s 290(4)(a) and (b). The principles are:

(a) The applicant must show that there is a genuine and arguable dispute as to the existence of the debt;

(b) material, short of proof, is required to support the claim that the debt is disputed;

(c) if such material is available, the dispute should be resolved other than by proceedings in the Companies Court;

(d) an applicant must establish that any counterclaim or cross-demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual sum. Such an obligation would amount to the dispute itself being tried on the application; and

(e) it is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[8] In relation to the ground under s 290(4)(b), I also mention Covington

Railways Ltd v Uni-Accommodation Ltd where the Court of Appeal said: ¹

It [the applicant] must be able to point to evidence before the court showing that it has a real basis for the claimed set-off and that accordingly the

¹ Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 at [11] per Blanchard J.

applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt. ... It must show that there are “clear and persuasive grounds” for the set-off claim.

[9] In Industrial Group Ltd v Bakker, the Court of Appeal said: ²

The statutory scheme ... for application to set aside statutory demands is a summary proceeding ... The section calls for a prompt judgment as to whether or not there is a substantial dispute. ... The test may be compared with the principles in cognate fields such as applications to remove caveats, leave to appeal an arbitator’s award and opposition to summary judgment. ... The tight time constraints distinguish the s 290 discretion from that to be exercised on, say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy. As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.

[10] Trade A Home Ltd has got into difficulties with the Inland Revenue Department with returns it has made for input tax under the Goods and Services Tax Act 1985. It is disappointed with the service it got from Oktillion in dealing with the GST question. It has refused to pay Oktillion for the work carried out from June to October 2013 because it says that Oktillion’s initial advice on the GST question was flawed. The question essentially comes down to whether Oktillion used the due care and skill required of a competent accountant.

[11] It is necessary to understand Trade A Home Ltd’s business plan. The idea it came up with was to buy earthquake-damaged properties in Christchurch. Under its agreements, the property-owners would assign to Trade A Home Ltd their claims in respect of the damage. These claims would be either under insurance policies or against the Earthquake Commission under its legislation.

[12] While Trade A Home Ltd used the ADLS form of agreement for sale and purchase, it added special terms. Trade A Home Ltd would investigate the property to ensure that there was a good claim available. It had 21 days in which to satisfy itself of that. After that the agreement would become unconditional. Settlement would then take place 210 days later. At the end of the 210 days, it would need to

_{settle the purchase price.}

² Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) 20 PRNZ 413 at [24]- [25] per Fogarty

J.

[13] Clearly it was planned that in the interim it would obtain some pay-out from the insurance company or from the Earthquake Commission. It would to take title, using the claim proceeds for partial funding. The title would be available as security for further mortgage finance. It needed, however, interim funding to pay deposits and also to pay its ongoing costs. It was interested in seeing whether it could make claims under the GST Act for the purchase price it would have to pay, to obtain payments of input tax ahead of settlement of the purchase. It put that problem to Oktillion and asked for Oktillion’s advice whether it could do that.

[14] Before I deal with the way that Oktillion dealt with that question, it is helpful to note the Inland Revenue’s understanding of the law. That is set out in an Interpretation Statement issued on 28 June 2007 with the heading:

ISI7/02: is an agreement for the sale and purchase of property an “invoice”

for GST purposes?

This question is relevant to the time of supply under the GST Act. Section 9(1) of the Act says:

Subject to this Act, for the purposes of this Act a supply of goods and services shall be deemed to take place at the earlier of the time an invoice is issued by the supplier or the recipient or the time any payment is received by the supplier, in respect of that supply.

[15] The purchase of land is the purchase of goods by reason of the extended definition of “goods” in s 2 of the GST Act. Vendors who were selling earthquake- damaged residential properties in Christchurch would typically not be GST- registered and accordingly the purchase would not be zero-rated. It would not be possible to buy any of their properties on a “going concern” basis.

[16] The effect of s 9(1) is that a claim for an input tax credit can only be made once payment is received by the supplier – in this case a vendor unregistered under the GST Act – unless there is some other way to show that a liability has arisen beforehand.

[17] The Interpretation Statement, in which the Inland Revenue Department

discusses the meaning of “invoice”, makes the point that an unconditional agreement

for sale and purchase of property does not meet the requirements of an invoice either under the statute or under the ordinary meaning of “invoice”. The Interpretation Statement indicates that an agreement for sale and purchase of land sets out the parties’ agreement for matters to be undertaken in the future, including the payment of money. On the other hand an “invoice”, in both its ordinary meaning and in its statutory sense, is a record of a past transaction where goods and services have been provided. An invoice lists the goods and services provided and the price for the goods. The Interpretation Statement draws on a decision of the Court of Appeal in

Shell New Zealand Holdings Co Ltd v Commissioner of Inland Revenue.³ On that

basis, the Interpretation Statement holds that an agreement for sale and purchase could not by itself ordinarily constitute an invoice because the time of supply would not have occurred until payment of the purchase price. It is only on the payment of the purchase price that the right to claim input tax would arise.

[18] Now for the advice given by Oktillion.

[19] There is only limited evidence as to the initial advice given. Some of it appears in a chain of emails (Exhibit A to the first affidavit of Mr Wilson). One other email in addition to that email chain has also been put in evidence. This email chain and the other email are not a complete record of the communications between Trade A Home Ltd and Mr Wilson. It is apparent from that email chain that Mr Wilson obtained outside advice on the GST question. Again, it is not clear that the email chain is a complete record of all communications between Mr Wilson and the source of the outside advice. It seems from the documents that there were also telephone calls and other conversations. The content of those other communications is not available in evidence, although it is possible to draw some inferences as to what might have been said.

[20] At the outset, Mr Wilson went to a specialist tax practice. It appears to offer specialist advice on tax questions. It appears to give its advice by telephone conversations and emails. The email chain referred to shows matters were

_{developing in a piecemeal fashion between Oktillion and the specialist tax practice.}

3. Shell New Zealand Holdings Co Ltd v Commissioner of Inland Revenue [1994] 3 NZLR 276 (CA).

Mr Wilson first raised the point that his client (whom he did not name) wanted to register for GST, to claim GST on the purchase of properties as developer and to claim GST upon a deal becoming unconditional. His email records that he was aware of the general principle that it is not customary to claim GST on unconditional contracts any more. He referred to the Inland Revenue Department’s Interpretation Statement. But he went on to state that the vendor’s solicitors said they would provide an invoice to the purchaser upon the contract going unconditional. He enquired whether that made a difference and, if so, should his client register on an invoice-basis for GST tax. He got a response from the specialist tax practice on 27

March 2013. The essence of the advice given, for present purposes, is this statement:

... A GST input credit can only be claimed to the extent that payment has

occurred.

[21] With that, Mr Wilson emailed Mr Cattermole. His email said:

Hi, I have BAD news.

My highly specialised advisers have said that normally you could claim GST

on the receipt of the invoice but because it is land (and therefore treated as a second-hand good) the GST input will only be allowed upon PAYMENT. In other words you have to “settle” (pay the cash) the transaction with the vendor before you can claim GST on it. Regardless of whether you registered for GST on an invoice or payments basis.

Spanner in the works, sorry but better to have this confirmed now than get the client on a GST input claim by the IRD.

Mr Cattermole replied:

We aren’t buying sections. All these have a dwelling and insurance.

We will rent them until we develop.

Mr Wilson emailed in response:

I’ll hold off on new company registration at the moment then.

Mr Cattermole replied further on the same day:

Yep. Just going to get a second opinion here also.

Mr Wilson, in turn, replied by email:

OK. All the best with that.

[22] The next day, however, Mr Wilson contacted the specialist tax practice with another query. He followed up a matter which had been suggested to him – apparently by Mr Cattermole or perhaps by Trade A Home Ltd’s lawyers. His question was whether an acknowledgment of debt given by the vendors would be adequate. The specialist tax practice replied on 28 March:

An acknowledgment of debt will constitute payment. Best to have the acknowledgment of debt in a separate document from the sale and purchase agreement.

The email went on to deal with some insurance aspects of the transaction.

[23] There followed further email traffic between Mr Wilson and the specialist tax practice. On 11 April 2013, Mr Wilson enquired as to the documentation which Trade A Home Ltd would need to keep in case of any audit or review conducted by the Inland Revenue Department. He stated that his client would have a sale and purchase agreement, a registered valuation, and acknowledgment of debt documentation. The specialist tax adviser gave advice on 15 April 2013 as to the documentation that the Inland Revenue Department would accept, giving an indication that the acknowledgment of debt would be useful, and stating:

... It is likely that the IRD will accept the documentation referred to by you as sufficient to grant the GST input credit.

[24] The advice also invited Mr Wilson to consider a text on GST which contained suggestions as to the documents to be kept on file by a purchaser of second hand goods. The advice said:

Clearly, your client will have sufficient evidence if it holds the sale and purchase agreement, the acknowledgment of debt and a valuation. In addition, there will ultimately be a settlement statement from the solicitors concerned, so it is most unlikely the IRD will suggest there is not sufficient information to allow the GST input credit.

That email of 15 April 2013 seems to mark the end of the steps Mr Wilson took to obtain advice from the specialist tax practice.

[25] Trade A Home Ltd had its lawyers prepare an acknowledgment of debt. It entered into agreements to buy earthquake-damaged properties in Christchurch using its standard agreement for sale and purchase and also the standard acknowledgment

of debt. It provided documentation to Oktillion which then lodged GST returns on its behalf. The Inland Revenue Department queried the returns, ultimately deciding to begin procedures under s 46 of the GST Act to investigate the circumstances of the returns. Later, the Inland Revenue Department advised Trade A Home Ltd that it rejected the claims for input tax. It appears however that, by oversight, one payment was made to Trade A Home Ltd. But under the authority of Contract Pacific Ltd v

Commissioner of Inland Revenue,⁴ it may be that that payment is recoverable by the

Commissioner.

[26] At the time that the Inland Revenue Department began investigating these returns, Mr Wilson sought further advice from the specialist tax practice. A more senior person within that practice looked at the matter more deeply. She considered the deed of acknowledgment of debt and cautioned that in her view the acknowledgment of debt was not effective for its intended purpose. In an email of

1 July 2013 she said:

... from our review of the documentation we do not consider the documents entitled “deed of acknowledgment of debt” ... are valid debt acknowledgments. As previously advised a payment can constitute a deed of acknowledgment of debt. However in the sale & purchase agreement clause

20 states “The settlement date shall be 210 days following confirmation of clause 19.4 by the purchaser or any other such reasonable date that may be

mutually agreed in order to keep within the spirit of the agreement.” The

210 days would be around the 31 October mark. The settlement statements provided by the vendor lawyers acknowledge this. ...

A deed of acknowledgment of debt will only be valid when a debt actually exists. Although this is a legal matter, Gasparin v FCT 96 ATC 4280 held that income from sale was not derived until settlement when a debt accrued to the purchaser as that is when unpaid purchase money may become a debt and may be recovered accordingly. A debt acknowledgment cannot therefore exist before settlement. It may be that the parties have agreed to settle by mutual agreement. However that is not what the documentation exist. Consequently a valid deed in our view cannot exist...

The email also suggests that the matter be taken up with the lawyers involved in drafting of the documents.

[27] Trade A Home Ltd says that it has entered into a significant number of agreements for sale and purchase of properties in Christchurch in reliance on being

4. Contract Pacific Ltd v Commissioner of Inland Revenue [2010] NZSC 136, [2011] 1 NZLR 302 (SC).

able to recover GST inputs, but it has been unable to do so. That has caused it losses. Specifically, it has spent significant sums on deposits but has now forfeited them as agreements have fallen over. It has also spent allegedly $60,000 on other expenses after having committed itself to these agreements for sale and purchase. That includes legal expenses and payments for other consultants. Those losses alleged by it are greater than the amounts claimed in the statutory demand.

[28] Trade A Home Ltd made its claim under s290(4)(a) and (b). Section

290(4)(a) allows the Court to set aside a demand when there is a genuine and substantial dispute, and s 290(4)(b) allows the Court to set aside a demand when there is a set-off, counterclaim or cross-demand that exceeds the amount of the debt. In my view of this case, this application overlaps both matters.

[29] It may be open to Trade A Home Ltd to run its arguments against payment by alleging abatement under the rule in Mondel v Steel.⁵ Alternatively, it may have good grounds for equitable set-off given that the claim of Oktillion to be paid for its accounting services is impeached by any claim that Trade A Home Ltd might have against it for alleged negligent advice. For present purposes I do not regard it as necessary to distinguish between s 290(4)(a) and (b).

[30] The question is whether Oktillion did exercise the due skill and care required of a competent accountant.

[31] Mr Grove, for Trade A Home Ltd, put the matter on the basis that Oktillion had warranted that the advice it had obtained from the specialist tax practice was correct. On the other hand, Mr Beresford pitched the matter much lower. He contended that Oktillion simply was no more than a communication channel for obtaining the advice and the advice was passed on without any warranty as to its correctness. Neither counsel provided authorities to support their propositions. Mr Grove submitted that when a professional gives advice to a client, if he was only passing on advice obtained from an outside source - and the professional himself was

_{not vouching for that advice – he would need to make that clear to the client. That}

⁵ Mondel v Steel [1841] EngR 61; (1841) 8 M & W 858, 151 ER 1288 (Exch).

has an initial attraction to it. All the same, I approach the matter on a lower level but not as low as Mr Beresford would have me accept.

[32] When a professional is approached for advice by a client and the professional recognises that the subject matter is not within his own area of expertise and that it would be better to seek outside advice, his role in obtaining that advice goes beyond simply acting as a conduit. The professional who obtains advice on behalf of his client still has duties of care to his client. He needs to make sure that he obtains clear instructions from his client, and then communicates the matter to the specialist so that the issues are clearly articulated. He needs to take care in selecting the specialist, to ensure that the specialist is an appropriate person from whom to seek advice. When the advice is given he needs to check to see that it is suitable for his client’s requirements. He may also have to consider issues of risk assessment: to see if the advice is, if you like, on the edge and that the client has a clear appreciation of the risks associated with following the advice proposed by the specialist. In setting matters out this way, I envisage that the professional is giving due attention to the needs of his client, to see that they are properly addressed.

[33] There are areas where the way that Oktillion went about the job in this case left it open to question. I do not put it any higher than that. I am not to be understood to be making any final findings that Oktillion was in breach of its duties to Trade A Home Ltd. In this case it is only necessary to establish whether there are arguable grounds for a claim by Trade A Home Ltd against Oktillion.

[34] What I say has to be qualified by the consideration that not all the communications between Oktillion and the client or Oktillion and the specialist tax practice are before the Court. The parties are not to be criticised for not putting all the evidence before the Court. This is after all a setting-aside application which must be brought speedily and determined promptly.

[35] It seems to me that these issues arise:

(a) Mr Wilson did not provide to the tax practice the actual documents – that is, the agreement for sale and purchase and the deed of acknowledgment of debt – which Trade A Home Ltd proposed to use.

(b) The specialist tax practice’s email in July 2013 shows that they put a different slant on the matter once the documentation had been shown to them.

[36] Mr Wilson is not to be criticised for the steps taken up to 27 March 2013. His advice in his email of 27 March 2013 seemed to be right on the mark. It is the steps taken afterwards which are more difficult. One of the problems is that the advice was sought and given in a piecemeal fashion. It also appears, and I may be misreading the correspondence, that there may have been a miscommunication between Oktillion and the tax practice. Some of the advice given by the tax practice seems to be directed at records to be kept under s 24(7) of the GST Act, rather than the question whether the deed of acknowledgment of debt could be used to claim a credit ahead of settlement of the purchases. There is also the question whether Mr Wilson should have addressed with his client their appetite for risk and whether they were prepared to take the chance of adopting an unorthodox transaction which would invite the scrutiny of the Inland Revenue Department and could delay payment, even if it was successful. The mechanism used by Trade A Home Ltd does not seem to be apt for obtaining the credits claimed. It is therefore arguable for Trade A Home Ltd that it incurred expenses and losses that it would not otherwise have done if it had had a clearer understanding.

[37] Of course, against that, Trade A Home Ltd was a property trader that entered into this line of business when badly under-capitalised. It is only necessary to indicate that for present purposes, Trade A Home Ltd has satisfied me that it has arguable defences to a claim for payment and that is sufficient to find that grounds have been made out under s 290(4) for the Court to set aside the demand.

[38] There are some additional matters. Trade A Home Ltd filed a late affidavit. That affidavit exhibited a draft pleading for a claim which Trade A Home Ltd intends to file in this court against Oktillion. I was advised from the bar that that proceeding

has now been filed. I am prepared to accept the affidavit for that purpose. The affidavit also raises new matters. Oktillion has had no opportunity whatsoever to address those new matters and reply to them. I have disregarded them in this decision.

[39] Oktillion claimed that Trade A Home Ltd had engaged it subject to Oktillion’s standard terms of engagement. Trade A Home Ltd had not signed any formal terms of engagement. Instead Mr Wilson relied on the fact that another company, Sino New Zealand Construction Ltd, had engaged it on those terms. Mr Cattermole had signed those terms of engagement as a director of that company. I was not given any submissions how any knowledge that Mr Cattermole obtained as a director of Sino New Zealand Construction Ltd could be attributed to Trade A Home Ltd. It is not clear to me that Trade A Home Ltd is subject to the terms of engagement relied on by Oktillion.

[40] There are also some complaints by Trade A Home Ltd which struck me more as “quibbles”. It appears that the relationship between Trade A Home Ltd and Oktillion came to a head in September 2013. Some of Oktillion’s charges run on for work undertaken after that date. I can accept, for Oktillion, that even when the relationship ends there would still be some finishing-off work to be done. I am not satisfied that there is any serious objection to Oktillion being paid for that work.

[41] Another “quibble” raised by Trade A Home Ltd was to query the charge-out rates. That did not strike me as an impressive ground for rejection. The heart of the matter lies in the matter of the tax advice. I have made my decision on that issue, not on the more minor issues raised by Trade A Home Ltd.

[42] Another allegation against Oktillion is that it did not file documents in time with the Inland Revenue Department. Part of Mr Wilson’s affidavit showed comprehensively that there was no basis for that.

[43] I make these orders:

(a) The statutory demand of 11 November 2013 is set aside.

(b) Oktillion shall pay Trade A Home Ltd costs on a 2B basis. If the parties cannot agree, then memoranda may be filed.

[44] On costs, Mr Grove sought an uplift. This was an ordinary application to set aside a statutory demand. In hindsight, it may be seen that the statutory demand should not have been issued, but that is always a hindsight view of matters. Creditors, including those whose debts are disputed invariably think they are entitled to be paid. I do not criticise Oktillion for issuing the statutory demand. I comment that it is not satisfactory that service was completed by serving the statutory demand at the registered office of Trade A Home Ltd which happened to be Oktillion’s own registered office. Notwithstanding that, Oktillion’s solicitors remedied that defect and justice was done in the end.

...........................................

R M Bell
Associate Judge