S and S Limited v XYZ Limited [2016] NZHC 26 (29 January 2016)

Last Updated: 8 March 2016

THIS JUDGMENT IS SUBJECT TO THE SUPPRESSION/NON- PUBLICATION ORDERS SET OUT IN PARAGRAPH [136(E)]

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-433 [2016] NZHC 26

BETWEEN	S AND S LIMITED Plaintiffs
AND	XYZ LIMITED Defendant

Hearing:	6 and 14 May 2015
Appearances:	R J Katz QC for Plaintiffs K Davenport QC for Defendant
Judgment:	29 January 2016

_{JUDGMENT OF ASSOCIATE JUDGE R M BELL}

This judgment was delivered by me on 29 January 2016 at 3:00pm

Pursuant to Rule 11.5 of the High Court Rules

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

Registrar/Deputy Registrar

Solicitors:

Lowndes Law (M W McCarthy), Auckland, for Plaintiffs

Davenports Harbour Lawyers (T McLeod), North Harbour, Auckland, for Defendant

Counsel:

R J Katz QC, Auckland, for Plaintiffs

Kate Davenport QC, Auckland, for Defendant

S AND S LIMITED v XYZ LIMITED [2016] NZHC 26 [29 January 2016]

Table of Contents

Paragraph

Introduction [1]

Background [10] The Intco Trust [14] The XYZ Family Trust [22]

Other proceedings [29] CIV 2013-404-2404 H v S (the 2404 proceeding) [29] Illegality [30] Unclean hands [33] Indemnity [34] CIV 2014-404-3 XYZ LTD v S [37]

A trustee’s indemnity and lien [38]

Officer’s indemnity [40] The alleged liabilities [41] Liability to W Trustees Ltd for defective title to assets [45]

New Zealand taxes [64] Intco trustees’ liability for income tax [68] Intco trustees’ liability for gift duty [79] XYZ Ltd’s liability for tax [84] Summary on New Zealand taxes [86]

Country B’s taxes [88] Mr H’s tax liability [92] The caveators’ downstream liability [94] Criminal offending [96] Offending by Mr H [98] Offending by Mr S and S Ltd [107] Consequences of offending [108] Voidable disposition of assets [111] Summary on country B’s taxes [121] What if the caveators do owe taxes to the taxation

authority of country B? [123]

A constructive trust argument [132] Issues not addressed [133] Outcome [134]

Introduction

[1] This is a contested application under s 145A of the Land Transfer Act 1952 to sustain two caveats. Mr S, an Auckland lawyer, and one of his trustee companies, S Ltd, have each lodged a caveat against the title to a property in Auckland owned by XYZ Ltd, the corporate trustee of the XYZ Family Trust. The family behind the trust are Mr and Mrs H, former clients of Mr S. They have fallen out with him and litigation has followed. This is one of the proceedings. While he acted for the Hs, Mr S assisted in establishing two trusts, the Intco Trust and the XYZ Family Trust. For a period, S Ltd, of which Mr S was a director, was a trustee of the Intco Trust. Mr S was one of the directors of XYZ Ltd for a time.

[2] Each caveat claims an equitable lien arising from a trustee’s right of recourse to trust assets to discharge liabilities incurred and recoup expenses paid as a trustee. S Ltd also claims a constructive trust in the alternative. It says that as a former trustee of the Intco Trust it faces potential liabilities: to a later trustee by reason of a defective title to trust assets, to the New Zealand Commissioner of Inland Revenue and to the taxation authority of country B. The caveats also claim a liability to vendors of shares which became assets of the trust, but in the hearing Mr Katz QC disclaimed any reliance on that alleged head of liability. Even though assets of the Intco Trust have been distributed, S Ltd says that its equitable lien allows it to follow the distributions through to the XYZ Family Trust and the investment in the Auckland property of funds derived from the Intco Trust.

[3] Mr S was not a trustee himself, but he relies on provisions in the trust deeds giving an indemnity to officers of corporate trustees. His caveat relies on the same liabilities as the caveat for S Ltd. As well, he claims for liabilities he may have incurred as a director of XYZ Ltd, in particular an alleged liability to the Commissioner of Inland Revenue.

[4] XYZ Ltd contests the liabilities alleged by the caveators, denies that liabilities incurred by trustees of the Intco Trust may be traced through to assets held by XYZ Ltd and says that the liens claimed are not caveatable interests under the Land Transfer Act. The focus of the decision is the alleged liabilities.

[5] In applications to sustain caveats under s 145A of the Land Transfer Act, the caveator has the onus of showing a reasonably arguable case for the interest claimed. The interest must come within s 137(1) of the Act. A personal or contractual right is not enough: the caveator must show an entitlement to or beneficial interest in the land in the caveat. Something more than a potential interest is required. Caveat applications are summary and therefore not suited for deciding disputed questions of fact. On the other hand the court is not required to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement in an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be. For a caveat to lapse it must be patently clear that the caveat cannot stand because there was no ground for lodging it at the time it was lodged or because any such ground no longer exists. The court has a residual discretion not to uphold a caveat but that is exercised cautiously, as when the caveat could serve no useful purpose or alternative safeguards are available.

[6] To establish a reasonably arguable case there must be evidence tending to prove the facts relied on. Assertion, whether in pleadings or affidavits, is not enough. The evidence need not be as extensive as that given in a hearing on the substantive merits. It may be circumstantial. But if there is no evidence to prove the facts contended for, the caveator will not have made out a reasonably arguable case for those facts.¹ As a qualification to the reasonably arguable standard, where there are allegations of fraud or other reprehensible conduct, it is necessary to show a prima facie case.²

Procedural matters

[7] XYZ Ltd sought an order under r 7.32 of the High Court Rules to refer to affidavits and pleadings in other proceedings: CIV 2013-404-2404 H v S (the 2404

_{proceeding) and CIV 2014-404-3 XYZ Ltd v S. There was no objection to my}

¹ Re Lord Cable [1977] 1 WLR 7 at 19-20, an interim injunction case, applied in Woodroffe v

_{Coleman (2011) 13 NZCPR 161(HC) at [16], a caveat case.}

² Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15], Trustees Executors Ltd v Steve G Ltd [2013] NZHC 16 at [63]-[66] and Paugra Holdings Ltd v Harvestfield Holdings Ltd [2013] NZHC 1297 at [78] (overturned on appeal, but not on this point - Paugra Holdings Ltd v Harvestfield Holdings Ltd [2014] NZCA 164, (2014) 15 NZCPR 227).

referring to the first proceeding. It was important to be able to do so. There is one technical awkwardness. Rule 7.32 allows the court to use affidavits in another proceeding only if the other proceeding is between the same parties. There is not a complete match between the parties. S Ltd is not a party in the 2404 proceeding. The Hs are parties in that proceeding but not in this one. Happily the absence of opposition overcame that difficulty. While I did consider the second proceeding, it has limited if any relevance to the issues in this case.

[8] There were complaints about late filing of affidavits and about opinion evidence given by experts without complying with r 9.43 and sch 4 of the High Court Rules. After the first day I directed further materials on questions of New Zealand taxes. XYZ Ltd used that opportunity to address the shortcoming under r 9.43. I have considered all the affidavits filed up to the second hearing day. Some of the delay in filing evidence seemed excusable: an affidavit from a lawyer in country B on country B’s tax law understandably could not be filed on time. In allowing all the affidavits, I considered that neither side would be unduly prejudiced and that it was important to have regard to all the evidence, whenever it was filed.

[9] In a decision in the 2404 proceeding Associate Judge Smith made orders against identification of the parties³ . He gave an anonymised judgment. It would undermine his orders if I were to identify the parties. Accordingly I also give an anonymised judgment and directions against publication of identifying information.

Background

[10] Mr H is from country B but renounced his citizenship in September 2013. He has a background in equities trading. Mrs H is from country A. She has an accounting background. They married in 2004 in country A and have one child. They came to New Zealand in December 2006 as skilled migrants and have permanent New Zealand residence. They had substantial funds derived from trading

_{in shares in Intco, a utility in country A. They transferred those funds to a New}

³ H v S [2015] NZHC 310 at [145]-[150].

Zealand bank account. In February 2007 they approached Mr S and became his clients.⁴

[11] The parties give differing accounts as to the transactions in country A. Mr S goes by Mr H’s instructions in 2007, which he says were reaffirmed later. Mr H told Mr S that in 2002 he borrowed B$1,000,000 from an associate in country B. He advanced that plus B$250,000 of his own to Ms HK (who later becomes Mrs H – they had not married at that stage) for her to use as his agent. The purpose was to acquire shares in Intco. Under country A’s law, holding Intco shares was restricted to its own citizens. Ms HK incorporated a company in country A under her sole control to buy and hold the shares. That was said to be no more than a device to conceal the true nature of the transaction which was the purchase of the shares by Mr H without infringing country A’s restrictions on foreign ownership of Intco shares. The shares were sold in 2006 and the proceeds (approximately B$8,000,000) paid into an account in Mrs H’s name, before they were remitted to New Zealand. On Mr S’s account, the share dealing was illegal under country A’s law. It also resulted in evasion by Mr H in paying country B’s taxes on the profits.

[12] The Hs on the other hand say that the transactions were lawful under country A’s law and that Mr H is not liable to pay country B’s taxes on the profits. PCo, a country A company under Ms HK’s control, borrowed B$200,000 in June 2002 and B$1,000,000 in October 2002 from Acorp, a country B company under Mr H’s control. PCo made two purchases of Intco shares: one tranche of shares in August- September 2002 for A$8,100,000 and another tranche in October 2002 for A$31,000,000. Precision sold the first tranche of shares to Ms HK in April 2003 for A$8,000,000. She sold them in October 2006 for A$90,000,000 and repaid the loan to PCo. As the sale was more than three years after the purchase, it was not subject to country A’s income or capital gains tax. In July 2005 PCo sold the second tranche of shares to Mrs H’s sister, Ms M, for A$50,000,000. Ms M sold the shares in August-October 2006 for A$200,000,000. Country A tax of A$21,000,000 was paid on the proceeds. Ms M repaid the loan of A$50,000,000 in November 2006. She

_{also made two loans to Mrs H: A$63,000,000 repayable in September 2026 and}

4. At different times Mr S was associated with various legal practices. He formed the last practice in August 2007. For this case these changes are not relevant.

A$68,000,000 repayable in November 2026. The loans to Acorp were repaid in

December 2006 with interest. ACorp repaid its loan to Mr H’s associate.

[13] For this case relevant differences include:

(a) Whether the purchases of shares were by one transaction, under which Mr H (or his company) was the principal and Ms HK (or her company) was his agent, or more, loans to Ms HK and purchases by her;

(b) Whether any shares were sold before 2006;

(c) Whether the dealing in the Intco shares breached country A’s law

restricting transactions to citizens of country A; and

(d) Whether Mr H is liable for country B’s taxes on the profits.

In so far as there are factual differences, I cannot say that one version is demonstrably wrong. I assume that after a hearing on the substantive merits, either account could be upheld.

The Intco Trust

[14] In April 2007 Mr S gave the Hs a written opinion on their position and how they should formalise that position in accordance with New Zealand law. He considered that a valid and binding oral trust was established in 2002 under which Mr H was the settlor, Mrs H the trustee and both of them and their children (one existing and any future) were beneficiaries. The opinion does not address any choice of law questions and does not say which laws govern that trust. If country A’s law applies, it is hard to see how there could be a trust – I understand that like most legal systems not derived from the common law, country A’s law does not recognise trusts. Following Mr S’s advice to document the trust, Mr H instructed Mr S to prepare a trust deed.

[15] In May 2007 funds held in the New Zealand bank account were transferred to an account with a foreign bank in Auckland, then to a bank in country C. The amount sent to the account in C was B$8,000,000.

[16] On 31 October 2007 Mr and Mrs H signed the trust deed prepared by Mr S for the Intco Trust. Mr H is the settlor, Mrs H the trustee. Their son and any further children of Mr H are the final beneficiaries. Discretionary beneficiaries are Mr and Mrs H, the final beneficiaries and any grandchildren, and charities. The trust began on 1 July 2002, the date of the first settlement on the trust. The trust fund is defined:

“Trust fund” means two original tranches in the sum of B$1,000,000 and

B$250,000 respectively, settled on the trustee during July 2002 and October

2003 respectively, and for the specific purposes of investing in Intco shares (ownership of which was then prohibited by country A’s authorities) and all property which may in the future be received or acquired by the Trustee from any source whatever for the purposes of the Trust and the money or investments from time to time representing such property and, unless inconsistent with the context, the income from such property.

The trustees’ powers to pay debts and discharge liabilities are within the general management powers in cl 12.1:

To achieve the objects of the Trust, the Trustees shall have in the administration, management and investment of the Trust Fund all the rights, powers and privileges of a natural person and, subject always to the trusts imposed by this deed, may deal with the Trust Fund as if the Trustees were the absolute owners of and entitled to the Trust Fund and accordingly, in addition to any specific powers vested in the Trustees by law, in dealing with the Trust Fund or acting as Trustees of the Trust, the Trustees may do any act or thing...or enter into any obligation whatever...”

Clause 21.2 is the indemnity provision:

Each Trustee or former Trustee or officer of any Trustee or former Trustee shall be entitled to a full and complete indemnity from the Trust Fund for any liability which that Trustee, former Trustee or officer, may incur in any way arising out of or in connection with that Trustee or officer acting or purporting to act as, or on behalf of, a Trustee of the Trust, provided such liability is not attributable to that Trustee’s or officer’s own dishonesty, or to the wilful commission or omission by that trustee or officer, of an act known by that Trustee or officer to be a breach of trust.

As to governing law, cl 22.1 says:

Whilst the trust was originally established under the laws of country A, the laws of New Zealand shall govern the effect and construction of this deed and the courts of New Zealand shall have exclusive jurisdiction.⁵

Other provisions are those typically found in a deed for a discretionary trust. The trustees have discretionary powers to distribute income and capital. The settlor may appoint and remove beneficiaries. Mr and Mrs H jointly may appoint and remove trustees and may transfer the power of appointment and removal. A trustee may reside overseas. The trustees are to act unanimously. A professional trustee may charge for its services. The trustees may vary or revoke the deed.

[17] On 16 November 2007 Mr and Mrs H appointed S Ltd as a further trustee.

[18] By a deed dated 26 March 2010 Mrs H and S Ltd retired as trustees and Mr and Mrs H appointed Mrs H’s sister, Ms M (of country A) as sole trustee of the Intco Trust. Mr S prepared the documents. The reason was to ensure that the trust had a non-resident trustee for New Zealand income tax purposes. The deed contains standard indemnities in favour of the retiring and incoming trustees. Mr S advised the Inland Revenue Department on 30 April 2010 that S Ltd was no longer a trustee of the Intco Trust and that the foreign trust no longer had a resident trustee.

[19] On 8 December 2010 Ms M resolved to distribute all the income of the Intco Trust to Mrs H. The purpose of the distribution was to take advantage of Mrs H’s exemption from New Zealand income tax for overseas investment income. The exemption was about to expire. The amount of the distribution was B$8,070,000

The trust’s balance sheet for the year ending 31 March 2011 shows that Mrs H

advanced B$7,500,000 back to the trust.

[20] There was a further change of trustee on 23 February 2011: by deed Mr and Mrs H removed Ms Y and appointed W Trustees Ltd. That is a registered company in country Q, a tax haven, but operates out of country V. Its ultimate holding entity is W Offshore Company. The proposal for W Trustees Ltd to become trustee had been mooted earlier, in 2008-2009. Mr S provided W Offshore Company with

_{information as to the Hs and the trust in that earlier period.}

5. I note again my reservation whether the trust could have been established under the law of country A.

[21] According to pleadings in the 2404 proceeding,⁶ W Trustee Ltd resigned as trustee on 29 October 2014 and was replaced by KLM Ltd, a New Zealand company.

The XYZ Family Trust

[22] The XYZ Family Trust was established by a deed signed on 9 December

2010. Mrs H is the settlor. The trustee is XYZ Ltd, which was incorporated on the same day. Mrs H is the sole shareholder. She and Mr S were the initial directors of the company. The trust deed is in terms similar to the deed for the Intco Trust, but without any exotic elements. The trust period runs from the date of the deed. The indemnity provision is in the same terms as that in the deed for the Intco Trust. Mr H was not initially a discretionary beneficiary, but he was added by a deed of the same date. By deed Mrs H transferred to him the powers to appoint and remove trustees.

[23] In February 2011, August 2011 and during 2012 at Mrs H’s direction payments totalling B$4,000,000 were made by the Intco Trust from its C account the New Zealand bank account of the XYZ Family Trust. These payments were treated in the accounts of Intco Trust as drawings against her beneficiary’s account.

[24] Under an agreement of 9 August 2011, XYZ Ltd bought half the shares in D for $544,000. D Ltd (later renamed) was a joint venture investment company. The vendors were the trustees of the T Trust, a family trust of Mr S. The source of the funds for the share purchase is the payments Mrs H drew from the Intco Trust. In the 2404 proceeding the Hs say that XYZ Ltd made further payments totalling

$1,041,500 towards the joint venture.

[25] In September 2011 XYZ Ltd bought the Auckland property and later built the Hs’ family home there. Again the source of the funds for the joint venture, the purchase and development in Auckland is the funds from the Intco Trust. XYZ Ltd does not suggest otherwise.

_{[26] On 11 December 2012 Mr S resigned as director of XYZ Ltd.}

⁶ Statement of defence of 30 September 2015 at [143].

[27] On 29 January 2015 the caveators lodged their caveats against the title to the

Auckland property.

[28] Other lawyers acted for XYZ Ltd on the purchase of the Auckland property, but that aside, there is no evidence that until then the Hs had any other New Zealand lawyer acting for them on transactions involving the trusts. They had New Zealand accountants to prepare end of year statements and to assist with compliance with New Zealand tax laws.

Other proceedings

CIV 2013-404-2404 H v S (the 2404 proceeding)

[29] D Ltd made unsuccessful investments in a number of ventures: an immigration consultancy, a scheme to help migrants remit their pensions to New Zealand, a foreign exchange scheme and a cupcake business. The Hs say that there was no return for the $1,585,500 XYZ Ltd invested. In the 2404 proceeding they and XYZ Ltd have sued Mr S and the trustees of the T Trust. S Ltd is not a party. The causes of action in the statement of claim of 26 June 2015 are for breach of fiduciary duty (three: against Mr S as lawyer, for receiving secret commissions and in respect of a joint venture), breach of a joint venture agreement, knowing receipt, misleading conduct under the Fair Trading Act 1980 and breach of confidence. As well as denying large parts of the plaintiffs’ case and putting them to proof, the defendants have pleaded affirmative defences and made a counterclaim. The counterclaim has three causes of action. It is not necessary to go into the first two causes of action: the first blames the Hs for incompetence and introducing tainted funds; the second alleges that D Ltd failed because the Hs refused to inject further funds in November 2012. The affirmative defences and the third cause of action in the counterclaim overlap with issues in this case.

Illegality

[30] For an illegality defence, the defendants say that the funds invested can be traced back to the proceeds of sale of the Intco shares and were obtained illegally in

breach of country A’s law. The applicable law pleaded is a regulation of country A which was in force until late 2005. Under the regulation foreigners required a permit to enter into certain transactions for Intco shares. The pleading does not specify the kind of transactions caught by the regulation. Transactions in breach of the regulation were void under legislation of country A. The defendants say that because the purchases and sales of the Intco shares were in breach of the regulation the Hs, the trustees of the Intco Trust and the trustee of the XYZ Family Trust never obtained clear title to the proceeds of sale of the Intco shares.

[31] As a second ground for illegality, they say that Mr H was answerable to the taxation agency of country B for the profits made on the sale of the shares. As a country B citizen he is liable for tax on his worldwide income. Provision 21 of statute A (country B’s tax legislation) makes tax evasion an offence and gives country B’s government a tax lien for the deficiency. Because Mr H allegedly evaded tax contrary to provision 21, the Intco and XYZ trustees never obtained title to the funds derived from the dealing in the Intco shares.

[32] The third ground for illegality is based on alleged non-compliance with New Zealand tax laws. The defence applies only if no oral trust was established in country A in 2002. In that case the Intco Trust was established only in October 2007. As the settlor and the trustees were New Zealand residents, tax was payable on the worldwide income of the trust. The Intco trustees made no returns to the Inland Revenue and paid no tax on the trust’s income. These breaches of the law are also alleged to taint the funds paid to XYZ Ltd so as to disable it from suing.

Unclean hands

[33] As a further defence, the defendants repeat the above allegations to say that the plaintiffs cannot claim in equity because of unclean hands.

Indemnity

[34] The third affirmative defence overlaps the third cause of action in the counterclaim. Mr S relies on the indemnity provisions of the trust deeds of both

trusts to seek declarations that they are entitled to full indemnity, exoneration and recourse to all the assets of the trusts with respect to any liability he may have to the taxation agency of country B, the New Zealand Commissioner of Inland Revenue and to any subsequent trustees of the Intco and XYZ Family Trusts. Those potential liabilities are the same as those in issue in this case. Oddly Mr S seeks a similar declaration for S Ltd, but it is not clear how he can do that when that company is not a party. No order has been made under s 165 of the Companies Act 1993 allowing a derivative proceeding. The current trustee of the Intco Trust, KLM Ltd, is a counterclaim defendant.

[35] The plaintiffs applied to strike out the defences of illegality and unclean hands, as set out in the first and second statements of defence. They argued that ex turpi causa non oritur actio⁷ did not apply as they did not have to rely on the illegality to sue. They also argued that the case involved the enforcement of foreign penal and revenue laws. Associate Judge Smith dismissed the application.⁸ His

_{decision illustrates the court’s normal cautious approach in strike out applications.}⁹

The judgment is in substance interlocutory: in refusing to strike out two affirmative defences, it was setting issues for the substantive hearing, but it was not deciding issues finally between the parties. Accordingly, no issue estoppel arises.¹⁰ It was a decision on the pleadings applying the normal presumption that the defendants would be able to prove what they had pleaded. In a caveat application pleadings are not enough: evidence is required to prove a caveatable interest.

[36] When a caveat is maintained, the court typically orders the caveator to take proceedings to have the interest claimed in the caveat upheld. The 2404 proceeding is a suitable vehicle for Mr S to claim the interests in his caveat, but as the proceeding is presently constituted S Ltd cannot use it to vindicate its lien. It is not a

_{party to the proceeding and Mr S cannot sue derivatively on its behalf.}

7. Lord Mansfield stated the principle in Holman v Johnson [1775] EngR 58; (1775) 1 Cowp 341, 343: “No court will lend its hand to a man who founds his cause of action upon an immoral or illegal act.”

⁸ _{H v S, above n 3.}

⁹ _{The plaintiffs applied to review his decision, but withdrew the review application.}

¹⁰ Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 (CA) at 43.

CIV 2014-404-3 XYZ Ltd v S

[37] XYZ Ltd lodged a caveat against properties owned by the T Trust on the alleged ground that funds it had put into D Ltd could be traced to these properties. That was the basis for the knowing receipt cause of action in CIV 2013-404-2404. An interim order has been made that the caveat not lapse. The proceeding is of no more than background interest for this case.

A trustee’s indemnity and lien

[38] A trustee’s right of indemnity and lien arose in equity. The right of indemnity has statutory recognition in s 38(2) of the Trustee Act 1956. The basic principles are:¹¹

(a) As against a third party, a trustee is personally liable for debts and liabilities incurred as a trustee;

(b) The trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee by recoupment of expenditure and exoneration of liability;

(c) The right of indemnity is secured by an equitable lien over the trust assets, which arises by operation of law, confers a proprietary interest by way of security in the trust assets and takes priority over the claims of beneficiaries;

(d) The lien extends to all the trust assets, except for those specifically excluded by the trust deed;

(e) As the lien is equitable, the trustee can enforce it only by judicial sale or appointment of a receiver, not by sale out of court;

¹¹ I have taken these from Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, (2008) 74 NSWLR 550. Brereton J in turn drew on Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153. See also Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [16.6].

(f) The right of indemnity accrues at the time the obligation is incurred;

(g) Upon bankruptcy or liquidation of the trustee, the right of indemnity vests in the Official Assignee or liquidator;

(h) If the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee – except in the `case of a bona fide purchaser for value;

(i) A trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised.

[39] These are general principles only, not specific rules. Their application may turn on the circumstances in which the indemnity is invoked. It is important to bear in mind that a trustee’s indemnity has different aspects: reimbursement, exoneration, retention and realisation.¹² A trustee who incurs a liability may discharge it out of his own pocket and then reimburse himself from the trust fund. Alternatively, he may discharge the liability by paying directly from the trust fund, so as to exonerate

himself. A trustee may retain the trust fund until he has been indemnified for present liabilities and for contingent or future liabilities. A trustee may realise trust assets to meet his expenses and liabilities.

Officer’s indemnity

[40] The general law does not provide for the case of an officer of a corporate trustee.¹³ It is possible that an officer of a corporate trustee may incur personal liability for a matter in which the company was acting as trustee. Clause 21.2 of the trust deeds in this case provides that the indemnity applies not only to each trustee and former trustee but also to their officers and that the indemnity is “full and complete”. An indemnity in favour of an officer which did not include the usual

_{equitable lien would not be full and complete. Accordingly Mr S as director of S Ltd}

¹² See Lynton Tucker, Nicholas Le Poidevin and James Brightwell (eds) Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [21-043].

¹³ Lewin on Trusts at [21-041] suggests that third persons with fiduciary functions, such as protectors, have an implied right of indemnity. That does not necessarily apply to directors, who may owe fiduciary duties only to their companies, not to trust beneficiaries.

and former director of XYZ Ltd is entitled to an equitable lien to the extent that he has a right of indemnity under cl 21.2. XYZ Ltd did not submit otherwise.

The alleged liabilities

[41] Mr S’s and S Ltd’s caveats rely on their having incurred liabilities during the trusteeships. For the Intco Trust, the relevant period is from 16 November 2007, when S Ltd became a trustee, to 26 March 2010, when it retired. For the XYZ Family Trust, the period is from 9 December 2010, when XYZ Ltd became the trustee on the trust’s establishment, to 11 December 2012, when Mr S resigned as director.

[42] XYZ Ltd’s initial response to the alleged liabilities was to say that none of the alleged creditors had made any demands and Mr S had not given any evidence that any trust creditor was looking to him or S Ltd for payment of any debts incurred as trustee. The caveators’ case is that S Ltd and XYZ Ltd could be liable and Mr S may face accessory or secondary liability of some sort, even if no demands have been made yet. It is therefore necessary to look at the alleged heads of liability more closely.

[43] I consider mainly whether the corporate trustees are or were under any liability. If a trustee cannot be liable, Mr S as its director should not be. Accordingly if the trustee is not liable, it is not necessary to consider separately whether Mr S could be liable. There was no submission that, even if the trustee was not liable, Mr S as its director could be. I can think of no case where he would be. Conversely, if the trustee may be liable, I shall assume that Mr S might also face liability without setting out exactly what that would be. As an example, if one of the corporate trustees were found liable, Mr S might be liable as an accessory or he might face a contribution claim or a claim for breach of duty as director. Working out the particular head of liability is unnecessary.

[44] As between the corporate trustees, I deal for the most part with the position of

S Ltd as trustee of the Intco Trust. The caveators say that XYZ Ltd has only one

head of distinct liability – for New Zealand taxes. In all other cases, I assume that if

S Ltd cannot be liable, XYZ Ltd cannot be either.

Liability to W Trustees Ltd for defective title to assets

[45] The particular liability claimed in the caveat of S Ltd is:

The right of indemnity is further in respect of a liability the caveator incurred to [W Trustees Ltd] in respect of defective title to trust assets which liability the caveator incurred in carrying out the Trust when the caveator was trustee and in an amount to be determined.

[46] Mr S’s caveat is to similar effect. In his affidavit, Mr S explains that he and S may owe duties to W Trustees Ltd. The duties could arise in two ways: because of liabilities to country B’s taxation agency and the New Zealand Commissioner of Inland Revenue and because as trust officer and trustee they received tainted funds. In this part of the judgment I deal only with the tainted funds aspect. I consider later

whether there are any liabilities to country B or for New Zealand taxes.¹⁴ If there is

no tax liability, it will not be necessary to deal with any question of breach of duty to

W Trustees Ltd.

[47] When a person makes a defective title claim, they are saying that an asset in their apparent ownership or possession really belongs to someone else or is subject to an interest of that other person. That requires them to show that there is some other person who owns or has an interest in the asset. In a caveat application that is to an arguable case standard. A valid claim by a third party results variously in that person obtaining ownership of the asset or recognition and enforcement of their interest or compensatory relief. The vulnerability to such adverse rulings gives the ground for a defective title claim. It is not enough to assert baldly that title to an asset is defective without also showing the adverse claim. The inquiry is accordingly into what claims could be made against W Trustees Ltd by third parties that they own or have an interest in assets of the Intco Trust. Only if such a claim is made out

_{could the caveators face any liability of the sort they allege.}

¹⁴ At [87] and [122].

[48] The caveators’ case is that Mrs H never had clear title to the funds settled on the Intco Trust because they were the proceeds of illegal dealing in Intco shares in country A. They invoke ex turpi causa non oritur actio. Because Mrs H did not have title to the funds, she could not pass title to the trustees, including S Ltd. They in turn could not pass good title to later trustees. Mr S refers to W Trustees Ltd in particular because the information he gave to W Offshore Company in [20] above, which he intended W Trustees Ltd to act on, may have been incorrect and there may be some claim against him as a result of W Trustees Ltd acting on that information to its detriment.

[49] The alleged illegality is a matter of country A’s law. Foreign law is a matter of fact and needs to be proved. Section 144 of the Evidence Act 2006 sets out how foreign law may be proved:

(1) A party may offer as evidence of a statute or other written law, proclamation, treaty, or act of State, of a foreign country—

(a) evidence given by an expert; or

(b) a copy of the statute or other written law, proclamation, treaty, or act of State that is certified as a true copy by a person who might reasonably be supposed to have the custody of the statute or other written law, proclamation, treaty, or act of State; or

(c) any document containing the statute or other written law, proclamation, treaty, or act of State that purports to have been issued by the government or official printer of the country or by authority of the government or administration of the country; or

(d) any document containing the statute or other written law, proclamation, treaty, or act of State that appears to the Judge to be a reliable source of information.

(2) In addition, or as an alternative, to the evidence of an expert, a party may offer as evidence of the unwritten or common law of a foreign country, or as evidence of the interpretation of a statute or other written law or a proclamation of a foreign country, a document—

(a) containing reports of judgments of the courts of the country;

and

(b) that appears to the Judge to be a reliable source of information about the law of that country.

(3) A party may offer as evidence of a statute or other written law of a foreign country, or of the unwritten or common law of a foreign country, any publication—

(a) that describes or explains the law of that country; and

(b) that appears to the Judge to be a reliable source of information about the law of that country.

(4) A Judge is not bound to accept or act on a statement in any document as evidence of the law of a foreign country.

(5) A reference in this section to a statute of a foreign country includes a reference to a regulation, rule, bylaw, or other instrument of subordinate legislation of the country.

(6) Subpart 1 of Part 2 (which relates to hearsay evidence) does not apply to evidence offered under this section.

[50] There is no evidence by the caveators as to the relevant law in country A. The references to the regulation and the legislation in the statements of defence and counterclaim in the 2404 proceeding are pleadings, not evidence. The caveators have had plenty of time to obtain evidence as to country A’s law: they first put it in issue in their statement of defence and counterclaim of 9 October 2013 in the 2404 proceeding.¹⁵ As something of a let-off for the caveators, Mr and Mrs H acknowledge that in country A there were restrictions on foreigners owning Intco shares, but at the same time they maintain that they structured their transactions so as to comply with the law.¹⁶ On that slender basis, it is arguable for the caveators that it was illegal under country A’s law for Mr H or any corporation under his control to own Intco shares. Under the caveators’ version of events, Mrs H or her corporation in country A arguably held the shares as agent for Mr H with the result that they

infringed the restrictions under the laws of country A.

[51] There is also no evidence as to the effects of the alleged breach of the law. In case it is thought that I have been too strict in not having regard to the pleading in the 2404 proceeding, I do not regard the plea that under country A’s legislation a transaction in breach of the law is void as offering any useful guidance.¹⁷ It is

_{necessary to avoid a trap: just because a word in the A language has been translated}

¹⁵ _{Statement of defence and counterclaim of 9 October 2013 at [104] and [139.14].}

¹⁶ Their joint affidavit of 24 October 2013 at [3], Mr H’s affidavit of 12 December 2013 at [11] and

_{Mrs H’s affidavit of 12 December 2013 at [5], all in the 2404 proceeding.}

¹⁷ Statement of defence of 30 September 2015 at [139.5].

into English as “void” does not mean that the consequences in country A’s law are the same as for a transaction that is void under New Zealand law. For all I know any of the following could apply under the A legislation:

(a) the courts may refuse to have anything to do with the transaction; (b) the transaction may be unenforceable;

(c) the parties to the transaction are to be put back in the position they were in at the outset;

(d) an owner may be able to enforce his rights to property against third parties, even though he acquired the asset illegally;

(e) some doctrine akin to “possession vaut titre” may apply; or

(f) the repeal of the regulation validated the transactions.

[52] Instead, in the absence of evidence of the foreign law a New Zealand court applies its general law.¹⁸ That is not a universal rule. In Damberg v Damberg, after reviewing comprehensively cases and learned commentators on the question, Heydon JA said:¹⁹

To state exhaustively when a court will not assume that the unproved provisions of foreign law are identical with those of the lex fori would be a difficult task.

In this case while the Hs’ acknowledgements allow inferences to be drawn as to regulatory controls on dealing in Intco shares, it is not possible to work out how country A’s law treats the illegality. In those circumstances it is acceptable for the court to apply its own general law as the law with which it is familiar. The court is not applying local regulatory laws: it is irrelevant that dealing in Intco shares was not

_{controlled in New Zealand. It does not matter that the local law is in statute rather}

¹⁸ _{Mount Cook (Northland) Ltd v Swedish Motors Ltd [1986] 1 NZLR 720 (HC) at 726-7.}

¹⁹ Damberg v Damberg [2001] NSWCA 87, (2001) 52 NSWLR 492 at [162].

than common law. The circumstances here are not within any of the cases in

Damberg v Damberg where courts did not apply local law.

[53] The applicable local law is the Illegal Contracts Act 1970. Here I diverge from the arguments in the strike out application in the 2404 proceeding which relied on the common law doctrine ex turpi causa non oritur actio. While that doctrine may have a place in other parts of the law, it does not apply to illegal contracts and their effects.²⁰ The Act provides for illegal contracts and their effects. Subject to certain immaterial savings, those rules displaced the former common law rules, including ex turpi causa non oritur actio.

[54] Sections 3 and 5 of the Illegal Contracts Act say:

3 Illegal contract defined

Subject to section 5, for the purposes of this Act the term illegal contract means any contract governed by New Zealand law that is illegal at law or in equity, whether the illegality arises from the creation or performance of the contract; and includes a contract which contains an illegal provision, whether that provision is severable or not.

5 Breach of enactment

A contract lawfully entered into shall not become illegal or unenforceable by any party by reason of the fact that its performance is in breach of any enactment, unless the enactment expressly so provides or its object clearly so requires.

[55] Because there is no evidence of the particular provisions of country A’s regulation, there is an obvious difficulty in applying them. But as it seems that ownership of Intco shares by foreigners was prohibited, it is arguable that a contract for a foreigner to acquire shares is illegal. On the other hand, because the apparent purpose of the enactment was to restrict ownership of Intco shares to country A’s citizens, a contract under which a foreigner sells his shares to a country A citizen cannot arguably infringe. The caveators have not shown an arguable case that any sales of the shares were illegal contracts. Moreover, if I have been too strict in not

_{having regard to the pleadings in the 2404 proceeding, the expiry in late 2005 of the}

²⁰ Illegal Contracts Act, s 10 and see Leason v Attorney-General [2013] NZCA 509, [2014] 2

NZLR 224 at [105].

regulation controlling ownership of Intco shares means that any sale of the shares in

2006 could not have breached the decree.²¹

[56] In case I am wrong on that, I go on to the effects of the sales being found to be illegal contracts. The Illegal Contracts Act altered the law on the passing of property under illegal contracts. Lord Browne-Wilkinson’s summary in Tinsley v Milligan matches the position in New Zealand before the act:²²

Neither at law nor in equity will the court enforce an illegal contract which has been partially, but not fully performed. However, it does not follow that all acts done under a partially performed contract are of no effect. In particular it is now clearly established that at law (as opposed to in equity), property in goods or land can pass under, or pursuant to, such a contract. If so, the rights of the owner of the legal title thereby acquired will be enforced, provided that the claimant can establish such title without pleading or leading evidence of the illegality. It is said that the property lies where it falls, even though legal title to the property was acquired as a result of the property passing under the illegal contract itself.

[57] On the other hand, under the act the starting position is that property does not pass under an illegal contract. Section 6(1) says:

Notwithstanding any rule of law or equity to the contrary, but subject to the provisions of this Act and of any other enactment, every illegal contract shall be of no effect and no person shall become entitled to any property under a disposition made by or pursuant to any such contract:

provided that nothing in this section shall invalidate—

(a) any disposition of property by a party to an illegal contract for valuable consideration; or

(b) any disposition of property made by or through a person who became entitled to the property under a disposition to which paragraph (a) applies—

if the person to whom the disposition was made was not a party to the illegal contract and had not at the time of the disposition notice that the property was the subject of, or the whole or part of the consideration for, an illegal contract and otherwise acts in good faith.

[58] If the sales were illegal, under s 6(1) the purchasers did not take title to the shares sold to them. On the other hand, under the proviso ownership would pass to

²¹ _{Statement of defence and counterclaim of 30 September 2015, paragraph [139.1].}

²² Tinsley v Milligan [1993] UKHL 3; [1994] 1 AC 340 (HL) at 369. See also Bowmakers Ltd v Barnet Instruments

Ltd [1945] KB 65 (CA) and Singh v Ali [1960] AC 167 (PC).

any sub-purchasers, unless they had notice of the illegality or otherwise did not act in good faith. The possibility that sub-purchasers would not satisfy the conditions for taking title is too remote to require consideration. Purchasers of shares in publicly- listed corporations almost never know any title defects of their sellers. They can be put to one side. The possibility that purchasers might make claims because they did not obtain title to their shares might support the caveators’ claims. That possibility also seems slim, given that their purchasers would have the benefit of the proviso and would not need to claim against them and the Hs certainly have no interest in recovering the shares from the purchasers. Without a claim by a third party to their shares the purchasers would not have claims for defective title.

[59] Section 7 is relevant as showing the court’s power to give discretionary relief,

including to vest property the subject of the contract:

Notwithstanding the provisions of section 6, but subject to the express provisions of any other enactment, the court may in the course of any proceedings, or on application made for the purpose, grant to—

(a) any party to an illegal contract; or

(b) any party to a contract who is disqualified from enforcing it by reason of the commission of an illegal act in the course of its performance; or

(c) any person claiming through or under any such party—

such relief by way of restitution, compensation, variation of the contract, validation of the contract in whole or part or for any particular purpose, or otherwise howsoever as the court in its discretion thinks just.

(2) An application under subsection (1) may be made by—

(a) any person to whom the court may grant relief pursuant to subsection (1); or

(b) any other person where it is material for that person to know whether relief will be granted under that subsection.

(3) In considering whether to grant relief under subsection (1), and the nature and extent of any relief to be granted, the court shall have regard to—

(a) the conduct of the parties; and

(b) in the case of a breach of an enactment, the object of the enactment and the gravity of the penalty expressly provided for any breach thereof; and

(c) such other matters as it thinks proper;

but shall not grant relief if it considers that to do so would not be in the public interest.

(4) The court may make an order under subsection (1) notwithstanding that the person granted relief entered into the contract or committed an unlawful act or unlawfully omitted to do an act with knowledge of the facts or law giving rise to the illegality, but the court shall take such knowledge into account in exercising its discretion under that subsection.

(5) The court may by any order made under subsection (1) vest any property that was the subject of, or the whole or part of the consideration for, an illegal contract in any party to the proceedings or may direct any such party to transfer or assign any such property to any other party to the proceedings.

(6) Any order made under subsection (1), or any provision of any such order, may be made upon and subject to such terms and conditions as the court thinks fit.

(7) Subject to the express provisions of any other enactment, no court shall, in respect of any illegal contract, grant relief to any person otherwise than in accordance with the provisions of this Act.

[60] This section supplants the common law on restitutionary relief in respect of illegal contracts.²³ Any claim by the purchasers to be paid back the purchase price of the shares or for compensation would be brought under the section. For that, their target would be the Hs as the vendors of the shares, not W Trustees Ltd. In a caveat decision it is not appropriate to evaluate the substantive merits of a possible application for relief under s 7, but one matter is clear. The claim would be statute- barred under s 4(1)(d) of the Limitation Act 1950: more than six years have passed since the sales.²⁴ Under s 55 of the Limitation Act 2010, foreign limitation laws are matters of substantive law, not procedural law of the forum. I have applied New Zealand law in the absence of evidence of country A’s limitation rules.

[61] The only way that the caveators could target W Trustees Ltd (or the current trustee) would be to assert a proprietary claim by contending that under s 6 of the Illegal Contracts Act they retained title to the funds they paid to Mrs H and to trace

_{and follow those funds through to the current trustee. That would also be an}

23. For the common law, see Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones: The Law of Unjust Enrichment (8th ed, Sweet & Maxwell, London, 2011) at ch 25 and

_35.

24. The Limitation Act 1950 has been repealed by the Limitation Act 2010, s 57, but there is a saving under s 59 for acts and omissions before 1 January 2011.

application under s 7. It would seek directions for the transfer or assignment of property under s 7(5). A claim outside the section is not available. This is another case where Parliament has enacted wide discretionary relief to replace particular rules.²⁵ Any such claim would still seek recovery of a sum of money by virtue of an enactment so as to be statute-barred under s 4(1)(d) of the Limitation Act 1950.

[62] In addition to s 7 now setting the restitutionary relief available for illegal contracts, it can also be noted that relief would not be available at common law anyway. The common law will treat the property as having passed. Illegality is in general a defence to a claim for unjust enrichment²⁶ and there is nothing to show that there would be any departure from that approach in this case.

[63] This consideration of the alleged illegality said to put W Trustees Ltd at risk of a defective title has shown that there was no breach of the law in obtaining the alleged tainted funds. The caveators have not shown an arguable case that the sales proceeds were obtained under illegal contracts. Even if the sales were illegal, the caveators have not shown how anyone could now mount a viable challenge to the Intco trustees’ ownership of the trust assets including any traced proceeds of sales of Intco shares. The purchasers of the shares could not claim – they are now out of time. The caveators have not identified anyone else who might claim and I cannot think of any. Because W Trustees Ltd could not face an arguable defective title claim on account of tainted funds, the caveators do not have any exposure to W Trustees Ltd on that account. The unreality of any such claim is also shown by these factors:

(a) the sales were completed at least nine years ago;

(b) there is no evidence of anyone notifying the Hs or the Intco trustees of any claim to the share sales proceeds;

²⁵ For a comparable case, see s 9 of the Contractual Remedies Act 1979, which replaced the rules for quantum meruit claims following cancellation for breach of contract – Brown & Doherty Ltd v Whangarei County Council [1990] 2 NZLR 63 (HC).

²⁶ Goff & Jones: The Law of Unjust Enrichment, above n 23, at [35-09].

(c) on the Hs’ account, Ms M was one of the purchasers of the shares – as a later trustee of Intco Trust she must have known of the trustees’ ownership of the proceeds of sale but she has not given notice of any intention to claim against those proceeds; and

(d) any purchaser from country A is likely to face real practical difficulties in bringing a claim.

In summary the caveators do not have an arguable case under this head of their caveats.

New Zealand taxes

[64] The particular liability claimed in the caveat of S Ltd is:

The right of indemnity is in respect of a liability that the caveator incurred to the New Zealand Inland Revenue Department in an amount to be determined, which liability the caveator incurred in carrying out the Trust when the caveator was trustee.

There is a similar claim in Mr S’s caveat, except that his also applies to his directorship of XYZ Ltd.

[65] After they came to New Zealand the Hs took professional advice on their New Zealand tax position, including from Mr S. Their tax planning was based on the notion that the Intco Trust had first been established in country A in 2002. The caveators accept that if that is the case, they do not face any liability for New Zealand income tax. Their liability arises if the trust was not established until October 2007. They say that would be the case, if the Hs’ version of events in [12] above is accepted. A further reason is that as country A apparently did not have a law of trusts, it makes good sense to consider the tax position of the trust on the basis that it was established in New Zealand.

[66] The Income Tax Act 2007 applies. It came into force on 1 April 2008. Besides, for this case there are no material differences between it and the Income Tax Act 2004. Many of the provisions of the tax legislation I shall refer to are hedged

with provisos and qualifications that are not relevant for this case. I will not set them out or refer to them.

[67] As migrants to New Zealand, Mr and Mrs H were transitional residents under s HR 8 of the Act. As they remained resident in New Zealand, their investment income sourced from outside New Zealand was exempt from New Zealand income tax until the end of the 48^th month after they came to New Zealand – 31 December

2010. The exemption provision is s HR 8(1). Relevantly the effect of s HR 8(1)(d), which applies to certain trust rules, is that distributions of exempt income from foreign-sourced amounts to beneficiaries are not taxable in the hands of transitional residents. The imminent expiry of the exemption is why the Intco Trust made the distribution in [19] above before the end of 2010. Once the four years were up, the Hs became taxable on all their income both New Zealand and worldwide. Their tax accountant says that they have made returns and met their New Zealand tax obligations ever since.

Intco trustees’ liability for income tax

[68] The income tax position of the Intco Trust is different. There are two aspects of potential tax liability for S Ltd: for trust income and for taxable distributions to beneficiaries. Subpart HC of the Act deals with the taxation of trusts. Trustees must satisfy the income tax liability for their trusts as if they were beneficially entitled to

the trust income.²⁷ Beneficiary income is income derived by a trustee to the extent

to which it vests absolutely in interest in a beneficiary in the relevant trust year.²⁸ To the extent that it is not beneficiary income, an amount of income derived by a trustee is trustee income.²⁹ Under s HC 26 there is an exemption for foreign-sourced trust income derived by a New Zealand resident trustee:³⁰

Exempt income

(1) A foreign-sourced amount that a New Zealand resident trustee derives in an income year is exempt income under section CW 54 (Foreign- sourced amounts derived by trustees) if—

²⁷ _{Section HC 24(1).}

²⁸ _{Section HC 6.}

²⁹ _{Section HC 7.}

³⁰ The exemption is also flagged in s CW 54.

(a) no settlor of the trust is at any time in the income year a New

Zealand resident who is not a transitional resident; and

(b) the trust is not—

(i) a superannuation fund; or

(ii) a testamentary trust or an inter vivos trust of which a settlor died resident in New Zealand (whether or not they died in the income year).

When subsection (3) applies

(2) Subsection (3) applies for an income year to a resident foreign trustee of a foreign trust to which sections 22(2)(fb) and (m), and 59B of the Tax Administration Act 1994 applies.

When knowledge offence committed

(3) Subsection (1) does not apply if the trustee—

(a) is not a qualifying resident foreign trustee for the income year;

and

(b) is convicted of an offence under section 143A of the Tax

Administration Act 1994; and

(c) has committed the offence in connection with information relating to the income year.

Exception

(4) Subsection (3) does not apply to an offence under section 143A(1)(b) of that Act if the information is supplied to the Commissioner after the conviction is entered.

[69] “Foreign-sourced amount” is defined in s YA1 to mean an amount of income

that is treated as having a source in New Zealand under ss YD 4 and YZ 1.

[70] Under s HC 27(2) there is an extended definition of “settlor”. It means more

than the person named in the trust instrument as the settlor:

Meaning of settlor

(2) A settlor of a trust is a person who, at any time,—

(a) transfers value—

(i) to the trust; or

(ii) for the benefit of the trust; or

(iii) on terms of the trust:

(b) provides financial assistance to the trust or for the benefit of the trust with an obligation to pay on demand, and the right to demand is not exercised or is deferred:

(c) is treated as a settlor under section HC 28.

[71] Mrs H was clearly a settlor; Mr H may have been as well. It was not suggested that anyone else could be a settlor. During the relevant period of trusteeship, both were transitional residents in New Zealand, so as to satisfy s HC 26 (1)(a). Any income of the Intco Trust came from the funds held in the account in C – the funds had been moved there before the trust deed of October 2007 and before S Ltd became a trustee. The account in C was not a New Zealand source, but a

foreign source under s YD 4.³¹ There is no evidence and no plausible reason to

believe that any of the trust’s income during the relevant period was New Zealand- sourced. Nor is there any reason to believe that the case comes within the exception under s HC 26(3). Accordingly while S Ltd was a trustee, the income of the Intco Trust was exempt from income tax under s HC 26. Accordingly, there is no arguable case that the trustee company can be liable for non-payment of income tax, nor can Mr S, its director.

[72] In her affidavit of 12 May 2015, Ms E, a former partner of Mr S, suggests that the Hs relied on distributions from the trust to fund their lifestyle in New Zealand. I take it that if that is the case they would take the distributions as beneficiary income, which would not be taxable in their hands as transitional residents. After all, the amount of the distribution to Mrs H in December 2010, B$8,070,000 is more than the amount paid into the C account in May 2007 – B$8,000,000. The Hs were not drawing on trust capital. Only one set of financial statements of the Intco Trust has been put in evidence, for the year ending 31 March

2011.³² They are consistent with this position. They show that in the year ending

31 March 2010 net income was B$490,000 and there were distributions to Mrs H of

B$17,000. Ms E’s evidence may show that the amount of trustee income was

_{reduced because of payments of beneficiary income, but it does not affect the}

³¹ _{See s YD 4(11) in particular for income from debt instruments.}

³² S’s affidavit in 2404 proceeding, exhibit 30, page 6.

position that the trustee income was exempt from income tax. The financial statements show that there was no provision for tax, but the caveators have not shown that the trustee income was taxable.

[73] The second aspect, taxable distribution to beneficiaries, requires consideration because of the distribution to Mrs H in December 2010. The resolution for it purports to distribute all income derived from the date of settlement to 31 December 2010, with “income” defined to include all amounts that would be treated as income under the Income Tax Act or any other relevant legislation. If the date of settlement was 2002, it is possible that most if not all of the distribution was income, representing the gains made on the sales of the Intco shares, after repayment of the funds provided for the purchases. But if the date of settlement is October

2007, the distribution consists of capital as well as income. The text of the resolution should not disguise the fact that this was for the most part a distribution of capital to Ms H. The wording of the resolution can be explained as careful drafting to ensure that so far as possible any funds that could be distributed as income in the hands of Ms H were received by her during her transitional residency.

[74] For distributions that are not beneficiary income, sub-pt HC has three categories:³³

(a) Complying trusts; (b) Foreign trusts; and

(c) Non-complying trusts.

[75] The tax planning for the Intco Trust was on the basis that it was a foreign trust under s HC 11 because there was no settlor resident in New Zealand when a settlement was first made on the trust in 2002. It is not necessary to set out that tax position, because here we are dealing with the position that the trust was established in October 2007 when the settlors, Mr and Mrs H, were resident in New Zealand.

_{For this part it is irrelevant that they were transitional residents. Both sides agree}

³³ Section HC 1(c).

that the Intco Trust was never at relevant times a complying trust. Its tax position as a non-complying trust is relevant.

[76] A trustee makes a distribution when the trustee transfers value to a person because the person is a beneficiary of the trust.³⁴ For a non-complying trust a distribution is taxable to the extent that it is not a distribution of beneficiary income or a part of the corpus of the trust.³⁵ The trust corpus is equal to the market value of a settlement of property on the trust at the date of the settlement.³⁶ There are ordering rules, starting with income the trustee derived in the income year and finishing with the corpus of the trust, to determine how much of the distribution is

_taxable.³⁷ _{A beneficiary is not liable for ordinary income tax on the distribution.}³⁸

Instead tax is payable on the taxable distribution at the rate of 45 cents in the dollar.³⁹

The trustee as agent must satisfy the beneficiary’s liability for the taxable

distribution.⁴⁰

[77] On that basis Ms E suggests that the trust should have paid tax of around B$4,000,000. That seems to assume that the entire distribution to Ms H was taxable under s HC 15(2) after applying the ordering rules. That might be the case if the trust had been established in 2002, but we are dealing with the trust on the basis that it is non-complying because it was established in 2007 with a corpus of about B$8,000,000. There is no evidence showing the application of the ordering rules to the distribution to Mrs H. But even if none of the distribution to her was beneficiary income, the amount of any taxable distribution is unlikely to be more than

B$70,000.⁴¹

[78] Whatever the amount of tax payable by the trustees on the distribution, S Ltd is not liable to pay it. The tax is payable on the trust’s terminal tax date.⁴² As the

_{trust has a balance date of 31 March, the trust’s terminal tax date for the distribution}

³⁴ _{Section HC 14.}

³⁵ _{Section HC 15(2).}

³⁶ _{Section HC 4.}

³⁷ _{Section HC 16.}

³⁸ _{Section HC 19(1).}

³⁹ _{Sections HC 19(2), HC 34(1), BF 1(b) and sch 1, ptA, cl 14.}

⁴⁰ _{Section HC 22(1) and (3).}

41. The difference between B$8,070,000 (the amount of the distribution) and B$8,000,000 (the apparent corpus from the settlement of the funds in the C bank account on the trust.

⁴² Sections C 34(2), RA 13, sch 3, Part A, column H.

made in the year ending 31 March 2011 was 7 April 2012. At that time the trustee was W Trustees Ltd. It incurred the liability during its trusteeship. That was well after the trusteeship of S Ltd had come to an end. As it cannot be liable, its director, Mr S, cannot be either.

Intco trustees’ liability for gift duty

[79] The caveators say that on the basis that the Intco Trust was not established until October 2007, they face liability for gift duty on the settlement on the trust. Gift duty was abolished for gifts on and after 1 October 2011, but is still payable under the Estate and Gifts Duties Act 1968 on gifts before that date.⁴³ Their case is that the settlement of the funds derived from the share trading on the trust was a disposition of property under the act. The definition of “disposition” is deliberately wide to cover all forms of alienation and expressly refers to the creation of a trust.⁴⁴

The disposition was a gift under the act as it was made without any consideration in money’s worth passing to Mrs H, the donor.⁴⁵ The gift was dutiable under s 63. Under that section a gift is dutiable if the donor is domiciled in New Zealand (s 63(1)(a)) or the property gifted is situated in New Zealand (s 63(1)(b). For this part of their case the plaintiffs rely on s 63(1)(b) to say that there was a gift of property situated in New Zealand, but I disagree. The property the subject of the gift was the funds in the account in C. That was not situated in New Zealand.⁴⁶ Instead the caveators may be able to rely on Mrs H having a New Zealand domicile under s 63(1)(a). It is arguable for the caveators that she had adopted a New Zealand domicile under s 9 of the Domicile Act 1976 by October 2007. Indeed the establishment of the trust is part of the evidence pointing to her intention to live indefinitely in New Zealand.

[80] Gift duty was payable when the dutiable gift was made.⁴⁷ Section 86 of the act says:

_{(1) Gift duty shall constitute a debt due and payable to the Crown by the donor.}

⁴³ _{Estate and Gift Duties Act 1968, s 61.}

⁴⁴ _{Section 2(2) – definition of “disposition of property”.}

⁴⁵ _{Section 2(2) – definition of “gift”.}

⁴⁶ _{Section 63(2)(d).}

⁴⁷ Section 85(1).

(2) Without excluding the liability of the donor, gift duty shall also constitute a debt due and payable to the Crown by the donee, or, where there is more than 1 donee under the same dutiable gift, by each of the donees in proportion to the value of his or her interest in the dutiable gift:

provided that where the interest of a donee is a future interest he or she shall not become personally liable until it becomes an interest in possession.

(3) Where a gift has been made by way of trust for any donee, the gift duty shall, without excluding the liability of the donor or the donee, also constitute a debt due and payable to the Crown by the trustee in his or her capacity as trustee.

(4) Unless it is otherwise provided by the terms of the gift, the donee and trustee shall each be entitled to be indemnified by the donor against all liability under this section.

[81] The caveators point out that in addition to the donor being liable, under subsection (2) the donee must also pay the duty and under subsection (3) where the gift has been by way of trust for any donee the duty is also payable by the trustee.

[82] As with the distribution of December 2010, there is the question of timing. The settlement of the funds in the C account took place on 31 October 2007 when the trust was established. That is apparent from the definition of trust fund in the trust deed. At that time S Ltd was not a trustee: it was not appointed until 16

November 2007. It is not liable for trust debts incurred before its appointment. If there is any liability for gift duty on the settlement, it falls on Mrs H as donor and trustee, but not on S Ltd or its director, Mr S.

[83] I add that the claim of liability for gift duty was not raised until Ms E’s affidavit of 12 May 2015. It has not been pleaded as a relevant liability in the 2404 proceeding, even though a new statement of defence and counterclaim was filed after the hearing.

XYZ Ltd’s liability for tax

[84] The XYZ Family Trust is a purely New Zealand matter. It is not necessary to consider any foreign elements in dealing with its tax position. As the trustee of the XYZ Family Trust, XYZ Ltd is subject to income tax obligations under the Income Tax Act including subpart HC in particular. To the extent that the taxable

distribution provisions of sub-pt HC apply, it is a complying company. It has retained a tax consultant. Mr S instructed him on behalf of the company in 2011. He has prepared financial statements for the company and acted as its tax agent since July 2011. He confirms that he has no knowledge of any claims or demands by the Inland Revenue Department with regard to the trust. In an affidavit in the 2404 proceeding, the Hs attached a copy of the financial statements of the trust for the year ending 31 March 2012. These show provision for tax for that year and the year before.

[85] As the caveator Mr S has to show to the standard of a reasonably arguable case that he, as a director of XYZ Ltd, incurred some liability to the Commissioner of Inland Revenue. Mr S has not given any evidence to suggest that XYZ Ltd or he are under any unmet liability to the Commissioner of Inland Revenue. In the 2404 proceeding, he has not pleaded that he or XYZ Ltd came under any New Zealand tax

liability.⁴⁸ In the absence of any evidence to support it, the allegation of tax liability

for XYZ Ltd does not deserve serious consideration.

Summary on New Zealand taxes

[86] The caveators have not shown an arguable case that while S Ltd was a trustee of the Intco Trust it was liable to the Commissioner of Inland Revenue for any taxes that have not been paid. Because there is no arguable case that the company was liable, there is no arguable case that its director, Mr S could be liable. Similarly he has not shown to an arguable case standard that XYZ Ltd did not pay its taxes while he was its director. This head of liability in the caveats has not been made out.

[87] I note the position of W Trustees Ltd on the question of New Zealand taxes. This is the defective title aspect I did not deal with earlier. The taxes the caveators have put in issue result in personal liability to the taxpayers and may be enforced by proceedings for recovery of unsecured debts. It is not clear how W Trustees Ltd could make a defective title claim in respect of taxes not paid by earlier trustees. A trustee is liable for taxes incurred during its trusteeship. W cannot be liable for taxes incurred by earlier trustees. If an earlier trustee is required to pay taxes after its

trusteeship has ended, it may have recourse to trust assets under its indemnity. But the fact that as a later trustee W Trustees Ltd may have to allow an earlier trustee to have recourse to trust assets to pay unpaid taxes does not give it a defective title claim or any grounds to sue the earlier trustee. But as S Ltd did not arguably incur any relevant tax liability which remains unpaid, it is not necessary to go further into this aspect.

Country B’s taxes

[88] The particular liability claimed in the caveat of S Ltd is:

The right of indemnity is in respect of a liability that the caveator incurred to the taxation authority of country B in an amount to be determined, which liability the caveator incurred in carrying out the Trust when the caveator was trustee.

There is a claim to similar effect in Mr S’s caveat. His also applies to his directorship of XYZ Limited.

[89] The caveators’ case is that as a citizen of country B, Mr H was liable for country B taxes on the profits made on the sales of the Intco shares. His renunciation of his citizenship did not relieve him from paying taxes incurred as a citizen. He did not pay country B’s taxation authority any such taxes. That failure to pay taxes has downstream effects. Transferees are also liable. As the trustees were transferees of the profits on the sales of the shares, S Ltd and XYZ Ltd are also liable to country B’s taxation authority.

[90] The caveators need to prove the applicable law of country B. In Damberg v Damberg the New South Wales Court of Appeal declined to find in the absence of evidence that German tax laws were the same as Australia’s.⁴⁹ Similarly I decline to apply New Zealand tax laws as a substitute for adequate proof of country B’s law. Tax laws are tailored for the circumstances of their particular country. It would be artificial to apply New Zealand tax laws. Besides, New Zealand law does not provide the downstream effects that the caveators are claiming.

[91] The caveators rely on an affidavit by a tax lawyer from country B as an expert on country B’s relevant law. Evidence by an expert on foreign law needs to prove the content of the relevant law. Traditionally an expert witness could not give evidence how the foreign law applied to the particular case, but under s 25(2) of the Evidence Act 2006, that may be relaxed.⁵⁰ It can be helpful for the expert to set out how the law may be applied in particular circumstances. In this case the expert’s affidavit does little more than state conclusions after references to various statutory provisions. There is no analysis to show how these provisions apply. As to the

content of country B’s law, the affidavit does not address a number of key areas of liability. As to the application of the law, the caveators’ evidence overall does not show the particular matters alleged to give rise to liability.

Mr H’s tax liability

[92] Under the caveators’ case, they have some form of secondary or accessory or downstream liability under country B’s law. They could not be liable to country B’s government unless Mr H is. His liability therefore needs to be established. The tax lawyer’s affidavit does not identify any relevant taxation statute under which he is liable, state the taxing provisions or explain the nature of the tax. There is no evidence that under country B’s law Mr H owes any unpaid taxes.

[93] Of course I can take judicial notice that country B taxes the incomes of its citizens. But that is not enough. The application of tax laws to the facts of this case is not so straightforward that I can take Mr H’s tax liability for granted. There are two versions of the facts. The expert does not indicate which version might be relevant here. As Mr H is alleged to be liable for taxes on share sales profits which he did not receive, there needs to be some explanation why he is liable under the law of country B. For example, the approach under New Zealand law is to ascertain the

legal substance of transactions, not just their economic effects.⁵¹ I do not know

whether that is also the law in country B. If it is, some analysis is required to show how the transactions in this case are to be characterised, for example, loan to Ms HK

⁵⁰ Under the Evidence Act 2006 s 25(2)(a), opinion evidence by an expert is not inadmissible simply because it is about the ultimate issue. That is subject to the reservations expressed by the Privy Council in Pora v R [2015] UKPC 9 at [26]-[27].

⁵¹ Mills v Dowdall [1983] NZLR 154 (CA) at 159.

followed by purchase and sale by her so that she received the profits, not Mr H; or advance of funds to her as his agent to buy and hold the shares on his behalf. As the transactions are at least to some extent related to country A, does country A or country B’s law apply to the characterisation? As the caveators allege that the profits from the sales of the shares are ill-gotten gains because of the breach of country A’s law on foreign ownership of Intco shares, there needs to be evidence whether illegally acquired profits are taxable under country B’s law. I cannot take judicial notice that they are. Evidence is also required on the extra-territorial aspects. The profits were derived in country A from the purchase and resale of country A assets. If the caveators say that country B’s government has imposed taxes on those profits, they need to show that its tax laws in this case extend beyond its borders.

The caveators’ downstream liability

[94] Mr S is a New Zealand lawyer and was at all material times in New Zealand. S Ltd is a New Zealand incorporated company. There is no evidence of their having entered country B, carried on business in country B, earned income in country B or submitted to the laws of that country. Accordingly the suggestion that they may be subject to country B tax laws is a little surprising. It requires an explanation and evidence.

[95] The tax lawyer’s affidavit says that there are a variety of legal reasons for the caveators’ secondary liability. She refers to provisions in statutes from country B, as well as other related tax law doctrines. She cites various provisions of country B’s statute law to allege that Mr H committed offences of money laundering, failing to file tax returns and tax evasion. That is said to expose Mr S and S Ltd to the risk of criminal prosecution in country B. She also refers to a provision in country B’s statute as showing the power to forfeit assets. Exhibits to the affidavit include copies of the statutory provisions, an extract from a policy manual of country B’s justice department and some brief text describing a particular doctrine in the context of tax

recovery.⁵² There is however no analysis of the provisions. On my reading of the

_{statutory provisions, the tax lawyer seems to suggest two broad grounds for}

⁵² The source of the text is not given, but it could be a manual from country B’s taxation authority.

secondary liability: consequences of criminal offending and voidable disposition of assets.

Criminal offending

[96] Now that allegations of fraud and reprehensible conduct have been raised, we are in an area where it is not enough for the caveators to make out an arguable case. They must prove a prima facie case of criminal offending.⁵³

[97] All the allegations of criminal offending are directed at people who were outside country B at relevant times. Evidence is required that the provisions of country B’s criminal law apply extra-territorially. That is provided only in the case of the money laundering offences.

Offending by Mr H

[98] The affidavit suggests that Mr H could be charged with failure to file tax returns, tax evasion and money laundering.

[99] As to failure to file tax returns, provision 11 of Statute A relevantly says:

Any person ... required by this title or by regulations made under authority thereof to make a return... who wilfully fails to...make such return...at the time or times required by law or regulations, shall...be guilty of a misdemeanour and, upon conviction thereof, shall be fined not more than B$25,000..., or imprisoned not more than 1 year, or both...

[100] There is no evidence as to the legal requirements to file a return and whether they applied to Mr H. Whether he was required may turn on whether he received any taxable income, but as shown above, there is no evidence that he was liable for any taxes. Nor is there any specific evidence whether he did or did not file any tax returns.

[101] As to tax evasion, provision 21 of statute A relevantly says:

Any person who wilfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other

⁵³ See above at [6].

penalties provided by law, be guilty of a felony and upon conviction thereof, shall be fined not more than B$100,000 ..., or imprisoned for not more than

5 years, of both, together with the costs of prosecution.

[102] That requires proof that Mr H was liable for a tax, but there is no evidence of that. If he were liable for a tax and he has not paid it, he would be a tax defaulter, but that does not mean that he is guilty of tax evasion.⁵⁴ Some evidence is required as to what constitutes tax evasion under this law. In New Zealand it is common to distinguish between legitimate tax planning, ineffective tax avoidance and nefarious tax evasion. That last usually involves some element of dishonesty or fraud. I

cannot tell whether country B’s law is the same. There is no evidence as to which actions of Mr H are said to amount to tax evasion.

[103] The money-laundering offences come under provision 14 of the criminal statute of country B. These provisions apply extra-territorially to country B’s citizens and persons.⁵⁵ Both provisions refer to proceeds from “specified unlawful activity”. That has an extended definition, but it does not include tax evasion or other tax offences.⁵⁶ Tax evasion is however an ingredient of part of provision 13 in statute B. The relevant text is:

(a) (1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity –

(i) ...

(ii) with intent to engage in conduct constituting a violation of provision 21 of statute A ...

shall be sentenced to a fine of not more than B$500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

[104] There is no evidence as to what actions of Mr H are said to infringe this provision. Without assistance, I do not know how this provision applies in this case.

_{I appreciate that “some form of unlawful activity” is wider than “specified unlawful}

⁵⁴ _{Under Statute A there is a separate offence of wilful failure to pay any tax due.}

⁵⁵ _{Statute B, provision 13(f) and 13(e).}

⁵⁶ Provision 13(g).

activity” – it extends to activity that is a felony under foreign law.⁵⁷ But there is nothing to show that any breach of country A’s law on owning Intco shares was a felony under country A’s law. The offence also seems to require the involvement of the proceeds of specified unlawful activity, but there is no evidence of that here.

[105] Statute B, provision 14 relevantly says:

(a) Whoever, in any of the circumstances set forth in subsection (d), knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than B$10,000 and is derived from specified unlawful activity, shall be punished as provided in subsection (b).

[106] On extra-territoriality, under subsection (d) there is an offence (among other reasons) if it is committed outside country B by a citizen of country B. I take it that that includes Mr H. There is however no evidence that any property Mr H dealt with is criminally derived property (as defined) or the proceeds of specified unlawful activity. Some explanation is required as to how he might be considered to have engaged in a monetary transaction under the section when the funds were held in the name of his wife and he was not a party to any of the trust deeds.

Offending by Mr S and S Ltd

[107] The affidavit states that Mr S and S Ltd could be prosecuted but it does not state any offences they could have committed. Perhaps the tax lawyer had in mind that they could be accessories to Mr H’s alleged offending but she does not say so. There is no evidence as to criminal law in country B on parties, accessories, aiding and abetting. The difficulty with prosecuting the caveators is that they were outside country B and not subject to its jurisdiction. There is nothing to show that they could have offended under extra-territorial provisions of country B’s law. On the facts, Mr S gives evidence against his being implicated in any tax evasion by Mr H in the earlier years, when the trusts were established. He says that he became concerned “particularly during 2012” with Mr H not complying with country B’s tax

_laws.⁵⁸

⁵⁷ _{Provision 13(g)(1).}

⁵⁸ Affidavit of 12 November 2013 in 2404 proceeding at [67] – [70].

Consequences of offending

[108] As to consequences, the tax lawyer refers to provision 42 of Statute A to say that a transferee (or the transferee of a transferee) is subject to the same assessment, payment and collection procedures as apply to a transferor. The section is an implementation provision – it enacts rules for the method of collection from liable transferees, but it does not impose a tax liability on transferees. It would be startling if every transferee had to pay the taxes of their transferor. There is no evidence that that is so. Accordingly it is necessary to see which transferees are liable. There is no evidence of country B’s tax law as to which transferees are liable and in which circumstances. Further, the tax lawyer has not addressed the extra-territoriality aspect.

[109] The tax lawyer refers to provision 53 of statute C, as showing the power of country B’s taxation agency to pursue the offshore assets of country B taxpayers committing financial crimes and to seize them. The provision is in a statute dealing with drug abuse prevention and control. It provides for criminal forfeiture following conviction for offences under the statute, not under the criminal law generally. The provision is irrelevant to this case.

[110] For completeness I note that provision 13(b) in statute B provides for the imposition of civil penalties on anyone conducting or attempting to conduct a transaction under the section. The foreign persons it applies to are limited. The caveators are not among them.

Voidable disposition of assets⁵⁹

[111] For this part the caveators’ case is that there were dispositions of property made to defeat or delay creditors. The corresponding area of law in New Zealand is pt 6 sub-pt 6 of the Property Law Act 2007. Most legal systems have laws under which such transactions may be challenged. While the caveators do not say so, I

_{take it that the transactions they might target are the establishment of the Intco Trust}

⁵⁹ The term “fraudulent disposition” is sometimes used. I have used “voidable” to make it clear

that proof of fraud in the strict sense may not be required.

in 2007 and subsequent transfers of funds. While the alleged affected creditor, country B’s government, was in country B, no-one else was. The parties to the transactions involving the caveators were in New Zealand, the transactions were entered into in New Zealand and funds, the subject of the transactions were in C and New Zealand. There is accordingly a choice of law question whether country B’s law or New Zealand law applies. The tax lawyer does not address the choice of law question. It is a matter of country B’s law. The matter will not call for a decision in a New Zealand proceeding, because there will be none: it would involve the

enforcement in New Zealand of foreign revenue or penal laws.⁶⁰ While there is no

evidence as to the applicable choice of law rules under the laws of country B, the range is between the law of the country with which the creditor is connected or the law of the country with which the debtor is connected. The relevant connection could variously be residence, domicile, citizenship or centre of main interests.⁶¹ If the law of the creditor’s country applies, that will be country B’s law. If the law of the debtor’s country applies, that will turn on which country Mr H is relevantly connected to. I consider the tax lawyer’s evidence on the basis that under country B’s choice of law rules, a court in country B may apply country B law on voidable

transactions.

[112] The tax lawyer refers to provision 23 in country B’s statute D. That is part of a statute dealing with government debt collection procedure. The section relevantly says:

(a) ...a transfer made or obligation incurred by a debtor is fraudulent as to a debt to -country B which arises before the transfer is made or the obligation is incurred if-

(1)(A) the debtor makes the transfer or incurs the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and

(B) the debtor is insolvent at that time or the debtor becomes

insolvent as a result of the transfer or obligation...

[113] I infer that proof of actual intent to defeat or delay creditors is not required. Under a separate part of the section (transfers without regard to date of judgment),

⁶⁰ _{Government of India v Taylor [1955] AC 491 (HL) and see further below at [123].}

⁶¹ By analogy with cross-border insolvency laws: see the UNCITRAL Model Law on Cross-Border

Insolvency 1997, art 2 (b).

there is an express requirement for actual intent (with an extensive list of badges of fraud).

[114] The caveators have not specified the particular transactions that could be attacked. For this case they would include the appointment of S Ltd as a trustee, but there would be others. Mrs H was the apparent owner of the funds in 2007. If the caveators are to say that they really belonged to Mr H, that may require reaching back to include the steps Mr H took to place the funds under her control. That would affect the questions whether country B was a creditor at the time of the transaction (rather than a future creditor) and whether Mr H was relevantly insolvent.

[115] The caveators’ evidence says nothing about whether Mr H was relevantly insolvent at any time, even though that is a key requirement of the section.

[116] It is not possible to tell how the caveators might be relevantly affected. S Ltd was an intermediate trustee – neither the original trustee nor the current trustee of the Intco Trust. While it held trust assets for a time as co-trustee, it cannot now be made to disgorge those assets to a creditor as it no longer has them. The tax lawyer’s affidavit does not say whether orders can be made against intermediaries who no longer have title.

[117] The tax lawyer also refers to a specific legal doctrine relating to creditor protection. The information about it is scanty. Under it when a transfer leaves the transferor without enough assets to pay debts, the transferee holds the transferred property in trust for the benefit of the transferor’s creditors. It is said to be used most commonly to impose transferee liability on a shareholder for debts incurred by a corporation when the shareholder receives assets from the corporation before its dissolution. There is no analysis how that doctrine would apply in this case. One uncertainty is the timing of the relevant transaction. If Mr H placed the funds under the control of Mrs H at the outset, before any dealing in Intco shares, it is unlikely that he failed to retain sufficient assets to pay his creditors. Country B’s taxation authority could not have been a creditor then. Another uncertainty is the position of S Ltd as an intermediate trustee.

[118] The tax lawyer refers to a “lien related to tax liabilities” but nothing more about it. It is not possible to say what is involved in the alleged lien or how it applies in this case.

[119] In case country B’s choice of law rules require New Zealand law to apply, I deal with the position here. For transactions before 1 January 2008, the relevant law is s 60 of the Property Law Act 1952:⁶²

(1) Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors.

[120] Again the caveators have not set out the particular transactions which could be voidable under this section. Any claim under the section would require the taxation authority of country B to establish its standing as a creditor of Mr H and to show that it has been prejudiced by the relevant disposition of property. That would typically require proof that the alienation has adversely affected Mr H’s ability to pay his debts, even if they have not fallen due at the time of the transaction. As yet there is no evidence to that effect. Under the section there is a test of intention, but intent will be inferred from circumstances that lead to an inference that the debtor

must have known that his creditors would be prejudiced.⁶³ While s 60 may appear to

be more pro-creditor than the parts of country B’s law the tax lawyer has referred to, the caveators have not made out an arguable case under the section that the country B’s taxation authority is a creditor of Mr H or that there was a relevant risk to his

_{creditors at the time of the transactions (whenever they occurred).}

⁶² The Property Law Act 2007 applies only to dispositions of property after 31 December 2007: s

346 (1).

⁶³ Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.

Summary on country B’s taxes

[121] There are considerable shortcomings in the tax lawyer’s evidence as to country B’s law. At almost every point she has simply stated conclusions. In some parts she has not identified the relevant laws. In another part she relied on an irrelevant law on drug enforcement. Where she has identified possibly relevant law, she has not explained the law. It would not be safe to rely on her affidavit. The difficulties are made worse because the caveators have not worked out what facts they rely on to allege liability under country B’s law. They have alleged criminal misconduct without a proper basis. Overall the caveators have not made out an arguable case that they have any liability in respect of taxes alleged to be due to the taxation authority of country B.

[122] That conclusion also addresses any claim by W Trustees Ltd for defective title.⁶⁴ As that company is registered in country Q, a tax haven and carries on business in another, it is improbable in any event that it would ever mount a defective title claim against the caveators by reason of a liability for unpaid taxes in country B.

What if the caveators do owe taxes to the taxation authority of country B?

[123] XYZ Ltd says that the caveators could in any event have no right of indemnity because that would involve the enforcement of foreign penal and revenue laws in New Zealand, a matter that is not permitted under the principles recognised in Government of India v Taylor.⁶⁵ In particular they rely on this passage in

Damberg v Damberg:⁶⁶

The relevant principle does not turn on whether the foreign State is actually suing for a tax debt. The German tax authorities are not parties any more than the Egyptian tax authorities were in Rossano v Manufacturers’ Life Insurance Co, the Singapore tax authorities were in Bath v British and Malayan Trustees Ltd or the Western Australian tax authorities were in Rothwells Ltd (in liq) v Connell. In Peter Buchanan Ltd and Macharg v

⁶⁴ _{See [47] above.}

⁶⁵ Government of India v Taylor [1955] AC 491 (HL). See also Dicey’s Rule 3 in Lord Collins of Mapesbury and Jonathan Harris (eds) Dicey Morris & Collins: The Conflict of Laws (15^th ed, Sweet & Maxwell, London, 2012) at [5R-019].

⁶⁶ Damberg v Damberg , above n 19, at [167].

McVey [1955] AC 516 at 527 (a decision of the Supreme Court of Eire), Kingsmill Moore J said:

“Those cases on penalties seem to establish that it is not the form of the action or the nature of the plaintiff that must be considered, but the substance of the right sought to be enforced; and that if the enforcement of such right would even indirectly involve the execution of the penal law of another State, then the claim must be refused. I cannot see why the same rule should not prevail where it appears that the enforcement of the right claimed would indirectly involve the execution of the revenue law of another State, and serve a revenue demand.”

That passage was approved in Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491 at 508 by Viscount Simonds (with whom Lord Morton of Henryton and Lord Reid concurred) and (at

510) by Lord Keith of Avonholm...

[124] The caveators countered that that principle does not apply when trustees elect to pay a foreign tax or to comply with a foreign penal law. The courts may recognise foreign revenue and penal laws without enforcing them. They cited authorities.

[125] Re Reid concerned a deceased estate with assets in both England and British Columbia.⁶⁷ An English corporate executor held the estate assets on trust. The estate was liable for estate duty under English law. The English assets were not enough to meet the duty due. When the English revenue authorities threatened to proceed against the company for recovery, the executor paid the duty and sought to reimburse itself from the assets in British Columbia. The British Columbia Court of Appeal decided that it was entitled to do so. The case was held not to involve the

enforcement in British Columbia of a foreign revenue law. There was no assertion of British sovereignty in the province. The beneficiaries’ rights were subordinate to those of the executor/trustee to reimburse itself from the British Columbia assets for the liability it had paid in England.

[126] Re Lord Cable is another case where beneficiaries of an estate unsuccessfully sought to restrain trustees from remitting funds abroad for the purpose of meeting foreign tax and regulatory obligations.⁶⁸ Funds from an Indian estate had been invested in England through an Indian company established by the will trustees.

_{Indian exchange control legislation required the will trustees to remit funds to India.}

⁶⁷ _{Re Reid (1970) 17 DLR (3d) 199 (BCCA).}

⁶⁸ Above, n 1.

Indian estate duty was payable but the assets in India were not enough to meet that liability. The will trustees wished to remit the funds to India to meet their obligations under Indian law. They and the Indian company under their control were vulnerable to enforcement proceedings being taken against them in India. The beneficiaries argued that the case involved the direct or indirect enforcement of the

revenue or penal laws of a foreign state. Rejecting that, Slade J said:⁶⁹

It is one thing for the court to intervene by requiring trustees to comply with foreign fiscal legislation: it is quite another thing for it to decline to prevent trustees of a foreign trust from complying with fiscal legislation of the country of the proper law, which under foreign law they are entitled and indeed obliged to obey.

And on the exchange control legislation:⁷⁰

The beneficiaries, however, must in my judgment be regarded by the English court as having succeeded to their interests under this trust at least subject to the rights, even if not the obligations, of the will trustees, in administering the trust, to comply with the exchange control legislation of the country of the proper law of the trust. There is clear authority that the court will refuse to enforce a contract if its performance would be illegal under exchange control legislation enacted by the country of the proper law of the contract...Similar principles must in my judgment apply where beneficiaries under a will invite the English court to order trustees to act in violation of exchange control legislation enacted by the proper law of the trust. This is not to say that the English court will intervene for the purpose of positively enforcing such legislation; it will, in my judgment, simply regard any equitable rights possessed by the beneficiaries to have their pecuniary interests protected by the English court as taking second place to the rights of the trustees to comply with such legislation if they think fit.

[127] Carey Group plc v AIB Group (UK) plc did not involve a trustee discharging a foreign tax liability but dealt with a challenge to an assignment of a lending facility agreement on the basis that it would amount to an unlawful exercise in England of sovereign power by a foreign government agency under the public law of a foreign

state.⁷¹ A Northern Ireland bank was a subsidiary of an Irish bank. An agency of the

Irish government established to stabilise and rebuild the Irish economy proposed to acquire from the subsidiary bank the rights under the lending facility. The customer

_{objected. One of its grounds was that the court should not allow the Irish}

⁶⁹ _{At 23.}

⁷⁰ _{At 24. The estate duty aspect was dealt with similarly at 25-26}

⁷¹ Carey Group plc v AIB Group (UK) plc [2011] EWHC 567 (Ch), [2012] Ch 304.

government agency to enforce the provisions of its empowering Irish legislation in

England. Briggs J rejected that. The caveators rely on this dictum:⁷²

In my judgment a person resident or carrying on business in this jurisdiction is at liberty to comply voluntarily with a request or demand of a foreign government agency, based upon foreign public law, without fear of restraint by the English courts, provided only that he thereby commits no wrong actionable under English law. Thus for example, a person with tax liabilities in the USA may, although resident in England, perfectly properly pay his US tax, and the Inland Revenue Service of the USA may perfectly properly demand payment of that tax. The only effect of the non-enforcement principle is that (in the absence of any relevant treaty or convention) the IRS will not be able to bring English proceedings to enforce payment.

[128] The caveators distinguished Damberg v Damberg. A father claimed from his children funds he had advanced to them: he claimed a resulting trust. The children resisted on the ground that he had made the advances so as to avoid incurring German capital gains tax. The New South Wales Court of Appeal held that foreign fiscal law could not be used to defeat the resulting trust: it would involve the indirect enforcement of German tax laws. The caveators say that this case does not involve any such indirect enforcement of country B’s tax laws. In their submission, a liability to pay taxes to country B’s taxation authority gave them a right of indemnity from assets of the Intco Trust. That is recognition but not enforcement of foreign revenue laws and is not objectionable.

[129] These cases do not help the caveators. There are two relevant aspects: they are under no practical compulsion to pay country B’s taxes and they are no longer a trustee or an officer of a trustee. In Re Reid and Re Lord Cable, the trustees’ compliance did not involve the enforcement of foreign revenue or penal laws in the country of the forum, but there was an element of compulsion – in both cases the trustees faced the real likelihood of enforcement in the other country. In Re Cable the Indian company was vulnerable to enforcement by the Indian authorities. It was understandable that the courts would allow the trustees recourse to trust assets to indemnify themselves. A trustee who has been forced under a foreign law to pay a foreign tax incurred during the trusteeship may arguably claim that it has incurred that as an expense for the purpose of the indemnity under s 38(2) of the Trustee Act.

_{In Carey Group plc v AIB Group (UK) plc on the other hand, not a trustee case}

⁷² At [62].

involving a claim to indemnity, the question of compliance with the foreign law was purely voluntary, although no doubt dictated by a desire to work in with the requirements of the holding company.⁷³

[130] In this case there is no element of compulsion. As a New Zealand-resident corporate trustee, S Ltd will not face any enforcement action by country B’s taxation authority in New Zealand. Mr S’s evidence does not suggest how he could face any enforcement proceedings. Compliance with country B’s tax law will be voluntary. That would not change if Mr S were to enter country B: he could not claim compulsion by willingly exposing himself to the risk of enforcement.

[131] There may of course be good reasons for trustees to arrange to pay foreign taxes from trust funds. It may be in the beneficiaries’ interests. I am not required in this decision to set the boundaries on trustees’ payments of foreign taxes. Voluntary payment of foreign taxes may be a proper exercise of powers by trustees, but they do not involve enforceable liabilities and therefore do not raise questions of indemnity. Voluntary payments from the trust fund are within the powers of current trustees, not former trustees. As the latter are no longer in office, they can no longer manage the trust assets. The caveators had the opportunity while S Ltd was trustee to raise the question of paying any of country B’s taxes from the trust fund. As the trustees are required to act unanimously, Mrs H would have had to agree. It is obvious from this case that she would not have. Now that it is no longer trustee, S Ltd has no power to manage the trust funds. Accordingly it is now too late for the caveators to raise payments of country B’s taxes as a ground for indemnity.

A constructive trust argument

[132] As part of their submissions as to recognition, but not enforcement, of foreign revenue and penal laws, the caveators referred to Nanus Asia Company Inc v Standard Chartered Bank.⁷⁴ Corporate customers sued a Hong Kong bank for the funds in their accounts. The man behind the companies had taken part in highly

_{profitable, but illegal, insider trading in the United States and had moved the funds}

⁷³ _{It had bound itself contractually, but was not subject to the Irish statute.}

⁷⁴ Nanus Asia Company Inc v Standard Chartered Bank [1988] HKCFI 334; [1988] HKC 377, [1990] HKLR 396.

to the Hong Kong bank. The United States Securities and Exchange Commission took enforcement proceedings in the District Court of the United States, obtained worldwide restraining orders and notified the bank’s New York branch. The Hong Kong High Court declined to enforce the orders of the United States District Court as that would amount to enforcement in Hong Kong of foreign penal laws. It found for the bank on another defence, which was independent of the orders obtained by the SEC. Applying banking law and rules of equity the court found that the bank had requisite knowledge of the interests of third parties in the funds – the defrauded investors. That knowledge placed the bank under an equitable duty not to act adversely to the interests of the third parties (beneficiaries under constructive trusts) by giving knowing assistance to the bank’s customers and the man behind it. The case illustrates that rights that do not rely on the enforcement of foreign revenue or penal laws will be enforced. That proposition does not assist the caveators to get round the difficulty that they do not have a second string to draw on, even if they were under any liability for country B’s taxes.

Issues not addressed

[133] The position reached now is that the caveators have not made out an arguable case that they are under any of the liabilities they have claimed in their caveats. That is enough to dispose of the case: the caveats must lapse. The parties’ submissions covered other matters. I do not need to decide them. In case this matter goes further, I note them:

(a) XYZ Ltd said that even if there were liabilities to the caveators, an equitable lien did not arise. It submitted that a former trustee can have an equitable lien only where the existing trust assets are insufficient to meet the liability, there is no existing trustee who is willing and able to meet the claim, the former trustee incurred the liability during its trusteeship and there is a real as opposed to a fanciful likelihood that a claim by a third party against the former trustee will be successful.

(b) XYZ Ltd cited older authorities for the proposition that a right of indemnity could not arise until liability had accrued.⁷⁵ The caveators countered with more recent authorities where rights of indemnity were recognised for contingent and future liabilities.⁷⁶ In these cases trustees’ rights of retention were in issue.

(c) The caveators’ claim to trace liabilities in respect of the Intco trusteeship through to assets held by XYZ Ltd is novel. Their arguments cited authorities showing that a former trustee’s right of indemnity may survive a change of trusteeship.⁷⁷ They did not however deal with following trust assets distributed to beneficiaries. There is a view that a trustee’s lien is discharged on a distribution of assets to a beneficiary, but it is not clear whether that applies to a lien of a former trustee.⁷⁸ There is an added wrinkle in this case in that Mr S took an active part in arranging the distribution to Mrs H.

(d) XYZ Ltd contested whether there was a caveatable interest under s 137 of the Land Transfer Act. It invited me to reconsider or to distinguish Official Assignee v Menzies.⁷⁹ Australian authorities accept that a trustee’s equitable lien is a proprietary interest,⁸⁰ but Lewin on the other hand says that there is no such interest in the case of a trustee’s right of exoneration.⁸¹

Outcome

[134] If I were to uphold the caveats, I would set conditions requiring the caveators to pursue substantive proceedings to uphold the interests they claim. In the case of

⁷⁵ Hughes-Hallet v Indian Mammoth Goldmines Co [1882] 22 Ch D 561 at 564; Re Perkins [1898]

_{2 Ch 182 at 189; and McIntosh v Dalwood (No 3) [1930] NSWStRp 17; (1930) 30 SR (NSW) 332 at 335.}

⁷⁶ Re Pauling’s Settlement Trusts (No 2) [1963] 1 All ER 857 (Ch); X v A [2000] 1 All ER 490; McKnight v Ice Skating Queensland (Inc) [2007] QSC 273; Southern Wine Corporation Pty Ltd v Frankland River Olive Co Ltd [2005] WASCA 236; Re Capricorn Trust [2008] SC Bda (Civ)

_{38; and Re the Bermuda Longtail Trust [2014] SC (Bda) (Civ) 79.}

⁷⁷ _{The discussion in Lemery Holdings, above n 11, is valuable.}

⁷⁸ _{Lewin on Trusts, above n 12, at [26-041].}

⁷⁹ _{Official Assignee v Menzies HC Auckland CIV-2010-404-5457, 14 February 2011.}

⁸⁰ Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367; Commissioner of Stamp

_{Duties for New South Wales v Buckle [1998] HCA 4; (1998) 192 CLR 226 at 245.}

⁸¹ Lewin on Trusts, above n 12, at [21-043(2)], [22-039] and [22-041].

Mr S, that would require him to continue the indemnity cause of action in the 2404 proceeding. S Ltd would need to start a fresh proceeding.

[135] I have provided time before the caveats lapse to give the caveators time to consider whether to appeal. If they do appeal and seek an interim extension of the caveats, they will need to apply for relief under r 12(3) of the Court of Appeal (Civil) Rules 2005.

[136] I make these orders:

(a) As from 19 February 2016 the caveats will lapse;

(b) The caveators are to pay XYZ Ltd the costs of this proceeding. If the parties cannot agree costs, memoranda may be filed;

(c) Publication of this anonymised version of the judgment is not restricted, but distribution and publication of any non-anonymised version of the judgment are prohibited without leave of a judge;

(d) The court file may not be searched without leave of a judge;

(e) Publication of the names of the parties to this proceeding and of any information which may tend to identify them is prohibited, including information identifying Mr and Mrs H, Intco, the Hs’ trusts and the trustees of those trusts; and

(f) Leave is reserved to apply for variations of orders (c) to (e).

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

Associate Judge R M Bell