Gibson v Official Assignee [2018] NZHC 2107 (16 August 2018)

Last Updated: 3 September 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2014-404-003355 [2018] NZHC 2107

UNDER	the Receiverships Act 1993, s 34(1) and s 284(1) of the Companies Act 1993
IN THE MATTER OF	Capital + Merchant Finance Limited (in receivership and in liquidation)
BETWEEN	BRENDON JAMES GIBSON and GRANT ROBERT GRAHAM Applicants
AND	OFFICIAL ASSIGNEE First Respondent FORTRESS CREDIT CORPORATION (AUSTRALIA) II PTY LIMITED Second Respondent (discontinued) PERPETUAL TRUST LIMITED Third Respondent (discontinued)

Hearing:	13 August 2018
Appearances:	R B Stewart QC and M D Arthur for Applicants C T Gudsell QC and D E G Nielsen for First Respondent
Judgment:	16 August 2018

JUDGMENT OF COURTNEY J

This judgment was delivered by Justice Courtney on 16 August 2018 at 3.30 pm

pursuant to R 11.5 of the High Court Rules Registrar / Deputy Registrar Date............................

GIBSON & OR v OFFICIAL ASSIGNEE & ORS [2018] NZHC 2107 [16 August 2018]

Introduction

[1] The Official Assignee is the liquidator of Capital + Merchant Finance Ltd (in receivership and in liquidation) (“CMF”). Brendon Gibson and Grant Graham are the company’s receivers. In 2015 the Official Assignee received a substantial payment in settlement of a claim against CMF’s former auditors (“the settlement sum”). The Official Assignee and the receivers reached an agreement regarding the application of the settlement sum, which was recorded in consent orders made by this Court (“the consent orders”). Under the consent orders, the Official Assignee was entitled to be paid a fixed amount in respect of the costs incurred in the litigation (the salvage costs). Further specific sums were to be set aside for determination of claims by other creditors. The balance was to be paid to the receivers.

[2] Before the balance could be paid to the receivers, an issue arose as to whether the settlement sum attracted GST. The consent orders did not allow GST to be paid from the settlement sum. The Official Assignee applied for an order varying the consent order. The application was scheduled to be heard on 13 and 14 August 2018 but the Official Assignee wishes to postpone the hearing of it until the GST position has been determined with the Inland Revenue Department (“IRD”). He has applied for an adjournment of the hearing¹ and orders staying the proceeding² or enforcement of the consent orders³ pending determination of whether GST is payable. The receivers oppose the application.

[3] For the reasons I come to, I do not consider it necessary to adjourn the hearing of the application to vary the consent orders, nor to stay the proceeding. I do, however, consider that enforcement of the consent orders ought to be stayed pending determination of the application to vary the consent order. Rule 17.29 permits a liable party to apply for a stay of enforcement against a judgment on the ground that a substantial miscarriage of justice would be likely to result if the judgment were enforced. Under the terms of the consent order, the receivers could take steps to enforce the requirement that the Official Assignee pay the remainder of the funds to them. I consider that r 17.29 permits the Official Assignee to apply for a stay of

¹ High Court Rules 2016, r 7.42.

² High Court Rules 2016, r 15.1.

³ High Court Rules 2016, r 17.29.

enforcement of that order. The principles applying to an application under r 17.29 are those set out by White J in Bay Cities Real Estate Ltd v Re/Max New Zealand Ltd.⁴ Relevantly, (1) the onus is on the applicant to persuade the Court to exercise its discretion (2) a substantial miscarriage of justice requires something more than minor or insubstantial (3) the requirement that a substantial miscarriage of justice be “likely to result” requires it to be probable rather than possible⁵ or a real and substantial risk⁶
(4) the Court seeks to balance the conflicting interests of the parties in a manner that will serve the overall interests of justice.⁷

Background

The consent orders

[4] CMF has been in receivership since 2007 and in liquidation since 2009. In 2012, the Official Assignee commenced proceedings against CMF’s former auditors, BDO Spicers (“BDO”). Those proceedings were settled in 2014, with BDO agreeing to pay $18.5m (including GST, if any) in full and final settlement of the proceedings. The settlement sum was paid to the Official Assignee in July 2014 and placed on term deposit on terms that included preferential interest rates and the benefit of the Official Assignee’s exemption from withholding tax deductions.

[5] Shortly before the settlement agreement was concluded, the receivers advised the Official Assignee that they considered any settlement funds to be assets to which the secured creditors were entitled, subject only to the Official Assignee’s “direct and agreed recovery costs”. Subsequently, claims on the money were received from two other secured creditors, Perpetual Trust Ltd (“Perpetual”) and Fortress Credit Corporation (Australia) II Pty Ltd (“Fortress”).

[6] The receivers filed an originating application for directions under s 34 of the Receiverships Act 1993 and/or s 284(1) of the Companies Act 1993 to determine the competing claims to the settlement fund. The parties agreed on how the settlement

4. Bay Cities Real Estate Ltd v Re/Max New Zealand Ltd HC Napier, CIV-2010-441-134, 8 June 2011 at [19].

⁵ Crawford v Odin Enterprises Pty Ltd [2009] NZCA 199 at [29].

⁶ Bay Cities Real Estate Ltd v RE/Max New Zealand Ltd, above n 4, at [22].

⁷ Enright v Gold Metal Exports Ltd (1989) 3 PRNZ 243 (HC) at 246.

sum was to be applied and, at counsels’ request, Venning J made the consent orders on 26 February 2015. Under the consent orders the settlement sum was to be dealt with as follows: two “ring fenced” funds were to be held for Fortress ($3,869,091.53) and Perpetual ($2,500,000); the Official Assignee was to be paid salvage costs of
$2,349,329.28; the balance of the fund was to be paid to the receivers.

[7] Fortress’ claim was settled. At the request of the receivers and Perpetual, Venning J made a further consent order on 11 March 2016 that the balance of
$1,750,000 be set aside pending further order of the Court. In February 2017, the receivers and Perpetual settled. The Official Assignee was asked to sign a notice of discontinuance and a consent memorandum seeking orders that would see the
$1,750,000 paid out to the receivers. By then, however, the Official Assignee had concerns about whether the settlement sum attracted GST. Although he had previously considered that the settlement had no GST consequences for CMF, in August 2016 the receivers had raised the possibility that GST was payable.

[8] The Official Assignee was not inclined to agree to the release of the money until the GST issue had been resolved. He applied for a binding ruling from the IRD and subsequently (at the IRD’s direction) made a voluntary disclosure. In November 2017, the IRD issued a notice of proposed adjustment in which it asserted that GST was payable in relation to the settlement sum. The Official Assignee filed a notice of response in February 2018 and a facilitation process is presently under way with the IRD to try and resolve the issue.

The application to vary the consent orders

[9] The Official Assignee applied to vary the consent orders as follows: to allow him to hold the balance of the settlement sum pending determination of the GST issue or to pay the money to the IRD to stop use of money interest accruing; if GST is found to be payable to allow payment of it from the balance and; regardless of whether GST is payable, to apply the funds to meet the costs of resolving the GST issue.

[10] The main ground advanced in support of the Official Assignee’s application is mistake. He asserts that if GST is payable he was entitled to meet the liability from the settlement sum as part of his salvage costs and would not have agreed to the
consent orders had he been aware that GST was payable. Therefore, he agreed to the consent orders under a mistake of fact and/or law or, alternatively, both he and the receivers were aware that the agreed salvage costs did not include GST and were both influenced in their respective decisions to agree to the consent orders by the same mistake of fact and/or law. In either case the mistakes resulted in a substantially unequal exchange of values and/or a benefit being conferred, or obligation imposed, that was substantially disproportionate to the consideration given and the consent orders do not oblige the Official Assignee to carry the risk of any mistake.

[11] If GST proves not to be payable, the Official Assignee says that there has been a significant change in circumstances since the consent orders were made that justifies the variation, namely that the Official Assignee has incurred fees and expenses in addressing the issue.

[12] The receivers oppose the application to vary the consent orders on two main grounds. First, they say that the agreement that was recorded in the consent memorandum is not capable of being set aside because the mistakes asserted by the Official Assignee are not qualifying mistakes under the Contract and Commercial Law Act 2017. Secondly, even if there was a qualifying mistake, the Official Assignee assumed the risk for that mistake by agreeing to fully and finally settle his salvage costs without obtaining advice as to GST (the latter being referred to in argument as the “negligence” allegations).

Application for adjournment/stay

[13] In their notice of opposition, the receivers asserted that, had the Official Assignee taken steps to ascertain the GST position prior to agreeing to the consent orders being made, he would have been advised and/or understood that there was a strong likelihood that GST was payable by the Official Assignee. Evidence filed in support of the notice of opposition included an affidavit from tax lawyer, Mr Ward, who expressed the view that the payment by BDO (or its insurers) to CMF was likely to be subject to GST.

[14] These assertions led to the present application to adjourn the hearing of the application to vary the consent orders (then scheduled for 13 and 14 August 2018) and
stay the proceeding or stay the enforcement of the consent orders pending final determination of whether GST is payable. Mr Gudsell QC, for the Official Assignee, submitted that the receivers’ assertion that GST is or is likely to be payable creates an overlap between the dispute between the Official Assignee and the IRD over whether GST was payable and the Official Assignee’s application to vary the consent orders. The liability to pay GST is an issue in both, which creates a risk of inconsistent findings in this Court on the issue.

[15] I agree that the assertion by the receivers in its notice of opposition that GST is, or is likely to be, payable created an overlap. The dispute between the Official Assignee and the IRD could culminate in proceedings in this Court through a challenge to the Commissioner’s notice of adjustment. That would mean the GST issue would arise for consideration in both and, clearly, a risk of inconsistent decisions on the point. That would be both undesirable and a waste of court resources.

[16] However, during the course of the hearing Mr Stewart advised that the receivers are no longer taking a position on whether GST is payable; the assertion in their notice of opposition that it was likely GST was payable was withdrawn and I was advised that the parts of the evidence to that effect could be deleted. Mr Stewart submitted that the question of whether GST is payable or not is not determinative of the application to vary the consent orders; the receivers contend that the Official Assignee is not entitled access to the fund, whether or not GST is payable.

[17] With the change in the receivers’ position I am satisfied that risk of overlap no longer exists insofar as the existence of GST liability is concerned. I accept that the argument over mistake and negligence can be determined without the need to know whether GST is payable. As a result, there is no reason to postpone determination of those issues while the GST position is resolved. The application for adjournment is therefore dismissed. It follows that the application for stay of the proceeding must also fail.

[18] There are, however, different considerations for the application for a stay of enforcement. If the receivers were to enforce the consent orders now, there would, potentially, be irreversible prejudice to the Official Assignee. If the settlement sum is
paid out to the receivers and the Official Assignee were later to succeed in his application to vary the consent orders, he would be left without any remedy. The receivers, clearly, intend to distribute the money to the debenture holders. Once that occurs there will be no practical means by which the Official Assignee could access the funds again, even if he were entitled to. I consider that this outcome would amount to a substantial miscarriage of justice.

[19] On one view, the risk of this outcome depends on the likelihood of the Official Assignee obtaining a variation of the consent orders. The receivers, of course, maintain that the application will not succeed, which would make the likelihood of an adverse outcome relatively low. But if the Official Assignee were to succeed on his application to vary the consent orders, the adverse outcome would be inevitable.

[20] In my view, the overall interests of justice are best served by the receivers not enforcing the consent orders at this stage. Provided the status quo is maintained pending determination of the application to vary the consent orders, neither the Official Assignee nor the receivers (and debenture holders) will be unduly affected. If the Official Assignee prevails, the money will be available to apply in accordance with whatever variation is permitted. If the Official Assignee fails to obtain a variation of the consent orders then the money can be dealt with in accordance with those orders, but the receivers will not be seriously disadvantaged by the delay because the amount (now some $1.2m with accrued interest) will continue to accrue interest. I acknowledge the receivers’ concern that the receivership has been very long and many of the debenture holders are elderly. However, given that the amount involved is relatively small proportion of the BDO settlement and the fact that the money is being held on favourable terms, I do not place significant weight on this factor.

Result

[21] The application to either stay the application to vary the consent orders pending determination of the GST position or to adjourn the hearing of it is dismissed. A hearing date should be allocated on a date after 28 November 2018 (the dates previously indicated by Venning J as available conflict with Mr Gudsell’s other commitments).
[22] The application to stay enforcement of the consent orders pending determination of the application to vary the consent order is granted.

[23] The Official Assignee sought costs. I was not addressed on the issue by the receivers. If counsel can agree, they may file a joint memorandum and seek a consent order. Otherwise, memoranda may be filed on behalf of the Official Assignee within 7 days and on behalf of the receivers within 14 days.








P Courtney J