Rescission of Mareva injunction
2005 case note - Judge concluded the threshold for making the Mareva injunction had been reached - interlocutory application, rescission, GST refunds, assessment.
The defendants claimed GST input credits on a number of property transactions. The input credits were accidentally released by the Commissioner before he confirmed the defendants were entitled to them. The Commissioner sought and gained a Mareva injunction preventing the taxpayers from using or removing the funds. The defendants applied to have the injunction rescinded.
This case concerns a Mareva injunction granted in favour of the Commissioner over the sum of $177,809.99 paid out in error to the bank of the second defendant, Nigel Asby.
There are 16 defendants in this case. The second defendant, Nigel Asby, is the sole director of 13 defendants and their taxation advice and general tax management stem from him. Their tax affairs are managed by the first defendant, Queen City Property Group Ltd and the third defendant is St George Bank of New Zealand Limited.
The thirteen tax payers claimed GST refunds of $177,809.99. The 13 taxpayers assert that they are entitled to a refund.
In July 2004 on Commissioner's ex parte application, interim orders were made in the nature of a Mareva injunction on the second and third defendants. The orders were made to restrain the bank from paying out or dissipating a sum of $177,809.99 released in error by the Commissioner. Similar orders restrained the second defendant who is co-director of the first defendant and effectively its proprietor. It is the second defendant's bank account with the third defendant where the restrained monies are deposited, the second defendant being the sole signatory of that account.
The Commissioner initially sought to reclaim the monies by issuing the Bank of New Zealand with a section 157 notice.
The dispute is based around the purchase of property. Each of the 13 taxpayers purchased an apartment in a block being developed in Hobson Street, Auckland. The 13 agreements, together with 32 other companies' agreements to purchase, with the same directors and shareholders as the 13 taxpayers, were all conditional. Two days later each of the 13 taxpayers on-sold the properties on a ten year deferred settlement basis to one of two non-associated companies, North Shore Holdings Limited ("NSHL") or Pennylane Investments Limited ("PIL"). These sales were unconditional.
Each of the 13 taxpayers had elected under section 19 of the Goods and Services Tax Act to account for GST on a payments basis, basing this on their anticipated annual turnover. Both NSHL and PIL were registered for GST on an invoice basis.
Both NSHL and PIL paid deposits to the 13 taxpayers. The deposits were in fact paid to the first defendant as agent. It appears that the source of those deposits was GST refunds received on the transactions by NSHL and PIL.
Each of the taxpayers paid output tax on the received deposit. The balance of the deposit was applied by the taxpayers to pay the deposit on the apartments they had purchased.
Two years later, the vendor of the apartments cancelled the agreements with all 13 taxpayers and the transactions did not proceed.
A year later, each of the 13 taxpayers filed GST returns, claiming a refund of input tax in respect of the deposits it had paid on the now cancelled agreements. Four months later, the 13 taxpayers cancelled their on-sale agreement with NSHL and PIL. They additionally filed GST returns for that taxation period claiming a refund of the output tax paid on the deposits from NSHL and PIL. None of the 13 taxpayers have repaid these deposits they had received to NSHL and PIL and these companies have been placed into liquidation.
While the audit and correspondence continued, account halts had been placed on the amounts claimed. As a result of administrative error, the halts were not renewed and the amount of $177,809.99 was paid out.
The Commissioner asserts refunds were not payable to the 13 taxpayers; the Commissioner wrote to the taxpayers informing them that the GST refunds would be delayed and the circumstances were being reviewed. No prior conduct by the Commissioner suggested that the money would be forthcoming.
All sixteen defendants applied for rescission of the orders.
Priestly J concluded the threshold for making the Mareva injunction had been reached on the evidence before him and the hearing before Williams J.
His reasons were:
- The Commissioner had a good arguable case that the defendants were not entitled to the money
- The assets held were within the jurisdiction
- There were grounds for holding the assets may be dissipated or disposed of before final judgment.
Although the defendants asserted their desire to trade with the money and carry on commercial activities, Priestly J considered there was a lack of evidence as to what those activities would be and how successful they would be. Further reasons for holding these points are set out in paragraphs 76 to 79 of the decision.
His Honour also disposed of the applicant's argument that the Sea Hunter case applied. There too, an account halt failed and the Court of Appeal held that summary judgment against the Commissioner was appropriate. The taxpayer was entitled to retain the $2.5 million paid out in error. Priestly J distinguished that case noting that there, it was the combined effects of ss 20(5) and 46(1) of the GST Act which operated to deny the Commissioner a remedy. That is, the Commissioner had not, in that case, notified the taxpayer within the statutory 15 day period that further information was needed or that an investigation had begun. In this case there had been notification and a clearly stated intention to investigate the claimed entitlement. Hence section 46(1) could not apply.
Priestly J considered the attempt by the Commissioner to remove the money from Mr Ashby's bank account pursuant to section 43 an unlawful attempt to invoke a statutory power. He considered there was force in the defendant's observation that the Commissioner had 'glossed over' this misguided attempt to retrieve the money.
Priestly J also noted the Commissioner's lack of reference to the simultaneous notices of assessment. Although this was not fatally determinative he considered the Commissioner should have referred to them considered the legal consequences of such notices and the statutory safeguards they are subject to.
While Priestly J found such omissions on behalf of the Commissioner worrying, they were not sufficiently serious or determinative to justify the rescission of the injunction. He considered it clear that the Commissioner had no intention in July 2004 to pay the refunds to the defendants. It was only due to an administrative error that the refunds were paid and it was this error that the Commissioner focussed on in his original ex parte application.
The application to rescind the orders was dismissed as no grounds for rescission had been made out. The evidence did not show the Commissioner had made the refund pursuant to an assessment to which he had turned his mind. There was a risk to the money if it was not restrained.
Judicature Act 1908