Issued
2005
Decision
05 Oct 2005
Appeal Status
Pending

Solicitor breaches undertaking

2005 case note - Court found there was little doubt that defendants' letter was an undertaking. Damages, costs and interest awarded to the CIR.

Case
The Commissioner of Inland Revenue v Manu Chotubhai Bhanabhai & Ors
Legal terms
Solicitor's Undertaking

Summary

Breach of Solicitor's Undertaking. Damages, costs and interest awarded to the Commissioner

Facts

The defendants were barristers and solicitors acting for two companies, Nautilus Developments Limited ("NDL") and Golden Gate Holdings Limited ("GGH"). Both companies were involved in a construction project of a block of residential apartments in Hobson Street, Auckland.

During the construction of the apartments GGH was entering into contracts for the sale and purchase of the apartments, with a deposit being required to be paid by the purchaser when entering the contract, and the balance being payable on completion of the unit and the title being available. There was an initial dispute between the companies and the Commissioner as to the time of supply and when the payment of GST was triggered. On 17 April 1997 the matter was finally resolved between the parties and it was agreed that GST would be payable on settlement in respect of the units with contracts entered into prior to July 1996. GST on agreements after July 1996 was to be accounted for on the basis of the normal time of supply rules, being the receipt of the deposit (July 1996 being the date on which the company had received a letter outlining an original proposal for agreement).

To ensure that GST payments in respect of the pre-July 1996 contracts was actually paid on settlement, an undertaking was required to be given by the defendants, and it was given, signed by Mr Bhanabhai. The undertaking given on 17 April 1997 was written in the following terms:

"We are the solicitors for Golden Gate Holdings Ltd. We have been instructed to settle the sale of the units in the development and we undertake that on settlement of units 3F, 5A, B, C, D, E, F, 6A, B, C, D, E and F, we will forthwith pay to you the GST component of the sale consideration."

UDC was the principal lender to the development. On 10 June 1999 GGH went into liquidation, NDL had already been liquidated in September 1998.

The liquidator, Mr Montgomerie, issued proceedings against the Directors of NDL seeking to recover over $2 million on behalf of the unsecured creditors, including over $1 million claimed by the Commissioner. This proceeding was later settled for $500,000. The settlement monies were sufficient only to cover the liquidator's costs and no dividends were paid to the creditors.

The undertaking of 17 April 1997 was not met and the Commissioner sought an order that the defendants pay the GST which it undertook to pay or damages for the equivalent sum.

The defendants further filed a third party claim against their insurers, Vero Insurance New Zealand Limited ("Vero"), claiming indemnity, should any liability be found against them, pursuant to their professional liability insurance. Vero denied liability under the policy.

Decision

Laurenson J found for the Commissioner. He found that there was little doubt that the letter of 17 April was an undertaking. He found that the defendants were undertaking to pay monies to the Commissioner which they expected to receive on behalf of their client on the settlement of the units. Their liability arose from the receipt of the client's money, not from the client's pre-existing liability to pay GST. He held that the terms of the defendants' undertaking were clear and were given by the defendants deliberately as a personal undertaking to make payment of monies to be received when settlement took place. Mr Bhanabhai's evidence was rejected in relation to this matter.

Laurenson J further found that the defendants' undertaking was not absolved by the concession made by the Commissioner to allow further time for the settlements to take place. He found it was not credible that the undertaking was given on condition that payments to the Commissioner were subject to repayment to UDC first.

Laurenson J also found that the Commissioner's decision to await the outcome of the two liquidations and the proceedings of the claim by the liquidator did not entitle the defendants to consider that the undertaking had ceased to be effective.

There was a defence raised that the Commissioner was estopped from claiming under the undertaking because the debt sought to be recovered was part of the same debt in the liquidators earlier proceedings. This was rejected.

There was the further issue as to what form of relief to be given, following the findings in favour of the Commissioner. Laurenson J declined to order the defendants to perform the undertaking as he found that it would now be impossible to perform as the monies from the settlement of the units have long gone. They were mainly paid to UDC. However, he found that Mr Bhanabhai had acted inexcusably in his position as a solicitor. Mr Bhanabhai did not honour the undertaking as he was more concerned to protect his own position as an investor and guarantor in the companies. Accordingly, the Court was entitled to consider compensation and the amount of $300,000 was awarded. This reflected the contribution already made by Mr Bhanabhai towards the liquidator's settlement. Costs and interest were also awarded to the Commissioner.

With regard to the claim against Vero, Laurenson J found that the policy did not apply as notwithstanding that the claim arose out of a trading loss, Mr Bhanabhai was fully involved in the management of the companies in his capacity as director, albeit in conjunction with the other directors. Accordingly, the exclusion clause applied, being that there is no indemnity under the policy for a claim "arising from a trading loss or trading liability incurred by a business managed by or carried on by the Insured".

Laurenson J went on to consider that a further exclusion clause applied, being that there is no indemnity for dishonest conduct. His Honour found that Mr Bhanabhai's failure to advise the Commissioner before the sales that he could not meet the undertaking was dishonest and deliberate.