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09 Jul 2010
Appeal Status
Not appealed

Security for costs ordered

2010 case note - High Court upheld the CIR's application on the basis that the plaintiff was impecunious and that the CIR had a strong case - stay of proceedings.

DT United Kingdom Ltd V CIR


The High Court upheld the Commissioner's security for costs application on the basis that the plaintiff was impecunious and that the Commissioner had a strong case.

Impact of decision

This decision confirms the position in Reefdale Investments Ltd v Commissioner of Inland Revenue (2004) 17 PRNZ 229, that the Commissioner can make an application for security for costs in respect of a tax challenge. As this decision is purely a procedural matter it will have no direct tax implications.


This case relates to an application by the Commissioner for security for costs and for a stay under rule 5.45 of the High Court Rules.

Digi-Tech (Communications) Ltd ("Digi-Tech") owned intellectual property rights in three products - Freerider, Terminal Adapter and DFS DBUSS.

Digi-Tech sold its intellectual property rights in these products to a number of subsidiaries, including DT United Kingdom Ltd ("DT UK"). DT UK bought the intellectual property rights for $395.1 million by way of paper transaction.

On 25 January 2002, DT UK sold the intellectual property rights to Fifth Investments Ltd, a related company, for $8.1 million by way of a loan from DT UK to Fifth Investments Ltd.

Digi-Tech reported the sale of the intellectual property rights as a capital receipt and therefore not taxable. DT UK bought the intellectual property rights with a purpose to resale, therefore reported the purchase price as expenditure on the revenue account.

The Commissioner sought valuation advice and found that the value of the intellectual property rights was realistically only in the order of $500,000 rather than $395 million. Accordingly, the Commissioner took the position that this transaction amounted to tax avoidance under section BG 1 of the Income Tax Act 1994 and made an adjustment and issued shortfall penalties. The assessments made by the Commissioner are the subject of challenge in these proceedings.

The Commissioner was concerned about the likely impecuniosity of the taxpayer as DT UK had filed nil returns for the 2005 and 2006 income tax years, except for claiming a loss of $389-odd million. Further it did not file tax returns for the March 2007, March 2008 and March 2009 income years and it is not presently trading. DT UK had already properly conceded the point that it would be unable to pay the Commissioner's costs if it was unsuccessful with its tax challenge. Notwithstanding that concession, DT UK opposed the Commissioner's application for security for costs and a stay on the grounds that it had a strong case and in the interest of justice.


The Court held that "there is no dispute that the threshold has been established ... there is good reason to believe that the plaintiff is unable to pay the defendants costs if the plaintiff is unsuccessful in its challenge".

The plaintiff had conceded the point in his affidavit "... that due to its financial position it is unable to pay costs if it is unsuccessful in this proceedings".

The Court, looking at the merits of the case, noted at paragraphs [21] and [31] that in considering the issues of the substantive proceedings, the Commissioner had a "stronger" and a "better hand". However, the Court also noted that even though the plaintiff's case was weak, it was not frivolous or vexatious and the plaintiff did have an arguable case.

The Court referred to the Court of Appeal case of McLachlin v MEL Network Ltd (2002) 16 PRNZ 747 and Reefdale as part of the balancing exercise for the use of its discretion and held applying the usual principals that "... there is no reason why the Commissioner should be subject to this proceeding continuing without being protected as to costs".

General observations were also made in regards to section BG 1:

  1. At present, the tide is running strongly in favour of the Commissioner of Inland Revenue in tax avoidance litigation. The tax team in the Crown Law Office has had such success in its tax avoidance cases as to have a significant effect on the Government's financial position.

The Court held that appropriate security would be $90,000 payable in two tranches. The proceedings are stayed pending payment of security by the plaintiff.

High Court Rules, Tax Administration Act 1994