Strike out declined

Summary

The plaintiffs claimed that the Commissioner had failed to act on a Notice of Proposed Adjustment ("NOPA") they issued in response to a memorandum of decision issued to them by the Commissioner. The alleged NOPA was issued at a time when several other proceedings involving the same issues were being reviewed by the Courts. The Commissioner applied for strike out on the grounds of abuse of process and no reasonable cause of action. The strike-out application was dismissed.

Impact of decision

The decision confirms that the grounds for strike out are limited.

Facts

These proceedings relate to orders sought by the plaintiffs regarding decisions made by the Commissioner about an alleged NOPA filed by the plaintiffs. The Commissioner sought to have the claim struck out on the grounds that the claim was an abuse of process and that it disclosed no reasonable cause of action.

The plaintiffs alleged in an initial judicial review and related appeals that the Commissioner:

• did not honour arrangements made with them about their tax liabilities;
• had failed to act with reasonable diligence and celerity in progressing audits and processing GST returns;
• had behaved unreasonably over the re-registration for GST of one of the plaintiffs' companies; and
• acted unreasonably with regard to remission of penalties and by his attempts to recover tax debts from the plaintiffs.

The first judicial review judgment (Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2004-409-001596, 15 December 2006) found generally in favour of the plaintiffs. Fogarty J set aside a June 2004 decision by the Commissioner declining the remission of additional tax. He required the remission issue to be reconsidered and gave certain directions as to that reconsideration.

A second judicial review (Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008-409-0722, 25 November 2008) relating to the first judicial review was also undertaken and the Commissioner was again directed to reconsider his actions with respect to the remission. The second judicial review was later appealed by the Commissioner (Chesterfield Preschools Limited v Commissioner of Inland Revenue [2010] NZCA 400; (2010) 24 NZTC 24,500). The second judicial review related to how the Commissioner had acted on the directions from the court in the first judicial review.

In June 2007 in response to the first judicial review, the Commissioner filed a memorandum of decisions which related to the plaintiffs' tax positions. The plaintiffs alleged they issued a NOPA to the Commissioner in response to the memorandum of the Commissioner. The Commissioner argues that no valid NOPA was served on him.

In October 2008, the plaintiffs commenced these "tax challenge" proceedings which the Commissioner applied to strike out.

The grounds of the strike-out application relied on by the Commissioner are summarised in the judgment at [9]:

1. The present proceeding is in essence an invitation to the High Court to reopen either or both of the two judicial review proceedings, in relation to which the High Court is functus officio.
2. The plaintiffs are precluded from pursuing the present proceeding either because of issue estoppel or the doctrine of res judicata.
3. The present proceeding is an attempt to circumvent the disputes and challenge proceedings in the Tax Administration Act 1994.
4. The present proceeding involves "gaming and diversionary behaviour" in terms of the Court of Appeal's description in Westpac Banking Corporation v CIR [2009] 2 NZLR 99.

At [16] Associate Judge Osborne noted that the principles for strike-out set out in Attorney General v Prince [1998] (Attorney General v Prince [1998] 1 NZLR 262), which were applicable in this case, included the following:

1. The Court is to assume that the facts as pleaded are true (unless they are entirely speculative and without foundation).
2. The cause of action must be clearly untenable in the sense that the Court can be certain that it cannot succeed.
3. The jurisdiction is to be exercised sparingly and only in clear cases.
4. The jurisdiction is not excluded by the need to decide difficult questions of law, even if requiring extensive argument.
5. The court should be slow to rule on novel categories of duty of care at the strike-out stage.

In [23], Associate Judge Osborne observed that the plaintiffs had pleaded that the plaintiffs'"… proposed adjustments in the NOPA were consistent with the findings and determination of the December 2006 judgment …"and "[T]he NOPA set out at paragraphs 33 to 37, the distinction between the disputable decisions that were addressed in the NOPA, and the discretionary decisions that were to be reviewed in judicial review proceedings …".

Associate Judge Osborne noted that the Commissioner continued to deny that the plaintiffs had met the statutory requirements for issuing a NOPA but that the main focus of the strike out proceedings was on res judicata/issue estoppel. The Court then discussed the issue of further litigation between the parties which had reference to the NOPA.

In a decision relating to the plaintiffs' property (Chesterfield Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2004-409-001597, 31 October 2007), Fogarty J recognised that alternatives existed to challenge the June 2007 decision, one of which was "to take the matter up internally by way of NOPA" [27].

In a decision relating to the first judicial review (Chesterfields Preschools Limited v Commissioner of Inland Revenue HCChristchurch CIV-2004-409-001596, 30 September 2009) Fogarty J:

• observed there was a serious argument as to whether pursuing the NOPA would be an abuse of process but observed that, depending on the outcome of the Court of Appeal hearing, there may yet be some life in bringing the NOPA issue for hearing [32].

A further judgment of Fogarty J (Chesterfield Preschools Limited v Commissioner of Inland Revenue HC Christchurch CIV 2004-409-001596, 21 October 2009) recorded that counsel for the Commissioner had:

• … re-assured me by stating the obvious that if and when the validity of the NOPA become relevant, and if it is found to be relevant, and he thinks that would probably be by way of a Court decision, then appropriate orders can be made as to the process thereafter [33].

In the Court of Appeal judgment (Chesterfield Preschools Limited v Commissioner of Inland Revenue [2010] NZCA 400; (2010) 24NZTC 24,500) in relation to the second judicial review, the Commissioner submitted that some issues dealt with by Fogarty J should have been dealt with by way of statutory challenge procedures. The Court of Appeal discussed this and noted "We are not to be taken as making any comment on whether the purported challenge is valid or not …" [36].

Decision

The Court found that it had been a recurring feature of the various branches of litigation between the parties that both have recognised the appropriateness of the statutory challenge procedures in relation to at least some of the issues. This was not a case where the parties had ignored, deliberately or inadvertently, the distinction between those matters properly to be determined through the statutory challenge procedures and the very limited category of matters that might be susceptible to judicial review. Both parties were aware of the distinction and incorporated it into various submissions on various applications.

Both the sub judice and issue estoppel pleadings fell away subsequent to the Court of Appeal issuing its judgment on 31 August 2010. The Court of Appeal was not asked to rule on the validity or outcome of the NOPA and expressly recognised the possibility that the purported challenge of 2007 might yet be upheld.

The Court recognised that there was substantial room for the Commissioner to argue that at least some of the matters in the NOPA were not the proper subject matter of a NOPA but submissions to that effect are to be properly determined when the validity of the NOPA is before the Court in a substantive hearing. The appropriate course is for all of the issues relating to the NOPA to be before the Court at a substantive hearing.

This is not as clear a case as the authorities envisage for the exercise of the strike-out jurisdiction and given the history of these proceedings and repeated references to the appropriateness of statutory procedures, this was not a case where issue estoppel clearly arises.

The Commissioner's application for orders striking out the statement of claim was dismissed.

Associate Judge Osborne noted that if the plaintiffs (other than Mr Hampton) are to pursue this litigation further, they will be required to either enter appearances through a solicitor or will require leave to be represented by Mr Hampton and the granting of such leave is unlikely.