Application to set aside freezing order granted and indemnity costs awarded against Commissioner
2013 case note - Application to set aside freezing order over bank accounts granted and indemnity costs awarded against CIR.
The Commissioner of Inland Revenue ("the Commissioner") obtained freezing orders over the defendants' bank accounts on 14 November 2013. However, prior to the application being made, and unbeknown to the Commissioner, the defendants had transferred sufficient funds to cover the assessments back to the liquidator of the assessed companies. The defendants' application to set aside the freezing order was granted and indemnity costs awarded against the Commissioner.
Impact of decision
There is a responsibility on parties who apply for a freezing order ex parte to ensure the Court is properly informed. This responsibility is not discharged by saying that they were relying on someone else to keep them up to date.
This decision relates to an application by the defendants to set aside an ex parte freezing order over funds of $462,000 held by the second defendant ("Mrs Dymock") in a personal account.
The first defendant ("Mr Dymock") was the sole shareholder of three related companies. The companies were placed into voluntary liquidation on 25 June 2013. At the date of liquidation, two of the companies had, between them, $1.3 million in funds from the proceeds from a sale of land. In mid-August 2013, an interim distribution of $1.3 million was made to Mr Dymock as sole shareholder.
The Commissioner contends that the two companies are related by common ownership to the original owner of the land, the third of the Dymock companies. On 1 November 2013, the Commissioner issued default assessments for the two companies totalling $462,018.92. The Commissioner considered that the full $1.3 million should be returned to the liquidator. However, the liquidator only sought $450,000 from Mr Dymock to be added to the $25,000 he already held. The combined total of which would therefore meet the default assessment if that proved to be the liability.
The Dymocks agreed to return $450,000, but there were complications in the funds being transferred, resulting in delays. The liquidator said he would update the Commissioner when the funds had been transferred. He did not do that. As it happens, the money did arrive at the liquidators on 4 November 2013.
The Commissioner sought to obtain undertakings from the liquidator that the money be preserved to satisfy her debt. The undertakings were not provided.
On 8 November 2013, the Commissioner filed an ex parte application for a freezing order over funds of up to $462,000 in Mr and Mrs Dymock's bank accounts. The order was granted on 14 November 2013.
Complications with the implementation of the freezing order meant that instead of only $462,000 being frozen, all funds in the accounts were frozen. Mrs Dymock encountered difficulties in paying for expenditure. On 18 November 2013, revised orders were sought limiting the freezing order to one specific account owned by Mrs Dymock.
Whether there was a need for the freezing order
In reliance on section 301 of the Companies Act 1993, the Commissioner submitted that she was not in control of the sum sought in the substantive proceedings. It was also submitted that more money may be needed as there is an on-going investigation, the liquidator's fee to take into account and the tax losses said to be available not yet being accepted.
The Court found that the purpose of the substantive proceeding was fulfilled. The Court noted that the Commissioner was the only creditor, suggesting her ranking as creditor in the liquidation would remain unchallenged. The Commissioner's desire for the sum to be more was considered irrelevant by the Court as nothing beyond $462,000 had been sought. The Court found that there was no basis for the continuation of the freezing order and it was subsequently discharged.
Whether there was a risk of dissipation
In her application for a freezing order, the Commissioner had argued that there was a risk of dissipation on the basis that (a) the assets were liquid assets, (b) Mr Dymock had gone to the Netherlands, (c) Mr Dymock had a poor history of tax compliance, and (d) there was an on-going investigation.
The Court was satisfied that the Commissioner had failed to establish a risk of dissipation. This view was supported by the fact that Mr Dymock had returned to the country before the application was filed, the audit investigations did not add any worth as a factor indicating risk and, in respect to his history of tax compliance, Mr Dymock always paid assessments once finalised.
In respect of the Commissioner's description of Mr Dymock's tax history as one of "poor tax compliance", the Court noted that more care was needed with the language used and the claims made. Specifically, the Court stated that "more objectivity is required, and a clear basis for any such claim articulated" (Commissioner of Inland Revenue v Marcus Seymour Dymock  NZHC 3346 at ).
Whether the application was misleading
The Court identified a number of errors in the affidavit filed in support of the freezing order that were "significant, avoidable, and troubling", and which suggested "a lack of objectivity and care that should not be found in a document filed to support ex parte orders of this type" (at ).
Whether indemnity costs should be awarded
The Court found a combination of factors made an award of indemnity costs appropriate. These factors were that:
- there was no sound basis for the orders once the liquidator received funds to a sum equivalent to that sought in the proceedings;
- enquiries should have been made as to the location of the funds prior to the application being filed in the Court;
- the unsubstantiated claim that Mr Dymock may have left New Zealand permanently, although not deliberate, is at the upper end of misleading the Court.