Summary judgment for $367 million

Summary

A summary judgment was entered by the Court as there was no arguable defence, and no grounds upon which the Court ought to exercise its residual discretion to decline summary judgment.

Impact of decision

A judicial review proceeding will not of itself amount to an arguable defence in a summary judgment application. The discretion of the Court in rule 12.2 is a discretion of the most residual kind.

Facts

The Commissioner of Inland Revenue ("the Commissioner") applied for summary judgment against John George Russell ("Mr Russell") in the amount of $367,204,207.41, plus costs and disbursements.

In January 2004, the Commissioner assessed Mr Russell for profits of $15,757,556.18 in relation to the 1985 to 2000 income tax years. Mr Russell challenged those assessments in the Taxation Review Authority ("TRA"). On 17 September 2009, the tax challenge was dismissed by the TRA.

On 3 September 2010, Mr Russell's appeal of the TRA decision to the High Court was dismissed. On 3 April 2012, the Court of Appeal dismissed Mr Russell's appeal of the High Court decision. On 13 August 2012, Mr Russell's application for leave to appeal to the Supreme Court was dismissed.

It was common ground between the parties that Mr Russell had exhausted his ability under the statutory disputes and challenge process provided for by the Tax Administration Act 1994 ("TAA").

In addition to the original assessments made, over the intervening years, additional tax penalties and interest increased the amount owed to the sum claimed by the Commissioner.

It is relevant to note that Mr Russell commenced judicial review proceedings against the Commissioner just prior to the summary judgment hearing. The judicial review seeks to challenge the Commissioner's decisions reached in 2006 and 2013, not to enter into an instalment payment arrangement with Mr Russell under section 177 of the TAA.

Decision

The High Court entered summary judgment for the Commissioner in the sum of $367,204,207.41. His Honour directed the parties to confer on the matter of costs and if unable to agree, to file memoranda not exceeding five pages on each side within 10 working days from the date of the judgment.

No arguable defence/effect of the judicial review proceedings on the ability of the Court to enter summary judgment

The Court dealt with the issues of whether the Commissioner could prove Mr Russell had no arguable defence to her claim and the effect that the filing of the statement of claim commencing judicial review proceedings had on the ability of the Court to enter summary judgment together.

In doing so, the Court considered the causes of action set out in the statement of claim filed in the judicial review and in particular Mr Russell's arguments that the Commissioner's decision to decline to accept Mr Russell's instalment arrangement proposals were "decisions that were not made fairly, reasonably or in accordance with the law".

In particular, the Court referred to the causes of actions whereby Mr Russell asserted that the decisions made by the Commissioner were not consistent with collecting the highest net revenue that is practicable within the law because continuing litigation against him will not lead to any recovery of revenue given he owns no assets.

The Court noted that the Commissioner did not accept that Mr Russell enjoyed any realistic expectation of success in the judicial review proceedings and went on to discuss the central authority relied upon by the Commissioner in support of her submissions, namely Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 (HC) ("Raynel"). After discussing Raynel in detail, the Court accepted the Commissioner's submission that Raynel has been applied in later cases where similar arguments on the Commissioner's duty to maximise recovery of outstanding tax and collect over time the highest net revenue have been raised.

The Court considered that the prospects of Mr Russell successfully obtaining judicial review of the determination on the part of the Commissioner not to accept the proposed instalment plan were not great. Further, the Court considered that the proposal for payment put forward by Mr Russell was not advantageous to the Commissioner.

In coming to a conclusion on the prospect of success in the judicial review proceedings, the Court stated that it has to bring common sense to bear. Accordingly, the Court considered that the argument that Mr Russell had put forward did not constitute a compelling case. However, the Court accepted that having heard arguments and evidence in proceedings which are specifically designed for the purpose of testing the legality of the Commissioner's decisions, the Court might come to a different view to him.

However, his Honour found that on the basis of the material available, the enquiry in the summary judgment proceeding is whether the plaintiff has been able to satisfy the Court that the defendant has "no defence" to the particular cause of action, which has been interpreted as meaning "no bona fide defence, no reasonable ground of defence, no fairly arguable defence", ie, the absence of any real question to be tried. Viewed from that perspective, and adopting as the principal question whether Mr Russell has a prospect of success in the judicial review proceedings, the Court held that the Commissioner had succeeded in showing that Mr Russell had no arguable defence.

Procedural issues raised by the intended application for interim relief

Before departing from the subject of judicial review and the application for interim relief, the Court commented on the process the Court should take in cases where an issue arises about the possibility that a defendant to proceedings in which judgment is being sought, might be able to seek judicial review which would reverse the basis upon which the judgment is sought.

The Court considered that obiter comments made in Air New Zealand v Wellington International Airport Ltd [2009] NZCA 259, [2009] 3 NZLR 713 (CA) and Tannadyce Investments Limited v Commissioner of Inland Revenue [2010] NZCA 253, (2010) 24 NZTC 24,341, are authority for the proper process, which is to seek interim relief under section 8 of the Judicature Amendment Act 1972 prior to the hearing of applications, such as the present proceeding. This is instead of arguing before the Court that its intended judicial review proceeding would arguably provide a defence to a plaintiff's claim.

While the Court noted the comments in the above authorities were obiter and therefore not directly binding, his Honour agreed with the views expressed by the Court in both cases. The Court did not consider that the Commissioner should be delayed in obtaining judgment because of the last minute judicial review proceedings when there had been adequate opportunity for Mr Russell to seek substantive relief by way of judicial review at any time during recent years. Further, having been served with the summary judgment proceedings on 13 December 2013, the Court considered that Mr Russell had adequate time to bring an application for relief.

Exercise of the Court's residual discretion

The Court accepted the Commissioner's submissions concerning the scope of the discretion under rule 12.2 of the High Court Rules and in particular that the discretion could be exercised where the use of summary judgment would be oppressive or unjust.

In considering whether to exercise the discretion not to enter summary judgment, the Court considered Mr Russell's argument that the Commissioner ought to have agreed to a payment instalment arrangement. The Court noted in regard to this argument that Mr Russell seems to have assumed that attempts to enter summary judgment are so inconsistent with what he sees as his entitlement to a payment instalment plan that the Court ought to exercise its discretion to decline summary judgment.

Accordingly, the Court considered the effect on the underlying debt that would have resulted, if the Commissioner had agreed to enter an instalment arrangement with Mr Russell. In the absence of any statutory indication, the Court commented that it would seem unlikely that the legislative intention was that one effect of entering into an instalment arrangement would be that the underlying debt would be abrogated entirely and replaced by a statutory obligation to make instalment payments. This view was implicitly supported by the fact that there is power in the legislation (section 177B(6) of the TAA) for the Commissioner to cancel an arrangement in certain circumstances.

The Court considered this issue relevant because it was implicit in the fact that Mr Russell invoked the discretion to decline to enter summary judgment that the step would be necessary to permit Mr Russell to take advantage of any instalment arrangement that the Commissioner might eventually be required to enter into as a result of a direction following the judicial review hearing. His Honour concluded in this regard that the entry of judgment would not have the effect of pre-empting interim relief in the judicial review proceedings. In other words, he considered it was not correct to characterise the availability of summary judgment and the instalment type proposal as being mutually exclusive alternatives.

The Court later considered the argument that Mr Russell did not obtain financial advantages equivalent to the amount of the tax imputed to him following the Commissioner's reconstruction of his income under section 99(3) of the Income Tax Act 1976. Counsel for Mr Russell put forward this argument in support of the Court exercising its discretion not to enter summary judgment. In response, the Court noted that the reconstruction which the Commissioner carried out was approved by the Court of Appeal in its judgment and it was this judgment that finally fixed the tax liability Mr Russell owes.

The Court noted that the Court of Appeal expressed the conclusion that there had been large-scale tax avoidance by a group of companies under the control of Mr Russell. The Court then found that it was not an answer to say that Mr Russell should be able to avoid liability because he did not receive the fruits of the tax avoidance scheme. That is because the legislature when conferring the power of reconstructing tax avoidance arrangements so as to move the burden of those arrangements to the author of the arrangements, did not make it a precondition of the assessment of reconstructed tax that the person assessed should actually have received pecuniary advantages from the arrangement.

The Court held that not only was the analysis of the policy put forward by counsel for Mr Russell flawed, but the entire argument about whether the reconstruction had been carried out on a legally justified basis or otherwise was irrelevant to the question of whether summary judgment ought to be entered.

Further, the Court commented on counsel for Mr Russell's criticism of the Commissioner for allegedly not taking steps to recover the tax from the parties who were the direct beneficiaries of the tax avoidance scheme. The Court found there was no basis upon which it could reasonably decline to enter summary judgment against Mr Russell, noting there were no express terms in the legislation giving rise to a defence of this kind and nor could it be said that such a defence is one that was arguably intended by implication from the legislation.

In conclusion, the Court found there were no grounds upon which the Court ought to exercise the residual discretion to decline summary judgment.