High Court varies a consent order to fund companies’ legal fees in respect of criminal proceedings, but not civil proceedings

Summary

Honk Marine Ltd and Honk Barges Ltd (“the Companies”) applied to vary a consent order which arose from ex parte freezing orders obtained by the Commissioner of Inland Revenue (“the Commissioner”). The Companies applied to access a fund (of $2,081,861.71) held in the Court in order to pay its legal fees for both civil and criminal tax proceedings. The High Court (Brewer J) varied the consent order in respect of the criminal proceedings, but not the civil proceedings.

Impact

This case provides guidance on the civil law test for varying consent orders and what will constitute a “significant change of circumstances”. The terms of the consent order expressly provided that the fund “has been preserved solely to enable payments of tax debts” and that “no other payments will be sought to be made from the Fund”. The Court accepted that the Commissioner has a proprietary interest in the fund.

Facts

The Commissioner was prosecuting the Companies for tax evasion (criminal proceedings). The Commissioner has also required the Companies to challenge her default assessments of tax (which are based on the same allegations as underlie the criminal proceedings) by filing proceedings under Part VIIIA of the Tax Administration Act 1994 (civil proceedings).

The Companies’ only asset was $2,081,861.71 (“the fund”) held in the Court pursuant to consent orders made by Lang J on 25 June 2013. The Companies applied to access the fund to pay their legal fees in both proceedings. However, the Companies’ proposed payments did not fall within the ambit of the consent orders, which clearly stated that the fund would be used solely to pay the Companies’ tax debt.

Decision

Legal Principles

His Honour stated that the High Court has the inherent jurisdiction to vary or set aside a consent order if the interests of justice require it and if good grounds are established to warrant that course. “Good grounds” traditionally means “grounds that would justify setting aside a contract”.

The Court stated that this case was to be considered under the inherent jurisdiction to vary the consent orders if the circumstances are extraordinary. As part of that inquiry, the Court considered whether the Companies’ circumstances have changed unforeseeably.

The Court accepted that the Commissioner had a proprietary interest in the fund. The Court noted that the parties agreed to discharge the freezing orders for pragmatic commercial reasons that had advantages for both sides. The Companies could dispose of assets and, save for having to create the fund, could deal with them as they chose. The Commissioner had the fund created and set aside for her to draw on (with the permission of the Court) in the event of victory in the civil tax proceedings. This was not just a continuation of the interim position created by the freezing orders.

The Court stated that the consequence was that the threshold to be crossed before the Companies could access the fund to pay for legal representation was higher. Where assets are restrained by freezing orders, the Court will normally allow access to them to pay for legal representation. That was not the case for a fund created by consent orders.

The Court commented that if a claimant has a proprietary interest in restrained funds pursuant to consent orders, then the applicant’s task will be even more difficult. The outcome depends on the facts and the Court retains its inherent jurisdiction to vary consent orders. However, the context will include the agreement of the parties that created the proprietary interest. The ultimate inquiry must always address the interests of justice. Consent orders are “not easily disturbed” and the Court will regard an application to vary them “with considerable caution”.

Civil proceedings

The Court stated that the legal principles underpinning freezing orders and consent orders are quite different. A freezing order is a temporary order restraining a respondent from (broadly) dealing with assets against the claimed interests of the applicant.

The Court further stated that a consent order is very different. It gives the Court’s authority to an agreement between the parties. That is why the traditional scrutiny of an application for variation is through the lens of contract. It is for the parties to set down the terms of their agreement and the Court’s order gives them effect.

The Court stated that the key point was that the threshold required to be crossed before a consent order will be varied is a high one. There is a contractual underpinning to a consent order so that an applicant for a variation must show that the agreement
should be set aside to the extent of the variation sought. The threshold is higher still when the terms of the consent order create a proprietary interest in favour of the respondent (in this case, the Commissioner). The purpose of the consent orders was to keep intact the fund against the Commissioner’s tax assessment being upheld. That there would be costs involved must have, or should have, been within the contemplation of the parties, even if the Companies expected to pay those costs from other resources. The Court held that the Companies did not cross the threshold in respect of the legal costs in the civil proceedings.

Criminal proceedings

The Court stated that the criminal proceedings were a significant change of circumstances. There was nothing to indicate that the consent orders were made with criminal prosecutions in contemplation.

The Court further commented that the fact that the Companies are not people does not diminish their right to defend themselves (New Zealand Bill of Rights Act 1990, ss 25(a) and 29). The right to a fair trial generally includes the right to legal representation. If the Companies were to defend the charges, to have a fair trial, they must access the fund.

The Court noted that if the Companies are convicted of the offences then that would significantly, if not decisively, affect the civil proceedings. Section 47 of the Evidence Act 2006 provided that in the absence of exceptional circumstances, proof that a person has been convicted of a relevant offence is conclusive proof in a civil proceeding that the person committed the offence.

The Court held that the interests of justice required the Companies to have reasonable access to the fund to defend themselves against the criminal charges brought by the Commissioner.

Result

The Court commented that this case was an example of a rare or exceptional situation where variation of consent orders will be granted to some extent. The application for access to the fund to pay legal costs relating to the civil proceeding was denied. The application for access to the fund to pay legal costs relating to the criminal proceeding was allowed, on certain conditions.

Leave was reserved to the Companies to make further application to access the fund in the event that $100,000 is insufficient to pay costs. The Companies were on notice that if such further application is received, the Court anticipated the Commissioner being given copies of all accounts so as to be able to make submissions.