Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd

• Jurisdiction: New Zealand
• Judge: McGrath J,Elias
• Judgment Date: 09 November 2012
• Neutral Citation: [2012] NZSC 94
• Docket Number: SC 8/2012
• Court: Supreme Court
• Date: 09 November 2012

BETWEEN

Commissioner Of Inland Revenue

Appellant

and

Redcliffe Forestry Venture LTD

First Respondent

Garry Albert Muir

Second Respondent

Accent Management Ltd

Third Respondent

Lexington Resources Ltd

Fourth Respondent

Bristol Forestry Venture LtD

Fifth Respondent

Ben Nevis Forestry Ventures Ltd

Sixth Respondent

Clive Richard Bradbury

Seventh Respondent

Gregory Alan Peebles

Eighth Respondent

[2012] NZSC 94

Court:

Elias CJ, Tipping, McGrath, William Young and Gault JJ

SC 8/2012

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from a CA decision which held that the HC did not have jurisdiction under r5.49 High Court Rules (“HCR”) (appearance and objection to jurisdiction) to strike out a proceeding – respondents had unsuccessfully applied to the HC to set aside an SC judgment which held an investment scheme they were involved with was a tax avoidance arrangement – respondents alleged the appellant had fraudulently concealed from the Court, the existence of a legislative provision which applied to the scheme in earlier proceedings – appellant had filed an objection under r5.49 HCR and applied for orders to dismiss the claim on the ground the HC's decision was final and could not reopened – CA held r5.49 HCR was limited to protests to jurisdiction in the strict sense and therefore did not apply and that the objection should have been brought by way of a strike out application – whether r5.49 was limited to protests to jurisdiction in the strict sense– whether the respondents had raised an arguable exception to the rules concerning the finality of judgments.

Counsel:

B W Brown QC, T G H Smith and J D Kerr for Appellant C G Gudsell QC for First and Second Respondents

M S Hinde for Third and Fourth Respondents

R B Stewart QC and N S Gedye for Fifth, Sixth, Seventh and Eighth Respondents

A The appeal is allowed and the judgment of the High Court dismissing Redcliffe's proceeding is restored.

B The respondents are jointly and severally liable to pay costs of $15,000 to the appellant together with reasonable disbursements to be fixed if necessary by the Registrar.

C The order for costs and disbursements made by the Court of Appeal is reversed. Any outstanding questions concerning costs and disbursements in the High Court should be determined by that Court.

JUDGMENT OF THE COURT

REASONS

(Given by McGrath J)

Introduction

1 This appeal raises a question concerning when a party to litigation, against whom judgment has been given and whose appeal rights are exhausted, may apply to have the judgment set aside. The general rule is that, once a court having jurisdiction to hear and determine a proceeding has entered its final judgment, that judgment is binding on the parties unless it is set aside on appeal. There are, however, certain identified exceptions. Under one of them a final judgment may be challenged in separate proceedings which claim that the judgment was procured by fraud. The present case involves a new proceeding challenging an earlier final judgment which is said by the respondents to fall into that category. Their claim differs, however, from the line of decided cases involving fraudulent procurement of a judgment, which alleged concealment of evidence, usually through perjury. In this case the respondents rather allege that the defendant, the Commissioner of Inland Revenue, fraudulently concealed from the Court in the earlier proceedings the existence of a legislative provision. The claim is that the Commissioner knew that the provision applied to the case, and thereby procured an erroneous legal result.

The ultimate issue in this Court is whether the respondents, in their new proceeding, have raised an arguable exception to the rules concerning the finality of judgments which should be allowed to go to trial.

Procedural background

2 On 19 December 2008 this Court delivered judgment in an appeal by nine investors and loss-attributing qualifying companies (the Trinity investors), who had claimed tax deductions as a result of their participation in a forestry development project known as the Trinity scheme. 1 The Court's judgment, in favour of the Commissioner of Inland Revenue, concluded that the Trinity scheme was a tax avoidance arrangement. Assessments by the Commissioner, disallowing the claimed deductions and imposing penalties on the investors for taking an abusive tax position, were upheld by this Court. Earlier High Court 2 and Court of Appeal 3 judgments had reached the same conclusions (but taking different views on the analysis of the scheme under specific tax provisions).

3 Four days after this Court's judgment, Accent Management Ltd and six other Trinity investors (including Redcliffe Forestry Investment Ltd) brought a representative proceeding seeking judicial review of the assessments upheld by the

Supreme Court. An application by the Commissioner to the High Court to strike out this proceeding was granted by Keane J on 12 March 2010. 4 An appeal against that judgment was later abandoned. Other challenges to the tax treatment of the Trinity scheme have also been brought since this Court's judgment, but it is only necessary for our purposes to refer to the proceeding next mentioned, which is the subject of the present appeal.

4 On 15 September 2009, Redcliffe and six other Trinity investors, along with Dr Muir, a director of Redcliffe who had devised and set up the Trinity scheme, brought a new proceeding against the Commissioner. These plaintiffs, to whom we

refer as “Redcliffe”, sought orders setting aside the judgment of the High Court, delivered by Venning J in 2004, in the Trinity scheme litigation 5 on the ground that the Commissioner had obtained that judgment by knowingly presenting a “false case” in the High Court. Redcliffe pleaded that the Commissioner had deliberately refrained from putting material facts and law, applicable to the treatment of the scheme by the Inland Revenue Department, before the High Court, so as to secure a judgment that departmental officers knew would not have been available if there had been full and frank disclosure of the legal position. Redcliffe's specific contention is that the Commissioner knowingly and wrongly applied a depreciation allowance to expenditure incurred by the Trinity investors under subpart EG of the Income Tax Act 2004 when subpart EH8(l) required that the expenditure be calculated under its provisions.

5 Redcliffe accepts that, in general, following completion of available appeals the decision of a court is final and a trial court is functus officio. Relying, however, on the exception to that principle which allows such a judgment to be attacked on the ground of fraud, Redcliffe contends that the Commissioner is not able to rely on the finality of the Supreme Court's judgment concerning the tax treatment of the Trinity scheme.

6 The Commissioner responded to Redcliffe's proceeding by filing an objection to the jurisdiction of the High Court under r 5.49 of the High Court Rules and applying for orders dismissing Redcliffe's proceeding on the ground that the High Court judgment Redcliffe seeks to set aside is final and cannot be reopened. The Commissioner also filed a memorandum which accepted that the Supreme Court had jurisdiction to vary the High Court's 2004 judgment and said the Commissioner would not object on jurisdictional grounds to any application to this Court by Redcliffe to recall its own judgment.

High Court judgment

7 The Commissioner's application was heard by Venning J, who dismissed Redcliffe's proceeding. 6 The Judge referred to the related principles of finality in litigation and that a trial court is functus officio once the proceeding has been subject to the decisions of appellate courts. These principles were not an absolute bar to

Redcliffe bringing a fresh proceeding in the High Court and a finding that an otherwise final first instance judgment had been obtained by fraud was a limited exception to the finality principle. The Judge accepted that such a claim should be brought in the High Court, particularly where the allegation was likely to reqsuire the resolution of disputed facts. He also pointed out that stringent requirements in the pleading of the alleged fraud had to be met before such a challenge to finality would be entertained.

8 Venning J held that only fraud in a strict legal sense would suffice to bring a proceeding within the fraud exception; the judgment had to be obtained by conscious and deliberate dishonesty. 7 The Judge's conclusion on Redcliffe's pleading in the statement of claim was:

[43] While a false case involving false evidence, the suppression of material evidence or the creation of false documents will be fraud, none of that is pleaded in the present case. The gravamen of the plaintiffs' pleading is that the Commissioner had a duty to refer to the existence, effect and likely application of subpart EH of the Income Tax Act 1994 (the ITA) but did not do so. It is said the Commissioner knowingly assessed the plaintiffs under the wrong statutory provision. The plaintiffs say that … the Commissioner knew that subpart EH rather than subpart EG was applicable and by failing to disclose that to the plaintiffs or the Court at any stage, the Commissioner presented a false case to this Court. But if the Commissioner was wrong to assess under subpart EG when subpart EH applied then he was wrong at law. That is not fraud.

9 It followed that the allegations of fraud that appear in Redcliffe's statement of claim were not of a kind that came within the exception to the principle of finality of judgments that had been subject to a completed appellate process.

10 Venning J also held that he had no jurisdiction to declare that his 2004 judgment was a nullity. The assessment had effect unless and until declared a nullity by a competent court, which could only be done in challenge proceedings under the Tax Administration Act...