Selkirk v McIntyre

• Jurisdiction: New Zealand
• Judge: Katz J
• Judgment Date: 25 March 2013
• Neutral Citation: [2013] NZHC 575
• Docket Number: CIV-2012-404-5870
• Court: High Court
• Date: 25 March 2013

Under Part 18 of the High Court Rules

In the Matter of the equitable jurisdiction of the High Court

Between

David Phillip Selkirk

Plaintiff

and

Donald Alexander McIntyre

Defendant

[2013] NZHC 575

CIV-2012-404-5870

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Application for contribution from co-trustee or indemnity from co-trustee — plaintiff was appointed as an independent professional trustee of the defendant's family trust — defendant was co-trustee — trustees acquired a farm, subdivided it and sold the resulting sections, incurring liability for GST — trustees failed to file a number of GST returns or make the required GST payments to the Inland Revenue Department — defendant had moved to Australia so IRD pursued plaintiff — plaintiff settled outstanding tax liability for $200,000 personally — plaintiff argued he was a “passive trustee” and defendant was the “active trustee” — extent to which a trustee was entitled to a contribution or indemnity from his or her co-trustee(s) in respect of trustee liabilities they have met personally — whether it was relevant that the paying trustee was an independent professional trustee with no personal interest in the Trust — whether it was relevant that the co-trustee undertook day to day responsibility for the management of the trust and the paying trustee's role was essentially “passive”.

Counsel:

J E Riddle for Plaintiff

No appearance for Defendant

JUDGMENT OF Katz J

Introduction

1 The plaintiff, Mr Selkirk, is a partner in the law firm Fortune Manning. In 1997 he accepted appointment as an independent professional trustee of the Donald McIntyre Family Trust (“Trust”). The Trust was settled by the defendant, Mr McIntyre, who was also a discretionary beneficiary and its other trustee.

2 Between 1997 and 2004 the trustees acquired a farm, subdivided it and sold the resulting sections, incurring liability for GST. The trustees failed to file a number of GST returns or make the required GST payments to the Inland Revenue Department (“IRD”). Mr Selkirk says the blame for this can be laid squarely at Mr McIntyre's door, for reasons which are discussed in further detail below. However, as Mr McIntyre had moved to Australia in 2002, the Inland Revenue Department (“IRD”) elected to pursue recovery action against Mr Selkirk only. The sum outstanding was by then in excess of $500,000 (including interest and penalties).

3 Mr Selkirk settled the IRD proceedings by paying $200,000 from his own resources. Although the Trust Deed included the normal indemnity in favour of the trustees out of the Trust assets, this proved to be worthless. Mr Selkirk accordingly now seeks to recover from Mr McIntyre the $200,000 he paid to IRD.

4 This case raises the important issue of when, and to what extent, a trustee is entitled to a contribution or indemnity from his or her co-trustee(s) in respect of trustee liabilities which he or she has met personally. To what extent, if any, is it relevant that the paying trustee is an independent professional trustee with no personal interest in the Trust? Further, is it relevant that the co-trustee undertook day to day responsibility for the management of the trust and the paying trustee's role was essentially “passive”?

5 Somewhat surprisingly, given that contribution and indemnity developed as equitable remedies in the English Courts of Chancery from the early 19th century onwards, there is a paucity of New Zealand authority directly on point. While the principles of equitable contribution are relatively straightforward, determining whether Mr Selkirk is entitled to a full indemnity from Mr McIntyre is rather more complex.

6 Mr McIntyre has not filed a defence to Mr Selkirk's claim. He was notified of the hearing but did not appear. The matter accordingly proceeded by way of formal proof, based on an affidavit filed by Mr Selkirk which set out the factual basis for the claim.

Further background

7 On 18 February 2004 Mr Selkirk received a letter from IRD advising that the Trust owed tax of $30,789.64 and had not filed all its GST and income tax returns. Mr Selkirk was surprised to receive this letter as he had assumed that Mr McIntyre and the Trust's accountants had “taken care of these obligations”.

8 During 2004 and 2005 Mr Selkirk urged Mr McIntyre to put the Trust's tax affairs in order. Mr McIntyre filed some of the outstanding returns and set up an automatic payment to IRD of $200 per week. However in December 2005 IRD advised Mr Selkirk that they had not heard from Mr McIntyre for some time. The outstanding debt was now $93,480.36, based in part on default assessments. IRD advised that the case was being considered for prosecution action.

9 Mr Selkirk had an email exchange with IRD regarding the outstanding tax in April 2006 and forwarded that on to Mr McIntyre, asking for an update as to progress in filing the outstanding returns. There is no record of a response.

10 On 8 November 2006 IRD wrote to Mr Selkirk reiterating that it was considering prosecution and recovery action. Mr Selkirk phoned Mr McIntyre, who assured him that he would speak to IRD and would fax through the outstanding GST returns. Following further correspondence in November and December 2006 Mr McIntyre told Mr Selkirk that he would need to get some further information from his accountants, in order to prepare the final outstanding GST returns over the summer holiday period.

11 Mr Selkirk followed up with Mr McIntyre after the holidays, on 22 January 2007, inquiring as to progress. No response was received. Somewhat surprisingly, the matter rested there for just over four years. Meanwhile, penalties and interest continued to mount.

12 IRD next contacted Mr Selkirk in February 2011. Matters then escalated from July 2011 onwards. A final warning was given by IRD on 31 January 2012. During this period Mr Selkirk wrote to Mr McIntyre four times, forwarding correspondence from IRD and again urging him to put the Trust's tax affairs in order.

13 In early May 2012 IRD issued proceedings against Mr Selkirk (only) for outstanding income tax and GST of $518,027.94. The base tax arrears comprised $165,938.51, which was largely based on default assessments due to GST returns not being filed. The balance of the sum owing was interest and penalties. Mr Selkirk settled the claim by paying $200,000 to IRD in full and final settlement of his personal liability as a trustee.

Personal liability of trustees

14 A trust is not a separate legal entity. Trust assets are held in the individual names of the trustees. The same applies to liabilities. Trustees will be personally liable to creditors, including the IRD. In Macalister Todd Phillips Bodkins v AMP General Insurance Ltd the Supreme Court summarised the relevant principles as follows: 1

[42] In imposing personal liability the tax statutes do no more than recognise the general principle that liabilities incurred by a trustee in relation to a trust are always the personal liabilities of the trustee. This is an aspect of the nature of a trust, which is not a person but an equitable obligation to deal with property for the benefit of beneficiaries. A creditor has a personal right to sue a trustee and to get judgment and make the trustee bankrupt.

(citations omitted)

15 Two decisions of the Court of Appeal illustrate the practical application of such principles in a tax context. In Commissioner of Inland Revenue v Chester Trustee Services Ltd 2

and Commissioner of Inland Revenue v Newmarket Trustees Ltd 3 the Court of Appeal held professional trustee companies liable for GST debts incurred in relation to trusts under their trusteeship. In both cases IRD was successful in having the trustee companies placed into liquidation for failure to meet their tax liabilities

16 Trustees' liability is joint and several. As a result, where there are two or more trustees, a creditor can choose to pursue any one of them (as happened in this case). If that trustee is found liable, he or she may then seek a contribution (or in some limited cases, an indemnity) from his or her co-trustee(s).

Right of contribution from co-trustee(s)

17 The concept of equitable contribution entitles parties who share a coordinate liability to seek a contribution from each other for any payment incurred in meeting that liability, so that the burden is shared equally among those liable for it. 4 The general equitable right to contribution is based on the principles of natural justice. There is a clear risk of injustice arising if a person who is liable for the same damages or expense does not bear their share of the burden. Accordingly, if any one trustee is sued, he or she may claim a contribution from any other trustee who is also liable. 5 The comparative culpability of each trustee is generally not relevant.

18 In accordance with these well established equitable principles, Mr Selkirk is entitled to a contribution from Mr McIntyre of 50 per cent of the $200,000 he has paid to IRD in respect of the trustees' joint and several tax obligations. He is also entitled to a contribution of 50 per cent of the legal expenses he incurred in relation to the proceedings brought by IRD.

Right of indemnity from co-trustee(s)

19 The issue of whether Mr Selkirk is entitled to a full indemnity from Mr McIntyre is unfortunately somewhat more difficult.

Relevant legal principles

20 In the trustee context at least, equity does not recognise an intermediate position between the two extremes of equal contribution or full indemnity. The starting point is one of equal contribution. However in some exceptional situations courts have developed specific “rules” to mitigate the harshness of the equal contribution rule. In such circumstances equity will require one...