Sir Robert Edward Jones, Yorgen Holdings Ltd and Tirohanga Family Trust v Whk Sherwin Chan … Walshe

• Jurisdiction: New Zealand
• Judge: Whata J
• Judgment Date: 25 July 2011
• Neutral Citation: [2011] NZHC 791
• Docket Number: CIV-2009-485-001324
• Court: High Court
• Date: 25 July 2011

Between

Sir Robert Edward Jones, Yorgen Holdings Limited And Tirohanga Family Trust

Plaintiffs

and

Whk Sherwin Chan & Walshe

First Defendant

And

Sherwin Chan & Walshe Limited (In Liquidation)

Second Defendant

And

WHk (NZ) Limited

Third Defendant

[2011] NZHC 791

CIV-2009-485-001324

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

Claim for damages for loss incurred as a result of defendant's breach of a contractual duty of care and/or negligent advice — defendant provided negligent accounting advice in inter-company lending and share sale — failed to consider the tax implications of controlled foreign company regime resulting in tax liabilities — whether losses from negligent advice could be offset against gains from competent advice — scope of duty owed by defendant — whether incorrect advice as to voluntary disclosure from another accounting firm broke the chain of causation.

Appearances:

M P Reed QC, M G Colson and B S Clarke for Plaintiffs

L J Taylor and P H V Cheng for Defendants

JUDGMENT OF Whata J

Table of Contents
	Para No
Introduction	[1]
Facts	[3]
Parties	[4]
Scope of services	[8]
Financial statements	[9]
Group restructure	[14]
CFC regime	[20]
IRD Audit and SCW Admission	[21]
Dispute	[25]
Claims and Defences	[40]
Statutory context	[45]
Evidence	[63]
Preliminary matters	[78]
Contributory negligence	[79]
Evidence of contributory negligence	[89]
Framework of assessment	[94]
Scope of duty	[102]
Nature of the breach	[109]
Causal Nexus	[115]
Supervening act: cause in law	[121]
Wrong advice?	[126]
No substitution	[131]
Anti-avoidance	[133]
Divisible?	[143]
Reasonable mitigation	[151]
Benefits	[167]
Principles	[170]
Tax benefits?	[184]
Costs on counterfactual	[191]
Ninth cause of action: Confidentiality	[208]
Quantum	[211]
Liability	[215]
Costs	[216]
Outcome	[217]

Introduction

1 Sir Robert Jones controls an Australian based company, Pamiers Pty Ltd (?Pamiers?). He also controls a New Zealand based company, Robert Jones Holdings Ltd (?RJHL?). They buy and lease buildings. From 2003 to 2007 Pamiers lent money to RJHL, and its predecessor, Sofia Ltd. In March 2007 Pamiers purchased a 20 per cent shareholding in RJHL. The proceeds from the sale of shares partially off-set the accumulated loan balances between Pamiers and RJHL.

2 The lending and the share sale were subject to the Controlled Foreign Company Rules (?CFC rules?) under relevant Income Tax legislation. Under those rules the lending and the share sale were deemed repatriation and potentially taxable. Sir Robert's then accountants did not advise him about the CFC rules. The accountants admit that this was negligent. This judgment is about how much, if anything, Sir Robert's former accountants are liable for the tax that Sir Robert paid on the lending and the share sale. This in turn raises issues about the scope of the CFC rules, the role played by Sir Robert's subsequent accountants, and the relevance of the benefits of the negligent advice and any hypothetical costs saved by Sir Robert.

Facts

3 Given the nature of the claims and the defences it is necessary to record the salient events and figures in some detail.

Parties

4 The plaintiffs, Sir Robert Jones and Yorgen Holdings Ltd, are trustees (“Trustees”) of the Tirohanga Family Trust (“Trust”). Sir Robert Jones (“Sir Robert”) has been involved in commercial property for almost fifty years. Yorgen Holdings Ltd is a corporate trustee. The Trust is one of a number of entities owned or controlled, directly or indirectly by Sir Robert. Relevant to this proceeding this group comprises the following New Zealand based entities: The Trust, Tirohanga Nominees Ltd, Tirohanga Holdings Ltd, Sofia Ltd, and Featherston Assets Ltd. Sir Robert also controls, through the Trust, an Australian based entity, Pamiers Pty Ltd (“Pamiers”). 1

5 In July and August 2006, Sofia Ltd and Featherston Assets Ltd amalgamated in the name of Featherston Assets Ltd. It was then shortly thereafter renamed as Robert Jones Holdings Ltd (“RJHL”).

6 The first defendant, WHK Sherwin Chan and Walshe (“the partnership”) is a partnership of chartered accountants. The second defendant, Sherwin Chan and Walshe Ltd (“SCWL”), provided accounting, tax and consultancy services to Sir

Robert and the New Zealand group of entities until 31 October 2006. From 1 November 2006 until about February 2009, 2 WHK (NZ) Ltd (“WHKNZL”), the third defendant, provided those services to Sir Robert and the New Zealand based group.

7 For the purposes of this narrative the plaintiffs will be referred to as the Trust and the defendants will be collectively referred to as SCW.

Scope of services

8 In July 2003 the Trust engaged SCW and transferred all of the New Zealand group's tax files to SCW from Sir Robert's previous accountants, Kendons. The broad scope of the services to be provided by SCW are later recorded in a letter of retainer dated 31 March 2004, including: 3

We have identified your requirements to include:

• 1. Preparing monthly GST returns for your registered group and you personally

• 2. Preparing annual financial statements and taxation returns

• 3. Providing accounting, tax and consultancy advice as required

• 4. Providing information technology products and support services as required

Financial statements

9 SCW prepared the New Zealand group's financial statements for the years ending March 2004, 2005, 2006 and 2007 (?the financial statements?). SCW also filed the Trust's tax returns for the years ending 2004, 2005, 2006 and 2007.

10 The financial statements for Sofia and then RJHL recorded advances commencing 26 February 2003 4 from Pamiers to Sofia with year end balances as follows:

31 March 2003	$ 518,390 5
31 March 2004	$2,952,064 6
31 March 2005	$6,495,408 7
31 March 2006	$8,755,492 8
31 March 2007	($178,787) 9
31 March 2008	$3,171,676 10

11 The financial records for Pamiers record the same advances in the following terms as at 2006: 11

Sofia Ltd 2003	$1,207,423.38
Sofia Ltd 2004	$3,078,542.53
Sofia Ltd 2005	$1,775,912.04
Sofia Ltd 2006	$1,354,560.73

12 As at June 2007, the above loans are shown as discharged, with a further entry as follows: 12

Sofia Ltd 2007 $2,084,674.18

13 The Pamiers' movements and interest loan account on Sofia Ltd shows an accumulating running balance from year to year, but with a summary recording yearly loans as then reflected in the financial accounts. Ultimately they record a loan repayment of $8,106,225.34 as at 13 March 2007, leaving $42,029.49 still owing. 13 A further payment for a management fee of $151,250 results in a negative balance (or credit balance for RJHL/Sofia) of $74,528.39 as at 31 March 2007. 14

Group restructure

14 In a letter from SCW to Sir Robert dated 6 April 2006, SCW proposes the following (among other things): 15

Adopt your suggestion of selling an interest in some New Zealand assets to Pamiers with the aim of reducing the Pamiers/Sofia advances, clarifying the BNZ Australia loan position, creating the class B shares (enabling more effective dividends from Australia) and creating a loan from Sofia to Pamiers which Pamiers can repay over time.

15 This proposal crystallises into a further more concrete recommendation described in a further letter from SCW dated 3 October 2006 as follows: 16

• • Change the constitution of Pamiers to provide for two share classes as previously outlined to you. This will facilitate the payment of dividends to New Zealand.

• • Sell 20% of Featherston Assets Limited to Pamiers for $16.2m. Featherston Assets owns Lambton House, Solnet House, Qantas House and Gen-I House (and other properties). Based on the values you provided it has equity of just under $81m.

• • The $16m will be used to repay the current loan between Pamiers and Sofia, rearrange the BNZ Australia loan as indicated and create a loan to Pamiers which can be repaid as a means of extracting cash from Pamiers.

• • We will consider charging Pamiers interest on the outstanding loan. While this will attract Australian non-resident withholding tax at 10% it will assist to minimise Australian tax.

16 This proposal was then implemented on 13 March 2007 the following year, with the result that Pamiers acquired 20 per cent of the shares in RJHL at a cost of $16,200,000.

17 More specifically the group restructure consisted of the following: 17

• (a) Share transfer of 20 ordinary shares in RJHL in consideration for $16,200,000.

• (b) An advance in the amount of $10,186,961.26 from the Trustees to RJHL.

• (c) An advance of $1,074,901.12 from the Trust to Pamiers.

• (d) Repayment of debt to Sir Robert by the Trust of $4,938,137.62 (Australian $4,550,000).

• (e) Partial repayment of debt in the sum of NZ$10,186,961.26 owed by RJHL to Pamiers (leaving interest accruing since 31 March 2006 as outstanding). 18

18 Various deeds and resolutions are executed to record the restructuring. Relevantly, the Deed of Acknowledgement of Partial Repayment of Debt dated 13 March 2007 records:

The Lender acknowledges receipt of NZ$10,186,961.26 from the Borrower in partial repayment of the Debt.

The Borrower acknowledges interest accrued since 31 March 2006 is still outstanding.

19 The effect of this restructure is captured in the financial records of Sofia, (RJHL) and Pamiers set out at [10]–[13] of this judgment.

CFC regime

20 SCW “did not consider and did not advise on the implications of the attributed...