Recent tax cases on the tort of misfeasance in public office
Two recent cases have highlighted the difficulties taxpayers face when alleging misfeasance in public office against the commissioner of Inland Revenue.
Misfeasance in public office is a tort, which arises from acts of targeted and non-targeted malice by a public officer in the exercise of his or her public functions.
The usual remedy is compensation for loss flowing from the act of misfeasance.
The first case, Reid & Ors v Commissioner of Inland Revenue (No 4)1, relates to the conduct of IRD investigations into the Digi-Tech investment scheme, which was promoted by the plaintiffs and had been determined to be a tax avoidance arrangement.
The second, Commissioner of Inland Revenue & Ors v Chesterfields Preschools Limited & Ors2, arose in the context of a 20 year-long tax avoidance dispute between a preschool operator and the IRD in respect of approximately $900,000 core tax and $3.1 million in penalties and interest.
John Reid & Ors v Commissioner of Inland Revenue (Reid No 4)
The plaintiffs in Reid (No 4) (which included a Mr Reid) had previously alleged misfeasance in public office by the commissioner and a number of her officers in the course of investigations into the Digi-Tech scheme.
The Commissioner had sought to strike out that claim on the basis that she was not liable for acts of misfeasance attributable to IRD officers.
The Court of Appeal refused to strike out the claim, holding that it was arguable that the commissioner could be held liable in tort for an act or omission of one of her officers.
With the plaintiffs free to proceed with their claim, the commissioner then applied for security for costs for the substantive proceeding. The main ground advanced by the commissioner in support of the application for security for costs was that the claim for misfeasance in public office had little prospect of success.
The apparent financial constraints of the plaintiffs were such that an order for security of costs ($200,000 was sought) could well preclude the plaintiffs from pursuing their claim further. The costs application could therefore secure the same practical outcome for the commissioner as striking out the proceedings, despite the commissioner having been unsuccessful in the strike out application.
The allegations of misfeasance centred on conduct during the commissioner's investigation into the Digi-Tech scheme, and the commissioner's referral of the scheme to the SFO on suspicion of serious offending. The SFO undertook its own investigation, which culminated in fraud charges being laid against Mr Reid, of which he was ultimately acquitted.
The plaintiffs alleged that in the course of the commissioner's investigation she had exercised her powers with the improper motive of encouraging Digi-Tech investors to concede their tax disputes and deterring promoters in comparable schemes, with intent to injure the plaintiffs.
Specific illegitimate acts alleged by Mr Reid to have been committed included:
- Creating false documents.
- Making false allegations of fraudulent misrepresentation.
- Reaching an agreement with the SFO to not record their dealings.
- Creating a false file note purporting to record admissions by Mr Reid when no such admissions were made.
- Withholding discoverable documents relevant to the fraud trial in breach of court orders.
In considering the commissioner's application for security for costs, Andrews J followed the Court of Appeal's 2007 strike out decision, and held that the commissioner could in theory be liable in tort for acts or omissions of her employees.
Despite that finding, in the circumstances before her, Andrews J considered that the plaintiff would have no more than a "slight" chance of a successful claim against the commissioner in each of the five alleged acts of misfeasance.
As a result the commissioner's application for an order for security for costs was granted, requiring the plaintiffs to pledge $200,000 security for costs in a staged fashion before continuing their misfeasance proceedings.
Commissioner of Inland Revenue v Chesterfields Preschools
In Chesterfields, David Hampton and entities associated with him filed proceedings alleging misfeasance in public office against various parties, including the commissioner and the IRD officers as individuals.
The claims arose in relation to a dispute between entities associated with Mr Hampton and the commissioner regarding those entities' attempt to offset income tax liabilities with substantial GST credits claimed by those entities. These credits themselves were the subject of dispute and were being examined by the commissioner's audit office.
The plaintiffs claimed that they had arranged with IRD officers that interest and penalties would not be imposed in respect of the income tax liabilities pending the outcome of the GST dispute, and that the commissioner had failed to honour this compromise.
The plaintiffs claimed misfeasance in respect of alleged acts by the commissioner in the course of these disputes, including:
- Failing to make a decision in respect of the claimed GST refunds.
- Failing to honour the arrangements entered into with the plaintiffs to offset the income tax liabilities with the GST credits.
- Seeking to enforce the income tax debts without making a decision in respect of the GST refunds.
- Denying the existence of, or claiming as privileged, various file notes that corroborated the plaintiffs' assertions.
The commissioner applied to the High Court to strike out the proceedings. The High Court had found (relying upon the Court of Appeal's decision in the 2007 Reid strike out application) that it was arguable that the commissioner could be liable for the tort of misfeasance as a result of the actions of her officers, and refused to strike out the proceedings. The commissioner appealed that determination.
The Court of Appeal overturned the High Court's decision and struck out the plaintiff's claim on the basis that the commissioner could not be liable for acts or omissions of her officers.
The court found that at common law the actions of a delegate (in this case IRD officers) are their own acts and not those of the delegator (in this case the commissioner), and that there was nothing in the relevant legislative framework that would justify a departure from this conclusion.
In particular, section 7 of the Tax Administration Act 1994, which provides for the delegation of the commissioner's responsibilities, was said to provide no indication that Parliament intended to alter this general principle. In reaching this view the court acknowledged that it was departing from its prior view in the 2007 Reid strike out decision.
However, it did accept the possibility that a claim may exist against the relevant IRD officers in their individual capacity.
Although tempted to strike out the claim against the named IRD officers as an abuse of process (the statement of claim had been drafted by Mr Hampton and failed to comply with the High Court Rules in many crucial respects), the court instead stayed the proceedings in respect of the named individual IRD officers until the plaintiffs complied with certain conditions, including that no amended statement of claim be filed without leave from the High Court, and that leave only be granted if the amended statement of claim is filed by a lawyer holding a current practicing certificate and who is familiar with the evidence.
Reid (No 4) and Chesterfields highlight the difficulties that taxpayers can encounter in making the novel claim (in the tax area at least) of misfeasance in public office.
The result of the Court of Appeal's decision in Chesterfields appears to be that such claims will need to be made against those officers as individuals, rather than against the commissioner.
While the extent to which a court would entertain a taxpayer's claim for misfeasance in a public office against individual officers remains unclear for the time being, it is suggested that the nature of the alleged actions by the officer would have to be at the colourful end of the spectrum and that strong evidence would need to be available to support its occurrence.
It is unclear whether the claims of misfeasance in a public office against individual IRD officers will be pursued by the litigants in Reid (No 4) and Chesterfields.
In the case of Reid (No 4), the requirement to provide $200,000 security for costs could well mean that the proceeding is abandoned altogether.
The plaintiffs in Chesterfields would need to comply with the various conditions set down by the Court of Appeal, including in particular engaging a lawyer with a current practicing certificate to file an amended statement of claim.
Whether the plaintiffs have the ability to obtain this representation remains to be seen.
Graham Murray is a senior associate and Hayden Roberts is a solicitor at Bell Gully.