Peters v Davison, [1999] 3 NZLR 744

Peters v Davison

High Court Auckland

[1999] 3 NZLR 744

HEARING-DATES: 12, 16 July, 20 August 1999

20 August 1999

CATCHWORDS:

Judicial review — Commissions of inquiry — Whether errors of law in report of commission amenable to judicial review.

Constitutional law — Act of state — Tax paid in foreign country credited against domestic tax — Whether commission of inquiry into payment of tax in foreign country precluded by doctrine of act of state — Commissions of Inquiry Act 1908, ss 4B and 4C.

Revenue — Income tax — Tax credits — Taxpayer claiming credit against New Zealand tax for tax paid overseas — Whether taxpayer obliged to disclose repayment of tax by foreign government to related company — Income Tax Act 1976, ss 99 and 301.

HEADNOTE:

The plaintiff member of Parliament had alleged that the Commissioner of Inland Revenue and the Director of the Serious Fraud Office acted unlawfully and incompetently in not prosecuting a group of companies for tax evasion, in particular as to transactions in which a taxpayer company claimed credits against New Zealand tax for tax paid in the Cook Islands without disclosing that the Cook Islands government had simultaneously repaid almost all of the tax to another company in the same group of companies as the taxpayer. The first defendant was appointed as a commission of inquiry into the conduct of the Inland Revenue Department and the Serious Fraud Office, and into the tax laws. The commission found no tax avoidance or fraud, no incompetence by the Inland Revenue Department or the Serious Fraud Office and criticised the plaintiff for making the allegations. Essential findings were that: (a) the transactions involved tax collection in the Cook Islands which was an act of state and therefore not justiciable in New Zealand; and (b) under s 301 of the Income Tax Act 1976 the taxpayer claiming the tax credit was not obliged to disclose the repayment to the other company in the group. The plaintiff sought judicial review on the basis that the commission had made errors of law.

Held 1 The doctrine of act of state limited the competence of a domestic Court to inquire into transactions of a foreign state in its own territory but did not limit Executive or administrative inquiries into a foreign state's activities. The doctrine did not apply to the commission because: it could receive any evidence; it had extensive powers of inquiry under ss 4B and 4C of the Commissions of Inquiry Act 1908; and its findings (unlike a judgment) had no legal effect. The commission therefore erred in law in its application of the doctrine of act of state (see paras [32], [33], [34], [38], [39]).

Buttes Gas and Oil Co v Hammer [1982] AC 888; [1981] 3 All ER 616 considered.

2 Under s 301 of the Income Tax Act 1976 a taxpayer had to disclose all information necessary to determine the amount of a tax credit, including information to determine whether the taxpayer was entitled to any relief or repayment of the foreign tax. The Inland Revenue Department would have been entitled to look at the effect as a whole of the series of transactions and would undoubtedly have invoked s 99 of the Income Tax Act 1976 if it had been informed of the combination of features of the transactions. The commission therefore erred in law in concluding that the taxpayer was not required to disclose the repayment to the other company (see paras [42], [45], [48], [49], [50]).

WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300; [1981] 1 All ER 865, Mills v Dowdall [1983] NZLR 154 (CA) and Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991; [1997] 3 All ER 817 (HL) applied.

3 The commission's conclusions that there was no tax avoidance or fraud and no incompetence by the Inland Revenue Department or Serious Fraud Office were also errors of law because they were based on erroneous findings in terms of the 1976 Act. Overseas tax had been paid and the taxpayer's non-disclosure did not debar entitlement to tax credits (see paras [52], [53], [59], [60], [69], [70]).

4 The effect on reputation (which must have been appreciable in the plaintiff's case) was a recognised indication for granting relief in cases of judicial review. Declarations were therefore granted (see paras [92], [97]).

Judgment for the plaintiff: declarations accordingly.

CASES-REF-TO:

Brannigan v Sir Ronald Davison [1997] 1 NZLR 140; [1997] AC 238 (PC).

Brunswick (Duke of) v King of Hanover (1848) 2 HL Cas 1; 9 ER 993.

Controller and Auditor-General v Sir Ronald Davison [1996] 2 NZLR 278 (CA).

Prebble v Television New Zealand Ltd [1994] 3 NZLR 1 (PC)[, [1995] 1 A.C. 321].

Turner v Pickering [1976] 1 NZLR 129.

INTRODUCTION:

Application

This was an application by the plaintiff, the Rt Hon Winston Peters MP, for judicial review on the basis of error of law in certain findings of the first defendant, the Rt Hon Sir Ronald Keith Davison, appointed as a commission of inquiry under the Commissions of Inquiry Act 1908. The Inland Revenue Department appeared as second defendant, the Serious Fraud Office as third defendant, Mr Michael John Scott as fourth defendant and Fay Richwhite & Co Ltd as fifth defendant. Brierley Investments Ltd also attended on a watching brief. The action had been struck out by Order of the High Court reported at [1998] NZAR 309 and reinstated by the Court of Appeal on appeal [1999] 2 NZLR 164.

COUNSEL:

Brian Henry and Rachel Downs-Honey for the plaintiff; Julian Miles QC and Jonathan Brook for the first defendant; Bruce Squire QC and Grant Pearson for the Inland Revenue Department; Nicholas Davidson QC, Edwin Wylie and Gus Andree Wiltens for the Serious Fraud Office; Michael Scott in person; Rhys Harrison QC and Mark Gavin for Fay Richwhite & Co Ltd; Ian Gault watching brief for Brierley Investments Ltd.

JUDGMENT-READ:

Cur adv vult

PANEL: Anderson, Robertson JJ

JUDGMENTBY-1: JUDGMENT OF THE COURT

JUDGMENT-1:

JUDGMENT OF THE COURT: The nature of these proceedings

[1] On 16 March 1994 the plaintiff, who is a member of Parliament, tabled in the House of Representatives a box of documents which were to become notorious as "the Winebox documents". They related to some 60 financial transactions involving the European Pacific group of companies and its major shareholders. One of the transactions, which Mr Peters had criticised as criminal in its nature, was the so-called "Magnum transaction".

[2] On 12 September 1994 the Governor-General, by Order in Council, acting pursuant to the Commissions of Inquiry Act 1908, appointed the first defendant to be a commission to inquire into and report upon:

"(a) Whether the Commissioner of Inland Revenue and his staff and the Director of the Serious Fraud Office and his staff acted, in the course of their official duties, in a lawful, proper, and competent manner in dealing with the transactions referred to in the Papers presented, by leave, to the House of Representatives by the member for Tauranga, the Honourable Winston Peters, on 16 March 1994 (A6, Volumes 1 to 3):

(b) Whether, having regard to the kinds of transactions referred to in the papers so presented, any changes to the criminal law or the tax law should, in your opinion, be made for the purpose of protecting New Zealand's income tax base from the effects of fraud, evasion, and avoidance, and, if so, what."

[3] Over the course of the next three years the commission received a vast amount of testimony and other evidence and dealt with numerous procedural applications. On some 20 occasions aspects of the proceedings were challenged in the Courts, including the Court of Appeal and the Privy Council.

[4] On 14 August 1997 the commission forwarded its report to the present Governor-General. It was subsequently made available to the public under the title "Report of the Wine-box Inquiry: Commission of Inquiry into Certain Matters Relating to Taxation" (the Winebox report). Certain of the commission's findings, expressed in a context severely critical of Mr Peters, are challenged in this application for judicial review. The grounds of the application are essentially that certain of the commission's findings and consequential criticisms of the plaintiff are invalidated by errors of law.

[5] Judicial review has been a steadily developing area of law and the proceedings of the Winebox inquiry have contributed significantly to the jurisprudence. At an interlocutory stage the plaintiff's proceeding was struck out in the High Court on the grounds that the Winebox report was not amenable to judicial review for alleged errors of law. The plaintiff appealed. In a landmark decision (Peters v Davison [1999] 2 NZLR 164) the Court of Appeal determined that commissions of inquiry may be amenable to judicial review for material errors of law. The decision held that the commission arguably erred in law in two central respects and that:

{747} ". . . it would be open to the High Court to hold that if there were [such] errors of law . . . then they were of sufficient materiality, going to the substance of a significant part of the report, to warrant a declaration." (Peters v Davison at p 193, lines 20-22.)

The case was accordingly remitted to the High Court for trial.

[6] Proceedings by way of judicial review are markedly different in character from an appeal. They are concerned with whether a person entitled to act pursuant to a statutory power does act within the terms of the power, in a rational way, applying the law correctly and acting fairly. The reviewing Court's concern is therefore with the validity of legal processes and the Court is not entitled to substitute its own findings of fact as if it were rehearing the evidence. It was the commission, not the Courts, who was charged with the responsibility of reporting to the Governor-General. The Court's responsibility in this case is to examine the legal correctness of the commission's reasons for certain conclusions and criticisms and, if it should find that the reasoning is legally incorrect, then to consider whether it should make a formal declaration about the validity of the conclusions and their effect on criticisms.

[7] In the course of the trial before us frequent reference was made to the views expressed by members of the Court of Appeal. We have, of course, been guided by that Court's rulings of law, but the determinations on the merits were left to the High Court. Many of the observations made in the Court of Appeal have to be taken in the context of the issues raised by the strike-out application and did not, nor were intended to, bind this Court in respect of the substantive merits of the proceeding.

[8] We would also mention that Mr Scott, the fourth defendant, who made brief submissions for our assistance, did not align himself with the other defendants and references herein to "the defendants" are not intended to encompass him.

New Zealand foreign tax credit legislation

[9] To appreciate the nature and significance of the alleged errors of law and invalid conclusions it is expedient, first, to look at the relevant provisions of the New Zealand and Cook Islands income tax legislation, and, second, the features of the Magnum transaction.

[10] At all relevant times the New Zealand Income Tax Act 1976, now repealed, contained provisions for relief against double taxation in respect of income giving rise to a tax liability both in New Zealand and in an overseas country. Section 293(2) of that Act provides:

(2) Subject to this section, where a person who is resident in New Zealand derives income from a country or territory outside New Zealand, income tax paid in that country or territory in respect of that income shall be allowed as a credit against income tax payable in New Zealand in respect of that income.

[11] For the purposes of that last-mentioned provision, income tax means in respect of any country or territory outside New Zealand any tax which in the opinion of the Commissioner of Inland Revenue (CIR) is substantially of the same nature as income tax imposed under Part IV of the Act itself. Certain imposts, not relevant to this proceeding, are excluded.

[12] Other important provisions in relation to relief against double taxation are ss 295 and 301 of the Income Tax Act 1976, which are in these terms:

{748} 295. Determination of claims for credits — (1) Where a taxpayer claims a credit for foreign tax in accordance with an agreement, the Commissioner shall determine whether a credit is allowable and, if so, the amount of the credit.

(2) The Commissioner may from time to time and at any time amend a determination as he thinks necessary in order to ensure the correctness thereof.

(3) A determination shall not form part of an assessment of New Zealand tax.

301. Information for credit to be furnished within 4 years — A credit for foreign tax shall not be allowed unless, within 4 years after the end of the income year in which the taxpayer derived the income against the New Zealand tax on which the credit is claimed, or within such further period, not exceeding 2 years, as the Commissioner in his discretion allows in any case or class of cases, the taxpayer claiming the credit —

(a) Makes application in writing to the Commissioner for the credit; and

(b) Furnishes to the Commissioner all information (including information in relation to any amount to which the taxpayer is entitled in respect of any relief or repayment of the foreign tax) necessary for determining the amount of the credit.

[13] Relevant to the definition of "income tax" for the purposes of relief against double taxation in this case is s 61 of the Cook Islands Income Tax Act 1972. That section is concerned with the issuing by a company of a debenture which provides for interest expressed to be "tax free". Section 61(2) imputes an obligation to pay interest of an amount which includes the appropriate tax component. Section 61(3) then has the effect of imposing a liability on the debenture holder for the appropriate amount of income tax and an obligation on the part of the company which issued the debenture to pay that amount of tax on behalf of the debenture holder. The Cook Islands legislation is important because the commission of inquiry held that it stipulated a tax which was substantially of the same nature as income tax imposed under Part IV of the New Zealand Act and therefore had the character of "income tax" for the purposes of the foreign tax credit provisions. The mechanism itself, however, is relevant to an understanding of the complex arrangements of the Magnum transaction.

The nature of the Magnum transaction

[14] The Cook Islands Government commissioned an inquiry into the Magnum transaction by an Australian Queen's Counsel, Mr AH Slater QC. Extracts from his report to the Cook Islands Government were cited in the Winebox report between pp 2:1:41 and 2:1:49. They indicate that on 27 July 1988, in the Cook Islands, the European Pacific company, Harcourt Acceptance Corporation Ltd (Harcourt), gave a debenture to European Pacific Funds Management Ltd (EPFML) as part of an arrangement to fund a dividend payable in respect of redeemable preference shares issued on the same day to a subsidiary of Magnum Corporation Ltd. Interest on the debenture was payable free of tax and accordingly, by virtue of s 61 of the Cook Islands Income Tax Act, EPFML became liable to pay income tax on a deemed interest basis and Harcourt had an obligation to pay that tax on the debenture holder's behalf. Harcourt paid or purported to pay the tax. It was immediately {749} reimbursed by Europen Pacific Merchant Finance Ltd (EPMFL) which had made an apparent profit equivalent to the due tax less $50,000 by purchasing from the Cook Islands Government for $50,000 promissory notes issued by another company in the EPL group for a consideration equivalent to the due tax. An instalment of tax due in July 1989 was treated in a similar way. EPFML then relied on these arrangements to obtain tax credits in New Zealand of some $2m. The nature and effect of the transaction was summarised by the Privy Council in Brannigan v Sir Ronald Davison [1997] 1 NZLR 140 at p 143 in these terms:

"All these dealings were part of a single, prearranged scheme. Their economic effect was to pay back almost all the tax paid . . . Thus European Pacific was better off by $1.95m, the Cook Islands Government was better off by $50,000, and the New Zealand Government was worse off by $2m."

[15] At p 2:1:49 of the Winebox report the commission said the Magnum transaction contained:

". . . within it a device involving payment of so-called tax to the Cook Islands Government and repayment of sums equivalent to that tax to a company within the EPI group."

[16] The Winebox report described the promissory note transactions as "quite unreal".

[17] For the two alleged payments of tax Harcourt received documents which the commission said "purported to be receipts for that tax". Apparently in the course of the Winebox proceedings and in the Winebox report these documents are referred to as "tax credit certificates", but such expression is somewhat euphemistic. The documents purport to be receipts according to their tenor and we intend to call them "receipts". These receipts stated that the particular sums had been received from Harcourt for income tax pursuant to s 61 of the Cook Islands Income Tax Act, re debenture held by EPFML. One was for $881,582, dated 27 July 1988. The other was for $1,168,609, dated 28 July 1989. The receipts were submitted by EPFML to the New Zealand CIR to support claims for tax credits pursuant to the New Zealand legislation to the amount shown on their face. No disclosure was made by or on behalf of EPFML of the complex steps which had been taken to ensure that all but $50,000 of the purported tax was contemporaneously channelled back from the Cook Islands Government to Harcourt. The CIR, who was by dint of the non-disclosure kept unaware of the realities of the situation, allowed the tax credits. The result was some $2m less tax for the New Zealand Government and an equivalent saving of actual expenditure for tax by or on behalf of EPFML. The Cook Islands Government received $50,000 for its participation in the scheme.

[18] At p 2:1:55 of the Winebox report the commission made the following observations:

"First the moneys were paid over and the repayments made to Harcourt on the same day within the same banking period.

Second the usual Government receipt book was not used but receipts for the tax credits were issued out of a separate book.

Third the payments were not recorded in the usual Government book of account and only the net 'fee' ($50,000 in the case of Magnum) was recorded.

{750} Fourth the payments were not deposited in the usual Government bank account but in another account opened with the EPBC for the purpose.

In those circumstances the issue for the Commission was whether a tax had genuinely been paid, or whether the actions of the Cook Islands Government were simply part of a device entered into by European Pacific with the co-operation of the Cook Islands Government to create false tax certificates.

The evidence created suspicions that such was the case. That meant that the Commission would have to look closely at the question of whether or not the so-called tax was levied under the exercise of its sovereign power, for public purposes."

The commission's application of the doctrine of act of state

[19] The commission then examined, under the heading "Can an Inquiry into the Validity of a Cook Islands Tax Be Considered by a New Zealand Tribunal?", whether the legal doctrine of "act of state" applied. Page 21:55 of the Winebox report contains the following:

"Whilst the Commission has been concerned as to whether or not the payments amounted to a tax, there arose a more fundamental issue as to whether any New Zealand Tribunal has any power at all to enter upon an inquiry into such a matter.

Mr Nash of the IRD in evidence stated the policies of revenue authorities worldwide relating to the acceptance of tax credit receipts or certificates originating from a foreign sovereign country. It was to accept such claims if properly documented at their face value. The reason for this course being followed is the 'act of State' doctrine which precludes a State from challenging the validity of an act of State of a foreign sovereign country in the exercise of its public authority within its own territory."

[20] The commission referred to the decisions of the House of Lords in Duke of Brunswick v King of Hanover (1848) 2 HL Cas 1 and Buttes Gas and Oil Co v Hammer [1982] AC 888. He referred to testimony given in the course of the inquiry by two eminent English experts in international law, Sir Arthur Watts KCMG, QC, of the English Bar, and Professor Christopher Greenwood, Professor of International Law at London School of Economics and also of the English Bar. Their opinions were that the levying and collection of tax by the Cook Islands Government were acts of state by reason of which they were not justiciable in New Zealand Courts. In consequence the New Zealand Courts were required to accept as genuine the receipts in question. The commission found that it could not lawfully inquire directly into the validity of the so-called tax certificates but that it was entitled to have regard to, and indeed was required to accept, the findings of Mr Slater QC because Mr Slater's inquiry had been instituted by the Cook Islands Government itself. Mr Slater concluded that liability to pay withholding tax under s 61 of the Cook Islands Income Tax Act satisfied the criteria for a tax. It was his opinion, noted at pp 2:1:62-2:1:63 of the Winebox report, that:

"Once it is accepted that the amount paid by Harcourt Acceptance is one which it was obliged by section 61 and the Schedule to pay, the character of the payment is determined by the character of the legislation. What is subsequently done with the funds collected, or for that matter what is done {751} in anticipation of the collection of the tax, is not determinative of the character of the statutory impost nor in consequence is it determinative of the character of the payment made in compliance with the statute."

[21] The commission's view was that Mr Slater reached the right conclusion when he decided that the withholding payments were a tax. The way in which the government chose to use those moneys was its own affair.

[22] The commission then proceeded to examine EPFML's tax returns. These showed that in the 1988 and 1989 tax years that company had invoked the amounts shown on the two forms of receipt issued by the Cook Islands Government, namely $876,280 and $1,173,711, for the purposes of obtaining tax credits. The commission's conclusions appearing at pp 2:1:65 and 2:1:66 of the Winebox report are important and require to be set out in full:

"The returns show that there was no failure to properly return income for the 1989 and 1990 tax years. EPFML in those returns claimed in each year two tax credits to set off against the tax payable.

There are two issues which arise out of those procedures. They are:

1. Did it use valid tax certificates?

2. Was it under any obligation to disclose under s 301 of the Income Tax Act 1976 that the tax had been repaid to another company, Harcourt?

That the tax certificates were valid cannot now be disputed.

The disclosure obligation contained in s 301 of the Income Tax Act 1976 required it to:

Furnish to the Commissioner all information (including information in relation to any amount to which the taxpayer is entitled in respect of any relief or repayment of the foreign tax) necessary for determining the amount of the credit.

The 'relief or repayment' required to be disclosed was limited to such as 'the taxpayer' was entitled to. There was no obligation to disclose a repayment which had not been made to EPFML. The company, Harcourt, to which the repayment was made was a separate legal entity from EPFML. There are those who argue that EPFML should have disclosed the repayment, even if it was to another company. Such a construction of the section, however, is not possible. A prosecution against EPFML for not making disclosure would be met with a reply that it had strictly complied with the law, and as such would appear to be unanswerable.

There was clearly a loophole in the section which the designers of the Magnum transaction had exploited to their advantage.

CONCLUSION

1. For the reasons which have been earlier discussed the tax credit certificates must be regarded as valid receipts for tax.

2. EPFML under the section as then enacted was not obliged to disclose the repayment of tax to Harcourt.

The Magnum transaction was a 'smart' transaction designed to take advantage of loopholes in income tax law. It did not exhibit any elements of illegality or fraud nor could it be claimed that it resulted in any evasion of tax. The proper returns of income were made and the IRD assessed tax upon that income.

{752} There are some who have suggested that EPFML was guilty of tax avoidance. However, such could not be the case when it had disclosed and returned all of the income received. The payment of the tax on that income was made by a tax credit. It has not avoided any tax at all."

[23] In that the commission's conclusion that the Magnum transaction did not exhibit any elements of illegality, fraud, tax evasion or tax avoidance was derived from his findings that the "tax credit certificates" must be regarded as valid receipts for tax and that EPFML was not obliged by s 301 of the Income Tax Act 1976 to disclose the repayment of tax to Harcourt, the validity of the Commissioner's conclusion must be affected by the validity of those findings from which it was derived. They are of central importance to the commission's decisions expressed in Part Seven of the Winebox report which bear on the principal issues in this proceeding.

[24] At pp 2:7:7, 2:7:8, and 2:7:9 of the Winebox report the following decisions are recorded:

"(a) The Magnum transaction — this transaction was not fraudulent."

"The IRD

. . .

Competence

There can be no substance to an allegation that it was

incompetent in that it failed to detect fraud or tax evasion

when there was in fact no evidence at all to indicate that

such occurred in relation to any of the Winebox

transactions."

"The SFO

. . .

Incompetence

The SFO cannot be held to have been incompetent for not

detecting fraud in transactions where no fraud existed."

The principal issues in this case

[25] An interlocutory order pursuant to s 10 of the Judicature Amendment Act 1972 settled the principal issues in the proceeding as follows:

"1. Did the Commission err in law in construing the Magnum transaction by not recognising that the whole of the interrelated contractual arrangements had to be considered together and that the promissory note arrangements were part of and steps in carrying out the Magnum transaction?

2. Did the Commission err in law in its assessment of the disclosure obligations on EPFML in seeking and obtaining tax credits?

[In respect of 1 and 2 see Peters v Davison at p 192, lines 7-16.]

3. If the Commission erred in law in any such respect, to what extent, if at all, does any such error or errors affect the validity of any of the Commission's findings as set out below:

(a) That the Magnum transaction was not fraudulent.

(Commission's Report 2:7:7)

(b) That there was in fact no evidence at all to indicate that fraud or tax evasion had occurred in relation to the Magnum transaction.

(Commission's Report 2:7:8)

{753} (c) That there can be no substance to an allegation that the Inland Revenue Department was incompetent in that it failed to detect fraud or tax evasion.

(Commission's Report 2:7:8)

(d) That the Serious Fraud Office cannot be held to have been incompetent for not detecting fraud.

(Commission's Report 2:7:9)

4. Even if the validity of any finding of the Commission in connection with the matters set out above is affected, then having regard to:

(a) the adverse criticisms of the plaintiff by the Commission, particularly in Part 7 of the Commission's Report;

(b) the relative significance or otherwise of the Magnum transaction in the context of the Commission's inquiry;

should declaratory or other relief be granted or denied, and if granted what should the form of any declaration or other relief be?"

Consideration of the doctrine of act of state — error by the commission

[26] The starting point for a consideration of those issues is an examination of the relevance and effect, if any, of the doctrine of act of state. Halsbury's Laws of England (4th ed) vol 18 at paras 1413 and 1414 refers to the doctrine in these terms:

"1413. Meaning of 'act of state'. An act of state is a prerogative act of policy in the field of foreign affairs performed by the Crown in the course of its relationship with another state or its subjects . . ."

"1414. Acts of state outside courts' jurisdiction. An act of state is essentially an exercise of sovereign power and hence cannot be challenged, controlled or interfered with by municipal courts. Its sanction is not that of law, but that of sovereign power, and the municipal courts cannot question it . . ."

[27] In the course of the Winebox inquiry and report, and in the context of Mr Harrison QC's submissions in this proceeding, the term extended to the wider meaning discussed in Buttes Gas v Hammer, and in particular in the speech of Lord Wilberforce at pp 931-932:

"So I think that the essential question is whether, apart from such particular rules as I have discussed . . . there exists in English law a more general principle that the courts will not adjudicate upon the transactions of foreign sovereign states. Though I would prefer to avoid argument on terminology, it seems desirable to consider this principle, if existing, not as a variety of 'act of state' but one for judicial restraint or abstention . . .

In my opinion there is, and for long has been, such a general principle, starting in English law, adopted and generalised in the law of the United States of America, which is effective and compelling in English courts. This principle is not one of discretion, but is inherent in the very nature of the judicial process."

[28] The commission found: "That the tax certificates were valid cannot now be disputed." A precis of the commission's line of reasoning is as follows:

(1) The doctrine of act of state prevented the commission from itself inquiring into the question whether the tax certificates were valid.

{754} (2) Nevertheless the commission was entitled to consider Mr Slater's report because he had been instructed to inquire on behalf of the Cook Islands Government.

(3) The Slater Report expressed the opinion that: "Once it is accepted that the amount paid by Harcourt Acceptance is one which it was obliged by section 61 and the Schedule to pay, the character of the payment is determined by the character of the legislation and what was subsequently done with the funds collected, or for that matter what was done in anticipation of the collection of the tax, was not determinative of the character of the statutory impost, nor in consequence is it determinative of the character of the payment made in compliance with the statute."

(4) The commission agreed with Mr Slater because the payments were compulsory in terms of s 61 of the Cook Islands Income Tax Act; they were imposed by the Cook Islands Government and were imposed for public purposes, namely the collection of revenue for the Cook Islands Government. The way in which that government chose to use the moneys was its own affair.

[29] What is not clear is why the commission accepted that Harcourt had met its obligation to pay the relevant amount of tax as it was required to do pursuant to s 61(3) of the Cook Islands Income Tax Act. The credit allowable in terms of s 293(2) of the New Zealand Income Tax Act 1976 is dependent upon foreign income tax being paid and the character of conduct which might or might not constitute payment is as pertinent as the question whether the statutory provisions creating the obligation impose an income tax.

[30] The commission must have formed the view that income tax had been paid either by way of transaction analysis or because the doctrine of act of state required the forms of receipt to be taken as conclusive of the transaction they purported to evidence. Mr Harrison submitted that on either approach the conclusion had to be that income tax was paid. Counsel for the CIR favoured a transaction analysis basis for such a conclusion. We deal first with the act of state doctrine because of its threshold relevance to the case.

[31] We acknowledge that the commission was entitled to regard the issuing of the receipts to Harcourt by the CIR for the Cook Islands as an act of state by the government of that country. In consequence the doctrine discussed by Lord Wilberforce in Buttes Gas v Hammer would prevent a Court from adjudicating upon the validity of the receipts. However, as we observe later in this judgment in relation to the interpretation and effect of s 301 of the Income Tax Act 1976, a Court is nevertheless entitled to adjudicate upon the issue whether a sovereign tax credit is allowable, and in doing so to have regard to relief or repayment of tax paid.

[32] Although the doctrine recognises and imposes limitations on the competence of Courts to inquire into transactions by a foreign government in its own territory, we do not take it to impose limitations on Executive or administrative inquiries into the activities of foreign states. Neither the commission nor the CIR was inhibited by the doctrine.

[33] The commission's powers were derived from the Order in Council made on 12 September 1994 and the provisions of the Commissions of Inquiry Act 1908. Section 4B of that Act authorises the commission to receive as evidence any statement, document, information, or matter that in its opinion may assist it to deal effectively with the subject of the inquiry, whether or not it would be {755} admissible in a Court of law. Extensive powers of inquiry are given by s 4C of that Act. A commission does not adjudicate. Its findings and report do not have a legal effect in the way that a Court judgment has. A commission's essential function is to inform the Executive by reporting to the Governor-General. Conventionally a commission does not publish its report except to the Executive which decides whether to undertake wider publication.

[34] According to the relevant doctrine municipal Courts are not an appropriate means of inquiry into the validity of government acts of a foreign sovereign in its own territory for reasons of practical difficulty, deference to sovereignty, and acknowledgment of constitutional separation of powers. It is a principle of judicial restraint and not one which mandates a factual presumption for the purposes of all domestic functions. It does not prohibit any inquiry at all by any element of the New Zealand Government into foreign acts of state. Such a prohibition would impugn New Zealand's own sovereignty.

[35] We are satisfied that the CIR was not only entitled, but obliged by the Income Tax Act 1976, to examine and make a determination about the validity of the conduct in the Cook Islands relating to the Magnum transaction. By virtue of s 293(2) a tax credit is to be allowed when there has been "income tax paid". In terms of s 295(1) the CIR "shall determine whether a credit is allowable, and, if so, the amount of the credit." That such determination is deemed correct except in proceedings on objection under Part III of the Act, is provided by s 297. A credit for foreign tax shall not be allowed unless the requirements of s 301 are met. Having regard to that statutory scheme, the proposition that the CIR's responsibilities are trammelled by a common law doctrine of judicial restraint is simply untenable.

[36] Because the commission of inquiry was required by its terms of reference to inquire into and report upon whether the CIR and his staff acted, in the course of their official duties, in a lawful, proper and competent manner in dealing with the relevant transactions, (including, of course, Magnum) the commission had to examine the issue as a commission of inquiry and in terms of the CIR's functions. It did not do so. Instead it considered the matter as if it were a Court of law facing a question of the validity of an act of state in litigation between parties.

[37] The CIR's powers and their exercise in respect of the Magnum transaction are relevant also to the conduct of the Serious Fraud Office (SFO) as examinable by the commission of inquiry. We will develop that matter later in this judgment. The CIR was not obliged to accept that for the purposes of s 293(2) of the Income Tax Act 1976 income tax had been paid merely because the receipts had been issued by the Government of the Cook Islands. In the context of the commission of inquiry's essential character and having regard to its terms of reference, the conclusion: "That the tax certificates were valid cannot now be disputed" cannot be founded on the doctrine of act of state.

[38] Furthermore, if the CIR were to determine that for the purposes of s 293(2) income tax had not been paid, the act of state doctrine could not be invoked by the taxpayer to contradict that determination. This is because the reviewing tribunal would be concerned with the validity of the CIR's determination, not the validity of the foreign government's conduct. The question would be whether the CIR, who is not bound by the doctrine, was entitled to make the determination he did. This would not require a direct adjudication upon the act of state.

{756} [39] It follows that if the commission of inquiry regarded an assessment of the whole of the interrelated contractual arrangements in the Magnum transaction as beyond its competence because of the particular aspect of the act of state doctrine, it was in error. The commission was entitled, indeed obliged, to consider the Magnum transaction in terms of the CIR's statutory functions, including the obligation to determine whether a credit was allowable and if so the amount of the credit. Those functions involved a determination by the CIR whether income tax had been paid, as envisaged by s 293(2), and included cognisance by the CIR of the provisions of ss 99 and 301 of the Income Tax Act 1976. In view of these matters the settled principal issues 1 and 2 require composite examination before they can be answered discretely.

Tax avoidance — relevant law

[40] Section 99 of the Income Tax Act 1976 is a provision against tax avoidance. Of particular relevance to this proceeding are subss (1) and (2), which are in these terms:

99. Agreements purporting to alter incidence of tax to be void —

(1) For the purposes of this section —

"Arrangement" means any contract, agreement, plan, or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect:

"Liability" includes a potential or prospective liability in respect of future income:

"Tax avoidance" includes —

(a) Directly or indirectly altering the incidence of any income tax:

(b) Directly or indirectly relieving any person from liability to pay income tax:

(2) Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner for income tax purposes if and to the extent that, directly or indirectly, —

(a) Its purpose or effect is tax avoidance; or

(b) Where it has 2 or more purposes or effects, one of its purposes or effects (not being a merely incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relate to, or are referable to, ordinary business or family dealings, —

whether or not any person affected by that arrangement is a party thereto.

[41] It is not surprising that in the course of the proceedings before the commission reference was continually made to "the Magnum transaction" and not "the Magnum transactions". The conduct involving the debiting of a sum equivalent to due tax, the contemporaneous reimbursement of that sum less a small proportion thereof, and all paperwork in between, had a unity of character which, to cite from the judgment of Henry J in Controller and Auditor-General v Sir Ronald Davison [1996] 2 NZLR 278 at p 309, rendered "the element of tax collection . . . largely illusory".

[42] Lord Wilberforce said in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 at p 323, a case involving tax avoidance, that a Court is not compelled to look at a document or a transaction in blinkers, {757} isolated from any context to which it properly belongs. This approach was accepted by the New Zealand Court of Appeal in Mills v Dowdall [1983] NZLR 154 where Cooke J observed, at p 157, that if it can be seen that documents were meant to operate as a series or combination, their effect may be looked at as a whole. The questions in that case concerned whether property transferred with the intention of implementing a gifting programme represented gifts of the property at the time of transfer. In the result they were held not to be gifts of the property itself because actual liability was intended to be created at the time of transfer with gifting to be implemented subsequently in respect of the liability. Cooke J observed however at p 157:

"Should it emerge that the transferee was never to be under a real liability, because the consideration was to be forgiven instantly and as an inseverable part of the whole operation, the transaction can then be recognised for the purposes of the [Matrimonial Property] Act as a gift . . ."

[43] The approach favoured by Cooke J is consistent with the unanimous speeches of Their Lordships in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991 where a compelling justification for looking to the reality of a transaction is articulated in the speech of Lord Steyn. At pp 999-1000 he pointed out how despite a shift over the last 30 years away from literalist to purposive methods of statutory construction, tax law seemed to have been largely left behind as some island of literal interpretation:

"The result was that the court appeared to be relegated to the role of spectator concentrating on the individual moves in a highly skilled game: the court was mesmerised by the moves in the game and paid no regard to the strategy of the participants or the end result."

[44] Whilst certain observations in the judgment of Richardson J in Mills v Dowdall at pp 159-160 could indicate a more discrete approach to transaction analysis as a general principle, there is nevertheless recognition in the judgment that s 99 of the Income Tax Act 1976 mandates a broader or different approach in relevant tax cases. Possible differences of approach, as far as they bear on tax issues, seem to be concerned with whether or not s 99 or its equivalent would need to be invoked in order to identify the true nature of a transaction with fiscal implications.

Answers to principal issues 1 and 2 are affirmative

[45] In the present case any difference of approach is of no real consequence because on either approach the result must be the same. In particular s 99 would undoubtedly have been invoked by the CIR in 1988 and 1989 if he had been informed of the combination of features of the transactions. When the CIR learned of the combination upon receipt of the Winebox documents he formed the view there had been blatant tax avoidance. If the CIR had been informed of the true nature of the Magnum transaction at the time the tax credits were claimed he would have been correct to determine that in respect of EPFML income tax had not been paid, either because the Magnum transaction rendered the so-called payment illusory or because the transaction was void for income tax purposes by virtue of s 99, or for both these reasons.

[46] Section 301 of the Income Tax Act 1976 shows that in making his determination under s 295(1) the CIR is obliged to have regard to relief or repayment of foreign tax.

{758}

[47] It is convenient to repeat the Commissioner's view at p 2:1:65:

"The disclosure obligation contained in s 301 of the Income Tax Act 1976 required it to:

[48] We find that the commission has erred in his interpretation of s 301. He has construed it as if there were no parentheses and the words "including information" did not appear. On this approach he considered that EPFML did not have an obligation of disclosure because it was not that company but Harcourt which had been contemporaneously reimbursed. But what the statute envisages is:

. . . all information . . . necessary for determining the amount of the credit.

[49] That information includes, but is not confined to:

. . . information in relation to any amount to which the taxpayer is entitled in respect of any relief or repayment of the foreign tax.

[50] If the taxpayer claiming a credit was entitled in terms of a bare payment, without relief or repayment being relevant to the fact or amount of entitlement, the words in parentheses in s 301 would be entirely superfluous. Their inclusion demonstrates the relevance of the ancillary dealings in respect of contribution or reimbursement.

[51] As previously noted, s 61 of the Cook Islands Income Tax Act imposes in the specified circumstances a liability for tax on the lending taxpayer and an obligation on the borrower to pay the tax. The words "all information . . . necessary for determining the amount of the credit" would prohibit the allowance of a tax credit where the person obliged to pay the tax on behalf of a taxpayer received relief or repayment and this was not disclosed. A Court may hold this, notwithstanding the act of state doctrine or aspects of it, because it does not involve adjudication in respect of a payment, or even a refund which may itself be an act of state, but rather an adjudication upon a taxpayer's failure to disclose information about those aspects of the transaction, such information being necessary for determining the amounts of the credit, if any.

[52] For these reasons principal issues 1 and 2 must be answered in the affirmative. This finding affects the commission's conclusion at p 2:1:66 of the Winebox report that EPFML could not be guilty of tax avoidance. The commission found:

"There are some who have suggested that EPFML was guilty of tax avoidance. However, such could not be the case when it had disclosed and {759} returned all of the income received. The payment of the tax on that income was made by a tax credit. It has not avoided any tax at all."

[53] That conclusion is wrong because it is derived from erroneous findings that:

(1) In terms of the New Zealand tax legislation, overseas tax had been paid; and

(2) The disclosure by EPFML of the whole transaction did not debar entitlement to tax credits.

[54] It therefore becomes necessary to consider the third issue. In doing so we repeat that in this proceeding the Court has no entitlement or necessity to determine whether there has actually been fraud in connection with the Magnum transaction. The Court's responsibility is in respect of the commission's reasons.

Obligations of disclosure — s 301 and criminal responsibility

[55] It was argued before us on behalf of some of the defendants that s 301 does not itself impose an obligation of disclosure on a taxpayer, notwithstanding that the commission held it did. Counsel submitted, in effect, that the statute prescribed a condition of entitlement, not an obligation of disclosure. On a literal approach that may seem correct but plainly there is a legislative expectation that there will be honest and comprehensive disclosure by a claimant. This must be so when in terms of the statutory scheme a credit is not allowed unless all information required by s 301(b) has been provided. Further, a taxpayer claiming a foreign tax credit may not with impunity wilfully fail to disclose information which the taxpayer knows the CIR is entitled to have for the purposes of determining whether a credit is allowable and, if so, the amount of the credit. Where:

(1) there is wilful non-disclosure; and

(2) it is accompanied by a belief that if the CIR was provided with the withheld information he would be entitled to make a determination that none or only part of the amount claimed is allowable; and

(3) having regard to the withheld information the taxpayer is not entitled to the whole amount of the credit which has been claimed;

then the taxpayer will have been guilty of fraud.

[56] There were also obligations of disclosure under other statutory provisions then in force, contravention of which would be tax evasion. These must be borne in mind when considering s 301. They are s 47(1)(b) and (c) of the Inland Revenue Department Act 1974 and s 416(1)(b) of the Income Tax Act 1976. Those provisions of the now repealed Acts are:

47. Offences — (1) Every person commits an offence against this Act who —

. . .

(b) Knowingly deceives or attempts to deceive the Commissioner or any officer of the Department in the exercise of any powers or functions under this Act:

(c) With intent to deceive makes any false or misleading statement or any material omission in any information given to the Commissioner or any officer of the Department for the purposes of this Act:

{760} 416. Penalty for failure to furnish returns, etc — (1) Every person commits an offence against this Act who —

. . .

(b) Wilfully or negligently makes any false return, or gives any false information, or misleads or attempts to mislead the Commissioner or any other officer, in relation to any matter or thing affecting his own or any other person's liability to taxation.

[57] Before the commission it had been submitted on behalf of the plaintiff that the Magnum transaction was fraudulent and criminally so. Provisions of the Crimes Act 1961 which were said to apply were ss 229A and 257, the relevant terms of which are as follows:

229A. Taking or dealing with certain documents with intent to defraud — Every one is liable to imprisonment for a term not exceeding 7 years who, with intent to defraud, —

(a) Takes or obtains any document that is capable of being used to obtain any privilege, benefit, pecuniary advantage, or valuable consideration; or

(b) Uses or attempts to use any such document for the purpose of obtaining, for himself or for any other person, any privilege, benefit, pecuniary advantage, or valuable consideration.

257. Conspiracy to defraud — Every one is liable to imprisonment for a term not exceeding 5 years who conspires with any other person by deceit or falsehood or other fraudulent means to defraud the public, or any person . . .

[58] The commission's conclusions on fraud in relation to the Magnum transaction appear at p 2:3:62 of the Winebox report in these terms:

"The Magnum transaction has been discussed in detail in Part Two of this section. There the Commission concluded:

— That the tax credit certificates must be regarded as valid receipts for tax paid;

— That EPFML was not obliged to disclose to the IRD the repayments of tax to Harcourt.

In view of those conclusions, the outcome must be that there was no fraud in the way that the tax credits were presented to IRD and credits of tax obtained.

The Magnum transaction was therefore not fraudulent either under s 257 of the Crimes Act or s 229A of the Crimes Act."

[59] For the reasons previously given the commission was in error when he concluded that the tax receipts must be regarded as valid receipts for tax. Whilst s 301 does not expressly impose an obligation of disclosure it implies it by stipulating a condition of entitlement which makes it unlawful to receive and retain a tax credit when the condition is not met. In relation to the Magnum transaction that condition was not met. A tax credit was accordingly not due and was unlawfully received and retained. If in EPFML's claiming and retaining the benefit of the credit when disclosure had not been made certain other features were present, there would be fraud.

[60] For the reasons previously given herein in respect of the commission's opinion that the tax receipts have to be taken as proof that the foreign tax was {761} paid, we hold that the bases for the commission's opinion that "there was no fraud in the way the tax credits were presented to IRD and credits of tax obtained" are wrong and the opinion is the product of error. The finding at p 2:7:7 of the Winebox report, referred to in principal issue 3(a), is similarly flawed.

Fraud and tax evasion

[61] Whether facts constitute evidence of fraud or tax evasion is a legal issue. A finding that there is evidence is not tantamount to a finding that fraud or tax evasion is proved. We emphasise these distinctions in our consideration of principal issue 3(b).

[62] The commission held at p 2:7:8, in relation to the issue of the competence of the Inland Revenue Department (IRD):

"There can be no substance to an allegation that it was incompetent in that it failed to detect fraud or tax evasion when there was in fact no evidence at all to indicate that such occurred in relation to any of the wine-box transactions."

[63] It is plain from the context that the commission included the Magnum transaction in that finding.

[64] The commission found at p 2:1:65 that there was clearly a loophole in s 301 of the Income Tax Act 1976 which the designers of the Magnum transaction had exploited to their advantage. However the finding that there was an exploitable loophole was the product of legal error, as we have already stated. The commission also erred in respect of the issue as to the validity of the tax receipts. The essential question whether EPFML was entitled to a tax credit requiring a legally correct interpretation of the functions of the CIR, the commission, and the legislation relating to foreign tax credits, was preempted by the errors of law. Accordingly the bases for the commission's finding that there was no evidence at all are legally incorrect and the finding itself could not be sustained unless the report contains another expressed basis for the conclusion.

[65] The commission remarked at p 2:1:1 that the Magnum transaction depended for its efficacy upon the validity of tax credits "which, to say the least, were created under the most questionable circumstances". Matters noted by the commission at p 2:1:55, referred to earlier in this judgment, raised "the issue for the Commission . . . whether a tax had genuinely been paid, or whether the actions of the Cook Islands Government were simply part of a device entered into by European Pacific with the co-operation of the Cook Islands Government to create false tax certificates. The evidence created suspicions that such was the case."

[66] The commission was led by error of law to find, in effect, that the suspicions were unfounded. Correction of the error must revive the suspicions. Add to that the inferences that might be taken from the very nature, intended result, and non-disclosure of the steps taken in the Magnum transaction. The circumstances then could support a finding that there was evidence of fraud. Consideration by the commissioner whether there was such evidence was diverted by his erroneous findings of law, and he did not express an alternative or additional basis for his conclusions.

[67] The finding that there was in fact no evidence at all to indicate that fraud had occurred in relation to the Magnum transaction is invalidated by the errors of law we have identified.

{762} Consequences for the Inland Revenue Department and the Serious Fraud Office — finding of "no evidence at all to indicate" fraud is invalid

[68] The commission found at p 2:7:8 of its report that there can be no substance to an allegation that the IRD was incompetent in that it failed to detect fraud or tax evasion. Whether the commission's errors of law affected the validity of that finding is principal issue 3(c).

[69] It is plain from the terms and context of the finding that it was based on a conclusion that there was no evidence at all to indicate that fraud or tax evasion had occurred in relation to the Magnum transaction. Because that conclusion was invalid, the finding that there can be no substance to an allegation that the IRD was incompetent in that it failed to detect fraud or tax evasion is similarly invalid.

[70] In a finding which encompasses the Magnum transaction, the commission found at p 2:7:9 of the report that the SFO cannot be held to have been incompetent for not detecting fraud in transactions where none existed. The effect on the validity of that finding of the commission's errors of law is principal issue 3(d). The errors of law invalidate that finding also.

[71] We reach these conclusions in full appreciation of the submissions of counsel for the defendants to the effect that there was a basis in the evidence before the commission for findings favourable to them. Counsel for the IRD, for example, referred to evidence presented to the commission that the Magnum transaction was not thought fraudulent by that department and its view coincided with a report for the Audit Office, Mr Slater's view, and the opinion of the SFO. Counsel referred also to evidence which focused on the issue of fraudulent intent as an essential of fraud or tax evasion. However, although the commission referred to such evidence he expressed no opinion upon it, nor findings in terms of it. The basis upon which the commission stated he formed his conclusions was technical and legal, relating as it did to his opinions about whether foreign tax was paid and the effect of s 301 of the Income Tax Act 1976 in respect of disclosure. His conclusions about fraud and competence were not based on findings about intent.

[72] Similarly, in relation to the SFO, counsel carefully examined the terms of a policy agreement between the IRD and the SFO which could have supported a finding, if the commission had made one, that notwithstanding issues of fraud or tax evasion the SFO should not be considered incompetent because it relied on that understanding with the IRD. This policy arrangement, which recognised differences in the natures and objectives of the two organisations, was that in respect of tax-related allegations of fraud the SFO would await a referral to it by the IRD. Counsel submitted that the SFO had a duty to prosecute, but the Serious Fraud Office Act 1990 shows that the powers of the director of the SFO are discretionary, and generally dependent on reasonable grounds. Section 49 specifically states that the Act imposes no obligation to investigate, take proceedings, or exercise any other power under it. The commission referred to the agreement but did not invoke it as a reason for concluding that there was no incompetence. The reason for that conclusion is the invalid reason already discussed. It was plainly of concern to the SFO that substantial reasons which it advanced were not identified by the commission as determinative of, or even influential in respect of, the conclusions. Indeed, as counsel said to this Court:

"Here the SFO stance remains the same. It has a finding of no incompetence reached by a path it did not seek."

{763} [73] Be that as it may, this Court cannot follow another path through the maze as if it were the commission. It can only say that the chosen path is blocked by invalidity.

[74] Counsel for Fay Richwhite, a party whose interests in these proceedings are limited by its non-involvement in the Magnum transaction, made submissions to the effect that a firm basis for the commission's conclusions under examination could be found in the record and inferred from issues adverted to in the Winebox report. He submitted that it would be an artificial and misconceived approach for this Court to require a formal acknowledgment by the commission that having seen and heard from the relevant witnesses he was satisfied that they did not act with dishonest intent. Yet such a finding would have been so significant and could have been made with such facility and finality that its omission cannot be taken by this Court as implied acceptance. We do not accept the submission on behalf of the defendants that, considering the Winebox report as a whole, it ought be inferred that the commission found that the Magnum transaction was not fraudulent (and therefore was not tax evasion or criminal) for a variety of reasons of which those given in the expressed conclusions are but some. The reasons the Court must test for validity are the reasons which the commission gave in his report.

Should relief be granted?

[75] We turn to the issue whether declaratory or other relief should be granted or denied and, if granted, what the form of the relief should be. It is not difficult to determine what form of relief ought not be granted. The Court is not entitled to find that there was or was not fraud; nor that the IRD or SFO were or were not incompetent. What the Court may do is to make formal declarations in terms of its findings on the issues, including declarations that the commission's conclusions identified in the principal issues are invalid by reason of errors of law. The practical result of such declarations would be to leave unanswered by the commission:

(1) Whether the Magnum transaction was fraudulent;

(2) Whether there was any evidence to indicate that fraud or tax evasion had occurred in relation to the Magnum transaction;

(3) Whether there is any substance to an allegation that the IRD was incompetent in its dealing with the Magnum transaction; and

(4) Whether the SFO can be held to have been incompetent in its dealing with the Magnum transaction.

[76] Although in proceedings by way of judicial review a Court has a discretion to decline relief, there would have to be very cogent reasons for withholding relief in a case such as the present. For years there has been unremitting private and public interest in the Winebox inquiry and its aftermath. The public interest, in the more formal sense of the term, includes the legitimate public interest in the commission's findings being properly based in law if the purposes of the report are to be achieved. Whether the IRD and SFO acted, in the course of their official duties, in a competent manner was one of the matters upon which the Commissioner was required by the Order in Council to report. The Court of Appeal observed in Peters v Davison at p 193, and it has been clear to us, that the correct construction of the Magnum transaction by the commission and his assessment of the disclosure obligations of EPFML were crucial to any consideration under para (a) of the terms of reference concerning the competence of the IRD and SFO. The commission's errors of law were very material. They went to the substance of a significant part of the report. In such circumstances relief is presumptively indicated and it is for the defendants, who contend for a discretionary denial of relief, to show why it should be denied.

[77] Before examining the reasons advanced on behalf of the defendants for declining relief, it is necessary to identify the criticisms made of the plaintiff in, particularly, Part Seven of the Winebox report. These are specified in principal issue 4(a) as relevant to the matter of discretion. That part begins with a description of the plaintiff's conduct in the House of Representatives leading up to the Order in Council establishing the commission. It includes reference to allegations made by the plaintiff in the House and remarks at pp 2:7:1-2:7:2:

"The result was that WP took the attitude that he had made the allegations and that the persons concerned were guilty. He had procured the appointment of a Commission of Inquiry charged to inquire into the matters contained in its Terms of Reference, and that thereafter it was the function of the commission to make its own inquiries and to prove that he was right."

[78] Later the report states at p 2:7:3:

". . . perhaps the greatest frustration of all was the inability of the commission to tie down WP and his counsel to state clearly where was the evidence of the frauds that he alleged."

[79] It was noted that Mr Henry had opened on behalf of the plaintiff on the basis that he did not regard the proceeding as a tax case but as a criminal case. Counsel's opening was described at p 2:7:4 as:

". . . strong on rhetoric but the subsequent evidence of WP was short on facts."

[80] The report states at p 2:7:8:

"However, in making his allegations of fraud WP grossly overplayed his hand and elevated the four types of transactions which he specifically identified to a level of fraudulent conduct which in fact none has been proved to have possessed."

[81] At p 2:7:9 the commission remarked:

"In his final submissions Mr Brian Henry acknowledged that WP's allegations against such corporates and persons arose out of their alleged participation in the tax credit schemes (Magnum and the JIFs). In making those allegations WP appears to have examined all the documents he had relating to such schemes and accused every corporate or individual identified in such documents of conspiracy to defraud. Scant regard, if any, was paid to the individual circumstances, the need to prove a conspiracy and the need to prove dishonesty."

[82] The commission concluded Part Seven at p 2:7:10 with these observations:

"The Commission has clearly established that the Magnum and the JIF transactions have not been proved to amount to fraud. The consequences are that the allegations made against the corporates and individuals claiming that they were guilty of conspiracy to commit such {765} frauds were false and completely unjustified. Whilst it is not possible for such corporates and individuals to take action to challenge WP's allegations, as they were made under circumstances of absolute privilege, the findings of this Commission may go some way to remedying the injustices done to them."

[83] Mr Miles QC's submissions commenced with the advice to the Court that the commission abided the Court's findings on the first three principal issues, and addressed the issues relating to discretion. He submitted that the claimed errors of law did not materially affect the conclusion that the Magnum transaction was not fraudulent, but the findings we have made dispel that argument.

[84] Mr Miles pointed out, correctly, that the mere fact that a person has been adversely criticised by a body amenable to judicial review does not make the criticisms reviewable. They must be legally invalid and may be so if they have been made in breach of natural justice. Here, said counsel:

"Mr Peters and his counsel were given clear notice on a number of occasions throughout the inquiry that the basis for Mr Peters' beliefs set out in his speeches would be examined by the Commissioner."

[85] Counsel submitted that accordingly there was no breach of natural justice. It was submitted that the commission was unimpressed by the fact that the plaintiff had relied on parliamentary privilege and, further, that the criticisms related not to the fact that the commission found no fraud but primarily to the fact that the basis of the allegations of incompetence was slight and made without appreciation of what was involved.

[86] Other counsel expressed concern at the impact which the granting of relief might have on others. Mr Harrison QC for example, in the course of submissions which robustly criticised the plaintiff, said that Mr Peters had put his reputation in issue by his conduct, including before the commission, and his allegations had put the reputations of others in issue. The question of relief should therefore be approached not merely with regard to the criticisms made of him and their justification, but also with sensitivity to the reputations which he had assailed. Mr Squire QC expressed similar views on behalf of the IRD and Mr Davidson QC was also concerned that if relief were granted a wrong inference might be taken as far as the reputation of his client, the SFO, and its officers were concerned. These concerns emphasise a matter to which the Court is appropriately sensitive; this is that our findings and the terms of any relief should be expressed with sufficient clarity and precision to obviate misinterpretation.

[87] This Court faces an immediate difficulty in referring to remarks by the commission critical of the plaintiff's speeches in the House of Representatives. Article 9 of the Bill of Rights 1688 provides as follows:

"Freedom of Speech — That the freedome of speech and debates or proceedings in Parlyament ought not be impeached or questioned in any court or place out of Parlyament."

[88] As the Privy Council recognised in Prebble v Television New Zealand Ltd [1994] 3 NZLR 1 at p 7, there is a long line of authority which supports a wider principle, of which art 9 is merely one manifestation. This is that the Courts and Parliament are both astute to recognise their respective constitutional roles. For constitutional reasons it would not be proper for the {766} Court to comment upon the merits of the plaintiff's speeches in the House. Whether it may have been similarly inappropriate for the commission to do so has not been adverted to in pleadings or submissions.

[89] The recitals to the Order in Council refer to allegations concerning the conduct of the CIR and the SFO in these terms:

"Whereas —

(a) It has been alleged that the Commissioner of Inland Revenue and his staff and the Director of the Serious Fraud Office and his staff have not, in the course of their official duties, acted in a lawful, proper, and competent manner, in relation to certain transactions; and

(b) Questions have arisen about the adequacy of the laws of New Zealand in relation to certain transactions:

And whereas the question whether the allegations or any of them is true and the question whether those laws are adequate are both matters of public importance."

[90] Mr Harrison submitted that the recitals set the commission in a context of character and reputation and that in making his allegations in the House of Representatives the plaintiff put his own reputation in issue.

[91] It is the case that the preamble of the Order in Council recites the circumstances in which the order came to be made. It does not follow that the plaintiff's allegations in the House made his character an issue for the commission. The matters which the Order in Council required the commission to inquire into and report upon were not whether the plaintiff was right or wrong, nor whether he could make out a case before the commission to support the allegations he had made in the House, but whether the matters alleged as defined by the Order in Council were true. In short, the intended focus of the commission was not the character of the plaintiff, nor whether he should be vindicated or rebuked by the commission in respect of his speeches in the House. The terms of reference focused upon the lawfulness, propriety, and competence of the CIR and his staff and the Director of the Serious Fraud Office and his staff in the course of their official dealings in connection with the Winebox documents. Many of the criticisms of the plaintiff, including, for example, the observations in the last paragraph of Part Seven at p 2:7:10, seem to blur that distinction.

[92] The conduct of the plaintiff and his counsel at the commission's hearings, including repetition of allegations previously made in the House, is not exempt on constitutional grounds from either adverse or favourable criticism. However, if the basis for them and the nature of them is directly related to material errors of law then the adverse consequences to reputation may be ameliorated by declarations that the conclusions based on such errors are invalid. Effect on reputation is a recognised indication for granting relief in such cases. Here the extent to which the errors impacted on the plaintiff's reputation cannot be measured but it must have been appreciable.

[93] The relative significance or otherwise of the Magnum transaction is a consideration in terms of principal issue 4(b). It was but one of about 60 transactions evidenced by the Winebox documents but it was included in only four categories of transactions which the commission focused on as allegedly containing evidence of fraud. In many ways it was the exemplar of the impugned transactions, being examined as such in the Court of Appeal and {767} Privy Council cases arising in the course of the commission's hearings. Furthermore, it involved the loss to the New Zealand taxpayer of $2m. Its significance therefore lies not in its unity, but in its relevant singularity.

[94] As to any other relevant factors, Mr Miles submitted that the granting of relief would be an exercise in futility. He submitted that the commercial and legal environment which produced the transactions examined in the Winebox inquiry has materially changed and in that light he invoked the observations of Casey J in Turner v Pickering [1976] 1 NZLR 129 at pp 141-142. Casey J enunciated the elementary principle that the Court's discretionary power to make a declaration will not be exercised in a plaintiff's favour unless the declaration may be of some utility. We do not demur to the principle but it seems implicit in counsel's argument that the utility and effect of the Winebox report itself is spent. Consider, however, the assiduity with which this application for judicial review was prosecuted and resisted by the parties and their learned counsel, and the interest in it which the public and the fourth estate have shown. Their interest contradicts the suggestion that the granting of relief by this Court would have no utility. There has been a substantial interest amongst the public about the Winebox proceedings; and, as previously mentioned, there is the public interest, in the more formal sense of the term, in the correctness and completeness of the report. Such interest, private and public, bespeaks the significance of granting or denying relief. Relief should be granted.

The form of relief

[95] There will be appropriate declarations. Relief cannot go to the extent claimed in the prayer for relief, some of whose elements exhibit prolixity and others idiosyncrasy in a public law proceeding. Paragraph (f) of the prayer for relief is notable in this latter respect. The appropriate declarations are that:

(1) The conclusion or finding expressed at p 2:7:7 of the "Report of the Wine-box Inquiry: Commission of Inquiry into Certain Matters Relating to Taxation", submitted to His Excellency the Governor-General on 14 August 1997, that: "The Magnum transaction — this transaction was not fraudulent" is, by reason of error of law, invalid.

(2) The conclusion or finding expressed at p 2:7:8 of the said report, that: "There can be no substance to an allegation that [the Inland Revenue Department] was incompetent in that it failed to detect fraud or tax evasion when there was in fact no evidence at all to indicate that such occurred in relation to any of the wine-box transactions" in so far as it relates to the so-called Magnum transaction is, by reason of error of law, invalid.

(3) The conclusion or finding expressed at p 2:7:8 of the said report that: "The Magnum transaction was not proved to have been fraudulent" is, by reason of error of law, invalid.

(4) The conclusion or finding expressed at p 2:7:9 of the said report, in respect of the SFO, that: "The SFO cannot be held to have been incompetent for not detecting fraud in transactions where no fraud existed" in so far as it relates to the so-called Magnum transaction is, by reason of error of law, invalid.

(5) Criticisms made of the plaintiff in the Winebox report are invalid to the extent that they are founded upon the above described errors of law and invalid conclusions.

{768}

[96] Declarations (1) to (4) are not, and are not intended to suggest, findings by this Court that there has been fraud or incompetence. The effect of the declarations is as if the words in the Winebox report to which they relate were crossed out, leaving the Winebox report incomplete in these respects. Declaration (5) will ameliorate the criticisms made of the plaintiff which are related to those errors. The Winebox report remains otherwise unaffected.

[97] There will be judgment for the plaintiff by way of formal declarations in those terms. Costs are reserved.

DISPOSITION:

Judgment for the plaintiff: declarations accordingly.

SOLICITORS:

Solicitors for the plaintiff: DJ Gates (Whangaparaoa); Solicitors for the first defendant: Meredith Connell & Co (Auckland); Solicitors for the Inland Revenue Department: Grant Pearson, Inland Revenue Department (Wellington); Solicitors for the Serious Fraud Office: Gus Andree Wiltens, Serious Fraud Office (Auckland); Solicitors for Fay Richwhite: Russell McVeagh McKenzie Bartleet & Co (Auckland); Solicitors for Brierley Investments Ltd: Bell Gully (Auckland).tWordStar 4.0B Messages 14 Feb 87Copyright (C) 1983,1987 MicroPro International Corp.All