AA TAXATION & ACCOUNTING SERVICES LTD v THE COMMISSIONER OF INLAND REVENUE [2019] NZHC 2301

AA TAXATION & ACCOUNTING SERVICES LTD v THE COMMISSIONER OF INLAND REVENUE[2019] NZHC 2301 [13 September 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-0209[2019] NZHC 2301UNDER the Companies Act 1993BETWEEN AA TAXATION & ACCOUNTINGSERVICES LIMITEDApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 24 June 2019Appearances: S Kilian for the ApplicantJ V Angelson for the RespondentJudgment: 13 September 2019JUDGMENT OF ASSOCIATE JUDGE SMITHThis judgment was delivered by me on 13 September 2019 at 3.00 pm,pursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors / Counsel:Kilian & Associates Ltd, AucklandInland Revenue, Auckland[1] The applicant (AA) has applied to set aside a statutory demand issued by therespondent (the Commissioner), in which the Commissioner demanded payment of$227,882 for taxes, penalties and interest. The Commissioner opposes the application.She says that there is no dispute as to the amount of tax outstanding, particularly asAA and the Commissioner entered into an Agreement to Amend Assessment on7 August 2018 (the Agreed Assessment), in which AA accepted an amendedassessment of $211,894.59 for unpaid GST and income tax, shortfall penalties, andfurther interest payable under s 120D of the Tax Administration Act 1994 (the TAA).In the Agreed Assessment, AA agreed that it had no rights to challenge the assessedtax further in terms of s 89I of the TAA.[2] AA does not dispute that it has been properly assessed for tax purposes in theamount set out in the statutory demand. Its argument is that the tax has already beenpaid by its director, Zhiwei Li (also known as Tom Lee), in the course of the settlementof a proceeding against Mr Li and his partner, Ms Cheng-Lan Wang, commenced bythe Commissioner of Police (the Police) against Mr Li and Ms Wang under theCriminal Proceeds (Recovery) Act 2009 (the CPRA). The contention is that the"significant criminal activity" which was required to engage the CPRA was primarilyevasion of the very same tax now demanded by the Commissioner from AA, and thatassets of Mr Li and Ms Wang were forfeited to the Crown in the CPRA proceedingwith the intention that the tax liability would be discharged.The proceeding under the CPRA[3] On 23 April 2015 Mr Li was convicted of one charge of obtaining bydeception. He was sentenced to four months' home detention. The offending that gaverise to the conviction involved Mr Li selling a fake qualification to an undercoverjournalist. Mr Li charged $12,000 for the qualification, and he personally received$3,000 of that sum. The qualification was paid for in cash by the undercover journalist.An appeal by Mr Li against his conviction was dismissed in May 2016.1[4] The Police commenced a proceeding under the CPRA, contending that the onecount on which Mr Li was convicted was but one example of an ongoing scheme under1 Li v R [2016] NZCA 237.which Mr Li sold fraudulent qualifications to international students. Restrainingorders under the CPRA were made on the application of the Police on 7 October 2015,in respect of the following property:(i) A residential property situated at Totara Vale, North Shore (the home),owned by Mr Li and Ms Wang and occupied by them as their home.Their equity in the home was approximately $500,000.(ii) Funds seized from personal bank accounts operated by Mr Li and orMs Wang totalling approximately $260,194.(iii) $135,000 in cash seized by the Police from the home on 10 September2017 (this cash was seized following the unauthorised withdrawal offunds by Mr Li from a restrained bank account).[5] In total, the value of the assets restrained came to about $885,000.[6] The Police then proceeded with a CPRA claim to have "tainted" assets of Mr Liand/or Ms Wang, and any profits from the criminal offending, forfeited to the Crown.The Police contended that Mr Li (and Ms Wang as his spouse) had unlawfullybenefited in the total sum of $1,855,136.64, consisting of the following deposits madeinto their bank accounts:(i) $1,552,543.45 in cash deposits;(ii) $84,459 in unidentified deposits; and(iii) $218,134.19 in non-cash deposits from third parties.[7] Mr Li accepted in the CPRA proceeding that the funds had been paid into thebank accounts, but he contended that they had been received by him in exchange forlegitimate services, such as accounting services, barista courses, and English classes.[8] The settlement eventually concluded by Mr Li and Ms Wang with the Policerecorded the acknowledgement of Mr Li and Ms Wang that, regardless of thelegitimacy of the sources of the deposits, the money deposited had not been declaredto the Inland Revenue Department for tax purposes. On that basis, the Police alsorelied on tax evasion as a "significant criminal activity" sufficient to justify the assetforfeiture orders sought. The Police contended that Mr Li's total tax liability was$778,883.98; Mr Li accepted that he had a substantial unpaid tax liability, butcontended that the total amount was $490,260.33.[9] The Police and Mr Li and Ms Wang eventually settled the asset forfeitureclaims, in the total sum of $575,000. The settlement required the approval of thisCourt under s 95 of the CPRA, and that approval was sought in a joint memorandumsigned by counsel for the parties on 12 July 2017 (the Settlement Agreement). TheSettlement Agreement was duly approved by order made by Woolford J on 12 July2017.[10] The principal parts of the settlement were:(i) All remaining restrained funds in the proceeding (approximately$385,000) were to be forfeited to the Crown; and(ii) The balance (up to $575,000) was to be paid by Mr Li to the OfficialAssignee on behalf of the Crown within one month of the orders beingmade;(iii) On payment of the $385,000 the restraining orders would be varied topermit Mr Li and Ms Wang to use the home as security to borrowsufficient funds to pay the balance of the settlement sum. On paymentof the full $575,000 the restrained property would be released from therestraint;(iv) The Police agreed not to pursue enforcement of certain costs ordersmade against Mr Li in the proceeding (total approximately $10,500),and also agreed not to pursue any profit forfeiture orders.[11] Under s 95 of the CPRA, the Court had to be satisfied that the SettlementAgreement was in accordance with the overall interests of justice. The SettlementAgreement included the following joint submissions to the Court on that issue:(i) The Police recognised certain litigation risks in the forfeitureproceeding. First, the only offending for which Mr Li had beenconvicted was one count of obtaining by deception, and he wassentenced on the basis that he received only $3,000 for supplying onefalse diploma. The case advanced by the Police relied largely oninferential reasoning — the much larger sum of $1,855,136.64 paid intobank accounts operated by Mr Li and or Ms Wang from unknownsources was likely the proceeds of further fraudulent offending.However, the Commissioner accepted that, beyond an inference fromthe one conviction and the sums received into the bank accounts, "therewas little to support this contention".(ii) The parties considered that any application for relief by Ms Wang onthe grounds of undue hardship under s 67 of the CPRA was likely to besuccessful. She would probably be considered as an innocent party,ignorant of her husband's offending.(iii) In settling upon a figure of $575,000, the Police were mindful of thefact that the pool of property available for settlement was limited to$885,000, and that it appeared to be accepted that Mr Li owedoutstanding tax (likely to be between $778,883.98 (the Police expert'sfigure) and $490,260.33 (Mr Li's figure)).(iv) In agreeing to the settlement at $575,000, the Police were also mindfulthat a settlement at that sum would allow Mr Li and Ms Wang to retainthe family home.(v) Mr Li recognised that he also had certain litigation risks. In particular"$1,855,136.64 in income was received by bank accounts controlled byMr Li, which he did not declare to Inland Revenue".(vi) The proposed settlement would also bring finality for the parties, andsave substantial ongoing costs. It would provide security and certaintyfor Ms Wang and her young child.[12] Paragraph 2.10 of the Settlement Agreement provided:2.10 In summary, [the Police rely] on both fraudulent offending and taxevasion as the significant criminal activity from which Mr Li hasunlawfully benefited. Mr Li disputes these allegations, however forthe purposes of settlement acknowledges that funds would be owedfor the tax identified by the forensic accountant [an accountantretained by Mr Li] (but not for tax evasion) and for the benefit hereceived from the original offending, being $3,000. The [Police note]that [the Commissioner] is not, and has never been, a party to theseproceedings. The parties' proposed settlement has no bearing on anyaction that may be taken by [the Commissioner] in the future, and howInland Revenue may treat the present settlement, if approved, wouldultimately be a matter for it.Mr Li's accountant's report and the Voluntary Disclosure[13] By letter from his solicitors dated 15 May 2017 (the Voluntary Disclosure),Mr Li and AA elected to make Voluntary Disclosure to the Commissioner in respectof the unpaid tax. The Voluntary Disclosure was made with the assistance of a forensicaccountant, Ms Sara Weaver, who had reviewed materials supplied to her by AA andMr Li and made certain calculations. Parts of a report by Ms Weaver were reproducedin the Voluntary Disclosure.[14] The purpose of the Voluntary Disclosure appears to have been to avoidprosecution for tax evasion (under the Commissioner's policies relating to thecircumstances in which criminal proceedings may be commenced), and to obtain areduction in the shortfall penalties that would otherwise have been applied in respectof the unpaid tax.[15] The Voluntary Disclosure advised that AA provides accounting and taxationservices, together with skilled job training services (including accounting training,coffee training, English courses, tuition services, assistance with school enrolment,and various other services). Many of AA's clients were overseas immigrants, mostbeing from India or China.[16] The Voluntary Disclosure advised that AA and Mr Li operated various bankaccounts which cash funds were deposited into and "transferred to and from". AA andMr Li accepted that all of the businesses' income and expenses had not been recordedin financial statements, and had therefore not been included in tax returns.[17] Ms Weaver noted that Mr Li "operated a business through [AA] providing [arange of services]". She said that Mr Li operated numerous bank accounts throughwhich he conducted his business activities, and numerous deposits were made into the"private bank accounts" of Mr Li and his family members and also into AA's bankaccounts. Those transactions that involved the use of AA's bank accounts wereincluded in the income tax returns for AA, but deposits into the private bank accountsof Mr Li and his family do not appear to have been included in the income tax returnsfor either AA or Mr Li. From her analysis of the source documents, Ms Weaverconcluded that it was highly likely that Mr Li generated substantial (undeclared)assessable income from business activities during the 2009 to 2015 years.[18] Ms Weaver described Mr Li's accounting practices as disorganised at best. Shenoted that it was conceivable that the majority of the receipts were deposited or usedfor legitimate business expenditure, and that a portion of these funds may have beenretained for personal use. However, she considered that those factors would be withinthe acceptable margin of error, and would not be material. She relied on the depositsinto Mr Li's bank accounts as a reasonable representation of (taxable) cash received,concluding that $1,839,736.64 of the deposits should be considered as businessincome. That income was not included in either Mr Li's or AA's income tax returns.[19] Ms Weaver then looked at the issue of allowable deductions, and concludedthat a total of $526,231.37, being transactions in private bank accounts which relatedto business expenses incurred in the operation of Mr Li's business activities, weredeductible. She noted that relevant withdrawals from private bank accounts had notbeen claimed in the financial statements or tax returns of AA, and on that basis sheconsidered Mr Li had incurred deductible expenditure that had not been claimed.[20] A complete copy of Ms Weaver's report was not provided, but it appears thatthe total unpaid tax identified by her for the years 2009 to 2015, for both Mr Li andAA, would have been the $490,260.33 referred to as Mr Li's expert's figure in theSettlement Agreement.[21] There is a dispute between the parties as to whether it has been sufficientlyproved in this case that the Police had either Ms Weaver's report or the VoluntaryDisclosure when the Settlement Agreement was made. Mr Kilian relied on acommunication dated 28 June 2017 from counsel for the Police, received by him ascounsel acting in the assets forfeiture proceeding, as support for an inference that thePolice did have this information. The relevant email was expressed to be written on awithout prejudice basis save as to costs. Mr Angelson objected to the production ofthe document on the grounds that the communication remained subject to the withoutprejudice privilege, and that privilege has not been waived by the Police or Ms Wang.I reserved the question of the admissibility of this document, to be dealt with in thisjudgment.Events after the Court's approval of the Settlement Agreement[22] The agreed settlement amount was paid to the Official Assignee on or about21 August 2017, and on 3 October 2017 the Commissioner was advised that paymenthad been made in accordance with the approved asset forfeiture agreement. At thatstage, the Commissioner had still not finalised the assessments for AA and Mr Li. TheCommissioner did not complete her review of the Voluntary Disclosure until July2018, and she then issued assessments for the full amount of tax owing as against AA.The amount was in fact lower than that contemplated in the Voluntary Disclosure, dueto further information being provided to the Commissioner in the interim. The resultwas an agreement to amend the assessment of tax to $211,894.59, including penaltiesand interest.[23] Assessments were also made by the Commissioner against Mr Li personally,and the Commissioner is attempting to recover the amount assessed from Mr Li. Forhis part, Mr Li has maintained that the agreed asset forfeiture provided in theSettlement Agreement and approved by the Court means that his personal tax liabilitywas also then discharged.AA's application to set aside the statutory demand[24] AA contends that it has paid the amount of tax owing, and that there are noamounts due. It also contends that it has a good counterclaim against theCommissioner, on the basis that the Commissioner was aware of the negotiationsbetween AA and the Police, and that the Police sought settlement for outstanding taxas well as for unrelated matters. It says that the Commissioner is seeking to obtain anunjust enrichment, to which she is not entitled.The Commissioner's opposition[25] The Commissioner relies on the Agreed Assessment as an acknowledgment byAA that the amended amounts for which it was assessed are due and payable by it.She says that under s 109 of the TAA the Agreed Assessment cannot now bechallenged.[26] The Commissioner also says that AA has no available counterclaim, and thatthere is no other basis on which the statutory demand could be set aside.Counsel's submissionsAA[27] Mr Kilian submitted that the debt owed to the Commissioner has been paid infull. Alternatively, Mr Li paid money to the Crown in lieu of the tax debt owed, andhe requested that those funds be used to pay AA's tax debt. In either circumstance, theCrown is in possession of funds in excess of the debt that is due for tax.[28] The payment made to the Crown under the Settlement Agreement was not aprofit forfeiture, but payment of a determined tax liability (without an assessmenthaving been concluded, despite the Voluntary Disclosure having been made). As thedetermination referred to by the Crown in the Settlement Agreement related to theVoluntary Disclosure made by both Mr Li and AA, the asset forfeiture should beregarded as having discharged the tax liabilities of both Mr Li and AA. The Policewere aware that the funds seized represented the extent of any funds available toMr Li, and taking the money for any other reason (ie apart from meeting the taxliabilities) would have resulted in Mr Li and AA not having funds to pay their taxliabilities to the Commissioner.[29] The Commissioner should not be allowed to differentiate between separateCrown entities for the purpose of her contention that AA's tax debt has not been paid.Whether the tax payment has been paid to the Official Assignee to be held on behalfof the Secretary for Justice, or whether it has been paid to the Commissioner, shouldnot matter.[30] The information provided by Ms Weaver was not questioned by theCommissioner, and the evidence supports an inference that the Voluntary Disclosurewas made available to the Police.[31] On the interpretation of the Settlement Agreement, Mr Kilian submitted that itis significant that, in July 2017 when the Settlement Agreement was signed, theCommissioner had not yet finalised her assessments for AA and Mr Li, despite havingreceived the Voluntary Disclosure. It was for that reason that Crown counsel (onbehalf of the Police) could not refer to assessments of tax in the Settlement Agreement— no such assessments then existed. Nor could the Police purport to recover the taxdebt or debts on behalf of the Commissioner. The only party empowered to collectGST or income tax is the Commissioner. It is that combination of circumstances thatled to cl 2.10 being inserted in the Settlement Agreement.[32] Mr Kilian also submitted that cl 2.10 must be read in conjunction with cl 5.1(d)and (g) of the Settlement Agreement. Clause 5.1(d) stated:In settling upon a figure of $575,000, [the Police] were mindful that the poolof available property was limited to $885,000 and that it appeared to beaccepted that Mr Li owed outstanding tax, albeit the sum of that was indispute: $778,883.98 according to the [Police's expert] and $490,260.33according to Mr Li's expert.[33] Clause 5.1(h) stated:the absence of a profit forfeiture order against Mr Li and Ms Wang will relievethem of a residual debt to the Crown in the future. This settlement will bringa degree of finality to the matter.[34] Mr Kilian contended that AA has shown that there exists a substantial disputeover AA's liability for the amount demanded.The Commissioner[35] Mr Angelson accepted that the only issue is whether the tax claimed in thestatutory demand has been paid. He pointed out first that neither the Commissionernor AA were parties to the Settlement Agreement. And while the SettlementAgreement did involve the forfeiture of assets that were, in part, the subject of taxevasion, the only tax liability referred to in the Settlement Agreement was that of Mr Li— AA's separate tax liability was not addressed. Nor were the assets forfeited to theCrown under the Settlement Agreement assets of AA; they were said to be assets ofMr Li and/or Ms Wang. AA made no claim to legal or beneficial ownership over anyof the forfeited assets, notwithstanding that it had the opportunity to make such a claimand be heard on it.2[36] The evidence shows that AA did have its own bank account, and financialstatements were prepared for it. It did file income tax and GST returns, although theyfailed to properly report AA's income. AA's tax liability was separate from Mr Li'stax liability, and a distinct tax shortfall arose in relation to AA, for both GST andincome tax. This separate tax liability of AA was not addressed in the SettlementAgreement.[37] AA was not the only entity through which Mr Li traded. He also operated thecompany NZ Student Services Ltd, and there appears to have been no clear delineationbetween the business activities of the two companies, and Mr Li personally. The factthat Mr Li dealt almost exclusively in cash meant that Ms Weaver could only estimatethe amount of legitimate business income and expenditure.[38] Although Mr Li was only convicted on the basis he received one payment of$3,000 for the offending, there is an available inference that he derived quite a lot morefrom the scheme. There would have been a number of steps necessary to put such ascheme in place, so it is unlikely that the entire fraudulent scheme would have been a2 Referring to ss 23, 28(1)(c), and 49(d) of the Criminal Proceeds (Recovery) Act 2009."one-off". All of the cash and other deposits totalling $1,855,136.64 were tainted byMr Li's fraud, and once that property became tainted, the entire amount became liablefor forfeiture.[39] Mr Angelson next submitted that, once assets are forfeited to the Crown underthe CPRA, they come within the custody of the Official Assignee. Under s 81 of theCPRA, the Official Assignee does not assume any liabilities in respect of the forfeitedproperty. Nor does the CPRA extinguish tax liabilities in respect of restrainedproperty. Those liabilities remain with the owner of the restrained property (in thiscase, Mr Li and/or Ms Wang), and there is no mechanism within the tax legislation torecognise the simple forfeiture of criminal proceeds by itself as a credit towards, or inpayment of, a tax liability. In those cases under the CPRA where a respondent's unpaidtax has been provided for, the taxes were either paid under the relevant settlement deeditself, or through express agreement with the Inland Revenue Department.[40] Mr Angelson referred to s 28 of the CPRA, which provides a mechanism forcertain liabilities to be paid out of restrained assets. One such liability is "any specifieddebt incurred by the respondent in good faith". Tax liabilities resulting from legitimatebusiness activities would have come within that expression. The Commissioner doesnot know why no provision was made for the payment of taxes out of the restrainedfunds, using s 28 of the CPRA.[41] As AA's debt to the Commissioner for the outstanding tax was not establisheduntil the tax assessments were finalised between AA and the Commissioner on orabout 7 August 2018, the forfeiture of assets in August 2017 could not have satisfieda tax liability that did not crystallise until approximately a year later.[42] Mr Angelson also referred to AA's ongoing liability for interest ($62,748.56 asat 31 July 2018, and $69,317 as at 1 March 2019).[43] The Commissioner says that her position at all times in the course of thenegotiations with Mr Li (on behalf of himself and AA) was that she was not a partyto, or bound by the Settlement Agreement.[44] Mr Angelson referred to a number of authorities under the CPRA whereprovision has been made for the discharge of the respondent's tax liabilities from therespondent's assets (including in cases where the significant criminal offending reliedupon was or included tax evasion).3[45] In answer to questions put by the Court at the hearing, Mr Angelson acceptedthat the difference between the situations that were in issue in Police v McCarthy,Police v Investments Ltd, and Police v Gong, and the present case, is that in the othercases there was specific reference or acknowledgment that the forfeited funds wouldbe applied in part to pay a tax liability owed to the Commissioner. Mr Angelsonsubmitted that in this case there was no such express reference; on the contrary, theSettlement Agreement was said to have no bearing on what the Commissioner mightor might not do with regard to tax assessments. Mr Angelson submitted that the effectwas to leave it to the Commissioner to decide whether some of the unpaid tax(reflected in the assets forfeited) would or would not be credited to Mr Li's or AA'sunpaid tax liabilities when they were assessed.DISCUSSION AND CONCLUSIONSApplications to set aside statutory demands — general principles[46] In my judgment in Eagle Flight Training Ltd v Aerospace Invest Pte Ltd Isummarised the relevant principles as follows.4[47] A statutory demand is a demand, made in accordance with s 289 of the Act, bya creditor in respect of a debt owing by a company to the creditor.5 The statutorydemand must be in respect of a debt that is due and is not less than the prescribedamount (currently $1,000), and it must require the company to pay the debt, or enterinto a compromise or otherwise compound with the creditor, or give a charge over itsproperty to secured payment, to the reasonable satisfaction of the creditor, within15 working days of the date of service of the demand.6 If a company fails to comply3 Commissioner of Police v McCarthy [2013] NZHC 3257, Commissioner of Police v InvestmentsLtd [2017] NZHC 284, and Commissioner of Police v Gong [2018] NZHC 1859.4 Eagle Flight Training Ltd v Aerospace Invest Pte Ltd [2018] NZHC 966.5 Companies Act 1993, s 289(1).6 Section 289(2).with a statutory demand, that failure provides prima facie proof that the company isunable to pay its debts – a ground on which the creditor may apply to put the companyinto liquidation.7[48] Section 290 of the Act materially provides:290 Court may set aside statutory demand(1) The court may, on the application of the company, set aside a statutorydemand.(4) The court may grant an application to set aside a statutory demand ifit is satisfied that—(a) there is a substantial dispute whether or not the debt is owingor is due; or(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less theamount of the counterclaim, set-off, or cross-demand is lessthan the prescribed amount; or(c) the demand ought to be set aside on other grounds.(7) An order under this section may be made subject to conditions.[49] Section 291 of the Act materially provides:291 Additional powers of court on application to set aside statutorydemand(1) If, on the hearing of an application under section 290, the court issatisfied that there is a debt due by the company to the creditor that isnot the subject of a substantial dispute, or is not subject to acounterclaim, set-off, or cross-demand, the court may—(a) order the company to pay the debt within a specified periodand that, in default of payment, the creditor may make anapplication to put the company into liquidation; or(b) dismiss the application and forthwith make an order undersection 241(4) putting the company into liquidation,—[on the ground that the company is unable to pay its debts.]7 Sections 287(a) and 241(4)(a).(2) For the purposes of the hearing of an application to put the companyinto liquidation pursuant to an order made under subsection (1)(a), thecompany is presumed to be unable to pay its debts if it failed to paythe debt within the specified period.[50] Under s 290(4)(a), the onus is on the applicant for an order setting aside astatutory demand to show that there is a genuine and substantial dispute as to theexistence of the debt. The dispute must be real and not fanciful or insubstantial; theapplicant must show a fairly arguable basis upon which it is not liable for the amountclaimed. The mere assertion that a dispute exists is not sufficient. Under s 290(4)(b),an applicant must establish that any counterclaim or cross-demand is reasonablyarguable in all the circumstances. The obligation is not to prove the actual claim; suchan obligation would amount to the dispute itself being tried on the application.8[51] Under s 290(4)(c), which is concerned with setting aside on "other" grounds,the Court will consider whether the creditor's prima facie entitlement to liquidate thecompany is outweighed by some other factor or factors making it plainly unjust forliquidation to ensue. The ground advanced by the debtor company must be sufficientlycompelling to overcome the general policy of the Act (that insolvent companies shouldnormally be put into liquidation).9 In Commissioner of Inland Revenue v ChesterTrustee Services Ltd, Baragwanath J considered that s 290(4)(c) should only be usedin cases which "clearly justify departure" from the fundamental principle thatinsolvency should bring the end of the company's existence.10[52] If an application to set aside a statutory demand is made on the basis that thedebt is disputed, proof of solvency is not determinative but will support the applicant'scase that the dispute is genuine.118 Linda Howes & Others Brookers Company and Securities Law (looseleaf ed, Brookers), at [CA290.02], citing North Harbour Equine Hospital Ltd v Little HC Auckland CIV-2006-404-7585,19 February 2007.9 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [3]per Tipping J, referred to by the Court of Appeal in 21st Century Investments Ltd v ANZ NationalBank Ltd [2011] NZCA 548 at [47].10 Commissioner of Inland Revenue v Chester Trustee Services Ltd, above n 9, at [48].11 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].[53] The Court is entitled to allow statutory demands to stand in reduced amountsrepresenting items not open to dispute.12Relevant provisions of the CPRA[54] Section 3 of the CPRA provides that the primary purpose of the CPRA is toestablish a regime for the forfeiture of property —(a) that has been derived directly or indirectly from significant criminalactivities; or(b) that represents the value of a person's unlawfully derived income.[55] The purposes of the criminal proceeds and instruments forfeiture regimeestablished by the CPRA include eliminating the chance for persons to profit fromundertaking or being associated with significant criminal activity, deterring significantcriminal activity, and reducing the ability of criminals and persons associated withcrime or significant criminal activity to continue or expand criminal enterprise.13[56] In general terms, the CPRA provides for the restraint and forfeiture of propertyderived as a result of significant criminal activity, without the need for a conviction.14It is common ground that the definition of "significant criminal activity" in the CPRAcatches tax evasion.15[57] The CPRA generally provides for civil proceedings for restraining orders, andorders for the forfeiture of assets and/or profits. The person empowered to apply forsuch orders is the Police, and any application for a civil forfeiture order must be madein this Court.16[58] Sections 22 and 28 of the CPRA are concerned with applications for restrainingorders, and conditions on the making of a restraining order. Under s 23, the parties12 United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [46]; 21st Century InvestmentsLtd v ANZ National Bank [2011] NZCA 548 at [39].13 Criminal Proceeds (Recovery) Act 2009, s 3(2).14 Section 4(1)(a).15 Section 6.16 Sections 43 and 44.entitled to appear and adduce evidence at the hearing of an application for a restrainingorder are the applicant, the Official Assignee, and any person who holds an interest inthe proposed restrained property (including, if applicable, the respondent).[59] Section 28(1) of the CPRA materially provides that the Court may impose suchconditions on the making of a restraining order as it thinks fit, including conditionsthat provide for the following to be met out of a respondent's restrained property:(c) "the payment of any specified debt incurred by the respondent in goodfaith";(d) any other expenses allowed by the Court.[60] Under s 49 of the CPRA, an application by the Police for an assets forfeitureorder must specify the particular property that the Police allege is "tainted property".17[61] The Police must state in the application for an assets forfeiture order thegrounds for belief that the property is "tainted property". The Police must also nameany other persons who, to the knowledge of the Police, have an interest in the propertyto which the application relates.[62] Section 50 of the CPRA provides that if, on an application for an assetsforfeiture order, the Court is satisfied on the balance of probabilities that specificproperty is tainted property, the Court must make an assets forfeiture order in respectof that specific property. The forfeited property:(a) vests in the Crown absolutely; and(b) is in the custody and control of the Official Assignee.17 "Tainted property" is defined in s 5 of the Criminal Proceeds (Recovery) Act as any property thathas, wholly or in part, been —(i) acquired as a result of significant criminal activity; or(ii) directly or indirectly derived from significant criminal activity."Tainted property" will include any property that has been acquired as the result of, or directly orindirectly derived from, more than one activity if at least one of those activities is a significantcriminal activity.[63] Section 95 of the CPRA deals with Court approval of settlements. Section 95provides:95 High Court must approve settlement between Commissioner andother party(1) The Commissioner may enter into a settlement with any person as tothe property or any sum of money to be forfeited to the Crown.(2) A settlement does not bind the parties unless the High Court approvesit.(3) The High Court must approve the settlement if it is satisfied that it isconsistent with—(a) the purposes of this Act; and(b) the overall interests of justice.The application of the law in this case[64] First, I do not think it is necessary to rule on the admissibility of the withoutprejudice letter dated 28 June 2017 sent by counsel for the Police to Mr Kilian. It isapparent from the Settlement Agreement that both the Police and Mr Li had retainedexperts to provide reports on the extent of the tax that had been evaded, and theSettlement Agreement states in a footnote that Ms Weaver provided an affidavit dated5 May 2017 in the proceeding under the CPRA. It seems improbable that Ms Weaver'sevidence in the CPRA proceeding, and the subsequent negotiations which must havetaken place between the parties to the CPRA proceeding, would not have involveddisclosure of essentially the same material that formed the basis of Ms Weaver's reportfor the Voluntary Disclosure. I therefore consider it more likely than not that, beforethe Settlement Agreement was signed, the Police were well aware that at least asubstantial part of the deposits into the bank accounts totalling $1,855,136.64 reflectedrevenue derived substantially by AA.[65] But I do not think the Police needed to be concerned with the issue of whichparty was the liable taxpayer (Mr Li or AA). The assets which were the subject of theapplication for a forfeiture order (the home and the cash) were in the possession ofMr Li and Ms Wang, and those assets would have been "tainted" for the purposes ofthe definition of "tainted property" in the CPRA if they were either directly orindirectly derived from significant criminal activity. The CPRA provides at s 5(2) thata reference to a person "deriving" property includes property derived by anotherperson "at the request or direction" of the first person. Any tax evasion by AA waspresumably carried out at the request or direction of Mr Li, and for that reason it wouldnot have mattered to the Police at the time the Settlement Agreement was entered intowhether the assets in question were tainted because Mr Li was guilty of the tax evasionthat constituted the "significant criminal activity", or whether the guilty party was AAacting at Mr Li's request or direction. Either way, the assets would be tainted, and theywere owned by Mr Li and/or Ms Wang.[66] I have not been provided with any of the evidence given in the CPRAproceeding, and it has not been explained to me how the home was, wholly or in part,acquired or derived directly or indirectly from one or both of the significant criminalactivities relied upon by the Police (or from one or more of those activities combinedwith legitimate activities), and thus qualified as "tainted property". Nevertheless,restraining orders had been made by Keane J in respect of the home as well as thecash, and the Court would have been required to be satisfied that there were reasonablegrounds to believe that the home was tainted property before any restraining ordercould be made in respect of it.18 And Woolford J would have satisfied himself, asrequired by s 95 of the CPRA, that the proposed settlement was consistent with boththe purposes of the CPRA and the overall interests of justice. I will proceed on thebasis that there was evidence that both the home and the remaining cash were taintedproperty under the CPRA.[67] I accept that AA has shown that it has a genuine and substantial argument thatthe amounts paid under the Settlement Agreement reflected, and would have beensufficient to extinguish, the relevant tax liability of AA. The total amount paid underthe Settlement Agreement was $575,000, and under the Agreed Assessment AA's taxliability was assessed, roughly a year after the Settlement Agreement, at onlyapproximately $211,000. Mr Angelson pointed out that the parties' respective taxpositions before the Settlement Agreement was made in the CPRA proceeding wouldnot have taken account of shortfall penalties, but I did not understand him to arguethat, if the $575,000 forfeited by Mr Li and Ms Wang to the Crown had been paid to18 Criminal Proceeds (Recovery) Act 2009, s 24(1).the Commissioner, that would not have been sufficient to extinguish AA's tax debt,together with shortfall penalties and interest, at the time of payment. Of course noassessment had been made at that point, and Mr Kilian submitted that that is thesubstantial reason why no provision was made in the Settlement Agreement for the(evaded) tax to be paid by the Official Assignee to the Commissioner.[68] I also accept AA's submission that the agreed forfeiture payments wereprobably calculated almost entirely on the basis that the relevant "significant criminalactivity" was tax evasion. The Settlement Agreement was reached not long before theforfeiture application was due to be heard at a three day hearing, and numerousaffidavits had been filed. Subject to any cross-examination, all of the evidence wasin. Against that background, the Police acknowledged in the Settlement Agreementthat Mr Li was only sentenced on the basis of one count of obtaining by deception,and the amount proved to have been received by him was only $3,000. The Policesubmitted that there must have been further fraudulent offending, but they acceptedthat there was "little to support this contention".[69] The eventual settlement figure of $575,000 appears to have reflected acompromise between the parties' competing positions on the amount of tax evaded($778,883.98 according to the Police; $490,260.33 according to Mr Li), also takingaccount of the limited value of the assets available for forfeiture ($885,000) and whatwas perceived as a likelihood that any hardship application by Ms Wang wouldsucceed.[70] For present purposes, I conclude that it is arguable for AA that an amountequivalent to the tax it was later assessed to have failed to declare and pay, wasincluded within the $575,000 paid by Mr Li and Ms Wang to the Official Assignee.[71] However, that conclusion only takes AA part of the way. The first, andsubstantial, problem for AA is that it did not do what parties appear to have done inother cases where settlements have been reached in proceedings under the CPRA inwhich the significant criminal activity was tax evasion, namely ensure that theirsettlement agreements provided for the forfeited assets to be applied to pay theoutstanding tax. It appears that the Commissioner was not involved in the CPRAproceeding at all, notwithstanding that an application could have been made unders 45(3) of the CPRA for an order directing that the Commissioner (and, for that matterAA) be served with the forfeiture application. And the parties expressly recorded thatthe Settlement Agreement would have no bearing on any action the Commissionermight take in the future, or on how the Commissioner might treat the settlement, ifapproved.19 On the face of it, Mr Angelson appears to have been correct when hesubmitted that the effect of cl 2.10 was to leave it to the Commissioner to decidewhether some of the unpaid tax (reflected in the assets forfeited) would or would notbe credited to Mr Li's or AA's unpaid tax liabilities when they were assessed.[72] It is not clear why the Commissioner elected to pursue the tax payable underthe Agreed Assessment without apparent regard to the payments earlier made by Mr Liand Ms Wang pursuant to the Settlement Agreement. In a letter to AA's solicitorsdated 9 October 2017 the IRD investigator had said that the Commissioner would"bear in mind the proceeds of crime recovery payment to [the Police] whenconsidering treatment of amounts that may be owed by your clients followingcompletion of all reassessments". The letter did go on to say that the Commissionergave no undertaking of what the outcome of the "bearing in mind" might be, andpointed out that the Commissioner was not a party to the Settlement Agreement.Given that early indication of a possible willingness to consider a credit for theforfeiture payments, one might have expected the Commissioner to have providedsome evidence of the process by which she apparently reached the view that thepayments made under the Settlement Agreement should be disregarded. But noevidence of that sort was provided.20[73] The Commissioner's view as expressed in counsel's submissions appears tohave been that her reasons for declining to give AA any "credit" for the payments madeunder the Settlement Agreement are not relevant. Mr Angelson submitted that thereis no mechanism in the tax legislation for the Commissioner to recognise the simple19 Settlement Agreement, cl 2.10.20 The communications between the Commissioner's staff and Mr Li or his agent Mr Lawson whichwere produced appear to show that those staff members were concerned solely with completingthe assessments of tax and shortfall penalties. Once those assessments were made, the matterwould be passed to "Collections", with a copy of the Settlement Agreement, for further decisionsto be made. The evidence does not show why the Collections staff concluded that no credit shouldbe given for the money recovered by the Crown under the Settlement Agreement.forfeiture of criminal proceeds by itself as a credit towards, or in payment of, a taxliability. He also submitted that it is contrary to the scheme and purpose of the CPRAto regard the confiscation of criminal proceeds as satisfaction of a liability arisingthrough legitimate business activities. Thirdly, he submitted that the statutory demandwas premised on tax assessments made by agreement between AA and theCommissioner on or about 7 August 2018, when the Agreed Assessment was signed.The forfeiture of the criminal proceeds in 2017 could not have satisfied a tax liabilitythat did not crystallise until August 2018. I return to those arguments below.[74] The second problem for AA is the Agreed Assessment. The AgreedAssessment set out details of the total of $211,894.59 agreed for the outstandingincome tax, GST, and shortfall penalties, and then provided:Due date of amended taxesThe due date for payment will be 35 days for GST assessment(s) and twomonths for all non-GST tax types from the date of the amended assessmentand will be detailed on Statement(s) of Account. If payment is not made bythe new date, late payment penalties may apply.[75] Mr Angelson submitted that in signing the Agreed Assessment for AA, Mr Liacknowledged the dates the taxes were due. There was no suggestion that the tax hadalready been paid.[76] The part of the Agreed Assessment quoted at paragraph [74] above appears tohave been part of a standard form of agreement, and in the communications whichpreceded it Mr Li and AA do appear to have maintained the position that the paymentsmade under the Settlement Agreement had effectively already discharged the taxliability for which AA would be formally assessed for each of the relevant years. Also,the process adopted by the Commissioner's staff does appear to have contemplateddeferment of consideration of the effect of the Settlement Agreement payments untilafter the assessments had been completed.21 In those circumstances I think it arguable21 For example, a record of a contact with Mr Li on 25 July 2018 which the Commissioner producedstates:25/7/2018 Mr Li confirmed receipt of the email and AAF forms. He is reviewingthem. He asked what he should do. I said that if he agrees with adjs and penaltieshe should sign and return them. He said what should he do about double paymentie payment to the court. Can he get the money from them. I said I do not know buthe should approach the court. I said that my job was make the correct assessmentsfor AA that the effect of the Agreed Assessment was to settle the amounts of taxpayable for each of the relevant periods, leaving open the question of whether that taxmay have already been paid.[77] If there is no mechanism in the tax legislation for the Commissioner torecognise the simple forfeiture of criminal proceeds by itself as a credit towards a taxliability, as Mr Angelson submitted, it is not at all clear how the Commissioner'sinvestigator felt able to advise AA's solicitors that the Commissioner would "bear inmind" the payments made under the Settlement Agreement when assessing the tax.Nor is it obvious to me that it would have been outside the scope and purpose of theCPRA to regard the Court's "confiscation" of criminal proceeds as satisfaction of aliability arising through legitimate business activities, when the "criminal proceeds"in question (the unpaid tax) might correspond precisely to that very same liability.Settlements in other cases involving tax evasion have made provision for payment ofthe outstanding tax to the Commissioner.[78] I do not think there is anything in Mr Angelson's submission that paymentsmade in 2017 under the Settlement Agreement could not have satisfied a tax liabilitythat did not crystallise until August 2018. The issue is not over the timing of thepayments made under the Settlement Agreement, but whether the payments to theCrown (whenever made) were and are available to be applied towards AA's present orfuture tax liabilities.[79] I accept Mr Angelson's submission that nothing in the CPRA would haverequired the Official Assignee to hold the money paid under the Settlement Agreementon trust for the Commissioner (notwithstanding that a principal reason the bulk of themoney was "tainted" at all was presumably that the same money had been wrongfullywithheld from the Commissioner). The Official Assignee was obliged, after meetingcosts (and certain other payments if applicable) to pay the balance of the forfeitedassets to the Crown.22 But Mr Kilian's argument, as I understood it, was that eitherand apply the correct [shortfall penalties] if any. I would then pass case toCollections who will then consider repayment and how the court payment agreementaffects IR. They can only do this when assessments raised and any applic penaltiesimposed. He said he will consider whether approaching Mr Kilian again.22 Criminal Proceeds (Recovery) Act 2009, s 82(1)(d).(i) payment to the Crown was sufficient to discharge the tax liability, or (ii) the Crown(not the Official Assignee) is holding the money equivalent to the tax liabilities on atrust or trusts for the Commissioner, and AA has directed the Crown to pay the amountof its tax liability to the Commissioner.[80] It is doubtful that AA has met the standard of proof normally required to setaside a statutory demand (showing that there is a genuine and substantial dispute overthe existence of the debt), but a concern remains that the Commissioner's positioncould involve AA being required to pay the outstanding tax, including shortfallpenalties and interest, twice, and I doubt very much that was ever contemplated whenthe order was made approving the Settlement Agreement. Certainly cl 2.10 recordedthat the Commissioner was not bound by the Settlement Agreement, but did the Police,Mr Li or Woolford J really contemplate that Mr Li and/or AA might later be compelledto pay up to $778,883.98 to the Commissioner? Such an outcome would arguably beinconsistent with the apparent intention of the Settlement Agreement to allow Mr Liand Ms Wang to retain the family home, and to "provide security and certainty forMs Wang and her young child". It is also arguably inconsistent with the understandingexpressed in the Settlement Agreement that the property pool available for settlementwas $885,000. I accept that cl 2.10 left it to the Commissioner to decide how to treatthe payments made under the Settlement Agreement, but that may have representedno more than an acknowledgment by the Police that only the Commissioner couldfinally settle the amount of tax payable. It must be doubted that anyone thought theCommissioner would disregard the $575,000 CPRA forfeiture altogether.[81] Mr Angelson submitted that the Settlement Agreement was made with Mr Li,not AA, and that AA had separate and distinct tax liabilities. That may be so, but itappears that there was never a clear distinction between Mr Li and AA in the runningof the business. And the Settlement Agreement did not need to address the distinction— the starting point was that $1,855,136.14 had been received by Mr Li and Ms Wangand everyone appears to have accepted that, wherever the money came from, itrepresented taxable revenue that had not been declared. Whether that revenue wasderived by AA or Mr Li did not matter under the CPRA; either way, Mr Li andMs Wang were arguably in possession of tainted assets.[82] No doubt there will be CPRA cases where the respondent has obtained moneyfrom someone by criminal fraud, and that fraud is the "significant criminal activity"on which an asset forfeiture order is made. The money obtained by the fraud in sucha case will presumably be tainted and liable to forfeiture. The complainant in such acase might no longer have any "interest" in the money paid as a result of the fraud,and accordingly might not have participated in the CPRA proceeding. In thosecircumstances I do not think anyone would suggest that the complainant could not suethe fraudster for recovery of his or her money, and it would be no defence to such aclaim for the fraudster to say that the money had been paid (forfeited) to the Crownunder the CPRA. But what is different in this case is that the complainant (theCommissioner) is in substance a department of the Crown, and the Crown receivedsufficient money under the Settlement Agreement to cover the unpaid tax and penaltiesthereon.[83] I accept that there are other difficulties facing AA, including the fact that theCPRA is concerned with broader matters, such as deterring criminal behaviour byothers. It is not necessarily just concerned with the recovery of the proceeds ofcriminal activities. And subject to hardship considerations, all of a tainted asset willbe forfeited, even if a substantial part of the cost of its acquisition or maintenancecame from legitimate funds. But the elephant in the room remains, in the form of alikelihood that no-one involved with the Settlement Agreement expected that theCrown would receive the evaded tax twice, once via the Official Assignee and oncevia the Commissioner.[84] There is authority under s 290(4)(c) of the Act 23 that the subsection may beinvoked where the use of the statutory demand procedure amounts to the applicationof undue pressure by the creditor.24 I think that is the position here. People shouldnot ordinarily have to pay their taxes to the government twice, and if there is a seriousrisk that that would occur, as I think there is in this case, the issue should not in myview be determined in a summary way on an application such as this. That in my view23 I think the subsection is sufficiently invoked by the application, in particular by the contentionthat the Commissioner is seeking to obtain an unjust enrichment.24 Stewart's Cycle City Ltd (now known as Trafalgar Traders Ltd) v Sheppard Industries Ltd [2013]NZHC 256 at [9]; Paramoor Eleven Ltd v Pramb Wong Enterprises Ltd HC Auckland M1434/94,10 April 1995, at 14.provides a "sufficiently compelling" circumstance that it would be unjust to allow theCommissioner to proceed with a liquidation claim based on failure to comply with thestatutory demand.25Result[85] For all of those reasons, there will be an order setting aside the statutorydemand under s 290(4)(c) of the Act, conditional on AA filing and serving anappropriate proceeding in this Court within 15 working days, seeking such declaratoryor other relief as it may consider appropriate to vindicate its contention that the amountclaimed in the statutory demand should be deemed to have been paid or sufficientlysatisfied by AA (whether by the actual payments made pursuant to the SettlementAgreement, or by the subsequent direction given by AA to the Crown to pay theoutstanding tax to the Commissioner).[86] Although AA has been successful with its application, I am of the view that AAand Mr Li have largely brought the problems on themselves, and the interests of justicewill be sufficiently met if costs are left to lie where they fall. I make no order for costs.Associate Judge Smith25 Commissioner of Inland Revenue v Chester Trustee Services Ltd, above n 9, at [3].