ACCENT MANAGEMENT LIMITED v COMMISSIONER OF INLAND REVENUE [2013] NZHC 3197 [2��December 2013]

ACCENT MANAGEMENT LIMITED v COMMISSIONER OF INLAND REVENUE [2013] NZHC 3197 [2 December 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-2430[2013] NZHC 3197IN THE MATTER of Section 290 Companies Act 1993 andan Application for an Order that StatutoryDemand issued pursuant to Section 289 ofthe Companies Act 1993 be set asideBETWEEN ACCENT MANAGEMENT LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 27 November 2013Counsel: GA Muir for plaintiffsR Roff and SJ Leslie for defendantJudgment: 2 December 2013JUDGMENT OF ASSOCIATE JUDGE FAIRE[on application to set aside statutory demand]Solicitors: Stainton Chellew, AucklandCrown Law, WellingtonIN THE MATTERCIV-2013-404-2431of Section 290 Companies Act 1993 andan Application for an Order that StatutoryDemand issued pursuant to Section 289 ofthe Companies Act 1993 be set asideBETWEEN LEXINGTON RESOURCES LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantJoint hearing[1] This judgment is given in respect of separate applications filed by Accent Management Ltd and Lexington Resources Ltd. Counsel were agreed that the issues were the same for both applications although the figures in the respective statutory demands are different. For that reason, the cases were heard together.The applications[2] Application is made by Accent Management Ltd in respect of a statutory demand dated 18 April 2013. In that statutory demand, demand is made by the Commissioner of Inland Revenue for payment of $3,250,265.74in respect of amounts owing under revenue acts for the 1998 tax year as set out in the attached statement of account.[3] Application is made by Lexington Resources Ltd in respect of a statutory demand also dated 18 April 2013. In that statutory demand, demand is again made by the Commissioner of Inland Revenue for payment of $2,115,039.48in respect of amounts owing under revenue acts for the 1997 tax year as set out in the attached statement of account.[4] The applications seek orders:(a) Declaring that the document purporting to be a statutory demand is not a statutory demand; or, in the alternative(b) Setting aside the statutory demand.The grounds advanced in support[5] The plaintiffs plead that:(a) There is a substantial dispute whether or not the debts are owing or are due and rely on s 290(4)(a) of the Companies Act 1993; and(b) The demands ought to be set aside on other grounds, in that in the circumstances of the case, serving the statutory demands is an abuse of process. This ground appears to rely on s 290(4)(c) of the Companies Act 1993.[6] Although it is not referred to in the applications, Mr Muir submitted that the specific grounds relied upon in support of the declarations sought, namely that the statutory demands are not statutory demands, are based on the definition of statutory demand contained in s 289 of the Companies Act 1993 and s 156 of the Tax Administration Act 1994.Origin of the debts[7] The plaintiffs were assessed for tax in respect of the 1997 year (Lexington Resources Ltd) and the 1998 year (Accent Management Ltd) by assessments issued by the defendant in March 2002 and March 2003 respectively. Lexington Resources Ltd had income for the income year 1997, which it claimed to off-set by the transfer of losses claimed by Accent Management Ltd in the same year. Its tax position for the 1997 year is dependent on the tax position of Accent Management Ltd.[8] The plaintiffs were parties to the "Trinity" tax scheme. The scheme has beensummarised in a number of judgments, including the Supreme Court decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue.1[9] The plaintiff companies and others challenged the defendant's assessmentsunder Part 8A of the Tax Administration Act 1994. The challenges were heard before Venning J. He dismissed the challenges.2 Venning J's judgment went onappeal to the Court of Appeal3 and then to the Supreme Court.4 The appeal courts upheld the decision dismissing the challenges.1 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 (with an addendum noted at [2009] 2 NZLR 358).2 Accent Management Ltd v Commissioner of Inland Revenue (2004) 22 NZTC 19,027 (HC).3 Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230, (2007) 23 NZTC 21,323.4 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 1.The statutory basis for the applications[10] The first ground relies on s 290(4)(a) of the Companies Act 1993. The relevant parts of s 290(4)(a) provide:290 Court may set aside statutory demand(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—(a) There is a substantial dispute whether or not the debt is owing or is due; orThe court's approach to an application to set aside a statutory demand based on the Companies Act 1993, s 290(4)(a)[11] The approach that the court adopts to an application that relies on the Companies Act 1993, s 290(4)(a) can be shortly stated. The court is required to determine whether there is a substantial dispute whether or not the debt is owing or is due. The applicant must show a fairly arguable basis upon which it is not liable for the amount claimed: Forge Holdings Ltd v Kearney Finance (NZ) Ltd5 andQueen City Residential Ltd v Patterson Co-Partners Architects.6 That formulation was approved in United Homes (1988) Ltd v Workman.7 Once that position is reached the statutory demand should be set aside and the dispute is then disposed of, if necessary, by other proceedings in the ordinary way.[12] The second ground relies on s 290(4)(c) of the Companies Act 1993. Section 290(4)(c) provides:290 Court may set aside statutory demand(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—(c) The demand ought to be set aside on other grounds.5 Forge Holdings Ltd v Kearney Finance (NZ) Ltd HC Christchurch M149/95, 20 June 1995 at 2.6 Queen City Residential Limited v Patterson Co-Partners Architects Ltd [1995] 3 NZLR 307 (HC).7 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at 451-452.The court's approach to an application to set aside a statutory demand based onthe Companies Act 1993, s 290(4)(c)[13] Before analysing the facts of this case it is appropriate that I refer to the examination of this question by the Court of Appeal in Commissioner of Inland Revenue v Chester Trustee Services Ltd:8That said, I agree with Baragwanath J that the general policy of the Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end comedown to a judgment by the Court as to whether the creditor's prima facieentitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue.[14] The Court of Appeal has given guidance in those situations where the company relies on an alleged ground of its solvency as a stand-alone ground for setting aside a statutory demand under the Companies Act 1993, s 290(4)(c). InAMC Construction Ltd v Frews Contracting Ltd the Court of Appeal said:9If there is no dispute as to the company's liability, so that para (a) or (b) [of s 290(4)] cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut thestatutory presumption, which applies "unless the contrary is proved". Theremight be circumstances in which it is appropriate to advance the inquiry as to solvency to the s 290 stage, but that would require some particular circumstance not present in this case.[15] The third ground relies on:(a) section 289(1) of the Companies Act 1993, which provides:8 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR (CA) 395 at [3].9 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].289 Statutory demand(1) A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.(b) section 156(1) of the Tax Administration Act 1994, which provides:156 Mode of recovery of unpaid tax(1) All unpaid tax shall be recoverable by the Commissioner on behalf of the Crown by suit in the Commissioner's official name.[16] In support of this ground, Mr Muir submitted that the Commissioner of Inland Revenue is not authorised to issue a statutory demand on behalf of the Crown to recover unpaid taxes.[17] Mr Muir submitted that the obligation to pay tax is imposed by Parliament. The power to recover taxes is delegated by Parliament pursuant to s 156 of the Tax Administration Act 1994. He submitted that the issue of a statutory demand was not authorised by s 156 because it was not suit. On that basis that the Commissioner of Inland Revenue did not acquire the status of a creditor for the purposes of s 289 of the Companies Act 1993 and therefore could not sign a statutory demand to recover unpaid taxes.[18] I reject Mr Muir's submissions. They can be answered quite shortly. Section6A of the Tax Administration Act 1994 charges the Commissioner of Inland Revenue with the care and management of taxes covered by the Inland Revenue acts. Also, it imposes an obligation on the Commissioner to collect the taxes. The Commissioner is therefore the creditor in respect of a taxpayer who has not paid his or her taxes.[19] Ms Roff referred me to Cates v Commissioner of Inland Revenue.10 That sets out how the position has been treated by the courts historically. In the matter of taxes, the Commissioner of Inland Revenue has been held to be the statutory agent of the Crown. Disputes about income tax are in truth disputes between the taxpayer10 Cates v Commissioner of Inland Revenue [1982] 1 NZLR 530 (CA), (1982) 5 NZTC 61,237and the Crown. The fact that the proceedings are commenced by or against the Commissioner of Inland Revenue is a matter of form not of substance.[20] The statutory demand is a document intended for use in legal proceedings.11Its purpose is to provide a foundation for one of the grounds that authorise the court to appoint a liquidator pursuant to s 241 of the Companies Act 1993, namely the company is unable to pay its debts. That arises specifically by the operation of ss s 241(4)(a) and 287 of the Companies Act 1993. Seen in this light, the statutory demand is simply a document for the purpose of a proceeding to be issued by the Commissioner in respect of a taxpayer who has not paid its taxes. It provides evidential support for one of the grounds which justify the court appointing a liquidator. It was not suggested that a proceeding issued under Part 31 of the High Court Rules seeking the placement of a company into liquidation and the appointment of a liquidator was not "suit" for the purposes of s 156 of the Tax Administration Act 1994. Clearly, it is suit.[21] The Commissioner of Inland Revenue in issuing a statutory demand is therefore simply taking one of the steps necessary to found the Part 31 proceeding. It is a step in that process and is therefore authorised by s 156 of the Tax Administration Act 1994. I therefore reject Mr Muir's submission that theCommissioner of Inland Revenue is not authorised to issue a statutory demand in respect of unpaid taxes.The opposition to the first and second grounds[22] The Commissioner of Inland Revenue's position on the first ground is thatthere is no substantial dispute because a substantial part of the debt contained in the statutory demands results from a tax assessment. Tax assessments are deemed to be correct in all respects and are prohibited from being disputed except in challenge proceedings.12[23] The assessments were disputed by the applicants in challenge proceedings. The assessments were upheld by the Supreme Court in Ben Nevis Forestry Ventures11 Delta Installations Ltd v Hamilton Joinery Ltd (2003) 16 PRNZ 814 (HC) at [21].12 Tax Administration Act 1994, s 109.Ltd v Commissioner of Inland Revenue.13 As a result, it is no longer open to the plaintiffs to claim that there is any substantial dispute in respect of the tax assessments.[24] Further, the remaining part of the debt claimed in the statutory demands results from a sealed cost order and cannot therefore be disputed.[25] The Commissioner's position on the second ground is that the circumstancesdo not justify the exercise of the additional jurisdiction given to the court under s 290(4)(c) of the Companies Act 1993. There is no abuse of process in the taking of a step to found a proceeding in respect of a debt about which there is no substantial dispute.Previous analysis of the plaintiffs' position by the courts[26] In two recent decisions I have delivered on applications to set aside statutory demands by participants in the Trinity Schemes I set out summaries of the proceedings that have been taken.14 I will not repeat those summaries but take them into account in considering these applications.The plaintiff companies' new proceedings[27] Mr Muir's primary submission was that the day of final determination ofliability in respect of the tax assessments has not yet arisen. That is because, he submitted, and I quote:any orders made by the hearing authority, to the extent they purport to find that the plaintiffs are charged with certain sums of tax and penalties in the 1997 and 1998 income years are invalid and/or unlawful, because they are repugnant statute law, and cannot be enforced, even presumptively. The final determination of the position awaits the outcome of proceedings filed before the statutory demands were issued.[28] The proceedings to which Mr Muir referred are the proceedings issued in this court under CIV-2013-404-6. They are referred to in the papers as "The Nullity Proceedings".13 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 1.14 Bristol Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 2819; Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 2818.[29] Those proceedings were examined by Priestley J in an application by the Commissioner pursuant to r 5.49.15 The Commissioner made application to dismiss the proceedings on the grounds that the court had no jurisdiction to hear and determine them.[30] The submissions made by Mr Muir repeat the case advanced on behalf of the plaintiffs before Priestley J.[31] In a judgment issued on 17 June 2013, Priestley J dismissed the proceedings. His Honour observed:[4] As will become apparent from the following brief narrative, the judgment of Venning J which the plaintiff seeks to set aside was unsuccessfully appealed to the Court of Appeal, and subsequently upheld by the Supreme Court. Thus the relief the plaintiff seeks 8½ years later, to have a judgment which has been scrutinised by twoappellate courts set aside and declared to be in excess of this Court'sjurisdiction, is startling. Indeed, in terms of any conventional analysis, the proposition is preposterous. This issue lies at the heartof the defendants' protest to jurisdiction.[18] In [45] of Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd16 the Supreme Court, in a pronouncement which is both binding and unassailable, stated that the High Court lacksjurisdiction to decide whether the Supreme Court's legal conclusionsin Ben Nevis were wrong. What Accent is endeavouring to do in this proceeding is raise, yet again, its argument based on subpart EH of the Income Tax Act 1994 as a platform to do precisely what the Supreme Court states cannot be done. The current attack is on thevalidity of Venning J's 2004 judgment, which Accent seeks both toset aside and have declared an invalidity on jurisdictional or statutory grounds.[32] His Honour concluded:[25] I am totally satisfied that the plaintiff's proceeding represents acollateral attack on not one but two judgments of the Supreme Court.[26] I see the statement of claim as an impermissible attack on Venning J's 2004 judgment. I am equally satisfied, on the basis ofthe Supreme Court's analysis in both its judgments, that this Court isfunctus officio and lacks jurisdiction to entertain the relief sought in15 Accent Management Ltd v Attorney-General [2013] NZHC 1447, (2013) 26 NZTC 21-020. (Citations omitted.)the plaintiff's statement of claim. Thus r 5.49(4)(a) is directlyengaged.[33] His Honour's judgment effectively puts to an end the nullity challenge, save for one issue. I was advised that the plaintiffs have appealed and although their appeal was out of time, the Commissioner of Inland Revenue has consented to an extension. Counsel informed me that the appeal was likely to be heard in the Court of Appeal, with a number of other appeals, on or about 19 March 2014.[34] I am not persuaded by the submissions made by Mr Muir today that I should adopt a different outcome than that which was reached by Priestley J for the purposes of these applications. Ultimately, the issue no doubt will be determined ifthe appeals are prosecuted. But, until then, his Honour's judgment stands.[35] Faced with his Honour's decision, Mr Muir submitted that I might follow one or other of the following courses:(a) Set aside the statutory demands on the basis that if the appeals fail, the defendant could issue new statutory demands;(b) Adjourn the current applications pending disposal of the appeals to the Court of Appeal. If I proceeded on this basis, it would mean that the order I made on 24 May 2013 extending the time for compliance pending further order of the court would still operate. That order was made in reliance on s 290(3) of the Companies Act 1993. The effect of proceeding on this basis, however, is that the Commissioner would not yet be able to rely on s 287 of the Companies Act 1993 to support the application to appoint a liquidator pursuant to s 241(4)(a) of the Companies Act 1993.[36] Whilst there is jurisdiction to proceed as Mr Muir has submitted in reliance on s 290(4)(c), I am not satisfied that the circumstances of this case, bearing in mind particularly the comments that have now been made as to the litigation approach adopted by the plaintiffs, that either of the suggestions advanced by Mr Muir would be justified in reliance on s 290(4)(c) of the Companies Act 1993.[37] Save for one further matter relating to the quantum of the sums claimed in the statutory demands, I conclude the applications must fail.Quantum[38] Mr Muir raised an issue as to the sums demanded which was a separate issue from his principal submission. Unfortunately, the figures given to me were not precise. One question raised was whether or not a GST credit available to Accent Management Ltd of $257,742.43 could be off-set against income in reliance on s 46(6) of the Goods and Services Tax Act 1985. Mr Fleming, in his affidavit of 2 October 2013 when this matter was raised, explains how the GST credits had been wrongly applied. He points out that it is a relatively simple matter to transfer those credits to the 1994 year, where there is a substantial debit for unpaid taxes owing. He has confirmed that the whole amount of the GST credit of $257,742.43 would be absorbed entirely by amounts outstanding in respect of the 1994 year. He has confirmed that the arrears and interest for the 1994 year were, by an oversight, omitted from the statutory demand.[39] The other issue that was raised was whether the cost order made by Keane J and which is included in the statutory demand, totalling $63,450.62, could likewise be the subject of a credit. Irrespective of the question of whether or not a credit for the costs is permissible under s 46(6) of the Goods and Services Tax Act 1985, if the credit is in fact absorbed entirely by amounts outstanding in respect of the 1994 year then there is nothing to credit. I therefore accept Mr Fleming's evidence, asconfirmed finally in his affidavit of 14 November 2013 that the amounts set out in the statutory demands are, in fact, correct.The Commissioner's application to appoint a liquidator in reliance ons 291(1)(b) of the Companies Act 1993[40] Ms Roff did not press this matter having regard to the conclusions I reached in my judgment in Bristol Forestry Venture Ltd v Commissioner of Inland Revenueand the position that was adopted in Redcliffe Forestry Ventures Ltd v Commissionerof Inland Revenue.16[41] Accordingly, it is appropriate that I apply s 291(1)(a).Orders[42] I order that:(a) Accent Management Ltd pay the sum of $3,250,265.74 within ten working days of this judgment and should a default in payment be made, the defendant may make application to put Accent Management Ltd into liquidation; and(b) Lexington Resources Ltd pay the sum of $2,115,039,48 within ten working days of this judgment and should a default in payment be made, the defendant may make application to put Lexington Resources Ltd into liquidation.Costs[43] Counsel requested that I reserve costs and give them the opportunity of discussing the resolution of same. If the parties cannot agree and an order is sought, memoranda in support, opposition and reply shall be filed and served at seven-day intervals commencing 1 February 2014._____________________JA FaireAssociate Judge16 Bristol Forestry Venture Ltd v Commissioner of Inland Revenue and Redcliffe Forestry Ventures Ltd, above n 14, at [36].