BROOKSIDE RESIDENTIAL PROPERTIES LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZHC 424

BROOKSIDE RESIDENTIAL PROPERTIES LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZHC 424 [13 March 2017]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYCIV-2016-409-000874[2017] NZHC 424BETWEEN BROOKSIDE RESIDENTIALPROPERTIES LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 13 March 2017Appearances: P Currie for ApplicantR Lemm for RespondentJudgment: 13 March 2017JUDGMENT OF ASSOCIATE JUDGE OSBORNEon application to set aside statutory demandIntroduction[1] The applicant (the company) incurred by self-assessment a tax liability for Goods and Services Tax (GST) in the financial year ending 31 March 2015. The GST assessment was $163,611.46. Subsequently, additional penalties and interest accrued in August 2016. The Commissioner issued a demand under s 289 Companies Act 1993 for the total sum ($202,311.27). The company applied for an order setting aside the demand. The application was to be before the Court for hearing today.The company's insolvency[2] The company is clearly insolvent in the sense that it is unable to pay its debts as they fall due and has been so throughout the period since the statutory demand was issued. The Inland Revenue Department records indicate that beginning at thelatest in the tax year ending 31 March 2015, the company has used the Revenue as its banker through failing to account for the GST.[3] The company accepts that, under the regime of the Tax Administration Act 1994 (particularly s 109 of the Act), its failure to take advantage of the challenge provisions means that the debt assessed by the Commissioner is not disputable.Grounds of application[4] The company's evidence on the application was given by its director, JamesHickey. The central point of Mr Hickey's evidence is that he believes there would be an injustice if the failure to register for GST by two parties who purchased property from the company in the year ending 31 March 2015 was to result in the company'sliquidation.[5] Mr Hickey exhibited the two agreements for sale and purchase to which his affidavit referred. Both contracts recorded that the purchaser was not registered forGST. The thrust of the company's injustice argument is that there werecircumstances which led Mr Hickey to believe that the purchasers should have registered for GST and that it was unfair that the company effectively be held to account for the failure of the two purchasers to do so. If Mr Hickey had an expectation of purchasers' becoming GST registered, the company has not protected its position in the contracts which it entered into. Neither of the contracts contained any contractual stipulation identifying such an expectation. There is no term in either contract requiring the purchaser to use best endeavours (or similar) to promptly become GST registered.Submissions for Commissioner[6] Mr Lemm, for the Commissioner, has emphasised a concern which is frequently mentioned in this Court. In a taxation regime which provides for self- assessment, as occurred in this case, it is of fundamental importance that the Commissioner be able to rely on the accuracy of the self-assessment. Mr Lemm, having made enquiries, is unaware of any particular issue raised by the company as taxpayer at the time it completed its self-assessment.[7] The company made its application in this case promptly after the issue of theCommissioner's statutory demand in early-September 2016. Mr Hickey's affidavitaccompanied the application as is required under the High Court Rules. The Commissioner filed her notice of opposition with an affidavit of Anne Woods, a Collections Officer of IRD, who identified the key points of the agreements for sale and purchase and the contractual arrangements to which I have already referred. If there had been a tenable basis for a challenge to the Commissioner's continuingdemand, it would have had to lie through an application for judicial review for some breach of administrative process. Mr Hickey's reference in his affidavit evidence toan "injustice" and to his expectation indicates that the company might have had in mind a right to judicial review based on a concept of legitimate expectation (or similar).[8] Mr Lemm's submissions indicated cogently why such an application would have been doomed to failure. Nothing in the steps taken by the Commissioner could have led the company as taxpayer to a legitimate expectation that the Commissioner would refrain from making a demand for a self-assessed liability while further enquiries were made of the purchasers. Mr Lemm accepted that had the company, when making its self-assessed return, signalled to the IRD a need for an investigationinto the purchasers' correct tax status, then responsible administrators would have required the IRD to investigate the issue. But the matter was not raised at the time as an issue. At most, what the company wished to do after the event was to pursue a line of enquiry as to whether two purchasers should have registered for GST. As it is, the company did not make an application for judicial review in the intervening seven months.Commissioner's notification of intention to seek immediate liquidation[9] I convened a telephone conference last Friday, the last working day before this hearing, at the request of counsel for the Commissioner. The Commissioner had filed, through Mr Lemm, her submissions as required by the Court's timetable set last year. The company had not through counsel filed any submissions. The company had not explained its position to the Court before Mr Lemm requested the early dismissal of the application last week. It transpired that, at that point, MrCurrie was without instructions to pursue the application. Because of the nature of the request Mr Lemm made (for an immediate dismissal of the proceeding and an immediate liquidation of the company under s 291 Companies Act), I adjourned the proceeding to this morning. I requested that Mr Hickey, who attended the telephone conference on Friday, give Mr Currie instructions so that the company could have representation today. That has occurred.The issues for determination[10] The company does not oppose the dismissal of the application and an order will be made to that effect. I am then required to consider two matters, namely, the costs of the application and the making of an immediate order of liquidation.[11] I will turn to the surrounding facts as they are at least partly relevant to both matters. I note particularly the following matters.(a) The company seeks time (six months) to pursue a subdivision of a central Rolleston property. The company has not adduced evidence as to prospects of effecting a successful subdivision in six months. Inote Mr Currie's advice through submissions that there are a number of factors relevant to the subdivision of the company's property which might weigh in favour of allowing the company approximately six months to proceed along that course. I attach to this judgment asSchedule A the matters identified in Mr Currie's submissions received this morning. He there states what are his instructions as to the financial position and prospects of the company. In short, Mr Currie'sinstructions are to the following effect. The company has at least two secured creditors who are owed $1.85 million. It has a valuation of its land (not produced) at $1.54 million. It projects a completion of the subdivision in July 2017 with titles issuing the following month. The sales would result in total net proceeds after GST and contributions of $3.7 million. The Commissioner would receive payment of the outstanding debt (which I take to include accruing penalties andinterests), plus an additional $415,000 in GST on 13 pre-sales which have been made (worth $2.34 million).(b) The company's track record relating to the year ending 31 March2015 is of a failure to comply with its tax obligations when it was selling property. The subdivision project in itself requires the company to go into further debt in order to produce profit. From the bar, Mr Currie indicated, in response to my question, that the company had met its first mortgage obligations during the period of seven months since the statutory demand was issued but has had to capitalise interest accruing on its second mortgage obligation in that period. The company has not provided information as to the existence of any unsecured creditors apart from the IRD. The IRD may be the sole unsecured creditor. The IRD, voting as a separate class from secured creditors, would be in a position to vote down any compromise of creditors.[12] These are the background matters to which the Court must have regard.The application for increased costs[13] The Court considers any application for increased costs under r 14.6(3) High Court Rules. One of the situations in which this Court may order increased costs is when a party has contributed unnecessarily to the time or expense of a proceeding by pursuing an argument which lacks merit.[14] I am satisfied in relation to this case that the application had no prospect of success in the light of the subsequent failure to pursue the judicial review proceeding– the debt owed to the Commissioner is, under s 109 Tax Administration Act, not disputable.[15] The company's application was a negotiating tool to buy it more time to achieve its subdivision. When the Court adjourned the proceeding into this year for hearings, it may well have been the hope of both parties that, by the time the matter came on for hearing, the company would have been able to achieve concreteprogress on its intended subdivision and a negotiated outcome with the Commissioner. But once the company failed to achieve that outcome, the fact remains that the proceeding has been used to achieve time for negotiation rather than in the expectation that the application could succeed on its merits. Had the company been able to succeed on the merits of the application, it would have pursued itsargument at today's hearing as scheduled. The recognition of Mr Currie that the application could not succeed is an implicit recognition of the inherent weakness of the application.[16] There will accordingly be an order requiring the defendant to pay increased costs to the Commissioner in relation to this application. An uplift of 50 per cent on a 2B1 award is appropriate.Liquidation[17] The Commissioner asks the Court to use its rarely invoked power under s 291(1)(b) Companies Act to, forthwith upon dismissing an application, make an order under s 241(4) of the Act putting the company into liquidation.[18] The statutory ground on which this may be done is that the company is unable to pay its debts. Clearly that is made out in this case.[19] The fact that that ground is made out is not of itself the end of the Court'sproper consideration of its discretion. Associate Judge Bell has, in at least two cases, discussed the nature of this discretion – see Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd and in 239 Queen Street Developments Ltd v Watts & Hughes Construction Ltd.2 His Honour has identified that one situation in which the Court may be prepared to exercise the s 291(1)(b) discretion is when the subject company is effectively moribund. His Honour has also identified (in 239 Queen Street) a second situation, namely when the creditor's interests are so clearly imperilled thatthe need to give urgent relief takes priority. Those situations are, of course, not exhaustive or definitive but I have regard to the concepts which lie behind them. A1 High Court Rules, Category 2 under r 14.3(1) and band B under r 14.5(2).2 Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd HC Tauranga CIV-2011-470-000697, 3 February 2012 and 239 Queen Street Developments Ltd v Watts & Hughes Construction Ltd[2012] NZHC 1791.third authority is the decision of Associate Judge Faire, as he then was, in Bristol Forestry Venture Ltd v Commissioner of Inland Revenue.3 His Honour's judgment issignificant for the observation that in that case no prior warning had been given before the day of hearing that the creditor would be seeking an order for immediate liquidation. That case is distinguishable on its facts given the prior notification in this case.[20] I am satisfied that this is such an unusual case and its circumstances so demanding of liquidation that there ought to be a liquidation order. While the company cannot be said to be moribund in the sense used by Associate Judge Bell, the reality is that the company has not been trading in any active financial sense since before the statutory demand was issued by the Commissioner. It would appear on the information (not strictly evidence) which I have been given that thecompany's efforts over the last half-year have gone into seeking to raise finance for the subdivision while not paying any of the Commissioner's debt. TheCommissioner in rejecting the company's request for what would be a further six month debt moratorium, has chosen not to be drawn into a further period of subdivision which by its nature carries further cost and risk. The information Mr Currie has provided to the Court (from the bar) is that a six month period will be required for completion of the subdivision. Mr Lemm notes the subdivision would be taking place into the winter period with the work complications which may arise in that season.[21] There is not a compelling basis to cut across the Commissioner's wish tohave liquidators now control this insolvent company's assets when the company itself has apparently been unable to make substantial progress in relation to itsunsecured debt in the seven month period since the Commissioner's demand wasissued. Mr Currie's contrary submission points to the benefit for the Commissioner should there be a successful subdivision. But the benefit is not supported by evidence which would enable either the Commissioner or this Court to reality-check the assessments being made by people such as the applicant's director and the persons intended to be involved in the subdivision. Similarly, in the absence of3 Bristol Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 2384. (See alsoBrookers Company and Securities Law (online looseleaf ed, Thomson Reuters)).evidence, the Court cannot assess the likelihood that the 13 pre-sales which are central to the proposal for adjournment will come to (profitable) fruition.[22] In the circumstances, I am satisfied both that the company is, in terms of s 291(1)(b), unable to pay its debts and that this is an appropriate case to put the company into liquidation forthwith. Liquidators can then make decisions in the interests of all creditors, both secured and unsecured. There will accordingly be an order made today in that regard.Orders[23] The orders of the Court are therefore:(a) The application dated 6 September 2016 is dismissed;(b) The applicant is to pay to the respondent the costs of the application on a 2B basis with an uplift of 50 per cent;(c) There is an order of liquidation;(d) I appoint Malcolm Grant Hollis and Wendy Ann Somerville as the liquidators;(e) The liquidator's remuneration will be approved in accordance with their certificate the original of which is to be filed today, subject to s 284 of the Companies Act 1993;(f) The liquidators are allowed to exercise their powers individually;(g) I time the order at 10.58 am; and(h) The liquidation order shall lie in Court until the original of theliquidators' consent and remuneration certificate is sighted by theRegistrar.Addendum[24] In the terms of my oral judgment delivered on 13 March 2017, I awarded the Commissioner, on Mr Lemm's application, costs on an indemnity basis.[25] Mr Lemm subsequently by Memorandum advised the Court that it had cometo his attention that indemnity costs were not appropriate as the Commissioner'slegal services had been provided by in-house counsel, without a charge fixed by reference to an hourly rate.[26] In these circumstances, I recalled that part of my judgment dealing with costs and disbursements (paragraphs [13] – [16] and paragraph [23](b)) and replaced the costs and disbursements award with what now appears in those paragraphs.Associate Judge OsborneSolicitors:Currie Lawyers Ltd, ChristchurchInland Revenue Legal and Technical Services, ChristchurchSCHEDULE AThe Applicant does oppose the Respondent seeking immediate appointment of a liquidator upon the following grounds:[a] The Applicant's sole asset is an undeveloped block of land situated in Central Rolleston;[b] The Applicant has 13 presales of sections totalling $2.34 million;[c] The Applicant has only received an offer of funding from its banker within the last two weeks to enable it to carry out the subdivision of the land;[d] The only remaining condition of finance is a Quantity Surveyors'report, the Applicant has met with the surveyor on 10 March 2017 and has received verbal approval. The report will be ready in two weeks;[e] The Applicant has a resource consent to carry out the subdivision, and there are no resource consent conditions;[f] Current secured creditors are owed $1.85 million;[g] The Applicant has a valuation of the land at $1.54 million;[h] Completion of the subdivision is expected in July 2017, titles usually follow within three to four weeks, with settlement and payment due five working days later;[i] The total net proceeds after GST and contributions is expected to be $3.7 million; and[j] The Respondent will receive payment of their outstanding debt plus an additional $415,000 in GST on the 13 presales noted above.