CHESTERFIELDS PRESCHOOLS LIMITED (IN LIQUIDATION) v COMMISSIONER OF INLAND REVENUE [2021] NZSC 83

CHESTERFIELDS PRESCHOOLS LIMITED (IN LIQUIDATION) v COMMISSIONER OF INLANDREVENUE [2021] NZSC 83 [12 July 2021]IN THE SUPREME COURT OF NEW ZEALANDI TE KŌTI MANA NUISC 12/2021[2021] NZSC 83BETWEEN CHESTERFIELDS PRESCHOOLSLIMITED (IN LIQUIDATION)First ApplicantTHERESE ANNE SISSONSecond ApplicantAND COMMISSIONER OF INLANDREVENUERespondentSC 17/2021BETWEEN THERESE ANNE SISSONApplicantAND CHESTERFIELDS PRESCHOOLSLIMITED (IN LIQUIDATION)RespondentSC 18/2021BETWEEN THERESE ANNE SISSONApplicantAND CHESTERFIELDS PRESCHOOLSLIMITED (IN LIQUIDATION)RespondentHearing: 22 June 2021Court: William Young, O'Regan and Ellen France JJCounsel: T A Sisson in personB M Russell and J C Wedlake for Chesterfields Preschools Ltd(in liq)P J Shamy and S M Kinsler for Commissioner of Inland RevenueJudgment: 12 July 2021JUDGMENT OF THE COURTA The applications for leave to appeal are dismissed.B The application for leave to adduce further evidence isdismissed.C The applicant must pay costs of $3,000 to theCommissioner and $1,500 to Chesterfields Preschools Ltd(in liq) plus usual disbursements.____________________________________________________________________REASONSIntroduction[1] The applicant, Ms Sisson, seeks leave to appeal against three Court of Appealjudgments which collectively dismissed 11 appeals against judgments of the HighCourt.1 Reflecting the three Court of Appeal judgments, the applications before thisCourt relate to the following: (1) the liquidation of Chesterfields Preschools Ltd(CPL), a company associated with Ms Sisson and her former husband, Mr Hampton(SC 12/2021); (2) the vesting of property in CPL (SC 17/2021); and (3) Ms Sisson'spersonal bankruptcy (SC 18/2021).[2] As we shall discuss, the primary focus of the applications concerns theliquidation of CPL. That aspect raises issues about the way in which theCommissioner of Inland Revenue's claim for unpaid tax, interest and penalties iscalculated. We held an oral hearing directed to one aspect of the calculation.Ms Sisson's case in essence is that, if the tax debt is correctly calculated, CPL is notinsolvent.1 Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue [2020] NZCA 686 (Miller,Venning and Katz JJ) [Second liquidation appeal judgment]; Sisson v Chesterfields Preschools Ltd(in liq) [2020] NZCA 687 (Miller, Venning and Katz JJ) [Vesting orders judgment]; andSisson v Chesterfields Preschools Ltd (in liq) [2020] NZCA 689 (Miller, Venning and Katz JJ)[Bankruptcy judgment].Background[3] Ms Sisson, Mr Hampton and the Commissioner have a lengthy litigationhistory. That history is set out in detail in the liquidation judgment which is the subjectof the first of the leave applications.2 Although it will be necessary in this judgmentto provide more by way of background material than is usually the case in a leavejudgment, at this point it is sufficient just to note the key events. We do so largelyadopting the summary in the Commissioner's written submissions.[4] CPL operated a preschool business in Christchurch. It was one of a number ofbusiness entities associated with Ms Sisson and Mr Hampton. They have had ongoinginteraction with the Commissioner over tax debts relating to the various entities forsome time. We can begin the narrative with reference to a statutory demand, servedon CPL by the Commissioner in April 2004, for a debt of $620,545.94 comprisingunpaid tax, late payment penalties and interest. CPL applied to set aside the demand,disputing the amount demanded. A range of related litigation followed, before CPLwas eventually put into liquidation on 6 October 2015 (the first liquidation order).3[5] The related litigation in the initial period included two judicial reviewproceedings.4 Further, in May 2008, CPL and associated entities filed a statement ofclaim alleging misfeasance in public office by the Attorney-General, theCommissioner and various other officers. The claim was stayed until repleaded by alawyer holding a current practising certificate and leave was granted by the High Court(the misfeasance claim).5 Ms Sisson advises that the claim has been repleaded inaccordance with this direction but it remains stayed.[6] Returning to the liquidation proceedings, Ms Sisson, a director of CPL, wasjoined as a party to enable her to pursue an appeal. After a partially successful appeal2 Second liquidation appeal judgment, above n 1, at [6].3 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2015] NZHC 2440, (2015)27 NZTC ¶22-029 [First liquidation judgment]. This was following a failure to comply with afresh statutory demand.4 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21,125 (HC)[First judicial review judgment]; and Chesterfields Preschools Ltd v Commissioner of InlandRevenue (No 2) (2009) 24 NZTC 23,148 (HC) [Second judicial review judgment].5 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013]2 NZLR 679 [CA misfeasance judgment]. The claim was struck out as against the Commissionerand a solicitor who acted for the IRD.to the Court of Appeal from the first liquidation order,6 this Court ultimately set thefirst liquidation order aside by consent on 23 November 2017.7 The matter wasremitted to the High Court for rehearing.[7] On 15 December 2017, CPL was put into interim liquidation.8 Then, on26 February 2019, CPL was once more put into liquidation by Osborne J in theHigh Court (the second liquidation order).9 Ms Sisson unsuccessfully appealedagainst that second liquidation order to the Court of Appeal (the second liquidationappeal judgment).10The liquidation of CPL: SC 12/2021[8] In the second liquidation appeal judgment, which is the subject of the presentapplication, the Court of Appeal determined four appeals. The notice of applicationin relation to this judgment is directed to the dismissal of Ms Sisson's appealcontending that the second liquidation order should be set aside. With one minorqualification, we do not address the other three appeals dealt with in the judgmentwhich were, relatively, of secondary importance.11Submissions[9] As we have foreshadowed, the primary argument in relation to the secondliquidation order is that the Commissioner has miscalculated the tax debt owing byCPL. Ms Sisson's case is that if the debt was properly calculated there would be a"modest balance" left to pay in the situation where CPL has "a substantialunencumbered property asset" to draw on, estimated at the time of the liquidationrehearing to have a value of $1m. In developing the submissions on this point,Ms Sisson says that the calculation does not comply with the requirements of the6 Sisson v Commissioner of Inland Revenue [2017] NZCA 326, (2017) 28 NZTC ¶23-023 [Firstliquidation appeal judgment].7 Chesterfields Preschools Ltd (in liq) v The Commissioner of Inland Revenue [2017] NZSC 176[SC 2017 judgment].8 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2017] NZHC 3172, (2017)28 NZTC ¶23-046.9 Commissioner of Inland Revenue v Chesterfields Preschools Ltd (in interim liq) [2019] NZHC 272[Second liquidation judgment].10 Second liquidation appeal judgment, above n 1.11 See below at [25].earlier judgments in the context of the taxpayers' largely successful judicial reviewlitigation. Rather, CPL has been treated as a deliberate late payer. Further, Ms Sissonchallenges the application of the ordering rules.12 Ms Sisson explains that the orderingrules operated to require all accumulated penalties to be paid in the unpaid GSTperiods under investigation before any core tax payment would be applied to theunderlying core tax balances. She says the Commissioner's approach breached acontrary arrangement agreed between Mr Hampton and the IRD (the Aronsenarrangement).[10] Ms Sisson also contends that, in calculating the amounts owing, insufficientaccount has been taken of both non-disclosure by the Commissioner of the Aronsenfile notes in the period prior to litigation as well as late discovery in the context of thelitigation. In a similar vein, it is contended that the Court erred in its approach toCPL's claim based on misfeasance in public office. That claim exceeds the debt andthe argument is that CPL should not have been placed in liquidation before the claimcould be heard.[11] As is apparent from this brief summary, the submission that the Court ofAppeal has erred has a number of strands. The key point to note is that if one or moreof these arguments was successful this would call into question various aspects of thecalculation including the July 2008 cut-off date13 and, as well, raise the need to takeinto account delays attributable to the issues with disclosure. Ms Sisson says the issueswith disclosure mean that penalties incurred from 1999 to 2006 should be remitted.[12] For all these reasons, Ms Sisson wishes to argue on appeal that CPL should nothave been placed into liquidation. To put the submissions in context, it is necessaryfirst to say a little more about the litigation history.Additional contextual material[13] Sometime after the first statutory demand was issued in April 2004, thetaxpayers (CPL and other entities in which Ms Sisson and Mr Hampton were involved)12 Ms Sisson also says the Commissioner erred in not treating CPL's approved GST refund creditsas payments of core tax.13 See below at [15].sought judicial review of a number of the Commissioner's decisions (the first judicialreview proceeding). At the heart of this proceeding were, relevantly, the contentionsthat the Commissioner had:(a) not honoured informal arrangements made regarding the tax (mainly GST)liability of the taxpayers;14(b) failed to act with reasonable diligence and celerity in progressing audits andprocessing GST returns; and(c) acted unreasonably over the proposed remission of penalties and attempts torecover from the taxpayers their total tax indebtedness.[14] In a judgment delivered on 15 December 2006, the first judicial reviewapplication was decided generally in favour of the taxpayers.15 Fogarty J set aside theCommissioner's decision to decline the remission of additional tax and directed theCommissioner to reconsider remission. A reconsideration was undertaken andresulted in a decision which reduced the total indebtedness of the taxpayers, but notsignificantly. The taxpayers sought a further judicial review of that decision and theJudge again found substantially in their favour (the second judicial reviewproceeding). This was on the basis that the reconsideration did not comply with thedirections in the first judicial review decision.16[15] The Commissioner appealed against the second judicial review decision to theCourt of Appeal, contending the reconsideration complied with the first judicial reviewdecision. In its 2010 judgment, the Court of Appeal largely found in favour of thetaxpayers.17 The majority said that what was envisaged by the first judicial reviewjudgment was for penalties "to be reduced to the extent that they had accrued as aresult of the inordinate delays by the Commissioner and comfort given by him to the14 Relevantly, an arrangement made by Mr Aronsen, an officer of the Inland Revenue Department,with the taxpayers, referred to as the Aronsen arrangement.15 First judicial review judgment, above n 4.16 Second judicial review judgment, above n 4.17 Commissioner of Inland Revenue v Chesterfields Preschools Ltd (No 2) [2010] NZCA 400, (2010)24 NZTC 24,500 [CA 2010 judgment].taxpayers" (what Ms Sisson refers to as the "proportionality exercise").18 The majoritysuggested that, as a "pragmatic" alternative which would meet the requirements of thefirst judicial review judgment, the Commissioner might choose to adopt an "across theboard" 15 per cent reduction of penalties.19 The Commissioner adopted the suggestedapproach applying a 15 per cent reduction in penalties and interest calculated as atJuly 2008. No penalties were imposed for the period after July 2008.Our assessment[16] The issues arising in relation to this aspect of the applications are unique. Theyreflect both the particular litigation history and the particular facts of this case. Noquestion of general or public importance or of commercial significance accordinglyarises.20 Rather, the central issue for us is whether the approach taken by the Court ofAppeal to the calculation of the tax debt gives rise to the appearance of a miscarriageof justice in the civil sense such that it is in the interests of justice for the Court to hearthe proposed appeal.21[17] We mean no disservice to the detail in the written and oral submissions whenwe say that whether there is an appearance of a miscarriage of justice really turns onwhether anything raised by Ms Sisson suggests that the Court of Appeal was wrong inits interpretation of the requirements for the tax calculation set out in that Court'searlier 2010 judgment. We interpolate here that, to the extent that Ms Sissonchallenges the appropriateness of the 15 per cent reduction, that argument has noprospects of success. As the Court of Appeal said in its 2017 judgment, CPL wasbound by the 15 per cent reduction measure, albeit it could "test the accuracy andmethodology of the Commissioner's calculation".22 We add that we also need toconsider the effect of Ms Sisson's argument about the disclosure issues and theinterrelationship between the misfeasance claim and the liquidation decision.18 At [86]. See also at [91].19 At [93].20 Supreme Court Act 2003, s 13(2)(a) and (c); Senior Courts Act 2016, s 74(2)(a) and (c).21 Supreme Court Act, s 13(2)(b); and Senior Courts Act, s 74(2)(b). See also Junior FarmsLtd v Hampton Securities Ltd (in liq) [2006] NZSC 60, (2006) 18 PRNZ 369.22 First liquidation appeal judgment, above n 6, at [105].[18] The Court of Appeal rejected Ms Sisson's argument about the calculation.Based on a close analysis of the 2010 judgment, the Court did not accept that the 2010Court had mandated that the Commissioner could not charge penalties after June 2004.Observations from the 2017 judgment were also cited as consistent with that position.The Court also held that the 2010 Court intended the 15 per cent reduction to apply topenalties and interest rather than just core tax, such that adopting a methodology ofordering was permitted.[19] Finally, the Court referred to the evidence of the calculations showing that CPLhad been relieved from all penalties and use of money interest for the period fromJuly 2008 to October 2015, totalling some $1.852 million in relief.23 The Courtaccepted the Commissioner's calculation of the tax debt ($1,088,461.15) andconcluded that the evidence supported the conclusion that CPL was not able to pay itstax debts as it had not answered the statutory demand and that sum was outstanding.In addition, the Court took into account other contingent or prospective debtsconcluding that the High Court was correct to find that, as well as being unable to payits debts as they fell due, CPL was balance sheet insolvent. There was accordingly noreason to exercise the discretion to decline to put CPL into liquidation.[20] None of the matters raised by Ms Sisson call into question this assessment ofthe requirements of the 2010 judgment. As is clear both from the passages discussedby the Court and from the 2010 judgment more generally, there was an expectationthat the Commissioner would have "considerable leeway" given both the "veryconfusing nature of the taxpayers' affairs and their clear defaults".24 Further, it wasnoted that "only a portion of penalties should be remitted even for the period ofinordinate delay as the taxpayers could clearly have paid the taxes rather than waitingfor the result of the investigation".25 We add that, in terms of overall justice, theevidence before the 2020 Court showed that stopping the clock as at July 2008 "cutout slightly more than half the interest and penalties accrued during the relevant periodof the litigation".2623 Second liquidation appeal judgment, above n 1, at [85].24 CA 2010 judgment, above n 17, at [91], n 106.25 At [91], n 107.26 Second liquidation appeal judgment, above n 1, at [86].[21] We turn then to Ms Sisson's argument, emphasised in her oral submissions,that the calculation of the debt should have taken into account what she says was thenon-disclosure and late discovery of the file notes concerning the Aronsenarrangement.27 Despite requests in 1998 and 1999, Ms Sisson says disclosure did notoccur. This, she says, frustrated the taxpayers' efforts to settle at the earliestopportunity in circumstances where early resolution would have led to a lower levelof indebtedness. Ms Sisson says the Commissioner had earlier denied non-disclosurein the judicial review proceedings, including in the appeal before the Court of Appealin 2010 but that, in an exchange with her in 2016, the Commissioner accepted thenon-disclosure during the period of settlement negotiations.28 She says the 2020 Courtof Appeal failed to consider non-disclosure as a delay factor relevant to the"proportionality exercise".29[22] Further, although judicial review proceedings were instituted in 2004,Ms Sisson says full discovery of the notes was delayed and did not occur until 2006.She says this too is relevant to the calculation.[23] In the 2010 judgment, the Court noted that the Commissioner denied discoverywas late and said "the taxpayers were aware of the content of those file notes".30 TheCourt said it was not able to make findings on this as it was not dealt with fully by theHigh Court but observed that it was "difficult to see how any late discovery of the filenotes (even if that were the case) can affect penalties arising before the litigationcommenced".31 The Court indicated it also had "some difficulty in understanding therelevance after the litigation commenced (and how it could be ruled upon withouthaving read the affidavits)".32 Nothing was raised with us in the oral argumentadequately addressing these difficulties and this Court would similarly haveinsufficient basis for resolving the factual position.27 In oral argument the Commissioner denied that there had been late disclosure or late discovery.28 This exchange is included in the affidavit which Ms Sisson seeks leave to adduce in evidencebefore us.29 Ms Sisson says this delay factor could not be considered by the Court of Appeal in 2010 becausethe Commissioner had denied non-disclosure up until 2016.30 CA 2010 judgment, above n 17, at [109(e)], n 125.31 At [109(e)], n 125.32 At [109(e)], n 125.[24] In terms of the broader non-disclosure aspect, we see it as being at the heart ofthe misfeasance proceedings. But the argument that the liquidation order waspremature and should have awaited the outcome of those proceedings faces a numberof impediments such that we are satisfied that it has insufficient prospects to warrantleave. This argument was rejected by the Court of Appeal in its 2017 judgment.33Leave to appeal on this point was declined.34 In addition, nothing raised by Ms Sissonsuggests any apparent error in the 2020 Court of Appeal's assessment of the legalposition.35 As the Court said, at its best, this is a contingent and unliquidated claim.It is for the liquidator to decide whether to pursue it. Finally, the misfeasanceproceedings are currently stayed and the stay would still need to be lifted by theHigh Court.[25] For these reasons, we see no appearance of a miscarriage of justice in the Courtof Appeal's approach. As we are dismissing the application for leave to appeal inrelation to the liquidation order, Ms Sisson's proposed appeal against the freezingorder on CPL's assets referred to in CA390/2019 has no prospects of success.Vesting orders: SC 17/2021[26] In the vesting order judgment, the Court of Appeal dismissed four appeals.36The first of these dismissed an appeal from a decision refusing to recall a previousdecision vesting certain property in CPL by consent (CA285/2017). The other threerelated to costs (CA683/2017, CA684/2017, and CA685/2017).Background[27] In terms of the background to the vesting orders, we need only note that, inAugust 2001, a property at 854 Colombo Street, Christchurch, was transferred fromCPL to Mr Hampton for no consideration, to refinance a mortgage. Mr Hampton heldthe property on trust for CPL until 2007. In October 2007, a court order was madepermitting the property to be transferred from Mr Hampton to Ms Sisson at a33 First liquidation appeal judgment, above n 6.34 Chesterfields Preschools Ltd (in liq) v The Commissioner of Inland Revenue [2017] NZSC 168 at[11].35 That assessment applies equally to Ms Sisson's argument based on r 5.61 of the High CourtRules 2016 dealing with set-off.36 Vesting orders judgment, above n 1.mortgagee sale auction to prevent it being sold at undervalue. The High Courtsubsequently clarified that the property was to be held by Ms Sisson as trustee, for thebenefit of the beneficial owner, CPL, pursuant to undertakings given by Ms Sisson(the trust order).[28] In early 2016, the liquidator for CPL applied under the Trustee Act 1956 fororders vesting the property and associated insurance monies in CPL. Ms Sissonopposed the application. Her primary defence was that she held the property on trustfor another entity, the Anolbe Family Trust, not CPL. However, on the fourth day ofthe hearing, 16 February 2017, Ms Sisson signed a consent memorandum agreeing tothe vesting orders. Gendall J then delivered a judgment making the vesting orders byconsent.37 The judgment vested the property and associated insurance proceeds andentitlements in CPL and ordered costs against Ms Sisson.The proposed appeal[29] Broadly, the challenges to Gendall J's refusal to recall the vesting decisionreiterate some of the themes of the arguments discussed above relating to the effect ofthe disclosure issues and the inability to have the misfeasance claim resolved ahead ofother proceedings. For example, Ms Sisson wishes to argue that the approach in theHigh Court was predicated on the refusal, on the first day of the vesting orders hearing,to allow Ms Sisson to raise a counterclaim based on the disclosure issues. The premiseof the argument is that non-disclosure tainted the right to enforce the trust order.[30] The Court of Appeal rejected this argument on the basis that no appeal hadbeen filed against the making of the trust order so it remained in place. Further, theCourt considered it would not be in the interests of justice to recall the consent orderspending resolution of the misfeasance claim "given the formidable obstaclesMs Sisson will face in progressing such claims".38 Those obstacles included the factthere had been no appeal from the decision of the High Court that the misfeasanceallegations were not relevant to the vesting proceeding, and that the misfeasance claimwas stayed. Given the dismissal of the liquidation appeal, it was for the liquidators of37 Chesterfields Preschools Ltd (in liq) v Sisson [2017] NZHC 181.38 Vesting orders judgment, above n 1, at [24].CPL to decide whether or not to pursue the misfeasance proceeding. We see noapparent error in the Court of Appeal's assessment of these matters.[31] To the extent Ms Sisson's arguments on this aspect reflect a concern about thecosts orders, there are insufficient prospects of success to warrant a grant of leave onthis basis. As the Court of Appeal noted, the costs awarded pursuant to the vestingorders proceeding, which she was unable to pay and which led to her bankruptcy,pre-dated the order adjudicating Ms Sisson bankrupt on 23 June 2017. Accordingly,only the Official Assignee can pursue such an appeal now and the Assignee does notconsider there is any basis for disputing the costs awards. We add that, similarly, theargument that the Court of Appeal was wrong not to consider Ms Sisson's submissionthat the consent orders should be stayed or set aside until the liquidation appeal wasdetermined has insufficient prospects of success to warrant a grant of leave.Bankruptcy: SC 18/2021[32] In the bankruptcy judgment, the Court of Appeal dismissed the appeal against:the refusal to halt adjudication in bankruptcy (CA310/2017); the adjudication inbankruptcy (CA404/2017); and the costs order (CA682/2017).39 In the leaveapplication in relation to this judgment, Ms Sisson accepts, as the Court of Appealheld, that her application regarding the bankruptcy "rests entirely on the fate of the application for leave to appeal the liquidation judgment". As leave to appeal has notbeen granted in relation to the liquidation judgment, we need not consider thisapplication further. The criteria for leave to appeal are not met.Application to file further evidence[33] Finally, Ms Sisson applies for leave to file an affidavit dated 22 July 2019. Shesays the affidavit is relevant as, amongst other matters, it sets out material relating tonon-disclosure. We accept the submissions for the respondent, liquidators and OfficialAssignee, in resisting this application, that leave to adduce this evidence should notbe granted as the evidence is not fresh and we are not satisfied there are anyexceptional circumstances justifying its admission.39 Bankruptcy judgment, above n 1.Result[34] The applications for leave to appeal are dismissed. The application to adducefurther evidence is dismissed. The applicant must pay costs of $3,000 to theCommissioner and $1,500 to Chesterfields Preschools Ltd (in liq) plus usualdisbursements. The Official Assignee filed submissions on insolvency issues but wasnot named as a party.40 We therefore make no costs award in favour of the OfficialAssignee.Solicitors:Lane Neave, Christchurch for Chesterfields Preschools Ltd (in liq)Crown Law Office, Wellington for Commissioner of Inland Revenue and Official Assignee40 Counsel for the Official Assignee was excused from appearance at the leave hearing.