COMMISSIONER OF INLAND REVENUE v ACCENT MANAGEMENT LTD [2014] NZHC 1878

COMMISSIONER OF INLAND REVENUE v ACCENT MANAGEMENT LTD [2014] NZHC 1878 [11 August 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-005199[2014] NZHC 1878BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND ACCENT MANAGEMENT LIMITEDDefendantCIV-2013-404-000520BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND LEXINGTON RESOURCES LIMITEDDefendantHearing: 14 April 2014Appearances: R L Roff and S J Leslie for PlaintiffG A Muir for DefendantJudgment: 11 August 2014JUDGMENT OF COURTNEY JThis judgment was delivered by Justice Courtneyon 11 August 2014 at 4.00 pmpursuant to R 11.5 of the High Court RulesRegistrar / Deputy RegistrarDate..................................Introduction[1] Accent Management Limited and Lexington Resources Limited were participants in the forestry venture known as the Trinity scheme. In 2004 Venning J held that the scheme was tax avoidance.1 The Court of Appeal upheld that finding,2as did the Supreme Court.3 The result was that tax assessments made by the Commissioner of Inland Revenue were confirmed. However, after unsuccessful collateral attacks on Venning J's 2004 decision and on the Supreme Court's decision, the tax remains unpaid.[2] In these proceedings the Commissioner seeks to have liquidators appointed to Accent and Lexington on the grounds that, first, they are insolvent and cannot pay their debts and, secondly, it would be just and equitable to do so.4 Accent and Lexington have applied for orders staying the proceedings and restraining advertising of them.[3] The numerous grounds advanced in support of the applications overlapped and, to a significant degree, represented the same argument dressed differently: that argument being that the tax should have been assessed under sub-part EH of the Income Tax Act 2007 (the EH argument) rather than subpart EG. I summarise these grounds as:(a) The Court does not have the power to appoint liquidators because todo so would perpetuate an order that is both "illegal" in terms of the Bill of Rights Act 1688 or "constitutionally unlawful" in terms of theConstitution Act 1986, namely an order by Faire AJ (as he then was) requiring Accent and Lexington to pay a specified sum to the Commissioner;(b) The Commissioner is not a creditor and therefore lacks the standing to bring the proceedings;1 Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC).2 Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230; (2007) 23 NZTC 21,323 (CA).3 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.4 Companies Act 1993, s 241(4)(a) and (d).(c) It is an abuse of process to bring the proceedings pending final determination of the EH argument, including the resolution of Notices of Proposed Adjustment (NOPAs) issued by Accent and Lexington earlier this year, which rely on that argument;(d) Issues arising from the EH argument are yet to be determined by the Court of Appeal and those determinations may result in no tax being payable, either at all or at present;(e) The balance of convenience favours the defendants because there would be no prejudice to the Commissioner in staying the proceedings but significant prejudice to the defendants, whose appeal rights would be rendered nugatory.[4] To a large extent these grounds have been overtaken by the release of the Court of Appeal's decisions dismissing appeals brought by Accent, Lexington and three other Trinity scheme participants.5[5] An application to stay liquidation proceedings is to be treated as if it were an application for an interim injunction.6 The principles to be applied in determining an application to stay a liquidation proceedings are those summarised by Wallace J inNemesis Holdings Ltd v North Harbour Industrial Holdings Ltd:7The Court has an inherent jurisdiction to stay winding up proceedings where the debt upon which such proceedings are founded is the subject of general dispute ... The decisions make it clear that the jurisdiction to stay is an inherent one to prevent abuse of process and that there is no inflexible rule. The governing consideration is whether the proceedings savour of unfairness or undue pressure. It is, however, a serious matter to stay winding up proceedings so that the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate "something more" than the balance of convenience considerations which it is usuallyappropriate to consider on an application for an interim injunction.5 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2014] NZCA 348; Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2014] NZCA 349; Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2014] NZCA 350; Accent Management Ltd v Commissioner of Inland Revenue [2014] NZCA 351.6 High Court Rule, r 31.11(2) and (3).7 Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC).[6] Wallace J's reference to "something more" requires an applicant to show astrong prima facie case as to the existence of a general dispute on substantial grounds or that there are clear and persuasive reasons for staying the proceedings. InAnglian Sales Ltd v South Pacific Manufacturing Co Ltd McMullin J said:8 the right to have a winding up petition determined, being a right conferred by statute, ought not to be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where the challenge can on appropriate grounds be made to the petitioning creditor'sstatus as such. If a challenge were allowed in circumstances short of this, the Court would in effect be refusing to give effect to the very right which the statute has conferred upon the creditor to have the petition itself considered. In bringing his petition the creditor is doing no more than asserting the right which the statute entitles him to do. In our opinion, acreditor's right in this respect ought not to rest simply on the balance ofconvenience considerations which may be relevant to an application for an interim injunction. Something more than that is required.Would appointing liquidators perpetuate an unlawful or illegal order?[7] The applicants' primary argument centred on the order that Faire AJ made on 2 December 2013 requiring the applicants to pay the Commissioner the amount of tax being sought. The order was made in the context of applications by Accent and Lexington to set aside statutory demands issued by the Commissioner. Accent and Lexington say that this order amounted to the unlawful or illegal imposition of tax, the Commissioner brings these proceedings in reliance on it and determination of the proceedings would perpetuate an unlawful or illegal order, which this Court cannot do. There are several layers to this argument but before considering them I need to refer to Faire AJ's decision and the Court of Appeal's dismissing the appeal againstit.Faire AJ's decision and the appeal against it[8] Faire AJ was asked to determine applications by Accent and Lexington for orders declaring that the documents purporting to be statutory demands were not, in fact, statutory demands or, if they were statutory demands, orders setting them aside. The applications were brought under s 290(4) of the Companies Act which relevantly provides that:8 Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA) at 251 – 252.(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 owingor is due; (c) the demand ought to be set aside on other grounds.[9] Accent and Lexington asserted that there is substantial dispute as to whether the debts are owing, and that Commissioner had no authority to issue the statutory demands.[10] On the first ground, the existence of a genuine dispute, Mr Muir advanced the EH argument in the following way: Venning J was properly regarded as a hearing authority under the Tax Administration Act 1994 (TAA) and the tax should have been assessed under sub-part EH so Venning J's orders were either of no effect or exceeded the jurisdiction conferred by ss 138B and 138P TAA. Therefore his decision can be revisited notwithstanding the Supreme Court's decision affirming it.[11] Accent and Lexington had already advanced this same argument before Priestley J in proceedings brought to set aside Venning J's 2004 judgment.9Priestley J dismissed the proceedings, finding they were a collateral andimpermissible attack on the judgments of both the Supreme Court and Venning J's2004 judgment. Faire AJ considered that the argument had been determined by Priestley J's decision, notwithstanding an extant appeal against it.[12] The Associate Judge went on to make orders requiring Accent and Lexington to pay the sums demanded within 10 working days of the judgment10 and that"should a default in payment be made, the defendant may make an application to put[the company] into liquidation". These orders reflected the wording of s 291 of the Companies Act, which provides that:(1) If, on the hearing of an application under section 290 of this Act, the Court is satisfied that there is a debt due by the company to the creditor that is not the subject of a substantial dispute, or is not subject to a counterclaim, set-off, or cross-demand, the Court may –9 Accent Management Ltd v Attorney-General [2013] NZHC 1447, (2013) 26 NZTC 21,020.10 Accent was required to pay $3,250,265.74 and Lexington $2,115,039.48.(a) Order the company to pay the debt within a specified period and that, in default of payment, the creditor may make an application to put the company into liquidation; or(b) Dismiss the application and forthwith make an order under section 241(4) of this Act putting the company into liquidation, –on the ground that the company is unable to pay its debts.(2) For the purposes of the hearing of an application to put the company into liquidation pursuant to an order made under subsection (1)(a) of this section, the company is presumed to be unable to pay its debts if it failed to pay the debt within the specified period.[13] The Court of Appeal has now upheld both Priestley J's and Faire AJ'sdecisions. In the appeal against Priestley J's decision (which reasoning it applied in the appeal against Faire AJ's decision) the Court of Appeal rejected both the suggestion that the High Court was a hearing authority under the TAA in the context of challenge proceedings under part 8A and the argument that failure to assess the tax under subpart EH led to Venning J levying a tax in breach of s 22(a) of the Constitution Act as being a tax levied other than by Act of Parliament:11[34] While it is correct that a hearing authority may make an assessmenton a de novo basis, we see Mr Muir's position as essentially advocating aninterpretation of the Income Tax Act. If that interpretation was"unambiguously correct" as Mr Muir now says it is, it should have been advanced during the challenge proceedings which were the appropriate mechanism for such a submission to be made. More to the point, it shouldhave been the basis on which Accent's tax returns for the relevant years wereprepared. In any event, both the High Court and the Supreme Court inRedcliffe SC12 found that the sub-part EH argument was moot, given the conclusion in Ben Nevis 200813 that the insurance contracts were part of a tax avoidance arrangement.[35] Accent 2004,14 subsequently confirmed in Ben Nevis 2008, upheldthe Commissioner's assessment on the basis of the Court's interpretation of the Income Tax Act. Thus, in carrying out the Court's constitutional functionof interpreting legislation, the High Court, Court of Appeal and Supreme Court reached the conclusion that the tax assessed by the Commissioner was correctly assessed in terms of the Income Tax Act. Thus, the tax that was"levied" was the tax that was levied under the Income Tax Act and thereforein accordance with s 22(a) of the Constitution Act. Exactly the same11 Accent Management Ltd v Attorney-General [2014] NZCA 351, at [34] – [39].12 Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013] 1 NZLR 804.13 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 3.14 Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC) and the unsuccessful application for recall of this judgment in Accent Management Ltd v Commissioner of Inland Revenue (2006) 22 NZTC 19,759 (HC).analysis applies to s 1, art 4 of the Bill of Rights, which is to the same effect as s 22(a) of the Constitution Act.[36] When viewed in this light the position now taken by Accent is no more than a contention that Accent 2004 contained an error of law, namely the application of subpart EG rather than subpart EH. Redcliffe SC provides a complete bar to the setting aside of the decision of the High Court on the basis that it involves an error of law. The analysis at [44] of Redcliffe SCapplies equally to the present case: again the propositions which are put forward by Accent are that that true legal position is governed by subpart EH and that the failure to apply it deprived the High Court of jurisdiction. The Supreme Court was clear that in those circumstances the High Court did not have jurisdiction to recall or set aside its judgment on questions of law which have been the subject of appellate decisions.[37] Applying that decision to the facts of this case, we conclude that the High Court does not have jurisdiction to deal with the application put to it in these proceedings and that Priestley J was correct to dismiss the proceeding on the basis that the High Court did not have jurisdiction to deal with it.[38] Mr Muir also argued that the Supreme Court decision in Tannadyce15supported the proposition that a decision that does not conform to the requirements of the Income Tax Act can be set aside. He said the majority inTannadyce emphasised the need for a court dealing with a tax dispute to decide the case in accordance with the statute, even if the point is not raisedby either party. This, he said, impliedly overturned the Supreme Court'sreasons for not allowing Mr Gudsell to put his sub-part EH argument to the Court in Ben Nevis. In addition, he said, it supported his point that adecision that does not conform with the statute (even where the "correct"interpretation was argued by either party) is unlawful.[39] We do not accept that Tannadyce supports Accents's case. The factthat a majority of the Supreme Court applied a test of judicial review that had not been argued by either party says nothing about the approach to pt 8A challenge proceedings. The Court made it clear that judicial review is not an available remedy where a point could have been raised in pt 8A challenge proceedings. The fact that it contemplates the possibility of judicial review of a decision of a Taxation Review Authority does not provide any support for judicial review of a High Court decision. The Supreme Court inTannadyce said nothing about re-opening judgments after they have been sealed and have been subsequently upheld at two levels on appeal.[14] Against those decisions I turn to consider Mr Muir's argument that the ordersFaire AJ made unlawfully imposed a tax and allowing these proceedings to proceed would impermissibly perpetuate that order.15 Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153.The proceedings are not brought in reliance on Faire AJ's decision[15] Mr Muir submitted that the present proceedings have been brought in relianceon the applicants' failure to comply with Faire AJ's orders. I do not accept this. The statements of claim traverse the lengthy history between the parties, culminating with the issuing of the statutory demands, the applications to set aside those statutory demands and the orders that Faire AJ made requiring Accent and Lexington to pay the amounts demanded.[16] The statement of claim then pleads two causes of action. The first, brought under s 241(4)(a) of the Companies Act, is that liquidators should not be appointed on the ground that the defendants have no substantial creditors other than the plaintiff, no significant assets, are insolvent and unable to pay their debts. The second action, brought under s 241(4)(d) of the Companies Act, is that the pleaded circumstances make it just and equitable for the companies to be placed in liquidation and, further, that it is inappropriate for insolvent companies to continue in existence with the potential to accrue further liabilities and it is in the public interest to maintain the integrity of the tax system.[17] It is clear from the pleadings, therefore, that the basis of the application to have liquidators appointed is not, either solely or even primarily, the order made by Associate Judge Faire requiring Accent and Lexington to pay specified sums to the Commissioner. The validity of Associate Judge Faire's order would not affect the Commissioner's right to bring the proceedings in the form it has done; the essential points are that the Commissioner has served a statutory demand that has not been set aside and can therefore make out the grounds required for its first cause of action regardless of the order requiring payment to be made. The second cause of action raises entirely different matters that do not depend on either the statutory demand or Faire AJ's orders. Thus, to the extent that Muir's argument rests on the link betweenthe orders to pay specified sums and this Court's jurisdiction to determine theseproceedings, it must fail.Faire AJ's order was not an imposition of tax.[18] Mr Muir submitted that Faire AJ's order requiring Accent and Lexington to pay the sum of money demanded by the Commissioner amounted to the imposition of a tax for which the Associate Judge had no authority (taxation being the preserve of Parliament). I do not accept this submission. Under s 291 the Associate Judge had only two options if he did not set aside the statutory demand. One was the immediate appointment of a liquidator. The other was the dismissal of theapplication together with an order requiring "the debt" to be paid. The order did notcreate any new debt, much less a tax. It was merely a step in the enforcement process relating to the tax that was the subject of the statutory demand (which had been confirmed by the Supreme Court).The tax was not assessed under sub-part EH[19] This is the sub-part EH argument that the Court of Appeal has rejected. Mr Muir submitted that a hearing authority under the Income Tax Act had to assess the tax in accordance with sub-part EH8(1) and the Supreme Court's decision in Ben Nevis16 does not preclude the taxpayers from pursuing an assessment on that basis.The Court of Appeal's decision is determinative of this argument and I need only record that I both respectfully agree with and, in any event, am bound to follow that decision.The Commissioner is a creditor[20] The applicants argue that the Commissioner is not a creditor, has no standing to bring this proceeding and that the orders made by Faire AJ requiring payment of the amounts for which demand had been made were illegal for the same reason. The argument is, in summary, that, although the Commissioner has the power to sue in her own name under s 156 TAA by virtue of s 14(1) Crown Proceedings Act 1950, liquidation proceedings are not an action for recovery of tax within the meaning of s 156. Nor can the Commissioner act under s 6A TAA because liquidation16 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.proceedings can only be brought by a creditor and the Commissioner is merely an agent for the creditor, who is the Crown.[21] This argument was advanced unsuccessfully in the applications for stay of liquidation proceedings brought by the three other Trinity scheme participants, Ben Nevis, Bristol and Redcliffe.17 I rejected it because I consider that the definition of"creditor" in s 240 of the Companies Act 1993 encompasses the Commissioner inrelation to proceedings brought to recover or pay tax debt and, therefore, the Commissioner is a creditor for the purposes of liquidation proceedings brought under s 241 of the Companies Act. I do not need to repeat the reasons for this conclusion; they are fully explained in my Ben Nevis/Bristol judgment.18The proceedings are an abuse of process[22] Mr Muir submitted that the proceedings are an abuse of process because the Commissioner obtained the orders requiring payment of the outstanding tax by"deliberately or recklessly misleading the hearing authority as to what it shouldconsider in determining what tax had already been imposed by Parliament". He also relies on the NOPAs served by Accent and Lexington earlier this year. Mr Muir submitted that the process to determine those notices should be completed before any further steps are taken.[23] The NOPAs are based, in the main, on the EH argument. Given the Court ofAppeal's decision regarding that argument, I cannot see that it could possibly be anabuse of process to pursue the current proceedings, notwithstanding the existence of the NOPAs.Balance of convenience[24] As I have already indicated, the assertion that the balance of convenience favours Accent and Lexington because there are outstanding issues to be determined on extant appeals has been overtaken by the recent decisions on those appeals.17 Commissioner of Inland Revenue v Ben Nevis Forestry Ventures Ltd [2014] NZHC 1876;Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2014] NZHC 1877.18 Commissioner of Inland Revenue v Ben Nevis Forestry Ventures Ltd, above n 11.[25] Nor, for the reasons I have already given, should the existence of the NOPAs stand in the way of these proceedings.[26] Thirdly, Mr Muir submitted that there may be civil claims against the liquidator for entering into compromises of litigation that the current boards of directors would not have agreed to if the liquidators' appointment is ultimatelyannulled. This point requires a degree of speculation that does not justify weight being placed on it.[27] Fourthly, Mr Muir submitted that, contrary to the Commissioner's assertionof a lack of bona fides on the part of Accent and Lexington, the companies are entirely within their rights to question the application of the Income Tax Act. This is not an issue which I can treat as favouring Accent and Lexington. Even if the various steps they have taken were completely bona fide, the issues they have sought to raise have now been properly considered and determined by the Court of Appeal.[28] Fifthly, Mr Muir submitted that there was no prejudice to the Commissioner in staying the proceedings. To the extent that this ground relied on the extant appeals, I do not need to consider it. In addition, however, he submitted that there was no prejudice because the Commissioner is the only creditor (leaving aside intra- group debts), neither company is trading and neither has made dispositions within the last income year. This is a point that I considered in the Ben Nevis and Bristoland Redcliffe proceedings. I do not need to re-visit my reasoning; it is sufficient to say that where assessments have been confirmed by the Supreme Court as correct and where the taxpayer either cannot or will not meet the debt but continues to engage the Commissioner in costly litigation, there is prejudice to the Commissioner in not having the matter finally disposed of.Result[29] I do not accept that any of the grounds relied on justify a stay of these proceedings. The applications are dismissed.[30] The Commissioner may address the issue of costs by memorandum filed within 14 days. The applicants may respond within a further seven days and the Commissioner may reply within seven days after that.____________________P Courtney J