THE COMMISSIONER OF INLAND REVENUE V ATLAS FOOD AND BEVERAGE LIMITED HC CHCH CIV-2009-409-001342

THE COMMISSIONER OF INLAND REVENUE V ATLAS FOOD AND BEVERAGE LIMITED HC CHCH CIV-2009-409-001342 27 October 2010IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2009-409-001342UNDER the Companies Act 1993 BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND ATLAS FOOD AND BEVERAGE LIMITED DefendantCIV-2009-409-001696AND CHAR CHAR LIMITED DefendantCIV-2009-409-001697AND YELLOW CROSS BREWING COMPANY LIMITED DefendantCIV-2009-409-001698AND EDWARD J SCHWARTZ INC LIMITED Defendant Hearing: 26 October 2010 Counsel: P H Courtney for Plaintiff A J Forbes QC for Defendants Judgment: 27 October 2010JUDGMENT OF PANCKHURST JIntroduction[1] These are liquidation proceedings in which the Commissioner seeks orders placing Atlas Food and Beverage Limited, Char Char Limited, Yellow Cross Brewing Company Limited and Edward J Schwartz Entertainment Inc Limited, in liquidation, and the appointment of private liquidators. Orders are opposed essentially on discretionary grounds which vary as between the four companies.Some further background[2] The four companies comprise a group. Atlas is the holding company. It owns the shares in the other three subsidiary companies, save as to 10 per cent of the shareholding in Schwartz. Mr David Henderson is the sole director of the four companies. [3] The three subsidiaries were involved in the hospitality business in SOL Square in Christchurch. Now only Char Char is actively trading. The business of Yellow Cross and Schwartz was sold by receivers in December 2009. Previously in June and July of that year the Commissioner filed these liquidation proceedings. As can be seen their disposition has been considerably delayed. [4] Following filing of the claims the companies (save for Atlas) filed notices of defence. Each company admitted the debts which were claimed to be outstanding and also their inability to pay those debts. Instead they indicated an intention to put compromise proposals to creditors of each of the companies. Indeed, meetings of creditors were convened in early October 2009. And, subsequently, applications were brought to this Court seeking approval of compromises pursuant to s236 of the Companies Act 1993. [5] The applications were heard by me on 30 November 2009. In the event a decision was not given until 24 February this year. Soon after, on 22 March, the companies sought a stay in relation to the decision declining to approve the compromises which had, of course, opened the door for the hearing of the liquidation proceedings themselves. In an oral decision dated 22 March I granted the stay application pending appeal. However, as was required by a condition of the order,the appeals were not prosecuted but rather abandoned on 9 August 2010. The reasons for that abandonment have not, to my knowledge, been explained. In any event the Commissioner then sought a hearing of the liquidation proceedings and a timetable to that end was prescribed. Such hearing occurred yesterday, 26 October, and the decision was reserved until now.Right of Atlas to be heard[6] As noted, Atlas did not file a defence at the same time as its subsidiaries did so. It was envisaged that it would need to rely upon a defence and leave to file one was isolated as a preliminary issue for determination at the hearing. In the event, however, the leave application was not pursued. [7] The Commissioner, concerned to avoid any further delay in disposition of the liquidation cases, withdrew opposition to Atlas having special leave to be heard. Pursuant to r.31.20 special leave may be granted so that a defendant may be heard despite failure to file a notice of defence. In the event this suited the purposes of Atlas. Mr Forbes QC was heard, both on behalf of Atlas and the three subsidiary companies.Atlas: should a liquidation order be made?The basis of the Commissioner's case[8] On 11 May 2009 a statutory demand was served. The amount demanded was not paid, nor was application made to set aside the demand. Therefore, as I have already noted, the present liquidation proceeding was filed in late June. [9] The present indebtedness of Atlas is $120,477 as at 21 October. This is confirmed in an affidavit sworn by Mr Shaun Bayne and dated 22 October. The indebtedness is based upon assessments predominantly of arrears of PAYE, with also some GST arrears, and arrears in accounting for deductions made on behalf of employees. In addition, penalties and interest have accrued.[10] Non-payment of a statutory demand gives rise to a rebuttable presumption of inability to pay to pay debts: s287. But there is no dispute as to this element. Counsel for the companies accepted that the subsidiaries and Atlas are unable to pay their debts in full. Hence the ground relied upon by the Commissioner is that in s241(4)(a) being that the company is unable to pay its debts.On what basis is the liquidation order opposed?[11] Mr Forbes outlined the relevant background which is also supported by an affidavit sworn by Mr Henderson. On 19 October the sum of $10,690 was paid to the Commissioner. This payment was intended to effect payment in full of the undisputable (non contestable) debt owed by Atlas to the Commissioner. In fact it proved that the payment was some $188 short on account of an adjustment to the figure made at about the time of the payment. As to that further amount Mr Forbes indicated that a trust account cheque was available to make the payment. [12] In addition, on 22 October (Friday last) notice of a proposed adjustment was filed as to the balance of the debt. Thereby Atlas invoked the statutory dispute process. I note in passing that this notice was filed at a day or two prior to the last available date on which to do so. [13] The argument continued that as a result of these actions the undisputable portion of the debt had been paid (or was in hand), while the disputable portion was now subject to a dispute process. Therefore, counsel submitted, the Commissioner was no longer a creditor; or at least circumstances existed which enabled the Court to exercise its discretion against making a liquidation order. [14] With reference to the first point I was referred to the decision of Associate Judge Osborne in Commissioner of Inland Revenue v Property Ventures Limited.1 In that liquidation proceeding the Commissioner elected to proceed by reference to the undisputable portion of the company debt and, in the event, a liquidation order was1 Commissioner of Inland Revenue v Property Ventures Limited CIV-2010-409-000123, 27 July 2010.made on that basis. Hence, Mr Forbes submitted that the Commissioner accepted the appropriateness of viewing the relevant debt as the undisputable portion.The Commissioner's response[15] However, Mrs Courtney did not accept this. She argued that the Commissioner remains a creditor and for the full amount of the debt which is claimed. Section 240(1) defines a creditor by reference to a person entitled to claim that a debt is owing to him or her in accordance with s303 of the Act. That section provides that a debt or liability may be "present or future, certain or contingent", that is it may be admitted to proof in a liquidation despite the existence of those features. [16] Counsel also relied on an affidavit sworn by Mr Shaun Bayne. In it he noted that the disputable portion of the Atlas debt included significant assessments of PAYE arrears made in August and September of 2009 for $42,000 and $52,000 (in round terms) respectively. These arose early on in the receivership. Annexed as an exhibit to the affidavit is a part affidavit sworn by Mr Hollis who was one of the receivers of Yellow Cross and Schwartz. He takes up the narrative and explains the relevant circumstances in which the PAYE arrears are said to have arisen. [17] I consider the easiest course is to quote the material paragraphs from Mr Hollis's affidavit. It was sworn in support of the plaintiff's case in a proceeding between D B Breweries v Henderson & Others 2 in which the plaintiff seeks summary judgment against the three individual defendants as guarantors. Mr Hollis in his affidavit comments that the receivers incurred increased expenses in the course of the receivership as a result of various actions attributed to Mr Henderson, and he then continues:36. To give an example, Mr Henderson advised me on the first day of the receivership that all of the staff working in the bars were employed by another of his companies, Atlas Food & Beverage Limited ("AFB"), and not the Companies in receivership. After lengthy discussion with Mr Henderson and his staff, and after taking legal advice, it was agreed that the receivers would pay the gross wages to AFB and AFB would continue to employ the staff and account for PAYE taxation.2 D B Breweries v Henderson & Others CIV-2010-409-1408.37. On the 13th day of the receivership, we were advised by the IRD that pre-receivership PAYE returns had been filed in the individual names of Yellow Cross, Edward J Schwartz and Fish and Chip Shop. 38. While the staff had employment agreements, they did not specify who the employer actually was. We needed to obtain a legal opinion as to who the employer of the bar staff actually was. 39. This necessitated us making an urgent application to the High Court for an extension of the 14 day period to ascertain precisely who the employer of the staff was. We had 14 days in which to either terminate the existing employment contracts or to extend them. Because of the gap in the contractual arrangements, this application had to be made at significant extra cost, both by way of receivers' fees and legal fees. The application was granted. 40. After this investigation, we proceeded on the basis that AFB was the employer of the staff in SOL Square. We gave AFB a gross sum of money each week to cover payment of all the employees' net wages and the PAYE. This process went on for some 10 weeks where we tried to work with AFB to operate the bars. 41. We decided in early September of 2009 that this arrangement with AFB would not continue and gave AFB 3 weeks notice that we would not continue to use them in this manner. 42. AFB advised all the staff on Monday 28 September 2009 that they were redundant. We then re-employed all of the staff on receivers' contracts under the names of the 3 companies. 43. We subsequently discovered in October of 2009 that in fact AFB had not paid the PAYE tax due to the IRD on behalf of the employees. We are now aware that AFB is in dispute with the IRD in relation to those PAYE payments. 44. Mr Henderson, or someone at AFB on his behalf, filed post- receivership PAYE tax returns in the receivership companies' names without any reference to us and without our knowledge or agreement. 45. Mr Henderson's solicitor, Mr Smith at Cousins & Associates wrote to the Commissioner of Inland Revenue (copy of letter dated 24 March 2010 attached as exhibit "A") which confirmed that Mr Henderson's view was that it was our responsibility as Receivers to have paid this tax. 46. I, together with Mr Cain, repeatedly asked Mr Henderson why he had taken these steps without any reference to us and at no stage has he provided us with a satisfactory answer. Resolving this issue with the Commissioner of Inland Revenue has taken a significant amount of time which has added to the cost of the receiverships.[18] As I understand it Mrs Courtney points to this affidavit evidence with reference to the merits of the pending PAYE dispute. However, her essentialargument remained that the Commissioner is a creditor of the company in the sum of $120,477 (regardless that the major part of this sum is now in dispute), and moreover that it would be inappropriate to exercise the discretion to not make a liquidation order in the circumstances of this case.Evaluation[19] It is common ground that the jurisdiction to make an order is discretionary regardless that grounds to liquidate the company have been made out. For the purposes of these cases the nature of the discretion is sufficiently explained inCommissioner of Inland Revenue v Chester Trustee Services Ltd. 3 The case concerned an application to set aside a statutory demand. It is acknowledged that the jurisdiction in relation to setting aside a statutory demand is likewise discretionary, and that the required approach to its exercise is similar to that in the present context. Tipping J at [1] of his judgment noted that the statutory demand discretion is general in nature. The circumstances for its exercise are not prescribed. It follows that examples of the previous exercise of the discretion, while helpful, are not to be taken as defining the limits of the discretion. Rather, its limits must remain at large. [20] At [3] he added this:That 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 come down to a judgment by the Court as to whether the creditor's prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.3 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA).In re Thames Freightlines (In Rec), 4 Greig J, in a passage which is to similar effect, also listed a number of consideration which may militate against the liquidation of a company. [21] I am in no doubt that the Commissioner remains a creditor of Atlas. Moreover, the extract from the affidavit of Mr Hollis suggests that the recent initiate to dispute the PAYE assessments may be fraught. I am aware from the approval of compromise proceedings that the total debts of Atlas are significant. At that point there were 20 unsecured creditors for amounts totalling about $900,000 and secured creditors of $3.6m. [22] I am also influenced by the history to which I have already referred. The recent flurry of activity in paying the non-contestable amount and filing a notice of proposed adjustment represents more of the same, and at the eleventh hour. I do not consider there are matters of policy, principle or justice which outweigh the Commissioner's rights. To the contrary, I see this as a plain case, not one for departure from the general policy that insolvent companies should be placed in liquidation. I shall return to the terms of the order which I propose to make shortly.Char Char[23] This company's tax liability as at 21 October was shown as $68,011, although a payment made at about that time seems to have reduced the liability to around $63,000. This figure comprises largely arrears of GST (about 70 per cent) and PAYE (approximately 20 per cent) with smaller amounts relating to employee deductions. As Mr Forbes explained, Char Char is not in receivership and continues to trade as a bar and restaurant. It employs 15 staff either on a full-time or part-time basis. Earlier this month the company submitted a payment proposal to the Commissioner. It also subsequently responded to his request for the provision of further information. The proposal was that the debt be paid by eight equal monthly payments. Mr Forbes indicated that he was instructed $16,000 was available for immediate payment. He noted as well that although there are other creditors of the4 In re Thames Freightlines (In Rec) (1981) 1 NZCLC 98,112 (HC).company, non have taken enforcement action. Nor, indeed, have Char Char's secured creditors. [24] Mr Forbes understood that the proposal was still alive, or put another way, under consideration by the Commissioner. In the alternative, however, if the Commissioner would not entertain the payment proposal, he requested that I make a provisional liquidation order to come into force if payment of the debt in full was not made within say 14 days. [25] Mrs Courtney, in responding to these submissions, indicated that the payment proposal had been declined by the Commissioner on 22 October. This was because income tax returns for the years ended March 2009 and 2010 had not been filed, and nor was the supporting information provided in relation to the proposal considered sufficient. In particular, cash flow and details of the balance sheet were apparently not forthcoming. Hence, effectively the matter for my consideration is the appropriateness of making a provisional order as sought on behalf of the company. [26] Mrs Courtney was also opposed to this. She submitted that a liquidator should be appointed; that he would be in a position to assess the commercial viability of the business undertaking and then to take steps in the best interests of all creditors. She noted that appearances have been filed by the receivers of Edward Schwartz and another subsidiary, the Fish and Chip Shop Limited. The receivers support the present application for Char Char to be placed in liquidation. [27] Further, it was argued that the public interest favoured a liquidation order so that the affairs of the group could be the subject of an investigation, particularly given the history to which I have referred. [28] Finally, Mrs Courtney argued that it would be wrong in principle to allow time, even 14 days, for payment to be made before the order became operative. This liquidation proceeding has been afoot for well over 12 months. The company has had ample time in which to pay the debt. It has not done so, but rather has made only belated efforts in the past few weeks.[29] I am in broad agreement with the submissions made by counsel for the Commissioner. The history of this and the relating proceedings, is to my mind an important consideration in assessing the exercise of discretion sought by the company, namely the indulgence of a 14 day period of grace in which to avoid the effect of a liquidation order. In my view it would be simply contrary to established practice in the liquidation regime to make a provisional order in the present circumstances. I accept there may be cases where that course is appropriate, although a short adjournment might ordinarily be preferred to the making of a provisional order. But this is not a case involving some exigency which might warrant an innovative approach. Rather, it is one where an indulgence is sought and in the context of a liquidation application which has been pending for many months. I am also conscious that there are other creditors but, most importantly, that the Commissioner, who has considerable knowledge of the tax affairs of this and the other companies, asserts his prima facie right to have an order made. I can find nothing sufficient to displace that prima facie entitlement. Again, I shall return to the terms of the order shortly.Yellow Cross / Edward J SchwartzThe background[30] The tax liabilities of these companies are $181,504 and $146,892 respectively. In relation to Yellow Cross the liability is predominantly arrears of GST (about $130,000) and a significant amount of PAYE (about $40,000). In relation to Edward J Schwartz the liability is almost entirely arrears of GST. [31] For similar reasons as with the other companies, including non-payment of a statutory demand, the Commissioner seeks liquidation orders. These were opposed by Mr Forbes but on a basis rather different to that in relation to the previous two companies. To recap, Yellow Cross and Edward J Schwartz were placed in receivership on 30 July 2009, together with another subsidiary, Fish and Chip Shop Limited. Mr Hollis became one of the receivers. The companies traded for a period of about six months. In December 2009 the businesses of the subject companies were sold.The argument[32] The receivers have filed two six monthly reports which deal with the three companies on a consolidated basis. The reports show that during the period of trading the combined trading receipts (sales) were of the order of $1.9m. The sale of the businesses brought in about $1.75m. The consolidated reports disclose that the Commissioner has received by way of preferential payments from the receivers, the sum of $18,131 in the case of Yellow Cross and $9,323 in the case of Edward J Schwartz. This is a total of $27,455 towards satisfaction of the preferential part of the debts. [33] The companies, and Mr Henderson as its director, consider that a much greater sum, if not the total amount owed, should have been met by the receivers. Recently this issue has been taken up with the receivers by virtue of an exchange of correspondence between solicitors acting for the companies on the one hand, and the receivers on the other. [34] I also heard detailed submissions from Mr Forbes yesterday directed to two aspects of the receivers' conduct. I should note that those submissions were made in the context of an application for leave to amend the notices of defence filed by the companies. I propose, however, to respond to the argument directly and without reference to the context in which such argument was advanced. [35] The first aspect developed by counsel concerned sales during the period of trading and which were said to be subject to the preferential regime prescribed by schedule 7 of the Companies Act. Clause 1(5) prescribes the priority to be accorded to core tax liabilities, essentially that they are payable following proper expenses incurred in the context of the liquidation or receivership. Clause 2 provides that, where the assets of a company are insufficient to meet preferential claims, preferential creditors enjoy priority over secured creditors in relation to "accounts receivable" and the company's "inventory". Hence, the argument continued, sales made during the six month trading period totalling about $1.9m should have been applied towards the preferential claims.[36] This contention was put to the receivers' solicitors in a letter from the companies' solicitors. On 15 October solicitors retained by the receivers responded to the assertion as follows:The proceeds of sales during the course of the receivership were absorbed by costs associated with trading, including purchases, wages, management fees, rent and other overheads. As such, there were no proceeds available to be considered as part of the preferential payments regime.This explanation is not accepted by the company or by Mr Forbes. [37] The second aspect concerned the approach adopted following the sale of the businesses in December and the basis upon which a calculation was made concerning the sum available for payment to the Commissioner in his preferential capacity. Included, for example, as expenses which affected the net amount available, were rental arrears which had been paid by the receivers during the course of trading in the sum of over $440,000. Again the appropriateness of paying this amount in priority to payment of the preferential claims was challenged. The response contained in the same letter from the receivers' solicitors was to this effect:Had rent arrears not been paid, there would have been no business to sell as the landlord refused to consent to the assignment unless the rent arrears were paid in full. The rent arrears were a cost required to be paid to bring about the sale. Accordingly the arrears were appropriately accounted for in the calculation of the preferential payment due to IRD.Again, Mr Forbes made detailed submissions contesting this proposition. [38] I have not, I think, had the benefit of full submissions in relation to these quite difficult and technical aspects. Nor, to be fair, have I done justice to the submissions which were advanced by counsel yesterday. It seems to me that the receivers' solicitors' letter is very much a brief response to the points raised, rather than anything approaching considered argument in relation to them. [39] Mr Forbes, I think, recognised this position. His submissions were couched on the basis that there were "issues" as to the correctness of the receivers' actions. Such issues, he submitted, should be properly investigated and in this context he asked me to exercise the residuary discretion to adjourn the liquidation proceedings for a period of a few weeks so that the Commissioner could further consider the twoissues to which I have averted. Reference was made to the Tax Administration Act 1994 and the obligation which rests upon the Commissioner to, over time, collect the highest net revenue practicable within the law. [40] The challenge to the approach adopted by the receivers was also raised in correspondence with the Commissioner in the lead-up to the hearing yesterday. The response on behalf of the Commissioner was to express doubt in relation to the two central contentions to which I have briefly referred; and then to maintain that liquidation orders should be made, leaving it to a liquidator to evaluate the merit of the contentions. The response also noted that the duty resting upon the Commissioner in relation to collecting tax was subject to the rider that he must have regard to the limited resources which are available to him. [41] In seeking orders Mrs Courtney relied on much the same factors as were advanced in relation to the other two companies. But she noted that these were undisputable debts and also the history of these proceedings to which I have already extensively referred. She submitted again that there is a need for external investigation of the affairs of the companies in this group. She noted as well the existence of numerous unsecured creditors who are owed over $5m by Yellow Cross and over $1.4m by Edward J Schwartz. [42] In all the circumstances I am satisfied that the Commissioner's stance in relation to the challenges which have been raised is a reasonable one. The discretion to deviate from making a liquidation order, when grounds to wind up a company have been made out, is not to be exercised lightly. Indeed I consider there is no principled basis upon which to deny, or even delay, the Commissioner's prima facie entitlement to have orders made immediately. For these reasons, and as in relation to the other two companies, I am of the view that liquidation orders must be made at this stage.The orders[43] I order that Atlas Food and Beverage Limited, Char Char Limited, Yellow Cross Brewing Company Limited and Edward J Schwartz Entertainment Inc Limitedbe put into liquidation. I appoint David Donald Crichton and Keiran Ann Horne, chartered accountants of Christchurch, to be liquidators of the companies (they having consented to this course). [44] The Commissioner is awarded costs on a 2B basis. I record that the liquidation orders were made at 3.05 pm.Addendum[45] Following delivery of the above judgment Mr Forbes applied for a stay in relation to the liquidation order affecting Atlas, but not those in relation to its subsidiaries. He indicated that Associate Judge Osborne had likewise granted a stay in relation to a related company, Property Ventures Limited (In Receivership), following the making of a liquidation order against it. [46] A similar point is relied upon in relation to both companies. This is whether the Commissioner is properly to be viewed as a creditor of the company where the undisputable portion of the tax liability has been paid, and the disputable portion is the subject of challenge following the filing of a notice of proposed adjustment. [47] Mrs Courtney indicated that the Commissioner would abide the decision of the Court concerning a stay. Her only submission was to the effect that the two appeals should be aligned, and conditions imposed to that end similar in nature to those applying to Property Ventures. [48] I am satisfied that a stay is appropriate. Despite the ruling I have just given, the point at issue may be seriously arguable. Conditions can be fashioned to ensure that the appeal is pursued without delay. [49] I grant a stay, upon condition: (a) that the appeal is to be progressed expeditiously, including in relation to the filing of the case on appeal and making application for a fixture;(b) this appeal is to be aligned with that in relation to Property Ventures so that the two may be heard together (if possible) given the similarity of the grounds of appeal; (c) leave is reserved to the parties to revert to the Court for further directions, if necessary.Further addendum[50] Subsequent to delivery of this judgment, but before it was typed back, Mrs Courtney sought that I recall the direction appointing David Crichton and Keiran Horne as liquidators of Char Char in favour of an appointment of Malcolm Hollis and Rhys Cain of PricewaterhouseCoopers. This was the appointment originally sought in relation to this company, although overlooked by me. However, upon further consideration this substitution was not pursued. A consent to act is to be provided by Mr Crichton and Mrs Horne and, accordingly, their appointment is confirmed. ____________________________________________________________________Solicitors: Crown Law office, PO Box 2858, Wellington 6140 for Plaintiff Cousins & Associates, PO Box 22-115, Christchurch for Defendants (Counsel – A J Forbes QC, PO Box 2929, Christchurch)