COMMISSIONER OF INLAND REVENUE v BEN NEVIS FORESTRY VENTURES LTD [2014] NZHC 1746

COMMISSIONER OF INLAND REVENUE v BEN NEVIS FORESTRY VENTURES LTD [2014] NZHC 1746 [25 July 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-004673[2014] NZHC 1746BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND BEN NEVIS FORESTRY VENTURESLIMITEDDefendantCIV-2013-404-004676BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND BRISTOL FORESTRY VENTURELIMITEDDefendantHearing: 12 March 2014Appearances: M Evans and R L Roff for PlaintiffG J Judd QC for DefendantsJudgment: 25 July 2014JUDGMENT OF COURTNEY JThis judgment was delivered by Justice Courtneyon 25 July 2014 at 4.30 pmpursuant to R 11.5 of the High Court Rules.Registrar / Deputy RegistrarDateIntroduction[1] A decade ago Venning J held that an arrangement known as the Trinity scheme, under which tax deductions were claimed in connection with a forestry investment, amounted to tax avoidance.1 The Judge confirmed assessments made by the Commissioner of Inland Revenue of tax payable by investors in the scheme, including the defendants in this case, Ben Nevis Forestry Ventures Ltd and Bristol Forestry Venture Ltd. Venning J's findings were upheld in the Court of Appeal2 and the Supreme Court.3[2] In this proceeding the Commissioner seeks to have liquidators appointed to the defendants. She asserts that the defendants are unable to pay their debts,4 citing their failure to comply with both statutory demands and court orders requiring payment of the amounts demanded.5 Alternatively, the Commissioner claims that it would be just and equitable that the defendants be placed in liquidation.6[3] The defendants have applied to strike out the Commissioner's application onthe ground that she is not a creditor of the companies and therefore lacks standing to bring the proceedings. Alternatively, they seek a stay of the proceedings. In addition to the argument that the Commissioner is not a creditor, they say that liquidation would be premature because there are decisions pending on various appeals and separate proceedings on foot that, if successful, may result in the tax claimed being extinguished.[4] Rule 31.22(1) of the High Court Rules requires leave to bring these applications. Initially, the defendants did not seek leave but subsequently amended their applications to do so. The Crown did not oppose leave being granted and I grant the leave required to bring both applications.1 Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027.2 Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230, (2007) 23 NZTC 21,323.3 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).5 Companies Act 1993, s 291(1)(a).6 Companies Act 1993, s 241(4)(d).The strike out applicationThe issue[5] The Commissioner is obliged under the Tax Administration Act 1994 torecover unpaid tax "by suit in the Commissioner's official name".7 The defendants say, first, that liquidation proceedings are not a suit for the recovery of tax. Secondly, they argue that liquidation proceedings can only be brought by a creditor and the Commissioner is not a creditor, merely an agent for the creditor. The defendants say, therefore, that the statement of claim discloses no reasonably arguable cause of action, is likely to cause prejudice or delay, is frivolous or vexatious or otherwise an abuse of the Court process.8The relevant principles[6] The principles relevant to strike out applications are well established, having been summarised by the Court of Appeal in Attorney-General v Prince & Gardner9and endorsed by the Supreme Court in Couch v Attorney-General,10 namely:(a) Pleaded facts, whether admitted or not, are assumed to be true;(b) The cause of action or defence must be clearly untenable;(c) The jurisdiction to strike out is to be exercised sparingly and only in clear cases;(d) The jurisdiction is not excluded by the need to decide difficult questions of law which may require extensive argument;(e) The Court should be particularly slow to strike out a claim in any developing area of the law.[7] The Commissioner has pleaded as a fact that each defendant is indebted toher as a result of the Supreme Court's decision. In the usual course, this would be assumed, for the purposes of a strike out application, to be correct. However, on7 Tax Administration Act 1994, s 156.8 High Court Rules, r 15.1(1).9 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 at 267.10 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].Mr Judd's argument, whether the defendants are indebted to the Commissioner is a question of law. The Commissioner's pleading that the defendants are indebted toher should not, therefore, be assumed to be correct for the purposes of this application.[8] Mr Judd also submitted that the Commissioner's notices of opposition which assert that she is entitled to recover unpaid tax "on behalf of the Crown" contradictthe pleading the defendants are indebted to her. I do not accept this submission. The question is whether the Commissioner's entitlement to recover unpaid tax on behalf of the Crown confers the status of creditor for the purposes of liquidation proceedings. That is the issue raised in both the pleadings and the notice of opposition, albeit expressed slightly differently.The Commissioner's power to recover unpaid tax[9] Under the s 6A(2) of the Tax Administration Act 1994 (TAA) the Commissioner is charged with the care and management of taxes. The Supreme Court has said of this responsibility that:11[The] quantification, assessment and collection of tax due remain theessential characteristics of the Commissioner's role.[10] The Commissioner's core function described at s 6A(2) is elaborated on in s 6A(3):In collecting the taxes committed to the Commissioner's charge, andnotwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to –(a) The resources available to the Commissioner; and(b) The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and(c) The compliance costs incurred by taxpayers.[11] Section 156 confers the power and specifies the method by which the Commissioner may recover unpaid tax:11 Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 at [18] per McGrath J.All unpaid tax shall be recoverable by the Commissioner on behalf of theCrown by suit in the Commissioner's official name.[12] The effect of the Crown Proceedings Act 1950 (CPA) is specifically preserved.12 Section 156 is therefore to be interpreted consistently with the CPA, which relevantly provides that all civil proceedings taken by the Crown may be treated in the same manner in all respects as proceedings that do not involve the Crown.13Are liquidation proceedings a debt recovery process?[13] Although Mr Judd accepted that liquidation proceedings are a "suit" he didnot accept that they were a recovery process for the purposes of s 156 TAA. Although there is some divergence in previously decided cases over this point I am satisfied that the correct view is that a liquidation proceeding is a form of debt recovery.[14] In Volcanic Investments Ltd v Dempsey & Wood Civil Contractors LtdRanderson J considered whether a statutory demand was a form of debt recovery for the purposes of s 79 of the Construction Contracts Act 2002.14 Randerson J'sdecision makes it clear that he considered both the issuing of a statutory demand and the commencement of winding up proceedings to be a form of debt recovery:15[20] Where the debtor is a company, there is nothing in the [Construction Contracts] Act to suggest the issue of a statutory demand under the Companies Act is not a proceeding contemplated by s 79 for recovery of a debt. It is an integral step in the winding up process and is the usual preliminary to a winding up application under Part 9A of the High Court Rules. An application to set aside a statutory demand is a proceeding "under the High Court Rules". It is brought as an originating application under r 458D(1)(a)(vi) and falls within the definition of a proceeding under r 3. An application to wind up a company is also a proceeding under the High Court Rules (RR700A and 700C). I conclude that recovery of a debt by the lawful process of the issue of a statutory demand and the bringing up of winding upproceedings against the debtor company are "proceedings" contemplated bys 79.12 Tax Administration Act 1994, s 164.13 Crown Proceedings Act 1950, s 121(1).14 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97.15 At [20].[15] In Silverpoint International Ltd v Wedding Earthmovers Ltd, Associate Judge Doogue reached a different view.16 Noting the primary object of liquidation proceedings as being the collection and distribution of assets among unsecured creditors after the payment of preferential debts, the Judge observed that a creditor who participates in any distribution cannot be said to have recovered the money "in the proceedings" which led to the company's liquidation because the liquidationproceedings themselves do not result in any order adjudging the defendant indebted. The Associate Judge considered, instead, that:17 while liquidation proceedings are de facto used to exert pressure on companies to pay their debts, the end in view and the objective of, such aproceeding is not a "proceeding for the recovery of a debt". Thereforepreliminary step [sic] leading up to those proceedings, the issue of astatutory demand, cannot itself be a "proceeding" within the meaning ofs 79.[16] However, a subsequent decision of the Privy Council is clearly to the effect that liquidation proceedings should be regarded as a form of debt recovery. InCambridge Gas Transport Corp v Unsecured Creditors of Navigator Holdings PLCLord Hoffman said:18The purpose of bankruptcy proceedings is not to determine or establishthe existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted orestablished. That mechanism may vary in its details The important pointis that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them.[17] I am satisfied that liquidation proceedings brought under Part 16 are a form of debt recovery. The Commissioner's application for an order that a liquidator beappointed is therefore a suit for the recovery of unpaid tax as contemplated by s 156 TAA.Is the Commissioner a creditor for the purposes of the liquidation proceedings?[18] The defendants say that even if the proceedings are a suit for the recovery of unpaid tax for the purposes of s 156 TAA, the Commissioner lacks that standing to16 Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007.17 At [83].18 Cambridge Gas Transport Corp v Unsecured Creditors of Navigator Holdings PLC [2006] UKPC 26, [2007] 1 AC 508 at [14] – [15].bring it because under s 241(2)(c) of the Companies Act only a creditor can bring such proceedings and the Commissioner is not a creditor. The defendants' argumentis straightforward; tax is public money and the property of the Crown.19 Therefore the debt is owed to the Crown. The Commissioner is not the Crown but merely a statutory agent appointed to collect tax on behalf of the Crown.20 An agent charged with the collection of a debt is not a creditor.[19] Mr Judd did not exclude the possibility of the Commissioner being a creditor in respect of the unpaid tax. To the contrary, he accepted that the Commissioner could acquire the status of creditor and become entitled to make an application under s 241(2)(c)(iv) of the Companies Act. However, he argued that, in order to do so, the Commissioner would need to bring separate proceedings for the recovery of the unpaid tax and obtain a judgment. Only then, as a judgment creditor, would the Commissioner also have the status of a creditor for the purposes of s 241(2(c).[20] Under Part 16 the liquidation process begins with the appointment of a liquidator by shareholders,21 the board22 or the Court on the application of specified persons.23 In this case the only relevant specified person is a creditor; s 241(2)(c)(iv) provides that:A liquidator may be appointed by – (c) The Court, on the application of – (iv) a creditor (including any contingent or prospective creditor)[21] "Creditor" is defined in s 240(1):In this Act, unless the context otherwise requires, –creditor means a person who, in a liquidation, would be entitled to claim in accordance with s 303 of this Act that a debt is owing to that person by the company; and includes a secured creditor only –(a) For the purposes of ss 241(2)(c) 19 Income Tax Act 1994, s BB1, Public Finance Act, s 2.20 Tax Administration Act 1994, s 156; Cates v Commissioner of Inland Revenue [1982] NZLR 530 (CA) at 534.21 Section 241(2)(a).22 Section 241(2)(b).23 Section 241(2)(c).(emphasis in original)[22] Section 303 identifies the debts that a person could claim in a liquidation:(1) Subject to subsection (2), a debt or liability, present or future, certain or contingent, where it is an ascertained debt or a liability for damages, may be admitted as a claim against a company in liquidation.(2) Fines, monetary penalties and costs to which s 308 applies are not claims that may be admitted against a company in liquidation.[23] There is no dispute that unpaid tax falls within s 303 as a debt claimable in a liquidation. Further, some types of unpaid tax are specifically recognised as having priority. Section 312(1) provides that:The liquidator must pay out of the assets of the company the expenses, fees and claims set out in Schedule 7 to the extent and in the order of priority specified in that schedule and that schedule applies to the payment of those expenses, fees and claims according to its tenor.[24] Schedule 7 is headed "Priority of payments to preferential creditors". Sub- clause (5) relevantly provides that:After paying the claims referred to in sub-clause (4), the liquidator must next pay, to the extent that it remains unpaid to the Commissioner of Inland Revenue or to the collector of customs, as the case may require –(a) Tax payable by the company in the manner required by Part 3 of the Good and Services Act 1985; and(b) Tax deductions made by the company under the PAYE rules of the Income Tax Act 2007; and(c) Non-resident withholding tax deducted by the company under the NRTT rules of the Income Tax Act 2007; and(d) Resident withholding tax deducted by the company under the RWT rules of the Income Tax Act 2007; and[25] In my view, the Commissioner is a creditor for the purposes of s 241(2)(c)(iv), notwithstanding the definition in s 240(1). The opening words of s 240(1), "unless the context otherwise requires", means that the definition is not exhaustive; the context may require "creditor" to be interpreted more widely than isset out and I consider that the context does require a wider interpretation in this case.I reach this conclusion by reference to the purpose of the Act and the effect of other provisions relating to creditors.[26] First, one of the stated objectives of the Companies Act is:To provide straightforward and fair procedures for realising and distributing the assets of insolvent companies.[27] Mr Judd's suggestion that the Commissioner cannot claim in a liquidation for unpaid tax until she has obtained a judgment for the amount would run counter to this objective. It would also undermine the purpose and effect of s 156 and result in significant duplication of proceedings; the assessments have already been confirmed by the Supreme Court and further challenge to them is precluded by s 109 of the TAA. As a result, the defendants could have no defence to proceedings brought by the Commissioner. There is, therefore, no apparent utility in requiring separate proceedings to obtain a judgment and Mr Judd did not suggest any. What the defendants propose is neither straightforward nor fair, either to the taxpayers concerned or to the taxpayers funding the litigation. Nor did Mr Judd address the status of the Crown as creditor once the Commissioner had obtained a judgment debt; the tax cannot be owing to both.[28] Secondly, requiring the Commissioner to embark on litigation before being able to take steps under s 241(2) in respect of unpaid income tax would see the Commissioner treated differently depending on the kind of tax owing. Under s 312 and Schedule 7(5) the Commissioner is a preferential creditor in a liquidation for the purposes of specified tax debts such as PAYE and GST. On Mr Judd's approachthese taxes must also be debts owing to the Crown, rather than the Commissioner, yet the Commissioner is recognised as a creditor in respect of them. There seems no good reason for the Legislature to have intended that the Commissioner be able to prove in a liquidation in relation to one form of tax but not another.24[29] Thirdly, the definition of "creditor" in s 240(1) differs subtly from the way it is defined in other parts of the Companies Act. In Part 14, which addresses24 Companies Act 1993, s 312.compromises with creditors, and Part 15A, which addresses voluntary administration, a wider definition is used:Creditor includes –(a) A person who, in a liquidation, would be entitled to claim in accordance with s 303 that a debt is owing to that person by thecompany (emphasis added)[30] On this less restrictive definition the Commissioner would undoubtedly be a creditor. The reason for a wider definition in Parts 14 and 15A likely reflects the very different nature of those parts compared to the liquidation provisions in Part 16. Compromises with creditors and voluntary administration lack the coercive nature of liquidation. On one view that might suggest that the scheme of Part 17 justifies a much more limited approach to identifying a creditor. But the recognition of the Commissioner as a preferential creditor in Schedule 7 significantly undermines that approach. Instead, I view the existence of wider definition, coupled with the fact that a wider definition is contemplated if the context so requires and the fact that the Commissioner is a preferential creditor for some types of tax, as indicating that"creditor" in s 241(2) is to be interpreted as including the Commissioner in respect of tax that she is charged with recovering under s 156 TAA.Application for stay[31] The application for a stay of the proceedings is based, first, on the argument that the Commissioner is not a creditor, which I have already rejected. The second ground is that there are appeals and other proceedings outstanding that may ultimately result in the tax not being payable and it would therefore be premature to appoint a liquidator.Relevant principles[32] Rule 31.11 permits an application to restrain the publication of advertising and stay further proceedings in relation to the liquidation. Rule 31.11(2), however, provides that:The Court must treat an application under sub-clause (1) as if it were an application for an interim application and, if it makes the order sought, it may do so on whatever terms the Court thinks just.[33] The principles relating to an application for a stay in winding up proceedings are clear. Wallace J summarised them in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd:25(a) The Court has an inherent jurisdiction to stay winding up proceedings where the debt is the subject of genuine dispute;(b) The jurisdiction is an inherent one to prevent the abuse of process. There is no inflexible rule;(c) The governing consideration is whether the proceedings suggest unfairness or undue pressure;(d) It is a serious matter to stay winding up proceedings and a decision to do so is not to be made lightly. The onus is on the applicant and itis normally necessary to demonstrate "something more" than thebalance of convenience considerations usually considered on an application for an interim injunction.[34] As to the last point, the Court of Appeal made clear in Anglian Sales Ltd v South Pacific Manufacturing Co Ltd the caution with which an application to stay a winding up proceeding should be approached:26 the right to have a winding up petition determined, being a right conferred by statute, ought not be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where thechallenge 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 a 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.[35] This approach applies even where a stay is sought pending disposal of appeals.2725 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379, citingExchange Finance Co Ltd v Lemington Holdings Ltd [1984] 2 NZLR 242 (CA); Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA); Fletcher Development & Construction Ltd v New Plymouth Hotels Holdings Ltd [1986] 2 NZLR 302 (CA); Pink Pages Publications Ltd v Team Communications Ltd [1986] 2 NZLR 704.26 Anglian Sales Ltd v South Pacific Manufacturing Co Ltd above n 25, at 251 – 252.The outstanding appeals and proceedings[36] Mr Judd submitted, first, that the strike out application in this proceeding raises complex issues of law and if the defendants fail on that application (which they have) they are likely to appeal the decision. He suggested that it would be premature to seek the appointment of a liquidator, leaving the prosecution of that appeal to the liquidator appointed. I do not accept this. The issue raised in this appeal cannot truly be described as complex. Nor is it novel; it has been raised and rejected in other proceedings.28 If there is merit in an appeal there is no reason that the liquidator could not consider advancing that.[37] Secondly, Mr Judd pointed to the pending decisions on appeals heard in March 2014. The first of these concerned a decision by Associate Judge Faire (as he then was) refusing to set aside statutory demands served by the Commissioner in respect of the assessed tax that was the subject of the Supreme Court's decision.29The defendants applied to set aside the demands on the ground that there werecollateral challenges to Venning J's 2004 on foot which, if successful, would mean that the shortfall penalties and interest being claimed by the Commissioner would not be owing.30 The Associate Judge considered that the assessments were to be regarded as valid unless and until they were declared invalid.31 That decision was, of course, made against the background of the Supreme Court's confirmation of the Commissioner's assessments and s 109 TAA, which precludes further challenge tothe correctness of the assessments.[38] The Court of Appeal also heard appeals against a decision of Katz J strikingout the defendants' proceedings seeking to have Venning J's 2004 decision set asideon the ground of presumptive bias.32 Katz J considered that this Court was functus officio and she did not have jurisdiction to determine the issue. In reaching her decision the Judge noted that a previous assertion of presumptive bias against27 See e.g. Property Ventures Ltd v Commissioner of Inland Revenue [2010] NZCA 217, (2010) 20 PRNZ 757.28 Accent Management Ltd v Commissioner of Inland Revenue [2013] NZHC 3197.29 Bristol Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 2384, (2013) NZTC 21,031.30 Bristol Forestry Venture Ltd v Commissioner of Inland Revenue above n 29; Accent Management Ltd v Commissioner of Inland Revenue above n 28.31 Following BASF New Zealand Ltd v Commissioner of Inland Revenue [1994] 1 NZLR 172.32 Ben Nevis Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 2361, 26 NZTC 21,032.Venning J on the same ground (the Judge being liable to the Commissioner in relation to an interest he had in a forestry investment) had been rejected by Goddard J in an appeal against Venning J's refusal to recuse himself from determining costson the challenge proceedings.33[39] Finally, the defendants have separate proceedings on foot against the Attorney-General seeking relief under the New Zealand Bill of Rights Act (BORA). This claim was brought following Katz J's refusal to deal with an application to join the Attorney-General into the proceedings seeking to have Venning J's 2004 decisionset aside. Without objection from Mr Judd, Ms Roff described the BORA proceedings claim as being premised on the same allegations of bias as have previously been rejected. Asher J heard the Attorney-General's application to strikeout the proceedings in February 2014 but, by agreement, the matter is being treated as having been stayed pending the outycome of the appeal against Katz J'sdecision.34Do these circumstances warrant staying the proceedings?[40] I do not accept that these circumstances justify staying the Commissioner'sproceedings. This is not an application for a stay sought for a short time pending the determination of a genuinely new point where the decision would assuredly spell the end of the litigation. There is no reason to think that if the the outcome of the appeals or the proceeding against the Attorney-General in this Court is adverse to the defendants, it will be accepted as determinative of the defendants' position. The history of this matter shows only that the defendants will continue to litigate, notwithstanding their insolvent state, until they get the answer they want.[41] Further, there is no prejudice to the defendants in the appointment of a liquidator, since they are not trading and have no assets. It was not suggested that, even if the appeals were successful, this position would change. There may beconsequences for the defendants' shareholders but I was not addressed on that aspectand it would not be a relevant consideration in any event.33 Muir v Commissioner of Inland Revenue [2007] 3 NZLR 495.34 Ben Nevis v Attorney-General HC Auckland CIV-2013-4040-004345, 16 April 2014.[42] There are, however, very good reasons not to stay the proceedings. The tax that is outstanding is due under assessments that were confirmed by the Supreme Court in 2008. The Commissioner has an obligation to recover the tax and to ensure the integrity of the taxation system. The steps she is taking to do so are entirely orthodox. Nor can there be any sensible suggestion of undue haste or pressure,given the lengthy period since the Supreme Court's decision and the variousunsuccessful attempts to collaterally challenge Venning J's original decision.[43] I am mindful of the Court of Appeal's caution in Anglian Sales against too readily precluding the exercise of the Commissioner's statutory rights. Although it seems very unlikely that the tax will be paid, that fact should not be determinative. There is a significant public interest in maintaining the integrity of the taxation system through the resolution of unpaid tax debt. It ought not to be the case that apparently insolvent companies owing large amounts of tax can simply not pay while at the same time continuing to engage the Commissioner in costly and time- consuming litigation. That is a spectacle that surely undermines the taxation system and risks bringing it into disrepute in the eyes of other taxpayers.Result[44] The defendants' applications for orders striking out or staying the proceeding are dismissed.[45] The defendants are to file statements of defence within 21 days.[46] If the Commissioner seeks costs she may file a memorandum within 14 days. The defendants are to reply within a further 14 days and the Commissioner may reply within a further 7 days.____________________P Courtney J