COMMISSIONER OF INLAND REVENUE v BF7 TRADING LIMITED [2021] NZHC 2553

COMMISSIONER OF INLAND REVENUE v BF7 TRADING LIMITED [2021] NZHC 2553 [28 September2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-2319[2021] NZHC 2553IN THE MATTER OF the Companies Act 1993BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND BF7 TRADING LIMITEDDefendantHearing: 24 September 2021Appearances: Cloete Van Der Merwe for the PlaintiffG D Clews for the DefendantJudgment: 28 September 2021JUDGMENT OF ASSOCIATE JUDGE R M BELLThis judgment was delivered by me on 28 September 2021 at 4:00pmpursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors:Inland Revenue Department (C Van Der Merwe), Auckland, for the PlaintiffICLaw/Culliney Foley (Owen Culliney), Hamilton, for the DefendantCopy for:G D Clews, Auckland, for the Defendant[1] BF7 Trading Ltd seeks a further adjournment of the Commissioner of InlandRevenue's liquidation application. It wants more time to carry out an agreement underwhich it has sold its "book" of labour. If that contract is completed, it says that it willclear its liabilities to the Commissioner. It also hopes there will be a surplus. TheCommissioner opposes and seeks a liquidation order now.[2] The Commissioner has applied for liquidation on the ground that BF7 TradingLtd is not able to pay its debts. In October 2020, she served a statutory demand on theregistered office of BF7 Trading Ltd, demanding paying of $661,625.59. This wasmade up of arrears of GST (totalling $190,409.90) going back to April 2017, arrearsof employer taxes (including PAYE) going back to 30 September 2017 (total$467,604.33), and unpaid income tax for the years ending 31 March 2017 and31 March 2019. The core unpaid taxes were $362,092.28. The company did notcomply with the demand. The Commissioner began this proceeding on 27 November2020. The solicitor's certificate for the hearing on 24 September 2021 showed thatthe outstanding taxes are now $886,879.67.[3] Since the Commissioner's statutory demand, BF7 Trading Ltd has not paidGST in October 2020, November 2020, December 2020, March 2021, April 2021 andJune 2021. It did pay GST in the other months. Again, since the statutory demand ithas not paid PAYE in October 2020, June 2021, July 2021 and August 2021. It didpay PAYE in other months. The total debt to the Commissioner has increased not onlybecause of ongoing interest and penalties on unpaid taxes, but also because new taxeshave not been paid. Of the taxes that have accrued since the statutory demand, thecore tax portion is $133,079.02.[4] The business of BF7 Trading Ltd is the recruitment and supply of labour,especially for the construction industry. In the past it has sourced labour from thePhilippines, but that came to an end with the onset of the COVID-19 pandemic. Itnow recruits labour locally. The company was incorporated in September 2016 underthe name Bishop Family Holdings Ltd. It changed its name to BF7 Trading Ltd inJuly 2017. On incorporation, the sole director was Mr Roy Gillingham David Bishop.He resigned in March 2017. Since then, the company's director has been Mr SpencerMcKenzie Gillingham Bishop. Mr Roy Bishop is the only person in the company togive evidence. The company employs him as a senior personnel consultant.[5] In 2019, the company entered into an arrangement with the Inland Revenue topay arrears of tax in instalments. The company did not comply with the arrangementand the Inland Revenue cancelled it. In 2020, the company made other proposals tothe Inland Revenue to pay off the debt, but no agreement was reached. This year, BF7Trading Ltd made proposals to sell its "book" of workers, with a view to paying offits debts to the Commissioner. The company says it has no other significant creditors.[6] The Commissioner's liquidation application has been called on 12 February,12 March, 23 April, 14 May, 11 June, 16 July, 13 August, 10 September and24 September 2021.[7] At the first call the company said it was exploring a proposed sale to One WorldResourcing Ltd, which carries on a similar business. It also had a back-up if thatproposal came to nothing. The Commissioner of Inland Revenue opposed anyadjournment. The Commissioner's evidence referred to past arrangements which hadnot been complied with, and the fact that the company had received eight wage subsidypayments from the Ministry of Social Development but had not paid the PAYE forthose payments. The company was apparently trading while insolvent.[8] Notwithstanding the Commissioner's opposition, I adjourned the applicationto give the company the opportunity to sell its "labour placement book." At the callon 12 March 2021, the company sought another adjournment. The proposed sale toOne World Resourcing Ltd had not gone ahead, but the company was now activelypursuing a sale to Extrastaff Management Ltd. The proposed price would clear theoutstanding taxes.[9] As there seemed reasonable prospects of this proposal producing funds,I adjourned the matter again. By the April call, the matter had progressed to the extentthat firm terms of contract were being negotiated with Extrastaff Management Ltd.I required the company to give fortnightly reports to Inland Revenue on progress onthe sale. The company's evidence has shown that it has been in frequent ongoingcontact with the Inland Revenue on progress.[10] On 11 June 2021 I was advised that an agreement had been entered into withExtrastaff Management Ltd. The company was to catch up on four tax payments (twoPAYE and two GST). Assignment of the company's rights to the Inland Revenue hadbeen completed and irrevocable instructions had been given to the company'ssolicitors to receive and disburse payments in accordance with the assignment. Bythis stage the Commissioner was not opposing adjournments.[11] On 16 July 2021 the company sought a further adjournment to allow theCommissioner to be satisfied on certain matters. I was advised that the first paymentunder the agreement with Extrastaff was imminent. Payment was to go directly to theCommissioner.[12] In August 2021 I was advised that the contract price had increased. The firstpayment under the agreement with Extrastaff, $150,000, was to be paid within twoweeks. I adjourned the matter to 10 September 2021. The promised payment of$150,000 did not eventuate. The company's explanation was that construction siteshad closed to comply with the fresh national lockdown restrictions, imposed as a resultof the appearance of the Delta variant of the COVID-19 virus, and Extrastaffaccordingly did not pay. This was the straw that broke the camel's back for theCommissioner. The Commissioner was no longer interested in the company'sproposal to pay off its debt with payments over time. On 10 September 2021 theCommissioner sought a liquidation order.[13] I adjourned the matter to 24 September 2021 to give the parties the opportunityto file evidence.[14] In many liquidation and other insolvency proceedings, the creditor establishesthe grounds for an order. For companies that is an order under s 241(4)(a) of theCompanies Act 1993 when the company is unable to pay its debts. A company mayhowever resist an immediate liquidation order by proposing that, if given time, thecreditor's debt will be satisfied and the company will establish its solvency. Its currentinability to pay the creditor's debt is no more than a temporary cash-flow difficulty.The court has a discretion whether to make a liquidation order. Under s 241(4) thecourt may appoint a liquidator and may properly decline to make a liquidation order ifthere are viable alternatives. Those alternatives include not only formal arrangementssuch as compromises with creditors under Part 14 of the Companies Act and voluntaryadministration under Part 15A, but also by extending time to see if the company candischarge its liabilities. Many liquidation applications are discontinued afteradjournments as a result the company clearing its liabilities. The business cancontinue. The expenses of liquidators and the loss in value associated with liquidationare avoided.[15] Accordingly, BF7 Trading Ltd's initial requests for an adjournment were notunusual. What was unusual is the number of adjournments and the time taken to putthe proposed sale of the "book" in place.[16] An affidavit by an Inland Revenue officer explains that the lawyers for BF7Trading Ltd presented a draft deed of assignment to which the Commissioner wouldbe a party, along with irrevocable instructions, under which the Commissioner wouldreceive payments made by Extrastaff and a draft undertaking by the company'slawyers. The officer says in the light of advice from the department's lawyers theCommissioner did not enter into the arrangement. The Commissioner also rejected thecompany's request for financial relief to pay overtime. That decision was made in thelight of legal advice, and also the Inland Revenue's Standard Practice Statement(SPS18/04) for "Options for relief from tax debt".[17] On 9 September 2021 the Inland Revenue officer wrote to counsel for BF7Trading Ltd explaining the Commissioner's reasons. The company filed furtherevidence in response. This included a schedule of payments to be made under the saleof the "book". The schedule showed payments totalling $875,000 to the InlandRevenue over eleven months, with the first payment to be $150,000.[18] The thrust of the submissions for the company was that this still offered thebest chance for the Commissioner to be paid. The core tax payable to theCommissioner, some $488,000, would be paid by the fourth month. Even if thetransaction did not carry through to completion, the Inland Revenue would still benefitmore than if the company were put into liquidation now. It was submitted that theInland Revenue officer had overstated the risk in opposing the arrangement. Whilethe schedule showed payments totalling $875,000 to the Inland Revenue, less than thefull debt, it was submitted that some of the debt could be remitted. The prospects ofremission would be improved if the court were to give its blessing to the arrangement.The failure to pay the $150,000, as indicated at the adjournment on 13 August, was asa result of an unforeseeable supervening emergency. Now that Auckland is at AlertLevel 3, work will start again on construction sites and the agreement with Extrastaffis likely to resurrect. There was no threat to the integrity of the tax system, becausethe taxpayer was trying to do its utmost to comply with its tax obligations.[19] There is another aspect, which I became aware of from dealing with anotherliquidation application, this one by One World Resourcing Ltd against anothercompany associated with the Bishop family. Mr Roy Bishop, the senior personnelconsultant, is an undischarged bankrupt. This is his second bankruptcy. His firstbankruptcy was in 2013. He was automatically discharged in 2016. This time, he wasadjudicated bankrupt in May 2019. Mr Clews explained that the Official Assigneehad given consent under s 149 of the Insolvency Act 2006 to Mr Roy Bishop beingemployed as a senior recruitment consultant by BF7 Trading Ltd, a companycontrolled by a relative. After the hearing Mr Clews sent a copy of the OfficialAssignee's consent. The consent, given in August 2019, is subject to conditionsincluding that the bankrupt must have no managerial control over the business and itsassets; he must not hold himself out to be in a management position within thebusiness; he must not incur any liabilities on behalf of the business; and he was not tohave authority or access to the business bank account.[20] Notwithstanding the Official Assignee's consent, Mr Roy Bishop'sinvolvement in the business gives me concern. From what I can judge in thisproceeding, his part seems to be prominent. He swore affidavits in February, March,April and September 2021. No one else has given evidence for the company. In hisaffidavits, he shows close knowledge of the affairs of the company, especially thenegotiations first with One World Resourcing Ltd and second with ExtrastaffManagement Ltd. From his presence in court on one occasion when the case wascalled, he appears to be the person within the company giving instructions to counsel.His affidavits are silent about anyone else actually running the company.[21] I acknowledge that I do not have full information. All the same, Mr Bishop'sinvolvement in the company raises questions whether he may be a de facto director ofthe company and whether his role in the company amounts to management, somethingoutside the scope of the Official Assignee's consent. At the least, his employment bya small closely-held company controlled by a relative, his status as an undischargedbankrupt and the company's ongoing failures to pay taxes are an unhappycombination.[22] A commonly cited purpose for making a liquidation order is to allow anindependent investigation of the affairs of the company and to safeguard the interestsof unsecured creditors.1 That is often applied even if there is little prospect of adistribution for creditors. That may count against acceding to suggestions thatliquidation will not serve a useful purpose or that those behind the company can betrusted to realise the assets more efficiently and at less cost than a liquidator would.Liquidation accordingly also serves a public purpose. There is good reason to applythat here.[23] The Inland Revenue officer was criticised for suggesting that a liquidatorwould be able to manage the agreement with Extrastaff. There is something in thecriticism, as a liquidator is unlikely to have the industry experience required to makesure that the agreement is completed successfully.[24] The sale of the company's "book" is a relatively unusual transaction. It is morechallenging than realising tangible assets such as land, plant and machinery. It hasbeen difficult to negotiate. Making it work is challenging, as the non-payment of$150,000 has shown. Success is not assured, even if no liquidation order were made.1 Re Feltex Carpets Ltd (in rec) (2006) 3 NZCCLR 714 (HC) at [38]; 90 Nine Ltd v Luxury RentalsNZ Ltd [2019] NZCA 424, [2020] 2 NZLR 1 at [15].[25] To sum up. BF7 Trading Ltd is clearly insolvent. For some years now it hasdefaulted many times in paying taxes. It did not keep to an arrangement made in 2019to pay its arrears. Its defaults continued after the Commissioner served her statutorydemand. Its position has got worse. The company's proposals in 2021 to sell its"book" are not straightforward. They involve payments over time and depend onongoing performance by the company. The failure to pay the promised $150,000shows that the arrangements are fragile and can fall over easily in these uncertaintimes. There can be no assurance that future difficulties may not come up again. Thecompany has been given the chance to give this matter its best shot, but its financialposition has deteriorated. Mr Roy Bishop's part in the company raises questions whichwarrant investigation by an independent insolvency practitioner.[26] In these circumstances, I do not consider that it is appropriate to give thecompany more time. I make an order putting BF7 Trading Ltd into liquidation. Thetime of the order is 4:00pm on Tuesday 28 September 2021.[27] I appoint Rhys James Cain and Larissa Helen Logan as liquidators. I approvetheir rates of remuneration on the normal terms. At the conclusion of the liquidationthey are to seek the court's approval of their overall remuneration.[28] I award costs to the Commissioner of $1,806.75 and disbursements of$1,248.81, a total of $3,055.56..Associate Judge R M Bell