COMMISSIONER OF INLAND REVENUE v WATKINS [2015] NZHC 1780

COMMISSIONER OF INLAND REVENUE v WATKINS [2015] NZHC 1780 [31 July 2015]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV-2014-470-186[2015] NZHC 1780IN THE MATTER OF the Insolvency Act 2006AND the bankruptcy of DONNA MARYWATKINSBETWEEN COMMISSIONER OF INLANDREVENUEApplicantAND DONNA MARY WATKINSRespondentHearing: 21 July 2015Appearances: C D Walmsley for ApplicantT D Grimwood for RespondentJudgment: 31 July 2015JUDGMENT OF ASSOCIATE JUDGE R M BELLThis judgment was delivered by me on 31 July 2015 at 2:00pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Inland Revenue Department, Legal and Technical Services (C D Walmsley) Hamilton, for ApplicantLance & Lawson (T D Grimwood) Rotorua, for Respondent[1] The Commissioner of Inland Revenue applies for an order adjudicating Ms Watkins bankrupt. The Commissioner obtained judgment against Ms Watkins in the District Court on 10 September 2014 for $268,493.72. The Commissioner served a bankruptcy notice on Ms Watkins. She did not comply with the notice. The Commissioner has satisfied the requirements of s 13 of the Insolvency Act 2006. There is no dispute that the Commissioner is a creditor, that the debt has not been paid and that Ms Watkins is insolvent.[2] The case has been called in court three times. Each time, Ms Watkins has asked for an adjournment on the ground that she has an insurance claim and she hopes the proceeds of the claim will be enough to clear her debt to the Commissioner.[3] Adjournments in bankruptcy cases are not uncommon. While a debtor maynot contest the merits of the creditor's application, he or she may request anadjournment on the basis that his or her cash flow difficulties are temporary only andthe creditor's debt will be quickly repaid in the near future. Allowing adjournmentsin such cases is acceptable, as it may be disproportionate to put a debtor into bankruptcy if they can clear their debts within a short time.[4] A significant feature of this case is that although the Commissioner obtained judgment against Ms Watkins for $268,493.72, she says that the debt has now risen to $485,901.52 even though Ms Watkins has not worked or carried on any activity that could make her liable to taxes since judgment. She is a beneficiary. The rub in this case is all the penalties and interest that the Commissioner has charged since the original judgment of less than a year ago.Ms Watkins' circumstances[5] Ms Watkins has not given any evidence. I record matters submitted by her counsel and also rely on an affidavit of a collections officer in the Inland Revenue Department.[6] Ms Watkins carried on business as a beauty therapist. She apparently had a number of branches. Some equipment failed, which gave her a business disruption claim under an insurance policy. She appears to have stopped business in aboutJanuary 2014. I infer that from the Commissioner's summary of account used in the District Court proceeding, which shows no assessments for PAYE and GST after January 2014. For the last year or so, Ms Watkins has been receiving a WINZ benefit. Ms Watkins' defaults in paying various taxes date from March 2013.[7] Although she says that she has insurance cover for the business disruption, she has made little progress with her claim. On 20 July 2015 her counsel explained that the accountant she wished to use to calculate her losses was out of the country temporarily and she had not been able to arrange for any other accountant to do the job. Understandably, her insurer will not be able to deal with her claim until she provides it with information from which her losses can be calculated. Ms Watkins'delay is not in her interests because of the rate at which her debt to the Commissioner is increasing. When the case had been called earlier, I had expressed my surprise at the increase in the debt claimed by the Commissioner.[8] The Commissioner relies on non-compliance with a bankruptcy notice under s 17 of the Insolvency Act as the act of bankruptcy in most bankruptcy applications. In many cases the debt claimed in the application is greater than the amount of the judgment the Commissioner has obtained against the debtor. The usual explanation is that further taxes have fallen due since the judgment. This case, however, stands out because of the rate at which the debt has increased since judgment. That led me to ask whether the Commissioner is entitled to charge added interest and penalties. The Commissioner helpfully provided submissions on the question.The District Court judgment and sums alleged due since then[9] In the District Court the Commissioner sued Ms Watkins for taxes due at 10 April 2014. She claimed $256,808.85 in taxes plus $11,338.87 for interest. Ms Watkins did not defend. The Commissioner sealed a default judgment. For this case the Commissioner gave updating evidence showing taxes claimed to be due at 7 July 2015. Here are the two sets of figures:Tax Type 10 April 2014 7 July 2015Student loan employer $21,869.36 $51,663.62Kiwisaver employee deductions $11,014.47 $26,619.82Kiwisaver employer contributions $9,935.55 $15,952.13Employer superannuation contribution tax $1,516.60 $1,899.10Goods and Services tax $81,261.02 $129,066.27PAYE tax deductions $80,126.37 $186,263.91Student loan $3,219.91 $3,604.82Income tax $37,718.48 $46,996.33Working for families tax credits $17,508.60 $22,086.67TOTAL: $271,170.76 $484,152.67[10] The total shown owing at April 2014 is more than the amount for which the Commissioner entered judgment. The difference is $3,023.04. In submissions, the Commissioner explained that that was Kiwisaver employer contributions which the Commissioner did not claim as payable.[11] The Commissioner provided this breakdown of the increase in the debt since judgment:Non-payment penalties/late filing penalties $120,810.24Late payment penalties $45,195.48Use of money interest $36,215.24Increased assessments $13,783.99Total: $216,004.95[12] The Commissioner says that liability for student loan employer, Kiwisaver employee deductions, Kiwisaver employer contributions, and PAYE tax deductions for the period ending 31 January 2014 was increased because the original amount was entered incorrectly. The Commissioner has also included a default assessmentfor GST for the period ending 31 March 2014, although it is not clear to me that Ms Watkins was carrying on business after January 2014.[13] The Commissioner has also charged late filing penalties at $50.00 per GST return every two months, and $250.00 per employer monthly schedule per month. More significantly the Commissioner has also charged further non-payment penalties, late payment penalties and use of money interest. The Commissioner does not contend that Ms Watkins has carried on any taxable activity so as to make her liable for goods and services tax since March 2014, has employed staff since January 2014 (so as to make her liable for PAYE tax deductions), has earned any taxable income, or has done anything else that could make her liable for taxes. The increase in indebtedness is largely for non-payment of taxes that have already accrued and, to a minor extent, for non-filing of returns.[14] Ms Watkins is alleged to be liable for non-payment of penalties under s 141ED of the Tax Administration Act 1994 for failing to pay amounts shown in employer monthly schedules. That penalty is 10 per cent per month up to a maximum cumulative penalty of 150 per cent. That can be seen in the increase in the sums claimed for PAYE.[15] Ms Watkins is also liable for late payment penalties under s 139B of the Tax Administration Act 1994. There is an initial late payment penalty of one per cent on the day after the default date, and a further penalty of four per cent at the end of the sixth day after the initial penalty, and ongoing incremental penalties of one per cent each month following the default date. There is apparently no ceiling on the penalties that can be charged under s 139B.[16] The Commissioner is also entitled to charge interest under Part 7 of the Tax Administration Act, including on unpaid non-payment penalties under s 141EDand late payment penalties under s 138B. The current rate of interest (with effect from 8 May 2015) is 9.21 per cent per annum.[17] Section 156A of the Tax Administration Act 1994 makes it clear that the Commissioner is entitled to recover any penalty tax by civil proceedings. TheCommissioner must accordingly be entitled to claim in a bankruptcy application that there are unpaid penalties.Can the Commissioner claim for further amounts owing as at the date of judgment?[18] The Commissioner's right to claim for further interest and penalties is subjectto the judgment. The matters to be considered are the scope of the Commissioner'scauses of action, finality and merger.[19] Some of the increased amount of $216,004.95 is said to have arisen before judgment was obtained on 10 September 2014. There are not only the increased assessments of $13,783.99, but also charges for interest and penalties. In the District Court proceeding the Commissioner claimed $11,338.87 for interest that had accrued up to 14 April 2014. Now the Commissioner claims further interest, accrued both before and after judgment. Similarly, penalties have continued to accrue. For example, for PAYE due on 30 April 2013, the non-payment penalty at 10 April 2014 was $2,947.25, but at 7 July 2015 it was $12,122.04.[20] A money judgment ascertains or establishes the liability of a defendant to the plaintiff for a previously existing liability.1 Whereas before judgment the Commissioner was a creditor of Ms Watkins for unpaid taxes, on judgment being given the Commissioner became a judgment creditor for that liability. The judgmentestablished Ms Watkins' liability to the Commissioner, including the amounts, for the claims made in the proceeding.[21] The judgment was final. It cannot be subject to adjustment except in the limited circumstances allowed by the law – for example, by appeal, application to set aside, recall and correction of clerical errors. Outside those limited circumstances, the debt cannot be adjusted. A judgment creditor cannot assert that the debt is for a greater sum than the judgment any more than a judgment debtor can say that it should be lower.1 Ex parte Chinery (1884) 12 QBD 342 (CA) at 345 per Cotton LJ.[22] On judgment being entered, there is only one debt, and that is the debt in the judgment. That is the merger rule.2 The debt for taxes has become a judgment debt.[23] The finality and merger rules bar the Commissioner from adjusting the judgment debt only for claims within the District Court proceeding. Matters that were outside the causes of action in the original proceeding may allow the Commissioner to assert further indebtedness, even if it accrued before she enteredjudgment. It is therefore necessary to establish the scope of the Commissioner'scauses of action.[24] The Commissioner's claim in the District Court was for a number of types oftaxes, with liability for each type of tax falling due at regular dates: monthly (for example for PAYE), bi-monthly (for GST) and annually (for income tax). Each tax of a different type falling due on a particular date which was not paid gave rise to a separate liability – a distinct cause of action. The failure to pay that tax also gave rise to ancillary liabilities – penalties and interest. They are relief that can be claimed as part of the cause of action for non-payment of the tax on which they are based, but they are not a cause of action in themselves. That position is similar to a claim for damages in tort and a claim for interest in a common law debt claim.[25] In Ex party Fewings, Cotton LJ said:3Of course a creditor cannot be compelled to take interest down to the date of his judgment, and, if he does not choose to claim it, he cannot afterwards bring a separate action for the interest which he might have obtained in his first action, but which he omitted to claim.And Lindley LJ said:4I suppose the Plaintiff in the action could properly have included in his judgment interest up to the date of the judgment, and his not doing so was probably a slip. I dare say upon an application to a Judge at Chambers it would have been corrected. But we are asked to say that, because of that slip, there is still a debt outstanding in respect of that unclaimed interest. If the Plaintiff were to sue the defendant again for that uncalculated interest, his action would be considered frivolous, and would fail, and he would have2 Legislation may provide for the merger rule not to operate, as in Woodward v Crutchley[1962] NZLR 221 (SC).3 Ex parte Fewings; in re Sneyd (1884) 25 Ch D 338 at 351.4 At 354-355.to pay the costs of it. The former judgment, if not set right by an application at Chambers, would be a bar, and the Plaintiff would be taken to have waived that interest.[26] Conveniently, the Commissioner's standard summary of account reflects thisdistinction between the tax giving the cause of action and the associated charges for ancillary relief. For each tax, there are entries showing the associated penalties and interest as well as miscellaneous transactions and payments, resulting in a balance owing for that tax.[27] The following are taxes that the Commissioner did not claim in the District Court proceeding that are alleged to have fallen due before judgment:(a) GST for the two months ending March 2014;(b) Late filing penalties for GST for May and July 2014; and(c) Late filing penalties for PAYE from February to August 2014.[28] The District Court judgment does not bar the Commissioner from claiming these taxes. On the other hand, the Commissioner has not explained how Ms Watkins can be liable for these taxes after she stopped business.[29] On the other hand, the default judgment fixes the amount of Ms Watkins'liability for the taxes, including ancillary relief, in the Commissioner's notice ofclaim in the District Court. That stated the amounts alleged to be due at 10 April 2014, not 10 September 2014, the date of judgment. The Commissioner cannot now assert that further interest and penalties on those taxes fell due before judgment or that she underclaimed for some of the taxes: she is estopped by the judgment. If the Commissioner wanted to recover for all penalties and interest up to the date of judgment, she could have made that clear in her notice of claim, and asked for a formal proof hearing to establish the amount of ancillary relief as at the date of hearing.[30] Accordingly, part of the sums the Commissioner now claims under the judgment appears to be over-stated. I have not been provided with calculations to work out the exact amount of the excess claim.Can the Commissioner claim for penalties and interest falling due after judgment?[31] The question here is whether the merger rule applies after judgment so as to bar the Commissioner from claiming penalties and interest after judgment on those taxes claimed in the District Court proceeding.[32] I accept the Commissioner's submission that the merger rule does not apply. There is a case on point. In London Borough of Ealing v El Isaac,5 the plaintiff had a statutory right to repayment of a sum together with interest until repayment. The court held that the entry of judgment did not stop interest running at the prescribed rate. Cases on merger were distinguished as applying only to contracts and covenants. The merger doctrine could not contradict a statute.6[33] I apply that approach. For any taxes unpaid at the date of judgment, the Commissioner is entitled to claim further non-payment penalties under s 141ED of the Tax Administration Act, late payment penalties under s 139B, and interest under s 120H.[34] There is a further question not addressed by the Commissioner. It seemsimplicit in the Commissioner's approach that she limits her claim to interest to that recoverable under the Tax Administration Act and does not claim interest under any other head.[35] Section 65A(2) of the District Court Act 1947 provides that:(2) Every judgment debt of an amount exceeding $3,000, or such other amount as may be fixed from time to time for the purposes of this section by the Governor-General by Order in Council, shall carry interest from the date of the judgment or order on the amount for the time being remaining unpaid.5 London Borough of Ealing v El Isaac [1980] 2 All ER 548 (CA).6 At 552.Section 65 was inserted under the District Courts Amendment Act (No 2) 1982. The current rate of interest is five per cent.7[36] Clearly Parliament cannot have intended a taxpayer against whom the Commissioner has obtained judgment for unpaid taxes to pay interest under s 120H of the Tax Administration Act and also interest under s 65A of the District Courts Act. This is a case where later specific legislation, dealing only with interest on unpaid taxes, prevails over an earlier general enactment, which applies to judgments generally.[37] The upshot is that the debt claimed by the Commissioner as due at 7 July 2015 is overstated for penalties and interest falling due between 10 April and 10 September 2014. That aside, the Commissioner is entitled to claim use of money interest and penalties under the Tax Administration Act, falling due after judgment.Exercise of the discretion[38] While I have not calculated the exact amount payable by Ms Watkins, it is clear that the sum is still substantial and that it is beyond her means to pay. Further, if I were to adjourn the proceeding, her indebtedness is likely to increase markedly, particularly with non-payment penalties running at 150 per cent.[39] I explored with counsel for Ms Watkins how much she hoped to obtain under her insurance claim. No firm answer could be given. Apparently the amount of the claim would turn on calculations which are still to be carried out by accountants. All the same, Ms Watkins faces a very real danger that continued delays in pursuing her insurance claim will result in the debt to the Commissioner increasing hugely before she can make any payment.[40] The Commissioner is resolute that all taxes, interest and penalties must be paid. Her position is that any softening in this stance will threaten the integrity of the tax system.87 District Courts (Prescribed Rate of Interest) Order 2011, cl 4.8 See Tax Administration Act 1994, s 6(1).[41] The prospect of Ms Watkins' debt spiralling upwards while she struggles ontrying to pursue her insurance claim is unpalatable. While I understand the purpose of the interest and penalties provisions of the Tax Administration Act to encourage voluntary compliance with tax obligations and to deter non-compliance, it is plain that loading more and more debt on Ms Watkins is not going to do Ms Watkins or the Inland Revenue any good.[42] There is only one way that I can think of that could stop the debt accumulating. That is to bankrupt Ms Watkins now. Ms Watkins resists that. She still wishes to pursue her insurance claims. She believes that unless she can control the matter her insurance claim will be lost. She does not trust the Official Assignee to take the matter up or to pursue it as vigorously as she would.[43] Ms Watkins' efforts so far have not been particularly impressive. Onadjudication, Ms Watkins' claim will vest in the Official Assignee. The OfficialAssignee is experienced in assessing recovery prospects for bankrupt estates. I seeno reason to doubt the Official Assignee's ability to assess her claim and pursue it if it is viable.[44] This is a case of an unresolved insolvency. Ms Watkins has been granted adjournments to enable her to pursue her insurance claim, but her efforts to date have not cured her insolvency. Not bankrupting her will leave her exposed to an ever- mounting debt to the Commissioner. It is better to face the fact that she cannot deal with that debt. Her own interests, as well as the Commissioner's are likely to bebetter served by adjudicating her bankrupt and leaving the Official Assignee to pursue the insurance claim.[45] For these reasons, I make an order adjudicating Donna Mary Watkins bankrupt. The time and date of the order is 31 July 2015 at 2:00pm.[46] I fix costs in favour of the Commissioner in the sum of $4,522 plus disbursements of $1,034.05...Associate Judge Bell