THE COMMISSIONER OF INLAND REVENUE v EVALUATION CONSULT (NEW ZEALAND) LIMITED [2017] NZHC 552

THE COMMISSIONER OF INLAND REVENUE v EVALUATION CONSULT (NEW ZEALAND) LIMITED[2017] NZHC 552 [24 March 2017]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2016-485-571[2017] NZHC 552UNDER the Companies Act 1993BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND EVALUATION CONSULT(NEW ZEALAND) LIMITEDDefendantHearing: 21 and 24 March 2017Appearances: S K Shaw for the plaintiffK P Sullivan for the defendantJudgment: 24 March 2017ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH[1] On 20 July 2016 the plaintiff (the Commissioner) applied for an order puttingthe defendant (Evaluation) into liquidation. The Commissioner contended thatEvaluation had failed to comply with a statutory demand for the sum of $478,314.77served on it on 7 June 2016, and was accordingly presumed to be unable to pay itsdebts as they fell due.[2] By the time the liquidation claim was filed the debt was said to be $516,091.55.A substantial part of that sum comprised unpaid PAYE deductions with interest andpenalties thereon (total $312,162.36 owing in respect of the periods ended 31 October2014 to 30 April 2016), and unpaid GST with interest and penalties thereon($62,003.51 owing in respect of the periods ended 31 July 2014 to 31 January 2016).In addition sums of $30,472.15, $40,205.70, and $24,799.78 were said to be owing inrespect of (respectively) student loan employer deductions, Kiwisaver employeedeductions, and Kiwisaver employer deductions (in all cases in respect of the period31 October 2014 to 30 April 2016, and inclusive of penalties and interest). Smallerunpaid sums were said to be owing for employer superannuation contributions($8,571.27), and income tax ($100.00).[3] The liquidation claim was listed for first call in this court on 6 September 2016,but counsel advised in advance of that hearing that the parties were seeking to enterinto a payment arrangement to resolve the proceeding, and the claim had not beenadvertised. They jointly sought an adjournment to the first available date after6 November 2016, to allow sufficient time for Evaluation to put forward a repaymentproposal and the Commissioner to consider it.[4] The matter was adjourned to 15 November 2016, but the hearing did notproceed that day due to the closure of the court following the 14 November 2016earthquake.[5] The case was included in the list for 7 February 2017, and Evaluation's counselappeared at the hearing that day to seek a further (and final) adjournment for twoweeks. Counsel referred to a payment arrangement in respect of which there had been"some slippage", but advised that a further proposal had been put to the Commissionerlate on 6 February 2017. The Commissioner did not oppose the adjournmentapplication, and I adjourned the case to the next list date, 21 February 2017.[6] By that date it appeared that the parties had not reached a binding repaymentagreement (or if they had, further defaults by Evaluation in meeting its current taxobligations may have been sufficient to allow the Commissioner to proceed with theliquidation claim). Mr Sullivan asked for "one final adjournment" for four weeks until20 March 2017.[7] In his memorandum filed for the 21 February 2017 hearing, Mr Sullivan soughtan agreement that the Commissioner would not advertise prior to 9 March 2017. Henoted that if Evaluation had not brought its current payments up-to-date by that date,"it is expected that Inland Revenue will proceed".[8] When the case was called on 21 February 2017, Associate Judge Christiansenadjourned the matter to 21 March 2017 for the Commissioner to advertise theproceeding.[9] No resolution was reached, and the Commissioner attended to the requiredadvertising on 9 March 2017.[10] On 20 March 2017 Evaluation filed a formal application for an order that theproceeding be stayed pending further order of the court. In the alternative Evaluationsought a further adjournment of four weeks to allow it to repatriate to New Zealandcertain funds held by it in Papua New Guinea (PNG), and to "document the repaymentarrangement with Inland Revenue". The funds from PNG would be applied to meeting"lump sum amounts" to be paid to the Commissioner. Further in the alternative,Evaluation sought leave to file a statement of defence in the event that no arrangementwith the Commissioner could be finalised within the four week adjournment period.[11] The stay application was accompanied by a detailed affidavit sworn byMs Averill, the Executive Director of Evaluation. Mr Sullivan provided writtensubmissions in support.[12] The Commissioner opposed the stay/adjournment application, and I heard oralargument from counsel on 21 March 2017. At the conclusion of the hearing Iadjourned the matter to this morning with a view to delivering an oral judgment.The case for a stay or further adjournment[13] As a preliminary matter, I record that Evaluation does not dispute that it owesoutstanding taxes. And at the hearing Mr Sullivan sensibly acknowledged that, if Ifind that there is no binding agreement with the Commissioner for payment over thetwo year period for which Evaluation contends, the effect of the liability for statutorypenalties under the Tax Administration Act 1994 is that Evaluation is insolvent.[14] The principal basis for the stay or adjournment is an arrangement Evaluationsays it reached with the Commissioner on 22 December 2016.[15] There had been a number of proposals and counter-proposals exchanged beforethat date, at least some of which were described by Ms Averill in her affidavit. MsAverill began by frankly accepting responsibility for the non-payment of taxes, whichshe says began in 2014. She referred to "regular default up to the period ending 31August 2016", by which date the core tax debt was approximately $330,000, interest$45,000, and penalties $265,000.[16] The proposals which Evaluation put to the Commissioner generally proceededon the basis that the Commissioner would waive the penalties, and Evaluation wouldmake two lump sum payments, with the balance of the core tax debt paid over time byinstalments.[17] By 10 November 2016, the Commissioner had expressed a conditionalwillingness to settle on the basis of payment of all of the core tax debt, by two lumpsum payments of $50,000, an instalment period of no more than 24 months, paymentof use of money interest by Evaluation, and agreement on what would constitutedefault events if the Commissioner were to accept the proposal.[18] By 21 December 2016, Evaluation had made one payment of $50,000 onaccount of the tax arrears, and it stood ready to pay a further $50,000 on account justafter Christmas. It indicated a willingness to enter into a security agreement with theCommissioner to secure the payment proposal, including the twenty four instalmentswhich would be required to meet the core tax debt (then $373,459.26) plus interest.[19] The Commissioner's solicitors replied by email dated 22 December 2016 asfollows:Referring to your letter sent by email below, I can advise that theCommissioner has in principle agreed to the instalment proposal put forwardby Education Consult, namely:• The making of a further lump sum payment of $50,000 as soon aspossible;• The payment over no more than 24 months of all outstanding core taxes;• The payment of use of money interest on outstanding all core taxes(which will continue to accrue throughout the arrangement until all coretaxes are paid); and• The payment of all current taxes (on time) during the instalment period.As part of this arrangement Inland Revenue would write off the approximately$296,273.75 of penalties owing by Evaluation Consult.I emphasise that the proposal by Evaluation Consult has only been agreed inprinciple. There will be no binding agreement until it is formally documentedwith terms satisfactory to Inland Revenue. I expect that this can be formalisedas soon as possible in the New Year.If there are questions in the meantime, please let me know.[20] The Commissioner's willingness to consider settlement on the general lines ofthese proposals appears to have changed fairly early in the new year. The causeappears to have been Evaluation's failure to pay PAYE instalments due on20 December 2016 and 20 January 2017. The Commissioner sought an explanationfor the missed payments, and reasons were offered on Evaluation's behalf in emailsdated 20 January 2017 and 2 February 2017. The explanations were to no avail: on 2February 2017 the Commissioner's solicitors wrote advising that the proposedinstalment arrangement was declined.[21] Evaluation made further attempts through its counsel to modify its proposal, tomake it more acceptable to the Commissioner, but again the attempts wereunsuccessful. On 22 February 2017 the Commissioner's solicitors advised that herposition was unchanged. The solicitors denied that any arrangement existed forEvaluation to pay its tax arrears by instalments, and advised that the Commissionerintended to advertise the liquidation proceeding at the earliest opportunity.[22] The Commissioner was no doubt reinforced in her rejection of Evaluation'sproposal when Evaluation failed to pay a third instalment of PAYE due on 20 February2017.[23] Evaluation and its counsel were still not deterred. A further detailed proposalwas put to the Commissioner on 10 March 2017. This proposal reported the goodnews that a substantial claim Evaluation had pursued for a lengthy period against theGovernment of PNG, and in respect of which Evaluation had obtained judgment inthat country, had finally been paid. A sum of approximately $315,000 is now held inthe trust account of Evaluation's PNG solicitors. In the 10 March 2017 proposal,Evaluation proposed that in addition to the monthly payments spread out over twoyears, it would make an additional lump sum payment of $50,000, to be sourced fromthe money in PNG. There was a problem with the PNG money, however, as under thelaws of PNG money could only be remitted to New Zealand at the rate ofapproximately $4,500 per day, and it would take a considerable time for Evaluation toclear the arrears using the PNG funds.[24] Evaluation's 10 March 2017 proposal accordingly proposed to assign to theCommissioner the PNG debt, together with the anticipated proceeds of a businessinterruption insurance claim made by Evaluation following the 14 November 2016earthquake, in sums sufficient to cover the instalment payments.[25] In addition, Evaluation advised that it would have its financial and taxarrangements overseen by Deloitte, with all taxes to be set aside in a separate bankaccount to ensure that PAYE, GST and other deductions at source would be providedfor. Evaluation's counsel referred to the ten staff employed by Evaluation, all of whomhold shares in the company. The staff were said to support the company and the verygood work it does with charities around the world.[26] Evaluation did receive the proceeds of the business interruption insuranceclaim ($56,525). Approximately $50,000 of that sum was paid to the Commissioneron 15 March 2017 to bring the current PAYE payments up-to-date.[27] A further proposal made by Evaluation to the Commissioner on 15 March 2017was declined by the Commissioner on 16 March 2017.[28] In her affidavit in support of the stay application, Ms Averill accepted that thestay application was very much "the last roll of the dice" for Evaluation. Howevershe insisted that the business is viable and profitable, and contended that no goodpurpose would be served by putting the company into liquidation and putting the tenstaff members out of work.[29] Ms Averill explained that Evaluation specialises in "evaluative monitoring oforganisations' strategic and/or operational outcomes", using a specially designed ITplatform. She deposed that the company has grown significantly over the last fiveyears, particularly in the promotion and use of its IT platforms, which have requiredsignificant investment. She says that there were cash-flow problems, which wereexacerbated by the non-payment of the PNG debt, which went back to September2014.[30] Ms Averill frankly acknowledges that the unpaid tax is substantial, and shemakes no excuses for it. However she says that she did keep the Commissionerregularly updated with details of developments in the recovery action beingundertaken in PNG, and also as to the financial position of Evaluation to make otherpayments. She expresses the view that the Commissioner (correctly) anticipated thatshe would received a substantial repayment of core taxes once the PNG debt wasrecovered.[31] Ms Averill describes the disruption caused by the 14 November 2016earthquake, which had a significant impact on Evaluation. Evaluation was forced tovacate its premises, and Ms Averill was forced to relocate the staff to her home for aperiod. She says that productivity dropped substantially. The result was that therewas not enough money to meet all cash obligations, and the PAYE instalments due on20 December 2016, 20 January 2017 and 20 February 2017 were missed.[32] Ms Averill says that she was "not initially made aware by our junioraccountant", but some of the payments missed were PAYE. She says that if she hadbeen advised of the correct dates she "would have made every effort to prioritise thepayment of PAYE over other payments, recognising the trust nature of the PAYE".[33] In her affidavit, Ms Averill says that the advertising of the liquidation claimcreated significant challenges for Evaluation with its funders. However the two banksinvolved both said they would support the company if it could reach an agreementwith the Commissioner.[34] On the present state of the business, Ms Averill says it is viable: there was aturnover of $1,000,000 in the 2016 tax year, and a profit of $150,000. She refers tothe ongoing contracts the company has, and the important work it is doing withinternational development partners and charities. She notes the problems caused bythe long delay in recovering the PNG money, and the disruptive effects of theNovember 2016 earthquake.[35] Ms Averill points to the support Evaluation has had from other creditors (whoare owed much smaller sums than the Commissioner). She says that Evaluation hasbeen "acting fairly on meeting on a pro-rata basis any deferred creditors, and to ensurethat as at 1 April we have very manageable sums agreed to for any deferred creditors(many, relating to costs incurred in PNG seeking to recover the PNG money, have nowbeen paid).[36] Finally, Ms Averill points to the systems the company has put in place,including the separate bank accounts for tax payments and the appointment of Deloittein an oversight role, to ensure nothing like this ever happens again.[37] At the hearing on 21 March 2017 Mr Sullivan advised, as an alternative toEvaluation's proposal for an additional $50,000 lump sum payment and payment ofthe balance of the core debt and interest by instalments over the next two years, that ifa four week adjournment were granted, means might be found to repay the entire$315,000 held by the PNG solicitors to the Commissioner.[38] If such a payment were made, it would almost be sufficient to clear the entire"core" tax debt and interest. However penalties, which I am told now amount toapproximately $309,000 could not be paid.1 Mr Sullivan properly acknowledged atthe hearing that, if regard is had to the penalties, Evaluation is presently insolvent.[39] The proposal of a four week adjournment, with payment of the $315,000 fromPNG within that period (if it can be achieved), was rejected by Ms Shaw at the hearing.Her firm instruction was that the Commissioner wished to proceed with the liquidationclaim.1 The Commissioner's certificate as to unpaid debts dated 23 March 2017 puts the total outstandingdebt, including penalties and interest, at $685,349.04Counsel's submissions on the stay or adjournment application[40] Mr Sullivan submits that the Court's jurisdiction to grant a stay of a liquidationclaim, whether under r 31.11 of the High Court Rules or in the court's inherentjurisdiction (which is not restricted by r 31.11), is designed to allow the court toprevent an abuse of process, to ensure that the liquidation process is being usedproperly and fairly. He acknowledges that the onus is on the applicant for a stay, andthat it is a serious matter for the court to stay winding up proceedings.[41] Mr Sullivan also acknowledges that an applicant for a stay of a liquidationclaim must show something more than facts showing that the balance of conveniencefavours a stay. As he put it, a strong prima facie case is required to show that there isa dispute, or that there are clear and persuasive grounds for a stay.[42] Mr Sullivan referred to a number of authorities, while acknowledging that moststay applications have been unsuccessful. Among the cases cited were Commissionerof Inland Revenue v Onsite Roofing and Cladding Ltd, a decision of Associate JudgeBell in which the Associate Judge was prepared to allow a small space of time in whichthe parties could explore settlement further, in circumstances where the AssociateJudge considered that the defendant had "possibly been caught on the back foot"2. MrSullivan also properly drew to my attention the case of Fortune TechnologyCorporation Ltd v The Commissioner of Inland Revenue,3 in which Associate JudgeDoogue declined to grant a stay.[43] Mr Sullivan summarised the proper approach by submitting that each casemust be considered on its own facts, and that the court will apply the principlesdiscussed above fairly, to prevent an abuse of process, there being no inflexible rule.[44] In his oral submissions, Mr Sullivan acknowledged that the court would haveto find in this case that there were unusual grounds to justify the grant of a stay.2 Commissioner of Inland Revenue v Onsite Roofing and Cladding Ltd [2013] NZHC 2487,[14]–[15].3 Fortune Technology Corporation Ltd v The Commissioner of Inland Revenue [2016] NZHC 2489.[45] In support of a submission that such grounds do exist, Mr Sullivan pointed tothe following four factors:(1) The parties did agree to a repayment arrangement, when the solicitorsfor the Commissioner sent their email of 22 December 2016. Thatemail constituted a binding acceptance of the most recently submittedproposal from Evaluation;(2) The Commissioner proceeded to enter into the repayment arrangementwithout regard to the monies which Evaluation would ultimatelyrecover from the PNG government. On top of that, lump sum paymentsof $60,000 have been made, and Evaluation was on track to meet thebalance of the instalments when its cash-flow was dealt a serious blowby the 14 November 2016 earthquake. Even then the position has beenrectified, with the unpaid PAYE due in December 2016 and January andFebruary of 2017, being paid on 15 March 2017. And the $315,000 isat least now in the hands of Evaluation's PNG solicitors.(3) To show good faith, Evaluation offered an additional $50,000 lump sumpayment. More recently, it has indicated a willingness to arrange forthe entire $315,000 from PNG to be paid to the Commissioner (subjectto arrangements being made for the repatriation of that money to NewZealand).(4) Finally, Mr Sullivan points to the damage the company's ten staffmembers will suffer if a liquidation order is made. He also refers to the"valuable lessons" the directors of Evaluation have learned, and thesteps they have recently taken to ensure that there will be no furtherdefaults (separate bank accounts and retention of Deloitte in asupervisory role). In all the circumstances he submits there will be noprejudice to the Commissioner in allowing the repayment to run itscourse.[46] For the Commissioner, Ms Shaw submits that no binding repaymentarrangement has been reached with the Commissioner, and whether an arrangementfor payment by instalments should now be made is a matter for the Commissioner, notthe court (relying on Fortune Technology Corporation).Discussion and conclusions[47] I accept Mr Sullivan's submissions relating to the circumstances in which thecourt may stay a liquidation claim. While each case will depend on its facts, theprincipal objective of the jurisdiction is to prevent an abuse of process.[48] The applicable principles were helpfully summarised by Associate JudgeDoogue in the Fortune Technology Corporation case as follows:4[16] The inherent jurisdiction and the power to stay that arises underr 31.11 is designed to prevent an abuse of process. Such an abuse of processwould arise in cases where winding up proceedings are taken in circumstanceswhere the debt is the subject of genuine dispute. The governing considerationis whether the proceedings suggest unfairness or undue pressure. Further it isa serious matter to stay winding up proceedings so the decision is never madelightly. The onus is on the applicant and is normally to demonstrate somethingmore than balance of convenience considerations which are usuallyconsidered on an application for an interim injunction. The foregoingprinciples are found in the judgment of Wallace J in Nemisis Holdings Limitedv North Harbour Industrial Holdings Limited [citation omitted]. Mrs Scottdid not, as I have noted, contend that the defendant was substantially indebtedalthough she was not prepared to accept the exact figure which theCommissioner put forward. However it is clear that the company owes a debtwhich it cannot dispute because it arises under decisions which theCommissioner had made: See section 109 of the Tax Administration Act 1994.Given that there is such a debt, it cannot be said that the liquidationproceedings represent an abuse of process.[49] Considering the application against those principles, I am not satisfied thatEvaluation has shown that there has been any abuse of process, or that the proceedingsuggests unfairness or undue pressure on the part of the Commissioner. There hasbeen what appears to be a very serious failure by Evaluation to pay GST, PAYE andother taxes required to be deducted at source, going back as far as 2014. And the sumsinvolved are not small. While the Commissioner appears to have been prepared towait what may perhaps be considered a surprising length of time before pursuing the4 At [16].matter, there is no suggestion from Evaluation that the Commissioner was not entitledto commence the liquidation claim when she did — the only argument is that a bindingagreement for instalment payments was concluded with the email from theCommissioner's solicitors dated 22 December 2016.[50] In my view no such agreement was concluded. The Commissioner's solicitorsmade it very clear in the penultimate paragraph of the email that the proposal byEvaluation had only been agreed in principle, and there would be no bindingagreement until it was formally documented with terms satisfactory to theCommissioner. In my view, the language made it very clear that the Commissionerwould have no obligation at all, unless and until a formal document was completedcontaining terms satisfactory to the Commissioner.[51] Of course what happened then must have had the effect of causing theCommissioner to re-think the whole proposal. PAYE payments due not just on20 December 2016, but also on 20 January 2017, were not paid.[52] In my view it was for the Commissioner to determine whether she wished toproceed with the arrangements which had been under discussion before Christmas2016, and she plainly did not. I agree entirely with Associate Judge Doogue when hesaid in the Future Technology Corporation case:5[17] Essentially the position for the defendant is the not uncommon onethat defendants in liquidation proceedings take namely that it would be betterfor the creditor to accept the proposed compromise offer rather thanproceeding to a liquidation hearing. In my view that is not a proper groundupon which the Court can exercise its jurisdiction to stay the proceedings. TheCommissioner has a right to bring liquidation proceedings. TheCommissioner has a right to bring liquidation proceedings and similarly thequestion of whether acceptance of a compromise offer is or is not a preferableoutcome is entirely a matter for the Commissioner to determine and not forthe court.[53] I add that I have some concerns over the reasons the PAYE payments were notmade in December 2016, January 2017, and February 2017. While some attempt wasmade to put those defaults down to the 14 November 2016 earthquake (and Iacknowledge the disruption that event caused to many businesses in the Wellington5 At 17.region), I doubt that the January and February 2017 defaults, at least, can reasonablybe attributed to the earthquake. Ms Averill says that she was not advised by thecompany's junior accountant of the dates for the PAYE payments, and that if she hadbeen advised of the correct dates she would have made every effort to prioritise thepayment of PAYE over other payments, in recognition of the trust nature of PAYE.Given the background at the time, with a liquidation claim pending because ofEvaluation's failure to pay PAYE and other taxes on due date, one would haveexpected Ms Averill to be acutely aware of the company's ongoing tax obligations. Itis concerning that she apparently was not.[54] This is not a case where there is any significant dispute over the debt, and I seeno other circumstances which might savour of unfairness or undue pressure, sufficientto justify a stay. Certainly Evaluation has encountered difficulty over a long period oftime in recovering a substantial debt from a client, but that is a misfortunate whichbefalls many businesses, and the Commissioner appears to have been accommodatingfor a relatively long period of time, possibly acknowledging the difficulties Evaluationwas attempting to work through.[55] Evaluation might now be "back on track" and have a viable business lookingforward, but the penalties due to the Commissioner are now very substantial. Even ifthe Commissioner were to receive within the next four weeks the full $315,000 fromPNG, there might still be a shortfall in the core tax debt and interest. But moreimportantly Evaluation would appear to have no hope of paying the penalties withinany reasonable timeframe, and the Commissioner is not now prepared to remit thosepenalties. The penalties are recoverable as a debt due under s 156A of theTax Administration Act 1994, and while the Commissioner may have power to remitthem, it is not for the court to direct her to do so.[56] For all of the foregoing reasons, I decline to grant the stay application.[57] Turning to the substantive application for a liquidation order, I think thestarting position is that which I described in Satuit Properties Limited v Commissionerof Inland Revenue as follows: 66 Satuit Properties Limited v Commissioner of Inland Revenue [2014] NZHC 1300, at [28]–[30].[28] Even where there is no dispute over the relevant debt, I accept that thecourt retains a residual discretion whether to make an order for liquidation.But the general policy of the Companies Act is that insolvent companiesshould be put into liquidation if a creditor seeks an order, and that policyshould not be departed from lightly. In Chester Trustees Services Ltd TippingJ said:7" To justify such a departure there must be some factor, be it policy,principle or simply the justice of a particular case, which outweighsthe prima facie entitlement of the creditor to an order putting theinsolvent company into liquidation"[29] The question is whether it is "plainly unjust" for liquidation to ensue.[30] In this case I can see no factor which outweighs the plaintiff's primafacie entitlement to a liquidation order. Certainly, none of the five factorslisted in McPherson's Law of Company Liquidations (third addition) areapplicable:(1) the applicant's debt amounts to less than [the statutoryminimum].(2) the debt is bona fide disputed by the company.(3) the company has paid or tendered payment of applicant'sdebt.(4) winding up is opposed by other creditors; and(5) the company is in the process of being wound up voluntarily.[58] In this case none of the factors quoted in Satuit from McPherson's Law ofCompany Liquidations appear to apply, and I see no other factor which would displacethe Commissioner's prima facie entitlement to the liquidation order she seeks. Havingregard to Ms Averill's acceptance that the core debt is owing, and the lack of utility ingranting a further adjournment when there appears to be no prospect of the penaltiesbeing either paid or remitted, I decline the application for a further adjournment, andalso decline the application for leave to file a statement of defence out of time.[59] Ms Shaw having produced the appropriate certificate of non-payment of thedebt, I make the following orders:(1) Evaluation is put into liquidation.7 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395(CA),at [3].(2) Vivian Judith Fatupaito and Andrew John Hawkes are appointedliquidators.(3) Evaluation is to pay scale 2B costs to the Commissioner, plusdisbursements as fixed by the Registrar.(4a) The rates of remuneration of the liquidators and staff working undertheir supervision and control are fixed at the rates set out in theliquidators' consents dated 23 August 2016.(4b) The liquidators are to apply at the conclusion of the liquidation forapproval of their overall remuneration.[60] Orders timed at 9.54am on Friday, 24 March 2017.Associate Judge SmithSolicitors:Meredith Connell, Auckland for the defendantGreenwood Roche, Wellington for the plaintiff