THE COMMISSIONER OF INLAND REVENUE v KIWI PAINTERS LTD [2017] NZHC 1676

THE COMMISSIONER OF INLAND REVENUE v KIWI PAINTERS LTD [2017] NZHC 1676 [20 July 2017]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2017-485-000331[2017] NZHC 1676UNDER THE Companies Act 1993IN THE MATTER OF Liquidation ProceedingsBETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND KIWI PAINTERS LIMITEDDefendantHearing: 17 July 2017(By Telephone Conference)Appearances: R A Hearn for Defendant/ApplicantB Padmanabhan for Plaintiff/RespondentJudgment: 20 July 2017JUDGMENT OF ASSOCIATE JUDGE OSBORNE [ON EXTENSION OF TIME FOR DEFENCE]Introduction[1] The Court is asked to extend the time for the filing of a defence to a liquidation proceeding.The Commissioner's application claim[2] Kiwi Painter's Ltd ("KPL") is a painting and decorating company which hasundertaken such services in Wellington and Christchurch. KPL's director,Mohammed Qaiyum Ali, deposes that KPL had a period of unprofitability when it had to meet unbudgeted travel and accommodation costs for workers.[3] The Commissioner's records indicate that for a period from May 2015 toSeptember 2016 KPL failed to account for significant Goods and Services Tax (GST) and PAYE tax.[4] The statutory demand issued by the Commissioner in February 2017 showed a debt on account of those aspects of tax of $146,601.04, of which 76 per cent represented core tax obligations.[5] KPL failed to meet the requirements of the statutory demand and is presumed to be insolvent and unable to pay its debts.[6] In his initial affirmation, Mr Ali deposed that he understood that, since September/October 2016, all payments due to the Inland Revenue Department("IRD") had been met, although some may have been late (for reasons he explains). The correct position is otherwise. Kathryn Taylor, a Collections Officer of the IRD, deposes that:(a) KPL's income tax return for 31 March 2016 was due on 7 July 2016,with payment to be made by 7 February 2017. The return was filed late (December 2016) and payment remains outstanding;(b) KPL's GST return for the period ending 30 September 2016 was filedlate, and the amount owed remains outstanding;(c) KPL's GST for the period 30 November 2016 remains outstanding;(d) KPL's Employer Monthly Schedules for the periods 30September 2016, 31 October 2016, and 30 November 2016 were filed late, and the amounts owed remain outstanding.[7] In a reply affirmation, Mr Ali has accepted that his earlier evidence as to understanding that all required payments had been met by September/October 2016 was incorrect. He deposes that he had not picked up that he had initially told his lawyer the wrong date, and he deposes that he did not intend to mislead the Court.[8] Mr Ali's evidence identifies a number of previous difficulties including:(a) unbudgeted expenses while KPL was based in Wellington;(b) Mr Ali's commitment to sick family members in Fiji;(c) Mr Ali's inability through those pressures to properly attend to KPL'sbooks; and(d) a wrongful deduction of payment of $42,000 by a debtor impacting on cashflow and profit.[9] Mr Ali has deposed as to a number of improvements in KPL's positionincluding:(a) KPL's relocation to Christchurch and costs savings;(b) KPL's securing in August 2016 of a service contract with a national provider; and(c) KPL's request to an accountant to handle its tax returns.KPL's current financial circumstances[10] Mr Ali deposes that KPL is solvent and profitable. He attaches a copy of financial statements of KPL for the year ended 31 March 2017. The statements show a net operating surplus of $32,978 and a net equity of $2.[11] Mr Ali, in his reply affirmation, has deposed that he is prepared to offer apersonal guarantee of KPL's tax obligations over the coming four months to ensure that KPL complies with its current obligations.KPL's settlement proposal[12] The basis of KPL's application for an extension of time to file a defence is that it asserts an arguable defence in that it is solvent and intends to pay its debts in full within three months.[13] Mr Ali has deposed that the payments required (now $165,578.56) will be made from cash resources as well as ongoing work. He states that there will be an immediate payment of $40,000 followed by three monthly instalments of $50,000 each (with the total exceeding the current debt).[14] Mr Ali has also produced a cashflow forecast prepared by KPL's accountant. It assumes a $40,000 injection of capital (by implication from Mr Ali or his family), resulting in a slight trading surplus for July. In each of the July, August and September months, allowance is made for a $50,000 payment to the IRD, but with the consequence that trading in that period and the period through to October 2017 is significantly in deficit.[15] Ms Taylor deposes that the Commissioner will not accept a payment arrangement if it is not sustainable.[16] The Commissioner has assessed and rejected recent payment proposals, partly having regard to KPL's previous performance in relation to arrangements. The IRD began working with KPL in July 2015 to negotiate and arrange instalments. Two previous instalment arrangements were not complied with:● a July 2015 arrangement to pay the full debt (then at $15,277.80) did not result in any payment; and● an October 2015 arrangement to pay the full debt (then at $28,117.97) resulted in $10,492.84 of payments, but no further reductionThe tax debts subsequently blew out to their present total.Service on KPL[17] The way in which KPL was served with relevant documents is not a groundof KPL's notice of application. It is not asserted that service of either the statutory demand or the liquidation proceedings was defective.[18] The evidence establishes that the statutory demand was served on a director of KPL (Mr Ali's wife). KPL therefore had the opportunity to respond to the statutory demand but did not.[19] Mr Ali deposes that the service copy of the proceedings did not reach the directors. This appears to be because the proceedings were appropriately served at the registered office of KPL, but KPL had in the meantime shifted its operations to Christchurch. The directors became aware of the proceedings only shortly before the first call when the proceeding was adjourned to enable KPL to put a proposal to the Commissioner.[20] Mr Ali relies on the circumstances of service of the proceedings simply toestablish the reason for KPL's failure to take steps to defend the proceeding in atimely way.Likelihood of KPL's clearing its indebtedness promptly[21] The central submission of Mr Hearn, for KPL, is that KPL is not merely solvent on a balance sheet test, but is in a position to clear the debt to the Commissioner within a three month period.[22] To meet the need to properly protect the Commissioner's position during anyperiod of payment, Mr Hearn identifies the following matters as providingreasonable assurance that the Commissioner's position is reasonably protected:(a) The first tranche of payment ($40,000) will be available within five working days.(b) Mr Ali will provide his personal guarantee in relation to KPL's tax debts.(c) KPL will retain throughout the period of repayment its currentaccountant to both keep KPL's accounts up to date and to process its tax returns and payments.(d) KPL will execute an assignment to the Commissioner of payment entitlements from Spotless Facility Services (NZ) Limited if called upon by the Commissioner to do so.Discussion[23] KPL has a poor record of tax performance. It is apparent that at times when KPL has traded poorly it has resorted to using significant sums of GST and PAYE which should have been paid on to the Commissioner. When the Department has previously seen fit to allow a catch-up through instalments, KPL has failed to meet those arrangements. Most recently, when he filed his initial evidence in this proceeding, Mr Ali, through his incorrect statements as to the currency of payments since October 2016, has displayed a continuing, concerning lack of attention to getting things right.[24] Against this background, the Commissioner's refusal of any furtherinstalment arrangement is understandable.[25] On the other hand, there are a number of features which suggest that this debtor may be one of those which can resolve its indebtedness within a relatively short period, in this case three months. The subcontractor agreement which has very recently commenced with Spotless Services provides a reasonable prospect of steady income to make possible the proposed repayment programme. The fact that KPL is now well-settled as an operation in Christchurch makes the prospect of steadyprofitability more realistic. KPL's overdraft arrangement with its bank to some extent cuts across the Commissioner's understandable concern that she should notcondone payment arrangements which are not sustainable. The retention of itsaccountant for more than the preparation of financial statements is likely to bringgreater discipline to KPL's compliance and generally.[26] These considerations of themselves might not be sufficient to instil greatconfidence in KPL's ability to achieve its repayment programme but the conditionswhich Mr Hearn has proposed, and which the Court will impose, serve to reinforce the realistic prospect of repayment.[27] In this case the Court is not dealing with the hearing of the liquidationproceeding itself but rather with KPL's application for extension of time to file itsdefence. The delay in filing the defence is explained and is sufficient to justify an extension of time upon the basis the Court is satisfied that KPL should have the opportunity to establish its solvency. If KPL does not honour the payment regime and has proved unable to meet its debt to the Commissioner, any defence would almost inevitably fail.Outcome[28] The Court will grant the application on conditions.[29] There will be no order as to costs given that KPL seeks an indulgence and aspects of its application as initially presented were not accurately supported.Orders[30] I order:1. The time for the filing of the defendant's defence (on the basis of the draft presented) is extended to five working days from today with the defendant entitled to assert such defence at a hearing on the condition that:(a) The defendant shall pay a first tranche of $40,000 to the Commissioner of Inland Revenue ("the Commissioner") within five working days from today;(b) Mohammed Qaiyum Ali shall provide within five working daysfrom today his personal guarantee of the defendant's existingindebtedness to the Commissioner and such additional indebtedness as accrues in the next 90 working days;(c) The defendant shall keep current in its tax returns to the Commissioner and in its payment of tax as it falls due;(d) The defendant shall retain throughout the next 90 working days its current accountant to both keep the defendant's accounts up to dateand to process the defendant's tax returns and payments to the Commissioner;(e) The defendant shall pay three further tranches of $50,000 each to the Commissioner in each of the months of July 2017, August 2017 and September 2017, on account first of arrears and (upon settlement of the arrears) newly accruing taxation obligations; and(f) The defendant shall execute an assignment to the Commissioner of payment entitlements from Spotless Facility Services (NZ) Limited (and any associated company) if called upon by the Commissioner to do so.2. In the event the defendant fails to comply with the conditions at [30] 1.(a) – (f), the leave granted to the defendant to file and rely upon its defence will be rescinded immediately at the election of theCommissioner, notified to the Court by counsel's memorandum filed andserved.3. There is no order as to the costs and disbursements of the application.Case management[31] I direct that the proceeding be called for mention in the List at Wellington at 10.00 am Tuesday, 1 August 2017, when counsel may anticipate that the Court willallocate a tentative hearing date for the liquidation application near the end of October 2017.Associate Judge OsborneSolicitors:Corcoran French, ChristchurchInland Revenue Department, Legal and Technical Services, Christchurch