COMMISSIONER OF INLAND REVENUE V LANDBANK LTD HC WN CIV-2006-485-625

COMMISSIONER OF INLAND REVENUE V LANDBANK LTD HC WN CIV-2006-485-625 30 June 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2006-485-625IN THE MATTER OF the Companies Act 1993 BETWEEN COMMISSIONER OF INLAND REVENUE Plaintiff AND LANDBANK LIMITED (PREVIOUSLY TRADING AS WHOLEFOODS BAKERY LTD) Defendant Hearing: 26 June 2006 (and subsequent affidavits filed by direction of the Court on 27 June 2006 and 29 June 2006) Appearances: M A Ross for Plaintiff J L Williams for Defendant Judgment: 30 June 2006JUDGMENT OF ASSOCIATE JUDGE D I GENDALL Introduction[1] On 17 May 2006 the plaintiff filed an interlocutory application to strike out the defendant's statement of defence in this proceeding in reliance on r 186 High Court Rules. [2] When this matter was called before me, it proceeded, however, as a formal application by the plaintiff to place the defendant company into liquidation.[3] The liquidation proceedings had been served upon the defendant company on 12 April 2006 and advertised in the DominionPost on 26 April 2006 and in the New Zealand Gazette on 27 April 2006. [4] Effectively the plaintiff sought an order placing the defendant company into liquidation on the grounds that the defendant was unable to pay its debts pursuant to s 241(4)(a) Companies Act 1993 ("the Act"). [5] The statement of defence filed by the defendant denied that it was just and equitable that the defendant be placed into liquidation and stated that the defendant is due "GST imputation credits" which exceed the amount alleged to be owing to the plaintiff. [6] I heard the present application on 26 June 2006 as part of and immediately preceding the hearing of a similar application brought by Rasmusen Poultry Farm Limited under CIV-2006-485-1067 also seeking an order to place the defendant company into liquidation. [7] My decision in the present matter will be given first. It will precede my decision in CIV-2006-485-1067, which is to follow immediately after the present decision.Decision[8] The plaintiff in this proceeding served a statutory demand upon the defendant on 27 February 2006 demanding payment of $212,353.56. This represented amounts which it claimed had been outstanding for some time for GST, PAYE tax deductions, income tax, student loan employer deductions and child support employer deductions. [9] The defendant took no steps to apply to set aside the statutory demand. [10] On 31 March 2006 the plaintiff commenced the present proceedings by filing a statement of claim and supporting documents in this Court.[11] Section 241(4) of the Act states in part:(4) The Court may appoint a liquidator if it is satisfied that – (a) the company is unable to pay its debts [12] Section 287 of the Act provides that a company is presumed (not deemed) to be unable to pay its debts if, amongst other things, the company has failed to comply with a statutory demand. [13] Notwithstanding this, if the debt in question is the subject of a genuine dispute of a substantial nature the Court may refuse a liquidation order or alternatively make an order at least to stay the proceedings. [14] Here, the defendant disputes that the debt in question is owing to the plaintiff. It says that on the basis of GST returns it has filed recently it is entitled to tax credits which exceed the global amount which the plaintiff alleges is owing to it. [15] Further, although it was not included in the defendant's formal statement of defence, the defendant also appears to be claiming that although it has ceased trading it is not in fact insolvent. [16] I turn now to consider these matters.Debt is disputed[17] The amount of the debt the plaintiff indicates as presently outstanding from the defendant (noted in the certificate from counsel for the plaintiff dated 26 June 2006) totals $268,853.82. This is made up of $106,528.04 claimed for outstanding GST, $95,283.67 claimed for PAYE tax deductions, $65,962.00 claimed for outstanding income tax, $124.39 claimed for student loan employer deductions and $955.72 claimed for child support employer deductions. [18] According to the plaintiff these amounts take into account a total sum of $235,285.21 which the plaintiff has received as a result of notices issued pursuant to s 157 Tax Administration Act 1994 with regard to the defendant's tax debts.[19] The defendant's position essentially is that it does not owe the outstanding tax claimed by the plaintiff on the basis that it is due a substantial GST input credit claimed on two property purchase transactions entered into on 2 May 2006. [20] Those transactions relate to the purchase by the defendant, first, of a property at 35 Broken Hill Road, Porirua, at a purchase price of $1,315,000.00. A deposit of $5,000.00 was provided for under this contract. [21] The second contract relates to the purchase of a property at 123-135 Houghton Bay Road, Wellington at a purchase price of $300,000.00. Again a deposit of only $5,000 was provided for under this contract. [22] In each case the vendor of the properties is Underground Construction Limited ("UCL"). Mr Michael Edwin Kooiman, the sole director of the defendant company, is also a director of UCL. He has signed each of the 2 May 2006 contracts as sole signatory for vendor and purchaser in his capacity as director of each of the companies. [23] It is the defendant's contention that as each of these contracts is unconditional it is entitled to GST input credits of $164,375.00 for the Broken Hill Road purchase and $33,333.33 for the Houghton Bay Road purchase. The plaintiff however contests this. [24] Each of the purchase contracts provides for a possession date of 23 June 2006. In terms of clause 14.1 of each contract:The property is purchased subject to existing securities registered against the property as at the date of execution of this agreement.[25] In each case clause 14.2 of the contracts states that the balance of the purchase price is to be secured by: a first ranking general security agreement in favour of the vendor subject to the following terms:- Interest rate 9.5% Penalty interest 12%".[26] The contracts also contain a further condition at paragraph 14.3 which states:Further security – the purchaser shall execute an agreement to mortgage any real property of the company registerable only on default of the purchaser.[27] Curiously, from a commercial perspective, it appears from clause 14.2 that the "first ranking general security agreement in favour of the vendor" to secure the balance purchase price in each case, although specifying interest rates does not require any date for repayment of the principal sum. Whether this might be seen as a requirement to pay the balance purchase price "upon demand" or on some other basis cannot be certain. It should be noted that these purchase contracts were signed some 24 days after the liquidation proceedings were served on the defendant, and six days after they were advertised in the local newspaper. Given all these matters I need to say that these deficiencies in the contracts must be regarded as somewhat unsatisfactory. [28] Further, there appears to be no formal condition in the purchase contracts to make them conditional upon the approval of each of the existing mortgagees of the properties, given that these mortgages were to be taken over by the purchaser in each case. From a commercial point of view this would seem to be unusual, particularly bearing in mind normal mortgage provisions that any transfer of the mortgaged properties would be a breach of the mortgage terms. [29] Notwithstanding these matters, it is the defendant's contention that as each of the purchase agreements is unconditional the defendant must be entitled to the GST input credits noted in [23] above, and that these go to offset the tax claimed by the plaintiff. [30] The plaintiff's response is that neither agreement for the purchase of the Broken Hill Road or the Houghton Bay Road properties can be regarded as unconditional. Each contract must implicitly at least be subject to approval of the vendor's mortgagees, given that those mortgages are effectively being transferred to the purchaser. It follows therefore that no entitlement to a GST input credit arises until those conditions are satisfied and this has not occurred here. There has been noconfirmation of mortgagee's consent to either transaction. Each contract must therefore remain conditional. [31] Further, in submissions made to me there was some suggestion that the plaintiff regarded the purchase contracts as "shams". Mr Williams for the defendant strongly objected to this suggestion and, as there was absolutely no evidence before the Court regarding this aspect, this contention was not pursued before me. I say nothing further about this here. [32] Notwithstanding these comments, however, it does need to be said, as I have alluded to above, that the terms included by the defendant in these purchase contracts appear to be somewhat unusual given usual commercial considerations. As I have noted, there is no repayment date for the vendor finance security, a critical matter from both the vendor's and the purchaser's perspective. Further, in a situation where a purchaser is buying subject to existing mortgages it would be usual to require the prior consent of mortgagees so that the transfer would not trigger a breach of the mortgage terms, and immediate default remedies. [33] These are all complex matters and what may have happened between the companies here is quite fact specific. As I see it, however, it is not strictly necessary here for the Court to make any definitive decision with respect to the plaintiff's argument that the purchase agreements are not unconditional and the defendant therefore is not entitled to a GST input credit pursuant to s 20(3)(a)(i) Goods and Services Tax Act 1985. [34] This is because even if such a GST input tax credit is available, the total credit amount is acknowledged to be only $197.708.33. As I have noted at [17] above the total outstanding tax claimed by the plaintiff however is $268,853.82. Even if the GST input credit is available this would still leave $71,145.49 outstanding from the defendant. [35] Mr Kooiman however, in his affidavit on behalf of the defendant, also endeavours to raise certain other objections to some of the various tax assessments made by the plaintiff. But, notwithstanding this, he has provided no real evidence tosupport these objections and as I see it the Court must proceed on the basis that at least $71,145.49 remains outstanding by the defendant.Defendant company is solvent[36] I turn now to consider the second defence put before me by the defendant. This is its claim that it is solvent and it would therefore be unfair to make a liquidation order here. [37] Although the defendant has placed no specific material before the Court in support of this defence, it appears that it is based upon the fact noted above that the defendant has purchased the Broken Hill Road and Houghton Bay Road properties and is now making arrangements to place these on the market for sale. Once sold the defendant contends that funds will be available to settle any debt owing to the plaintiff. [38] Regrettably however these submissions overlooked an important aspect. This was that the defendant in agreeing to buy these two properties from the related company UCL had substantial debts owing to the lender and mortgagees, being the unpaid purchase price in each case. The purchase prices as I have noted above are substantial, being $1,315,000.00 and $300,000.00 respectively, and it seems at most only deposits of $5,000 on each purchase contract may have been paid. No evidence is put before the Court of likely sale prices for the properties. Nor has any explanation been provided over why the properties should have been purchased by the defendant from a company probably "related" to it after liquidation proceedings against the defendant had been advertised, and those properties then only to be placed on the market for sale immediately after settlement on 23 June 2006. [39] Further, despite matters raised in the affidavits filed by Mr Kooiman in this matter, he omitted to place before the Court any details of the defendant's financial position to satisfy the Court as to its solvency. Indeed, in the last paragraph (18) of Mr Kooiman's affidavit of 16 June 2006 he referred to this solvency issue when he rather curiously stated:I believe that the company is not in fact insolvent as This sentence appeared to be unfinished. [40] Obviously I can take nothing from this claim to solvency. With this comment, Mr Kooiman appears to acknowledge that reasons for his claim to solvency are required. None were provided however. And significantly this omission was not remedied in Mr Kooiman's further affidavit of 29 June 2006 just filed in this matter, which makes no reference whatever to solvency matters. [41] For these reasons I am not satisfied that the defendant has done enough to satisfy the Court that it is solvent and, given the circumstances here, on that basis alone in my view an order for liquidation should be made. [42] This effectively deals with the application before the Court. [43] Notwithstanding this, however, there was one further matter argued before me, which I now mention. [44] This is the contention from the plaintiff that even if the defendant was entitled to the GST input credits it has claimed with respect to the purchase of the Broken Hill Road and Houghton Bay Road properties, the defendant would only be able to offset those GST refunds against taxes and revenues owing to the plaintiff other than outstanding PAYE deductions. [45] As to this, the defendant points to the authority of Commissioner of Inland Revenue v Cappuci Knitwear Ltd [1989] 11 NZTC 6,112. In that case the defendant sought an order staying proceedings for liquidation. One of the grounds upon which the defendant sought this order was that the plaintiff had not credited GST refunds that the defendant contended were due. [46] In rejecting this ground for seeking a stay order, Master Gambrill in Cappucistated at 6,118:I believe it would be an abuse of and not the intent of the sections herein before referred to if the defendant was allowed to cross-credit taxes arisingout of different obligations and by law to be paid on different bases. Liability to pay PAYE and Fringe Benefit Tax which is the proportion of tax belonging to somebody else, have never been able to be offset against, for example, credits owing to defendant companies of dividend withholding tax. I think the prime consideration here is that the money that has not been paid is not the company's own money, it is the money the company has in fact deducted or withheld from the wages of its employees. It is not something the company is entitled to bargain with over its obligations in respect of Goods and Services Tax. Goods and Services Tax inputs and credits are moneys due and owing to and from the company in the same way as dividend withholding tax would be moneys of the same type, which was the company's own money.[47] Here, the total amount for PAYE deductions, penalties and interest claimed by the plaintiff is $95,283.67. According to the plaintiff this amount remains outstanding. It says that even if GST input credits were available to the defendant it would not be able to set those credits against the outstanding PAYE tax deductions, interest and penalties – s 120F Tax Administration Act 1994. [48] In response, counsel for the defendant endeavoured to argue that a proper calculation of the payments recovered from third parties as a result of the s 157 notices issued would show that when these amounts were applied to settle outstanding core PAYE tax deductions there would be no PAYE owing by the defendant. Issues were raised with respect to applying deductions to interest and penalties on the outstanding PAYE deductions. The plaintiff's position is that even if the defendant's argument on core PAYE deductions is accepted in terms of s 120F Tax Administration Act 1994, some amounts still remain outstanding for core PAYE as well as for penalties and interest. [49] From the material provided to the Court, calculation of the amounts in question appears to be somewhat complex. For these reasons, I make no definitive decision as to this aspect. I note in passing, however, that from the material which is before the Court, it seems likely that significant amounts do remain outstanding to the plaintiff for PAYE assessments, penalties and interest, notwithstanding the s 157 notice payments collected from third parties.Conclusion[50] It will be apparent from the comments outlined above that I am satisfied that at least a substantial part of the amount claimed from the defendant in the statutory demand and well above the statutory threshold remains unpaid and that, therefore, in terms of s 287 of the Act the defendant company must be presumed to be unable to pay its debts. I am satisfied too that the defendant has been unable to put before the Court any material to show either that it is solvent or that there is any proper reason to refuse the order for liquidation sought by the plaintiff. [51] An order is now made therefore that the defendant company is placed into liquidation. [52] John Howard Ross Fisk and Richard Dale Agnew are appointed liquidators.Costs[53] Costs are awarded to the plaintiff on a category 2B basis together with disbursements as fixed by the Registrar. [54] This order is timed at 3.15pm today 30 June 2006. __________________________Associate Judge D.I. GendallSolicitors: Sladden Cochrane, Wellington, for Defendant