THE COMMISSIONER OF INLAND REVENUE V NGATURI PROPERTIES LIMITED HC WANG CIV-2006-483-228

THE COMMISSIONER OF INLAND REVENUE V NGATURI PROPERTIES LIMITED HC WANG CIV- 2006-483-228 31 October 2006IN THE HIGH COURT OF NEW ZEALAND WANGANUI REGISTRY CIV-2006-483-228IN THE MATTER OF the Companies Act 1993 BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND NGATURI PROPERTIES LIMITED Defendant Hearing: 27 October 2006 Appearances: R.E. Holloway and K. Doherty for Plaintiff G.A. Paine for Defendant Judgment: 31 October 2006 at 4.15pm In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 4.15pm on the 31st day of October 2006.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] The plaintiff seeks an order placing the defendant company into liquidation. The basis of that application is that the defendant company failed to respond to a statutory demand issued under s289 Companies Act 1993, and that the defendant company is therefore unable to pay its debts.Background Facts[2] The statutory demand from the plaintiff claimed $28,226.69, which was said to be a debt due by the defendant in respect of goods and services tax and income tax. The statutory demand was served on the defendant on 24 May 2006. [3] The defendant did not respond to the statutory demand, and on 25 July 2006 the plaintiff issued a Statement of Claim seeking an order placing the defendant company into liquidation. The Statement of Claim and related documents were also served upon the defendant company on 25 July 2006. [4] Subsequently, advertising of this liquidation proceeding took place in the Wanganui Chronicle on 15 August 2006, and in the New Zealand Gazette on 17 August 2006. [5] In the meantime, on 15 August 2006 the defendant through Mr D.W. Churton, filed in this Court a document headed "Statement of Defence and Court Claim". This Statement of Defence appeared first, to dispute that the amount claimed by the plaintiff was due, and secondly, to contend that the defendant had a counterclaim against the plaintiff of $230,000 "for the loss of purchasing the Reynolds Road property". In the Statement of Defence the defendant also contended that "the plaintiff failed to allow the defendant from (sic) completing the purchaser of the Reynolds Road property".Preliminary Matter[6] When this matter was called before me on 27 October 2006, Mr Paine appeared for the defendant. He indicated that he had received instructions from the defendant company, but only late on 26 October 2006 or early 27 October 2006. Mr Paine stated that these instructions were rather limited, and that they were simply to seek an adjournment of this matter today. [7] This proceeding had previously been called on 29 August 2006 before His Honour Justice Miller, who made directions setting this matter down for hearing on27 October 2006, and allowing ½ a day for the hearing. In a Minute His Honour Justice Miller issued on 29 August 2006, he directed that:Mr Churton advised that he will not be permitted to represent the companies, they may only appear by counsel.[8] That said, when he appeared before me, I indicated to Mr Paine that the defendant's request for an adjournment of the proceeding was therefore declined. Mr Paine then made a formal application to the Court to withdraw as counsel for the defendant company. Mr Paine is an experienced barrister and is an officer of this Court. I appreciate the difficult position in which Mr Paine found himself at the time, given that his instructions were rather limited, but notwithstanding that, on the basis that it was desirable the defendant company had some representation, I declined Mr Paine's application to withdraw. [9] The plaintiff's application for liquidation of the defendant company then proceeded before me on 27 October 2006.The Debt and the Defendant's Counterclaim[10] The plaintiff provided an appropriate solicitor's certificate confirming that the amount outstanding by the defendant, which remained unpaid, totalled $30,480.57. [11] This amount represented goods and services tax assessments in 2001, 2002, and 2006 totalling $5,509.31, GST penalties of $3,684.18, and interest on the GST amounts totalling $3,610.59. In addition, the amount included income tax assessments for 2001 and 2002 totalling $6,599.01, income tax penalties totalling $5,195.95, and interest on the income tax assessments totalling $5,881.53. [12] As I have noted at paragraph [5] above, in response to the plaintiff's present proceeding the defendant company through Mr D.W. Churton filed a document headed "Statement of Defence and Court Claim". Effectively, however, this document was principally a counterclaim made by the defendant for "$230,000forthe loss of purchasing the Reynolds Road property(which)the plaintiff failed to allow the defendant (from) completing the purchase of the Reynolds Road property". [13] Although in paragraph 3 of the Statement of Defence the defendant stated that it "objects to the amount of $28,724.45 claimed by the plaintiff", there was no elaboration of any kind to explain why this amount should be in any way disputed. Further, it is undisputed that when the statutory demand was served upon the defendant five months previously, no application was made to set aside the statutory demand either alleging that the debt was not due, or payable, or on any other basis. [14] In addition to the Statement of Defence filed on 15 August 2006, Mr D.W. Churton has also filed an affidavit sworn on that date. This affidavit states:Inland Revenue action stopped the sale of Reynolds Road being completed in favour of Ngaturi Properties[15] No evidence has been placed before the Court for the defendant, however, either by Mr Churton in his affidavit or by anyone else as to the financial position of the defendant company or as to its solvency. [16] Although it is somewhat difficult to discern from the defendant's Statement of Defence, it appears that the only defence offered to the plaintiff's liquidation application is this alleged counterclaim by the defendant. [17] As best as I can tell from material before the Court, in this counterclaim the defendant is claiming that it attempted to purchase a property at Reynolds Road, Turakina ("the property"). The vendors were allegedly Mr David Wayne Churton and Mrs Miria Christine Churton. The defendant claims at paragraph 6 of its Statement of Defence and counterclaim that the plaintiff "failed to allow" the defendant to purchase the property. Accordingly, at paragraph 7 of its Statement of Defence, the defendant seeks by way of counterclaim $230,000 from the plaintiff for what it says is "the loss of this purchase".Counsel's Arguments and My Decision[18] As to the counterclaim, the starting point must be a consideration of r146(1) High Court Rules. This rule provides that:In any proceeding by the Crown for the recovery of taxes, duties, or penalties, no defendant shall be entitled to avail himself of any set-off or counterclaim.[19] The current liquidation proceedings have been brought by the Crown for the recovery of taxes, duties and penalties. They relate to a debt for GST and income tax, penalties and interest. This is clear from the plaintiff's Statement of Claim. It is the plaintiff's contention, therefore, that pursuant to r146(1), the defendant is not entitled to make any counterclaim here against the plaintiff. [20] R.146(1) was discussed in Commissioner of Inland Revenue v Carswell Investment Company Limited (2002) 20 NZTC 17,523. The issue in that case was whether the defendant could claim to set off GST refunds against sums claimed by the Commissioner in a statutory demand issued against the defendant. If the defendant was able to satisfy the Court that it had an arguable set-off that would effectively extinguish the plaintiff's debt, then the basis for the plaintiff's liquidation application was gone. In that case, however, the High Court held that the provisions of r146 prevented the defendant from raising its counterclaim. [21] The Court in Carswell held at p17,527 that:Rule 146 applies to these proceedings either by reason of r146(1) or 146(2). Either this is a proceeding for the recovery of taxes or, if because of the nature of the liquidation proceedings it cannot properly be regarded as a proceeding for recovery of taxes as it does not seek judgment for a sum, then it is 'any proceeding of any other nature'. 'Proceeding' is defined in r3 as: any application to the Court for the exercise of the civil jurisdiction of the Court other than an interlocutory application: These proceedings are not an interlocutory application. Liquidation proceedings are provided for in rr700A et seq. Rule 700C requires every application for liquidation to be made by a statement of claim. Rule 700E refers to such an application to be 'a proceeding'. The application is commenced by a statement of claim and accompanied by a notice of proceeding. Rule 700F(2) refers to the hearing of the proceeding.An application for liquidation is therefore a 'proceeding' for the purposes of r146. The provisions of r146(1) or (2) therefore apply to prevent a defendant such as the present from raising a counterclaim or set-off in opposition to the Plaintiff's proceeding. If that may seem a harsh situation, the answer to it is that the statutory provisions of the Companies Act (s290 et seq) enable a company facing a statutory demand from the Commissioner of Inland Revenue to challenge that statutory demand either on the basis that the debt is genuinely disputed or that the company has a counterclaim or set-off. However, the challenge must be mounted at the time the statutory demand is issued and before proceedings are issued. Once the liquidation proceedings are issued, r146 prevents a defence on the ground of a counterclaim or set- off at that stage. It should also be noted that it is always open for a defendant to rebut the presumption and defend the liquidation proceedings on the grounds that it is solvent and able to pay its debts.[22] The current proceedings are liquidation proceedings fore the recovery of taxes along similar lines to the proceedings issued in Commissioner of Inland Revenue v Carswell. And it is clear from Carswell that liquidation proceedings are a "proceeding" for the purposes of the High Court Rules. [23] In my view, the clear wording of r146(1) and the findings in Carswell lead to the conclusion that the defendant here is prevented from raising a counterclaim to the plaintiff's liquidation proceeding. [24] One further matter needs mention, however. [25] McGechan on Procedure at para HR146.01 indicates that the absolute prohibition on maintaining a counterclaim against the Crown may be circumvented where appropriate by a defendant issuing separate proceedings against the Crown, and then seeking an application for consolidation and concurrent trial under r382. [26] In the present case, however, the defendant has not applied to consolidate the current proceedings under r382. It is unclear, too, whether the defendant may have issued any formal counterclaim proceedings. [27] And, in any event, the plaintiff submits that if consolidation was sought, it is inappropriate in the present case, as the defendant has no reasonable claim against the plaintiff.[28] I turn now to consider this latter aspect. As to this, it is difficult to ascertain from the defendant's pleading what precisely it does allege in relation to the plaintiff's claimed interference with the sale of the Reynolds Road property. The cause of action might be assumed to involve a tortious claim for inducing breach of contract, but this is unclear from the pleadings. [29] From material before the Court it seems, however, that: a) The Reynolds Road property was owned by Mr D.W. Churton and his wife Mrs M.C. Churton in their personal capacities in equal shares. Mr D.W. Churton was adjudicated bankrupt some time ago and his one half share in the property passed to the Official Assignee in bankruptcy. b) Any profit from the sale of the property to the defendant of course would have been a profit made by Mr D.W. Churton or the Official Assignee in his bankruptcy and Mrs M.C. Churton as vendors. c) Moreover, it was as a result of Mr Churton's bankruptcy that his half share in the property was the subject of a caveat placed upon the title by the Official Assignee on 30 October 2000 to protect the interest of creditors. d) As best I can tell, it appears to be this caveat which forms the foundation of the defendant's complaint. e) Having registered the caveat, the Official Assignee on 26 June 2003 then registered a transmission of Mr Churton's half interest in the property to himself under s80(3) Insolvency Act 1967. This was to protect the property for creditors before the discharge of Mr Churton's bankruptcy occurred around 20 September 2003, and before the caveat was to be withdrawn.f) If any purported sale of the property to the defendant was affected in any way, then as I see it, this was not by any action taken by the plaintiff, but rather by the bankruptcy of Mr D.W. Churton as vendor. g) There is nothing whatever before the Court to suggest that the plaintiff in any way interfered with any attempted purchase of the property by the defendant. The plaintiff here has attempted merely to collect the outstanding debt owing by the defendant company by filing the present proceeding. h) Accordingly, I am satisfied that in any event, the defendant has not established that it has an arguable cause of action against the plaintiff for any counterclaim here. [30] I find, therefore, that by virtue of the operation of r146 High Court Rules and the evidence before the Court in relation to the Reynolds Road property, the present case is one in which the defendant's counterclaim is so clearly untenable that it could not possibly succeed, no matter how that counterclaim might be reformulated. The counterclaim is barred by r146, and further has no basis in fact. [31] This effectively disposes of any defence which the defendant may have put forward to the plaintiff's claim against it. [32] The defendant company has clearly failed to comply with the statutory demand issued by the plaintiff against it. [33] And, as I have noted, there has been no evidence placed before the Court by the defendant as to its financial position or as to its solvency. This is notwithstanding the clear directions in the Minute made in this matter by His Honour Justice Miller on 29 August 2006, that the hearing of the liquidation application was to proceed on 27 October 2006. The defendant must have been aware since that time that details of its defence and evidence of its solvency would have been required to be put before the Court.[34] I can reach no other conclusion, therefore, but that it is appropriate here for an order to be made placing the defendant company into liquidation.Orders[35] An order is now made placing the defendant company Ngaturi Properties Limited into liquidation. [36] Bruce McCallum and David Stuart Vance are appointed liquidators. [37] Costs are awarded to the plaintiff on a category 2B basis, together with disbursements as fixed by the Registrar. As to costs, I certify for the appearance of only one counsel for the plaintiff on 27 October 2006. [38] This order is timed at 4.15pm on 31 October 2006. __________________________Associate Judge D.I. GendallSolicitors:Crown Law Office, Wellington for Plaintiff