COMMISSIONER OF INLAND REVENUE v REDCLIFFE FORESTRY VENTURE LTD [2014] NZHC 1877

COMMISSIONER OF INLAND REVENUE v REDCLIFFE FORESTRY VENTURE LTD [2014] NZHC 1877 [11 August 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-004880[2014] NZHC 1877BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND REDCLIFFE FORESTRY VENTURELIMITEDDefendantHearing: 14 March 2014Appearances: R L Roff and M Evans for PlaintiffM S Hinde for DefendantJudgment: 11 August 2014JUDGMENT OF COURTNEY JThis judgment was delivered by Justice Courtneyon 11 August 2014 at 3.00 pmpursuant to R 11.5 of the High Court RulesRegistrar / Deputy RegistrarDate.IntroductionThe application[1] Redcliffe Forestry Venture Limited was party to the forestry venture known as the Trinity scheme. In 2004 Venning J held that the scheme was tax avoidance,1 a finding upheld by the Court of Appeal2 and Supreme Court.3 The result was the confirmation of tax assessments made by the Commissioner of Inland Revenue. The tax has not been paid. In these proceedings the Commissioner seeks to have liquidators appointed to Redcliffe.[2] Redcliffe has applied to stay the proceedings and restrain advertising of them.4 Several grounds were identified in the application but the grounds actually advanced before me can be summarised as:(a) The Commissioner lacks standing to bring the proceeding because she is not a creditor;(b) The proceedings are an abuse of process;(c) There is a genuine dispute over the debt and the parties are awaiting the outcome of an appeal on that point;(d) There would be no prejudice to the Commissioner in granting the stay.[3] These grounds have been undermined somewhat by the release of the Courtof Appeal's decision dismissing the appeals by Redcliffe and other participants in the scheme.51 Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC).2 Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230; (2007) 23 NZTC 21,323 (CA).3 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.4 High Court Rules, r 31.11(1).5 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2014] NZCA 349.Relevant principles[4] Under r 31.11(2) of the High Court Rules an application to stay liquidation proceedings must be treated as if it were an application for an interim injunction. InNemesis Holdings Ltd v North Harbour Industrial Holdings Ltd Wallace J summarised the principles to be applied in determining an application to stay a liquidation proceedings:6The Court has an inherent jurisdiction to stay winding up proceedings where the debt upon which such proceedings are founded is the subject of general dispute ... The decisions make it clear that the jurisdiction to stay is an inherent one to prevent abuse of process and that there is no inflexible rule. The governing consideration is whether the proceedings savour of unfairness or undue pressure. It is, however, a serious matter to stay winding up proceedings so that the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate "something more" than the balance of convenience considerations which it is usuallyappropriate to consider on an application for an interim injunction.[5] In Anglian Sales Ltd v South Pacific Manufacturing Co Ltd McMullin J emphasised the caution to be exercised in considering an application to stay liquidation proceedings:7 the right to have a winding up petition determined, being a right conferred by statute, ought not to be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where the challenge can on appropriate grounds be made to the petitioning creditor'sstatus as such. If a challenge were allowed in circumstances short of this, the Court would in effect be refusing to give effect to the very right which the statute has conferred upon the creditor to have the petition itself considered. In bringing his petition the creditor is doing no more than asserting the right which the statute entitles him to do. In our opinion, acreditor's right in this respect ought not to rest simply on the balance ofconvenience considerations which may be relevant to an application for an interim injunction. Something more than that is required.Further ground not permitted to be argued[6] Ms Hinde, for Redcliffe, sought to argue another ground, which I did not allow. The argument was based on a notice of proposed adjustment (NOPA) issued by Redcliffe to the Commissioner on 26 Feb 2014. The NOPA was annexed to anaffidavit by Redcliffe's director, Mr Muir, filed four days before the hearing. Also6 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC).7 Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA) at 251 – 252.annexed was a letter to the Commissioner dated 26 February 2014 indicatingRedcliffe's intention to refer to the NOPA in the stay application. The NOPAproposed that the Commissioner should not take steps to enforce costs awards previously made against Redcliffe (and others). Various issues were canvassed which seemed to repeat issues already considered and rejected in past litigation.[7] Notwithstanding the letter to the Commissioner, the NOPA was not referred to in the application, nor was it referred to in Ms Hinde's submissions filed on28 February 2014. Instead, Ms Hinde handed up a "synopsis of peripheral matters for Redcliffe" that included the submission that the NOPA "appears to be relevant towhether the court is being asked to make a futile order during the period that theNOPA remains unresolved". The argument did not appear to me to have any merit and I saw no basis on which I should allow it to be advanced at such a late stage.Use of affidavit from another proceeding[8] Mr Muir also annexed to his affidavit an earlier affidavit that he had sworn insupport of Redcliffe's application to set aside the statutory demand.8 Ms Hinde sought leave to rely on that affidavit in support of her submissions. Rather than hold up matters over whether the affidavit should be permitted to be used I accepted it, subject to my decision on relevance.[9] Having heard Ms Hinde's submissions, I allow the affidavit to be used to theextent of the background information contained in paragraphs 1 – 9. Paragraph 10 appears to have no relevance. Paragraphs 11 and 12 are not evidence but in the nature of submission.Is the Commissioner a creditor?[10] This argument is effectively the same as that advanced by other investors, Ben Nevis Forestry Ventures Ltd and Bristol Forestry Venture Ltd, in the Trinityscheme in support of applications to strike out or stay the Commissioner'sliquidation proceedings against them.9 The argument is based on the assertion that8 Redcliffe Forestry Ventures Ltd v Commissioner of Inland Revenue [2013] NZHC 2818.9 Commissioner of Inland Revenue v Ben Nevis Forestry Ventures [2014] NZHC 1746.liquidation proceedings can only be brought by a creditor and because tax is payable to the Crown the Commissioner is not a creditor of the taxpayer, merely an agent of the creditor for the purpose of collecting unpaid tax.10 Further, it is said that the Commissioner could only become a creditor by obtaining a judgment for the outstanding tax.[11] In addition, Ms Hinde, for Redcliffe, submitted that the quantum ofRedcliffe's penalty tax has not yet been determined because it depends oncalculations deriving from the respective tax positions of its shareholders. Its three shareholders (Mr Muir, Ms Muir and Mr Maud, are all in different positions in this regard). She pointed out that there is no sealed court order giving the Commissioner a money judgment against Redcliffe.[12] In the Ben Nevis and Bristol applications I concluded that s 156 conferred creditor status on the Commissioner for the purposes of bringing liquidation proceedings under s 241 of the Companies Act 1993. My reasons were, first, the liquidation proceedings are recovery proceedings and therefore authorised by s 156 TAA. Secondly, the context in which unpaid tax falls to be recovered in liquidationproceedings means that the definition of "creditor" in s 240 of the Companies Act isto be treated as encompassing the Commissioner. Therefore, the Commissioner does not require a judgment to commence liquidation proceedings. I do not need to elaborate on my reasons further.[13] I note, too, that the Court of Appeal has rejected a similar argument made inrelation to appeals against Faire AJ's (as he then was) decision not to set aside statutory demands issued by the Commissioner.11Are the liquidation proceedings an abuse of process?[14] Redcliffe's argument centres on the nature of the Commissioner'sresponsibilities under the TAA and the Public Finance Act 1989. Under s 6A(2) TAA the Commissioner is charged with the care and management of taxes. In particular, under s 6A(3):10 Taxation Administration Act 1994, s 156.11 Redcliffe Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 5.In collecting the taxes committed to the Commissioner's charge, andnotwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to –(a) The resources available to the Commissioner; and(b) The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and(c) The compliance costs incurred by taxpayers.[15] Under s 176:(1) The Commissioner must maximise the recovery of outstanding tax from a taxpayer;(2) Despite subsection (1), the Commissioner must not recover outstanding tax to the extent that –(a) Recovery is an inefficient use of the Commissioner's resources [16] Ms Hinde argued that the cost of collecting tax is relevant to the decision to pursue liquidation proceedings because there should be reasonable grounds for expecting that an amount equivalent to those costs will be received from the liquidation in reimbursement. A net benefit cannot result from a liquidation where collection costs are not reimbursed. In this case, although the Commissioner seeks to have more than one liquidator appointed she does not indicate the source of funds to pay a liquidator or liquidators. Ms Hinde submitted that, in these circumstances, a proposal by the Commissioner to fund liquidators herself, would indicate a purpose for the liquidation other than the collection of tax, contrary to ss 6, 6(2)(f), 156 and 177C(2)(b) TAA.[17] Ms Hinde also submitted that under s 177C(2) TAA, the Commissioner was statutorily required to write off outstanding tax that could not be recovered in a liquidation, subject only to reinstatement for additional funds being received.[18] Section 177C provides that:(1) The Commissioner may write off outstanding tax that cannot be recovered ...(2) The Commissioner must write off outstanding tax that cannot be recovered in the following situations:(a) Bankruptcy;(b) Liquidation;(c) A taxpayer's estate has been distributed.(3) Despite subsection (1) the Commissioner must not write off outstanding tax (inclusive of any shortfall penalties), if a tax payer is liable to pay, in relation to the outstanding tax, a shortfall penalty for an abusive of tax position or evasion or a similar act.(4) Despite subsection (2) the Commissioner may reinstate all or part of the outstanding tax written off if the Commissioner receives, by operation of law, additional funds in respect of a taxpayer after the taxpayer becomes bankrupt, is liquidated or if additional funds dueto the taxpayer's estate are discovered after the taxpayer's estate hasbeen distributed.[19] As matters presently stand s 177C(4) has not been triggered because Redcliffe is not in liquidation. The proceedings currently fall within s 177C(3) because the unpaid tax comprises mainly shortfall penalties.[20] In Raynel v Commissioner of Inland Revenue Randerson J made helpful observations as to the obligations of the Commissioner faced with unpaid tax that is unlikely to be recoverable.12 The taxpayer applied unsuccessfully for judicial reviewof the Commissioner's decision to reject various proposals for the repayment of taxdebt. The taxpayer had a pattern of failing to meet his tax obligations. He argued that the Commissioner would have obtained a higher recovery by accepting the various offers that had been rejected than would be obtained on a bankruptcy and winding up and that the duty to maximise the recovery of outstanding tax was theCommissioner's primary or overriding obligation.[21] Randerson J rejected this argument. He considered that s 6A(3) prevailed over other provisions in the Inland Revenue Act, including s 176 of the TAA. In particular, he considered that the obligation to collect the highest net revenue was not an absolute one; the Commissioner was also required to have regard to the available resources, the importance of promoting compliance (especially voluntary compliance) by all taxpayers and the compliance costs incurred by taxpayers. His12 Raynel v Commissioner of Inland Revenue (2004) 21NZTC 18,583 (HC).Honour acknowledged that where the public interest in collecting taxes would be better served by compromise with the taxpayer than enforcement, that course iswithin the Commissioner's broad managerial discretion. Randerson J held that, nevertheless, the considerations relevant to the exercise of the Commissioner's dutyare not limited to issues of practicality, resources and costs:13 importantly, the Commissioner is also required by s 6A(3)(b) to have regard to the importance of promoting compliance (especially voluntarycompliance) by all taxpayers with the Inland Revenue Acts Sections 6 and 6A(3)(b) emphasise that there is a broader public interest in the integrity of the tax system and in ensuring that taxpayers meet their obligations. Taxpayers who comply with the requirements of the Inland Revenue Acts are entitled to expect that appropriate and (where necessary) firm action is taken against taxpayers who shirk their obligations. If not, complying taxpayers would justifiably perceive there is a lack of integrity in the system and an unfair burden is cast on those who conscientiously complywith their obligations. As well the voluntary compliance scheme which iscentral to the proper functioning of the Inland Revenue Acts will be placed in jeopardy unless all taxpayers know that the Commissioner will act firmly and resolutely with those who do not meet their obligations and have no reasonable excuse for doing so.Ordinarily, where a higher net recovery will be achieved through a proposed compromise than by winding up or bankrupting a taxpayer and there are no countervailing considerations, the Commissioner's duty will be to accept thecompromise. But there may be circumstances where, in order to preserve the integrity of the tax system and promote compliance by other taxpayers, the Commissioner will be justified in refusing an offer and, instead, taking enforcement proceedings. Where, for example, there has been a flagrant andongoing failure to comply with the taxpayer's obligations and whererecovery is dubious or is likely to result only in a relatively minor proportion of the overall debt being recovered, the Commissioner may be justified in initiating or continuing enforcement proceedings to secure the wider interests identified by the legislation.[22] I respectfully agree with Randerson J and consider his observations to be apt in this case given Redcliffe's unpaid tax avoidance scheme. Its liability has been thesubject of extensive challenge and appeal proceedings, culminating in affirmation bythe Supreme Court of the Commissioner's assessments. Redcliffe does not trade andhas no assets. Yet, for years it has engaged the Commissioner in expensive litigation. In these circumstances I see no abuse by the Commissioner in seeking to have liquidators appointed.13 At [52], [54] and [55].[23] In a related argument, Ms Hinde submitted that the Commissioner could never rely on the just and equitable ground to obtain an order placing an insolvent company in liquidation because to do so would be acting outside the statutory scheme. She could not offer any authority for this proposition and I do not accept it; to the contrary, having regard to my earlier discussion winding up on that groundseems to be consistent with the Commissioner's obligation to ensure the integrity ofthe tax administration system.[24] Ms Hinde also submitted that the application is an abuse of process because itwill disable Redcliffe's tax disputes. She submits that the appointment of aliquidator is a costly process that automatically leads to accruing of further claimsagainst the company's assets and removes the ability of the director to pursue theresolution of any tax disputes. Ms Hinde states that the tax challenges will essentially be stopped by the liquidation, and even if the liquidator pursues the tax challenges, it will need funding which will ultimately come at the cost of the shareholder. I do not accept this submission either. If there is merit in the tax disputes the liquidator will pursue the litigation. It is not appropriate to stay a liquidation and prevent the Commissioner from exercising her statutory right because the shareholders may want to pursue litigation.Is there a genuine dispute and should a stay be granted pending the outcome of outstanding appeal?[25] Ms Hinde submitted that a stay was appropriate because of the outstanding appeal which, if successful, would result in Redcliffe not being indebted to the Commissioner. The appeal to which Ms Hinde refers is the appeal against Faire AJ'srefusal to set aside a statutory demand,14 which has now been dismissed.15[26] Before the Associate Judge, Redcliffe argued that there was no debt uponwhich to found a statutory demand because the Commissioner's claim againstRedcliffe could not be quantified without reference to the position of its shareholders who had relied, in calculating their tax, on the apparent losses sustained by Redcliffe14 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue (2013) 26 NZTC 21,054 and the subsequent imposition of indemnity costs: Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 3468.15 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue, above n 5.as a Loss Attributing Qualifying Company. Only one of Redcliffe's shareholders hadhad his position determined by way of a settlement with the Commissioner. The remaining shareholders had extant challenges (one on appeal after being struck out).[27] Faire AJ was satisfied that Redcliffe's position had been finally determinedby the Supreme Court and there was no basis on which to find that a genuine dispute existed. To succeed in its appeal against that decision Redcliffe would need to show that its position had not been determined by the Supreme Court and that the Associate Judge was wrong to find that no genuine dispute existed. Given the history of the litigation I am not satisfied that the apparent merits of the appeal justify my staying the present proceedings. If I am wrong and there is a genuine dispute it is a matter that the liquidator can pursue.[28] I am also conscious that determination of the appeal is unlikely to spell the end of the litigation considering the contentious history between the parties.16 As a result, this is not a situation where a stay is sought pending the determination of a genuinely new point where such decision would mean the end of the litigation. I am entitled, indeed bound, to find that tax is due under assessments confirmed by the Supreme Court in 2008. The Commissioner has an obligation to recover that tax and to preserve the integrity of the tax system. The application to appoint liquidators is part of that process. In these circumstances, and having regard to the statements by the Court of Appeal in Anglian Sales Ltd v South Pacific Manufacturing Co Ltd17 I do not consider that the outstanding appeals warrant a stay of this proceeding.18[29] Ms Hinde's further submission that liquidation would render Redcliffe'srights in the appeals nugatory and disable the tax dispute is no longer sustainablewith the delivery of the Court of Appeal's decision.There is no prejudice to Commissioner in granting a stay[30] Ms Hinde submitted that a factor in favour of granting the stay was that there was no prejudice to the Commissioner in doing so. In particular, there are no assets16 Commissioner of Inland Revenue v Ben Nevis Forestry Ventures, above n 9, at [40].17 Anglian Sales Ltd v South Pacific Manufacturing Co Ltd, above n 7.18 At [41] – [43].at risk of dissipation and there is no risk to new or existing creditors because Redcliffe is not trading.[31] Whilst this submission is true in one sense, it is not persuasive. It is true to the extent that, on present information, it seems very unlikely that theCommissioner's prospects of recovering money on a liquidation will be the same in the future as they are now. On the other hand, for so long as Redcliffe's status remains undetermined, the Commissioner will continue to incur costs in relation to the litigation pursued by this insolvent company. Further, the question of financial prejudice does not affect the broader obligations of the Commissioner that I have already discussed.Result[32] I have concluded that the Commissioner is a creditor who is entitled to bring these proceedings. The debt that is the subject of the proceedings is tax that has been confirmed by the Supreme Court as owing. The fact that recovery is unlikely does not preclude this step. To the contrary, the Commissioner's obligation to preservethe integrity of the tax administration system provides a sound justification for it. The existence of an appeal against the decision not to set aside the statutory demand is not a good reason for staying the proceedings.[33] The application is dismissed.[34] The Commissioner may address the issue of costs by memorandum filed within 14 days. Redcliffe may respond within a further 7 days and the Commissioner may reply within a further 7 days.____________________P Courtney J