COMMISSIONER OF INLAND REVENUE v SHEARING SERVICES KAMUPENE LIMITED [2016] NZHC 1379

COMMISSIONER OF INLAND REVENUE v SHEARING SERVICES KAMUPENE LIMITED [2016] NZHC 1379 [23 June 2016]IN THE HIGH COURT OF NEW ZEALANDWHANGAREI REGISTRYCIV-2015-488-191[2016] NZHC 1379BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND SHEARING SERVICES KAMUPENELIMITEDDefendantHearing: 20 June 2016Appearances: P J Smith for the CommissionerP Te Whata (a director of Shearing Services Kamupene Ltd)V Ruwhiu (appearing as a McKenzie Friend)Judgment: 23 June 2016JUDGMENT OF ASSOCIATE JUDGE R M BELLThis judgment was delivered by me on 23 June 2016 at 3:00pmpursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors:Crown Solicitor, Whangarei, for the CommissionerCopy for:P Te Whata, director of Shearing Services Kamupene LtdV P Ruwhiu, Kaiwhakawa for the Māori Incorporation[1] The Commissioner of Inland Revenue applies under s 241(4)(a) of the Companies Act 1993 for an order that Shearing Services Kamupene Ltd be put into liquidation. The Commissioner says that she is a creditor of the company for $4,373,780.59. The company did not comply with a demand under s 289 of the Companies Act served on the registered office on 27 October 2015. The Commissioner relies on the presumption of insolvency that arises as a result, and says that there are no discretionary factors that count against a liquidation order.[2] Mr Te Whata, a director of the company, opposes on a number of grounds, but they come down to two main points:[a] He says that the company is being transformed into a new entity, which is not subject to the Commissioner's taxes.[b] He contests the company's liability to the Commissioner.Procedural matters[3] In my minute of 23 May 2016 I directed that the company had to berepresented by a lawyer in accordance with the Court of Appeal's decision inRe GJ Mannix Ltd.1 In a minute of 24 May 2016, I recorded that the rule in GJ Mannix Ltd applies only to corporate entities. Directors and shareholders have standing in their own right to oppose a liquidation application. I indicated that Mr Te Whata, as director of the company, could oppose the Commissioner'sapplication himself without instructing a lawyer. I fixed the time for Mr Te Whata to enter an appearance as no later than 7 June 2016. I indicated that for the application to be defended competently, it was strongly advisable that a lawyer should be instructed in any event. I recorded that if he acted personally, Mr Te Whata might face personal liability for costs.[4] The company's representatives filed a memorandum seeking an adjournmentof the fixture for 20 June 2016 on the ground that they had not been able to instruct lawyers. I directed that the hearing on 20 June 2016 should proceed. After that,1 Re GJ Mannix Ltd [1984] 1 NZLR 309 (CA).Mr Te Whata filed a memorandum out of time seeking leave to appear in person. He said that he had only recently become aware of my minute of 24 May 2016 giving him the opportunity to appear. Given that the company did not have legal representation and otherwise would not be heard, I granted leave to Mr Te Whata to oppose the application in person as director of the company. The Commissioner'sapplication was opposed. It would be unfair to hear the application on an unopposed basis.[5] Mr Te Whata also sought leave for Ahu Whenua Services Ltd to appear. Mr K Brown, that company's director, was present in court. There was no lawyer to represent Ahu Whenua Services Ltd. Under the rule in GJ Mannix Ltd, Mr Brown could not appear for his company in court. Mr Brown had, however, sworn an affidavit. I have read his affidavit and taken it into account in my decision, but did not allow Mr Brown to address me on behalf of Ahu Whenua Services Ltd.[6] At the start of the hearing, Mr Te Whata tendered a number of applications under s 290 of the Companies Act to set aside the Commissioner's statutory demand.The applications were by Shearing Services Kamupene Ltd, Mr Te Whata, as itsdirector, Ahu Whenua Services Ltd as creditor and "the Māori Incorporation" asshareholder. Section 290(1) and (2) of the Companies Act says:290 Court may set aside statutory demand(1) The court may, on the application of the company, set aside astatutory demand.(2) The application must be—(a) made within 10 working days of the date of service of thedemand; and(b) served on the creditor within 10 working days of the dateof service of the demand.As only the company can apply to set aside a statutory demand, the applications by the director and shareholder and creditor are all invalid for lack of standing.[7] The company's application was out of time. The statutory demand wasserved on 27 October 2015. The company had only ten working days after that date in which to make a setting-aside application and to serve it on the Commissioner of Inland Revenue. The affidavit of service shows that the statutory demand was affixed to the front door of the registered office of the premises at the Kaitiaki Ahu Whenua Trust, 60 Main Road, Moerewa, because no one was present at the time of service. That was valid service under s 387(1)(c) of the Companies Act.[8] Mr Te Whata says that he did not become aware of the statutory demand until December 2015. The court has no power or discretion to adjust the time for applying under s 290(2) of the Companies Act.2[9] While the failure to apply to set aside the statutory demand results in a rebuttable presumption of insolvency, under s 287(a) of the Companies Act the liquidation application can be opposed on other grounds. The failure to apply under s 290 does not bar other defences.3 As Mr Te Whata's defence is based on othermatters, he has not been prejudiced by the invalidity of the applications under s 290 of the Companies Act.The Commissioner's case[10] In opposed applications by creditors to have a company put into liquidation under s 241(4)(a) of the Companies Act, there are usually three main issues:[a] is the plaintiff a creditor?[b] is the company unable to pay its debts?[c] are there discretionary reasons why the company should not be put into liquidation?2 Hartner Trustee Ltd v Colin MacKenzie Plumbers Ltd (2001) 15 PRNZ 318 (HC) illustrates the absence of such a power.3 Yan v Mainzeal Property & Construction Ltd (in rec and in liq) [2014] NZCA 190,Heron's Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC).[11] For the first two matters the burden of proof is on the plaintiff. If a creditor establishes these matters, the creditor is ordinarily entitled to a liquidation orderex debito justitiae. The company or those opposing the application have the burden of persuading the court that a liquidation order ought not to be made.4[12] According to the records of the Companies Office, Shearing Services Kamupene Ltd was incorporated on 4 January 1996. It has its registered office at Moerewa. Mr Te Whata is the sole director. He is also the sole shareholder, although he explains that he holds at least some of the shares on trust. The company says that it carries on business providing shearing services, mainly in Southland.[13] The Commissioner pleads that she is a creditor for $4,373,780.59 for outstanding assessed taxes, including penalties and interest, as at 25 November 2015. A summary of account as at 25 November 2015 is attached to the statement of claim. The bulk of the debt is unpaid PAYE deductions falling due between 31 January 2005 and 30 June 2007. The Commissioner also claims unpaid GST for May and July 2006 and default assessments of GST for September and November 2014 and January 2015. There are also minor default assessments for not filing returns of income tax for the years ending 31 March 2009 to 2011, and GST returns for March, May, July and September 2015. These default assessments are very much de minimis. By far the greater part of the debt is made up of interest and penalties.[14] The Commissioner's statement of claim has her standard pleading that thereare no outstanding objections or challenges in relation to the assessment of these debts. That is relevant in light of s 109 of the Tax Administration Act 1994:109 Disputable decisions deemed correct except in proceedingsExcept in objection proceedings under Part 8 or a challenge under Part 8A,—(a) no disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and(b) every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.4 Re Thames Freightlines Ltd (in rec) (1981) 1 NZCLC 88,112 (HC).A tax assessment is a disputable decision under s 109.[15] Before a tax assessment can be challenged under Part 8A, the taxpayer and the Commissioner must follow the disputes procedures under Part 4A of the Tax Administration Act. When a taxpayer has disputed liability for tax assessments, by following the procedures under Parts 4A and 8A of the Tax Administration Act, the taxpayer may be able to contend that, as its liability for tax is contested, the debt cannot be indisputable for the purpose of a liquidation proceeding.[16] Up until the end of 2004 the company, which employed shearers and shed hands, made PAYE deductions for their wages. From the beginning of 2005 until 2007 it did not make any such deductions. The Inland Revenue Department began an investigation in March 2007. In 2009 the Commissioner issued a Notice ofProposed Adjustment to amend the company's monthly employer schedules from January 2005 to June 2007 to include payments to the shearers and the shed hands. The Commissioner also imposed a shortfall penalty for evasion. The total amount including shortfall penalties came to $1,598,201.57. The company contested this with a Notice of Response. There was an exchange of statements of position. Following the adjudication phase, the Commissioner issued amended assessments totalling $1,498,201.57 for PAYE and shortfall penalties.[17] The company began a proceeding in the Taxation Review Authority under Part 8A of the Tax Administration Act. The Commissioner applied to strike out.The Authority, Judge Barber, understood the company's argument to be that it stoodoutside the tax legislation. He rejected that as unarguable, but he noted two matters potentially arguable for the company:51. the shearers and shed hands were independent contractors, not employees; and2. a lower level of shortfall penalty than that for evasion might be appropriate.5 XXX v Commissioner of Inland Revenue [2012] NZTRA 9, (2012) 25 NZTC 15,305.[18] He gave leave for the company to run a case based on those issues.[19] That was the subject of his decision in Shearing Services Kamupene Ltd v Commissioner of Inland Revenue.6 The Commissioner applied to strike out thecompany's proceeding primarily on the ground that the company had not used the opportunity to advance a case on the basis of the two issues Judge Barber had identified, but was instead advancing arguments that were not open to it. Inparagraph [22] of his decision Judge Barber described the company's case:The disputant now purports to bring a case that its shearers and shed hands are neither employees, nor independent contractors. The disputant also seeks to interpose an entirely new taxpayer, namely Ahu Whenua Services Ltd, trading as New Zealand Contracting Solutions Inc ("CS") and a number of "whanau trusts" of questionable legal status. Ahu Whenua Services Ltd did not exist for most of the tax period under consideration. CS is not a legal valid entity and had no capacity to operate as intermediary between the disputant and the shearers and shed hands as the disputant claims.[20] Judge Barber struck out the claim by the company as disclosing no reasonable cause of action and as being an abuse of process. He also granted summary judgment to the Commissioner. He confirmed the assessments. He notedthat the Employment Relations Authority had considered whether the company'sshearers and shed hands were employees or independent contractors and had heldthem to be employees. Judge Barber's decision is a rejection of arguments by the company that:1. it was outside the tax laws;2. there was another entity, Ahu Whenua Services Ltd with whom the company contracted for the provision of services by shearers and shed hands.[21] The company appealed against the decisions of the Taxation Review Authority, but out of time. It needed leave, but the Commissioner opposed. Mallon J reviewed the matter thoroughly and declined special leave to appeal out of time.76 Shearing Services Kamupene Ltd v Commissioner of Inland Revenue [2013] NZTRA 7, (2013) NZTC 2-006.7 Shearing Services Company Ltd v Commissioner Inland Revenue [2014] NZHC 3223.The Commissioner's case is that with that decision, the company's opportunity to argue liability for PAYE came to an end and the matter cannot be reopened by reason of s 109 of the Tax Administration Act.[22] There is no evidence that Shearing Services Kamupene Ltd at any stage disputed its liability for goods and services tax. The assessments for goods and services tax are likewise indisputable, even though the assessments have never beenchallenged. The Commissioner's case is accordingly that all the debts areindisputable, and she accordingly has status as a creditor to bring the liquidation applications. As previously noted, the non-compliance with the statutory demand served on 27 October 2015 gives rise to a presumption of insolvency.8 With that, the Commissioner says that she is a creditor for undisputed debts and has standing. Given the presumption of insolvency, it is for those opposing to persuade the court in its discretion why a liquidation order ought not to be made, but no such case has been made out.Mr Te Whata's case: the transformation defence[23] At earlier stages in this proceeding documents filed by Shearing ServicesKamupene Ltd referred to "Māori Incorporation Maunga Hikurangi Koporeihana" also called "Māori Inc". It is described as the owner of Shearing Services KamupeneLtd. At the hearing, Mr Te Whata explained that although his office records showed him as the sole shareholder, he was holding at least some shares on trust, apparentlyfor the Koporeihana Māori. When the case has been called earlier, I was told that an application had been made to the Māori Land Court to have the Koporeihanarecognised under Te Ture Whenua Māori Act 1993. I understand that the MāoriLand Court has not yet given any decision.[24] In the hearing on 20 June, Mr Te Whata submitted that the matters before theMāori Land Court involved the transformation of Shearing Services Kamupene Ltdinto a Māori Authority under Te Ture Whenua Act. Such a Māori Authority wasdifferent from a normal company. The rights of the shareholders would be protectedby the common law and tikanga Māori. Ownership of the company would be8 Companies Act 1993, s 287(a).inalienable except among the preferred classes of alienees.9 The Koporeihana was tobe for Māori community purposes. He referred to ss 218, 253 and 258 of Te Ture Whenua Māori Act. The Koporeihana would be run in accordance with tikangaMāori values and practices. This entity would be within the voluntary communitysector and classified as a tangata whenua organisation providing mahi aroha and koha services under whakawhanaungatanga.[25] In Mr Te Whata's submission, this transformation would affect the way thatfinancial statements were prepared and the company's tax liabilities. The companyhad tried to explain this in the hearing before the Taxation Review Authority but its case had been misconstrued as an argument as to sovereignty issues.[26] Mr Te Whata offered little in the way of hard evidence in support of his submission. There are a number of flaws in his submission, but the most importantone is that it does not get rid of the company's tax liability to the Commissioner.[27] A company established under the Companies Act is a creature of statute – its existence is determined by the provisions of that Act. A company is registered upon application. Upon registration a certificate of incorporation is issued, which is conclusive evidence that the company is incorporated under the Companies Act.10 It continues in existence until it is removed from the register.11 It is an entity distinct from its shareholders. In this case that means that it is distinct from Mr Te Whata and from the beneficiary of any trust on which he holds his shares.[28] Section 318 in Part 13 of the Companies Act provides for the removal of a company from the register in a number of cases. That marks the end of the existence of the company. A company may also be removed from the New Zealand register, if it is to be incorporated in another country.12[29] Between incorporation and removal from the register, a company keeps its identity, even if there are changes in directors and shareholders. Companies do not9 This is Maori land law terminology. See Te Ture Whenua Maori Act 1993, ss 2, 147A and 148.10 Companies Act, s 14.11 Section 15.12 Sections 350, 351, 355.metamorphose. There is nothing in the Companies Act by which a company incorporated under it can be transformed into some other entity.[30] Shearing Services Kamupene Ltd remains a company established under the Companies Act. It has not been removed from the register. Shearing Services Kamupene Ltd remains what it always has been, a company incorporated under the Companies Act 1993. It has not been and cannot be transformed into anything else.[31] The other end of the transformation submission is that the company has become another type of corporation – a so-called Maori authority. The application in the Maori Land Court was to obtain recognition of that authority. Under New Zealand law, corporations are established by statute.13 Part 13 of Te Ture WhenuaMāori Act provides for Māori incorporations. Under these provisions, Māorifreehold land may be held in corporate ownership. The shareholders are those who would otherwise own the land. Aside from incorporations, Part 13 of Te TureWhenua Māori Act does not make any provision for establishment of other corporateentities. It is little wonder that Mr Te Whata has not obtained an order in the Māori Land Court, recognising his incorporation. That aside, Mr Te Whata's submissionshave not shown the incorporation of any body corporate under any relevant legislation. In particular, there is nothing to show that Maunga HikurangiKoporeihana Māori is a Māori incorporation under Te Ture Whenua Māori Act orany other legislation.[32] On Mr Te Whata's submission, the transformation process is still under way. He did not submit that the transformation had already been carried out. His case is based more on hopeful expectation than any actual change.[33] Ultimately, the transformation submission gets Mr Te Whata nowhere. TheTaxation Review Authority's decisions deal with the tax liability of ShearingServices Kamupene Ltd. Given its continuity of existence, that is the same body that was incorporated in 1996 and was the subject of the decisions of the Taxation13 Under English law, corporations may also be established by royal charter from the Crown, but that is not done in New Zealand.Review Authority and the High Court on appeal and is the subject of theCommissioner's application in this proceeding.[34] The liability of Shearing Services Kamupene Ltd under the PAYE assessment upheld by the Taxation Review Authority remains a debt of the company. The submission on transformation is ineffective to show that the liability has somehow gone away.Challenge to assessments[35] Shearing Services Kamupene Ltd was held liable for PAYE tax deductions because the Commissioner considered its shearers and shed hands to be its employees. The Taxation Review Authority upheld that and dismissed arguments directed at interposing other entities between the company and the shearers and shed hands.[36] Mr Brown's evidence contests that. Mr Brown describes Ahu WhenuaServices Ltd as incorporated as a Māori authority. It was in fact incorporated as acompany on 7 March 2007. He also says that he is a director of New Zealand Contracting Solutions Inc, but he does not explain what this entity is. As best I can gather, it appears to be a trading name for Ahu Whenua Services Ltd. Mr Browncontends that Ahu Whenua Services Ltd carries out "mahi aroha sub-contracts" withShearing Services Kamupene Ltd. He denies that the shearers and shed hands(described as "whanau kaitono") were employees. His evidence suggests that they worked as independent contractors.[37] That evidence is an attempt to re-litigate matters decided in the Taxation Review Authority. Now that all avenues to challenge the tax assessments for PAYE tax deductions have been exhausted, it is no longer open to Shearing Services Kamupene Ltd to contest its liability for those assessments in this proceeding.[38] I also refer to the GST part of the Commissioner's claim. A large part of the arguments in opposition attack the company's liability for PAYE tax assessments.No arguments were directed against its liability for goods and services tax. TheCommissioner's standing as a creditor for unpaid goods and services tax remainsintact.The special purpose financial report[39] Mr Te Whata tendered a "special purpose financial report" for ShearingServices Kamupene Ltd. It was a set of financial statements as at 31 July 2014. Thedirectors' report explains that the status of the company was changed to a MāoriAuthority and that New Zealand Contracting Solutions Inc was engaged on sub- contract to provide shearers and shed hands While an independent accountant appears to have prepared the financial statements, I am unable to put any weight on them for this case. The financial statements purport to show total tax refunds available at $5,503,309 but there is no basis for that whatsoever. The statement of financial position shows liabilities of the company between 2005 and 2014 as neverexceeding $154,000. The company's undisputed liability for the PAYE deductionshas been totally ignored.Outcome[40] The indebtedness of Shearing Services Kamupene Ltd to the Commissionerhas been incontestable, at least since Mallon J dismissed the company's applicationto appeal out of time against the decisions of the Taxation Review Authority. Under s 109 of the Taxation Administration Act, the company's indebtedness to theCommissioner is now indisputable. Nothing that has been raised in this hearing hascast any doubt on the company's indebtedness to the Commissioner or shown thatthe company is able to pay its debts. The presumption of insolvency that arose when the company did not comply with the statutory demand has not been rebutted. Nothing has been raised which suggests that the discretion should be exercised against putting the company into liquidation.[41] For these reasons, I make an order that Shearing Services Kamupene Ltd be put into liquidation. The time of the order is 3:00pm on Thursday 23 June 2016.[42] I appoint David John Bridgeman and Craig Alexander Sanson liquidators. In their consents, they say that their professional practices provide services to certain identified secured creditors: the ANZ Bank and CFG Finance (NZ) Ltd. Notwithstanding those continuing business relationships, I am satisfied that they will be able to carry out their duties as liquidators independently in the interests of unsecured creditors. I make an order under s 280 of the Companies Act 1993 allowing them to act as liquidators. I approve their rates of remuneration on the normal terms.[43] I award the Commissioner costs on the application. Counsel should send a schedule of proposed costs to Mr Te Whata for comment. If there is any dispute as to costs, memoranda may be filed and I will decide costs on the papers.__________________________Associate Judge R M Bell