THE COMMISSIONER OF INLAND REVENUE V THE FISH & CHIP SHOP LIMITED HC CHCH CIV 2009 409 672

THE COMMISSIONER OF INLAND REVENUE V THE FISH & CHIP SHOP LIMITED HC CHCH CIV 2009 409 672 14 July 2009IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV 2009 409 672BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND THE FISH & CHIP SHOP LIMITED Defendant Hearing: 13 July 2009 Appearances: K Clark QC for Plaintiff (appearing 13 July 2009) S Weston for Plaintiff (appearing 14 July 2009) A J Forbes QC for Defendant Judgment: 14 July 2009JUDGMENT OF ASSOCIATE JUDGE OSBORNE Background[1] The plaintiff on 13 February 2009 served a notice of statutory demand (under s289 Companies Act 1993) upon the defendant. The notice incorporated calculations of goods and services tax which the plaintiff calculated as owing from four revenue periods being 31 March 2008, 31 July 2008, 30 September 2008 and 30 November 2008. Of the approximately $30,600.00 owing by way of GST slightly less than $5,500.00 was owing by way of late payment penalties and interest and the balance by GST itself. There was included within the statutory demand $50 of income tax. [2] The defendant did not seek to set aside the statutory demand.[3] This proceeding was commenced on 6 April 2009. The plaintiff relied upon the presumption of insolvency and inability to pay debts arising by reason of the expiration of the s289 statutory demand, together with the Court's equitable jurisdiction. [4] The proceeding was served on the defendant at its registered office on 16 April 2009. The notice of proceeding notified the defendant that the application was to be heard on 2 June 2009 and contained the other prescribed information including the requirement to file any statement of defence within 10 working days after service. [5] The notes attached to the notice informed the defendant in the normal way that if a statement of defence is not filed within the prescribed time, counsel for the defendant company will not without an order for extension of time or the special leave of the Court be allowed to appear at the hearing. [6] The defendant did not file a statement of defence within 10 working days after service. Nor did the defendant seek leave to file a statement of defence before the hearing on 2 June 2009. However, at that hearing the proceeding was adjourned to 13 July 2009 following a request by the Commissioner to enable the Commissioner to consider a request which had been made by the defendant for financial relief. [7] That is the background as the Court file discloses it through the period of the adjournment.Updating affidavit of Fraser John Hawkins[8] On 10 July 2009 the plaintiff filed a second affidavit of Fraser John Hawkins, who had sworn the initial affidavit verifying the statement of claim. Mr Hawkins' updating affidavit contained a record of events concerning the indebtedness and attached exchanges of correspondence and information which had occurred. I will return to some of that.Adjourned hearing on 13 July 2009[9] At the hearing on 13 July 2009 Ms Clark appeared for the plaintiff and indicated that the plaintiff was ready to proceed. [10] Mr Forbes attended Court and indicated that he wished to be heard. As much of what he then indicated to the Court appeared to be in support of an application for adjournment, Mr Forbes was constrained to clarify at the conclusion of his comments that his submissions were also in support of an application for special leave under r 31.20 High Court Rules. [11] The request made by Mr Forbes therefore required me to consider the matter at two levels. First I need to consider whether special leave should be granted. In such event, I need to consider whether there should be an adjournment.Basis of plaintiff's request[12] Mr Forbes outlined a number of propositions which I summarise into the following: (a) The Commissioner (the plaintiff) has a statutory obligation under s6A(3) Tax Administration Act 1994 to collect over time the highest net revenue that is practicable within the law. Three considerations are required under s6A(3) including the importance of promoting compliance, especially voluntary compliance, by all tax payers. Mr Forbes noted that against that background the Department of Inland Revenue allows tax payers to put forward a tax proposal to allow tax situations to be worked through – such indulgence is permitted for a tax payer only once. (b) The defendant (as tax payer) in relation to this debt put forward a proposal which was rejected by the Commissioner on 3 July 2009 with reasons to follow. The 3 July position was in response to an instalment arrangement submitted by a Mr Hunt who occupied amanagerial position in the group of companies of which the defendant is one. Between 28 May and 3 July there had been further information provided by the defendant at the request of the plaintiff. (c) By the plaintiff's 3 July letter, the plaintiff also put forward a counter offer. The counter offer contained essentially the same base provisions as proposed by Mr Hunt (namely fortnightly repayments spread over six months) but contained a number of other conditions including personal guarantees from Messrs David Henderson and Ian Hyndman by 9 July 2009 (time being strictly of the essence) and a mortgage from Mr Hyndman over two parcels of land (in a form satisfactory to the plaintiff). The counter offer itself was required to be accepted in writing by the defendant on or before 1pm on 8 July 2009 (time being strictly of the essence). (By reason of the requirement as to the form of mortgage, Mr Forbes noted that in reality the defendant needed to await the Commissioner's required forms). (d) Mr Hyndman had prior to 3 July 2009 travelled overseas to Canada and from that time his phone had not been answered. This had made it impossible to comply with the conditions of the plaintiff's proposals. Both in correspondence from the defendant and in Mr Forbes's comments to the Court it was emphasised that the unavailability of Mr Hyndman was not a delaying tactic. He had had to travel overseas for personal reasons. It was now understood that he was due back "this week" – subsequently clarified by Mr Forbes to be a return date of 21 July 2009 but with phone access available again at some point this week. Mr Forbes noted that this was Mr Hyndman's "principal business", although Mr Forbes subsequently clarified that it was in fact not correct to describe this as Mr Hyndman's "principal business" – rather it was a significant business interest for him. In any event, he and Mr Henderson are the co-directors with personal interests.(e) Having regard to the nature of the instalment proposal that had been under discussion (approximately $10,000.00 per month) Mr Forbes indicated that the defendant would have available for payment to the plaintiff $20,000.00 on the day of the hearing (i.e. 13 July 2009). (f) Mr Forbes indicated that the accounts manager of the defendant company who had worked for the defendant company for some six years had created the GST issue which the defendant now faces. (g) Finally, Mr Forbes advised the Court that the defendant had available to it the option of an application under s236 Companies Act 1993 (for approval of an arrangement or compromise of creditors.) Mr Forbes indicated that his instructions were that DB Breweries, as by the far the largest secured creditor of the defendant (beyond 75% of value), would likely consider a s236 arrangement a preferable outcome to the liquidation of the defendant. Mr Forbes noted also that a substantial proportion of unsecured liabilities of the defendant arise through inter-company advances and that those creditors will certainly support a s236 application. [13] For all these reasons Mr Forbes sought an adjournment of the proceeding.Submissions for the defendant[14] Ms Clark opposed any suggestion of adjournment and emphasised that she did not accept the appropriateness of any request for adjournment given that the defendant may not appear without special leave. She noted no application for special leave had been made. [15] Ms Clark noted that the Commissioner was not satisfied as to the prospect of the resolution of the debt. She questioned the credibility of a situation where a keydirector, who must have known of the adjournment of the proceeding from 2 June 2009 to 13 July 2009, could leave New Zealand after 2 June 2009 with no contact details. [16] Ms Clark took the Court to the detail of the chronology provided by Mr Hawkins in his second affidavit. While I have had regard to the full chronology and supporting documents, I particularly note the following points identified by Ms Clark in an email from Mr Hunt to the Department on 23 June 2009. Mr Hunt was replying to points raised by the Commissioner in order to consider the defendant's request for financial relief. Ms Clark noted particularly the facts that:• While Mr Hunt for the defendant was reporting that other companies in the group owed a substantial total to the defendant, none had repaid any of the debt in the interim.• Each of the companies had overdue tax.• As at 23 June none of the companies was in any position to repay significant amounts.• No demands for payment had been made by the defendant on any of the group companies.• The reason no demands had been made was that the group companies were run as a group. [17] Ms Clark further observed that as disclosed by Mr Hawkins' updating affidavit, the total amount owing to the Commissioner had increased from the time of service of the statutory demand ($30,693.81) to $64,462.44. [18] Ms Clark submitted that on the papers before the Court the company is prima facie insolvent. I took Ms Clark to mean that this is a case in which the Commissioner has not merely entitlement to rely on the statutory presumption of insolvency but is also able to point to evidence establishing insolvency.[19] Ms Clark submitted that the defendant has not made out a case for special leave. With the Court's necessary focus on solvency, the focus of the material relied upon by the defendant is relevant only to the success or ability in concluding counteroffer arrangements. Nothing put forward for the defendant is relevant to the defendant's ability to pay. Ms Clark submitted that the granting of special leave and an adjournment would be contrary to the sound policy of the legislation which is against the protraction of liquidation proceedings for procedural reasons. [20] In conclusion, Ms Clark noted the defendant's failure to meet the statutory demand; the fact that the defendant has not disputed the account; the fact that this hearing has not been a first call; and the fact that the company has appeared to have the ability to strategically position itself when it wishes to do so.Reply for the defendant[21] I offered Mr Forbes a reply. [22] In the course of that reply he clarified the matters I have referred to above as being clarified. [23] Mr Forbes advised that Mr Hyndman had travelled overseas on 28 June 2009 before any issue had been raised as to a counter offer (which was made on 3 July 2009.) [24] Mr Forbes emphasised again the importance of the Commissioner's duties under s6A Tax Administration Act. [25] Mr Forbes raised a further matter in relation to the defendant's creditors. He commented that while DB Breweries is noted in Statements of Financial Position provided by the defendant as the defendant's secured creditor, the defendant also has a liability as guarantor to Secured Finance Limited (which is not shown on Statements of Financial Position as a guarantee liability – Mr Forbes indicated that the principal debtors are Atlas Food & Beverage Limited and another company.) Mr Forbes explained that the situation of the defendant through a liquidation would beexacerbated as Secured Finance Limited would undoubtedly move to take control of the defendant's fit-out and other assets. Mr Forbes noted that Secured Finance act as the group's accountants and through that close association have a detailed understanding of the financial relationships. [26] Finally, Mr Forbes explained an item of $200,767.00 which had been identified by Mr Hawkins in his analysis of the financial information provided to the plaintiff. Mr Hawkins' analysis had shown that a company called RFD Investments Limited (not a member of the group but one of which Mr Henderson is a director ) had had the debt of $964,860.00 owed to it as at 31 March 2008 reduced by $200,767.00 by 31 March 2009. Mr Hawkins took that transaction to indicate that the group of the companies had elected to pay another company under the control of Mr Henderson in preference to meeting the statutory GST obligations of members of the group. Mr Forbes indicated that the $200,767.00 was in a sense part of the difficulties that had arisen from the period of management involving the manager I have earlier referred to. Mr Forbes explained that the transaction in question was not a cash payment but had come from Minx Limited in the form of a write off. Mr Forbes indicated that the defendant had been seeking explanation from the former manager, who had since been dealt with and was no longer in the company, but that no further explanation was available.Leave applications – the principles[27] I did not receive detailed submissions on the law applicable to an application for special leave in this case. I consider there is no better starting point than the judgment of Paterson J in Fresh Cut Flower Wholesalers Limited v The Living and Giving Gift Company Limited (2001) 16 PRNZ 173 at 175, where his Honour said:The law[9] Neither counsel made submissions on the law applicable to an application for special leave. There are several helpful decisions of Masters referred to in para HR700T.04 of McGechan on Procedure. With respect, I adopt the principles applied by the Masters. First, leave should not be granted unless the applicant can show on the papers an arguable basis upon which it is not liable for the amount claimed. Further, in my view, even ifthere is an arguable defence, leave should not be granted if the applicant is insolvent.[28] In her submissions as to the care which the Court must exercise in relation to special leave, Ms Clark clearly had in mind the following discussion fromMcGechan on Procedure HR31.20.01, where the authors were referring to authority from the State of Victoria, where it was observed:the Court stressed the adjective "special" and stated that it is for the applicant to make out a case to justify this, the general policy being that winding-up proceedings are not to be protracted for procedural reasons.[29] In relation to applications for extension of time to file a statement of defence, it has been held that an applicant must demonstrate an arguable defence on the papers – see Mosaed v Roy Turner Ski Shop Limited HC Wanganui M63/92 10.12.92 Master Williams QC. As Master Faire held, when approving the same approach inOrme v Parkway Investments Limited HC Hamilton M149/00 7.5.01, in principle the test to be applied is the same as in an application to set aside a statutory demand.Consideration of factors for exercise of discretion[30] The defendant has suggested no arguable basis that it is not liable for the sum demanded. [31] The defendant has not suggested it is other than insolvent. It has not filed any evidence on the issue. Having regard to the emphasis which the defendant places on the group of companies of which it is part, I attach substantial weight to the uncontradicted evidence of Mr Hawkins. In his evidence Mr Hawkins deposes that the insolvency of the defendant is most strikingly demonstrated by the increase in outstanding tax liabilities owing to the Commissioner since the serving of the statutory demand on 13 February 2009. But he further notes that from the financial information provided to him by the defendant it appears that the total net liability position of the companies in the group as at 31 March 2009 was $2,110,045.00. For the defendant Mr Forbes did not suggest that there was evidence of solvency. In his submissions he did not challenge the evidence of Mr Hawkins or the basis of hisconclusions (save in relation to the RFD Investments Limited point to which I have referred.) [32] Having regard to the submissions made by Mr Forbes, and the evidence of insolvency before the Court, I conclude that this is not a case on which the Court should consider granting special leave for an extension of time. To do so would be to grant leave to the defendant to file a pleading ( a statement of defence) which asserts a position when it is not a position put forward by the defendant.Disposition[33] I dismiss the defendant's informal application for special leave pursuant to r 31.20 High Court Rules. [34] I have considered whether the Court should grant the indulgence of a further brief adjournment to enable the defendant to clear the debt. [35] Mr Forbes for the defendant stresses that there has been no attempt to avoid the issues and that the absence of Mr Hyndman at short notice, uncontactable and out of the jurisdiction, was a genuine misfortune. He suggests that the outcome of liquidation is not desirable from the general tax payer perspective as the proposal for full payment (albeit by instalments) is more than will come from a liquidation. Mr Forbes further submits that while the defendant was not in a position to give a commitment as to Mr Hyndman's involvement in security arrangements, the Court could take it that Mr Hyndman was extremely likely to agree to the requirements given the lack of options. [36] Ms Clark for the plaintiff however emphasised that the Commissioner's counter offer was no longer open for acceptance. It had lapsed on 3 July 2009. It is the plaintiff's position that he can have little confidence in the workability of any arrangements that would be entered into by the defendant having regard to the defendant's performance through the period of the adjournment.[37] This Court will not, despite Mr Forbes' invitation to it to do so, embark on an exercise of critiquing the willingness of the plaintiff (who happens to be the Commissioner of Inland Revenue) when it comes to the acceptance or rejection of an instalment payment arrangement by a company which is on the prima facie evidence insolvent. In terms of an instalment proposal along the lines previously discussed between the parties, there is no point of even a short further adjournment for the consideration of an instalment arrangement when the plaintiff's position is that he is no longer prepared to enter into an instalment arrangement. [38] That would leave as the sole purpose of a further adjournment the enabling of the defendant to satisfy the debt in full. That would carry with it the complication that over the period since the issue of the statutory demand in February, the total debt owing by the defendant to the plaintiff has been appreciably growing without reduction. Unless the defendant paid the total debt as it now stands the plaintiff would be in a position, relying on the evidence of insolvency, to nevertheless have the company wound up on insolvency grounds. [39] In these circumstances I am not prepared following my refusal to grant leave for the filing of a statement of defence to exercise a discretion to adjourn the hearing to a later date. Accordingly, pursuant to the terms or r 31.20 the defendant must not be allowed to appear at the hearing of the plaintiff's application. [40] I will now hear from counsel for the plaintiff.Addendum[41] Having heard from counsel I stand the matter down to 4pm today ________________________ Solicitors K Clark QC and S Weston for Plaintiff A J Forbes QC for Defendant