THE COMMISSIONER OF INLAND REVENUE V TINY INVESTMENTS LIMITED (FORMERLY TAVIS INTERNATIONAL LIMITED) HC AK CIV 2011-404-005528

THE COMMISSIONER OF INLAND REVENUE V TINY INVESTMENTS LIMITED (FORMERLY TAVIS INTERNATIONAL LIMITED) HC AK CIV 2011-404-005528 9 February 2012IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2011-404-005528[2012] NZHC 98BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND TINY INVESTMENTS LIMITED(FORMERLY TAVIS INTERNATIONALLIMITED)DefendantHearing: 7 February 2012Counsel: C Van De Merwe for plaintiffK Sullivan for defendantJudgment: 9 February 2012 at 4:00 PMINTERIM JUDGMENT OF ASSOCIATE JUDGE ABBOTTIn accordance with r 11.5 High Court RulesI direct the Registrar to endorse this judgmentwith a delivery time of 4pm on 9 February 2012.Solicitors:C Van der Merwe, Legal and Technical Services, Auckland North Services Centre, Inland Revenue Department, PO Box 33150, Takapuna, AucklandS Moran, Duncan Cotterill, PO Box 10376, Wellington 6143Counsel:K P Sullivan/D A Bleier, Port Nicholson Chambers, PO Box 5817 Lambton Quay, Wellington 6145[1] In this proceeding the plaintiff (Commissioner) seeks an order for liquidation of the defendant (TIL). The application is based on an unmet statutory demand for payment of income tax and GST.[2] TIL did not apply to set aside the statutory demand, but now opposes the application for liquidation.Change of Name[3] The defendant was incorporated under the name Tavis International Limited. It changed its name to Tiny Investments Limited earlier this month (on 2 February 2012). I amend the name of the defendant to Tiny Investments Limited.Background[4] This proceeding has a very extensive background history. TIL has been trading since 1986. In about 1994, through either an oversight on the part of its director or from an error within the Companies Office (I do not need to determine that on this application), its annual registration fees were not paid with the consequence that it was struck off. This led to a failure to complete and file various tax returns (there was a period in which the director did not appreciate that it had been struck off). The business continued and, when the problem surfaced, a decision was made to continue as a partnership. Later it was found that that presented other problems (particularly in dealing with an asset) and steps were taken to reinstate the company.[5] A consequence of its restoration to the register was that it had to catch up on both GST and income tax returns for the intervening period. TIL's director, MrsDenton, has given evidence of a number of problems created by the delay. Those were compounded by a number of other difficulties that she personally was encountering.[6] These historical issues continued until 2010. At that time the parties agreed on a pragmatic approach which essentially crystallised all of the historical tax obligations as at that point. The present application is in respect of residualliabilities identified at that point and further liabilities that have arisen in respect ofobligations that were not resolved by the "pragmatic solution".[7] The Commissioner eventually issued a statutory demand, seeking payment of a total sum of $209,027.27. TIL did not take steps to set that demand aside. On 5 September 2011 the Commissioner filed the present application for liquidation.[8] Initially Mrs Denton, as director, filed a notice of intention to oppose the application and a statement of defence. The application was adjourned to allow TIL opportunity to take legal advice. It has done so and is now legally represented.[9] The application is brought on the basis that TIL is unable to pay its debts.The Commissioner relies upon a statutory presumption arising from TIL's failureeither to comply with the statutory demand or to have it set aside. In addition, the Commissioner seeks the order on the grounds that it is just and equitable. The essence of the latter ground is the factual contention that TIL has received a substantial payment in the tax year ending 31 March 2011 which was credited to ashareholders' loan account (the shareholders being the only other creditors of TIL).There is a dispute as to whether or not there was any such payment received by TIL– another explanation has been given by Mrs Denton for the reduction in theshareholders' account.[10] The Commissioner has established a prima facie entitlement to an order for liquidation on the ground that TIL is unable to pay its debts. It is entitled to rely on the presumption of insolvency created by the non-payment of the statutory demand. On the other hand, TIL contends that, notwithstanding its failure to challenge the statutory demand, there is a genuine and substantial dispute as to whether the tax debts are payable. As an alternative to seeking dismissal of the application for liquidation, TIL seeks a stay to enable it to complete processes for review of the debts.Discussion[11] This matter has an extraordinarily lengthy history. That history is a consequence of a number of factors but, in terms of the consequences now before the Court, I consider that it can largely be attributed to a failure by TIL to deal with itstax affairs in a sufficiently timely manner (notwithstanding that there were a number of other contributory factors). I consider it appropriate to record that the Inland Revenue Department recognised many of these factors in coming to the pragmatic solution that was reached in May 2010. As I have said, the issues that are now before the Court arise out of the terms that were agreed at that time or matters that have arisen since.[12] The debt which is at the heart of the proceeding has two components:(a) Income tax, which was identified in an affidavit filed on behalf of the Commissioner in December 2011, of $117,816. This comprises assessments for tax years dating back to March 1995, with the largest components being substantial penalties (imposed in accordance with statutory requirements) for the tax years ending March 1995 and March 1997.(b) GST, again assessed as at December 2011, of $107,642.52, being assessments for three six-monthly periods from September 2007 to September 2008.[13] It is difficult to see any basis for contending that there is an arguable dispute over the income tax obligation. The tax is assessed on the basis of returns filed by TIL. It did not dispute those assessments in accordance with the dispute procedures under the Tax Administration Act 1994 (the Act). As a consequence, the assessments are deemed to be correct.[14] The GST position is different. There was some evidence that the returns were prepared in a timely manner and that they may have been filed but not processed. If the returns were filed, the default assessment (now being sought by the Commissioner) should have fallen away in whole or in large part. If that were to happen it seems that most if not all of the debt now being sought could go. TIL has recently (last week) applied for review of these obligations under s 113 of the Act, and for remission of penalties and interest (s 183 of the Act). If it were to be successful in that application, it is possible that a substantial amount, if not all, of the penalties in respect of income tax for the 1995 and 1997 years could fall away. That is of course a matter for a discretionary determination by the Commissioner but ifthat determination were to be made then the amount at issue between the Commissioner and TIL would reduce substantially.[15] TIL has attempted to meet the possibility that the debt would be reduced substantially by estimating what it regards as its outside liability (a total of $20,000) and depositing that sum into a trust account. As matters currently stand, the Commissioner does not accept that that sum is the appropriate debt even afterdetermination of TIL's applications, but the applications have not yet been given any detailed consideration. I understand that that in part is because they are not fully supported by relevant documents.[16] Whether the Court looks at this matter as a defended application for liquidation, or an application by TIL for stay pending completion of the various statutory processes identified above, the issue ultimately comes down to a matter of discretion for the Court and whether the Court considers that proceeding with liquidation would be unfair in all the circumstances.1[17] There are three possible areas of concern which need to be taken into account:(a) TIL's solvency: as matters stand (and on the basis of accounts as at 31 March 2011) there must be some concern about TIL's solvency, butthat concern could well dissipate if its tax position altered as a result of the applications TIL has just made under the Act.(b) The possibility of a voidable transaction in the year ending 31 March 2011 in the form of the significant credit (in the order of $200,000)made to the shareholders' loan account. It is not possible to resolve this issue on the present application, but the Commissioner (as the only other significant creditor) clearly has an interest in challenging that.(c) It is common ground that TIL has one debtor, a related company, for a relatively substantial amount. The related company has recently obtained a judgment against a third party. This debt is the sum1 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC).represented in the shareholders' loan account. If it is successful ingathering that amount, there will possibly be a need to apportion that between creditors.[18] After hearing submissions from both counsel in the hearing, I offered the parties an opportunity to confer with a view to seeing if terms could be agreed for resolving this application. I indicated my preliminary view that it was unlikely that TIL had an arguable dispute in respect of the income tax obligation, and its case in that respect was better put as one for an adjournment to allow the recently made applications under the Act to be pursued.[19] In respect of GST I indicated that there was a greater case for some form of arguable dispute, which the Court would have to determine if the parties did not reach some agreement but, in any event, there still remained the application for adjournment to allow the procedures under the Act to be completed. In that event, there was certainly material on which the Court could consider an adjournment of a reasonably limited period, taking into account the issues raised by the concerns over voidable preference and if assured that any recoveries from the related company would be held pending an ultimate decision on those procedures.[20] After taking time to discuss that matter, counsel advised the Court that those terms for disposing of the application had been agreed. Those terms are (and I direct accordingly):(a) The present application is adjourned to a list hearing at 10am on 11 May 2012;(b) TIL will submit to the Commissioner applications (or revised applications) for review under s 113 of the Act in respect of both income tax and GST and any application for remission of penalties in respect of income tax under s 183 of the Act, all together with full supporting documents and, in the case of any application under s 183, together with the sum assessed for core tax liability ($14,264.52), by 20 March 2012;(c) The Commissioner will issue determinations on the applications by 4 May 2012;(d) If there is any distribution from TIL's related company (Southern BeefLimited) prior to the hearing on 11 May 2012, TIL is to put the whole amount of that distribution into its solicitor's trust account pendingfurther order of the Court.(e) It is agreed that the sum of $20,000 currently held by TIL's solicitorsunder its undertaking to the Court can be released, and that that sum will provide the source of the $14,264.52 to be lodged into the trust account under subparagraph (b) above.Costs[21] I have already indicated that I consider that the extraordinarily long history to this matter can largely be attributed to delays by TIL in addressing its obligations. Although on one view TIL could be said to have been successful, at least in part, on this application, I consider that if any costs are payable, the appropriate order wouldbe for an order to meet the Commissioner's cost of bringing this application on ascale 2B basis. I reserve determination of costs until further order of the Court. This aspect will be revisited at the list hearing on 11 May 2012. This will give the parties an opportunity to discuss the matter and see if any agreement can be reached.____________________Associate Judge Abbott