The Commissioner of Inland Revenue v Tower City Holdings Ltd [2020] NZHC 2240

The Commissioner of Inland Revenue v Tower City Holdings Ltd [2020] NZHC 2240 [31 August 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-1331[2020] NZHC 2240IN THE MATTER OF the Companies Act 1993BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND TOWER CITY HOLDINGS LIMITEDDefendantHearing: 11 February 2020 and further submissions 24 & 26 February 2020Appearances: K Naik-Leong for the PlaintiffTJP Bowler for the DefendantJudgment: 31 August 2020JUDGMENT OF ASSOCIATE JUDGE SMITHThis judgment was delivered by me on 31 August 2020 at 3pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Crown Law, WellingtonNeilsons Lawyers, Auckland[1] The plaintiff (the Commissioner) applies for an order under s 241(4) of theCompanies Act 1993 (the Act) to put the defendant (Tower) into liquidation. Theliquidation proceeding was commenced in July 2019, and on 8 July 2019 VivianFatupaito and Elizabeth Kenne were appointed interim liquidators.[2] The liquidation claim was not preceded by any statutory demand under s 289of the Act.[3] With the liquidation claim, the Commissioner filed a without notice applicationfor an order under s 246 of the Act appointing interim liquidators to Tower. In ajudgment given on 8 July 2019,1 Associate Judge Andrew appointed Vivian Fatupaitoand Elizabeth Keene as joint and several interim liquidators of Tower. Tower and itsdirector Lawrence Chek Wai Chan (Mr Chan) were given leave to apply to the Courtto vary or rescind the order appointing the interim liquidators, but no such applicationhas been made.[4] Tower filed a statement of defence to the liquidation claim, dated 9 August2019.The liquidation claimThe Commissioner's causes of action[5] In her claim, the Commissioner pleaded four separate causes of action.[6] First, she contended that Tower is unable to pay its debts, being a ground forwinding-up by the Court under s 241(4)(a) of the Act.[7] Secondly, the Commissioner alleged that Tower has failed to keep properaccounting records that enable its financial position to be determined without requiringexplanation or reconstruction.1 Commissioner of Inland Revenue v Tower City Holdings Ltd [2019] NZHC 1577.[8] Thirdly, the Commissioner contended that the directors of Tower have failedto comply with their duties under the Act, in the following respects:(i) Failing to ensure that Tower met its tax obligations;(ii) Failing to ensure that Tower kept proper accounting records;(iii) Allowing its assets (properties and funds) to be consistentlystripped by its directors for their personal benefit, in priority toapplying them to payment of Tower's creditors (including its taxliabilities);(iv) Advancing their personal interests over those of Tower.[9] In her fourth cause of action, the Commissioner says that, in the circumstancesof the case, it is just and equitable that Tower should be put into liquidation by theCourt. She contends that an objective observer would justifiably lack confidence inthe conduct and management of Tower, and that there is a need for a thorough andindependent investigation of Tower's affairs. She also contends that it is in the publicinterest to maintain the integrity of the tax system, which includes the Commissioner'sability to collect tax when it is due and the liquidation of entities that are unable tomeet their tax debts (or show a blatant disregard for complying with their statutoryobligations).Tower's directors and shareholders[10] Mr Chan has been a director since Tower was incorporated on 12 March 2009.[11] Between 17 June 2011 and 16 August 2011 Mr Stewart Clarke (Mr Clarke)was registered as a director with Mr Chan.[12] For a period between 23 December 2015 and 9 February 2018, Mr EthnikKrasniqi was also a director of Tower. From 9 February 2018, however, Mr Chan hasbeen the sole director of Tower.[13] Initially, the shares in Tower were held by Wellpark Trustees No.2 Limited, acompany of which Mr Clarke was the sole director and shareholder. In April 2012, theshares were transferred to Mr Chan, who has remained the sole shareholder in Towersince then.[14] The Commissioner says that Mr Chan was largely out of New Zealand between29 September 2014 and 11 June 2017. He has not communicated with theCommissioner about Tower's tax affairs.[15] Mr Clarke acted as Tower's tax agent, or contact person for GST purposes, andhe has filed some tax returns for Tower. Mr Clarke also nominated a bank accountunder his control to receive payments from the Commissioner for Tower, and he hasdirected where GST refunds for Tower were to be paid by the Commissioner.[16] Mr Clarke is an undischarged bankrupt, and in March 2019 he received a three-year custodial sentence for offences under the Insolvency Act 2006.[17] The Commissioner says that Mr Krasniqi was purportedly engaged on 1 June2012 by Tower to work on the sale and marketing of its properties. Under a marketingagreement he had with Tower, he was to be paid a retainer of $250,000 per annum.The Commissioner says that Mr Krasniqi facilitated the property transactions, and thathe (or an entity associated with him) received the proceeds of sale of Tower'sproperties. The Commissioner says that Mr Krasniqi owes $10,287,005.85 forpersonal income tax covering the income tax years from 2005 to 2018.2The tax audit[18] The Commissioner carried out an audit of Tower commencing in 2015. Theprincipal targets of the audit were GST for the period between October 2012 andAugust 2014, and income tax for the period 1 April 2012 to 31 March 2013.2 By memorandum dated 13 August 2020, Mr Bowler advised that the issues between Mr Krasniqiand the Commissioner have now been resolved. That was disputed in a memorandum filed for theCommissioner on 17 August 2020. There is no need to address the issue further, however, as I amable to determine the liquidation claim without reference to Mr Krasniqi's personal tax position.[19] The Commissioner says that information requested from Tower was notprovided, but she was able to identify from information obtained from third parties anumber of property transactions entered into by Tower that had not been returned forincome tax or GST purposes.The default assessments[20] In May 2017, the Commissioner issued default assessments in respect ofincome tax for the years ended 31 March 2014 to 31 March 2016. Of the defaultassessments, only the assessment for the year ended 31 March 2016 resulted in Towerhaving a liability to pay tax. Losses were available from the earlier years for Tower tocarry forward into the 2016 tax year.[21] The notice of assessment issued for the 2016 income year recorded an assessedamount of $4,084,478.22 payable by Tower. That assessment related to the sale ofproperties by Tower at 223 Kohimarama Road, 7 John Rhymer Place, and 3-5 ElthamRoad, Kohimarama, for a total price of $32,180,000. The Commissioner also assessedTower for an evasion shortfall penalty of $3,063,358.70.[22] In May 2017, the Commissioner made default assessments in respect of GSTfor the period ended 31 July 2016. GST of $273,913.04 was assessed on the sale of aproperty owned by Tower at 10 Huka Road, Birkenhead. The Commissioner alsoassessed Tower for an evasion shortfall penalty of $205,434.78 for failing to declarethe sale for GST purposes in its return for the period ended 31 July 2016.[23] The total amount of these assessments came to $7,627,184.74. TheCommissioner says that interest and late payment penalties have continued to accrueon that sum in accordance with the Tax Administration Act 1994 (the TAA). Towerhas made no payment in reduction of the outstanding amount.Tower files some returns[24] In March 2019, Tower filed two income tax returns for the tax years ending 31March 2017 and 31 March 2018. It also provided completed IR10 financial statementssummary forms for those tax years. The 2017 income tax return declared $46,331 topay. That sum fell due on 7 February 2018, but it has not been paid by Tower.[25] Tower also filed GST returns in March 2019, covering the periods ended 31May 2016, 31 August 2016, 31 December 2017, 28 February 2018 and 30 June 2018.The returns for four of these periods claimed expenses, but recorded no sales. GSTrefunds were claimed for these four periods.[26] The GST return for the period ended 31 December 2017 returned taxable salesof $4,500,000, and zero-rated sales of $2,300,000. Expenses of $546.25 were claimed,leaving tax to pay of $286,885.27. That sum was due to be paid by 28 February 2019,but it has not been paid.Tower disputes the default assessments[27] On 11 September 2017, Tower issued notices of proposed adjustment("NOPA's") to the Commissioner, disputing the default assessments. With theNOPA's, Tower provided financial statements for the tax year ended 31 March 2015,which showed comparative figures for the 31 March 2014 year. The NOPA's alsodisputed the 2016 income assessment, although no financial statements were providedto support an adjustment for the 2016 tax year. The adjustments for the 2016 tax yearcontained in Tower's NOPA relating to that tax year were recorded as "provisional atthis stage", and "TBC".[28] Mr Clarke emailed financial statements for Tower for the tax year ended 31March 2016 to the Commissioner, on 5 October 2017. He had prepared thesestatements, and also those submitted for the 2015 tax year, himself. The Commissionersays that, in certain instances, the figures in the 2015 financial statements did notmatch the figures included under the same headings in the comparative figures shownin the 2016 financial statements.The Commissioner rejects Tower's NOPA's[29] The Commissioner issued notices of response ("NOR"s) rejecting Tower'sNOPA's on 9 November 2017 (in respect of the GST default assessment) and 4December 2017 (in respect of the income tax default assessment).[30] The dispute has not been resolved, and is currently in the conference phaseunder the dispute resolution procedures.3Concerns over Tower's record-keeping[31] The Commissioner says that Tower has not provided her with general ledgers,capable of verifying the financial records. Nor does Tower hold a bank account in itsown name – Tower's business has all been transacted through its solicitors' trustaccounts.Transfers of properties since the tax audit[32] The Commissioner says that Tower has transferred a number of properties outof its ownership since the tax audit began, but the proceeds of sale have not beenapplied to reduce the outstanding tax debts. Instead, the proceeds appear to have beenapplied for the benefit of Mr Krasniqi, Mr Chan and Mr Clarke.[33] On 22 December 2017, Tower transferred six properties in Tukairangi Road,Taupo (the Taupo properties), to a company called Ten Abbotts Limited (Ten Abbotts).Tower has not applied any of the proceeds of these sales to its tax debts.Allegation that Tower cannot pay its debts[34] In support of her contention that Tower is unable to pay its debts, theCommissioner says that Tower currently owns three properties, the combined value ofwhich is not sufficient to meet its tax liabilities. On that basis, she says that Tower isinsolvent. In the alternative, she says that Tower is unable to pay its debts because3 Once a NOPA and NOR have been issued, s 89M of the TAA provides for each side to submit tothe other a statement of its position, which must include an outline of the facts and evidence onwhich it intends to rely, and an outline of the issues that it intends to raise and the propositions oflaw on which it will rely. Normally a facilitated conference is arranged. The objective of these"pre-litigation procedures" is to promote the prompt and efficient resolution of the dispute byrequiring the issues and evidence to be considered by the parties before proceedings arecommenced (s 89A(1) of the TAA). The disputes procedure just described is in the nature of anegotiation process; if agreement is not reached (or one party is deemed to have agreed to theother party's position by failing to take a step in the process within a prescribed time), proceedingsmay follow in either the Taxation Review Authority or in this Court (Allen v Commissioner ofInland Revenue [2006] NZSC 19; [2006] 3 NZLR 1 at [9]).those with effective control and management of Tower have been making decisions toensure that Tower does not pay its debts as they fall due.Tower's statement of defence[35] In its defence, Tower generally admits the Commissioner's allegations relatingto the shareholding and directorships in Tower.[36] Allegations relating to the tax audit conducted by the Commissioner aregenerally denied, but the notices of assessment are acknowledged to have been issuedor proposed. They are said to be the subject of a challenge under Part 8A of the TAA.[37] Tower says that some disputed assessments constitute deferrable tax, and it isnot liable to pay deferrable tax in relation to the challenge (or any penalty or interest)until the expiry date of the deferral, which has not yet occurred. It says its challengehas not yet been determined, and its final liability has not been determined.[38] In respect of its returns, Tower says that it has lost confidence in Mr Clarke,and the returns filed are being reviewed with a new accountant. It says that in anyevent Tower has significant tax losses, which would be available to set off against taxliabilities in any liquidation.[39] In respect of the sales of the properties referred to by the Commissioner, Toweradmits that it sold the Huka Road properties, and that it also sold the six Taupoproperties to Ten Abbotts Limited at market value (purchase price $4,500,000).[40] Except for a 2017 GST liability ($286,885.27, due in respect of the GST periodended 31 December 2017), Tower denies that it has any tax liability to theCommissioner. It says that the Commissioner is holding GST refunds payable to itwhich can be offset against any GST liability it has.The Commissioner's reply[41] In her reply, the Commissioner denied an allegation that she is holding GSTrefunds payable to Tower, and that those refunds can be offset in a liquidation againstany debt owed by Tower to the Commissioner. She acknowledged that a dispute withTower has been commenced under Part 4A of the TAA, but she denied that a challengeunder Part 8A of the TAA has been commenced.[42] In response to Tower's denial of the Commissioner's allegation that between 9and 11 May 2017 Notices of Assessment reflecting Tower's income tax defaults weresent to Tower, the Commissioner stated that Notices of Assessment reflecting thedefault assessments in respect of the income tax years from 31 March 2014 to 31March 2016 were sent to both directors of Tower at that time (Mr Chan and MrKrasniqi) at particular stated addresses.[43] The Commissioner denied allegations in the defence that Tower, having lostconfidence in Mr Clarke, is having the returns filed on its behalf reviewed by a newaccountant. She also denied Tower's pleading that it has significant tax losses, and that"such amounts are set off in liquidation".[44] In response to Tower's contention that the Commissioner is holding GSTrefunds payable to Tower, the Commissioner stated:(i) a GST refund claimed by Tower for the GST period ended 31August 2014, in the sum of $133,317.26, is not payable toTower. The refund was withheld by the Commissioner, under s46 of the TAA, and Tower was notified that the refund was beingwithheld. Supporting documents were requested to substantiatethe refund claim. To date, Tower has not responded to the s 46letter or provided documents supporting the refund claimed forthe August 2014 GST period.(ii) Mr Clarke filed GST returns for Tower in March 2019, for eachof the GST periods ended 31 May 2016, 31 August 2016, 28February 2018 and 30 June 2018. GST refunds totalling$5,635.26 were sought in these returns. The Commissionermade a nil assessment of GST in respect of the May 2016period, and that has not been disputed. The amounts claimed byTower in respect of the other periods were credited (less a $250late filing fee in respect of each period) against outstandingamounts owed by Tower in respect of earlier GST periods.(iii) The GST returns for the periods ended 31 August 2016, 28February 2018 and 30 June 2018 were not accompanied by anysubstantiating documents. Those returns are being reviewed bythe Commissioner.The evidence for the Commissioner[45] Mr Lorigan, a customer compliance specialist employed by the Commissioner,provided the usual affidavit verifying the allegations in the statement of claim. He alsofiled a lengthy affidavit in support of the application to appoint interim liquidators.[46] In view of the conclusion I have reached on the Commissioner's second causeof action (alleged failure by Tower to keep proper accounting records that enabled itsfinancial position to be determined without requiring explanation or reconstruction),it is not necessary to refer to most of the evidence given by Mr Lorigan. It is enoughto refer to the following.[47] In a section of his evidence headed "Inaccuracies in accounting recordsprovided by Tower", Mr Lorigan demonstrated that the financial statements for the2016 financial year provided by Tower could not have been correct. For example, the2016 financial statements purported to show that Tower sold the Taupo properties inthe course of the year for $5,999,999, but the documentary evidence held by theCommissioner supports a conclusion that the Taupo properties were not sold by Toweruntil 22 December 2017. Indeed, the purchaser, Ten Abbotts, was not incorporateduntil 20 September 2016.[48] Mr Lorigan also noted that the comparative figures for 2015 included in the2016 financial statements differed from the actual figures contained in the 2015financial statements. The figures included for the items "Related Entity LoanAccounts", "Accrued Mortgage Interest", and "Term Loan Funding" did not match.4That resulted in the "Total Liabilities" and "Net Assets" figures changing significantly.In the 2015 financial statements the "Total Liabilities" figure was $3,981,963, whilethe "Net Assets" figure was $487,780. In the figures for 2015 that were included inthe 2016 financial statements for comparison purposes, the "Total Liabilities" figurewas ($5,785,099 and the "Net Assets" figure was ($1,315,356)).[49] Mr Lorigan noted that it was unusual for figures in financial statements for acertain period to change in the comparative figures for the same period which areincluded in the financial statements for the following year. Normally the figures wouldbe the same, and represent the starting point for the calculations in the later reportingperiod. The difference in these particular financial position items did not have anymaterial effect on the tax payable by Tower, apart from the calculation of the interestexpense in the statement of financial performance in the 2016 financial statements.However, Mr Lorigan said that the inconsistency raised questions, which he was notable to answer by reference to any underlying accounting records.[50] Mr Lorigan also referred to an item "Interest – Development Loans" recordedas $4,217,857 in Tower's statement of financial performance for the 2016 year. Hesaid that there was a lack of supporting documentation to verify this substantial interestdeduction.[51] Mr Lorigan said that the inconsistency in the figures made it difficult toestablish the solvency of Tower. For example, the actual 2015 financial statements forTower suggested that the company was then solvent on a balance sheet basis. Howeverthe 2015 figures as set out for comparison purposes in the 2016 financial statementsshowed that Tower would have been insolvent on a balance sheet basis during the 2015tax year.4 The Statement of Financial Position for the 2015 tax year showed "Accrued Mortgage Interest" at$536,661. The same item in the "2015 Comparison" column in the 2016 Statement of FinancialPosition was shown as $823,323. The item "Related Entity Loan Accounts" was shown in the2015 Statement of Financial Position as $1,564,313, but the "2015 Comparison" column in the2016 Statement of Financial Position showed the same item as ($238,823). The 2015 Statementof Financial Position showed Total Term Loan Funding of $3,429,777, while the "2015Comparison" column in the 2016 Statement of Financial Position recorded the same item as$4,946,251.[52] The IR10 financial summary forms produced by Tower for the years ended 31March 2017 and 31 March 2018 also appeared to be inaccurate. While the figure forclosing stock in Tower's financial statements for the year ended 31 March 2016 wasshown as ($3,135,996), the opening stock figure recorded in the IR10 form for theensuing tax year was $7,285,996. Mr Lorigan said in his evidence that the effect ofthis was to minimise Tower's gross profit and assessible income by approximately$4,000,000, which he described as a "substantial error".[53] Mr Lorigan said that the IR10 summary form provided by Tower for the 2017tax year showed a grossly understated sales figure of $4,482,000. Evidence obtainedby the Commissioner from third party sources showed that sales in the 2017 yeartotalled approximately $14,582,000. The IR10 form for the 2017 tax year alsorecorded $754,490 of purchases made by Tower, but the only evidence of purchasesthe Commissioner has been able to obtain, relating to a deed of nomination supportingthe purchase of certain properties at Horeke, supported a purchases figure of only$30,000.[54] Given the inaccuracies in the accounting records provided by Mr Clarke onbehalf of Tower for the 2015, 2016 and 2017 tax years, Mr Lorigan said that it wasunclear what the sales purportedly declared in the 2018 IR10 form provided by Towercould be, apart, possibly, from the sale of the Taupo properties. However the sale ofthe Taupo properties had been included in the 2016 financial statements, so they couldnot also have been included in the 2018 IR10 form.[55] Mr Lorigan said that no ledgers for Tower had been provided for any years.Ledgers might have assisted the Commissioner to reconstruct the financial position ofTower. He said that there was no evidence to suggest that ledgers even exist. Also, asTower has not had any bank account in its name, it has not been possible to reconstructits financial position from bank statements. He said that the Commissioner hasendeavoured to get a picture of Tower's transactions from tracing funds throughaccounts controlled by Mr Clarke, Mr Chan and Mr Krasniqi, and ledgers of varioussolicitors' trust accounts, but he was not confident that the documents obtained for thispurpose provided the full extent of transactions Tower had been involved in orundertaken.Evidence for TowerMr Chan[56] Mr Chan expressed the view that Tower has no tax liability to theCommissioner. On the contrary, he said that he believed Tower has outstanding GSTrefunds and substantial losses. Any proposed assessments which would change thatare presently the subject of a dispute which has not yet been concluded.[57] Mr Chan said that Tower was nothing more than a property developmentcompany that had run into some difficulties with one of its developments. He referredto a GST dispute with the Commissioner in relation to the sale of a property at 2 HukaRoad. Tower's position is that the sale should have been zero-rated because theultimate purchaser was GST-registered. The Commissioner's position is that thetransaction should be standard-rated, because the party who signed the sale agreementwas not GST-registered. Mr Chan said that dispute is ongoing, and it extends to theissue of Tower's liability for income tax. He asserted that, unless and until the taxdisputes are completed, Tower does not owe the Commissioner anything.[58] Mr Chan accepted that Tower was behind in filing its income tax returns. Hesaid his error, if any, had been in engaging Mr Clarke to assist him. He also acceptedthat there had subsequently been delays in providing documents to the Commissioner,but he understood the Part 4A dispute was in the conference phase, and that therewould be time to provide documents.[59] Mr Chan expressed the view that the Commissioner had made insufficientefforts to contact him about her concerns. He said that he found it difficult to believethat the Commissioner could not contact him, as he has always responded to theCommissioner by email. Nor could he understand why the Commissioner could notkeep in touch with Tower's solicitors. He denied receiving any letter from theCommissioner advising that Mr Clarke had been removed from her list of approvedtax agents, and he said he was first made aware of the Commissioner's concerns whenhe was contacted by the office of the interim liquidators on 10 July 2019.[60] Mr Chan denied any knowledge of Mr Clarke's tax issues, or the fact that MrClarke had been made bankrupt and could no longer act as a tax agent. He said he didnot know about Mr Clarke's criminal convictions, noting that he had spent much ofthe last several years working out of New Zealand. His contact with Mr Clarke hadgenerally been by email.[61] Mr Chan expressed concern that the Commissioner appeared to be using theappointment of the interim liquidators to seek information about third parties, and thathad nothing to do with Tower or himself. He suggested that the appointment of theinterim liquidators may have been intended to allow the Commissioner to go on afishing expedition in relation to the third parties, noting that "Mr Krasniqi is clearly ofinterest".[62] Mr Chan acknowledged that, when he was overseas, Mr Clarke did contact himto ask for information to complete the GST and income tax returns. When Mr Clarkecontacted him, he instructed one of Tower's former solicitors to forward theinformation to Mr Clarke to complete the returns. He said that the solicitors were notvery cooperative, and were very slow to respond to any communication. When hereturned to New Zealand, he found that the law firm no longer existed, and its partnerswere in dispute. The particular partner with whom he had corresponded was nowacting in his own firm, and Mr Chan said he was struggling to obtain documents forTower from the solicitor.[63] Mr Chan said that all the income tax returns for Tower were completed usingthis lawyer's trust account statements, as the lawyer paid all Tower's bills.[64] Mr Chan said that he had been unaware that Mr Clarke was not handlingTower's tax affairs appropriately. Since he became aware of that, he has personallyengaged a new accountant. The new accountant would have taken over for Tower andcontinued to assist with the dispute, but for the appointment of the interim liquidators.[65] Mr Chan described difficulties Tower ran into with a development at Lot 4,Huka Road. He said that Tower engaged a firm of consultants on the development, andthe consultants quoted between $500,000 and $600,000 in development costs for thecompletion of six new land titles within 12 months. However the consultants' budgetblew out to a figure in excess of $3,000,000, and the estimate of 12 months for thedevelopment extended to three years. The consultants were then removed, and MrChan took over managing the project while he was present in New Zealand.[66] By 2014, because of the penalty interest rates and blow out in expenses andtime, the debt to the lender (Aston Investments) exceeded the value of the property.Mr Chan said that he had other business interests he had to deal with overseas, and atthat point he handed over the day-to-day management of Tower to Mr Krasniqi, laterappointing him a director of Tower so that he could handle the completion of theproject. Mr Krasniqi was left to manage Huka Road and any other projects undertakenby Tower, as he saw fit.[67] Mr Chan said that he appreciated that "on paper" Tower appeared to beinsolvent. However, as its director and shareholder, he has been working through itsissues with a view to resolving them. He said that he has had a good relationship withTower's secured creditors, and has been sufficiently successful in other matters to haveconfidence in obtaining a good outcome. He said that he has a number of otherbusiness interests that are successful, and that he did not appreciate theCommissioner's attempt to sully his reputation because she has issues with thirdparties.Mr Krasniqi[68] Mr Krasniqi said he resides in Australia, and is in the process of renewing hisresidency in Dubai. He said that, due to his absence from New Zealand, he had limiteddocumentation available relating to the matters in issue.[69] Mr Krasniqi said that he acted as an adviser to Tower, and was a director ofTower from the latter half of 2015 until 9 February 2018.[70] Mr Krasniqi did not suggest that Tower maintained accounting records at itsregistered office, or indeed that records such as ledgers explaining day-to-daytransactions were maintained. However he did say in respect of the development atHuka Road, Birkenhead, which related to the completion of a six-lot subdivision andthe building of approximately 22 terrace houses, that all the information was recordedin multiple files that were in the possession of the solicitors then acting for Tower. Thesolicitors firm has since been dissolved, and Mr Krasniqi assumed that the documentswould be held by the partner who did the work for Tower.[71] Mr Krasniqi understood that Mr Clarke was preparing the GST returns forTower in 2014, but he said he was not privy to the returns. He contended, however,that there would be a considerable GST claim due to Tower because the works on theHuka Road site cost in excess of $3,000,000, and in the end the principal owing andcapitalised penalty interest resulted in the costs of the development exceeding thevalue of the completed lots.[72] Mr Krasniqi explained the acquisition of the Taupo properties, which involveda swap transaction which is at the heart of the income tax dispute for the 2016 tax year.Tower acquired two contiguous properties in Kohimarama (the Kohimaramaproperties) for $14,998,000, and it immediately sold the Kohimarama properties for$29,380,000. The sale price of $29,380,000 was satisfied in part by the transfer of sixtitles of land at Taupo owned by the purchaser (the Taupo properties), to which a valueof $6,000,000 was allocated, intellectual property valued at $8,000,000 associatedwith the Taupo properties, and a cash component of $15,308,000. In cash terms, Towerpaid out $14,998,000 to acquire the Kohimarama properties, and it received$15,308,000 on the sale of the Kohimarama properties. The modest surplus of$382,000 was applied to agent's fees, and specialist consultants' and legal fees. MrKrasniqi summarised the result of the swap transaction, saying that Tower came awaywith $382,000 in cash, $6,000,000 in the value of the Taupo properties, and $8,000,000worth of intellectual property associated with the Taupo properties.[73] Mr Krasniqi explained that the intellectual property value was associated withthe potential to developing a geothermal power station on the Taupo properties, whichit was thought would have a value of roughly $300,000,000 when constructed.[74] In the event, there proved to be no value in the intellectual property – aftersettlement, Tower ascertained from specialist testing that the contemplated powerstation could not be erected on the site, and that a smaller power station would not beprofitable. The $8,000,000 attributed to the intellectual property had to be written off.[75] Mr Krasniqi then began to look at selling the Taupo properties. He formed theview that the Taupo properties were then worth no more than $3-4,000,000. Theirvalue was written down to approximately $4,000,000 in the tax returns completed byMr Clarke for Tower, and they were later sold to Ten Abbotts for approximately$4,500,000. Mr Krasniqi said that the sale of the Taupo properties to Ten Abbotts wasan arms-length transaction, in no way connected to him. He said he has received noremuneration from the on-sales of the Taupo properties by Ten Abbotts.[76] Mr Krasniqi contended that the Commissioner has failed to consider theintellectual property value in the Taupo properties.[77] Mr Krasniqi concluded by expressing the belief that Tower has sufficient taxlosses to cover any income tax arising, and that it remains in a GST refund position.The order appointing interim liquidators[78] In his judgment of 8 July 2019, Associate Judge Andrew noted that anapplication for an interim order appointing a liquidator must show a good prima faciecase for the liquidation order. On the facts before him, His Honour concluded that theapplication for the liquidation order would in all probability succeed.5 The AssociateJudge took the view that the disputes raised by Tower did not appear to be genuine,and in any event a portion of the tax debt had been self-assessed by Tower (total$333,216.27), and was not currently subject to any dispute.65 Commissioner of Inland Revenue v Tower City Holdings Ltd, above n 1, at [9]-[10].6 Income tax of $46,331 was self-assessed by Tower for the tax year ended 31 March 2017, and$286,885.27 was self-assessed for GST in respect of the period ended 31 December 2017.[79] The Associate Judge considered that the Commissioner had made out a goodprima facie case on the issue of persistent and serious failure by Tower to comply withthe Act, in particular by failing to keep accounting records as required by s 194 of theAct.[80] On the issue of persistent or serious failure to keep accounting records, theAssociate Judge said:[24] Financial statements for the years ending 31 March 2015 and 31March 2016 were provided to the Commissioner by Mr Clarke, for Tower. TheCommissioner requested copies of ledgers, journals, trial balances, chart ofaccounts, working papers for returns and bank statements for Tower. None ofthose records have ever been provided, and part of the Commissioner's reasonfor imposing the evasion or similar at shortfall penalty in the 2016 year wasthe failure of Tower to maintain records as required under s 22 of the TAA.[25] The Commissioner contends there is no evidence to suggest thatledgers even exist. She has been unable to verify the financial statementsprovided and to establish Tower's financial position. The [affidavit of MrLorigan, a customer compliance specialist employed by the Commissioner]notes there are significant differences in the figures included in the 2015financials and the comparative figures for 2015 which have been included inthe 2016 financials. The differences culminate in the "net assets" changingsignificantly. In the 2015 financials, the "net assets" figure is $487,780. In thecomparative figures for 2015 and the 2016 financials, the "net assets" figureis $1,315,356.[26] Furthermore, the sales and purchase figures in the 2017 IR10 areinconsistent with the documentation held by the Commissioner. The salesfigures included in the 2017 IR10 is $4,482,000. The Commissioner hasdocuments which show that Tower's sales should be approximately$14,582,000 in the year ended 31 March 2017. The 2017 IR10 includespurchases of $754,490. The only evidence the Commissioner holds supportsTower's purchases of $30,000 in the year ended 31 March 2017.[27] I accept that the Commissioner is unable, in the absence of properaccounting records, to re-construct the financial position of the company usingas her starting point the company's bank statements. Tower does not hold anybank accounts in its name and aside from that being, as the Commissionersubmits, unorthodox, the absence of a bank account clearly means it would bevery difficult to re-construct the financial position of Tower.[81] The Associate Judge was satisfied that there was very good reason for theCommissioner to conclude that Tower was insolvent on a balance sheet test (on theevidence, Tower's assets of $1,390,000 fell far short of the claimed tax liability($7,627,184.74), let alone its total liabilities figure). His Honour also accepted thatthere was prima facie evidence that the case was one where those having effectivecontrol and management of a company had used their power to ensure that thecompany did not pay its debts that were lawfully due. In such circumstances, acompany will be held to be unable to pay its debts.7[82] Finally, the Associate Judge considered that there was a good prima facie casethat it would be just and equitable to put Tower into liquidation. His Honour acceptedthat a prima facie case had been made out of "a justifiable lack of confidence by theCommissioner in the conduct and management of [Tower's] affairs". A variety ofmatters led the Associate Judge to that conclusion, including property transactionsconducted by Tower with unusual features, such as contemporaneous same-daypurchase and sale of single properties, significant changes to purchase price close tosettlement, and large parts of the purchase price being satisfied through the transfer ofother properties. His Honour also noted that Tower had transferred properties worthapproximately $14,000,000 out of its ownership after the Commissioner had issuedthe Notices of Assessment.Interim liquidators' reports dated 17 September 2019 and 8 October 2019[83] In their first report dated 17 September 2019 (the First Report), the interimliquidators included a section headed "Books and records".[84] In this section, the interim liquidators recorded that they had received a copyof Tower's financial statements for the years ended 31 March 2015 and 2016. Thestatements appeared to have been prepared by Mr Clarke, and one of the interimliquidators interviewed him on 12 August 2019. Mr Clarke said that he tookinstructions from Mr Chan and Mr Krasniqi. The records that he was provided with toprepare accounts and GST returns often consisted of solicitor trust account records.Mr Clarke expressed the opinion that there was a significant amount Tower would oweto the Commissioner, but he wasn't sure exactly how much.7 Forward Plastics Ltd v NZ Distilled Water Ltd [2012] NZHC 1383 at [41], approved by the Courtof Appeal in Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408 at [35].[85] The interim liquidators said in the First Report that they had not received anywork papers or other supporting documents to support Tower's financial statementsfor the years ended 31 March 2015 and 2016. They confirmed that Tower did not havea bank account held in its own name, and that it appeared to have exclusivelyconducted its financial affairs from an assortment of solicitors' trust accounts. Theyreported that they had received copies of various trust account statements from theCommissioner and from solicitors who had acted for Tower, and they were workingto reconstruct a consolidated set of receipts and payments from those records.[86] Under a section in their report headed "Adequacy of books and records", theinterim liquidators said in the First Report that they had formed the view that Towerhad not kept adequate accounting records as required under s 194 of the Act. Theyreached that view for the following reasons:(i) they had not received any evidence that Tower kept records ofits transactions outside of the aggregate of solicitor trustaccounts;(ii) Mr Clarke advised them that he had had difficulties preparingaccounting records from the information he was provided;(iii) Tower's financial statements for the years ended 31 March 2015and 2016 reported inconsistent figures; and(iv) Tower may have materially misrepresented its tax position tothe Commissioner.[87] The interim liquidators considered that, due to the inadequacy of Tower'saccounting records, further analysis was required to understand the financialimplications of the transactions it was a party to, and its true financial position.[88] The interim liquidators noted a number of indicators of apparent insolvency,and concluded that, at the date of their appointment, it was likely that Tower wasinsolvent on a balance sheet basis.[89] The interim liquidators identified a number of transactions they consideredwould require more detailed investigation and analysis. First, they identified 10separate transfers from trust accounts which they considered merited furtherinvestigation. The payments made included payments totalling approximately$400,000 to Mr Krasniqi or members of his family, and a payment of $83,047 to acompany called Crimsonbox Company Limited (Crimsonbox), that was substantiallyowned and controlled by Mr Chan.[90] In addition, the interim liquidators identified for further consideration Tower'sacquisition of the Taupo properties, and the sale of a property Tower owned at 10 HukaRoad, Birkenhead. With regard to the Taupo properties, the interim liquidators notedthat on 28 May 2015 Tower sold two properties in Auckland to Rainbow Holdings, for$30,680,000. Under the agreement for sale and purchase, $14,000,000 of the purchaseprice was satisfied by the transfer of the Taupo properties to Tower. Tower later soldthe Taupo properties to Ten Abbotts for only $4,500,000.[91] With regard to the 10 Huka Road property, the interim liquidators noted thaton 17 April 2019 the property was transferred to Mr Warwick Choy. Although aneighbouring and almost identical property had been valued a few months earlier at$2,900,000, the sale price to Mr Choy, who was an existing lender to Tower, was$2,000,000. The sale agreement was contemporaneous with the execution of anagreement to lease the property to Crimsonbox for the purposes of developing theland, and there was a separate sale-back agreement, under which Tower agreed topurchase the property back from Mr Choy within 12 months. It appears that Mr Choyonly paid $1,400,000 of the $2,000,000 purchase price, and the $600,000 balanceappears to have been treated as a deposit payable by Tower to Mr Choy under the buy-back agreement.[92] In their second report dated 8 October 2019 (the Second Report), the interimliquidators reported that they had been advised that the buy-back agreement with MrChoy may have been cancelled, but they had been unable to obtain any information asto who cancelled the agreement, when any cancellation took place, and how anycancellation affected the $600,000 deferred consideration due from Mr Choy.[93] The interim liquidators also noted in the Second Report that Mr Chan hadpersonally received $385,000 from Tower's trust account with a law firm.Approximately $98,000 of that sum was paid to Mr Chan on 24 May 2018, and thebalance on 17 April 2019.Applications for liquidation orders – legal principles[94] Section 241 of the Act materially provides:241 Commencement of liquidation(1) A company may be put into liquidation by the appointment asliquidator of a named person or of an Official Assignee for a named district.(2) A liquidator may be appointed by—(c) the court, on the application of—(iv) a creditor (including any contingent or prospectivecreditor); or(4) The court may appoint a liquidator if it is satisfied that—(a) the company is unable to pay its debts; or(b) the company or the board has persistently or seriously failedto comply with this Act; or(ba) the company, or 1 or more of its directors or shareholders, hasintentionally provided the Registrar with inaccurateinformation; or(bb) the company, or 1 or more of its directors or shareholders, hasin a persistent or serious way failed to comply with dutiesrelating to the company—(i) under this Act; or(ii) under the Financial Reporting Act 1993 while inforce, except that this subparagraph does not applyafter 5 years have elapsed after this subparagraphcame into force; or(c) the company does not comply with section 10; or(d) it is just and equitable that the company be put into liquidation.(5) The liquidation of a company commences on the date on which, andat the time at which, the liquidator is appointed.[95] It will be seen (from s 241(2)(c)) that, in order to have standing to apply for aliquidation order, the Commissioner needs to qualify as a "creditor" of Tower, whetheractual, contingent, or prospective.[96] A creditor whose debt is only prospective or contingent must obtain the leaveof the Court if that creditor wishes to obtain a liquidation order on the ground that thedebtor is unable to pay its debts. The Court may grant such leave, with or withoutconditions, only if it is satisfied that a prima facie case has been made out that thecompany is unable to pay its debts.8[97] Where a liquidation claim is made on the basis that the defendant is unable topay its debts (s 241(4)(a) of the Act), the defendant may defend the claim either byshowing that it is solvent (able to pay its debts) or that there is a genuine and substantialdispute as to the existence of the debt. In Yan v Mainzeal Property and ConstructionLtd (in rec and in liq), the Court of Appeal summarised the applicable principles asfollows:9(a) A winding up order will not be made where there is a genuine andsubstantial dispute as to the existence of a debt such that it would bean abuse of the process of the Court to order a winding up;(b) In such circumstances, the dispute, if genuine and substantiallydisputed, should be resolved through action commenced in theordinary way and not in the Companies Court;(c) The assessment of whether there is a genuine and substantial disputeis made on the material before the Court at the time and not on thehypothesis that some other material, which has not been produced,might nonetheless be available;(d) The governing consideration is whether proceeding with anapplication savours of unfairness or undue pressure;[98] The Court must keep in mind throughout that the task for the Judge is not toresolve the actual dispute, but to determine whether there is a substantial dispute as towhether or not the debt is due.108 Companies Act 1993, s 288(5).9 Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 190 at [61].10 Link Electrosystems Ltd v GPC Electronics (NZ) Ltd [2007] NZCA 501, (2007) 18 PRNZ 946 at[17].[99] The list of grounds in s 241(4) of the Act is a disjunctive list; the Court needonly be satisfied that one of the statutory grounds alleged by a plaintiff has beensatisfied.[100] In her first cause of action, the Commissioner contends that Tower is unable topay its debts not only because it is an insolvent, but also because the wilful actions andconduct of those with control and management of Tower are preventing it from payingits debts.11[101] For her second cause of action, the Commissioner relies on s 241(4)(b) of theAct. She says that Tower has persistently or seriously failed to comply with the Act byfailing to keep the required accounting records.[102] The relevant section of the Act relating to accounting records is s 194. Thatsection materially provides:194 Accounting records must be kept(1) The board of a company must ensure that there are kept at all timesaccounting records that—(a) correctly record the transactions of the company; and(b) will enable the company to ensure that the financialstatements or group financial statements of the companycomply with generally accepted accounting practice (if thecompany is required to prepare such statements under this Actor any other enactment); and(c) will enable the financial statements or group financialstatements of the company to be readily and properly audited(if those statements are required to be audited).(2) The board of a company must establish and maintain a satisfactorysystem of control of its accounting records.(4) If the board of a company fails to comply with the requirements ofthis section, every director of the company commits an offence and isliable on conviction to the penalty set out in section 374(3).11 Relying on Forward Plastics Ltd v NZ Distilled Water Ltd, above n 7.[103] In R v Bennett, the Court of Appeal held that the word "kept" in theintroductory part of s 194(1) of the Act is not limited to retaining or restoring suchrecords as happened to come into the company's possession, but includes an obligationto create those records necessary to conform with the descriptions in the section whichmay not already be in existence and in the company's possession.12[104] The purpose of s 194 is not made explicit in the section itself. In its judgmentin Bennett, the Court of Appeal stated:13Section 151(1) [the equivalent of s 194(1) in the Companies Act 1955] doesnot stipulate the accounting records to be kept save by the purposes they areto serve and the information they are to provide. What is necessary will varywith the nature of the business and the urgency and state of its affairs.Further than this we do not at present go. On some future occasion it may benecessary to decide whether among the objects of s 151 is that of having themanagement of a company know of its financial state at all times [105] In Commissioner of Inland Revenue v Jackson Property Group Ltd, AssociateJudge Doogue noted that although Bennett was decided under the predecessor sectionto s 194 of the Act, there is no reason to suppose that what the Court of Appeal said inthat case does not remain applicable.14 Generally, Associate Judge Doogue consideredit likely that one of the roles played by s 194 is to impose specific record-keepingresponsibilities on those who take advantage of limited liability by adopting anincorporated body as the vehicle for their business.15[106] In Mizeen Painters Ltd (in liquidation) v Tapusoa, the liquidators commencedproceedings against the company's former directors and shareholders.16 The claimsincluded a claim under s 300 of the Act relating to the defendants' failure to keepadequate accounting records for the company, as required by s 194. Muir J noted thatalthough financial statements had been prepared for three financial years, there wereno accompanying general ledgers provided to the liquidators. The balances recordedin the company's financial statements could not therefore be verified, and they were12 R v Bennett (1985) 2 NZCLC 99,279 (CA) at 5.13 At 99,282.14 Commissioner of Inland Revenue v Jackson Property Group Ltd [2017] NZHC 1014, [2017]NZCCLR 30 at [148].15 At [149].16 Mizeen Painters Ltd (in liquidation) v Tapusoa [2015] NZHC 826, (2016) NZAR 423.not a reliable starting point for calculation of the shareholder current account balancesat liquidation. In the absence of proper accounting records, the liquidators wererequired to reconstruct the financial position of the company using as their startingpoint the company's bank statements.17 Muir J referred to the decision of this Courtin Maloc Construction Ltd (in liquidation) v Chadwick,18 in support of the propositionthat the records to be held by a company under s 194 must be such that they will, atany time, enable the financial position of the company to be determined withoutrequiring explanation or reconstruction.19 Muir J was satisfied that a breach of s 194had clearly been made out. While financial statements had been prepared for the threefinancial years, no general ledgers were maintained from which the statements couldbe verified, no cash books were provided to the liquidators, and no accountingsoftware package appears to have been used to record the day-to-day transactions ofthe company.20[107] In Maloc Construction, Tompkins J considered that the expression "accountingrecords" was deliberately not defined in the Act. That was because the scheme of thesection was to require a company to keep whatever records in whatever form may benecessary to achieve the objectives specified. The Judge said:21The records must speak for themselves. They must, without more, do or enableto be done, the matters spelt out in the four paragraphs of subs (1). It does notavail a company to say, as was said here, that those objectives could beachieved by reference to the accounting records available, plus furtherinformation and explanations that can be furnished by a company officer oremployee.The records themselves do not have to show the financial position of thecompany. They must be such that they will, at any time, enable that positionto be determined. This requirement is not complied with if the company keepsonly basic accounting records such as chequebooks, deposit books, bankstatements, invoices and the like. It may be that using such basic records anaccountant could construct further records that would enable the financialposition of the company to be determined but the section requires that thisbasic accounting information should be assembled and recorded in such a way17 Mizeen Painters Ltd (in liquidation) v Tapusoa, above n 16, at [12]-[13].18 Maloc Construction Ltd (in liquidation) v Chadwick (1986) 3 NZCLC 99,794 (HC).19 Mizeen Painters Ltd (in liquidation) v Tapusoa, above n 16, at [47].20 At [48]21 Maloc Construction Ltd (in liquidation) v Chadwick, above n 18, at 22 and 23. Maloc Constructionhas been followed in a number of cases in addition to Mizeen, including Grant v Guo [2015]NZHC 2480; [2015] NZAR 1585 at [17], Grant v Gifford [2018] NZHC 26 at [10], and NZ NaturalTherapy Ltd (in liq) v Little [2018] NZHC 2164 at [119].that the record itself will not only enable the financial position to bedetermined, but will enable that to be done at any time [108] In addition to s 194, s 189(1) of the Act requires a company to keep thefollowing documents at its registered office:(a) the constitution of the company:(b) minutes of all meetings and resolutions of shareholders withinthe last 7 years:(c) an interests register:(d) minutes of all meetings and resolutions of directors anddirectors' committees within the last 7 years:(e) certificates given by directors under this Act within the last 7years:(f) the full names and addresses of the current directors:(g) copies of all written communications to all shareholders or allholders of the same class of shares during the last 7 years,including annual reports made under section 208:(h) copies of all financial statements and group financialstatements required to be completed by this Act or any otherenactment for the last 7 completed accounting periods of thecompany:(i) the accounting records required by section 194 for the currentaccounting period and for the last 7 completed accountingperiods of the company:(j) the share register.[109] In her third cause of action, the Commissioner relies on s 241(4)(bb) of theAct. She says that Tower's directors have, in a persistent and serious way, failed tocomply with duties relating to Tower under the Act. Specifically, the directors are saidto have seriously and persistently failed to comply with their duties under ss 131, 135,and 137 of the Act.[110] Generally, s 131 of the Act requires a director, when exercising powers orperforming duties, to act in good faith and in what the director believes to be the bestinterests of the company. In this case, the Commissioner says that Tower's directorshave advanced their personal interests rather than acting in the best interests of Tower.[111] Section 135 of the Act provides:135 Reckless tradingA director of a company must not—(a) agree to the business of the company being carried on in a mannerlikely to create a substantial risk of serious loss to the company'screditors; or(b) cause or allow the business of the company to be carried on in amanner likely to create a substantial risk of serious loss to thecompany's creditors.[112] In this case, the Commissioner contends that Tower's directors have carried onTower's business, or allowed it to be carried on, in a manner likely to create asubstantial risk of serious loss to Tower's creditors.[113] The last relevant section of the Act relied upon by the Commissioner in herthird cause of action is s 137, which imposes a duty of care on a company director.Section 137 provides:137 Director's duty of careA director of a company, when exercising powers or performing duties as adirector, must exercise the care, diligence, and skill that a reasonable directorwould exercise in the same circumstances taking into account, but withoutlimitation,—(a) the nature of the company; and(b) the nature of the decision; and(c) the position of the director and the nature of the responsibilitiesundertaken by him or her.[114] The Commissioner says that Tower's directors failed to exercise the care,diligence and skill expected of a reasonable director.[115] In her last cause of action, the Commissioner relies on s 241 subs (4)(d) – it isjust and equitable that the company be put into liquidation. The Commissionercontends that the improper conduct of Mr Chan, Mr Krasniqi, and Mr Clarke has ledto a justifiable loss of confidence in the conduct and management of Tower. TheCommissioner refers in support to Morgan Roche Ltd v Registrar of Companies.2222 Morgan Roche Ltd v Registrar of Companies (1987) 3 NZCLC 100,189 (HC) at 14.Preliminary question – does the Commissioner have standing to claim as a"creditor" of Tower?[116] I am satisfied that she does.[117] While a number of default assessments made by the Commissioner were andremain subject to NOPAs issued by Tower, and those NOPAs are currently still in thenegotiation phase applicable under Part 4(A) of the TAA (following the service ofNORs by the Commissioner), two returns submitted by Tower are not presently thesubject of any dispute. These are the self-assessed sums of $46,331 in income tax forthe year ended 31 March 2017, and $286,885.27 in GST for the period ended 31December 2017.23 Both those sums are long overdue,24 and neither has been paid.[118] Tower contends that it is entitled to set off against these acknowledged taxdebts a number of refunds it contends it is entitled to in respect of other income taxand GST periods. However, all of Tower's claims to refunds are disputed, and I amsatisfied that the Commissioner is entitled to take advantage of r 5.61 of the HighCourt Rules 2016, which precludes the set-offs Tower claims.[119] Rule 5.61 materially provides:5.61 Restriction when the Crown involved(1) In a proceeding by the Crown for the recovery of taxes, duties, orpenalties, a defendant is not entitled to advance any set-off orcounterclaim.(2) In a proceeding of any nature by the Crown, a defendant is not entitledto advance any set-off or counterclaim arising out of a right or claimto payment in respect of any taxes, duties, or penalties.[120] In Commissioner of Inland Revenue v FB Duvall Ltd, this Court held that thedefendant's argument that "complicated and extensive unresolved issues between thedefendant and the plaintiff regarding GST" might lead to a sizeable GST refund, was23 The four month periods for Tower to dispute these self-assessments (Tax Administration Act 1994,s 89AB(3)) both expired in July 2019, and no disputes have been raised in respect of them. Theeffect of s 109 of the Tax Administration Act is that these self-assessments are deemed to becorrect.24 The GST for the 31 December 2017 period was due on 28 January 2018, and the income tax forthe year ended 31 March 2017 was due on 7 February 2018.squarely caught by r 5.61.25 A similar conclusion was reached by Associate JudgeDoogue in Commissioner of Inland Revenue v Jackson Property Group Ltd. JacksonProperty Group contended that it was entitled to set off its claims for GST refunds toprove its solvency, but that argument was rejected by the Associate Judge. His Honourconsidered that the Commissioner was able to take advantage of r 5.61(1), whichforbids a taxpayer from raising a set-off.26[121] Mr Bowler relied on the judgment of Associate Judge Bell in Commissioner ofInland Revenue v The Fishing Company Ltd.27 In that case, the Associate Judgereferred to s 310 of the Act, which deals with the question of set-off after a companyhas been put into liquidation. The Associate Judge considered that, once a companygoes into liquidation, r 5.61(1) no longer applies, and set-offs are allowed under s310.28 Associate Judge Bell accepted that r 5.61(1) is a "pay now argue later"provision, but he considered that it was an error to rely on r 5.61(1) as stating any finalposition. The claim for the GST refund in that case was considered a relevant factor inthe exercise of the Court's discretion whether to make a liquidation order.29[122] In my view, Commissioner of Inland Revenue v The Fishing Company Ltdcannot help Tower on the standing issue. The question of standing to bring a claim hasto be assessed at the time the liquidation claim is made, and on my reading of the casenothing in The Fishing Company Ltd suggests that r 5.61(1) does not continue to applyup to the point a liquidation order is made. If it appears likely that a liquidator wouldallow the defendant's claimed set-offs after liquidation under s 310, and that allowingthe set-offs would or might extinguish the debt owed to the Commissioner, those maybe matters to be taken into account in the exercise of the Court's discretion as towhether a liquidation order should be made (just as the Court might take into accountthe defendant's prospects of making a substantial recovery on a claim it has against athird party). But those considerations could not affect the Commissioner's standing tobring the liquidation claim.25 Commissioner of Inland Revenue v FB Duvall Ltd, HC Auckland, CIV-2007-404-2708, 13November 2008 at [22].26 Commissioner of Inland Revenue v Jackson Property Group Ltd, above n 14, at [51].27 Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5 (HC).28 At [24].29 At [37]-[38].[123] For those reasons, I accept Ms Naik-Leong's submission that theCommissioner was and is an actual creditor of Tower, based on Tower's two self-assessed returns showing a total indebtedness of $333,216.27. The Commissioner thushas full access to all of the grounds available to a creditor under s 241(4) of the Act,including the "unable to pay its debts" ground in s 241(4)(a). She did not require leave(as a prospective or contingent creditor would have done) to access the s 241(4)(a)jurisdiction.Issues[124] The following issues arise:(1) Is the liquidation proceeding vexatious, and/or an abuse of process?(2) Has the Commissioner shown, on the balance of probabilities, thatTower has persistently or seriously failed to comply with s 194 of theAct?(3) Has the Commissioner shown, on the balance of probabilities, thatTower is unable to pay its debts?(4) Does Tower have a genuine and substantial argument that there areGST set-offs which do or may exceed any amount owing to theCommissioner?(5) Has the Commissioner shown, on the balance of probabilities, thatTower's directors have, in a persistent and/or serious way, failed tocomply with duties relating to Tower under ss 131, 135, and/or 137 ofthe Act?(6) Has the Commissioner shown, on the balance of probabilities, that itwould be just and equitable to put Tower into liquidation?[125] I will address each issue (as necessary) in turn.Issue (1): Is the liquidation proceeding vexatious, and/or an abuse of process?Submissions for Tower[126] For Tower, Mr Bowler noted that the Commissioner's ex parte application foran order appointing liquidators sought to expressly reserve Tower's right to challengeor dispute an assessment under the TAA. However the Commissioner now seeks toremove Tower's rights under the TAA completely, without offering any reason for thechange in position.[127] In his judgment on the application for appointment of the interim liquidators,Associate Judge Andrew relied and acted on that reservation of Tower's rights as oneof the grounds justifying the making of the interim order.30 There has been no materialchange in the position since the Associate Judge gave his judgment, and the status quoshould be preserved. The Commissioner should not now be permitted to resile fromthe position she took when she applied to have interim liquidators appointed.[128] Further or alternatively, Mr Bowler submitted that the liquidation proceedinghas been brought for vexatious or ulterior motives, namely:(i) so that the Commissioner can avoid determining Tower's GSTreturns and/or making refunds to Tower;(ii) to obtain information about third parties;(iii) to deny Tower its rights to dispute and/or challenge theCommissioner's application under the TAA.[129] The Court should dismiss the liquidation application for those reasons. Therewould be no prejudice to the Commissioner if the application were dismissed. Theinterim liquidators would remain in place until such time as Tower has exhausted itsrights under the TAA.30 Commissioner of Inland Revenue v Tower City Holdings Ltd, above n 1, at [22] and [48(b)].Submissions for the Commissioner[130] For the Commissioner, Ms Naik-Leong submitted that, in considering theapplication to appoint interim liquidators, Associate Judge Andrew accepted theCommissioner's submission that the disputes raised by Tower did not appear to begenuine, and appeared to be only a delaying tactic.[131] Ms Naik-Leong acknowledged that the Court has a residual discretion inrelation to the appointment of a liquidator, but the onus is on Tower to establish thatthe whole of the debt is subject to a genuine dispute, and that the Commissioner isacting unfairly, and seeking to put undue pressure on Tower.31 Ms Naik-Leongreferred to the decision of this Court in Commissioner of Inland Revenue v ErueruitiInvestments Ltd, where the Court stated:32[5] The company's application and the submissions supporting it wereheavily focussed on arguments that the Commissioner's assessment of thecompany's tax liability is the subject of dispute. In that regard the company'sarguments missed the point that the application to put the company intoliquidation is based on a number of facts – other facts (beyond the legal statusof the tax liability) justify the application Discussion and conclusions[132] I do not consider there is anything in this Issue raised by Tower.[133] I have looked at the application to appoint interim liquidators, and the affidavitof Mr Lorigan and memorandum of counsel filed in support, and I have seen nothingto suggest that the Commissioner gave anything in the nature of an undertaking not tocontinue with the liquidation claim pending completion of the procedures under Parts4A and 8A of the TAA. That is expected: having filed a liquidation claim, the onuswas on the Commissioner to pursue the claim to a hearing with all reasonableexpedition.[134] That is consistent with Ms Naik-Leong's memorandum dated 3 July 2019 insupport of the application to appoint interim liquidators, where she said:31 Pink Pages Publications Ltd v Team Communications Ltd [1986] 2 NZLR 704 (HC).32 Commissioner of Inland Revenue v Erueruiti Investments Ltd (2009) 24 NZTC 23,520 (HC) at [5].[102] The appointment of an interim liquidator would not prejudice thepursuit of a genuine dispute of the debt by Tower. In the Application theCommissioner has sought orders preserving Tower's ability to pursue itsdispute. In any event, a liquidator would be able to engage with theCommissioner in the statutory disputes process stipulated in the TAA andpursue a tax challenge on behalf of Tower in the event the liquidator considersthere is value in doing so.33[135] The broad purpose of appointing an interim liquidator is to maintain the valueof assets owned or managed by a company,34 and the Court's orders are generallylimited accordingly. The specific order sought in the application in this case (thatwould allow Tower to continue to pursue its rights under Parts 4A and 8A of the TAA)effectively confirmed that the interim liquidators' asset preservation powers wouldextend to pursuing Tower's rights under those parts of the TAA while they remainedin office as interim liquidators. But I do not think it was intended to go beyond that.The passage quoted at paragraph [134] made it clear that a liquidation order might bemade before the Part 4A and 8A procedures had been completed. And consistent withthat, Tower filed a statement of defence on 22 August 2019, and participated in themaking of timetable orders required to bring the substantive liquidation claim on forhearing, without applying to have the proceeding stayed until any Part 8A challengehad been determined.[136] In addition to those considerations, the Commissioner's contention that Towerand its directors have seriously and persistently failed to comply with their obligationsunder s 194 of the Act is a matter standing separate and apart from any Part 8Achallenge proceeding either party might commence after the parties have workedthrough the Part 4A negotiation procedures. If there are grounds for liquidation on thebasis of serious or persistent failure to comply with s 194 of the Act, why would thatclaim be deferred, possibly for some years, pending the completion of a Part 8Achallenge proceeding? Also, there is an undisputed debt to the Commissioner ofapproximately $333,000, which would not be touched by any Part 8A challengeproceeding that might be issued.33 Referring to s 248 of the Companies Act 1993.34 Companies Act 1993, s 246(2).[137] I see no basis for the other allegations of abuse of process made by Mr Bowlerin his submissions. There is nothing to suggest that the Commissioner has beenmotivated by any desire to avoid determining Tower's GST claims, or avoid makingrefunds. Indeed, Mr Lorigan said the Commissioner has credited some refunds toTower's account, and it appears that the problem with other GST refund claims is thatTower has failed to provide sufficient supporting documents. Nor is there any apparentbasis in the evidence for the submission that the Commissioner has been motivated byan improper desire to obtain information about third parties.[138] For those reasons, I find for the Commissioner on Issue 1.Issue (2): Has the Commissioner shown, on the balance of probabilities, thatTower has persistently or seriously failed to comply with s 194 of the Act?Submissions for the Commissioner[139] For the Commissioner, Ms Naik-Leong referred to Maloc Construction Ltd,and Mizeen Painters Ltd, in support of the submission that a company must keeprecords that speak for themselves. She submitted that the records must, without more,do or enable to be done the matters spelt out in s 194(1) of the Act. It is not enough fora company to say that the objectives of that section can be achieved by reference tothe accounting records which are available, supplemented by further information andexplanations that might be furnished by a company officer or employee. The recordsmust be such that they will, at any time, enable the company's financial position to bedetermined. Section 194 requires that basic accounting information should beassembled and recorded in such a way that the record itself will not only enable thefinancial position to be determined, but will enable that to be done at any time.35 MsNaik-Leong noted that in Mizeen Painters Ltd Muir J held that a breach of s 194 wasmade out in circumstances where financial statements had been provided, but nogeneral ledgers had been maintained from which the financial statements could beverified, and there were no cash books or accounting software packages used to recordthe day-to-day transactions of the company.3635 Maloc Construction Ltd (in liq) v Chadwick, above n 18, at 22-23.36 Mizeen Painters Ltd (in liquidation) v Tapusoa, above n 16, at [48].[140] On the facts, Ms Naik-Leong referred to Mr Lorigan's evidence that theCommissioner requested copies of ledgers, journals, trial balances, chart of accounts,working papers for returns, and bank statements for Tower, but none of those recordshave been provided.37 That was part of the reason the Commissioner imposed penaltiesin the 2016 income year.[141] Ms Naik-Leong relied on the following evidence provided by Mr Lorigan.First, there were inconsistencies in the financial statements, including significantdifferences between some figures included in the 2015 financial statements and thecomparative figures for 2015 that were included in the 2016 financial statements. Thedifferences were significant: in the 2015 financial statements the net assets figure wasshown as $487,780, while in the 2016 financial statements the 2015 net assets figurewas said to be ($1,315,356). Mr Lorigan also gave evidence of inconsistenciesbetween the 2016 financial statements produced by Tower, and documents obtainedby the Commissioner from third parties. In particular, the 2016 financial statementsincluded income from the sales of certain properties that were not transferred out ofTower's ownership until 22 December 2017.[142] The IR10 financial summary forms produced by Tower for the years ended 31March 2017 and 31 March 2018, provided by Mr Clarke, also appeared to beinaccurate. While the closing stock figure in Tower's financial statements for the yearended 31 March 2016 was shown as ($3,135,996), the opening stock figure recordedin the IR10 form for the ensuing tax year was $7,285,996. Mr Lorigan said that theeffect of this inconsistency was to minimise Tower's gross profit and assessibleincome by approximately $4,000,000.[143] Mr Lorigan gave evidence that the IR10 summary form provided by Tower forthe 2017 tax year was also inconsistent with documents held by the Commissioner.The form showed total sales of $4,482,000, but the Commissioner has obtaineddocuments showing that Tower's sales should have been approximately $14,582,000in that year. Also, the form showed purchases of $754,490, but the only evidence theCommissioner has been able to obtain supports purchases of $30,000 in that year.37 It is common ground that Tower did not maintain a bank account. Payments and receipts weremade and received through various solicitors' trust accounts.[144] Ms Naik-Leong relied on the concerns expressed by the interim liquidators inthe First Report, and she noted that Tower did not provide in its statement of defenceany particulars of records that had been created or maintained in satisfaction of its s194 obligations – it simply denied the Commissioner's claim that it had failed to keepaccounting records, pleading that Mr Clarke was responsible for keeping the recordsand was paid to do so.[145] Ms Naik-Leong also referred to Mr Chan's acceptance in his evidence thatthere was a delay in providing documents to the Commissioner. She referred to MrKrasniqi's evidence that files relating to the Huka Road properties were in thepossession of one of the law firms that acted for Tower, and that he assumed that theywould still be held by the solicitor (formerly from that firm) who was then acting. MsNaik-Leong submitted that, if there were simply a delay in providing the records andthey were available to be supplied in time, or if amended records were being preparedby a new accountant, it would be reasonable to expect evidence of that to have beenprovided for Tower. No such evidence was provided.[146] Finally, Ms Naik-Leong submitted that the lack of records cannot be effectivelyblamed on Mr Clarke. The obligations under s 194 are imposed on the board of thecompany.Submissions for Tower[147] Mr Bowler noted that Mr Chan had been overseas for a number of years, andleft matters in the control of other individuals. He submitted that, although Mr Chan'sabsence was, with hindsight, a matter of regret, Mr Chan has confirmed that he hasengaged a new accountant to deal with Tower's financial affairs. He noted Mr Chan'sevidence that the new accountant was also reviewing the financial statements preparedby Mr Clarke, and that the absence of company records was the fault of Mr Clarke.[148] Neither Mr Chan nor Mr Krasniqi nor Mr Bowler challenged Mr Lorigan'sevidence of deficiencies in the financial statements and IR10 summary formssubmitted for Tower.Discussion and conclusions[149] I have no doubt that the Commissioner has made out her case that Tower hasseriously and persistently failed to comply with its obligations under s 194 of the Act.Indeed, the failures have not really been denied by Mr Chan or Mr Krasniqi.[150] While there may be some question over the exact extent of the accountingrecords Tower was required to maintain, the authorities consistently say that therecords had to be such that they would, at any time, enable the company's financialposition to be determined.[151] In Mizeen Painters Ltd, Muir J considered that the absence of any generalledgers, cash books, or accounting software recording day-to-day transactions put thecompany in breach of s 194, and I think the position for the Commissioner is ifanything stronger in this case. It was simply not good enough for Tower to say to theCommissioner, in effect, "go and talk to the solicitors who acted for us in the varioustransactions, to get the supporting documentation you need". For one thing, s 189(1)of the Act required Tower to keep its accounting records for the last seven completedaccounting periods at its registered office, not scattered among a number of law firms,at least one of which appears to be no longer in existence. But more fundamentally, itappears that Tower never kept any ledgers, cash books or other such documents thatwould have allowed its financial position to be determined at any time.[152] I take into account also that Tower acted as a developer who entered into anumber of transactions which, on their face, were complex enough to requiresupporting explanatory documents to show what had happened and why. Theinconsistencies between the financial statements for the 2015 and 2016 tax years, andthe inconsistency between the 2016 closing stock figure shown in the 2016 financialstatements and the 2017 opening stock figure shown in the IR10 form, only highlightthe fact that this is a situation where more, rather than less, was required in the way ofunderlying accounting records sufficient to support the financial statements.[153] It is not necessary for the purposes of this judgment to describe all of theunusual financial transactions entered into by Tower over the period since 2014, as Iagree with the view expressed by Associate Judge Andrew in his judgment on theapplication to appoint interim liquidators that:38[37] Tower has engaged in property transactions with unusual features,including contemporaneous same-day purchase and sale of single properties,significant changes to purchase price close to settlement and large parts of thepurchase price being satisfied through the transfer of other properties.[154] The failure to keep proper accounting records was highlighted in Tower'sNOPA in respect of the 2016 tax year, where it was apparently only able to say thatthe adjustment it sought to the Commissioner's default assessment was "TBC".Evidently, Mr Clarke himself did not have adequate documentation to put together thetrue position for the 2016 tax year.[155] Another matter is that the substantial payments made from Tower's funds toMr Krasniqi or his family members, and to Mr Chan, should have been supported byadequate accounting records, but it appears they were not. In the end, neither theCommissioner nor the interim liquidators have been able to piece together the truefinancial position of Tower.[156] It is no answer for Tower to say that responsibility for the accounting recordswas delegated to Mr Clarke. Mr Clarke was only a director of Tower between 17 June2011 and 16 August 2011, well before the events with which this proceeding isprimarily concerned. And of course the obligation to comply with s 194 of the Actrested with the board. It is apparent that there has been little or no monitoring of thecompany's record keeping over the period Mr Clarke was entrusted with such mattersas preparing and filing GST and income tax returns, and I have no doubt that the failureto keep proper accounting records was both persistent and serious.[157] Mr Chan has said that Tower has engaged (or is engaging) a new accountant togo over the work performed by Mr Clarke. But no affidavit has been provided fromany new accountant, notwithstanding the fact that the audit of Tower commenced some38 Commissioner of Inland Revenue v Tower City Holdings Ltd, above n 1, at [37].years ago and Tower was made aware of the interim order putting it into liquidation inJuly of 2019. The only sensible inference to draw is that, if a new accountant has beeninstructed, that accountant has encountered the same difficulties unravelling Tower'sfinancial position as did the Commissioner and the interim liquidators.[158] As Mr Lorigan's affidavit made clear, the inconsistencies in the financialstatements and IR10 summary forms provided by Tower are not inconsequential. Theyinvolve substantial sums, and adequate accounting records would be required to sortout the true position.[159] As I have said, Tower's obligation to keep accounting records that compliedwith s 194 was a stand-alone obligation, which existed regardless of the Part 4Adispute procedure in which it was engaged with the Commissioner. The only realrelevance of the Part 4A procedure, and the possibility of a Part 8A challenge later, isthat the parties' respective positions in getting to the truth of the matter have beenmade immensely more difficult by what appears to have been a deliberate failure byTower to maintain accounting records which would readily explain its varioustransactions.[160] I conclude that the Commissioner has made out her case for a liquidation orderunder ss 241(4)(b) and 194 of the Act.[161] I add that I see nothing which would persuade me to exercise my discretionagainst making a liquidation order. The company appears to be no longer trading, andMr Chan acknowledged in his affidavit that "on paper" Tower appears to be insolvent.Mr Lorigan's evidence was to the effect that the value of the remaining assets held byTower is substantially less than the claimed tax liability, and of course Tower has notpaid the self-assessed amounts, for which it accepted liability. Those factors do notsuggest any sound basis on which the Court should exercise its discretion againstmaking a liquidation order, and if the liquidators consider that there is merit in Tower'sposition on any of the tax issues which are presently in dispute, they will no doubtpursue those matters with the Commissioner.[162] I also consider the circumstances (including the substantial payments made toMr Chan and/or Mr Krasniqi or his family members, and the inadequately explainedland transactions involving the features referred to at paragraph [153] above), call forexamination by liquidators having the full array of investigative tools available underthe Act. Mr Krasniqi has provided some details of the Huka Road development andthe acquisition and sale of the Taupo properties, but it seems to me that there are ormay be aspects of those transactions that would properly be the subject of scrutiny byliquidators. The acquisition of the Taupo properties, in particular, may merit furtherexamination. The circumstances appear to be that Tower acquired the Kohimaramaproperties for $14,998,000 from Education Holdings (2008) Limited in July 2015, andsold them to Rainbow Holdings (the owner of the Taupo properties) for $29,308,000the same day. According to Mr Lorigan's evidence, property sales reports for theKohimarama properties showed that they had combined capital values in 2014 ofapproximately $7,570,000. Then, within a relatively short time after the transaction, itappears that the intellectual property said to be associated with the Taupo properties,valued at $8,000,000 in the transaction, proved to be worthless. It may be that thereare good explanations for all of those matters, but it seems to me that they are at leastworthy of further consideration by liquidators, to see if there may be any avenues ofrecovery for Tower's creditors (including the Commissioner if her claims are acceptedby the liquidators).[163] For all those reasons, I see no reason for the Court to stay its hand. There willbe a liquidation order accordingly.Issue (3): Has the Commissioner shown, on the balance of probabilities, thatTower is unable to pay its debts?[164] There is strictly no need for me to address this issue, but I record that, ifnecessary, I would have held for the Commissioner on this issue. The evidence showsthat Tower is at least "balance sheet insolvent", and Mr Chan himself acknowledgedthat "on paper" Tower appeared to be insolvent. Any challenge by Tower under Part8A, even if successful, would not affect its self-assessed income tax liability of$46,331 for the 2017 tax year. Any losses Tower may have suffered in later tax yearscould not be carried backwards to provide an off-set against this liability, and r 5.61of the High Court Rules 2016 would preclude any set-off of any GST refunds to whichTower might prove to be entitled. Similarly, Tower appears to have no defence inrespect of the self-assessed GST debt of $286,885.25 owing in respect of theDecember 2017 GST period. Tower's claims for GST refunds are not presentlypayable, and there is nothing to suggest that Tower has other actual or contingent assetsthat would be sufficient to cover the admitted income tax and GST liabilities as wellas Tower's other liabilities.Issue (4): Does Tower have a genuine and substantial argument that there areGST set-offs which do or may exceed any amount owing to the Commissioner?[165] In view of my conclusion on the preliminary issue relating to theCommissioner's standing as a creditor, my answer to this question, if an answer hadbeen necessary, would have been "no". It is not disputed that Tower owes the self-assessed amounts totalling approximately $333,000, and r 5.61 of the High CourtRules 2016 precludes any set-off against that debt.Issue (5): Has the Commissioner shown, on the balance of probabilities, thatTower's directors have, in a persistent and/or serious way, failed to comply withduties relating to Tower under ss 131, 135, and/or 137 of the Act?[166] My conclusions on Issues 1 and 2 mean that no answer is required, and Iconsider it neither necessary nor appropriate to embark on an analysis of theperformance of the directors, in a number of complex transactions, in order to makefindings on whether they discharged their respective duties under ss 131, 135, and 137of the Act (and to the extent that they did not, whether their defaults can becharacterised as "persistent" or "serious", so as to justify the making of a liquidationorder).Issue (6): Has the Commissioner shown, on the balance of probabilities, that itwould be just and equitable to put Tower into liquidation?[167] Again, in view of my conclusions on Issues 1 and 2 there is no need to addressthis issue. The need for a liquidation order is clear on the issue of serious and persistentbreach of s 194 of the Act, and I do not consider anything useful would be added bymaking findings on the question of whether the circumstances are also caught by thebroad "just and equitable" jurisdiction in s 241(4)(d) of the Act.Result[168] I make the following orders:(1) Tower is put into liquidation.(2) Vivian Judith Fatupaito and Helen Elizabeth Keene are appointedliquidators.(3) Costs are awarded to the Commissioner on a 2B basis, withdisbursements to be fixed by the Registrar.(4) The fees of the liquidators and staff working under their supervisionand control are fixed at the rates set out in the liquidators' consent dated21 August 2019.(5) The liquidators are to apply at the conclusion of the liquidation forapproval of their overall remuneration.[169] The foregoing orders are timed at 3pm on 31 August 2020.Associate Judge Smith