FIXED COST CIVIL LIMITED V THE COMMISSIONER OF INLAND REVENUE HC AK CIV 2007-404-006052

FIXED COST CIVIL LIMITED V THE COMMISSIONER OF INLAND REVENUE HC AK CIV 2007-404- 006052 16 April 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-006052IN THE MATTER OF the Companies Act 1993 Section 290 BETWEEN FIXED COST CIVIL LIMITED Applicant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 15 April 2008 (on the papers) Counsel: M Tolhurst for applicant S Ko for respondent Judgment: 16 April 2008 at 1630JUDGMENT OF ASSOCIATE JUDGE FAIRE [on costs]Solicitors: Citylaw, PO Box 6086, Auckland for applicant Inland Revenue Department, PO Box 33 150, Takapuna for respondent[1] Both the applicant and respondent seek costs. The respondent's alternative position is that neither party should be awarded costs. [2] The applications arise following an agreement reached by the parties where the respondent withdrew the statutory demand and the applicant withdrew the application to set it aside. I made orders covering that agreement on 8 February 2008 and gave directions relating to costs. [3] If it were not for some special features in this case, the position would be covered by my decision in Jones Odell Motor Bodies Ltd v Hard Core Ltd 17 PRNZ 809. [4] In Jones Odell Motor Bodies Ltd v Hard Core Limited 17 PRNZ 809 I considered a situation where a statutory demand was effectively withdrawn after the filing and service of the application to set it aside. I adopt and set out the comments I made at [4], [5], [6], [7], [17] and [20] of that judgment as follows:[4] In fixing costs it is appropriate that I refer briefly to the approach, which the Court must take on an application for costs. Rule 46 provides that costs are to be in the discretion of the Court. InMansfield Drycleaners Ltd v Quinny's Drycleaning (Dentice Drycleaning Upper Hutt) Ltd CA 296/01 29 September 2002 the Court of Appeal, in noting the Court's over-riding discretion pursuant to r 46 said:There is a strong implication that a Court is to apply the regime in the absence of some reason to the contrary: Body Corporate 97010 v Auckland City Council. We do not think that a Court should hesitate to depart from the regime where appropriate but we agree that some articulation of the reason for doing so is to be expected, however succinct. If no reason is given it will expose the award to close appellate scrutiny.[5] The general principles to be applied in the exercise of that discretion are those contained r 47. Subrule (a) provides that:The party who fails with respect to a proceeding should pay costs of the party who succeeds.[6] In Commerce Commission v Southern Cross Medical Care Society[2004] 1 NZLR 491 the Court of Appeal, referring to the authorities said in relation to costs:In the interests of predictability and expedition, Courts will be less inclined to depart from the prescribed approach. The prescribed approach includes the presumption that costs followthe event. However, we do not think that the Court should hesitate to depart from that approach where clear reason for it is shown.[7] In Glaister & Ors v Amalgamated Dairies Ltd & Anor [2004] 2 NZLR 606 the Court of Appeal endorsed the proposition it made in the earlier decision in Mansfield Drycleaners Ltd v Quinny's Drycleaning (Dentice Drycleaning Upper Hutt) Ltd. It noted that if there was any departure from the costs regime as set out by the High Court Rules that could only be done on a particularised and principled way. [17] I repeat what I said in relation to statutory demand applications inInternational Airline Trading (NZ) Ltd v Rohlig NZ Ltd HC AK CIV-2003-404-3464 23 February 2004:[13] There is developing a trend where debt collectors use statutory demands as the first step in a process to recover a debt. The statutory demand procedure is not intended as a debt collection device. Its purpose is to provide the evidential foundation to support an application to appoint a liquidator in respect of a company. That follows from s 287 of the Companies Act 1993. One of the persons authorised to apply to appoint a liquidator, by virtue of s 241 of the Companies Act 1993, is a creditor of the company. A creditor, in terms of s 241 of the Companies Act 1993, includes both contingent and prospective creditors. A creditor will be successful if the creditor can show that the company is unable to pay its debts. It is for that purpose that the statutory demand is used. The reason that it is used is because non-compliance, in terms of s 287, presumes that the company is unable to pay its debts. Precise proof of the quantum of debt where a liquidator is appointed is a matter that will ultimately have to be determined by the liquidator of the company. The liquidator's principal duties are defined in the Companies Act 1993 starting at s 253. [14] I emphasise these matters because there is a common misconception that the statutory demand procedure is in some way analogous to the summary judgment regime which relates to ordinary proceedings. A summary judgment application is, of course, [813]an interlocutory application. An application made to set aside a statutory demand, as I have already said, is an originating application. In short, it is a discrete, stand-alone, application. [15] Because of its special nature, an order on the application concludes the specific application to the Court. Generally it will not be appropriate to reserve costs pending some other event. However, because the Court is required to exercise the discretion, each case will be determined on the facts before the Court. Nevertheless, there needs to be good reason for departing from the general principle that the party who fails should pay costs to the party who succeeds.[16] If the above points are observed, statutory demands should only be issued in cases which are appropriate, that is, where there is a genuine basis for establishing the evidential foundation so that an application can ultimately be made to appoint a liquidator. It is quite improper for the procedure to be used as a debt collection device or as a device to embarrass a party in a situation where there is a contest as to liability for a given debt. [20] The judgments of Heath J, in Keystone Ridge Ltd v City Sales LtdHigh Court Auckland M549im02 19 July 2002, and Master Lang, inInsolare Investments Ltd v Fetherston High Court Auckland M1042im02 17 October 2002, emphasise the need for creditors to take care before issuing statutory demands that there is in fact no dispute as to the debt. Service of the statutory demand on a company requires it to work within a very tight timetable imposed by s 290 of the Companies Act 1993. If it fails to so act, then the presumption created by s 287 applies.[5] Normally, if a statutory demand is withdrawn before the actual hearing of the application to set aside the statutory demand the Court will apply, by analogy, the position that arises on a notice of discontinuance. That, of course, is set out in r 476 of the High Court Rules. There is a presumption that a discontinuing party will be liable for costs: North Shore City Council v Local Government Commission 9 PRNZ 182. Generally, the Court will not inquire into the merits of the case unless the answer is clear and obvious. [6] This case, however, does not fit within the ordinary position which I have outlined in the previous paragraphs. [7] Counsel were given the opportunity to file memoranda. The applicant's memorandum was advanced on the conventional basis that as the statutory demand had been withdrawn, the applicant was, in essence, the successful party and therefore entitled to costs on a 2B basis. [8] The respondent's memorandum is more detailed and sets out the circumstances which existed at the time the statutory demand was issued and which were changed by virtue of steps taken by the applicant. Counsel for the respondent's memorandum has not been the subject of any memorandum in reply. My Case Officer has advised me that counsel for the applicant has indicated that he did not wish to reply to the matters raised by counsel for the respondent's memorandum.[9] The lack of response is important because it means that the essential summary of the history of this matter made by counsel for the respondent is unchallenged. [10] The statutory demand related to outstanding GST owing for the tax periods ended 30 June 2007, 31 May 2007, 30 April 2007, 31 March 2007, 28 February 2007, 30 November 2006, 31 March 2006, 28 February 2006, 31 December 2005, 30 November 2005, 30 September 2005, 31 August 2005, 30 June 2005, 31 May 2005, 31 March 2005, 28 February 2005 and 31 May 2003 and income tax for the years ended 31 March 2006, 2004 and 2003. [11] The total amount owing at the time of the statutory demand was $63,643.39 including late payment and filing penalties. [12] On 28 September 2007, the applicant filed an application to set aside the statutory demand together with a supporting affidavit of Mr Mahoney. [13] On 2 October 2007, a copy of the application to set aside statutory demand was faxed, by way of service, to the Commissioner. [14] On 16 October 2007, the respondent filed and served a notice of opposition to the application to set aside statutory demand together with supporting affidavits of Ms Kathy Gavin and Ms Heidi Gibbs. [15] On 27 November 2007, amended returns with supporting documentation were received from the applicant for the periods subject to the statutory demand to be considered under s 113 of the Tax Administration Act 1994. [16] The Commissioner accepted the amended returns on the basis of the supporting documentation. Accordingly, on 4 December 2007, the Commissioner notified the applicant that the debts subject to the statutory demand have been re- assessed and cleared. [17] At the time the statutory demand was issued, and in the absence of any documents for either the applicant or its duly authorised officers, the debt claimed bythe Commissioner was deemed to be correct and accepted by the applicant pursuant to s 109 of the Tax Administration Act 1994. The summary I have set out indicates that the reason for the Commissioner deciding not to press with opposition to the application to set aside the statutory demand is because of the specific steps belatedly taken by the applicant. But for those steps and the Commissioner's decision to reconsider the matter, the debt could not be disputed. I see nothing in what has happened here that could amount to an abuse of process on the part of the Commissioner. The Commissioner was entitled to issue the statutory demand when he did. This was a proper attempt to obtain payment. If payment was not made it would have justified the Commissioner to proceed to the appointment of a liquidator. There is nothing that can be challenged in that approach: Apple Fields Ltd v The Trustees Executors and Agency Co of New Zealand Ltd (1999) 8 NZCLC 262,008. [18] The conclusion I reach is that this situation is best covered by r 48D(f). In short, there are proper reasons, namely a step taken by the applicant after the filing of the application which leads to the initial liability being removed but in circumstances where there can be no fault or complaint alleged against the respondent. That leads me to the conclusion that the correct approach is, in fact, to refuse the applicant's request for costs. Having said that, I do not consider that the circumstances justify my departing otherwise from the costs regime set up in rr 47 and following by ordering costs in favour of the party who has, in this case, failed, ie the Commissioner. The correct approach is that there should be no order for costs either way.Orders[19] Both applications for costs are refused. _____________________ JA Faire Associate Judge