HARLOCK v THE COMMISSIONER OF INLAND REVENUE [2013] NZHC 3389

HARLOCK v THE COMMISSIONER OF INLAND REVENUE [2013] NZHC 3389 [17 December 2013]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV-2013-470-527[2013] NZHC 3389UNDER The Companies Act 1993BETWEEN DAVID HARLOCKApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 2 December 2013Appearances: Mr S Kilian and Mr Hawkins for ApplicantMrs Courtney and Ms Park for CommissionerJudgment: 17 December 2013JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on17.12.13 at 2.30 pm, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateBackground[1] This application concerns a company called Raiz Enterprises Ltd which Ishall refer to in this judgment as "the company". The company had been in businessas a horticultural contractor and kiwifruit orchardist. Because of the horticultural contracting element of the business, the company was required to make withholding tax-type payments to the Commissioner from time to time.[2] The Commissioner claims that when the company ceased doing business it owed her the sum of $$77,055.51 for unpaid PAYE and the sum of $179,264.27 for unpaid GST, a total of $256,319.78.[3] The Commissioner served a statutory demand for the sum of $256,319.78 on the company on 2 April 2013. When that was not responded to an application was made to the court for an order appointing liquidators on 15 May 2013. However, a liquidator was appointed by special resolution of the trustees 5 June 2013.[4] The Commissioner says that it was discovered that the company had overpaidincome tax following the filing of its tax return for the year ended 31 March 2013which occurred on 22 May 2013. The Commissioner determined that it would beappropriate to offset the amount of overpaid income tax in the sum of $98,998.88 inorder to meet the liability for PAYE and GST which I have mentioned.[5] The liquidator, Mr Harlock, swore an affidavit 19 September 2013. In thataffidavit he referred to the fact that the company had attempted from September2012 through to May 2013 to negotiate an instalment arrangement with therespondent for payment of outstanding tax arrears over time. The company alsoproposed that a tax credit that it had resulting from overpaid provisional taxpayments should be applied towards the arrears.[6] The liquidator then states that on 28 May 2013 a Mr Alan Eichmann, therelevant departmental officer managing the account of the company, spoke toMs Vanessa Dodunski, the company accountant. The liquidator said Mr Eichmann:Confirmed the instalment proposal was declined and that the respondent would offset the tax refund of approximately $98,000 against the outstanding tax arrearsowed by the company. The contents of this telephone discussion is referred to andconfirmed in the affidavit of Mrs Vanessa Dodunski dated 18 September 2013which has been filed in these proceedings.[7] Mr Harlock says that on 7 June 2013 he wrote to the respondent advising of his appointment as liquidator and on the same day wrote to the respondent –Requesting that the tax refund be paid to me as I considered it to be an asset of the company for the purpose of the liquidation.[8] He also exhibited to his affidavit the letter which was received in response to that proposition which Mr Eichmann wrote on 12 June 2013 as stating, amongst other things:Reference is made to your letter dated 7 June 2013 requesting Inland Revenue credit the tax refund of approximately $98,000 to [the liquidator].The income tax refund for the period ending 31 March 2013 currently totals $98,998.88 and Inland Revenue is using the refund to offset tax arrears, as it is entitled to do so as per the provisions under section 310 of the Companies Act 1993.[9] In an affidavit which she filed, Ms Dodunski stated, that on 28 May 2013 she had a telephone conversation with Mr Eichmann who confirmed that the respondenthad declined the instalment proposal which was put forward on behalf of thecompany.Mr Eichmann also advised that the respondent had decided to offset the tax refund credit of approximately $98,000 against the outstanding tax arrears owed by thecompany.[10] Her file note of the conversation was annexed and it read in part:They will take the $98,000 refund due.[11] The applicant issued a voidable transaction notice on 25 July 2013 which was served on the respondent on 31 July 2013. The respondent did not respond to or oppose the voidable notice. The applicant then sought to enforce the payment of the voidable notice. The respondent failed to respond within the statutory time frame. The applicant issued an application to set aside a voidable transaction on 25 September 2013.[12] In her notice of opposition the respondent included as one of the grounds ofopposition the following:3.1 The action by which the respondent on 18 June 2013 set-off the income tax refund of $98,998.88 due to Raiz Enterprises Limited ... against outstandingPAYE and Goods and Services Tax obligations under RM10(3) of theIncome Tax Act 2007 was not a "transaction" involving steps by thecompany transferring the company's property.[13] It was then alleged that the actions in doing so did not constitute a"transaction" within the terms of s 292 of Companies Act 1993 ("CA").[14] For that reason it is necessary to say something about the chronology that relates to the purported set-off which the respondent carried out.[15] A Mr Wilson who is a departmental team leader employed by the respondent gave an affidavit. He deposed that Mr Eichmann who had been dealing with the matter was overseas. Mr Wilson deposed that he had retrieved information held bythe Inland Revenue in its computer system and correspondence files in relation to thematter and is familiar with it. He also said that Mr Eichmann had also spoken withhim directly about the matter at various times and that he had given advice andprovided approval of how the case was progressed. In his affidavit he said that as at15 March 2013 the company, "Raiz" had a total outstanding debt of $258,319.78.He said that on 22 May 2013 a repayment proposal was made on behalf of Raizoffering amongst other things the refund and part payment of the outstanding debt.He annexed to the affidavit a written communication that Ms Dodunski sent to thedepartment on 22 May 2013 making a proposal to repay the amount outstanding.The proposal was that the company would propose:To pay the core debt in its entirety by way of transferring the 2013 tax refunds for the company and ... paying off the remainder over a three year period at $3,350 per month.[16] In his affidavit Mr Wilson said that on 18 June 2013 the respondent applied the income tax refund against the PAYE and GST liabilities for unpaid tax.[17] He commented on a assertion by Ms Dodunski that:On 28 May 2013 Mr Eichmann advised her that the respondent had decided to offset the tax refund against the outstanding tax arrears.[18] He further said that the final decision to offset the refund was made aftertaking legal advice on 12 June 2013.However, the actual processing of the offset did not take place until 18 June 2013.[19] Finally, Mr Harlock himself deposed in his affidavit that on 18 June 2013 therespondent "processed transfers of the Tax Refund" totalling $98,998.88 against anumber of PAYE and GST periods and he attached a spreadsheet to his affidavitnoting the amounts and dates of the transfers and that:This paid the tax, interest and penalties of the tax periods it was transferred to.[20] The spreadsheet which he attached showed that all of the transfers took place on 18 June 2013.[21] The practical effects of the respondent succeeding are demonstrated by the following figuresSet-off appliesOverpayment of income tax -$98,998.89Total that company owed $258,319.78Net amount company owed $159,320.89[22] The Court was not advised how much of the sum of $159,320.89 would be recoverable in the event that the IRD proved for that amount, and, presumably, exercised its entitlements as a preferred creditor.[23] If the outcome of this proceeding is unfavourable to the IRD it will have to pay back the $98,000 approximately and will be left proving for the full amount of the debt owed of $258,319.78.1[24] In setting off the credit for the overpaid income tax the Commissionerpurported to act in accordance with authority provided by section RM 10 IncomeTax Act 2007 (ITA).1 Note: the total amount which the Commissioner claims is slightly more than the figures set out earlier in the judgment but the difference is immaterial for present purposes.[25] The position of the applicant is that it does not dispute that there was authority to carry out a set-off. The question is whether the set-off was caught by the insolvent transactions provisions of s 292 CA.[26] The liquidator had disputed the entitlement of the Commissioner to carry out the set-off and issued a notice pursuant to s 294 CA which provides that where aliquidator has served a person with a notice under this section, and the person doesnot object within the 20 working day period in s 294(3), the transaction isautomatically set aside under s 294(3).The issues[27] The case for the Commissioner in overview is that:a) Her action in exercising a statutory right to set-off a refund of income tax against outstanding PAYE and GST after liquidation is not a"transaction" that comes within s 292 of the CA;b) Section 310(1) applies, and automatically extinguishes the set-off portion, so that it no longer exists and cannot be challenged as a voidable transaction under s 292;c) For the reasons relied on in support of sub paragraphs (a) and (b) above, the applicant has not satisfied the burden of proof of showing that what was set aside under s 294(3) was a transaction under s 292. The Crown is a preferential creditor in respect of PAYE and GST and had a statutory entitlement to set-off the income tax refund under s RM 10 of the ITA. As s 310(1) applies, and the set-off occurred after liquidation, the PAYE and GST debts have been extinguished. The respondent has not been preferred, so there is no benefit that requires to be disgorged, and accordingly no basis for the Court to exercise its discretion under s 295.The s 292 issue[28] The Commissioner submitted that an application of funds pursuant to sectionRM 10(3) ITA did not come within the meaning of a "transaction" that was caughtby s 292 of the CA.[29] The Commissioner took the position that the way in which the tax credit was dealt with was as provided for in s RM 10(2). Section RM10 provides as follows:When this section applies(1) This section applies when a person is entitled to a refund of an amount of tax under sections RM 2, RM 4, and RM 5. Request for particular application(2) The person may ask under section 173T of the Tax Administration Act 1994 for the Commissioner to apply some or all of the amount on a particular date to satisfy a liability under the Inland Revenue Acts.Commissioner applying refundIf no request is made under subsection (2), the Commissioner may apply the amount of the refund to satisfy a liability that the person has under the Inland Revenue Acts.[30] Mr Kilian for the liquidator took the position that the Commissioner had held the overpayment at the request of the company and that the application of the over- payment to the tax arrears was at the request of the company. All of this was as a first step in reasoning that the eventual application of the overpayment to the tax arrears occurred as a result of an agreement between the parties with the result that such agreement could be attacked as a voidable transaction under s 292.[31] The first task of the Court is to enquire into the factual questions that areraised by Mr Kilian's submission.Disputed factual issue about the circumstances in which the surplus tax payment was applied[32] The parties were not able to agree about the circumstances in which the Commissioner applied the surplus that was held on account of the company. It is therefore necessary to briefly refer to the factual circumstances.[33] The applicant's submission is that the company made a proposal to theCommissioner that the Commissioner appropriate the surplus amount of overpaid income tax and use that to reduce the PAYE and GST liabilities to meet part of the amount that was owing to the Commissioner. Those amounts were approximately $98,000. It proposed that the balance should be met by a series of instalment payments extending into the future. The liquidator accepts that the Commissioner did not agree with this overall payment package and elected to proceed with theliquidation. However, it is the applicant's contention that when the Commissioner appropriated the amount of $98,000 approximately she was acting in response to a request from the taxpayer (the company) to do that being the type of request that a taxpayer can make under s RM10 of the Act. The respondent on the other hand says that the department appropriated the amount on its own initiative.[34] I accept that the contents of the notice of application which the applicant filed in this matter are not evidence. However, it is relevant for the purposes of resolving any doubts on the evidence that the application which the applicant filed dated 23 September 2013 stated:2.1 On or about 28 May 2013, the Respondent notified [the company] of her deci[sion] to apply a credit Tax Refund of $98,998.88... held in credit for the Company towards tax liabilities owed by the Company to the Respondent.........2.4 The Respondent processed the Tax Refund by way of transfers on 18 June 2013, towards the tax liabilities owed by the Company after the Company had been placed into liquidation on 5 June 2013.[35] On the basis of the evidence that I have reviewed, I conclude that there is no evidence to suggest that the applicant is correct when he suggests that the paymentof tax was carried out at the request of the company. It is correct that at one point the company put forward a repayment package which included a proposal that the Commissioner could apply the overpayment to other PAYE and GST liabilities along with an adjunct proposal to pay off the tax arrears by instalments. That seems to be the only context in which the company ever raised the possibility of such a transfer. Essentially the taxpayer was making the proposal that the Commissioner offset the excess tax against the arrears as part of the overall proposal, but as the evidence discloses, the offer of the package was declined by the Commissioner. Thereafter, the Commissioner exercised the power, which she undoubtedly always possessed, to apply the funds against the arrears without any reference to the taxpayer company. The fact that the taxpayer at one stage adverted to the possibility of a voluntary arrangement including the retention by the Commissioner of the excess tax paid is nothing more than an aspect of the history of dealings between the parties. It is not a factor which makes it more likely than not that the Commissioner was acting at the request or with the agreement of the taxpayer when subsequently she took the excess tax and applied it as she did. In the end, my conclusion is that such evidence as there is points to the Commissioner's explanation being the correctone rather than that which is put forward by the applicant.[36] I therefore accept the submission of the respondent that the Commissioner acted pursuant to s RM10 ITA when applying the excess tax payment on 18 June 2013.The legal consequences of the Commissioner applying the overpaid tax to the arrears – s 292 CA[37] The respondent referred to a number of authorities in addition to the text of the section in support of the submission that the setting off process did not amount to a transaction within the meaning of s 292 CA.[38] In my view, the setting off was not a voidable transaction that is caught by the section because it does not literally fall within the description of a transaction. That is because it took place after the end of the specified period.[39] The policy behind s 292 does not require that the literal meaning of the section be ignored. The policy behind the section has been described as reinforcing the entitlement of all creditors to participate in a distribution pari passu. The legislation was therefore concerned with preventing any particular creditor whether by self-help, or by taking court proceedings, from obtaining an unjustified priority over equally ranking creditors during the period leading up to the commencement of liquidation. After the commencement of liquidation the liquidator has control of thecompany's property2 and may be expected to process creditors' claims and distributethe assets in accordance with the Act.3[40] There is another reason which I now deal with which leads me to the view that counsel for the Commissioner was correct in submitting that the exercise of a statutory power of set-off by the Commissioner does not come within the definition of transaction set out in s 292. The first point is that that the expression "transaction"is one with considerable width of meaning. Ms Courtney referred me to the Court of Appeal judgment of Rea v Russell where it was observed:4The definition of "transaction" at s 292(3) is broad. Subsection (e) refers to the payment of money and (f) anything done or remitted to be done for the purpose of entering into the transaction. It is clear from these words that theconcept of "transaction" is broader than the dictionary definition of a "piece of commercial business done" or a "deal". It is not necessary for thepayment to arise from a contract or some other business. It can stand alone.[41] It is not inconsistent with the passage from Rea to note that two limitations suggest themselves on the scope of the expression "transaction" as it applies to the circumstances of the present case. First, s 292 refers to transactions "by the company". That would suggest that the expression does not extend to the pointwhere it embraces actions or decisions of third parties which are unilateral in nature and which the company did not participate in. The second point is that consistently with the meaning just suggested, the legislature in providing the definition of transaction in s 292(3) of the Act stated that the expression "means" "..(a). Conveying or transferring the company's property" and the other following fivecategories of transaction that are referred to in the subsection. Being subjected to a2 Companies Act 1993, s 248.3 Companies Act 1993, s 302 and following.4 Rea v Russell [2012] NZCA 536 at [22].set-off under the taxation legislation is not included. A similar subcategory, but one that does not apply to the circumstances in this case, is referred to in section 292(3) -"(d) undergoing an execution process".[42] Further, there is authority of the Court of Appeal in Commissioner of Inland Revenue v Smith which is persuasive that s 292 does not apply in the circumstances of the present case.5 At issue in that case was whether the, payments and set-offsapplied before a company was placed in liquidation to satisfy a company'sobligations to pay PAYE and GST, came within s 292 of the CA. In that case, as thePAYE payments were made before liquidation, and satisfied liabilities quantified inreturns, the Court held that they were paid pursuant to the trust established by s167(1) of the TAA and did not form part of the bankruptcy estate. A GST creditowing to the company was set-off against its liability for unpaid GST. The Courtheld that the set-off was not a transaction to which s 292 applied: Ms Courtney forthe Commissioner drew my attention to a passage in the judgment where the Courtstated: 6In our view, a set-off effected under the provisions of s 46(6) of the Goods and Services Tax Act before a company is placed in liquidation, is not subject to the provisions of s 292 of the Act. It is not the payment of money by a company in the normal sense of that word and is not a voluntary payment made by the company. Although no specific trust is created by the Goods and Services Tax Act, the tax payer has an obligation to pay to the Commissioner the difference in any GST period between the input tax collected by a registered person and the output tax. The registered persons whose payments otherwise qualify, are entitled to treat such payments as output tax for the purposes of their returns. The integrity of the GST system is therefore maintained by giving the Commissioner, in appropriate circumstances, the set-off right under s 46(6) of the Act.(emphasis added)[43] The Court also stated (obiter) that it was reinforced in its conclusion, because:7 If in this case, the set-off had not been effected before the date of liquidation, the Commissioner would have been entitled to have effected the set-off under s 310 of the Act. 5 Commissioner of Inland Revenue v Smith [2000] 2 NZLR 147 (CA).6 At [20]7 At [21].[44] However, it is the first of the two passages that would appear to have particular relevance to the question of whether the process of setting off under the TAA comes within the definition of transaction under section 292 CA.[45] For the liquidator, Mr Kilian referred to the Court of Appeal decision ofTrans Otway v Shephard which was a case where the parties had agreed between themselves to a set-off.8 The Court concluded that the set-off that occurred pursuant to the agreement came within the definition of payment in s 292. However the Court also referred to the fact that an agreement for a creditor to unilaterally set-off funds that it held may not be considered a payment so as to be a voidable preference.[46] Subject to a consideration of the point concerning the Commissioner holding the money in the capacity as a trustee, which I shall deal with next, my conclusion is that the events which in combination led to the Commissioner applying the surplus taxation which she held in reduction of the GST and PAYE debt did not amount to a transaction within the meaning of s 292 CA.Commissioner as trustee?[47] The argument for the liquidator commenced with a consideration of the provisions of section RM 2. Mr Kilian described these as being to the effect that where there is an amount which is more than the tax required to be paid by the taxpayer, then the Commissioner must refund the amount of tax that is overpaid. He drew attention to the mandatory wording of the section. Until that payment has been made, he described the Commissioner as being in the position of the trustee for the amount overpaid.[48] The point about the submission for the company is that if the Commissioner was holding the overpayment funds as a trustee for the company, then she could only apply them in reduction of the PAYE and GST liabilities if mandated by the company to do so. Because that would require an agreement between the parties, thesubmission continued, the provisions of s 292 were engaged and a "transaction"would have taken place.8 Trans Otway Ltd v Shephard [2005] 3 NZLR 678 (CA).[49] In my view, harmonisation between sections RM2 and RM 10 is achieved by viewing the obligation of the Commissioner as one to pay the funds back unless the funds are to be dealt with in another fashion recognised by the Act. It could not possibly be complained, for example, that where the Commissioner applied funds in reduction of another taxation liability at the request of the taxpayer, the taxpayer could then subsequently complain that in applying the funds in that way the Commissioner breached the obligation under section RM2 to pay the money back to the taxpayer. Further, even though there is no express provision linking the obligation and RM2 to the power of the Commissioner to unilaterally apply excess funds, it must be the case that the legislature intended that the obligation to refund only extended to any funds that remained after the Commissioner had used the excess tax paid to pay off another distinct taxation liability. What is important is that it does not matter at whose election the application of the funds to the separate taxation liability occurred.[50] Mr Kilian referred to other authorities such as CIR v Jennings Road Freight (in Liq) in order to distinguish them.9 Jennings was concerned with the effect of section 167 of the ITA which constituted an employer a trustee for the Commissioner in regard to funds that had the character of deductions of PAYE tax. The circumstances of that case are not of direct relevance to the present one.[51] I do not consider that that submission is sustainable. First, there is no provision in the relevant taxation legislation which requires the Commissioner to be deemed to be a trustee for the taxpayer with regard to tax overpayments. As well the taxation regime is statute-based and, even if it were thought that a gap in the statutory arrangements could in theory be assisted by having to resort to concepts of trusts, the courts would be slow to agree with such a proposition because of the assumption that they would have to make that Parliament considered that the legislative scheme was sufficient to cover the ground without the importation of concepts borrowed from equity and the law of property. Secondly, the fact that the parties are on opposite sides of an account does not on its own give rise to a conclusion that the party on the credit side of the ledger from time to time is to be9 Commissioner of Inland Revenue v Jennings Roadfreight Ltd (in liq) [2013] NZCA 455.regarded as a trustee for the creditor in regard to the account balance. Further, importing aspects of trustee law into the operation of the revenue would result inconfusion or at least in the loss of clarity about tax payer's rights and obligations.[52] As well, for these purposes a trust will not come into existence unless the conscience of the recipient is affected.10 The receipt of money voluntarily paid by the taxpayer to the Inland Revenue against a background where it is understood that at some later point in time the process might be reversed with the Commissioner being required to pay an amount to the taxpayer, cannot possibly have the effect of making it unconscionable or a breach of the equitable duties to the taxpayer for the Commissioner in the meantime to accept the money on the basis that it is her own to deal with as the Commissioner pleases.[53] In any case, it would be difficult to justify the imposition of a trust which, after all, is generally resorted to where it is required for the purpose of providing protection for a vulnerable person, to protect creditors against a risk of insolvency etc. It was not explained why such a trust would be necessary in the interests of a taxpayer such as the company in this case which claimed to be owed an amount by the Crown.[54] For those reasons this submission is rejected. That is to say, it does not have the effect of displacing the contention for the commissioner that she was acting pursuant to RM10(3) when she applied the excess tax.[55] Because of the foregoing conclusion it is not necessary to deal with associated submissions which Mr Kilian made concerning the date on which the application of the funds occurred.The effect of section 310 of the Companies Act[56] The submission was made for the respondent that:As s 310(1) applies, and the set-off occurred after liquidation, the PAYE and GST debts have been extinguished. The respondent has not been preferred,10 Westdeutsche Bank v Islington [1996] AC 669 at 705.so there is no benefit that requires to be disgorged, and accordingly no basis for the Court to exercise its discretion under s 295.[57] I understand that this submission is to the effect that because of the automatic extinction of the amounts owed by each party that came about as a result of the applicability of s 310, there is a further ground for concluding that a transaction of the kind which is covered by s 292 did not, and could not have, occurred. The company and therefore the applicant lost any entitlement to recovering the approximate $99,000 by the operation of s 310. I understand that this argument is alternative to the earlier submission that I have already dealt with concerning the fact that any application of the funds on the part of the respondent to reduce other taxation liabilities explained how the respondent was able to take advantage of that sum of money which occurred by those means, rather than by any transaction which is caught by s 292 CA.[58] In the amended notice of opposition which the respondent filed ground 3.2 is stated in the following terms:3.2. As the set-off occurred after liquidation, s 310(1) of the CA applies, and automatically extinguishes the set-off portion of the tax debt, so that it no longer exists and cannot be challenged as a voidable transaction under section 292.[59] The ground of opposition is put forward as an additional or alternative reason for the contention of the respondent that there was no transaction that came within the provisions of section 292 of the CA.[60] Section 310 CA provides as follows:310 Mutual credit and set-off(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—(a) An account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and(b) An amount due from one party must be set-off against an amount due from the other party; and(c) Only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.(2) A person, other than a related person, is not entitled under this section to claim the benefit of a set-off arising from—(a) A transaction made within the specified period, being a transaction by which the person gave credit to the company or the company gave credit to the person; or(b) The assignment within the specified period to that person of a debt owed by the company to another person—unless the person proves that, at the time of the transaction or assignment, the person did not have reason to suspect that the company was unable to pay its debts as they became due.(3) A related person is not entitled under this section to claim the benefit of a set-off arising from—(a) A transaction made within the restricted period, being a transaction by which the related person gave credit to the company or the company gave credit to the related person; or(b) The assignment within the restricted period to that person of a debt owed by the company to another person—unless the related person proves that, at the time of the transaction or assignment, the related person did not have reason to suspect that the company was unable to pay its debts as they became due.(4) This section does not apply to an amount paid or payable by a shareholder—(a) As the consideration, or part of the consideration, for the issue of a share; or(b) In satisfaction of a call in respect of an outstanding liability of the shareholder made by the board of directors or by the liquidator.(5) In this section, related person means a related company and includes a director of the company in liquidation....[61] I have already accepted that the position of the respondent is correct concerning the date on which the Commissioner purported to apply the $99,000 to the other taxation liabilities being 18 June 2013. That occurrence post-dated the commencement of the liquidation.[62] Therefore to the extent that the determination to apply the $99,000 pursuant to section RM 10 post-dated the commencement of liquidation, depending upon what consequences followed from the onset of liquidation, it could be that the date of entry into liquidation triggering the operability of s 310, rather than theCommissioner's actions in purporting to set-off, was the critical feature.[63] It is also to be observed that the provisions of the ITA which entitle the Commissioner to apply overpayments of tax to other categories of tax are not exempted from any applicable provisions in the Companies Act which bear upon the effect of setting off arrangements generally. That is to say, the respondent is subject to the provisions of s 310 CA just as any other individual is.[64] The particular issue which arises is whether the operation of the above set-off provision leaves any room for and can coexist with a claim that the operation of the set-off provision results in the making of a payment or constitutes some other transaction that could be caught by the terms of s 292 CA.[65] The respondent referred to the decision of Finnegan v He.11 That case in turn referred to the authority of Stein v Blake, a judgment of the House of Lords in which the main speech was that of Lord Hoffmann.12 Stein establishes that so-called bankruptcy set-off provisions are automatic in their effect. On the bankrupting of a natural person or the liquidation of a company, debts that are the subject of bankruptcy set-off will be automatically extinguished. The passage from Stein was expressly adopted by Duffy J in her judgment in Finnegan as being a correct statement of New Zealand law:13Later, at p 966, Lord Hoffman emphasised the self-executing nature of s 323 when he cited a passage from the High Court of Australia in Gye v McIntyre (1991) 171 CLR 609 (at 622):Section [323] is a statutory directive ('shall be set-off') whichoperates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration canproceed. Only that balance can be claimed in the bankruptcy. Thesection is self-executing in the sense that its operation is automaticand not dependent upon 'the option of either party'. "11 Finnigan v He [2010] 2 NZLR 668 (HC).12 Stein v Blake [1996] AC 243 (HL).13 Finnigan at [20].[66] Applying these propositions in the context of the present case, the following conclusions can be arrived at.[67] The liquidation in this case commenced 5 June 2013.14 The effect of s 310 is that an account was to be taken in respect of the set-off on that date.15 Prior to thatdate there had been "mutual credits, mutual debts or other mutual dealings" withinthe meaning of s 310.[68] Therefore it was the statutory and automatic netting that took effect with the commencement of liquidation on 5 June 2013 rather than the account that the respondent stated on 18 June 2013 which was of crucial effect. That conclusion must mean that any entitlement that the Commissioner had to the $99,000 approximately was not referable to a transaction which breached s 292 CA and for that reason the additional application which the liquidator brings cannot succeed.Does the operation of s 294 prevent the respondent from contending that the set-off was not a "transaction" within the meaning of s 292?[69] The procedure and s 294 applies to:(1) A liquidator who wishes to set aside a transaction or charge that is voidable under section 292 or 293.[70] Subsection (3) provides:The transaction or charge is automatically set aside as against the person on whom the liquidator has served the liquidator's notice, if that person has not objected by sending to the liquidator a written notice of objection that is received by the liquidator at his or her postal, email, or street address within 20 working days after the liquidator's notice has been served on that person.[71] The reference to "transaction or charge" in ss 3 would seem to be to the sametransaction which is referred to in ss (1), and is therefore a reference to a transaction or charge that is voidable under ss 292 etc.[72] The giving of a notice under s 294 does not have the effect that a transaction which does not have the elements to bring it within s 292 is, as a result of the giving14 Companies Act 1993, s 241(5).15 Re Milan Tramways Ltd v, ex parte Theys (1884) 25 Ch D 587; and see Brookers Company Law(online looseleaf ed, Thomson Reuters) at CA310.05.of a notice under s 294, thereafter deemed to be a transaction that does fall within section 292.[73] It is therefore open to a party faced with an application for an order under s295 to oppose that application on the basis that the "transaction" supposedly set aside under s 294 was not a transaction which came within that section and that therefore the arrangements were not set aside as the notice intended.[74] I have considered whether such an interpretation which the liquidator opposed would have the effect of depriving s 294 of its efficacy. I do not think that it does. In most cases there will be no argument that a transaction fell within the parameters of s 292. Cases where that does not occur will be the exception. I do not consider that the section should be interpreted in such a way that the recipient of a notice who fails to respond will potentially lose property as a result of the transaction (which does not fall within the section), solely because the liquidator who gives the notice states his/her belief that it does. An interpretation of the kind which the liquidator puts forward can only be based upon arguments of efficiency. It would of course be open to the legislature to enact legislation which has the effect that I have described because it takes the view that the requirements of efficiency and reduction of legal costs etc outweigh hardship to any particular party who finds him/herself visited with a notice setting aside a transaction which is not one that comes within s 292. There are however no indications in the form of statements of legislative intention, context of the legislation or background evidence of the climate in which liquidators carry out their work to suggest that such a radical outcome was contemplated by the legislature. It would appear that a similar approach was taken to interpretation of the legislative elements in the case of McKinnon v Falla Holdings NZ Ltd (in Liq)16 and also in the decision of the High Court in Grant v Lotus Gardens Ltd.17The section 292 requirement of a preference[75] It was also submitted for the Commissioner that there had in any event been no proof that the supposed arrangement contravening s 292 had resulted in the16 McKinnon v Falla Holdings NZ Ltd (in liq) (1999) 8 NZCLC 262,034 (HC).17 Grant v Lotus Gardens [2013] NZHC 1135.respondent receiving more towards satisfaction of the preferential tax debts than would have been received in the liquidation which is a requirement of section 292.18[76] It is difficult to assess this submission. The approach that the Court has to take is to consider what would have happened if no offsetting had taken place in this case. A reasonably complex calculation would have had to have been carried out to prove the point and that has not been done. Proper consideration would have to be given to the fact that had the Commissioner not pursued offsetting she would, no doubt, have considered exercising her entitlement to enforce the statutory trust provided for PAYE by the provisions of s 167 ITA. As well, the fact that she was a priority creditor would have been relevant.[77] However, deciding this point is not necessary to my decision given the conclusion that I have reached to the effect that there was not in fact any transaction falling within s 292 in this case.Costs[78] The parties should confer on the matter of costs and if they are unable toagree they are to file memorandum not exceeding five pages on each side within tenworking days of the date of this judgment._____________J.P. DoogueAssociate Judge18 Levin v Market Square Trust [2007] 3 NZLR, 591 at [38]