RUSSELL v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 2353

RUSSELL v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 2353 [28 September 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2015-404-000880[2015] NZHC 2353BETWEEN JOHN GEORGE RUSSELLApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 1 September 2015Appearances: S R G Judd for the ApplicantP Courtney for the RespondentJudgment: 28 September 2015JUDGMENT OF ASSOCIATE JUDGE SARGISSONThis judgment was delivered by me on 28 September 2015 at 4.00 p.m.pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.......................................Solicitors:Ladbrook Law Limited, AucklandCrown Law, WellingtonS Judd, AucklandSummary[1] This is an application to obtain the High Court's approval of a proposal for paying Mr Russell's judgment debt, and to set aside a bankruptcy notice issued bythe Commissioner in respect of Mr Russell's proposed bankruptcy.Background[2] Mr Russell owes the Commissioner of Inland Revenue, his sole creditor, a debt of over $400 million as a result of tax liabilities, penalties and interest accrued over a period of years. He is 80 years old. He does not have the resources to pay his debt. On 24 April 2015, he was served with a bankruptcy notice demanding that he pay the Commissioner the sum of $367,204,207.41 (the full sum then owing).[3] Mr Russell has already made a proposal to the Commissioner purporting to be under section 326 of the Insolvency Act 2006. That proposal was refused by the Commissioner, and Mr Russell was not successful in his subsequent application to have the refusal judicially reviewed.1 The terms of the proposal in respect of which Mr Russell brought the judicial review proceeding are substantively similar to the current proposal. In an application for a stay or interim relief until the appeal against that judicial review decision was heard, the Court of Appeal dismissed theapplication, partially on the basis that the appeal had "weak prospects of success" because judicial review could not determine the Commissioner's substantive claimas to Mr Russell's means to pay his tax liability. The substantive appeal against thejudicial review judgment, in which Mr Russell was denied relief, was also dismissed.2[4] Associate Judge Bell directed that this application should be heard fully because it was common ground that, unless the proposal is approved, an order forMr Russell's adjudication would be inevitable if the Commissioner proceeds to filean application seeking such an order. The jurisdictional requirements for an order of adjudication, as set out in s 13, would indeed be met. Mr Russell has numerous1 Russell v Commissioner of Inland Revenue [2015] NZHC 754, (2015) 27 NZTC 22-003.2 Russell v Commissioner of Inland Revenue [2015] NZCA 351.judgments confirming the debt he owes. Though he has attempted to challenge the debt in various courts and authorities, he has not been successful. There would be no statutory grounds remaining under which he could realistically challenge either the debt or an application for adjudication.[5] In reality therefore only Mr Russell's proposal stands between him andbankruptcy. He relies on whatever discretion the Court may have on his present application to approve the proposal and to set aside his bankruptcy notice. The proposal is:(a) To pay the Commissioner $1,000 per week for the rest of his life; and(b) To permit the Commissioner to prove in his deceased estate for the remainder of any debt claimed to be owing to her at the time of his death.[6] The proposal, Mr Russell says, complies with s 177B of the Tax Administration Act 1994, which deals expressly with instalment arrangements. Mr Russell says that he is not seeking for any portion of the debt to be written off. He says that, since he has no assets which could be sequestered for the payment of tax, paying the debt by instalments from future income would maximise the effective return in taxes. He notes that the payment will be made out of tax paid funds; taking that into account, the effective return to the Commissioner will be $1,460 per week.[7] The Commissioner opposes the proposal, saying that she has a duty not only to maximise the recovery of outstanding tax, but also to preserve the integrity of the tax system and promote compliance by other taxpayers. Those interests justify declining the proposal and allowing bankruptcy proceedings to continue. Because the duty to maximise recovery is not the only factor governing the consideration of the proposal, neither the Commissioner nor the Court is required to accept it. She points out, too, that she had good reasons for declining the proposal initially:(a) Part of the debt comprises abusive tax penalties, which cannot be written off.3 Though Mr Russell says he is not seeking to have any portion of the debt written off, the fact that there is no realistic prospect that he will pay any significant portion of it means that the practical effect of accepting his proposal will be the same;(b) The proposal was unrealistic in the sense that it would not even cover accruing interest (and, given that the debt would grow faster than payments made, would be an inefficient use of resources);(c) The proposal provided no certainty or finality;(d) Mr Russell has no history of compliance and the companies he is associated with do not have good return filing histories;[8] Taking those reasons into account, she says, not pursuing bankruptcy would not maximise recovery even of the debt currently in issue, and would be an inefficient use of resources.[9] The Commissioner further says that her experience, knowledge and judgment should not lightly be interfered with. Perhaps more importantly, the proposal is also materially similar to that declined on 7 August 2013. The August 2013 proposal was rejected by the Commissioner, a decision upheld in judicial review in the High Court and on appeal to the Court of Appeal.Legal basis for application[10] Mr Russell has made his application on a somewhat confused basis. Initially, he purported to apply under s 29(1)(b)(iii) of the Act. However, that provision simply sets out the form and contents of a bankruptcy notice. There is no evidence brought that the current notice is deficient in any way. Though Mr Russell contends that s 29(1)(b)(iii) requires the Commissioner to accept an adequate compromise if one is made, the disjunctive statutory language makes it clear that that is not the case.3 Tax Administration Act 1994, s 177C(3).[11] Moreover, the statutory test in s 17 for setting aside a bankruptcy notice is clearly not intended to allow an alternative route to the approval of a proposal. Nor isit the case that the Court exercises a 'just and equitable' jurisdiction at the point inthe bankruptcy process where it is being asked to set aside a bankruptcy notice. That jurisdiction arises only when dealing with an application for adjudication, not when dealing with what really amounts to an application to set aside a bankruptcy notice. The Court does, it seems, have a limited jurisdiction in the context of an application to set aside a bankruptcy notice, to approve terms of payment.4 But it would be absurd to say that jurisdiction is aimed at a proposal concerning a debt of the magnitude that Mr Russell makes. He openly acknowledges that there is no prospect that either he or his estate can pay the debt. In reality his proposal is concerned with a disguised write-off of a massive debt, and not simply with the terms of payment, and his submission to the contrary is simply untenable.[12] The Court also has an inherent jurisdiction to set aside a bankruptcy notice, but that is aimed at preventing serious abuses of process arising from procedural defects, usually where a judgment is wrongly obtained by default.5 No allegation which would found an application under that inherent jurisdiction has been made in the present case.[13] The Commissioner has queried whether Mr Russell's intention was to followthe pathway under s 326 of the Act which allows for insolvents to make a proposal tocreditors for the payment or satisfaction of the insolvent's debts. That procedure requires the creditor, in this case the Commissioner, to approve the proposal.Though the Court's approval is also required to validate a proposal,6 s 328 of the Act provides that if the creditors at a creditors' meeting (as required under s 331 of the Act) the chairperson of the meeting must return the proposal to the Court with his orher signed endorsement "Not accepted by creditors", and the registrar must cancel the proposal. The section contains no provision which authorises the Court to4 The statutory form of a bankruptcy notice allows the debtor to "obtain the High Court's approval to the terms of payment".5 Re Wise HC Auckland B227/95, B228/95, 21 June 1995; Russell v Cox [1983] NZLR 654 (CA);Re Reynolds [2014] NZHC 447.6 Insolvency Act 2006, s 331(A).override the creditors' refusal. In any case, Mr Russell's "proposal" does not meetthe minimum statutory requirements.7[14] At the hearing, it became clear that the argument was most appropriately framed in this way. Mr Russell is unable to pay the debt, but he has made an informal proposal for a modest part payment. That should be sufficient justification for the Court to exercise its discretion at this stage of the bankruptcy process, as if it were a residual discretion of the kind available to it under s 37, so as to pre-empt his adjudication (either because it is just and equitable that the Court does not make an order of adjudication, or because for some other reason an order of adjudication should not be made).[15] There is, to some extent, precedent for this type of approach in the context of an application for adjudication. In Re Taylor, for example, Thomas J declined to adjudicate a debtor bankrupt.8 The debtor had committed acts of bankruptcy in the context of a downturn in the country's economy, and Thomas J thought that in that context a person might "find him or herself insolvent through no fault or foible of their own". Considering that the debtor had made a proposal which Thomas J thought was "the best he could do", adjudication would be unnecessarily severe andwould serve no useful purpose. He stayed the bankruptcy, and the debt remained due and owing. Because this is not an application for adjudication, I doubt my jurisdiction to exercise such discretion as the Court has in that way, but because of the conclusion I reach, I proceed to consider the merits of the matter assuming, for the sake of argument, that I do have jurisdiction.[16] The question is, however, an inherently discretionary one, and will involve weighing all relevant factors.Analysis[17] Counsel for Mr Russell says that considerations of res judicata do not arise. The decision is a discretionary one, whereas in the judicial review proceeding it was7 Section 327.8 Re Taylor ex parte Greenwood (1992) 4 NZBLC 102, 875 (HC).not for the judges of the High Court or the Court of Appeal to substitute their ownviews for the Commissioner's. Here, he says, I have a separate and distinct power toconsider the merits under s 29. As such, he is not attacking the findings of the Court of Appeal. In order to exercise the discretion, I should consider how the debt came about; in this case, I should consider the fact that the debt was attributed to Mr Russell as a debt he was responsible for, despite actually being incurred by various companies. That, he says, is a factor that weighs against allowing the process of bankruptcy to proceed, because it would be unjust and inequitable to do so.[18] The Commissioner submits that the proposal may not be the most efficientway of recovering Mr Russell's funds, because if he were to be made bankrupt, theOfficial Assignee would be able to pursue debts owed to him by associated entities and business partners.[19] Even accepting, for the sake of argument, Mr Russell's submission that hehas no assets that merit investigation by the Official Assignee, I cannot see any valid reason to decline to exercise my discretion to allow the bankruptcy process to proceed. I cannot see how Mr Russell's argument in this case amounts to anythingother than a collateral attack on judgments already issued in the matter; and he says that it would be unjust and inequitable to adjudicate him bankrupt.The res judicata issue[20] The principles governing res judicata and issue estoppel in cases such as this were aptly summarised by Osborne AJ in Minter Ellison Rudd Watts v Hampton:9[36] The principle upon which the doctrines of res judicata and of issue estoppel turns is that stated by Lord Maugham LC in New Brunswick Railway Co. v British & French Trust Corporation Ltd:"If an issue has been distinctly raised and decided in an action, in which both parties are represented, it is unjust and unreasonable to permit the same issue to be litigated afresh between the same parties or persons claimingunder them "9 Re Minter Ellison Rudd Watts, ex parte Hampton [2012] NZHC 1715.[37] Halsbury's Laws of England provides this explanation of "Issue estoppel; ingeneral":"Issue estoppel; in generalIssue estoppel means that a party is precluded from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him. Even if the objects of the first and second claims or actions are different, the finding on a matter which came directly in issue in the first claim or action, provided it is embodied in a judicial decision that is final, is conclusive in a second claim or action between the same parties and their privies. Issue estoppel will only arise where it is the same issue which a party is seeking to re- litigate. This principle applies whether the point involved in the earlier decision, and as to which the parties are estopped, is one of fact or one oflaw, or one of mixed fact and law."[21] I respectfully adopt that formulation and consider that it applies both to theliability for and quantum of the debt, and to the nature of the Commissioner's duty inrelation to recovery of tax debts.[22] It is undeniable, at this point, that the entire debt is Mr Russell's as a matter of law. The Commissioner was entitled to reconstruct the companies' debt to himunder section 99(3) of the Income Tax Act 1976 (and sections GB1(1)-(3) of the later Income Tax Act 1994). That reconstruction was done correctly. Mr Russell has already attempted to challenge it in the Taxation Review Authority, the High Court, the Court of Appeal, and the Supreme Court. In none of those proceedings has he been successful.10 They were final, not interlocutory, decisions, in that they finally determined factual and legal issues relevant to the case.[23] As to Mr Russell's contention that it would be unjust or inequitable to allowthe bankruptcy to proceed, Mr Russell has already been unsuccessful in a judicialreview of the Commissioner's decision not to accept his proposal, and an appealagainst that judicial review.11 Those proceedings traversed almost exactly the same ground he now seeks to cover in this proceeding. Both the judicial reviewproceeding and this one rely on an argument that the Commissioner's sole duty is to10 Case Z19 (2009) 24 NZTC 14,217 (TRA); Russell v Commissioner of Inland Revenue (2010) 24NZTC 24,463 (HC); Russell v Commissioner of Inland Revenue [2012] NZCA 128; Russell vCommissioner of Inland Revenue [2012] NZSC 73.11 Russell v Commissioner of Inland Revenue, above n 1; Russell v Commissioner of Inland Revenue, above n 2.recover the greatest possible proportion of the debt now in issue, regardless of broader considerations relating to the integrity of the tax system and the incentives her actions might create for other defaulting taxpayers. That argument was rejected by Asher J and by the Court of Appeal. The current proposal is, in substance, the same as the proposal then at issue. I consider that, if I were to conclude at this point that adjudication would be unjust and inequitable, as Mr Russell asks me to, I would not only have to accept that argument, but I would also be making an implicit finding that the Commissioner considered irrelevant considerations, or was unreasonable in her decisions. Such a finding would itself be the foundation of a successful judicialchallenge. Mr Russell's arguments in that respect have already been considered, andrejected, as a fundamental part of the reasoning in the decisions of the High Court and the Court of Appeal in respect of his judicial review application. The decisions were final, not interlocutory, in character.[24] Though not the basis of my decision on the res judicata issue, I note additionally that both Courts made it clear that, though the function of judicialreview is not to impose their views in place of the Commissioner's, they consideredthat she had made the correct decision.[25] In this particular case, therefore, Mr Russell's application addressesconsiderations so similar to those at play in the judicial review proceeding that, were this Court to reach a conclusion which would allow Mr Russell to impose his proposal upon the Commissioner, that would amount to a collateral attack on the judgments of Asher J and the Court of Appeal. In respect of the legitimacy of the debt, the collateral attack would be on the decisions of the Taxation Review Authority, the High Court, and the Court of Appeal, as well as possibly the Supreme Court, which declined Mr Russell leave to appeal the previous three decisions. Icannot, and will not, differ from the Courts' previous conclusions on those issues.Just and equitable[26] Even if there were no issue of res judicata, as I have discussed, I doubt I have jurisdiction to consider Mr Russell's argument (which I find unconvincing in any case) that bankruptcy would not be a just and equitable outcome in thecircumstances. I accept completely the Commissioner's submissions, and I agreewith her that though she has a duty to recover as much tax as possible, that does not mean she must take any proposal made to her, however manifestly inadequate in the face of the actual debt owing. It might be said that she has a responsibility to recover as much as possible across the tax system; certainly, the goals of preserving the integrity of the tax system and promoting compliance by other taxpayers are reasonable ones.12 The Court of Appeal aptly summarised the relevance of those considerations in this case:13[44] Mr Russell was assessed in January 2003 for $5,690,441.39 in core tax on income he had received of $15,458,855.42. By "core tax" we mean, excluding anyinterest or penalties. Mr Judd confirmed to us that Mr Russell has not paid a single dollar of that tax. Mr Judd submitted Asher J had focused wrongly on the core tax and ignored the fact the very first notice of assessment Mr Russell received included not just that core tax, but "nearly $70m of interest and penalties". We address thispoint further at [62] below, but note that Mr Russell, as a chartered accountant, would have been well aware of the consequences of avoiding paying income tax on the $15.45 million approximately. Given that situation and Mr Russell's concerted efforts, over the ensuing 12 years, to challenge, in every available way and at every level, his liability to tax, the Commissioner was entitled to place considerable weight on taxpayer perceptions of the integrity of the tax system. What would other, voluntarily complying, taxpayers think if it became widely known that the Commissioner had accepted, in August or September 2013, an offer from Mr Russell of $1,000 a week until he died (he was at the time aged 78), or an all in offer of $150,000? Mr Russell's third (lump sum) offer represented just 0.04 per cent of his tax debt or 2.63 per cent of the $5,690,441.39 core tax referred to earlier in this paragraph.[27] This is a case where the public interest clearly lies in broader considerations than just ensuring the payment of the largest possible proportion of the original debt. As I said in Marsh and Perriam, on the subject of public interest in the context of insolvent proposals to avoid bankruptcy:14Finally, approaching the public interest from the perspective of protecting the public may involve wider considerations extending to the integrity of the insolvency regime generally. In particular, the integrity of the insolvency regime, and thus the public interest to which that regime is directed, is undermined where, in the recurring words of this Court, insolvents are seen to dine at the rich man's table while their creditors receive only crumbs: Re Riddiford HC Wellington B91/89, 712 See for example Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 (HC) at [54]-[55]; Bristol Forestry Venture v Commissioner of Inland Revenue [2013] NZHC 2819 at [24].13 Russell v Commissioner of Inland Revenue, above n 2, at [44].14 Re Marsh ex parte Commonwealth Bank of Australia HC Auckland CIV-2009-404-3336, CIV- 2009-404-3337, 16 March 2010 at [39].July 1989; Re Lowndes HC Auckland, B2161/90, 10 May 1991; Re Lal HC Auckland CIV-2007-404-3456, 5 November 2007. In such a case the Court may exercise its discretion to refuse approval under the expedience head notwithstanding that a proposal may be reasonable in the narrower sense contemplated by s 333(3)(b). Even where a proposal places creditors in a better position than that on insolvency, where benefits under a proposal are distributed so inequitably as between the insolvents and their creditors as to give rise to the perception above, the Court will not hesitate to refuse the proposal on the ground of inexpedience.[28] Those principles apply directly here, but the same logic also applies to the tax system. The Commissioner is charged with ensuring the integrity of the system as a whole. In a situation such as this, where Mr Russell has knowingly engaged in large- scale tax avoidance over a period of years, and wasted large amounts of public money on unmeritorious challenges, the broader public interest is clearly engaged against setting aside the bankruptcy notice.[29] It is true that the core tax debt is a very small proportion of the total debt, and that the difference can be attributed to interest and penalties (and interest and penalties on those sums, compounding over a period of years). I can understand how Mr Russell, faced with a debt of this size, might think that the law itself is unjust. But the situation is one of his own making, created by his failure to recognise the core debt and either pay it or reach a compromise with the IRD at an early stage. Whatever Mr Russell thinks about the justice of those consequences, they are the ones laid out in law, and as a matter of law they do not constitute the kind of injustice which might move me to exercise any residual discretion in his favour.[30] Even if there were no issue of res judicata, and putting aside momentarily my serious doubts about jurisdiction, then, there are strong arguments in favour of allowing bankruptcy proceedings to continue, and no basis for setting aside the bankruptcy notice.Result[31] Mr Russell's "informal" proposal is demonstrably not a ground for settingaside the bankruptcy notice.[32] I decline to set aside the bankruptcy notice. The Commissioner may proceed with the filing of an application for adjudication.[33] As costs follow the event, the Commissioner is entitled to costs under the statutory costs regime. It is doubtful whether there is any useful purpose is makingan order for costs, given Mr Russell's lack of apparent resources. If there is anyintention to claim costs other than 2B costs and standard disbursements, then counsel for the Commissioner is to file and serve a memorandum within 5 working days setting out the basis on which such costs are sought, failing which there will be an order for 2B costs plus disbursements to be fixed by the Registrar.[34] If however a memorandum is filed, Mr Russell is to have a further 5 working days from service to file and serve any memorandum in response._____________________Associate Judge Sargisson