JT MARINE FARMS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2010-409-002137

JT MARINE FARMS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2010- 409-002137 30 November 2010IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2010-409-002137BETWEEN JT MARINE FARMS LIMITED Applicant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 30 November 2010 Appearances: J M Fitchett for the Applicant J D Tasker and CS Stanton for the Respondent Judgment: 30 November 2010[ORAL] JUDGMENT OF WYLIE JSolicitors/Counsel J M Fitchet, Rout Milner Fitchett, 167 Hardy Street (john@rmf-law.co.nz) David Tasker, Phillip Laing House, 114 Rattray Street, Dunedin 9054 CS Stanton[1] JT Marine Farms Limited ("JTMF") has filed an originating application seeking to set aside a statutory demand pursuant to s 290 of the Companies Act 1993. [2] An affidavit has been filed in support by a Mr JC Turner, who is the sole director of the company. JTMF seeks to cure an irregularity in the execution of Mr Turner's affidavit under r 1.5 of the High Court Rules. The execution of the affidavit is deficient because Mr Turner resides in Japan, and the affidavit was signed in that country. [3] The respondent — the Commissioner of Inland Revenue — opposes the originating application. An affidavit has been sworn by a Ms Croy in support of the notice of opposition. The Commissioner does not however oppose the making of an order under r 1.5. [4] In my view an order under r 1.5 is appropriate given the circumstances in which the affidavit was sworn. I waive the irregularity accordingly, and direct that the affidavit is to be treated as if it were properly sworn.Background[5] JTMF was formed as a result of the amalgamation of various companies, including Kiwi Marine Farms Limited ("KMF"), and Port Gore Marine Farms Limited ("PGMF"). A number of those companies have outstanding debts owing to the Inland Revenue Department (the "Department"). JTMF has GST owing to the Department. This has been outstanding since November 2008. KMF has outstanding GST owed to the Department which has been owing since November 2007. In both cases, the debts have continued to increase since they were incurred. [6] In April 2010, Mr Turner wrote to the Department proposing a payment plan of $25,000 per month to pay the outstanding GST. He proposed that the repayment plan would commence on 1 June 2010. The Department declined this proposalbecause one of the companies which formed part of JTMF had failed on an earlier occasion to meet its obligations under a previous instalment arrangement. [7] On 25 June 2010, JTMF's accountants wrote to the Department seeking reconsideration of Mr Turner's proposal. The proposal was declined again on 1 July 2010. On 7 July 2010, JTMF's accountants advised the Department that Mr Turner had been attempting to raise finance, but that those attempts had been unsuccessful. [8] In the interim, Mr Turner had paid $25,000 to the Department on 1 June 2010. He made a further payment of $25,000 to the Department on 28 June 2010 but thereafter ceased making payments on the advice of his accountant, given that the Department had not agreed to an instalment arrangement. [9] On 10 September 2010, a statutory demand was served on JTMF pursuant to s 289 of the Companies Act for the sum of $266,472.17. The demand related to outstanding GST. It did not include tax arrears owing by PGMF, as the Commissioner's records show that that company's debt was under an instalment arrangement at the time of issuing the statutory demand. [10] As at 5 October 2010, JTMF owed some $282,500 to the Department. I am advised from the bar that the amount outstanding is now approaching $300,000 including penalties and interest. JTMF acknowledges that it is indebted to the Department in the sum referred to in the demand. [11] Mr Turner in his affidavit asserts that JTMF has attempted to negotiate with the Department for an instalment payment plan. He notes that he has made two payments in accordance with that plan in good faith. He states that the company has attempted to rearrange its affairs through: a) the sale of assets; b) raising finance secured against those assets; and c) obtaining funds from an internal cash flow source.He asserts, however, that the first two options have failed because of the economic downturn in the aquaculture industry and generally.Applicable Law[12] Section 290 of the Companies Act 1993 reads as follows:290 Court may set aside statutory demand(1) The Court may, on the application of the company, set aside a statutory demand. (4) The Court may grant an application to set aside a statutory demand if it is satisfied that— (a) there is a substantial dispute whether or not the debt is owing or is due; or (b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or (c) the demand ought to be set aside on other grounds. [13] Mr Fitchett for JTMF acknowledges that the company cannot rely on s 290(4)(a) or (b) because there is no dispute as to whether the debt is owing and there is no suggestion that JTMF has a counterclaim, set-off or cross-demand. Accordingly, the application is based on s 290(4)(c). [14] The leading case is the decision of the Court of Appeal in Commissioner ofInland Revenue v Chester Trustee Services Ltd.1 In that decision Baragwanath J noted that subs (4)(c) confers jurisdiction on the Court to set aside a statutory demand even if a company is unable to pay its debts and is insolvent. However, his Honour stated that the use of the exceptional power conferred by the section must be confined to cases which clearly justify departure from the fundamental principle that1 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA).insolvency should bring to an end a company's existence. His Honour referred to the long title to the Act and noted that one of the purposes of the Act is to provide straightforward and fair procedures to realising and distributing the assets of insolvent companies. His Honour also said that the purpose of the legislation is to allow the creation of a legal entity distinct from its directors and shareholders, but on the condition that the company is able to pay its due debts. Inability to pay those debts thus triggers certain consequences. He noted that s 290(4)(c) aside, insolvency generally results in winding up and the insolvency is proved by inability to establish a substantial dispute over the debt or by way of cross-claim. [15] I also note the observations of Tipping J, with whom Hammond J agreed, in that regard: I agree that if the company upon which the demand is served cannot show a substantial dispute concerning the debt, or that it has a qualifying cross-claim, the creditor is prima facie entitled to have the company put into liquidation. The creditor is not, however, entitled to liquidation as of right (ex debito justitiae as it was put in earlier times). To take that view would not be consistent with Parliament's direction that there can be other grounds upon which the statutory demand may be set aside. Hence Parliament has contemplated that it may in some circumstances be inappropriate for a company which is undoubtedly insolvent to be placed in liquidation. Furthermore, Parliament has not chosen to categorise what those circumstances are. While it is undoubtedly helpful to identify circumstances which have been held to qualify in the past, it is important not to regard those circumstances as comprising an exhaustive or exclusive list.His Honour noted that the general policy of the Companies Act is that insolvent companies should be put into liquidation. If a creditor seeks such an order, that policy should not be departed from lightly. To justify such departure there must be some factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation.Analysis[16] Here JTMF's application was founded on the proposition that its assets exceed its liabilities.[17] Mr Turner's affidavit has annexed to it a financial statement for the year ended 31 December 2009. It records that the company made a modest profit of some $22,000. It also suggests that it has total equity of some $16.4 million. However, Mr Turner in his affidavit, and Mr Fitchett in Court, acknowledge that the accounts, from a practical perspective, are not particularly accurate. In particular, they show as a current asset of the company an advance to an entity known as New Zealand Trade of some $7.1 million. Mr Turner acknowledges in his affidavit that that is effectively a bad debt. The accounts also record that the company's marine licences are valued at some $15.7 million. Mr Turner acknowledges in his affidavit that under current market conditions, that figure is too high. [18] Mr Fitchett has this morning produced to me, with Mr Tasker's agreement, a copy of an updated valuation prepared by Alexander Hayward Limited dated 31 August 2010, which has only recently become available. That valuation suggests that the company's marine licences have a current market value of some $7.8 million. The company has some liabilities; in particular, it owes Rabobank Limited some $6.4 million. That sum is secured against the marine licenses. [19] As noted, Mr Fitchett's submissions, and JTMF's application, was founded on the proposition that the company's non-current assets exceeded its total liabilities. It may be that that assertion is accurate although the difference would appear to be relatively minimal. [20] Mr Fitchett also submitted to me that the company has taken and is continuing to take reasonable and responsible steps to sell its assets so that it is in a position to repay its debts, including its debt to the Commissioner. [21] I accept that Mr Turner has detailed some steps that he has taken to date to try and realise the company's assets in his affidavit. Unfortunately, however, he has given relatively little detail. It is difficult to determine how reasonable the steps are that have been taken. While I accept that some endeavour has been made to realise the company's assets, to date, those endeavours have been unsuccessful.[22] Mr Fitchett also emphasised that if the company is put into liquidation, it is likely that there will be little if anything available to unsecured creditors. He further noted that the company has offered to give security to the Commissioner by way of a general security agreement ranking behind Rabobank, secured over the marine licenses. The Commissioner has rejected that offer for reasons which are readily understandable. [23] In my view, the matters raised by the company in its application and by Mr Fitchett in his submissions on behalf of JTMF, are not sufficient to clearly justify a departure from the general principle that insolvency should bring an end to the company's existence. The reality is that the GST debts outstanding to the Commissioner have been outstanding for some considerable time. The company has had ample opportunity to put its affairs in order and to try and realise its assets. It has been unable to do so. [24] In my judgment, there is nothing in the facts to distinguish this case from the generality of other cases and there is nothing sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies. The application by JTMF is dismissed. The Commissioner is entitled to his costs on a 2B basis including his reasonable disbursements. I record that disbursements are not to cover the costs of counsel travelling to Christchurch. In the event that there is any dispute regarding costs or disbursements, the same is to be referred to the Registrar.Rulings[25] I now turn to the consequences of this ruling. [26] The Commissioner requested that I immediately place the company into liquidation pursuant to s 291(1)(b) of the Act on the grounds that the company is unable to pay its debts. Mr Fitchett resisted that application and requested that the company should be given a short fixed time within which to endeavour to raise the requisite monies to pay the Commissioner the amount of outstanding GST owed. In that regard, Mr Fitchett referred to a letter which he had sent to the Department dated 29 November 2010, which was shown to me with Mr Tasker's consent. That letteradvises, and it is not contested, that Mr Turner has in a number of other situations been able to resolve financial difficulties, albeit at the last moment. [27] Mr Tasker was not strongly opposed to the company being given one last opportunity to pay the debt. Moreover, the company is not currently incurring further debt, other than to the Inland Revenue Department. [28] It was suggested to me that it might be possible to adjourn the Commissioner's application that the company be placed into liquidation until early in the new year and to record on the Court file that the liquidation would then proceed if the debt had not been paid. I have considered that possibility but I am not attracted to it. It seems to me that it could potentially cut across the rights of other creditors. [29] In the circumstances, I order that JTMF pay the debt within 10 working days of today's date and that in default of payment, the Commissioner may make an application to put the company into liquidation._________________________Wylie J