NEWMARKET TRUSTEES LTD V COMMISSIONER OF INLAND REVENUE HC AK CIV 2009-404-008108

NEWMARKET TRUSTEES LTD V COMMISSIONER OF INLAND REVENUE HC AK CIV 2009-404- 008108 14 April 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2009-404-008108UNDER the Companies Act 1993 BETWEEN NEWMARKET TRUSTEES LIMITED Applicant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 13 April 2010 Counsel: DB Hickson for applicant RW Elika and KB Nordstrom for respondent Judgment: 14 April 2010 at 12 noonJUDGMENT OF ASSOCIATE JUDGE FAIRE [on application to set aside statutory demand]This judgment was delivered by me on 14 April 2010 at 12 noon, pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: DB Hickson, PO Box 56 613, Auckland for applicant Inland Revenue Department, PO Box 76 198, Manukau for respondent[1] The applicant company applies to set aside a statutory demand dated 16 November 2009. The statutory demand seeks payment of $293,251.23. The statutory demand alleges that the debt claimed represents money due and owing for goods and services tax and income tax. [2] The application is made in reliance on the Companies Act 1993, s 290(4). Section 290(4) provides:290 Court may set aside 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.[3] Counsel confirmed that the application was filed and served within the time prescribed by the Companies Act 1993, s 290(2). No issue as to the timeliness of the application therefore arises. [4] Counsel further confirmed that I should make an order with immediate effect extending time for compliance with the statutory demand pending my delivery of this judgment. I confirm that such order was made by me pursuant to the Companies Act 1993, s 290(3). [5] Mr Hickson confirmed that the application did not assert that: a) There is a substantial dispute whether or not the debt is owing or is due; or b) that the company appears to have a counterclaim, set-off or cross- demand and the amount specified in the demand less the amount ofthe counterclaim, set-off or cross-demand is less than the prescribed amount. In short, the application does not rely on the Companies Act 1993, s 290(4)(a) or 290(4)(b). [6] Mr Hickson submitted that the order sought was justified on an application of the Companies Act 1993, s 290(4)(c). Before analysing the facts of this case it is appropriate that I refer to the examination of this question by the Court of Appeal inCommissioner of Inland Revenue v Chester Trustee Services Ltd:1That said, I agree with Baragwanath J that the general policy of the Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other 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. If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor's prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue.[7] The company acts as a bare corporate trustee for the clients of a firm of barristers and solicitors, Castle Brown. It has no assets in which it holds a beneficial interest. [8] One of the partners of the law firm, Mr Brown, described the extent of the company's operation as follows:Newmarket Trustees is a corporate trustee for 118 different trusts. Newmarket Trustees is also a registered proprietor of a 145 different properties in which clients of Castle Brown have an interest . The trust is also the owner of shares in companies, both listed and unlisted, that are operated by clients of Castle Brown.[9] Mr Brown then explained the background to the current demand. One of the trusts for which Newmarket Trustees Ltd is a corporate trustee is the Southern Lights Trust. It is a family trust which was established for Castle Brown's client, Mr Tony1 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at 397 per Tipping J.Goh. Mr Goh apparently undertook the task of managing, on a day-to-day basis, the affairs of the trust, including the filing of all necessary tax returns. Mr Brown says that Mr Goh did not disclose to Newmarket Trustees Ltd that the trust had tax obligations which it had not satisfied. Precisely why Newmarket Trustees Ltd did not take a more active interest in the affairs of the trust was not directly explained. Mr Hickson acknowledged that legally Newmarket Trustees Ltd assumed liabilities on behalf of the trust, including the liabilities for tax. The trust deed, in respect of which the company was party to the execution of, contains the not uncommon indemnity provision in respect of liabilities assumed by the trustees. Clause 19(a) of the deed establishing the trust provides:The trustees shall not be liable for and shall be indemnified by and out of the trust fund in respect of any loss or liability which may be sustained or incurred by reason of the exercise, the mode of exercise, or the non-exercise of any powers, authorities or discretions hereby or by law conferred upon them and no trustee shall be liable for There follows a number of matters that do not have a direct bearing on this case. [10] The above circumstances, Mr Hickson submitted, justified the exercise of the discretion under the Companies Act 1993, s 290(4)(c) because: a) No useful purpose or public benefit, he said, would be served by putting the company into liquidation as it was a bare corporate trustee and had no assets; b) It had not involvement whatsoever in the day-to-day management of the debtor trust, Southern Lights Trust, and ought not to be held accountable for the actions of its co-trustee with responsibility for all such matters particularly in circumstances when the co-trustee had failed to disclose to it that Southern Lights Trust had tax obligations which had not been met; and c) There would be considerable and wholly needless inconvenience and disruption to the affairs of a number of clients of Castle Brown Solicitors if this company was put into liquidation.He explained that the needless disruption and inconvenience caused by the liquidation of the company would involve a partner of the law firm in: a) Arranging preparation and execution of deeds of retirement of trustee and appointment of a new trustee for the 118 trusts for which the company was corporate trustee; b) Arranging preparation and execution and registration of memorandum of transfer from Newmarket Trustees Ltd to a new trustee in respect of 145 properties for which Newmarket Trustees Ltd is a registered proprietor; c) Obtaining of consent of mortgagees to the above-mentioned 145 memoranda of transfer; d) In respect of all companies listed on the New Zealand Stock Exchange of which Newmarket Trustees Ltd is a shareholder preparing, executing and registering share transfers from Newmarket Trustees Ltd to a new trustee with appropriate notification to the Companies Office; and e) In respect of those companies not listed on the New Zealand Stock Exchange in which Newmarket Trustees Ltd was a shareholder preparing, executing and registering share transfers from Newmarket Trustees Ltd to the new trustee and arranging the filing of appropriate annual returns in the Companies Office recording the changes. He further submitted that as matter of public policy, the demand should be set aside because a failure to do so might lead to a situation where partners in a number of law firms would cease to provide a corporate trustee service to clients. [11] The evidence before me is lacking in a number of important areas. No information is provided as to what attempts were made by the company as trustee, to have the Southern Lights Trust pay the tax from its assets. No information isprovided as to the personal circumstances of the other trustee. No information is before the court which would enable any assessment to be made as to what prospects the liquidator, if appointed, would have in pursuing the indemnity rights provided by the Trust Deed, clause 19(a) against the Southern Lights Trust's assets. That, in my view, is particularly important because it may well be the only practical way the Commissioner of Inland Revenue can effect real recovery of the outstanding taxes which appear to be due by this trust's operation. [12] Mr Elika, in his carefully prepared submissions, set out the relevant provisions of the Tax Administration Act 1994 and the Goods and Services Tax Act 1985 pursuant to which the liability is imposed on the applicant as a taxpayer in this case. I need not set that out in this judgment because no issue was specifically taken with it by Mr Hickson. [13] Mr Elika referred to Foundation Custodians Ltd v Morton 2 where the judge summarised the well-established principles of trustee law as follows:a) A trustee is personally liable for all debts incurred in the conduct of a trust, and the personal assets of the trustee are available to meet the liabilities of the trust. b) A trustee will normally have indemnity in the first instance from the assets of the trust in respect of liability in a trust transaction: Trustee Act 1956, s 38. c) Trustees may avoid personal liability for the debts of the trust under a contract with a third party if their liability is expressly limited to the assets of the trust and their personal liability is expressly excluded by the terms of the contract. The need for an express provision in the contract arises because there is a presumption in favour of personal liability: NZHB Holdings Ltd v Bartells at [41] per Baragwanath J. d) Whether the personal liability of a trustee has been excluded will depend on the language of the particular contract. InNZHB Holdings the following language, quoted at [10] and [42], was sufficient to exclude liability for an independent trustee but not for anyone else:Persons, except independent trustees, who sign this document shall at all times remain personally liable for all obligations of the persons on whose behalf they have signed. An independent trustee is a person who is not a settler of the trust or has no rights2 Foundation Custodians Ltd v Morton HC Auckland CIV-2009-404-3112, 2 November 2009 at [24].to an interest in or assets of the trust except as a trustee of the trust.As Baragwanath J also pointed out in NZHB Holdings at [43]:It is common for contractual language, like that of a statute, to offer more than one possible literal meaning. In that event a major consideration is what construction best conforms with settled legal principle and settled commercial practice and thus suggests the meaning most reasonably to be ascribed to contracting parties.e) A trustee's right to be indemnified from the assets of the trust may be lost if the trustee breaches duties owed to the trust: Butler (ed) Equity and Trusts in New Zealand (2 ed, 2009) at 449-451; Laws NZ, Trusts Reissue 1, at paras 439, 455 and 459.[14] Mr Elika referred to Commissioner of Inland Revenue v Chester Trustee Services Ltd3 to which I have already made reference. That case concerned a limited liability company which had no assets and which held a position as trustee in approximately 35 trusts. They were established on behalf of solicitors' clients. Counsel for the company in that case raised a similar submission to that advanced by Mr Hickson in this case. In short, it was alleged that there was no realistic prospect of the taxpayer trading in the future. It was further alleged that any indemnities which the taxpayer held were worthless. It was also said that if the taxpayer was placed into liquidation it would have to resign all other trusteeships with consequential transfers of shares in titles to land. [15] I have already referred in [6] to the Court of Appeal's guidance in the interpretation of the Companies Act 1993, s 290(4)(c). It is appropriate that I add to that that which was said in the principal judgment of Commissioner of Inland Revenue v Chester Trustee Services Ltd:4Section 290(4)(c) must be exercised in conformity with the purposes of the measure on which it is conferred. Use of the exceptional power must be confined to cases which clearly justify departure from the fundamental principle that insolvency should bring the end of the company's existence.3 Commissioner of Inland Revenue v Chester Trustee Services Ltd above n 1, at 397.4 Ibid at [48] per Baragwanath J.[16] Baragwanath J at [52] referred to the safeguards which exist in relation to solicitors' nominee companies. I am not dealing with a solicitors' nominee company in this case and therefore those considerations do not assist in the determination of this application. [17] Baragwanath J at [84] added very importantly, having regard to the matters advanced by Mr Hickson in this case that:The combination of the presumptive desirability of liquidation of a company that has incurred debt through trading and of the position of the beneficiaries under the numerous trusts outweighs in my opinion the cost of the conveyancing necessary to remove the continuing trusts from Chester's hands.[18] To that I would only wish to add that the court will not endorse any waiver by a trustee of its obligations. The fact that, in this case, the applicant company took no active part in the day-to-day management of the trust cannot, in my view, be advanced as an excuse justifying the exercise of the discretion under the Companies Act 1993, s 290(4) in its favour. [19] The Court of Appeal in Commissioner of Inland Revenue v Chester Trustees Services Ltd5 declined to set aside the statutory demand. [20] Mr Hickson sought to distinguish the facts in that case. Whilst there are differences, the general guidance given as to how the discretion in the Companies Act 1993, s 290(4)(c) is to be exercised makes it plain to me that this is not an appropriate case to set aside the statutory demand. [21] There is a further matter which, in my view, is of significance in this case. As already recorded, I have been provided with no specific evidence as to the actual asset position of the Southern Lights Trust. Nor have I been provided with any evidence as to any inquiry made by the applicant company of the other trustee, Mr Goh, about the trust's assets. If a liquidator is ultimately appointed following an application under the Companies Act 1993, s 241, the Trust Deed, clause 19 opens the way for a claim to be made by the liquidator against the trust's assets so that the5 Ibid.liquidator can recoup sufficient funds to pay the creditor. That appears to be the primary method by which the Commissioner can, in fact, effect recovery of this debt. To refuse to set aside the statutory demand under the Companies Act 1993, s 290(4)(c) would deny that result and possibly leave the Commissioner without any effective remedy. When that is taken into account, the exercise of the discretion under the Companies Act 1993, s 290(4)(c) in favour of the applicant company simply cannot be justified. [22] In the course of argument I took the opportunity of discussing with counsel what order was appropriate having regard to the provisions of the Companies Act 1993, s 291. Both were in agreement that some time should be allowed for further discussion between the applicant company and its solicitors and the Commissioner. It is for that reason that I adopt the option available to the court under the Companies Act 1993, s 291(1)(a). I have selected a period of 20 working days because, in the overall scheme of things, that should be sufficient time for such discussion to take place and for the Commissioner to determine whether he would then wish to make an application under the Companies Act 1993, s 241.Orders[23] The application to set aside the statutory demand is refused. The applicant company shall pay the debt demanded in the statutory demand within 20 working days of the date of this decision. In default of payment, the respondent may make an application to put the company into liquidation.Costs[24] The respondent is entitled to costs which I order be paid by the applicantbased on Category 2 Band B plus disbursements as fixed by the Registrar. _____________________ JA Faire Associate Judge