SIMPSON AND DOWNES v COMMISSIONER OF INLAND REVENUE HC WN CIV-2010-485-1860

SIMPSON AND DOWNES v COMMISSIONER OF INLAND REVENUE HC WN CIV-2010-485-1860 17 May 2011IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2010-485-1860BETWEEN RICHARD GRANT SIMPSON ANDTIMOTHY WILSON DOWNESApplicantsAND COMMISSIONER OF INLANDREVENUERespondentHearing: 30 March 2011Counsel: J Toebes and C Carey for applicantsH Ebersohn and P O'Regan for respondentJudgment: 17 May 2011RESERVED JUDGMENT OF DOBSON JContentsIntroduction ....................................................................................................................................... [1]The provisions...................................................................................................................................[11]Approach to interpretation ............................................................................................................. [15]Position as caveator ......................................................................................................................... [45]Alternative bases for attributing liability to the receivers ........................................................... [51]Introduction[1] In form, these proceedings constitute an originating application by receivers under s 34 of the Receiverships Act 1993 for directions. In substance, the proceedings reflect a dispute as to whether the receivers are personally liable to account for goods and services tax (GST) on the sale of six properties effected by them.[2] The extent of GST without the addition of any interest or penalties amounts to some $1.215 million. The respondent (the Commissioner) is holding an amount which it is agreed would be accepted in full and final settlement of the GST liability in respect of the relevant supplies, in the event that the receivers are held to be personally liable to pay the GST. On the other hand, if it is decided that there is no personal liability on the receivers, then it is agreed that the money would be returned to them with the consequence that the Commissioner would be left as an unsecured creditor of the company in respect of which the receivers have been acting.[3] The parties also agreed on a set of facts treated as sufficient to assess the arguments arising, and on the terms of the questions that would be posed in order to obtain the directions sought by the receivers.[4] The company in receivership, Capital + Merchant Investments Limited (CMI) is owned by the same shareholders as a former finance company, Capital + Merchant Finance Limited (CMF), which is in receivership and liquidation. CMI was formed to acquire all the assets of CMF, which acquisition CMI financed by borrowings from Fortress Credit Corporation (Australia) II Pty Limited (Fortress). To secure those advances, Fortress took a General Security Agreement over all the assets of CMI, which comprised the assets it had acquired from CMF. Those assets included secured loans over the properties, the subsequent sale of which are the taxable supplies giving rise to the GST liabilities relevant in the present proceedings.[5] After CMI defaulted on its obligations to Fortress, the present applicants were appointed as receivers of CMI. There were instances of default by the mortgagors of each of the mortgaged properties, and the receivers have exercised powers of sale contained in the mortgages over the six properties. CMI'sindebtedness to Fortress exceeded the gross realisation of all assets including the proceeds of the mortgagee sales.[6] I was not advised, but assume, that the indebtedness of each of the mortgagors to CMI was greater than the amounts realised on sale of their properties. Certainly, there was no reference to any competing claim to account to the mortgagors for amounts beyond what was owing by them.[7] A sample of the agreements for sale and purchase that was exhibited to an affidavit from Mr Downes used the form approved by the Real Estate Institute of New Zealand Inc and the Auckland District Law Society, in which the provision forpayment of the purchase price is stipulated as the price agreed by the parties, ―plus GST (if any). The agreement stipulated CMI (In Receivership) as the vendor,acting in exercise of its mortgagee's powers. The settlement statement identified thevendor in the same way, and stipulated the purchase price as the price agreed in the agreement for sale and purchase, plus GST on that amount. I am to assume that all of the transactions were settled in accordance with settlement statements prepared in that way.[8] The essence of the argument for the receivers is that the provisions of the Goods and Services Tax Act 1985 (GST Act) attribute the liability to pay that GST to the mortgagee, that the Commissioner is an unsecured creditor of the mortgagee, and that there are no grounds for attributing personal liability to the receivers to pay the amounts of GST included in the sales, and recovered by them. That analysis would leave the receivers free to account to Fortress for the net proceeds of sale, plus the amount recovered from the purchasers as the GST payable on the sales.[9] The contrary stance for the Commissioner is that the GST Act imposes a tax on supplies, levied upon those effecting taxable supplies so that liability is imposed on those through whose hands the consideration for the taxable supplies had to pass. Here, the relevant provisions are to be interpreted as attributing the liability to the receivers as the persons in effective control of the taxable supplies of property. There were certain additional and alternative arguments advanced, and I shall address them later in this judgment.[10] Mr Toebes argued that if the approach just described was intended, then it has not been achieved in the anomalous situation where the mortgagee exercising powers to sell (supply) property belonging to the mortgagor was not obliged to be registered for GST because its business was solely that of exempt supplies, in the nature of financial services. He argued that the receivers are not caught as suppliers by any ofthe provisions of the GST Act. They are exercising the mortgagee's powers so thattheir conduct comprises a supply by the mortgagee. Here, CMI filed a GST returnbut did not make payment of the amounts involved. The Commissioner had rights as an unsecured creditor of CMI.The provisions[11] The directly relevant provisions of the GST Act are ss 5, 17 and 58, the material parts of which provide:5 Meaning of term "supply"(1) For the purposes of this Act, the term supply includes all forms of supply.(2) For the purposes of this Act, where any goods acquired (whether interms of a hire purchase agreement or otherwise) or produced by a person (that person being referred to hereafter in this subsection as the first person) are sold, under a power exercisable by another person (that person being referred to hereafter in this subsection as the second person), in or towards the satisfaction of a debt owed by the first person, those goods shall be deemed to be supplied in the course or furtherance of a taxable activity carried on by the first person (being deemed a registered person), unless—[two exceptions then follow which are not relevant for present purposes]17 Special returns(1) Where goods are deemed to be supplied by a person pursuant to section 5(2) of this Act, the person selling the goods, whether or not that person is a registered person, shall —(a) Furnish to the Commissioner in the prescribed form a return showing—(i) That person's name and address and, if registered, registration number; and(ii) The name, address, and, if registered, registration number of the person whose goods were sold; and(iii) The date of the sale; and(iv) The description and quantity of the goods sold; and(v) The amount for which they were sold and the amount of tax charged on that supply; and(vi) Such other particulars as may be prescribed; and(b) Pay to the Commissioner the amount of tax charged on that supply; and(c) Furnish to the person whose goods were sold, details of the information shown on the return referred to in paragraph (a) of this subsection,—and the person selling the goods and the person whose goods were sold shall exclude from any return, other than a return required pursuant to this subsection, which either or both may be required to furnish under this Act, the tax charged on that supply of goods.[12] By the terms of s 58(1), for the purposes of that section:―Incapacitated person means a registered person who dies, or goes intoliquidation or receivership, or who becomes bankrupt or incapacitated.―Specified agent means a person carrying on any taxable activity in acapacity as personal representative, liquidator or receiver of an incapacitated person, or otherwise as agent for or on behalf of or in the stead of an incapacitated person.[13] The operative provision in s 58(1A) is as follows:58 Personal representative, liquidator, receiver, etc(1A) Despite sections 5(2) and 60, a person who becomes a specified agent is treated as being a registered person carrying on the taxable activity of the incapacitated person during the agency period, and the incapacitated person is not treated as carrying on the taxable activity during the period.[14] Although not directly relevant to analysis of the capacity in which the receivers participated in the relevant supplies, s 51B is also relevant in broadening the categories of persons to whom liability will be attributed in other circumstances where taxable supplies occur. It provides:51B Persons treated as registered(1) For the purposes of Parts 3 and 6, and of Part 9 of the Tax Administration Act 1994, the following are treated as registered persons:(a) a person who is not otherwise a registered person but who supplies goods or services, representing that tax is charged on the supply:(b) if goods are treated by section 5(2) as being supplied by a person—(i) the person selling the goods, if subparagraph (ii) does not apply; or(ii) the person whose goods are sold, if the person supplies a written statement under section 5(2)(a) to the person selling the goods and the Commissioner considers that the written statement is incorrect:(c) a person whose registration has been cancelled under section 52(5) with effect from the original date of registration.(2) If a person referred to in subsection (1) represents that tax is being charged on a supply that they make in a taxable period, the person is liable to pay the amount of the tax.(3) If a person is treated by subsection (1)(c) as being a registered person, the person is treated as being registered from the original date of registration to the date when the Commissioner cancels the registration.(4) For the purposes of this Act, in relation to a supply to which section 11(1)(mb) applies, a recipient who is treated as a supplier under section 5(23)—(a) is treated as registered from the date of the supply under section 5(23); and(b) must apply under section 51(2) to the Commissioner for registration.Approach to interpretation[15] Mr Ebersohn urged that I adopt a purposive approach to the interpretation of the relevant provisions. He cited the judgment of Elias CJ and Anderson J in Ben Nevis Forestry Ventures Ltd & ors v Commissioner of Inland Revenue as reflecting the current approach.1 In endorsing a purposive approach, that judgment observed that the meaning of any term used by the statute in a particular provision must be contextually accurate. That was followed by:2we do not therefore accept that when considering the application of a specific tax provision, and before considering the question of avoidance, the Court is concerned primarily with the legal structures and obligations created1 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009]2 NZLR 289 at [2], [4]-[5].2 At [5]. The quotation is from Barclays Mercantile Business Finance Ltd v Mawson [2005]1 AC 684 at [32].by the parties, and not with the economic substance of what they do. Itdepends on the context. The critical question is whether ―the relevantprovision of the statute, upon its true construction, applies to the facts asfound.[16] In Ben Nevis, the Supreme Court was considering the approach to interpretation of specific taxing provisions in the Income Tax Act 1994 in the context of their relationship with a general anti-avoidance provision. However, I consider the passage just cited to be appropriate in considering the scope of the provisions of the GST Act that are relevant in the present case.[17] I note that a somewhat different emphasis on a purposive approach to interpretation of revenue statutes may be discerned from the judgment of Tipping, McGrath and Gault JJ in Ben Nevis, but I do not discern a relevant difference on this present point. In that judgment, there is more caution suggested in adopting the approach from English cases on use of a purposive approach to interpretation, in light of the absence from the United Kingdom statutes of general anti-avoidance provisions. More generally, however, both judgments for the Supreme Court in Ben Nevis recognise the appropriateness of a purposive approach to specific taxing statutes.3[18] I also acknowledge that the requirement for prospective certainty of the application of taxing statutes, and the potential severity of the consequences of taxpayers being found liable for income tax or other taxes on a construction of a taxing statute that was not literally and abundantly clear, have been among reasons previously cited for a narrower approach to interpretation in the cases of taxing statutes, than more liberal approaches perceived as appropriate for statutory interpretation in other contexts. In light of the approach to a purposive interpretation in the judgments in Ben Nevis, and having regard to the context in which this particular dispute has arisen, I am not persuaded that purposive considerations should be excluded from the analysis as to the proper interpretation to be applied.[19] The first issue is what interpretation is to be given to the breadth of thosecontemplated as ―the second person for the purposes of s 5(2) of the GST Act. The3 See, for example, [109]-[110].Commissioner urges that it is capable of a wider interpretation, so that a receiver of a mortgagee who is in control of the supply in commercial and practical terms, and who has the consideration for the supply (including the payment of GST) passingthrough their hands, could be treated as ―the second person. The receivers argue fora narrower interpretation so that ―the second person can only be the mortgagee whose powers to procure a sale of the mortgagor's property must be invoked in thename of that mortgagee to enable the transaction to occur.[20] The evident purpose of s 5(2) is to address the consequences of supplies occurring where the owner of goods has granted security over them, and after default on the terms of secured borrowings the secured creditor has effected the supply of the goods to a third party, to reduce the debt owing by the owner/debtor.[21] Achieving complementarity in respect of taxable supplies and receipts is a basic aim of this tax on supplies. Although some anomalies may not be avoided, theaim is to match a buyer's entitlement to an input tax credit on the GST component ofthe cost of acquisition, against the seller's obligation to account for output tax on itssale. There is also a complementarity for the same registered person obtaining the benefit of an input credit when being supplied, and the off-set of that when the same person assumes the burden of an output tax when making on-supplies to others. To facilitate that matching of credits on the way in and liabilities on the way out, s 5(2) deems supplies in the name of a secured creditor, exercising powers of sale, to be supplies by the mortgagor.[22] Section 5(2) applies in all cases where a sale is effected by the exercise of powers vested in someone other than the owner. Within that category, it will apply in relation to the person who exercises the powers over the property of another. Because the purpose of the provision is to catch and re-categorise transactions involving supply, arguably the critical element is not the identity of the person empowered to sell, but the identity of the person practically responsible for thatpower being exercised. The relevant elements of the identity of the ―second personas that expression is used in the sub-section is that the second person be the person who has sold, under a power exercisable by a person other than the owner, for the purposes of satisfying a debt owed by the owner. The section does not specify thatthe second person has to be the person to whom the debt was owed. Given thosecriteria, on the wording of the section the ―second person could conceivably be amortgagee, or where the mortgagee is in receivership, the receiver of the mortgagee,where that person effects the transaction that is to be deemed a supply by the ―first person, ie the owner/mortgagor.[23] Mr Toebes resisted any means by which the definition of ―second person ins 5(2) can be extended in this way. He argued that the critical element is the identity of the person by whom the power of sale was exercisable, and the answer in all respects can only be the mortgagee. The receivers did not have independent standing to conduct the sale, and rather did so as agents of the mortgagee. He cited s 6(3) of the Receiverships Act 1993 which provides for the status of receivers as agents of the company to be the default position, unless the security under which they are appointed specifies otherwise. In this case, Mr Toebes advised that the terms of the security do not alter that default position. The sample agreement for sale and purchase annexed to Mr Downes' affidavit specifies that the company (inreceivership) was the vendor in exercise of the power of sale under the specified mortgage. He signed as vendor, without any stipulation as to the capacity in which he did so.[24] The receivers resist any attribution of personal involvement in the sales as cutting across the settled pattern of receivership law in which receivers act in the name of the company, and only have status as its agents. Exceptions to that will arise where receivers elect to conduct the business of a company in receivership, and in certain such circumstances are treated as assuming personal liability for business transacted at their direction.[25] The status of receivers as agents of the company acting without the prospect of personal liability is not entirely sacrosanct. Were it necessary to do so in order to make the provisions work, I would be prepared to consider adopting the wider interpretation of s 5(2) so that in circumstances such as the present, receivers wouldhave standing as ―the second person where they exercised commercial and practical control over the transaction involving a taxable supply. It is artificial to treat the sales as being conducted by the mortgagee when the power to do so has been takenout of its hands, and may have occurred contrary to its wishes. I accept that to attribute separate status to the receivers would be inconsistent with the general structure of the law in relation to the conduct of receiverships. However, had it been necessary, that would at least arguably have been justified on the purposive and contextual approach to interpretation adopted in Ben Nevis, when supported by public policy concerns to promote the effective working of the GST provisions in accordance with their evident purpose.4[26] The focus on the person actually effecting the taxable supply is supported by the terms of s 17 of the GST Act.5 Section 17(1) imposes the obligation to file aspecial return on ―the person selling the goods, and the obligation is imposed onthat person whether or not he, she or it is a registered person for the purposes of the GST Act. The details required to be furnished to the Commissioner require relatively detailed knowledge of the circumstances of the supply, consistent with the person completing the return having had actual involvement in it. Section 17(1)(b) imposes the obligation on the person completing the return to pay the Commissioner the amount of tax charged on the supply. It is a fair assumption that Parliament has imposed this obligation in those terms because of an expectation that the person completing the return and effecting the sale will be the person who received the consideration for the supply, including the charge for GST. Read together, ss 5(2) and 17 reflect the purpose of the GST Act to impose the obligations to account for GST, where someone other than an owner makes taxable supplies, on the person with practical control of that supply.[27] However, the Commissioner did not suggest that it was necessary to read ss 5(2) and 17 so widely in the present circumstances because the GST Act contains another provision which explicitly addresses situations such as those in which amortgagee exercising powers of sale is itself ―incapacitated.[28] This analysis relies on s 58 of the GST Act. Mr Ebersohn's argumentaccepted that in present circumstances, the ―second person for the purposes ofs 5(2) may well be CMI. However, CMI's status as an incapacitated person for the4 See, for example, [62] to [64] below.5 Cited at [11] above.purposes of s 58 means that the receivers, as its specified agent, are deemed to be carrying on the taxable activity, which in any event is deemed to be that of the mortgagor.[29] Section 58 appears in Part 9 of the GST Act which is headed ―Special cases.The sections in that part deal with the attribution of liability in cases such as groups of companies, branches and divisions of a registered person, and unincorporated bodies. Part 9 includes s 60 (referred to in the opening words of s 58) which deals with the position of liability for agents and auctioneers. The purpose of that part of the GST Act is to relate the participation in the provision of taxable supplies to the attribution of the GST liability consequences of doing so.[30] In s 58, receivership is treated as a form of ―incapacity so that conduct by receivers is treated as being that of a ―specified agent of a company in receivership. When those circumstances apply, the taxable supplies effected by a specified agent on behalf of the incapacitated person are attributed to the specified agent. Accordingly, on Mr Ebersohn's analysis, if ―the second person for the purposes ofs 5(2) was CMI, then s 58 recognises that it is not participating in its own rightbecause of its receivership, and the receivers are to be treated as ―the second person.[31] However, Mr Toebes objected to this approach on the ground that CMI was not a registered person because all of its own business was exempt. It therefore fallsoutside the definition of ―incapacitated person and furthermore, it did not carry on ataxable activity within the meaning of that phrase in s 58(1A).[32] Mr Toebes's attempt to exclude CMI overlooks the structure of s 5(2) of the GST Act. When sales occur in satisfaction of debts, the GST Act deems it not to be the activity of the second person (mortgagee), but rather that of a supply in the furtherance of the taxable activity carried on by the first person (each of the mortgagors, who were all registered persons). Consistently with that, on the terms of s 17, persons involved in supplies that are caught by s 5(2) are obliged to furnish a return whether or not that person is registered. Section 17 also imposes the obligation on that person, whether registered or not, to pay the amount of tax charged on that supply.[33] The structure of these provisions, and in particular s 58, would be frustratedunless the reference to ―a registered person in the definition of ―incapacitated person were interpreted to include persons who would otherwise be liable to file areturn under s 17, whether or not they were registered. That interpretation achieves consistency, when there can be no suggestion that s 58 was intended to create an anomaly for those situations where the obligations of being registered apply, irrespective of whether the person is actually registered.[34] I do not consider that the drafting is inadequate to effect this outcome, which I treat as consistent with the purpose of the GST Act, and the particular provisions that are relevant to it. The contrary outcome contended for by Mr Toebes could certainly not credibly be attributed to Parliament as an intentional outcome of the drafting of this revenue statute. Nor is the inter-relationship between the various provisions and the interpretation I have settled on for each of them so forced as to do any form of violence to the words used in each of those sections.[35] In his submissions for the Commissioner, Mr Ebersohn made a concession that the provisions of s 58 do not apply to the GST liability of a mortgagee for sales conducted in its name when that mortgagee is in receivership. This was because mortgagee sales are not conducted in the course of the mortgagee's business whenthe GST Act treats them as being in the course of the mortgagor's taxable activity.Rather, Mr Ebersohn treated s 58 as only applying to the taxable supplies of the mortgagee within its own business, and not to the GST consequences of transactions it effects as a deemed part of the business of the mortgagor.[36] I am not persuaded that that concession is necessary, so as to exclude the application of s 58 to the present circumstances. The effect of s 58(1A) is to substitute the receivers for a company in receivership in relation to taxable activity of the company in receivership. The effect of ss 5(2) and 17 is to attribute to the mortgagee responsibility for taxable activity that is treated as if it was the activity of the mortgagor. It is nonetheless conducted by the mortgagee, except where themortgagee's incapacity means that that activity is carried out by a receiver in the mortgagee's name. In that chain of involvement, the receiver becomes the secondperson contemplated in s 5(2) and the person ―selling the goods for the purposes ofs 17.[37] Mr Ebersohn's alternative was to invoke the provisions of s 51B of the GSTAct, which he argued constituted ―another route to the same end. That section is setout in [14] above.[38] However, I am not satisfied that s 51B is indeed an alternative. What it illustrates is that the structure of the GST Act is intended to operate by imposing liability for taxable supplies on those responsible for effecting the transaction. In circumstances that are likely to be quite distinct from those applying when ss 5(2) and 17 are invoked, s 51B(1)(a) catches the consequences of an otherwise unregistered person making a supply on terms representing that tax is charged on that supply. Then s 51B(1)(b) treats the person selling the goods in circumstances caught by s 5(2) as a registered person. The consequence is that that representor will be treated as a registered person and under s 51B(2) is liable to pay the amount of the tax that has been represented.[39] If Mr Toebes is correct that the person who sells the goods on the present facts remains the mortgagee, then the representation that tax is charged on the supply is a representation attributable to the mortgagee and not the receivers.[40] However, given the recognition of companies in receivership as having an incapacitated status, I treat the terms of s 51B as supporting the extension I haveproposed to the scope of ―registered person in the definition of ―incapacitated person in s 58. Because s 51B(1)(b) treats the person selling the good under s 5(2) (ie on this analysis, the mortgagee) as a registered person, this mortgagee is indeed an incapacitated person as that expression is used in s 58. Consistently, if thereceivers' conduct in representing that tax is charged on the supply, as that concept isaddressed in s 51B(1)(a), is to be treated as the conduct of the mortgagee, then again that person is to be treated as registered, also bringing the mortgagee within thedefinition of an ―incapacitated person in s 58.[41] Mr Toebes argued that s 51B has no relevance to the present argument because it only introduces an extended definition of the persons who are to be treated as registered for the purposes of the GST Act, for the purposes of three parts of the Tax Administration Act 1994. He further argued that none of those parts of that Act are relevant for present purposes. I did not raise with Mr Toebes the effect that should be given to the punctuation in the opening sentence of s 51B(1). I consider that the comma after the references to Parts 3 and 6 is intended to delineate references to those parts of the GST Act, from Part 9 of the Tax Administration Act 1994, which is provided for separately after the comma. If s 51B was introduced only for the purposes of provisions in the Tax Administration Act, the draftsperson could reasonably be expected to have expressed the cross-reference differently, suchas ―for the purposes of Parts 3, 6 and 9 of the Tax Administration Act. Itwould also be unusual to effect an amendment intended only to apply to discrete parts of another Act, at this point in the GST Act.[42] Section 51B appears in Part 8 of the GST Act, which deals with registration, and is reasonably referable to Part 3, dealing with returns and payment of tax, and Part 6, dealing with recovery of tax.[43] Mr Toebes cited the decision of the Taxation Review Authority in Y2 for the proposition that a special return under s 17 is distinguishable from the generality of provisions requiring the on-going provision of returns in relation to each GST return period for a registered person.6 I am not satisfied that the distinction drawn in that case could have any influence on the application of s 58 to the provisions of s 5(2) and 17.[44] I also acknowledge that Mr Toebes relied on the decision of the Federal Court of Australia in Deputy Commissioner of Taxation v PM Developments Pty Ltd.7 That judgment decided that a liquidator was not personally liable for the GST debt created on a sale of residential premises where the contract had been entered into and completed after the order for winding up. It was also held that the Commissioner would, as a result, simply rank with other unsecured creditors to be paid equally with6 Y2 (2007) 23 NZTC 13,017.7 Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886.them. However, the statutory provisions for attribution of liability for GST to others than the taxpayer whose assets were being supplied are materially different. As noted in the judgment itself, there is no equivalent in the Australian GST legislation of s 58 of the New Zealand GST Act.8 In these circumstances, the reasoning relied on by Mr Toebes is not strictly analogous, and it cannot assist the receivers here in contending for a narrow interpretation of the provisions of the New Zealand Act.Position as caveator[45] A further factual feature that was raised as supporting the receivers' denial ofany personal liability is that Fortress had lodged caveats against the titles of all the mortgaged properties, claiming a caveatable interest in them by virtue of its rights under the GSA granted by CMI in its favour.[46] In the process of effecting settlement of the various properties, Fortress purported to make it a condition of providing releases of the caveats that it be paid all monies available from the mortgagee sale, including the amount paid by the purchaser in relation to GST.[47] It is not possible for that purported contractual stipulation to alter the manner in which the relevant provisions of the GST Act apply to these taxable supplies. In particular, those demands by Fortress cannot influence the proper interpretation ofwho is attributed with the liability to pay the output tax charged on the sale/―supplyof the properties.[48] If I am right in interpreting the provisions of the GST Act as creating liability for the receivers to account for the output tax they have charged and recovered on the sales, then the secured creditor of the incapacitated mortgagee has no lawful entitlement to withhold a release of the caveat until the GST is paid to it. CMI as the mortgagee was only entitled to the net proceeds of the mortgagee sale after the payment of all expenses incurred in the realisation of the property and Fortress cannot assert any claim greater than that of CMI.8 See PM Developments at [55].[49] Conversely, if I am wrong in applying the provisions of the GST Act toattribute personal liability to the receivers, then it was merely ―window dressing forFortress to insist on being paid the GST. The receivers could avoid liability for the GST and, in maximising the return to the secured creditor who appointed them, could have paid on the GST, irrespective of any posturing by Fortress as to conditions for release of the caveats.[50] Accordingly, on the view I have taken, it is no answer for the receivers to say that they cannot be liable for the GST because they were obliged to pay it over to Fortress in order to obtain releases of the caveats to complete settlement of the sale of the properties.Alternative bases for attributing liability to the receivers[51] If the relevant sections of the GST Act did not apply to impose liability on the receivers, then it was argued for the Commissioner that in the alternative scenario where that liability rested only on the mortgagee, there were nonetheless grounds for imputing personal liability to the receivers because of the nature of their involvement and the creation of liability under common law and the equitable doctrine of the duty to account.[52] Section 185 of the Property Law Act 2007 provides for the sequence in which the proceeds of a mortgagee sale must be applied. The first category includes amounts reasonably paid or advanced at any time by the mortgagee with a view to the realisation of the security (s 185(2)(d)). The imposition of a liability for GST output tax is an inevitable consequence of a sale effected in realisation of the security. The Court of Appeal in Commissioner of Inland Revenue v Edgewater Motel Ltd accepted that this was so.9 The Court of Appeal's approach was adoptedby the Privy Council.10[53] The sequence for the application of the proceeds of sale of mortgagedproperty is mandatory. So, on the Commissioner's analysis, even if the receivers are9 Commissioner of Inland Revenue v Edgewater Motel Ltd [2003] 1 NZLR 425 (CA) at [12].10 Commissioner of Inland Revenue v Edgewater Motel Ltd [2005] 3 NZLR 289 (PC).not liable under the provisions of the GST Act, because they are effecting thetransaction in the mortgagee's name, the receivers are obliged to deal with the proceeds in accordance with the sequence provided for in s 185 of the Property Law Act 2007. In Edgewater Motel, the comparable obligation existed in the predecessor of s 185, namely s 104 of the Land Transfer Act 1952. The Commissioner's argument relied on the following observations in the Court of Appeal's judgment:11Section 104 is a general provision which gives priority to expensesoccasioned by the sale. In this case the GST Act, by imposing a tax on the sale transaction, creates an expense of sale which ranks under s 104 ahead of the mortgage debt. That it might not do so where the tax is imposed under a different section of the GST Act is beside the point when s 17 is so clearly worded.the selling mortgagee is obliged to pay the GST charged on the supply of the land in priority to any payment in respect of secured debts. Such payment is an expense occasioned by the sale and must ultimately be borne by the mortgagor by way of deduction from the purchase price under para (a) of s 104(1) of the Land Transfer Act.[54] The Privy Council's approach was consistent:12Once the mortgagee has paid the GST, the question of the priority of his claim for reimbursement will arise. Their Lordships consider that it isplainly an ―expense occasioned by the sale within the meaning of para (a).It is an obligation imposed upon the mortgagee by virtue of his having sold the property. He is therefore entitled to deduct it from the proceeds before payment of his own debt and is accountable to subsequent encumbrancers only for the balance.[55] Mr Ebersohn submitted that the reasoning of both the Court of Appeal and the Privy Council applied to whomever was exercising the power of sale of amortgagor's property – the obligation imposed by virtue of having sold the property was personal to whomever undertook that activity.[56] To the contrary, and consistent with his analysis of the provisions in the GST Act, Mr Toebes submitted that the Commissioner's reliance on this reasoning inEdgewater Motel was misconceived because the judgments did no more than recognise a liability on the mortgagee to pay the costs of sale, including GST. If the receivers are correct that they have no independent status under the provisions in the11 At [18]-[19].12 At [12].GST Act, and therefore incur a liability only in the name of the mortgagee, then the reasoning in Edgewater Motel must be confined to the position of the mortgagee, even if the mortgagee is incapacitated and a receiver is acting in its stead. The PrivyCouncil's analysis of the structure of the GST Act was, Mr Toebes submitted, reflected in the following:13in claiming payment of the GST, the Crown is not seeking to assert apriority in the distribution of the assets of the mortgagor, any more than an estate agent instructed by the mortgagee and claiming commission on the sale. The claim lies directly against the mortgagee.[57] Even if the receivers can avoid any personal liability by virtue of their conduct all being in the capacity of an agent for the company, then the Commissioner would contend that a failure to account for the output tax paid to them would constitute a failure to account resulting in liability for them. Mr Ebersohn cited the English decision in Sargent v Customs and Excise Commissioners.14 In that litigation, receivers were appointed to those parts of the business of a company which constituted the leasing of three properties of which it was the landlord. The receivers continued to collect rent, and VAT (the United Kingdom equivalent of GST) was charged in respect of the rentals. The receivers argued that the company, and therefore they, could not be compelled to account to the Commissioners for the VAT received. The Court of Appeal held that notwithstanding that the failure to pay the tax would not be a criminal offence, the absurdity remained that the receivers could, on behalf of the company, collect VAT and not pay it on to the Commissioners. In those circumstances, the Court of Appeal held that as a matter of public policy, the receivers had to account for the VAT. It was reasoned that the adverse consequences for the company of failure to account for VAT received were potentially so serious that the receivers could not exercise a discretion as to whether to account to the Commissioners or not, in any other way than doing so.[58] Sargent is commented on in the text Private Receivers of Companies in New Zealand.15 The authors comment:13 At [10].14 Sargent v Customs and Excise Commissioners [1994] 1 WLR 235 (HC) and [1995] 1 WLR 821(CA).15 Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand(LexixNexis, Wellington, 2008) at 298.In many cases the statute itself would impose liability on those in controlof the company, including the receiver. The receiver would obviously thenbe entitled to do whatever was necessary to repay the company's default. Onthe basis of the Sargent decision, the receiver may in fact be obligated to take this course even if no personal liability is imposed.[59] The cynical reality is that receivers accountable to the secured creditor of a mortgagee in circumstances such as the present may be far less concerned about the adverse consequences for the mortgagee of its being found in default of obligations to account for GST, than the expectation of both the English Court of Appeal inSargent and, to the extent that the learned authors of the New Zealand text endorse it, their observations on the consequences of the approach in Sargent.[60] In Sargent, there was only a partial receivership in respect of three propertiesso that the remainder of the company's business continued to be managed by it. That would create a serious concern for the directors if the receivers ―overpaid theappointing creditor by the extent of the VAT, whilst creating an additional debt and the prospect of penalties for the company. In that context, Nourse LJ for the Court of Appeal emphasised that the receivers owed duties to the company as well as to the appointing creditor.16[61] In the present case, the receivers' preference to pay the GST they have received to Fortress demonstrates an indifference to the consequences for CMI of it being found in breach of obligations to account for the output tax recovered on the sales of all of the properties.[62] I accept that, in public policy terms, it is undesirable to permit receivers to charge 12.5 per cent (now 15 per cent) more than the mortgagor could have retained for sale of its own property, thereafter leaving the Commissioner out of pocket by that same amount by virtue of having to permit the purchaser an input tax credit for paying that amount. Mr Toebes denied that this was in any way an unsatisfactory outcome, or one inconsistent with the scheme of the Act. He emphasised that the Commissioner does not have any protection under the GST Act as a secured creditor, and in numerous situations will be left unpaid if the party liable for output tax becomes insolvent.16 [1995] 1 WLR 821 at 829F.[63] I do not accept that Mr Toebes's points are a sufficient answer to this validconcern. Even in the absence of an anti-avoidance provision in the GST Act, the prospect of abuse of these provisions by engineering a receivership for the sake of a 15 per cent premium on recoveries in such situations and at an equivalent cost to the Revenue cannot be lightly dismissed.[64] If my interpretation of the GST Act is wrong, so that purposive principles do not warrant an interpretation that creates liability for receivers, then there is certainly scope to adopt the stance suggested by the observations in Private Receivers of Companies in New Zealand, so that receivers in such circumstances are obliged to account, even if personal liability is not attributed to them in terms of the statute. Ultimately, however, I would be reluctant to impose a liability on the receivers merely as a matter of public policy. Mr Ebersohn's additional arguments did raisefurther issues that also warrant consideration.[65] The issue in the proceedings was formulated as to whether the receivers had personal liability. The agreement of the parties was that if personal liability was not made out, then GST would be released by the Commissioner and paid to Fortress. After the dispute was defined in those terms, Mr Ebersohn sought to alter the terms for resolution of the dispute by focusing more on whether the Commissioner or Fortress could claim priority to the amount held by the receivers on account of the GST output tax received by them. The receivers were not prepared to revisit the terms of the agreement and, in those circumstances, the Commissioner argued for a further basis on which the receivers could be made liable to account for the GST received by them, namely that paying it to Fortress rather than the Commissioner would constitute the tort of breach of statutory duty, that duty being imposed by s 185 of the Property Law Act 2007 when read together with ss 5(2) and 17 of the GST Act.[66] This argument for the Commissioner relied on a further analysis in the textPrivate Receivers of Companies in New Zealand. The passages cited in Mr Ebersohn's submissions included the following:1717 At 184.It is, however, clearly established that receivers are liable in damages intort to preferential claimants if, when they are or should be aware of preferential claims, they exhaust such assets in making payment to the holder of the security under which they were appointed or to other creditors, without first applying them in satisfaction of the preferential claims. That constitutes a breach of their statutory duty.The moral is that once receivers become aware of the existence of a preferential debt and they have funds in hand derived from accounts receivable or inventory, they fail at their peril to pay the debt. It is wise that they should ensure that the assets left in their hands are never run down to a level below that necessary to discharge preferential claims.[67] On this argument, the Commissioner's status as a preferential claimant for theGST depends on the priority it is accorded under s 185 of the Property Law Act 2007.[68] The text on Private Receivers cites the relatively old decision in Woods v Winskill.18 In that Chancery Division case, it was held that a receiver and manager with notice of a preferential claim is liable for damages in tort if he exhausts the then assets of the company in making payment to the ordinary creditors without first applying the same or a sufficient part thereof in satisfying such preferential claims.[69] Mr Toebes denied that there could be any tort committed because the proceeds of the mortgagee sale were to be paid to the secured creditor rather than to an unsecured creditor, and there could be no tortious duty to do anything else. He accepted that the sequence of payments from mortgagee sales is to be governed by s 185 of the Property Law Act 2007, even when the mortgagee is in receivership, and discharge of the obligation imposed by s 185 was solely the responsibility of the mortgagee, whether acting itself, or if in receivership, by the receivers as themortgagee's agent.[70] The context in which this argument would arise would be if the relevant provisions of the GST Act do not impose any obligations on the receivers to account for the output tax. In that event, the receivers would be free to pass the amounts of GST received over to Fortress as the secured creditor of the mortgagee. That would18 Woods v Winskill [1913] 2 Ch 303, [1911-13] All ER Rep at 318.leave the Commissioner to pursue claims as an unsecured creditor against the likely or potentially insolvent mortgagee in circumstances where the directors and management of the mortgagee could disavow any involvement in the relevant transactions.[71] In that scenario, the Commissioner would be claiming that (notwithstandingacceptance of the receivers' involvement for the purposes of the GST Act solely asagent for the mortgagee) as the persons in effective control of the transactions, the receivers had knowingly procured a breach of their principal's obligation to applythe proceeds of mortgagee sales in accordance with the sequence required by s 185 of the Property Law Act 2007. Alternatively, a claim may lie against the receivers as a party to the mortgagee's breach of statutory duty. The cause of action is notwithout difficulties,19 and it is inappropriate to attempt any definitive ruling without the evidence and argument that could influence the existence and scope of such tortious obligation.[72] Nevertheless, I consider this analysis suggests a credible cause of action. Although it was not part of the agreed facts, Mr Toebes was not able to resist my inference that receivers in situations such as the present would generally negotiate the benefit of an indemnity from the appointing creditor, in respect of liabilitiesarising in the course of carrying out the receivership in the secured creditor's interests, notwithstanding the receivers' legal status as agents of the company.[73] Accordingly, this final argument, whilst accepted by Mr Ebersohn as outside the scope of the issues as formulated in terms of the agreement between the parties, would raise the prospect of a further means of achieving the outcome sought by the Commissioner. In the absence of an agreement such as that reached in this case, if receivers collected the GST and complied with a direction from the appointing creditor to pay the GST on to the creditor as if part of the net proceeds of sale, then, in the absence of personal liability imposed by the terms of the GST Act, such receivers would be on notice that they had facilitated a breach by the mortgagee ofthe mortgagee's obligations under s 185 of the Property Law Act.19 See, for example, Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Thomson Reuters,Wellington, 2009) at Chapter 8.[74] It is entirely tenable that in such circumstances the receivers would be liable in tort for having procured or been a party to a breach of the statutory duty imposed under s 185 of the Property Law Act. In situations such as the present, it can readily be inferred that appropriation of the GST in this way would be against the wishes of the mortgagee, were it a free agent.[75] The tenability of this possible basis for a claim against receivers in circumstances such as the present provides a measure of support for the principal conclusion I have come to on the application of the relevant provisions of the GST Act. The purposive interpretation renders the receivers liable, but if that approach is not valid, then it is a liability that they cannot avoid in any event.[76] Accordingly, the answer to the receivers' application for directions is that they are liable to account to the Commissioner for the GST charged as an output tax on the respective sales of the relevant properties. In terms of the agreement between the parties, the issue is to be determined simply on the basis of the Commissioner retaining the amount already paid in relation to those liabilities, in full and final settlement of them. No issue as to interest or costs arises.Dobson JSolicitors:JTLaw, Wellington for applicantsCrown Law, Wellington for respondent