Apex Security Limited v Commissioner of Inland Revenue
[2024] NZHC 3564
•27 November 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-1731
[2024] NZHC 3564
UNDER Part 19 of the High Court Rules 2016 and section 290 of the Companies Act 1993 IN THE MATTER OF
An application to set aside a statutory demand
BETWEEN
APEX SECURITY LIMITED
Applicant
AND
THE COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 25 November 2024 Counsel:
A T Grant for the Applicant
C van der Merwe/ H Tanielu for the Respondent
Judgment:
27 November 2024
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 27 November 2024 at 12 midday.
Pursuant to Rule 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel:
Lockhart Muir, Auckland Inland Revenue, Auckland
Paul Murray, Barrister, Akarana Chambers, Auckland
APEX SECURITY LTD v THE COMMISSIONER OF INLAND REVENUE [2024] NZHC 3564
[27 November 2024]
Introduction
[1] During 2023, the applicant, Apex Security Limited (Apex) was in arrears in its payment of GST and income tax. Apex requested the Commissioner of Inland Revenue (the Commissioner) to enter into an instalment arrangement. The terms of the proposed instalment arrangement were accepted by the Commissioner in a letter from the Department of Inland Revenue (IRD) to Apex dated 26 July 2023 (the first arrangement).
[2] By December 2023, the Commissioner considered that Apex was in default of the first arrangement. IRD sent Apex a letter dated 28 December 2023 giving notice that the Commissioner had cancelled the instalment arrangement.
[3] On 2 May 2024, Apex submitted a request that the Commissioner enter into a new instalment arrangement. The Commissioner declined the request.
[4] On 10 May 2024, Apex’s director, Matthew Ziesler (Mr Ziesler), had a telephone discussion with an IRD customer service officer, Edward McKay (Mr McKay), regarding the declinature. Mr Ziesler says that Mr McKay committed the Commissioner to a new arrangement (the second arrangement).
[5] Mr McKay denies committing the Commissioner to the second arrangement. He says that he was expecting Apex to submit a further proposal for a new instalment arrangement, and one was never received.
[6] On 4 July 2024, the Commissioner served a statutory demand dated 12 June 2024 to Apex for $151,180.83, being the outstanding tax debt on 12 June 2024. Apex has applied to set that demand aside.
[7]The issues raised by Apex’s application are:
(a)Does Apex have an arguable case that the Commissioner’s decision to cancel the first arrangement was wrong and liable to be overturned on judicial review?
(b)Is there a substantial dispute that the Commissioner is bound by the second arrangement which compromises the debt that is the subject of the statutory demand?
Setting aside a statutory demand – the legal principles
[8] When a statutory demand is issued under s 289 of the Companies Act 1993 (the Act), it may be set aside by the Court if:
(a)there is a substantial dispute as to 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.1
[9] For an alleged debtor to succeed in setting aside a statutory demand, some material short of proof is required to support the claim that the debt is in dispute; mere assertion of a dispute will not suffice.2 In deciding an application, the task for the judge is not to resolve the actual dispute but to determine whether there is in fact a genuine and substantial dispute as to whether the debt is due.3
[10] In the context of a tax debt, the party seeking to set aside a statutory demand must show a genuine and substantial dispute as to the existence of the debt such that it would be an abuse of the process of the Court to order liquidation, and the Commissioner’s process savours of unfairness or undue pressure.4
1 Companies Act 1993, s 290. See also Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd [2007] NZCA 501, [2008] NZCCLR 19 at [13].
2 At [17].
3 At [17].
4 Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd (2003) 21 NZTC 18,281 (HC) at [15]; and Commissioner of Inland Revenue v K J Cummings Ltd (2003) 21 NZTC 18,277 (HC) at [15].
[11] Whether “other grounds” are made out under s 290(4)(c) of the Act requires a judgment by the Court as to whether the creditor’s prima facie entitlement to the debt is outweighed by some factor making it plainly unjust for liquidation to ensue.5
[12] The possibility that a party may be successful with a claim for judicial review of a decision which gives rise to the debt may amount to “other grounds” in terms of s 290(4)(c).6
[13] Under s 291 of the Act, if the Court is satisfied that there is a debt due from the alleged debtor to the creditor that is not the subject of a substantial dispute, counterclaim, set-off or cross-demand, the Court may order the alleged debtor to pay the debt within a specified period. In default of payment, the creditor may make an application to put the company into liquidation.
Does Apex have an arguable case that the Commissioner’s decision to cancel the first arrangement was wrong and liable to be overturned on judicial review?
[14] Apex accepts that the Commissioner’s assessment of the outstanding tax is correct and indisputable.7
[15]Section 177 of the Tax Administration Act 1994 (TAA) relevantly provides:
177 Taxpayer may request financial relief
(1)A taxpayer, or a person on a taxpayer’s behalf, requests financial relief by either—
(a)making a claim stating why recovery of the taxpayer’s outstanding tax or a relief company’s outstanding tax would place the taxpayer, being a natural person, in serious hardship; or
(b)requesting to enter into an instalment arrangement with the Commissioner.
(1B) For the purposes of this section, the Commissioner must consider the taxpayer’s financial position at the date on which the request for financial relief is made.
(2)The Commissioner may require a taxpayer, or a person on a taxpayer’s behalf, to request financial relief under subsection (1)(a) by notice.
(3)Upon receiving a request, the Commissioner may—
5 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [3].
6 Condor International Ltd v Steelhaus 2014 Ltd [2019] NZHC 296 at [53]-[77].
7 Tax Administration Act 1994, s 109.
(a)accept the taxpayer’s request; or
(b)seek further information from the taxpayer; or
(c)make a counter offer; or
(d)decline the taxpayer’s request.
…
[16]Section 177B of the TAA provides:
177B Instalment arrangements
(1)The Commissioner must not enter into an instalment arrangement with a taxpayer or a relief company to the extent that the arrangement would place the taxpayer, being a natural person, in serious hardship.
(2)The Commissioner may decline to enter into an instalment arrangement if—
(a)to do so would not maximise the recovery of outstanding tax from the taxpayer; or
(b)the Commissioner considers that the taxpayer is in a position to pay all of the outstanding tax immediately; or
(c)the taxpayer is being frivolous or vexatious; or
(d)the taxpayer has not met their obligations under a previous instalment arrangement.
(3)A taxpayer may renegotiate an instalment arrangement at any time.
(4)The Commissioner may renegotiate an instalment arrangement at any time after the end of 2 years from the date on which the instalment arrangement was entered.
(5)The renegotiation of an instalment arrangement is treated as if it were a new request for financial relief.
(6)The Commissioner may cancel an instalment arrangement if—
(a)it was entered into on the basis of false or misleading information provided by the taxpayer; or
(b)the taxpayer is not meeting their obligations under the arrangement.
(7)Despite section LA 6(2) of the Income Tax Act 2007, a taxpayer with an instalment arrangement who is meeting their obligations under it may choose to have an amount of refundable tax credit remaining for a tax year paid to them rather than used under the ordering rules set out in those sections.
[17] The Commissioner’s decision to cancel the first arrangement is amenable to judicial review.8
8 P v Commissioner of Inland Revenue [2014] NZHC 760, (2014) 26 NZTC 21-067.
[18] The first arrangement required Apex to pay $178,441.63 by 22 monthly instalments. Most of the instalments were $7,000, except for $20,000 due on 28 September 2023, $20,000 due on 28 December 2023, and a final instalment of
$5,441.63 due on 28 May 2025.
[19]The Commissioner’s decision accepting the request confirmed that:
(a)if the agreed instalments were not paid then the arrangement could be cancelled; and
(b)Apex needed to file all future returns and pay any new tax during the term of the arrangement in full and on time.
[20] Apex claims to have made the following payments towards the instalment arrangement before it was cancelled:
(a) $5,000 on 5 July 2023;
(b) $7,000 on 30 August 2023;
(c)$2,982 on 3 September 2023;
(d)$7,000 on 30 September 2023;
(e)$11,422.24 by way of a tax credit on 2 October 2023;
(f)$9,910 on 3 November 2023; and
(g)$3,000 on 5 December 2023.
[21] The payment of $5,000 on 5 July 2023 was made before the arrangement was accepted and cannot be a payment towards it.
[22] The payment of $7,000 on 30 August 2023 was two days late, but the breach was de minimis.
[23] The payment on 3 September 2023 was a payment of current GST due on 28 August 2023. It was not a payment towards the instalments.
[24] Apex had not received anticipated retention payments due to it under contracts, which caused Mr Zeisler to send an email to an IRD case officer on 28 September 2023, advising that:
(a)Apex could not pay the $20,000 due on 28 September 2023 and proposing a payment of $7,000 instead; and
(b)proposing that the two $20,000 instalments be changed to $15,000 instalments, and the dates for those instalments changed to 28 October and 28 December 2023.
[25] Mr Zeisler says that he did not receive a reply from IRD, which is not contradicted by the Commissioner, and he therefore assumed that the first arrangement had been varied by consent. Apex paid IRD $7,000 on 30 September 2023.
[26] It is not reasonably arguable that the Commissioner agreed to vary the first instalment arrangement, given the context – Apex had previously made a formal request for an instalment arrangement and the Commissioner had issued a letter setting out the accepted terms of the arrangement. Even if IRD did not respond to Mr Zeisler’s email dated 28 September 2023, that cannot be taken to be agreement to a variation of the instalment arrangement.
[27]In any event, Apex did not pay $15,000 on 28 October or 28 December 2023.
[28] The Commissioner accepts that Apex became entitled to a credit of $11,422.24 for income tax, which could be applied to the income tax due for the year ended 31 March 2020. On 2 October 2023, IRD sent an email to Apex’s tax agent requesting confirmation of whether Apex wished to apply the credit to the outstanding GST. Mr Zeisler says that he gave that confirmation.
[29] The Commissioner argues that a tax credit cannot be treated as a payment under an instalment arrangement. However, the Commissioner did not point to any statutory
basis for that submission, which seems to contradict s 177B(7) of the TAA. The Commissioner’s letter dated 26 July 2023 stated:
Any refundable tax credits in your account will be used to pay some of the amount you owe unless you have specified otherwise. If credits are applied to the periods under arrangement, it will reduce the amount of interest you’ll be charged and will change your final payment.
[30] The credit of $11,422.24 relates to the outstanding GST that was the subject of the first arrangement. The letter from IRD on 2 October 2023 requested confirmation that the credit could be applied to that outstanding GST. The credit plainly reduced the amount that was due under the first arrangement.
[31] The payment of $9,910 on 3 November 2023 was in respect of current GST due on 28 October 2023. It was not a payment towards the instalments. The Commissioner says that Apex made a further payment on 3 November 2023 of
$802.56. The Commissioner accepts that this payment was to be applied to the instalments.
[32] Apex made a payment of $3,000 on 5 December 2023, which is accepted by the Commissioner as appropriately applied to the instalments.
[33] On the basis of my findings above, Apex made the following payments to the Commissioner, and received a credit in respect of the instalment arrangement from 30 August 2023 to 27 December 2023, together totalling $29,224.80 as follows:
(a) $7,000 on 30 August 2023;
(b)$7,000 on 30 September 2023;
(c)A credit of $11,422.24 on 2 October 2023;
(d)$802.56 on 3 November 2023; and
(e)$3,000 on 5 December 2023.
[34] The total of the instalments due during that same period was $41,000, excluding the payment that fell due on 28 December 2023. Putting to one side that the payments were late during this period, there was a shortfall of $11,775.20.
[35] The Commissioner was entitled to cancel the first arrangement on 28 December 2024. There is no reasonable prospect of Apex succeeding with judicial review of the Commissioner’s decision to cancel the first arrangement.
Is there a substantial dispute that the Commissioner is bound by the second arrangement which compromises the debt that is the subject of the statutory demand?
[36] On 2 May 2024, Mr Zeisler submitted a proposal for an instalment arrangement, using the “MyIR” function on the IRD website. The proposal was that Apex pay $2,500 per month towards the tax arrears. The Commissioner declined the proposal. That led to a lengthy telephone discussion between Mr Zeisler and Mr McKay on 10 May 2024. A transcript of that conversation is in evidence.
[37] Apex argues that Mr Zeisler was right to interpret comments by Mr McKay as agreement by the Commissioner to a two-step process:
(a)first, Apex would demonstrate credibility by consistently meeting its current tax obligations; and
(b)once Apex had demonstrated that credibility to the Commissioner, then Apex would propose a more attractive plan to the Commissioner for the repayment of the outstanding tax.
[38] The transcript of the telephone conversation is lengthy. I will not traverse it in detail, although I have reviewed it carefully. The context of the telephone discussion is important. Mr McKay was explaining to Mr Zeisler, at length, why the Commissioner had rejected Apex’s proposal of $2,500 per month, and what was required for the Commissioner to accept an alternative proposal. For example, Mr McKay said:
This is how to achieve the progress okay moving forward, not to dwell on the past about what was said, whatever. You know the situation is what we are left with at the moment okay, so there’s debt sitting on the account that’s got to be dealt with. What I discuss with you is that if you well, what we want to do is get something set up that is a realistic amount and something that over the year you will be able to achieve as well as pay current on time, which you know, we’ve already discussed…
[39]Towards the end of the conversation, Mr McKay said:
… We’ve sort of probably attacked it from all the angles that we can at the moment. But yeah, I suggest have a chat to your accountant to look at things over the 12 month period perhaps and then you say, well, okay, look, here’s what you should be able to achieve as a minimum amount over the 12 months, right, and therefore you can come back to me with something that’s a bit more realistic than a five and a half year plan.
[40] When the transcript is read as a whole, there is no reasonable basis for Mr Zeisler to conclude that the Commissioner had agreed to the two-stage approach contended for by Apex. Mr McKay had explained that Apex would need to make a realistic arrangement to pay the arrears and also keep its current tax obligations up to date. Apex did not subsequently make a request for an instalment arrangement.
[41] It is not reasonably arguable that the Commissioner agreed to an instalment arrangement by the actions of Mr McKay during the telephone discussion on 10 May 2024, or on any other basis. If Mr Zeisler believed that to be the case, then he was suffering under his own misapprehension of what Mr McKay said.
[42] There is no genuine and substantial dispute that the Commissioner is bound by a second arrangement. There is no basis to set aside the statutory demand.
The Court’s discretion
[43] Mr McKay has sworn an affidavit dated 20 November 2024 which confirms that Apex’s outstanding tax on 20 November 2024 is $157,679.69. That includes the GST return that fell due in January 2024, and Apex’s income tax for the year ended 31 March 2023.
[44] Notwithstanding Apex’s dispute with the Commissioner, it remained open to Apex to make payments towards the tax arrears after the Commissioner cancelled the
first arrangement on 28 December 2023 and after the conversation on 10 May 2024. Apex has not done so.
[45] It is open to the Court to make an order putting Apex into liquidation under ss 241(4) and 291(1)(b) of the Act, on the grounds that Apex is insolvent. I am not prepared to do that at this stage. I will provide Apex with a final opportunity to pay the arrears of tax or to obtain the Commissioner’s agreement to an instalment arrangement. Failing that, the Commissioner will be able to file a liquidation proceeding.
Orders
[46]The applicant’s application to set aside the statutory demand is dismissed.
[47] The applicant shall pay the respondent the outstanding tax as at 20 November 2024 of $157,679.69 by 20 December 2024, and in default of payment, the respondent may make an application to put the applicant into liquidation.
[48] The respondent is entitled to costs. The respondent shall file a memorandum as to costs by 6 December 2024. The applicant may file a reply memorandum by 13 December 2024. I will then fix costs.
Associate Judge Brittain
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