Chesterfields Preschools Limited (in liquidation) v Commissioner of Inland Revenue
[2020] NZCA 686
•22 December 2020 at 2.00 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA115/2019 [2020] NZCA 686 |
| BETWEEN | CHESTERFIELDS PRESCHOOLS LIMITED (IN LIQUIDATION) |
| AND | COMMISSIONER OF INLAND REVENUE |
| CA361/2019 | ||
| BETWEEN | THERESE ANNE SISSON | |
| AND | COMMISSIONER OF INLAND REVENUE | |
| CA390/2019 | ||
| BETWEEN | THERESE ANNE SISSON | |
| AND | COMMISSIONER OF INLAND REVENUE | |
| CA391/2019 | ||
| BETWEEN | THERESE ANNE SISSON | |
| AND | COMMISSIONER OF INLAND REVENUE | |
| Hearing: | 5-6 October 2020 |
Court: | Miller, Venning and Katz JJ |
Counsel: | Appellant in Person and D Hampton (McKenzie friend) |
Judgment: | 22 December 2020 at 2.00 pm |
JUDGMENT OF THE COURT
A CA115/2019 — the appeal is dismissed.
B CA361/2019 — the appeal is dismissed.
C CA390/2019 — the appeal is dismissed.
D CA391/2019 — the appeal is struck out.
EIn respect of CA115/2019, Ms Sisson must pay to the Commissioner costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements. Ms Sisson must pay to CPL costs for a standard appeal on a band A basis plus usual disbursements.
F In respect of CA361/2019, Ms Sisson must pay to the Commissioner costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements.
GIn respect of CA390/2019, Ms Sisson must pay to the Commissioner costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements.
HIn respect of CA391/2019, Ms Sisson must pay to CPL costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Venning J)
TABLE OF CONTENTS
Introduction[1]
Other appeals[4]
Liquidation proceedings[4]
Vesting order proceedings[4]
Bankruptcy proceedings[5]
Procedural history[6]
The first liquidation[7]
The second liquidation hearing[11]
CA115/2019[17]
The TRA proceeding and NOPAs[19]
The MASOC[29]
Calculation of the CPL’s tax debt[54]
The 2017 liquidation appeal decision[59]
The second liquidation hearing in the High Court[71]
Discussion[79]
CA361/2019[103]
CA390/2019[113]
CA391/2019[128]
Result/orders[132]
Costs[136]
Introduction
There is an element of déjà vu to this case. Chesterfields Preschools Ltd (CPL) failed to comply with a statutory demand issued by the Commissioner of Inland Revenue (the Commissioner) and was put into liquidation by the High Court on 6 October 2015.[1] Ms Sisson, a director of CPL, was subsequently joined as a party to enable her to appeal the decision.[2] An appeal to this Court was partially successful.[3] Ultimately, the Supreme Court set the order for liquidation aside by consent on 23 November 2017.[4] The Supreme Court remitted the matter to the High Court for rehearing.
[1]Commissioner of Inland Revenue v Chesterfields Preschools Limited [2015] NZHC 2440, (2015) 27 NZTC 22-029 [First liquidation judgment].
[2]Commissioner of Inland Revenue v Chesterfields Preschools Limited (in liq) [2015] NZHC 2667.
[3]Sisson v Commissioner of Inland Revenue [2017] NZCA 326, (2017) 28 NZTC 23-023 [First liquidation appeal judgment].
[4]Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue [2017] NZSC 176.
CPL was then put into interim liquidation on 15 December 2017.[5] CPL was once more put into liquidation by the High Court on 26 February 2019.[6]
[5]Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2017] NZHC 3172, (2017) 28 NZTC 23-046.
[6]Commissioner of Inland Revenue v Chesterfields Preschools Ltd (in interim liq) [2019] NZHC 272 [Second liquidation judgment].
The appellant, Ms Sisson, now appeals that second liquidation order in CA115/2019, contending CPL has a claim against the Commissioner which exceeds the amount of tax debt claimed by the Commissioner and, in any event, the Commissioner’s calculation of the unpaid tax, interest and penalties is incorrect. Ms Sisson argues CPL is not unable to pay its debts.
Other appeals
In addition to the appeal against the liquidation of CPL, there are a number of other appeals before the Court.
Liquidation proceedings
(a)CA361/2019 — an appeal against a finding r 17.29 of the High Court Rules 2016 (HCR) was not applicable to the liquidation proceedings;
(b)CA390/2019 — an appeal against the rejection of documents (in the nature of interlocutory applications) filed in the liquidation proceedings to remove a freezing order and caveat; and
(c)CA391/2019 — an appeal against an order that Ms Sisson pay CPL (in liquidation) costs of $4,460.00 following the liquidation hearing.
Vesting order proceedings
(a)CA285/2017 — an appeal against refusal to recall or set aside an earlier order vesting property in CPL by consent;
(b)CA685/2017 — an appeal of the costs decision of Gendall J of 16 February 2017 following the vesting orders hearing;
(c)CA683/2017 — an appeal of costs awards made by Gendall J on 24 March 2017 quantifying the costs order made and subject to appeal in CA685/17. The costs were quantified at $92,013 to CPL and $87,555.38 together with disbursements of $4,114.15 to the Commissioner; and
(d)CA684/2017 — an appeal of a costs award in CPL’s favour following Nation J’s dismissal of Ms Sisson’s application for review on 15 June 2016.
Bankruptcy proceedings
In addition, there are three appeals directly related to Ms Sisson’s personal bankruptcy:
(a)CA310/2017 — an appeal against refusal to halt Ms Sisson’s adjudication in bankruptcy; and
(b)CA404/2017 — an appeal against Ms Sisson’s adjudication.
(c)CA682/2017 — an appeal of the costs award made by Osborne J dated 5 October 2016.
Procedural history
We take the summary of the earlier procedural history to the issues between Ms Sisson and CPL and the Commissioner from the 2017 decision of this Court on the appeal against the first liquidation order:[7]
[7]First liquidation appeal judgment, above n 3 (footnotes omitted).
[3] Mr Hampton and his former wife, Ms Sisson, were involved for several years in various business ventures run through a number of different entities including, in addition to CPL, Chesterfields Partnership, Chesterfields Preschools Partnership and Anolbe Enterprises Ltd. In several litigation episodes described in the following narrative, a number of those entities were plaintiffs together with Mr Hampton personally. We will refer to them collectively as the taxpayers.
[4] The taxpayers’ escalating indebtedness to the Commissioner was attributable in significant part to the way in which their tax affairs were intertwined. As Fogarty J explained in the first judicial review decision:
[138] The revenue legislation does provide for entities to make tax returns as a group and as between them offset tax losses and make subvention payments. Because this was a mixture of limited liability companies, partnerships and personal taxpayers, husband, wife, and sister, the group entity provisions do not apply. But for practical purposes Mr Hampton seems to have sought to operate all aspects of the family ventures as a group for tax purposes. The core income generating activity are two preschool businesses, a bed and breakfast venture (about to start trading) and some property development, in progress.
[139] This combination of a casual approach to filing returns and paying tax in arrears, and a myriad of related parties’ dealings, overlaid by Departmental suspicion, has led to a quite extraordinary outcome of indebtedness.
[5] The present appeal concerns CPL alone. It commenced operations in September 1993, having acquired the property at 396 Manchester Street, Christchurch, and the preschool business operated there in July 1993.
[6] It appears that CPL’s tax self-assessments based on tax returns it filed were either not disputed by the Commissioner or, where disputed, were resolved in the Commissioner’s favour. Hence in the Commissioner’s view those tax assessments were not capable of challenge pursuant to s 109 of the Tax Administration Act 1994.
[7] A number of proceedings were filed for the liquidation of CPL, either initiated by or supported by the Commissioner, but CPL was never wound up as the proceedings were resolved by debt payments. In April 2004 the Commissioner served on CPL a statutory demand demanding payment of the sum of $620,545.94 which comprised:
PAYE, GST, Income Tax $318,787.53
Late payment penalties $190,119.86
Interest $171,781.28
(Payments) ($60,142.73)
$620,545.94
The Commissioner also commenced summary judgment proceedings against Mr Hampton and the two partnerships.
[8] CPL’s solicitors filed an application to set aside the statutory demand on 18 May 2004. An affidavit in support by Mr Hampton explained his view that a substantial dispute existed as to whether CPL owed the Commissioner the amount demanded.
First judicial review proceeding
[9] In 2004 the taxpayers filed a judicial review proceeding, the tenor of which is captured in the following from the resulting judgment of Fogarty J:
[1] This is a difficult case. The events are spread over a long period of time. There are numerous taxpayers’ accounts. The “taxpayers” have been trying to take full advantage of every strategy possible to reduce tax. The “taxpayers” accounts have now got quite out of hand. Against core assessments in excess of $900,000, there is now a total liability on paper of about $4 million, the additional $3 million being made up of late payment penalties and interest. The plaintiffs seek judicial review on numerous past decisions of the Commissioner.
…
[30] At the heart of the plaintiffs’ grievances in this case are several contentions that the Commissioner has not kept arrangements or should have accommodated the plaintiffs more effectively with earlier recognition of refunds of GST. As part of recognition of the refunds, penalties should be remitted on the accounts which were to benefit from the refunds.
[10] The figure of $3,393,822.55 (calculated by the Commissioner as at 3 May 2006) was spread among the taxpayers as follows:
Chesterfields Partnership $1,209,019.67
Chesterfields Preschool Ltd $969,857.28
Chesterfields Preschool Partnership $242,770.82
Anolbe Enterprises Partnership $249,211.87
Mr Hampton $722,963.20
$3,393,822.55
[11] The amount of $969,857.28 claimed to be payable by CPL comprised:
Total assessments $387,347.43
Late payment penalties 328,942.06
Interest 325,737.39
Payments 72,169.60
[12] On 25 January 2005 the taxpayers filed a notice of claim in the Taxation Review Authority (TRA). It was a voluminous document of some 120 pages. The Commissioner filed an application for transfer of the challenge proceeding to the High Court and sought an order for consolidation with the judicial review proceeding (the statement of claim in which was 121 pages).
[13] Noting that it was common ground that the proceedings before the TRA and in the High Court overlapped, Fogarty J ruled:
[56] In the totality of all the circumstances I think there is a serious argument that lodging proceedings before the Taxation Review Authority when there are all these proceedings before the High Court is quite inefficient, if not itself threatening to unfairly prevent the Commissioner of Inland Revenue from enforcing the tax statutes. These proceedings will be and are transferred to the High Court.
[14] Also before the Judge was an application to consolidate, with the judicial review proceeding, various other proceedings, including the applications for summary judgment against some taxpayers and the opposition by CPL to the Commissioner’s statutory demand. Fogarty J considered that the proceedings could not be consolidated in a formal sense because they were too different in character. However in lieu of formal consolidation he directed that the various proceedings were to be placed under his case management, that the judicial review proceeding would be heard first and that the other cases would be case managed in order to be ready to proceed immediately after the judicial review hearing.
[15] In the substantive judgment delivered on 15 December 2006 (the first judicial review decision) Fogarty J found generally in favour of the taxpayers. The Judge recognised that Mr Hampton was “to put it mildly, an extremely difficult ‘taxpayer’ to deal with”, who expected to be able to move credits from one taxpaying entity to another on the strength of handwritten letters filed from time to time. The Judge recorded that the Inland Revenue Department (IRD) officers were highly suspicious of many of the transactions which accounted in large part for halts which were placed on the GST refund credit returns, later summarising his view in this way:
[12] The IRD officers were sceptical of a number of GST input credit claims. They were sent off to audit for vetting, where they languished for years. Had the IRD accepted the GST inputs and then booked them to account at an appropriate and much earlier date from the date of acceptance then there would have been a very large reduction in the interest and penalties. The total indebtedness of the plaintiffs would be much reduced from the amount the Commissioner is now claiming and upon which he is seeking judgment.
[16] In the first judicial review decision, Fogarty J found that while the taxpayers did not establish the “arrangements” with the IRD contended for, Mr Hampton had received sufficient assurances or commitments from IRD officers that, for all practical purposes, had the same effect as arrangements.
[17] The judgment set aside a decision by the Commissioner declining remission (under s 182 of the Tax Administration Act 1994) of additional tax. It required the remission issue to be reconsidered and gave directions as to that reconsideration which, given the events which followed, we set out verbatim:
4.Make a decision under s 182 of the [Tax Administration Act], as preserved by Taxation (Remedial Provisions) Act 1999, s 103, treating the historic correspondence and meetings from and with Mr Hampton as substantive requests for remission, in respect of all the plaintiffs, received before 23 September 1997, and in so doing recognise that Mr Hampton was led to believe that the GST input claims he was lodging would be considered and decisions made upon them and refunds lodged to the best advantage of the plaintiffs.
5.Make a decision under s 183A, as to remission in respect of the period that has elapsed while this litigation has been proceeding.
[18] As the Supreme Court later commented, those directions imposed constraints on the Commissioner to ensure that the reasonable expectations of the taxpayers were not frustrated. The Court noted that:
Relevant to the required reconsideration was the Judge’s apparent view that the Commissioner was required to remit additional tax to the extent necessary to ensure that the resulting impost was proportionate to the breaches on the part of the applicants and his conclusion that if the conditions for remission stipulated in s 182 could not be satisfied, the Commissioner should resort to his more general powers under ss 6 and 6A of the Tax Administration Act.
[19] The debt collection proceedings against the taxpayers were adjourned pending the outcome of compliance with the directions. The Commissioner did not appeal the first judicial review decision.
Second judicial review proceeding
[20] The reconsideration directed by Fogarty J resulted in a decision made on 5 June 2007 by an IRD officer, Mr Budhia. The result of Mr Budhia’s reconsideration was that the total indebtedness of the taxpayers was reduced, but not by much. As at 11 September 2008 the total liability of CPL, according to the IRD, was $1,508,354.46.
[21] However, Fogarty J considered that there were serious grounds for contending that Mr Budhia’s decision did not accord with the directions in the first review judgment. In the context of an application by the taxpayers to set aside injunctions, the Judge indicated that one way to challenge that decision was by way of a further application for judicial review.
[22] The taxpayers accordingly brought a second application for review, which resulted in a further judgment of Fogarty J (the second judicial review decision). Again, the Judge found substantially for the taxpayers, observing that “[n]on-compliance pervaded the analysis and decision making that went to the Commissioner’s purported compliance with the directions” in the first judgment. Concluding that Mr Budhia had been wrong in a number of respects, the Judge set that decision aside, together with any consequential decisions, and directed further reconsideration in the following terms:
2.The Commissioner is redirected to act upon the December judgment and to reconsider the matters in accordance with the Court’s directions in that judgment, being bound to the reasons of that and this judgment.
The stay of debt collection proceedings remained in place.
The Court of Appeal decision
[23] The Commissioner appealed against the second judicial review decision contending that he had fully complied with the first judicial review decision and that the second judicial review decision wrongly reinterpreted and extended the first. The majority (Glazebrook and Chambers JJ) allowed the appeal but only to a limited extent, specifically in relation to Anolbe Enterprises Ltd. Baragwanath J would have allowed the appeal in full except in one respect.
[24] In the Court of Appeal the Commissioner filed an affidavit dated 5 June 2009 of Mr Doubleday, a senior investigator in the IRD Large Enterprises Unit in Christchurch. Annexed were schedules comprising 41 pages prepared by Mr Doubleday providing a detailed summary of the tax debts of the taxpayers as at July/September 2008 and historical movements in each tax account since the indebtedness first arose.
[25] At [8.1] the affidavit set out a table summarising the taxpayers’ overall tax indebtedness by entity as at July/September 2008 which we reproduce only so far as it referred to CPL:
[A] -[B] -[C] =[D] Entity Tax Type Debt Total by Entity by Tax Type Chch HC Challenge Default Assessments Not Disputed Not Challenged CPL Total $1,467,585.23 $0.00 $70,078.09 $1,397,507.14 [26] Although the majority indicated that the first judicial review decision could well have been subject to a successful appeal and stated that it should be treated as confined to its unusual facts, they emphasised that their judgment was predicated on the fact that the Commissioner was bound by the findings of fact and law in that judgment because he did not appeal against it. The majority observed:
[90] While the Judge had upheld the decision not to remit penalties under s 183A made by the Commissioner on 9 June 2004, he does appear to have expected the Commissioner to reconsider the position, taking into account the delays, the assurances and comfort given which gave rise to the “reasonable expectations” that the sums owing were negotiable and the deteriorating financial position of the taxpayers.
[91] In our view, what the first judicial review judgment required in this regard was for the Commissioner first to assess: the level of inordinate delay, being delay that cannot be explained by the needs of the investigation (noting the particular care that must be invested in any investigation which may result in criminal charges); ordinary workload pressures; any failures of the taxpayers to provide information; any conflicting instructions given; the reasonable suspicion with which the transactions were regarded; and the sheer complexity and confusion surrounding these taxpayers’ affairs. The Judge was then expecting that some portion of the penalties for the period of inordinate delay would be remitted (using ss 6 and 6A of the [Tax Administration Act] if necessary). This direction does not seem to have been limited to the amounts actually in dispute but related more widely to the accounts of the taxpayers generally.
[92] As Dr Harley, counsel assisting the Court, submitted, the Judge seems to have had in mind a certain minimum percentage of penalties that should be remitted to take account of the Commissioner’s responsibility for the level of penalties and to take into account the effect of the litigation and the taxpayers’ financial circumstances. We do not read this as suggesting that this deteriorating financial situation was in any way the fault of the Commissioner. Indeed, such a finding could not rationally have been made.
[93] Given the long history of this matter, rather than undertaking the laborious process of consideration set out above, a pragmatic course may be merely to reduce penalties by a certain percentage across the board. In this regard, a reduction of 15% would, in our view, more than fulfil the requirements of the first judicial review judgment. In saying this, we are not to be taken as mandating this pragmatic approach. Rather we raise it as an alternative solution. It is for the Commissioner to choose whether or not he wishes to adopt this pragmatic approach.
(Footnotes omitted.)
[27] In relation to remission of some portion of the penalties, noted in [91], this Court made two comments:
(a) First, given the confusing nature of the taxpayers’ affairs and their clear defaults, the Court thought that considerable leeway would be accorded to the Commissioner in this regard. The fact that the taxpayers could have used their resources to pay tax (but chose to await the outcome of the investigations) was noted to be a relevant consideration.
(b) Second, the Court considered that only a portion of penalties should be remitted, even for the period of inordinate delay, as the taxpayers could clearly have paid the taxes rather than waiting for the result of the investigation.
[28] The Court did not consider that the stay of enforcement should continue, stating:
[146] Fogarty J has restrained the Commissioner from collecting any of the taxation owed by the taxpayers until the first judicial review judgment has been complied with. In our view, this is unreasonable. The Commissioner should be able to collect immediately (at the least) the core tax owing which is not in dispute (and some portion of the associated penalties).
[147] We had hoped to have the Commissioner provide calculations in this regard (on the most favourable assumptions for the taxpayers) but it did not prove possible in the timeframe. If these calculations can be provided to the High Court, however, we would expect the order would be varied to allow immediate collection of the undisputed core tax and some associated penalties.
(Footnote omitted.)
In relation to the calculations mentioned in the first sentence of [147] the Court stated:
Given that these penalties relate to core tax which is not under dispute we would have thought that the percentage of any write off of penalties for inordinate delay of the Commissioner would be very small, even taking into account that the Commissioner is bound by the first judicial review judgment. We also see no reason why the normal rules as to collection should not apply to tax (and penalties) in dispute.
[29] Regrettably the judgment did not provide any indication, at least in relation to CPL, as to what the Court considered was the amount of the “undisputed core tax” or the amount of “some associated penalties”.
[30] An application by the taxpayers for leave to appeal to the Supreme Court was declined, the Court commenting:
[8] The merits of the competing positions have now been fully reviewed twice by Fogarty J and by the Court of Appeal. Leaving aside perhaps the proportionality issue, the proposed arguments do not raise any substantial issue of principle and we are not persuaded that there is an appearance of error in relation to the Court of Appeal judgment such as could give rise to a miscarriage of justice.
[9] In relation to the proportionality issue, the judgment of the Court of Appeal indicates that the applicants were not arguing for a general requirement of proportionality in relation to additional tax. Rather they were contending for a proportionality assessment by reference to what the Court of Appeal described as “inordinate delays on the part of the Commissioner and the related assurances and comfort given by him to the taxpayers”. Such an exercise, once carried out, would ensure that additional tax will be reduced to that portion of the total assessed which was referable to “the fault of the taxpayers”. And this is exactly what they are entitled to in terms of the Court of Appeal judgment.
Other proceedings
[31] Before narrating the events subsequent to the judicial review proceedings, it is convenient to note three other proceedings instituted by CPL and other taxpayers against the Commissioner.
[32] First, in May 2008 the taxpayers filed a statement of claim alleging misfeasance in public office by the Commissioner, Mr Shamy (counsel for the Commissioner), the Attorney-General and various IRD officers. The Commissioner’s application for strike-out was declined by Associate Judge Osborne. On review that decision was largely upheld by Fogarty J. However, on appeal this Court struck out the misfeasance claim against the Commissioner and Mr Shamy and stayed the claim against the remaining defendants until it was repleaded by a lawyer holding a current practicing certificate and leave was granted by a High Court Judge.That claim remains stayed.
[33] Secondly, on 3 September 2008 the taxpayers filed a statement of claim against the Commissioner alleging the pursuit of malicious civil proceedings. The High Court struck out the bulk of the claim, leaving CPL as the sole remaining plaintiff. On 9 October 2012 Associate Judge Osborne refused Mr Hampton’s application to represent CPL in that claim,and it remains stayed pending representation.
[34] Thirdly, on 29 October 2009 the taxpayers commenced a proceeding in the High Court (the NOPA proceeding).
The Commissioner’s recalculation
[35] After considering the Court of Appeal’s judgment the Commissioner elected to adopt the “pragmatic approach” pursuant to the powers under ss 6 and 6A of the Tax Administration Act. Using the schedules prepared by Mr Doubleday in July 2008 for the base figure to be adjusted by 15 per cent as suggested by this Court, the Commissioner determined the level of indebtedness of CPL to be $1,199,835.11, calculated as follows:
Debt owing as per the schedules as at July 2008 $1,467,585.23
Less 15% reduction $197,472.03 $197,472.03
Sub total still due $1,270,113.20
Less default assessments $70,278.09
Amount for which recovery action can be taken $1,199.835.11[36] The Litigation Management Director for IRD notified CPL of the Commissioner’s proposed approach in a letter dated 27 July 2012, in which she further explained the intention to cancel total penalties and interest in the period 31 July 2008 to 25 May 2011 in the sum of $470,810.11:
Additionally, and to offer some finality to matters, once the 15% reduction has been made the Commissioner intends to cancel any penalties and interest imposed subsequent to that date. This would effectively fix the level of indebtedness. This extra step is not required by the Court of Appeal but is consistent with resolving matters between the parties. It is considered that, if the 31 July 2008 date is adopted, then the use of resources saved by such a course would justify removal of the subsequent penalties and interest.
[37] In a lengthy letter in response dated 17 August 2012 Mr Hampton declined what he described as the said Commissioner’s “settlement offer”, stating:
The plaintiffs respectfully consider that it is unsafe for the taxpayers to rely on the adverse findings of the judgments as the sole ground or basis for determining the terms of settlement, given the unresolved complaints of maladministration, and the fact the evidence of alleged maladministration conduct and the efforts of the plaintiffs to resolve their complaints and the payment of their tax accounts without waiting for audit decisions on the various GST refund claims, are yet to be tried by the Courts. These are factors for investigation and determination by the High Court at trial.
[38] The Litigation Management Director responded in a letter of 25 September 2012, recording the Commissioner’s stance that civil claims in tort were not relevant to CPL’s obligation to pay tax, and noting the intention to proceed to implement the proposal on the basis set out in the letter of 27 July and recommence debt recovery proceedings against CPL.
[39] By memorandum dated 19 August 2014 the Commissioner applied to the High Court to lift the stay on debt recovery proceedings. The memorandum summarised the tax owing by CPL at key decision points and at that date of application in this manner:
1st JR, 3 May 2006
$969,857.28
2nd JR, 11 September 2008 $1,508,354.46 Position at July 2008 $1,467,585.23 Current position $1,199,835.11 Relief allowed $197,472.03 The Commissioner explained that she had stopped further penalty and interest accumulation after July 2008 and she drew attention to the exchange of correspondence in July and August 2012 concerning the recalculation of the debts.
[40] On 23 September 2014 Fogarty J issued a minute granting the Commissioner’s application to lift the stay on debt recovery proceedings.
The first liquidation
We pick up the narrative after the stay was lifted. The Commissioner issued a fresh statutory demand for $1,231,940.11 on 5 December 2014.[8] As CPL did not comply with the statutory demand or apply to set it aside, the Commissioner filed an application to liquidate CPL. CPL opposed the application. Associate Judge Osborne was satisfied that, on any view of it, there was a substantial debt owing to the Commissioner, and on 6 October 2015 made the order placing CPL in liquidation.
[8]The amount demanded represented the $1,199,835.11 referred to at [35] and [39] of the First liquidation appeal judgment, together with costs orders in the Commissioner’s favour of $32,105.
Ms Sisson pursued an appeal to this Court. In its judgment delivered on 28 July 2017, this Court expressed concern the Judge had made the order for liquidation on the footing the amount “indisputably owed” by CPL must on any approach be substantial.[9] This Court noted the amount of the core debt owing to the Commissioner was not specified, nor was the amount of the “undisputed core debt” referred to by the Judge accepted as such by Mr Hampton, CPL’s director.[10]
[9]First liquidation appeal judgment, above n 3, at [70].
[10]At [85].
This Court considered, on a balance sheet analysis, the difference between the Commissioner’s revised claim and CPL’s asset position appeared to be comparatively narrow.[11] It was at least open to doubt the Court could have properly made a liquidation order.[12] In the circumstances, this Court considered the proper course was to allow the appeal on the condition Ms Sisson, on behalf of CPL, paid into the Court within 15 working days the amount of $109,675.22, which it considered represented the core tax due by CPL (without taking account of any penalties) in July 2008.[13]
[11]At [86].
[12]At [86].
[13]At [87]–[88].
Ms Sisson appealed that conditional order to the Supreme Court. On 23 November 2017, the Supreme Court allowed the appeal by consent.[14] The Commissioner accepted the condition imposed by this Court had been based on the assumption Ms Sisson had funds available to satisfy the condition, when that was not correct.[15] The Supreme Court set aside the liquidation order and remitted the proceeding to the High Court for rehearing on whether CPL should be placed into liquidation.[16]
The second liquidation hearing
[14]Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue, above n 4.
[15]At [2].
[16]At [2].
The rehearing took place on 29–30 October 2018. In the meantime, the High Court had appointed interim liquidators to CPL on 15 December 2017.[17] The Commissioner again relied on the unmet statutory demand issued on 5 December 2014 for $1,231,940.11. In addition, the Commissioner asserted she was also entitled to rely upon further contingent debts owing by CPL to her which totalled $587,389.01.
[17]Commissioner of Inland Revenue v Chesterfields Preschools Ltd, above n 5. An appeal from the appointment of interim liquidators was unsuccessful, see Chesterfields Preschools Ltd v Commissioner of Inland Revenue [2017] NZCA 624, (2017) 28 NZTC 23-047.
Ms Sisson again opposed the liquidation. She argued:
(a)it remained open to CPL to test the accuracy and methodology of the Commissioner’s calculation of a 15 per cent reduction of penalties in accordance with this Court’s 2017 judgment;[18]
(b)the Commissioner had not issued assessments in relation to her claims for GST on the sale of 856–858 Colombo Street ($85,118.16) and CPL’s receipt of insurance proceeds ($117,667.25);
(c)the Commissioner’s advance of $280,000.00 to CPL’s liquidator in relation to the insurance proceeds litigation should not be taken into account as a debt owing by CPL; and
(d)by reason of vesting orders made by the Court in its favour, CPL had an available asset, namely a property at 854 Colombo Street.
[18]First liquidation appeal judgment, above n 3, at [105].
While Ms Sisson accepted the statutory demand had not been complied with, she also argued the Commissioner was aware the amount was disputed by reason of the earlier proceedings and, when the above matters were taken into account, CPL was balance sheet solvent.
Osborne J rejected the defences raised by Ms Sisson. The Judge confirmed the test of ability to pay debts under s 241(4)(a) of the Companies Act 1993 involved a cash flow, rather than a balance sheet, test of solvency.[19] CPL failed the test. CPL was in interim liquidation. CPL had not conducted its core business as a preschool operator for many years.[20] It was common ground it was not in a position to meet its debts as they fell due.[21]
[19]Second liquidation judgment, above n 6, at [180], referring to Re Tweeds Garages Ltd [1962] Ch 406 at 410.
[20]At [185].
[21]At [185].
The Judge also considered, looking at the matter in the most favourable way from CPL’s point of view, it was not balance sheet solvent either.[22] Even were further time to be made available to CPL to realise the two remaining assets (the land and insurance proceeds, assuming they were assets belonging to CPL), the realisations would not enable CPL to clear its indebtedness to the Commissioner.[23]
[22]At [201].
[23]At [201].
The Judge noted nothing had been advanced before the Court to suggest it should exercise its discretion against placing the company into liquidation.[24] The Judge made the liquidation order placing CPL into liquidation on 26 February 2019.[25]
CA115/2019
[24]At [204]–[205].
[25]At [209].
In support of the appeal, Ms Sisson developed two main themes:
(a)first, it is an abuse of process to put CPL into liquidation before CPL’s misfeasance claim (which is currently stayed) can be heard. CPL has not had a fair and reasonable opportunity to pursue the misfeasance amended statement of claim (MASOC) in answer to the Commissioner’s statutory demand; and
(b)secondly, a challenge to Osborne J’s acceptance of the Commissioner’s approach to the application of the 15 per cent reduction in penalties and the Judge’s interpretation of this Court’s 2010 and 2017 judgments.[26]
[26]Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400, (2010) 24 NZTC 24,500 [Judicial review appeal judgment]; and Second liquidation judgment, above n 6.
In addition, Ms Sisson argued:
(a)the Judge incorrectly held the issues raised in the Taxation Review Authority (TRA) proceeding and the 2009 Notice of Proposed Adjustment (NOPA) proceeding could not be raised as defences to the liquidation; and
(b)the Judge was wrong to refuse to consider the 2018 NOPAs as the allegations of non-disclosure and illegality in them had not previously been heard and determined.
The TRA proceeding and NOPAs
Before addressing Ms Sisson’s two main themes, it is convenient to deal with her points regarding the TRA proceeding and the NOPAs. They can be dealt with briefly.
The TRA proceeding and the 2009 NOPA proceeding have previously been considered and resolved by this Court.[27]
[27]Judicial review appeal judgment, above n 26, at [88]; and First liquidation appeal judgment, above n 3, at [102].
As noted in the above summary from this Court’s 2017 decision, CPL filed a notice of claim in the TRA on 25 January 2005. That was transferred to the High Court and was before Fogarty J with the judicial review proceeding. Then, in October 2009, CPL (and its related entities) commenced a proceeding in the High Court based on a NOPA issued in 2008. Like the claim in the TRA proceeding, the NOPA also addressed the dispute between CPL (and its related entities) and the Commissioner.
In its first liquidation decision, the High Court rejected the submission for CPL that it should not be put into liquidation pending resolution of the TRA proceeding. Associate Judge Osborne held there was an issue estoppel which precluded CPL from addressing, through the TRA processes, a remedy for some aspect of the Commissioner’s or his department’s earlier conduct.[28] The issues had been dealt with by the Court.
[28]First liquidation judgment, above n 1, at [65].
While this Court allowed the appeal against the first liquidation order in its 2017 judgment, it confirmed it was not open to CPL to revisit the TRA proceeding or the 2009 NOPA proceeding at the liquidation stage when it responded to Ms Sisson’s argument that the fact and extent of CPL’s liability to the Commissioner still remained to be determined in the TRA or NOPA proceedings:[29]
[99] This Court [in 2010] treated itself as seized of the scope of all the taxpayers’ arguments that challenged the correctness of assessments and the imposition of penalties and interest. If the taxpayers sought to challenge their liability for 85 per cent of the penalties in any context after this Court’s judgment, the Commissioner could avail herself of this Court’s determination that 85 per cent would be lawfully recoverable. In our view, while it was ultimately for the Commissioner to choose the path to take, the approved pragmatic approach was an integral part of the Court’s decision and the doctrine of res judicata applies to it.
…
[101] As the majority noted at the commencement of their judgment, the binding nature of a final decision is not dependant on its being correct in fact or law. The majority helpfully quoted the observation of Millett J that the principle of res judicata “gives effect to the policy of the law that the parties to a judicial decision should not afterwards be allowed to re-litigate the same question, even though the decision may be wrong”.
[102] It follows that, notwithstanding Fogarty J’s initial directions when transferring the TRA proceeding into the High Court, issues that were ultimately addressed and resolved by this Court may not be revisited again in the so-called TRA proceeding or the NOPA proceeding. Those proceedings do not live on in isolation from the previous conclusions reached by this Court.
[29]First liquidation appeal judgment, above n 3 (footnotes omitted).
We agree with Osborne J’s conclusion in the second liquidation judgment the TRA and NOPA proceedings cannot stand alongside the previous decisions of this Court and, particularly, the confirmation by this Court in its 2017 judgment that the issues raised in the TRA and NOPA proceeding were addressed by the 15 per cent adjustment fixed by the Court in its 2010 decision.[30]
[30]Second liquidation judgment, above n 6, at [115]; and First liquidation appeal judgment, above n 3, at [102]–[103].
Nor can Ms Sisson rely on the NOPAs she purported to issue on behalf of CPL in 2018. In the notice of appeal to the liquidation application, Ms Sisson referred to a NOPA lodged with the Inland Revenue on 31 January 2018. It was not produced in evidence. Then, just before the liquidation hearing, Ms Sisson sought to file a further affidavit annexing a new document in the form of a NOPA dated 29 October 2018.[31] The Judge correctly refused to accept that evidence.[32]
[31]Second liquidation judgment, above n 6, at [119].
[32]At [120].
Quite apart from the fact the 2018 NOPAs were not before the Court in any admissible form and apparently purport to raise the same issues as the earlier NOPA, Ms Sisson lacked standing to lodge NOPAs on behalf of CPL in 2018.[33] Ms Sisson was joined as a party to the liquidation proceedings to enable her to appeal the order for liquidation in her personal capacity, and was entitled to be heard on the subsequent liquidation hearing and on this appeal, but she does not have any wider authority to act on behalf of CPL.
[33]There are no proceedings related to the 2018 purported Notice of Proposed Adjustment.
On a liquidation, directors cease to have powers, functions or duties in relation to the company other than those required or permitted to be exercised by the relevant provisions of the Companies Act.[34] The limited powers and duties include, for example, the power to apply to the Court for supervision of the liquidation, and the requirement for the directors to obtain and provide information and deliver up company property.[35] Similar constraints to the director’s powers apply on an interim liquidation as to a final liquidation.[36] The appointment of the interim liquidators on 15 December 2017 effectively displaced the directors.[37] While directors of a company in interim liquidation may oppose a final order for liquidation, their powers do not extend to filing NOPAs on behalf of the company. Further, as counsel for the Commissioner submitted, the NOPA purported to be served on 31 January 2018 failed to meet the response period requirements of the Tax Administration Act 1994.[38]
[34]Companies Act 1993, s 248(1)(b).
[35]Sections 261 and 284.
[36]Sections 246 and 248.
[37]Re Mawcon Ltd [1969] 1 WLR 78 at 82.
[38]Tax Administration Act 1994, s 89AB.
Ms Sisson cannot rely on the issues raised in the TRA and 2009 NOPA proceedings or in the purported 2018 NOPAs to support an argument there was a substantial dispute as to CPL’s indebtedness.
The MASOC
We return to Ms Sisson’s first main theme. Ms Sisson argues CPL has a valuable claim, now repleaded in the MASOC, which far exceeds the Commissioner’s debt. She says CPL should not have been placed in liquidation before the MASOC claim could be heard. While the claim is currently subject to a stay, Ms Sisson explained the lack of funding had prevented CPL and Ms Sisson from pursuing it to date.[39] Recently, the claim had been revised and redrafted by senior counsel, Mr Billington QC. In the claim, CPL (and other entities) claim in excess of $13 million against the Attorney-General (sued on behalf of the named Inland Revenue officers). If CPL was not in liquidation, it could apply to the Court to lift the stay and pursue the claim.[40]
[39]Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679.
[40]Ms Sisson did not directly refer to the malicious prosecution proceeding which is also stayed. It relates to a liquidation proceeding issued by the Commissioner which was ultimately not pursued.
Ms Sisson relies on the judgment of Bell AJ in Commissioner of Inland Revenue v The Fishing Company Ltd to support her argument the liquidation of CPL is futile because CPL would be entitled to set-off its MASOC against CPL’s tax debt, resulting in no indebtedness owing to the Commissioner.[41]
[41]Commissioner of Inland Revenue v The Fishing Company Ltd (2011) 25 NZTC 20-016 (HC).
In the Fishing Company case, the Fishing Company had claimed a GST input refund relating to the purchase of a yacht which was to be used in the taxable activity of charter hire. An issue arose as to whether the yacht was actually used in that taxable activity. The Commissioner withheld payment of the refund pursuant to s 46 of the Goods and Services Tax Act 1985 (GST Act) pending further investigation of the claim. While the investigation was continuing, the Commissioner issued a statutory demand for the collection of unpaid taxes and penalties. The statutory demand was not met. The Commissioner then brought proceedings for the liquidation of the company. The Fishing Company sought to offset the amount of its claimed refund against the Commissioner’s claim.
The Commissioner relied on r 5.61(1) of the HCR as precluding the set-off of the claimed GST refund against the tax owing. Rule 5.61(1) provides:
In a proceeding by the Crown for the recovery of taxes, duties, or penalties, a defendant is not entitled to advance any set-off or counterclaim.
Associate Judge Bell rejected the Commissioner’s reliance on r 5.61(1) in the liquidation proceedings. He referred to the provisions of s 310 of the Companies Act before reasoning:[42]
[24] Once a company goes into liquidation, r 5.61(1) of the High Court Rules no longer applies. There is no longer a proceeding by the Crown for the recovery of taxes. Any proceedings by or against the company are stayed under s 248(1)(c) of the Companies Act (except to the extent that the liquidator agrees or the Court orders otherwise). Once the company is in liquidation, s 310 applies. In any proceedings to determine the company’s liability to the Crown for taxes, the Court will apply s 310 of the Companies Act to determine the correct balance between the Crown and the taxpayer in liquidation. As that is a final balance, there is no room for an interim pay now, argue later regime under a liquidation.
…
[26] If an order for liquidation is made in this case, the liquidator will apply s 310 in accepting or rejecting proofs of debt submitted by the Commissioner. When he does that, he will have to take into account The Fishing Company Limited’s claim for a GST input of credit.
[27] If the insolvency set-off under s 310 results in there being no net indebtedness to the Commissioner, then putting the company into liquidation may be futile. The company would stop operating, the staff would be thrown out of work and assets would be realised to meet the costs of the liquidation. While there might be good grounds for imposing this on the company if it is indebted to the Commissioner and cannot pay, there would not be if the Commissioner is not a creditor.
[28] Because pay now, argue later provisions such as r 5.61 cannot operate once a taxpayer is put into liquidation, the Commissioner cannot succeed in his argument that r 5.61 requires the Court to disregard The Fishing Company Limited’s claim for a GST input credit. The Commissioner’s claim to be a creditor is subject to the claim for a GST input credit.
[42]Commissioner of Inland Revenue v The Fishing Company Ltd, above n 41. Associate Judge Bell doubted on the evidence the application for the GST refund would succeed so adjourned the application to a further hearing.
Ms Sisson seeks to rely on the above reasoning to support her submission the Commissioner cannot rely on r 5.61(1) as an answer to her argument CPL’s claim in the MASOC should be set-off against the tax debt.
We are satisfied Bell AJ was wrong to conclude the prospect of the operation of s 310 of the Companies Act precludes the operation of r 5.61(1) in relation to a prospective counterclaim or set-off leading up to the liquidation as he suggested in Fishing Company.
The policy behind s 310 is to avoid the injustice of a creditor not being able to set-off its claim against a debt it may owe to an insolvent company.[43] In the absence of a set-off under s 310, a creditor could be left in the position where it would be required to pay the debt it owed to the insolvent company but would then have to prove in the liquidation for the debt owed by the company to it. Of course, the corollary is if the creditor owed the company more than the company owed it, the liquidators would be entitled to pursue the balance due after any set-off.
[43]Forster v Wilson (1843) 12 M & W 191 (Exch) at 203–204; and Roy Goode Principles of Corporate Insolvency Law (4th ed, Sweet & Maxwell, London, 2011) at [9-01].
We agree with the Associate Judge that s 310 is self-executing and operates automatically on the liquidation of a company. The accounting for mutual credits and debits applies by operation of the statutory wording of the provision. But while s 310 applies upon liquidation, it does not apply before it. Rule 5.61(1) and s 310 apply to different stages of the proceeding. Just as s 310 applies by operation of law on liquidation, on its wording, r 5.61(1) applies to the earlier stages of the proceeding. Further, its application does not involve a discretion.
Rule 5.61(1) is a “pay now, dispute later” provision. It applies to proceedings by the Crown for the recovery of taxes, duties or penalties. An application for liquidation is a proceeding for the purposes of the HCR. A proceeding is defined as:[44]
proceeding means any application to the court for the exercise of the civil jurisdiction of the court other than an interlocutory application
[44]High Court Rules 2016, r 1.3.
An application for liquidation is made under r 31.1 of the HCR by way of statement of claim and is an application to the Court in the exercise of its civil jurisdiction.
This Court has already considered whether, in the context of pay now, dispute later provisions, the issue of a statutory demand and the institution of liquidation proceedings are properly categorised as “proceedings for the recovery of a debt”.
In Laywood v Holmes Construction Wellington Ltd, the creditor relied on an adjudication in its favour under the Construction Contracts Act 2002 (CCA).[45]One issue was whether the debtor could raise a counterclaim in order to have a bankruptcy notice set aside. The Court considered an earlier decision of Randerson J in Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd.[46] In Volcanic Investments, Randerson J had discussed the relationship between ss 73 and 79 of the CCA, the pay now, dispute later provisions, and the provisions of the Companies Act relating to statutory demands. Dempsey & Wood had obtained a determination from an adjudicator under the CCA that Volcanic was liable to pay it a specified amount under the construction contract by a definite date. Volcanic failed to pay. Dempsey & Wood issued a statutory demand under s 289 of the Companies Act for payment. Volcanic responded by applying to set aside the demand on the basis it had a set-off for losses said to have resulted from delays by Dempsey & Wood in carrying out the work. Randerson J held the words “proceedings for the recovery of a debt” in s 79 of the CCA included the issue of a statutory demand and the institution of liquidation proceedings.[47]
[45]Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243.
[46]Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC).
[47]Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd, above n 46, at [20].
In Laywood v Holmes, this Court noted that, although Randerson J’s approach had been adopted subsequently, a different view had been taken by Doogue AJ in Silverpoint International Ltd v Wedding Earthmovers Ltd.[48] Ultimately, this Court agreed with Randerson J’s approach to interpreting “proceedings for the recovery of a debt”:[49]
[61] We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand and an adjudication of bankruptcy or order to wind up a company on the other. The question we are asked to resolve concerns the former. In that context, we prefer the view expressed by Randerson J in Volcanic Investments. We find some assistance in the exceptions provided for in s 79. Under that section, a set-off may be taken into account in debt recovery proceedings (including the s 73 process) if it relates to a liquidated amount and either judgment has been entered for that amount or there is no dispute between the parties in relation to the claim for that amount. Absent that, a determination can be entered as a judgment under s 73 and enforcement proceedings taken through the District Court, and any counterclaim, set-off or cross-claim must be pursued through separate proceedings.
…
[63] If the contrary view were to be adopted, the efficacy of the s 73 process would, in our view, be undermined. Parties to construction contracts could refuse to pay an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to recreate similar problems to those which led to the enactment of the CCA, albeit in a different context.
…
[65] We emphasise again that we were asked to consider only the first of the two stages referred to at para [61] above. It may be that different considerations arise at the point that the court must determine whether it will exercise its discretion to adjudicate a judgment debtor bankrupt or order the liquidation of a company (see AMC Construction Limited v Frews Construction Ltd [2008] NZCA 389 at [7]). But that is a point on which we express no opinion.
[48]10 Gilmer Ltd v Tracer Interiors and Construction Ltd HC Wellington CIV-2005-485-2009, 6 December 2005; Sci Development & Construction Ltd v NZ Built Ltd HC Auckland CIV-2005-404-3656, 23 December 2005; Freemont Design & Construction Ltd v Natures View Joinery Ltd t/a Nebulite Waikato HC Hamilton CIV-2006-419-269, 26 July 2006; and Kizer Builders Ltd v OEC Construction Ltd HC Wellington CIV-2006-485-2287, 16 November 2006. Compare Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007.
[49]Laywood v Holmes Construction Wellington Ltd, above n 5.
The observation of the Court in terms of the efficacy of the process and the intent behind the statutory provisions of the CCA is equally applicable to the application of r 5.61(1) to taxation disputes.
In Laywood v Holmes, the Court was discussing an application to set aside a statutory demand. The Court expressly left open whether the reasoning also applied to the liquidation hearing itself. This Court subsequently had occasion to directly consider the issue of the application of s 310 of the Companies Act in the context of an application for liquidation in Manchester Securities Ltd v Body Corporate 172108.[50]
[50]Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408.
In Manchester Securities, the Body Corporate was seeking to liquidate Manchester Securities Ltd. Manchester resisted the application. It claimed it had two claims to set-off against the Body Corporate’s demand which should be arbitrated first. Manchester relied on s 310 of the Companies Act and the Fishing Company decision. This Court rejected that submission noting:[51]
Third, any set-off between Manchester and the BC will be taken into account in the liquidation, but it is stating the obvious to say that will happen under s 310 of the Companies Act, after the company is put into liquidation. The existence of an unverified and unliquidated set-off need not preclude liquidation even if it is possible that when accounts are taken the liquidator will establish that the BC is not a net creditor. Accounts need not be taken to establish that the BC is a creditor with standing to pursue winding up.
[51]At [36] (footnote omitted).
We note a number of other High Court decisions have also taken a different approach to that of Bell AJ in Fishing Company. For example, in GCA Legal Trustee (2004) Ltd v Consultant Management Services Ltd, Dobson J applied directly contrary reasoning.[52] GCA Legal Trustee was not referred to Bell AJ. Further, Fishing Company has been distinguished or explained in other decisions of the High Court.[53]
[52]GCA Legal Trustee (2004) Ltd v Consultant Management Services Ltd HC Dunedin CIV-2007-412-56, 26 May 2009 at [28].
[53]See Colebrook v Okarahia Downs Ltd [2019] NZHC 241, [2019] NZAR 936 at [64]–[67]; and Commissioner of Inland Revenue v Tower City Holdings Ltd [2020] NZHC 2239 at [122].
Rule 5.61(1) excludes Ms Sisson’s argument in opposition to the liquidation of CPL on the basis it is able to pay its debts because it has a set-off as pleaded in the MASOC. It was not open for the Court to consider CPL may have such a set-off when considering whether to liquidate CPL under s 241(4)(a) of the Companies Act.[54]
[54]In Ms Sisson’s personal bankruptcy appeals this Court found that r 5.61(1) did not apply to the set-off sought because the claim did not relate to the recovery of taxes. The set-off argument still nevertheless failed the s 254 Insolvency Act 2006 test for the reasons expressed in [2020] NZCA 689 at [22] to [25] of that judgment.
There are further, practical reasons why the Court should not take the prospective unverified and unliquidated set-off or counterclaim into account pre‑liquidation. The MASOC proceedings have been stayed since the Court of Appeal’s decision of 18 March 2013.[55] Even if the proposed claim has now been reviewed by senior counsel, the stay would have to be lifted by a High Court Judge.
[55]Commissioner of Inland Revenue v Chesterfields Preschools Ltd, above n 39.
Further, for the Court to take the MASOC into account as a set-off at the liquidation stage would require the Court to consider the merits of the claim and its likely quantification. That is not an appropriate exercise to be conducted at the stage of a liquidation hearing when the Commissioner has the status of a creditor and the focus is rightly on whether CPL is able to pay its debts. We also note Mr Hollis, the liquidator of CPL, has advised his present view is none of the proceedings (including the MASOC) proposed to be pursued by CPL has any reasonable prospect of success.
At best, CPL’s claim is a contingent, unliquidated claim. If ultimately the liquidator was (contrary to his current view) to accept it in whole or in part, it could be set-off in accordance with s 310. It is for the liquidator to make a decision whether to pursue the MASOC or whether to accept the contingent claim in whole or in part. If the liquidator decides not to pursue the MASOC on behalf of CPL or rejects the claim in whole or in part, then Ms Sisson could challenge that decision under s 284 of the Companies Act if granted leave to do so. That is the proper process to follow in relation to the claimed set-off.
Further, in the present case, quite apart from the application of r 5.61(1), this Court in its 2017 decision considered and rejected the suggestion the potential claim in the MASOC could be set-off against the Commissioner’s claim:[56]
[106] Finally we note that, while not explicit on the point, the notice of appeal appears to convey the implication that in CPL’s solvency analysis the Court should be required to include potential damages claims associated with the alleged failure of the Commissioner to disclose information. In that connection we note the phrasing of the second of the contentions set out at [62] above, which may have been included with an eye to the extant (albeit stayed) misfeasance and malicious civil proceedings claims.
[107] We do not accept that CPL may rely on such potential claims as an off‑set or counterclaim against such amount as it owes the Commissioner for core tax and penalties. Were it otherwise, then the recovery of unpaid tax would have had to await the conclusion of those dormant claims. Clearly that was not the intention of the majority in ruling that the stay on enforcement was to be lifted.
[56]First liquidation appeal judgment, above n 3 (footnotes omitted).
The Supreme Court approved that reasoning in its leave decision.[57]
[11] The final issue on which leave is sought relates to the finding by the Court of Appeal that Chesterfields could not rely on potential claims of stayed proceedings alleging misfeasance in public office and malicious institution of civil proceedings against the respondent as an off-set or counterclaim against the amount it owes to the respondent for tax and penalties. Ms Sisson seeks to argue that the applicants’ claims of maladministration should be dealt with in the context of the liquidation proceeding. Nothing put forward by Ms Sisson causes us to doubt the correctness of the Court of Appeal’s finding on this point.
[57]Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue [2017] NZSC 168.
For the above reasons, Ms Sisson is not able to raise the proposed MASOC as a set-off or counterclaim against the Commissioner in opposition to the liquidation of CPL. The remaining issue is whether Osborne J was correct to find, at the time the liquidation order was made, CPL was unable to pay its debts because of the debt owed to the Commissioner.
Calculation of the CPL’s tax debt
Ms Sisson challenged Osborne J’s approach to the application of the 15 per cent reduction in penalties and the Judge’s interpretation of this Court’s 2010 and 2017 judgments.
In both liquidation proceedings before the High Court, the Commissioner relied on the unmet statutory demand for $1,231,940.11. That figure was based on a tax debt of $1,199,835.11 and court costs of $32,105. Mr Brighty, a technical adviser in the Legal and Technical Services Unit of the Inland Revenue deposed in his affidavit of 18 July 2014 that the $1,199,835.11 was calculated after adopting this Court’s suggestion the 15 per cent reduction in overall penalties was a reasonable response to the issues raised by the taxpayers (including CPL). The figure was calculated as follows:
Debt owing as per schedules of July 2008 $1,467,585.23
Less a 15 per cent reduction $197,472.03
Subtotal: $1,270,113.20
Less default assessments $70,278.09
Amount for recovery sought to be recovered $1,199,835.11The schedules referred to were 41 pages of schedules Mr Doubleday, a senior investigator with the Inland Revenue, had annexed to an affidavit of 5 June 2009 in the 2010 judicial review appeal proceedings before the Court of Appeal.
In the first liquidation proceeding, the Judge accepted CPL was presumed to be unable to pay its debts because it failed to meet the statutory demand.[58] He also rejected the submission for CPL it was balance sheet solvent as that conclusion appeared to have been reached by ignoring the core debt to the Commissioner.[59] In response to the bare claim on behalf of CPL the amount claimed by the Commissioner was still disputed, the Judge referred with approval to the approach of this Court in Anglian Sales Ltd v South Pacific Manufacturing Co Ltd that where there is no doubt the petitioner is a creditor for a sum which would otherwise entitle him to a winding up order, a dispute as to the precise sum owed is not of itself sufficient answer to the petition.[60] The Judge was satisfied the amount indisputably owed by Chesterfields must on any approach be substantial.[61]
[58]First liquidation judgment, above n 1, at [30].
[59]At [32].
[60]First liquidation judgment, above n 1, at [46], citing Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA) at 251 and Re Tweeds Garages Ltd, above n 19.
[61]First liquidation judgment, above n 1, at [49].
While Ms Sisson’s appeal against the liquidation order was ultimately granted by consent and on the papers by the Supreme Court, in the hearing before this Court, the Court engaged in a detailed consideration of the Commissioner’s claim.[62]
The 2017 liquidation appeal decision
[62]First liquidation appeal judgment, above n 3; and Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue, above n 4.
This Court noted it may well be the case CPL was insolvent, but was concerned at the manner in which the solvency analysis had been undertaken in the High Court.[63] In particular, it focused on what was described as the undisputed core debt.[64] The Court noted there had been a degree of imprecision in the use of language, notably in the use of expressions “core tax” and “core debt”.[65]
[63]First liquidation appeal judgment, above n 3, at [69].
[64]At [69].
[65]At [71].
This Court noted it appeared Osborne AJ had requested:[66]
(a)further evidence concerning Mr Doubleday’s schedules that were before the Court of Appeal in the 2010 appeal against the second judicial review;
(b)an approximation of CPL’s debt as at 2006; and
(c)the core tax owed by CPL (as distinct from the core tax plus shortfall penalties).
[66]At [46], referring to a memorandum of counsel for the Commissioner dated 2 July 2015.
The Court then noted:
[47] We infer that the focus in the second information request on 2006 was because the first judicial review decision was delivered on 15 December 2006. Concerning the third request, the relevant portion of Table B attached to the Commissioner’s letter of 27 July 2012 had stated:
B
Tax Type
C
Core tax plus shortfall penalties
D
All other penalties and interest
E
Payments etc
F
Refunds and transfers
G
Net owing as per the Dept’s schedules as at July 2008
GST
$472,365.60
$546,527.40
($441,978.02)
$19,563.55
$596,478.53
INC $269,981.07 $744,594.91 ($83,452.20) -$60,017.08 $871,106.70 ACC $19,034.65 $6,961.71 ($124,924.88) $98,928.52 $0.00 SEA $5,797.45 $6,368.04 ($2,351.36) -$9,814.13 $0.00 PAY $353,393.57 $34,138.90 ($362,705.13) -$24,827.34 $0.00 SLE $15,566.02 $1,121.93 ($11,051.55) -$5,636.40 $0.00 Totals: $1,136,138.36 $1,339,712.89 ($1,026,463.14) $18,197.12 $1,467,585.23
The Court noted a further complication. In his affidavit of 5 June 2009, Mr Doubleday had calculated that as at July/September 2008, CPL’s tax debt was $1,397,507.14. That figure had been arrived at as follows:
Total debt $1,467,585.23
Less default assessments $70,078.09
Balance – not disputed/not challenged $1,397,507.14While Mr Doubleday suggested the figure was not disputed and not challenged, this Court noted that did not appear to have been CPL’s position.[67] The sum of $1,397,507.40 formed the basis for the tax debt claimed in the statutory demand of $1,199,835.11.
[67]At [72].
Next, in the course of preparing the calculations of CPL’s debt as at 2006, in response to Osborne AJ’s request, the Commissioner identified an arithmetical error in the calculation of the 15 per cent reduction of interest in penalties.[68] On 2 July 2015, the Commissioner filed an affidavit of Mr Brighty containing a further calculation which stated CPL’s debt as at 2 July 2015, with penalties and interest stopped as at December 2006, but still allowing the 15 per cent reduction was $827,304.62. The $827,304.62 was calculated as follows:[69]
[68]At [48].
[69]At [49].
Summary
as at 22/7/08
as at 10/12/06
Income Tax $759,247.46 $592,399.53 GST $336,502.27 $242,193.68 ACC ($1,044.25) ($1,044.25) SEA ($955.21) ($955.21) PAY ($5,120.84) ($5,120.84) SLE ($168.29) ($168.29) Total collectable debt $1,088,461.14 $827,304.62
Mr Doubleday also filed a further affidavit dated 2 July 2015 which attached his June 2009 affidavit and its schedule. He also addressed the adjustment that took into account that, 18 months after the July 2008 schedules were prepared, a GST tax credit of $102,777.77 had been applied to three GST periods.[70]
[70]At [50].
After applying the 15 per cent relief, Mr Doubleday calculated the total tax debt as at 22 July 2008 was $1,088,461.15 calculated as follows:[71]
[71]At [51].
22 July 2008 – unpaid tax pursued
Less reduction of the December 2007
tax creditLess reduction and consequential
reduction in penalties and interestRevised July 2008 – unpaid tax
Less revised figure reduced by the
15 per cent reliefAmended July 2008 tax debt
$1,397,307.14
$102,777.77
$10,113.16
__________$1,284,416.21
$195,955.06
___________$1,088,461.15
Broken down as follows:
Core tax assessed debt as returned and/or reassessed
by CIRand incremental late payment penalties and use of
money interestTotalling:
$347,183.66
$741,277.49
_____________
$1,088,461.15
This Court noted the affidavit evidence did not directly explain how the core tax figure of $347,183.66 was derived.[72] The core tax should have represented tax due without penalties or use of money interest.[73]
[72]At [52].
[73]Neither term is used in tax legislation. “Core tax” is used to describe tax assessed as due and “core debt” is used to describe unpaid tax plus penalties plus interest.
While in its 2017 decision this Court expressed some reservation about the Court’s evaluation in its 2010 decision of an across-the-board 15 per cent reduction in penalties as being an appropriate measure, the Court accepted it had no jurisdiction to revisit that issue.[74] CPL was bound by the 15 per cent reduction. All that remained open to it was to test the accuracy and methodology of the Commissioner’s calculation of that 15 per cent reduction.[75] That calculation was to be on the most favourable assumption for the taxpayer and needed to reflect the appropriate adjustment to core tax necessitated by an earlier error concerning a GST refund.[76]
[74]First liquidation appeal judgment, above n 3, at [100].
[75]At [105].
[76]At [105].
This Court then summarised its position on the various figures and calculations as follows:
[76] Before proceeding further, it is convenient to note the source, within the material already referred to, of the various figures that were mentioned by Mr Doubleday:
(a)$1,467,585.23 is the July 2008 total debt in column G at [47] above;
(b)$1,397,307.14 is derived by subtracting $70,278.09 (being the default assessments) from the figure in (a);
(c)$1,199,835.11 is derived by subtracting $197,472.03 (being the IRD’s 15 per cent reduction) from the figure in (b);
(d)$1,088,461.15 reflects the reduction for the $102,777.77 tax credit as shown at [51] above;
(e)$827,304.62 is Mr Brighty’s calculation which assumed penalties and interest stopped at December 2006;
(f)$109,675.22 (the “core tax” figure in Annexure E to Mr Doubleday’s June 2009 affidavit) is the differential between $1,136,138.36 (core tax plus shortfall penalties) and $1,026,463.14 (payments) shown in columns C and E respectively at [47] above.
(Footnotes omitted.)
The Court then considered it was arguable on Mr Hampton’s evidence that CPL had assets of approximately $879,029.92.[77] In addition, there was an insurance payout of $138,064.77 still to be disbursed which led to total adjusted assets of CPL of $1,017,094.60.[78] The Court considered the figure of $1,017,094.60 was only slightly shy of the figure of $1,088,461.15 referred to in Mr Doubleday’s adjusted figure.[79] For those reasons, this Court allowed the appeal on condition that the sum of $109,675.22 which it had identified as the core tax was paid.[80]
The second liquidation hearing in the High Court
[77]At [81], referring to bank accounts and the property at 854 Colombo Street.
[78]At [82]–[83].
[79]At [83].
[80]At [87]–[88].
When the second liquidation application came back before Osborne J, the Commissioner again argued, as at 16 February 2018, CPL was indebted to her in the sum of $1,088,461.15 calculated up to the July 2008 cut-off date.[81] In addition, the Commissioner claimed CPL was contingently liable to her for an additional $587,389.01 and court costs in the sum of $32,105.
[81]Second liquidation judgment, above n 6, at [36].
Osborne J accepted the further evidence filed by Messrs Doubleday and Brighty for the second liquidation application established both the core tax due to the Commissioner and also the calculation of a 15 per cent reduction adopted by the Commissioner after the 2010 judgment of this Court was correctly applied and calculated.[82]
[82]At [37]–[39], referring to Affidavit of Lieuwe Alexander Le Fleming Doubleday, dated 10 April 2018 and Affidavit of Adrian James Brighty, dated 11 April 2018.
Mr Brighty deposed the core tax (tax assessed by the Commissioner but without penalties or interest) owed by CPL was $333,752.26. That was made up as follows:[83]
6 income tax periods $193,329.69
1999 income tax period $16,186.05
14 GST periods $96,640.27
GST period ended 31/7/2000 $27,596.25Total core tax owing $333,752.26[83]At [39].
Mr Brighty confirmed in only one income tax period and one GST period had payments been made. Applying the payment first to penalties and interest led to the balance income tax figure due from 1999 of $16,186.05. The GST credit of $57,860.13 was insufficient to offset all of the interest and late payment penalties of $90,223.16. After taking account of the accrued penalties and interest in addition to the core tax, the tax debt was $1,397,307.40. A 15 per cent reduction applied to those penalties and interest, in compliance with the 2010 appeal judgment, was $197,472.03. From the figure of $1,397,307.40 the $197,472.03 was deducted, then, as Mr Brighty explained:
[The resultant figure of] $1,199,835.11 … is then reduced by the input tax credit of $102,777.77 plus the interest and penalties ($10,113.17) that are automatically removed. However, we had previously allowed a 15% reduction in relation to the amount of $10,113.17, so that 15% reduction now needs to be reversed, an amount of $1,516.98. In the amended statement of claim the net difference between the two figures ($8,596.21) is what is deducted in relation to the interest and penalties from the debt able to be collected …
That analysis led to the tax debt due of $1,088,461.15 before taking account of the unpaid Court costs of $32,105 and the additional contingent claims.[84]
[84]Second liquidation judgment, above n 6, at [149].
In support of her challenge to the calculations, Ms Sisson drew the Court’s attention to this Court’s decision in 2010 where it said:[85]
The Commissioner should be able to collect immediately (at the least) the core tax owing which is not in dispute …
And later that the calculation of core tax owing must be made “on the most favourable assumptions for the taxpayers”.[86] Ms Sisson argued the Commissioner was wrong to assess the tax debt overall including penalties and use of money interest on an ordering basis. In her submission, that ignored the success of the plaintiffs (including CPL) in establishing that during the period of the alleged arrangement the taxpayers could rely on the deferral of recovery action to excuse their failure to make payment.
[85]Judicial review appeal judgment, above n 26, at [146].
[86]At [147].
In Ms Sisson’s submission, taking the direction from this Court in 2010, the Commissioner should have prepared a schedule of the dates of CPL’s core tax payments, assessments and period by period tax balance owing as at 2004. Ms Sisson also argued the clock on penalty accumulation should stop at 2004. The Court would then have been able to determine the balance of core tax that remained unpaid up to that time. She submitted the 15 per cent reduction should be made on the total of penalties accruing for the period of any unpaid balance of core tax during the period of negotiations to the time of the 2004 stay.
Ms Sisson compiled a table reflecting the basis she considered appropriate which showed, excluding the shortfall penalties of $53,700.00 (which was subject to dispute in the MASOC claim), CPL had unpaid core tax of $26,213.00 as at 2004. She submitted accordingly there was virtually no unpaid core tax balance on which penalties could accumulate.
Ms Sisson argued in 2017 the Court of Appeal had applied a similar approach to the methodology in requiring CPL to pass core tax of $109,675.22. Ms Sisson also criticised the decision to transfer a credit of $59,518.00 away from CPL to the Chesterfields’ partnership.
Discussion
At its heart, the difference between the parties is the interpretation of the 2010 Court of Appeal judgment and what this Court intended by its suggestion of a 15 per cent deduction in tax liability. Ms Sisson considers the deduction should be applied to core tax and prepared her analysis on the basis there was no interest or penalties payable by CPL after 2004. The Commissioner has taken the view the appropriate date to stop penalties and interest is July 2008 and has applied a 15 per cent reduction in penalties and interest calculated at that date.
The relevant passage of this Court’s 2010 decision is:[87]
[93] Given the long history of this matter,rather than undertaking the laborious process of consideration set out above, a pragmatic course may be merely to reduce penalties by a certain percentage across the board. In this regard, a reduction of 15% would, in our view, more than fulfil the requirements of the first judicial review judgment. In saying this, we are not to be taken as mandating this pragmatic approach. Rather we raise it as an alternative solution. It is for the Commissioner to choose whether or not he wishes to adopt this pragmatic approach.
[87]Judicial review appeal judgment, above n 26 (footnote omitted).
The conclusion 15 per cent was the appropriate reduction was in the context of the preceding paragraphs:
[89] With regard to s 183A, the task was to assess the extent of remission of penalties that should occur during the period of the litigation. This reconsideration would need to take into account, we assume, the fact that there was a bar on the collection of taxation imposed by the Court during this period.
[90] While the Judge had upheld the decision not to remit penalties under s 183A made by the Commissioner on 9 June 2004,he does appear to have expected the Commissioner to reconsider the position, taking into account the delays, the assurances and comfort given which gave rise to the “reasonable expectations” that the sums owing were negotiable and the deteriorating financial position of the taxpayers.
[91] In our view, what the first judicial review judgment required in this regard was for the Commissioner first to assess: the level of inordinate delay, being delay that cannot be explained by the needs of the investigation (noting the particular care that must be invested in any investigation which may result in criminal charges); ordinary workload pressures;any failures of the taxpayers to provide information; any conflicting instructions given; the reasonable suspicion with which the transactions were regarded;and the sheer complexity and confusion surrounding these taxpayers’ affairs. The Judge was then expecting that some portionof the penalties for the period of inordinate delaywould be remitted (using ss 6 and 6A of the TAA if necessary). This direction does not seem to have been limited to the amounts actually in dispute but related more widely to the accounts of the taxpayers generally.
[92] As Dr Harley, counsel assisting the Court, submitted, the Judge seems to have had in mind a certain minimum percentage of penalties that should be remitted to take account of the Commissioner’s responsibilityfor the level of penalties and to take into account the effect of the litigation and the taxpayers’ financial circumstances. We do not read this as suggesting that this deteriorating financial situation was in any way the fault of the Commissioner. Indeed, such a finding could not rationally have been made.
(Footnotes omitted.)
When those paragraphs are considered in context, we do not accept this Court was mandating the Commissioner was not entitled to charge penalties after June 2004. Quite the reverse. The Court noted and apparently accepted Fogarty J’s confirmation of the Commissioner’s decision in June 2004 not to remit penalties. The Court intended the 15 per cent reduction was to apply to penalties and interest, rather than just the core tax. Adopting a methodology of ordering was permitted.
The further observation of this Court in its 2017 decision is consistent with approval of that approach:[88]
[27] In relation to remission of some portion of the penalties, noted in [91], this Court made two comments:
(a) First, given the confusing nature of the taxpayers’ affairs and their clear defaults, the Court thought that considerable leeway would be accorded to the Commissioner in this regard. The fact that the taxpayers could have used their resources to pay tax (but chose to await the outcome of the investigations) was noted to be a relevant consideration.
(b) Second, the Court considered that only a portion of penalties should be remitted, even for the period of inordinate delay, as the taxpayers could clearly have paid the taxes rather than waiting for the result of the investigation.
[88]First liquidation appeal judgment, above n 3 (footnote omitted).
As to when the stay should apply, in its 2010 decision this Court noted:[89]
[145] As a separate exercise, the Commissioner should consider the remission of penalties incurred while the litigation was proceeding. In this regard, the fact that the Commissioner has not been able to collect the tax because of High Court orders is relevant. While the taxpayers could have paid at least the tax that was not in dispute the fact they did not do so cannot, in terms of the reasoning of the first judicial review judgment, be placed totally at their door. The Court (and the Commissioner) must take some responsibility. We agree with Fogarty J that the fact that the taxpayers were largely successful in the first judicial review is relevant in that regard.
[89]Judicial review appeal judgment, above n 26 (footnote omitted).
The Commissioner made a decision to not impose further interest and penalties after 2 July 2008. On Mr Brighty’s calculations that has relieved CPL from all penalties and use of money interest and on Mr Brighty’s evidence, for the period July 2008 to October 2015, the total relief enjoyed by CPL was approximately $1.852 million.
Mr Doubleday explained the Commissioner’s approach to the July 2008 cut‑off date was that the litigation started at the beginning of 2005 and ended on 27 July 2012 when the Inland Revenue had finalised the work arising from the litigation together with notification to CPL. Stopping the clock at July 2008 cut out slightly more than half the interest and penalties accrued during the relevant period of the litigation.
We agree with Osborne J’s conclusion Ms Sisson’s reliance on the period of the bar on the Commissioner recovering tax which commenced in 2004 is misconceived.[90] In its 2010 decision, this Court expressly referred to remission of penalties “during the period of the litigation”.[91] The Commissioner’s approach is consistent with that observation.
[90]Second liquidation judgment, above n 6, at [142]–[145].
[91]Judicial review appeal judgment, above n 26, at [89].
We also agree with Osborne J’s approach to the issue before him on the second liquidation:[92]
[64] The Court here must accordingly focus on the matters which the creditor must establish in order to obtain an order of liquidation. One of those matters, on the facts of this case, is the total amount of CPL’s debt to the Commissioner (established on the balance of probabilities). The identification of a particular figure of core debt (which would have been relevant in the interim debt collection situation were the Commissioner to have sought to enforce payment of that portion of the debt) falls away in significance. What the Commissioner is required to establish is the figure of total indebtedness, arrived at by accurate calculation and methodology in relation to all elements.
[92]Second liquidation judgment, above n 6.
On that basis, the evidence before the Court supported the conclusion CPL was unable to pay its debts as it had failed to answer the statutory demand and it owed the Commissioner $1,088,461.15 for unpaid tax, penalties and interest.
Quite apart from the above, the Court was also able to take into account contingent or prospective debts when determining CPL’s ability to pay its debts.[93]
[93]Companies Act, s 288(4).
In relation to that, the contingent debts the Commissioner claimed were:
Estimated GST on sale of 856–858 Colombo Street $85,118.16
Estimated GST on insurance proceeds $117,667.25
Use of money interest $104,603.60
Advance to interim liquidators of CPL $280,000.00
Total: $587,389.01
The Commissioner’s claim for GST in relation to the sale of 856–858 Colombo Street follows the sale of the property at auction for $802,000.00. CPL did not account for GST on the sale. In the absence of any returns from CPL, the Commissioner considers the GST liability, after allowance for costs, is $85,118.16. In the statement of defence, Ms Sisson pleaded no assessment had been issued.
Similarly, the Commissioner claims GST on the insurance proceeds of $117,667.25. CPL received insurance proceeds following the earthquakes totalling $936,906.89. It did not account for GST on those proceeds. GST was due and payable in relation to them pursuant to s 5(13) of the GST Act. Again, Ms Sisson takes the point no assessment had been issued by the Commissioner.
In addition, the Commissioner claimed there is use of money interest on both GST awards. Mr Sisson did not take issue with the Commissioner’s contention such interest was due in the event either or both of the GST claims were established.
We agree the Commissioner is a contingent or prospective creditor for the above sums claimed even absent any formal assessment at present. The obligation was on CPL to submit the relevant returns.
We are not so sure the $280,000.00 advanced to the liquidators should be regarded as a debt of CPL. The evidence in relation to the $280,000.00 is the Commissioner has advanced funds to the liquidator in anticipation of realisation of CPL’s assets in settlement of its debts. That suggests the money will be repaid. It is in the nature of a loan to the liquidators. It is not apparent why that should be laid at the feet of CPL as a debt of that company.
But even putting to one side for the moment the advance of $280,000.00 to the interim liquidators of CPL, there is a further contingent debt of $307,389.01.
Against that, on Ms Sisson’s case, the assets of CPL are 854 Colombo Street and the balance of an insurance claim. The parties generally agree the value of 854 Colombo Street at approximately one million dollars (excluding GST).
The insurer considers the residual insurance payment due to be $138,064.77. Ms Sisson considers the value of the insurance to be considerably more on a replacement basis, but that is not accepted by the insurer or the liquidators. On any view of it, it is not an asset CPL could rely on to meet its debt to the Commissioner.
On the above analysis, CPL’s assets were $1,138,064.77. Its debts were $1,395,805.16, leaving a shortfall of $257,785.39. The Judge was correct to come to the view that, as well as being unable to pay its debts as they fell due, CPL was balance sheet insolvent.
While the Court has a discretion whether to make a liquidation order under s 241(4)(a) of the Companies Act, the discretion to decline to put a company into liquidation is to be sparingly exercised.[94]
[94]90 Nine Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424, [2020] 2 NZLR 1 at [15]–[16], quoting Feltex Carpets Ltd (in rec) v N & I Investments Ltd (2006) 3 NZCCLR 714 (HC) at [38].
There is no reason to exercise the discretion in this case. The appeal against the liquidation order must be dismissed.
CA361/2019
In a related appeal, Ms Sisson challenges the decision of Osborne J delivered on 26 July 2019 in which the Judge dismissed Ms Sisson’s application for a stay of execution and enforcement of the liquidation order pending the hearing and determination of CPL’s (and the related parties’) claim in the MASOC.[95] The application was made in reliance on r 17.29 of the HCR.
[95]Commissioner of Inland Revenue v Chesterfield Preschools Ltd (in interim liq) [2019] NZHC 1774.
The Commissioner and CPL took the position any interim protection of the position should be dealt with in the context of the pending appeals to this Court. The liquidators also undertook, pending the outcome of Ms Sisson’s appeal against the order placing CPL into liquidation, they would not dispose of the property held in CPL’s name at 854 Colombo Street, provided the appeals were diligently pursued.[96]
[96]At [16].
Osborne J readily concluded the application under r 17.29 for a stay of enforcement was misconceived.[97] The judgment appealed from was concerned with status, rather than a judgment, which created a civil debt or other liability. The Judge considered the appropriate procedure was for the applicants to seek a stay in the context of the appeals already filed.[98] He made an order under r 12(3) of the Court of Appeal (Civil) Rules 2005 staying any step by the liquidators in relation to the property at 854 Colombo Street, pending adjudication of Ms Sisson’s appeal.[99]
[97]At [20].
[98]At [21].
[99]At [26].
We agree with the Judge’s reasoning. Rule 17.29 of the HCR provides:
17.29 Stay of enforcement
A liable party may apply to the court for a stay of enforcement or other relief against the judgment upon the ground that a substantial miscarriage of justice would be likely to result if the judgment were enforced, and the court may give relief on just terms.
Part 17 of the HCR provides for the enforcement of judgments. The terminology of ‘entitled party’, ‘judgment creditor’, ‘judgment debtor’ and ‘liable party’ is consistent with one party being entitled to enforce a judgment against another.
Rule 17.1 defines “enforcement process” as including every order referred to in r 17.3. Rule 17.3(1) refers to the following methods of enforcing judgments specifically:
(a)an attachment order;
(b)a charging order;
(c)a sale;
(d)a possession order;
(e)an arrest order; or
(f)a sequestration order.
Again, the terminology is consistent with the enforcement of obligations under a judgment rather than a change in status such as on a liquidation or adjudication. The effect and consequences of a liquidation order are provided for by the provisions of pt 16 of the Companies Act. They are quite different to the steps a creditor may take to enforce a judgment debt. There is no enforcement process in relation to the liquidation order. There is, therefore, nothing to stay under r 17.29.
This Court had occasion to consider a similar application by Mr Hampton in relation to his adjudication in the case of Hampton v Minter Ellison Rudd Watts.[100] In that case, Mr Hampton lodged an appeal against his adjudication and sought a stay of the judgment under r 17.29.
[100]Hampton v Minter Ellison Rudd Watts [2020] NZCA 291, (2020) 29 NZTC 24-069.
The first issue addressed by the Court was whether it had jurisdiction under r 17.29 to stay Mr Hampton’s adjudication. This Court noted:
[19] The purpose of the rule is to enable parties who are held liable under a judgment of the Court to apply for a stay of enforcement of the judgment or other relief against it. That is a poor fit for the situation here because Mr Hampton is not a liable party under a judgment: rather, he has been adjudicated bankrupt, and bankruptcy is a status rather than a form of liability. Before us, Mr Hampton maintained that he was a judgment debtor to MERW and thus a “liable party” in terms of r 17.1. However, that confuses the original judgment obtained by MERW in February 2010 with the adjudication order made by Associate Judge Matthews in June 2013. Unlike the 2010 judgment, the adjudication order could not be “enforced” by MERW. Once made, it took effect by operation of law: there is nothing further the creditors could do.
[20] Mr Hampton further contended that the word “judgment” could be defined broadly to encompass an adjudication order and pointed to the suggestion a court order could be “enforced in the same way as a judgment” in r 17.2 and the broad definition adopted elsewhere in r 11.1. Again, however, we reject that submission simply because it misdescribes the nature of an adjudication order, which as we have noted, cannot be “enforced” and is not what is contemplated by r 17.2.
[21] The correctness that conclusion can be confirmed by considering the effect of the orders Mr Hampton sought in the context of fundamental principles of insolvency law.
[22] A fundamental aspect of that law is that the adjudication of a bankrupt vests the remaining assets of that person in the Official Assignee. It is the Assignee who thereafter has full control of those assets. They are to be disposed of for the benefit of the bankrupt’s creditors. Subject to the possibility of there being a surplus after realisation and application, the insolvent person can have no interest in the assets of their insolvent estate absent (perhaps) disclaimer of onerous property which the insolvent nevertheless values.
…
[25] We are therefore satisfied that Osborne J’s decision there was no jurisdiction to make the order Mr Hampton sought under r 17.29 was correct and the Second Appeal is dismissed accordingly.
(Footnotes omitted.)
Similar reasoning applies to Ms Sisson’s appeal against the refusal of a stay under r 17.29 in relation to the liquidation of CPL in the present case.[101] The appeal is dismissed.
CA390/2019
[101]In Hampton v MinterEllisonRuddWatts [2020] NZSC 123 the Supreme Court dismissed Mr Hampton’s application for leave to appeal the Court of Appeal judgment. In doing so, at [20] it noted it saw no need to depart from this Court’s view that r 17.29 did not apply to bankruptcy applications.
As well as dismissing the application for stay of the enforcement under r 17.29, Osborne J issued a separate minute dealing with the papers Ms Sisson had filed, which were in the nature of interlocutory applications, for orders removing a freezing order against the assets of CPL and removing a caveat against the title to a property at 854 Colombo Street.[102]
[102]Commissioner of Inland Revenue v Chesterfields Preschools Ltd (in liq) HC Christchurch CIV‑2015-409-43, 26 July 2019 (Minute of Osborne J).
The Judge considered neither of those applications could properly be the subject of an interlocutory application in the liquidation proceeding.[103] He ruled they should not have been accepted for filing.[104] He also expressed the view Ms Sisson may not have had standing to pursue the applications.[105]
[103]At [3].
[104]At [3].
[105]At [5].
Ms Sisson seeks to appeal those orders as well. She argues the Judge failed to take into account:
(a)the interlocutory applications were unopposed;
(b)the liquidation judgment was under appeal;
(c)the interlocutory applications were contingent on the decision of the High Court in a stay application;
(d)the freezing order had been obtained on an ex parte interlocutory application by the Commissioner and liquidator in the liquidation proceeding;
(e)the Court had previously authorised Ms Sisson to act on behalf of CPL in the capacity of trustee to meet the condition in setting aside the liquidation order;
(f)the freezing order affected Ms Sisson in her personal capacity and she was a party to it; and
(g)previous High Court and Court of Appeal judgments had granted Ms Sisson standing to act on behalf of CPL.
As counsel for the Commissioner submitted, the history of the freezing order, in particular, is convoluted. They were first made by Fogarty J in his judgment of 13 September 2005.[106] Fogarty J imposed mareva injunctions (now called freezing orders) on the taxpayers to restrain them from disposing of or encumbering or otherwise dealing with property (including 854 Colombo Street) or other assets up to the value of $3 million.[107] Ms Sisson also provided an undertaking to the Court in relation to not encumbering or otherwise dealing with assets to a total value of $3 million.[108]
[106]Chesterfield Preschools Ltd v Commissioner of Inland Revenue (No 2) (2005) 22 NZTC 19,500 (HC).
[107]At [49]–[50].
[108]At [48].
Some additional charging orders were made in 2006 but then, in 2007, the orders were set aside and replaced by an extended undertaking from Ms Sisson to the Court.[109] At the same time, 854 Colombo Street and other properties were transferred into Ms Sisson’s name to allow them to be refinanced. Ms Sisson was to hold the property as trustee for the beneficial owner.
[109]Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2004-409-1596, 19 December 2006; and Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2004-409-1596, 31 October 2007.
After difficulties arose, the Court re-imposed mareva injunctions in August 2008, this time, extended to include Ms Sisson.[110] The freezing orders were amended by subsequent judgments of 30 September 2008 and 16 March 2010 to permit the taxpayers to raise finance against certain properties that were subject to the freezing orders.[111]
[110]Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008-409-722, 28 August 2008.
[111]Chesterfield Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,032 (HC); and Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008-409-722, 16 March 2010.
Further finance was raised on one of the properties (67 Augusta Street) without authority. A mortgagee sale followed. A further freezing order was sought. Fogarty J directed the Official Assignee to hold the proceeds as sole trustee.[112]
[112]Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008-409-722, 24 October 2013 (Minute of Fogarty J).
Various other applications were made to the Court to vary the freezing orders. In a judgment delivered on 16 March 2015, Gendall J made freezing orders in relation to 854 Colombo Street, funds in two ANZ bank accounts and the proceeds of sale of 67 Augusta Street.[113] Ms Sisson was not a party to the proceeding. She was, however, released from her undertaking.[114]
[113]Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2015] NZHC 482.
[114]At [13]–[14].
Then, following CPL’s first liquidation, the liquidators sought orders vesting the property in CPL. The freezing orders were lifted to allow that to occur. Following the appeal decision setting aside the liquidation order, the Commissioner sought the reinstatement of a freezing order and a caveat on 854 Colombo Street. The freezing orders and caveat were reinstated by Gendall J on 15 August 2017.[115]
[115]Commissioner of Inland Revenue v Chesterfields Preschools Ltd HC Christchurch CIV-2015-409‑43, 15 August 2017 (Minute of Gendall J).
As counsel for the Commissioner submits, this appeal is not an appeal against the freezing orders imposed by Gendall J in his minute of 15 August 2017, which reinstated the orders previously made on 16 March 2015. Rather, it is a purported appeal against Osborne J’s dismissal of the applications to remove the freezing order and caveat.
While the freezing orders seem to have been made in the course of the liquidation proceedings which were commenced prior to 1 March 2017, and so leave is not required to bring the application, a principal difficulty for Ms Sisson is standing.[116]
[116]Senior Courts Act 2016, s 56 and sch 5 cl 10.
Ms Sisson was granted leave to be joined as a defendant to the liquidation proceedings for the purposes of appealing against the liquidation order in her own right and interest. She has no standing in relation to the freezing orders or the caveat.
Further, quite apart from the standing issue, any application to remove a caveat should have been made by an originating application.[117]
[117]High Court Rules, r 19.2(l).
Finally, we note the freezing order and caveat relate to property owned by CPL. In practical terms, given the present decision confirming the liquidation of CPL, there is no justification or valid reason to rescind the current freezing order or caveat to allow Ms Sisson to take control of property owned, held by, or on behalf of CPL.
For these reasons, the Judge was correct to rule Ms Sisson could not pursue the applications within the broader context of the liquidation proceedings.
CA391/2019
The appeal is directed at Osborne J’s costs order delivered on 12 July 2019.[118] Osborne J awarded costs of $4,460.00 in favour of CPL against Ms Sisson on her unsuccessful opposition to the liquidation.
[118]Commissioner of Inland Revenue v Chesterfields Preschools Ltd (in interim liq) [2019] NZHC 1644.
The appeal was dated 8 August 2019. Security was required to be paid under r 35(3) of the Court of Appeal (Civil) Rules within 20 working days after the appeal was filed. Ms Sisson failed to pay security by that date or subsequently.
In a minute of this Court issued on 10 August 2020, Miller J confirmed security had not been paid.[119] Ms Sisson advised she intended to abandon the appeal but had not filed a notice of abandonment.[120] The appeal was called with other appeals before the Court for the purposes of dealing with it.[121]
[119]Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue CA391/2019, 10 August 2020 (Minute of Miller J) at [1].
[120]At [1].
[121]At [2].
The appeal is struck out in accordance with r 37(1) of the Court of Appeal (Civil) Rules.
Result/orders
CA115/2019 — the appeal is dismissed.
CA361/2019 — the appeal is dismissed
CA390/2019 — the appeal is dismissed.
CA391/2019 — the appeal is struck out.
Costs
We order Ms Sisson to pay the following costs:
(a)In respect of CA115/2019, Ms Sisson must pay to the Commissioner costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements. Ms Sisson must pay to CPL costs for a standard appeal on a band A basis plus usual disbursements.
(b)In respect of CA361/2019, Ms Sisson must pay to the Commissioner costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements.
(c)In respect of CA390/2019, Ms Sisson must pay to the Commissioner costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements.
(d)In respect of CA391/2019, Ms Sisson must pay to CPL costs for a standard appeal on a band A basis, with certification for second counsel, plus usual disbursements.
Solicitors:
Lane Neave, Christchurch for Chesterfields Preschools Ltd
Crown Law Office, Wellington for Commissioner of Inland Revenue
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