Commissioner of Inland Revenue, ex parte Letica

[2012] NZHC 379

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2011-488-491 [2012] NZHC 379

BETWEEN  COMMISSIONER OF INLAND REVENUE

Judgment Creditor

ANDPETER JOSEPH LETICA Judgment Debtor

Hearing:         27 February2012

Appearances: M B Smith for Creditor

D Grindle for Debtor

Judgment:      27 February 2012

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:

Marsden Woods, Inskip & Smith (P J Smith), P O Box 146 Whangarei 0148

Email:  [email protected]

Webb Ross Lawyers (D Grindle), Private Bag 9012 Whangarei 0148

Email:  [email protected]

COMMISSIONER OF INLAND REVENUE V LETICA HC WHA CIV-2011-488-491 [27 February 2012]

[1]      This is an opposed application for an adjudication order.  The Commissioner of Inland Revenue obtained judgment against Peter Joseph Letica in the District Court at Kaitaia on 22 June 2011.  The amount of the judgment was $273,415.05. That was made up of liability for a variety of taxes: PAYE deductions, child support deductions, student loan deductions, KiwiSaver employee deductions, KiwiSaver employer contributions and goods and services tax.  The judgment was obtained by default. There was no appeal against the judgment and the judgment has not been set aside or stayed.

[2]      A bankruptcy notice was served on Mr Letica on 23 August 2011.  There was no application to set aside the bankruptcy notice.   Mr Letica did not comply with the notice.  Because he did not comply with the notice within 10 working days of being served he committed an act of bankruptcy.   The creditor filed the application for adjudication on 10 October 2011, within time under s 13 of the Insolvency Act 2006.

[3]      In his notice of intention to oppose the bankruptcy application, Mr Letica says that he intends to dispute the act of bankruptcy on the grounds that the judgment debt  claimed by the  Inland  Revenue is  owned  by Peter  Letica  Ltd  and  not  by himself.    However, in submissions today, Mr Grindle focused more on the court’s discretion under ss 36 and 37 of the Insolvency Act whether to make an order for adjudication.

[4]      It may be helpful to consider the particular taxes for which Mr Letica is said to be liable.   In his affidavit in opposition, Mr Letica challenges his liability for goods and services tax.  It is necessary to go back into the history of the matter.

[5]      Originally Mr Letica was trading on his own account.  In September 2006 a company was incorporated, Peter Letica Ltd.  It appears that from that time onwards that the business he had formerly operated under his own name was now operated by his company, Peter Letica Ltd.   That company went into voluntary liquidation in June 2011.  Mr Letica has objected that the assessments for goods and services taxes

are for goods and services tax liabilities incurred after the company began operating the business and he says that these are not his personal liabilities.

[6]      In October 2006, an application was made to the Inland Revenue on form IR 374.   This was an application for group registration for GST purposes.   Under s 55 of the Goods and Services Tax Act there can be group registration of GST taxpayers.   That allows two or more companies to be registered as members of a group if they come within a group of companies as that is defined in the income tax legislation.  If there is a group registration, then one of the members of the group is nominated as a representative.  The consequences of a group registration are set out in s 55. They include subs (7)(e):

Any input tax paid or payable by a member of the group shall be deemed to be paid or payable by the representative member.

A further proviso says:

All members of the group shall remain jointly or severally liable for any tax payable by the representative member.

[7]      So  far,  that  legislation  only applies  to  members  of a  group,  that  are  all companies.  But the section goes on to provide that the Commissioner can also allow group registration for natural persons when one person controls each of the others or all of the others in the group.  That was the provision that was applied here because Mr Letica was in control of his company, Peter Letica Ltd.   The Commissioner allowed group registration under s 55(8).  The effect of that was that Mr Letica was the representative of the group and that he was personally liable for the group’s GST liabilities.

[8]      Mr  Letica  says  that  he  did  not  appreciate  that  at  the  time.   The  Inland Revenue did write to him personally in October 2006.   They recorded that his application had been accepted.  In his affidavit, Mr Letica says that he considers the letters sent by the Inland Revenue to be misleading.

[9]      I have read those letters.   It is correct that the letters do not spell out the implications of group registration.   I have to say that I do not regard the Inland Revenue as required to spell out all the consequences of group registration formally

to Mr Letica.  That is because he had a tax agent acting for him.  The tax agent made the application for group registration on behalf of Mr Letica and his company.  The Inland Revenue was entitled to assume that the tax agent who had arranged for group registration would have advised Mr Letica about the consequences.

[10]     In this proceeding, it is not relevant whether or not the taxation authorities may or may not have advised Mr Letica.   For the case in this court, the essential point is that for goods and services tax purposes Mr Letica is under a personal responsibility for GST because of the group registration, even though his company may have incurred the liability.  What that means is that the Commissioner of Inland Revenue is in truth a creditor of Mr Letica for goods and services tax.  I accept that Peter  Letica  Ltd  operated  the  business  that  Mr  Letica  had  operated  up  until September 2006.

[11]     One  matter  that  puzzles  me  is  that  the  Inland  Revenue  has  also  treated Mr Letica as personally liable for PAYE, KiwiSaver, child support, and student loan deductions.  It is not clear to me at the moment whether there is provision in other tax statutes that could make Mr Letica personally liable for the other taxes of Peter Letica Ltd in addition to the goods and services tax.  So far as PAYE deductions are concerned, it could well be that as director of Peter Letica Ltd he may have an accessory liability for deductions not paid by the company.  Mr Smith was not able to help me very far on that point.

[12]     The  Commissioner  has  obtained  a  judgment  against  Mr  Letica.     In bankruptcy law, not all judgments are conclusive against a debtor.  In some cases the court is able to look through a judgment as to whether there is a true liability.  An authority which bears on that question is a decision of the High Court of Australia in Corny v Brien.[1]    In particular, when judgment is obtained by default, that decision makes it clear that the court might look through the judgment to see whether there is a true liability at law.  In this case, if I were to attempt that exercise, I am satisfied that I would find that Mr Letica does have a true liability at law for goods and

[1] Corney v Brien (1951) 84 CLR 343 at 2.

services tax.   There is still a question-mark in my mind about the PAYE, student

loan, KiwiSaver and child support deductions.   If those were the only liabilities

I might have been tempted to see whether the Inland Revenue would look at the matter afresh under s 113 of the Tax Administration Act.  But as it is, I regard the indebtedness  for  goods  and  services  tax  as  conclusive  and  not  open  to  further inquiry.   I have to deal with the matter on the basis that the Commissioner has established that it is in truth a creditor, and Mr Letica has committed a valid act of bankruptcy.

[13]     Mr Grindle urges on  me the  difficult  position  that  Mr  Letica  has  found himself in, because, as a result of the group registration, the consequences went beyond what Mr Letica may have appreciated and it would be unduly harsh now to adjudicate him bankrupt.

[14]     In the insolvency jurisdiction, the key issue is the insolvency of the debtor. That has been established.  In particular I note that over a period of time the Inland Revenue was prepared to see if arrangements could be entered into to resolve the outstanding tax issues between Mr Letica and the Commissioner.   These did not come to fruition.   Admittedly, they seemed to have been made on the basis that Mr Letica had a personal liability for PAYE as well as for GST, but the end point is that there is still this outstanding GST liability.  There are not now any proposals in front of the court by which the liability can be otherwise resolved.

[15]     I remind myself that the bankruptcy jurisdiction can be exercised in cases where  a  person  has  become  insolvent  without  any  fault  on  his  part  at  all. Misfortunes can befall people, with the result that they are no longer able to meet their liabilities, even though they may have planned prudently to pay their debts. Bankruptcy can still be an appropriate response to that state of insolvency.  First, it allows the affairs of the insolvent person to be placed under independent administration so that assets may be realised to pay creditors.  Next, it also marks the debtor’s accountability for the liability.  Accountability may be required even in the absence of fault on the part of the debtor.   And bankruptcy can be appropriate because it has the ultimate effect of discharging the debtor from the debt so that it does not continue to hang over him indefinitely.  In my view, those considerations outweigh any hardship that Mr Letica may feel.

[16]     Accordingly, in the exercise of my discretion under ss 36 and 37, I regard the appropriate response as being to make an order for Mr Letica’s adjudication in bankruptcy. The time of the order is 2:50pm.

[17]     There is an order for costs in favour of the Commissioner in the sum of

$3,760 and disbursements of $1,152.69.

........................................

R M Bell

Associate Judge