Commissioner of Inland Revenue v BF7 Trading Limited

[2021] NZHC 2553

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-2319

[2021] NZHC 2553

IN THE MATTER OF

the Companies Act 1993

BETWEEN

COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

BF7 TRADING LIMITED

Defendant

Hearing:	24 September 2021
Appearances:	Cloete Van Der Merwe for the Plaintiff G D Clews for the Defendant
Judgment:	28 September 2021

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on 28 September 2021 at 4:00pm

pursuant to Rule 11.5 of the High Court Rules

…………………………. Registrar/Deputy Registrar

Solicitors:

Inland Revenue Department (C Van Der Merwe), Auckland, for the Plaintiff ICLaw/Culliney Foley (Owen Culliney), Hamilton, for the Defendant

Copy for:
G D Clews, Auckland, for the Defendant

COMMISSIONER OF INLAND REVENUE v BF7 TRADING LIMITED [2021] NZHC 2553 [28 September 2021]

[1]    BF7 Trading Ltd seeks a further adjournment of the Commissioner of Inland Revenue’s liquidation application. It wants more time to carry out an agreement under which it has sold its “book” of labour. If that contract is completed, it says that it will clear its liabilities to the Commissioner. It also hopes there will be a surplus. The Commissioner opposes and seeks a liquidation order now.

[2]    The Commissioner has applied for liquidation on the ground that BF7 Trading Ltd is not able to pay its debts. In October 2020, she served a statutory demand on the registered office of BF7 Trading Ltd, demanding paying of $661,625.59. This was made up of arrears of GST (totalling $190,409.90) going back to April 2017, arrears of  employer  taxes  (including  PAYE)  going  back  to  30 September  2017  (total

$467,604.33),  and  unpaid  income  tax  for  the  years  ending  31 March  2017  and

31 March 2019. The core unpaid taxes were $362,092.28. The company did not comply with the demand. The Commissioner began this proceeding on 27 November 2020. The solicitor’s certificate for the hearing on 24 September 2021 showed that the outstanding taxes are now $886,879.67.

[3]    Since the Commissioner’s statutory demand, BF7 Trading Ltd has not paid GST in October 2020, November 2020, December 2020, March 2021, April 2021 and June 2021. It did pay GST in the other months. Again, since the statutory demand it has not paid PAYE in October 2020, June 2021, July 2021 and August 2021. It did pay PAYE in other months. The total debt to the Commissioner has increased not only because of ongoing interest and penalties on unpaid taxes, but also because new taxes have not been paid. Of the taxes that have accrued since the statutory demand, the core tax portion is $133,079.02.

[4]    The business of BF7 Trading Ltd is the recruitment and supply of labour, especially for the construction industry. In the past it has sourced labour from the Philippines, but that came to an end with the onset of the COVID-19 pandemic. It now recruits labour locally. The company was incorporated in September 2016 under the name Bishop Family Holdings Ltd. It changed its name to BF7 Trading Ltd in

July 2017. On incorporation, the sole director was Mr Roy Gillingham David Bishop. He resigned in March 2017. Since then, the company’s director has been Mr Spencer McKenzie Gillingham Bishop. Mr Roy Bishop is the only person in the company to give evidence. The company employs him as a senior personnel consultant.

[5]    In 2019, the company entered into an arrangement with the Inland Revenue to pay arrears of tax in instalments. The company did not comply with the arrangement and the Inland Revenue cancelled it. In 2020, the company made other proposals to the Inland Revenue to pay off the debt, but no agreement was reached. This year, BF7 Trading Ltd made proposals to sell its “book” of workers, with a view to paying off its debts to the Commissioner. The company says it has no other significant creditors.

[6]The Commissioner’s liquidation application has been called on 12 February,

12 March, 23 April,  14  May,  11  June,  16  July,  13  August,  10  September  and 24 September 2021.

[7]    At the first call the company said it was exploring a proposed sale to One World Resourcing Ltd, which carries on a similar business. It also had a back-up if that proposal came to nothing. The Commissioner of Inland Revenue opposed any adjournment. The Commissioner’s evidence referred to past arrangements which had not been complied with, and the fact that the company had received eight wage subsidy payments from the Ministry of Social Development but had not paid the PAYE for those payments. The company was apparently trading while insolvent.

[8]    Notwithstanding the Commissioner’s opposition, I adjourned the application to give the company the opportunity to sell its “labour placement book.” At the call on 12 March 2021, the company sought another adjournment. The proposed sale to One World Resourcing Ltd had not gone ahead, but the company was now actively pursuing a sale to Extrastaff Management Ltd. The proposed price would clear the outstanding taxes.

[9]    As  there  seemed  reasonable  prospects  of  this  proposal  producing  funds, I adjourned the matter again. By the April call, the matter had progressed to the extent that firm terms of contract were being negotiated with Extrastaff Management Ltd.

I required the company to give fortnightly reports to Inland Revenue on progress on the sale. The company’s evidence has shown that it has been in frequent ongoing contact with the Inland Revenue on progress.

[10]   On 11 June 2021 I was advised that an agreement had been entered into with Extrastaff Management Ltd. The company was to catch up on four tax payments (two PAYE and two GST). Assignment of the company’s rights to the Inland Revenue had been completed and irrevocable instructions had been given to the company’s solicitors to receive and disburse payments in accordance with the assignment. By this stage the Commissioner was not opposing adjournments.

[11]   On 16 July 2021 the company sought a further adjournment to allow the Commissioner to be satisfied on certain matters. I was advised that the first payment under the agreement with Extrastaff was imminent. Payment was to go directly to the Commissioner.

[12]   In August 2021 I was advised that the contract price had increased. The first payment under the agreement with Extrastaff, $150,000, was to be paid within two weeks. I adjourned the matter to 10 September 2021. The promised payment of

$150,000 did not eventuate. The company’s explanation was that construction sites had closed to comply with the fresh national lockdown restrictions, imposed as a result of the appearance of the Delta variant of the COVID-19 virus, and Extrastaff accordingly did not pay. This was the straw that broke the camel’s back for the Commissioner. The Commissioner was no longer interested in the company’s proposal to pay off its debt with payments over time. On 10 September 2021 the Commissioner sought a liquidation order.

[13]   I adjourned the matter to 24 September 2021 to give the parties the opportunity to file evidence.

[14]   In many liquidation and other insolvency proceedings, the creditor establishes the grounds for an order. For companies that is an order under s 241(4)(a) of the Companies Act 1993 when the company is unable to pay its debts. A company may however resist an immediate liquidation order by proposing that, if given time, the

creditor’s debt will be satisfied and the company will establish its solvency. Its current inability to pay the creditor’s debt is no more than a temporary cash-flow difficulty. The court has a discretion whether to make a liquidation order. Under s 241(4) the court may appoint a liquidator and may properly decline to make a liquidation order if there are viable alternatives. Those alternatives include not only formal arrangements such as compromises with creditors under Part 14 of the Companies Act and voluntary administration under Part 15A, but also by extending time to see if the company can discharge its liabilities. Many liquidation applications are discontinued after adjournments as a result the company clearing its liabilities. The business can continue. The expenses of liquidators and the loss in value associated with liquidation are avoided.

[15]   Accordingly, BF7 Trading Ltd’s initial requests for an adjournment were not unusual. What was unusual is the number of adjournments and the time taken to put the proposed sale of the “book” in place.

[16]   An affidavit by an Inland Revenue officer explains that the lawyers for BF7 Trading Ltd presented a draft deed of assignment to which the Commissioner would be a party, along with irrevocable instructions, under which the Commissioner would receive payments made by Extrastaff and a draft undertaking by the company’s lawyers. The officer says in the light of advice from the department’s lawyers the Commissioner did not enter into the arrangement. The Commissioner also rejected the company’s request for financial relief to pay overtime. That decision was made in the light of legal advice, and also the Inland Revenue’s Standard Practice Statement (SPS18/04) for “Options for relief from tax debt”.

[17]   On 9 September 2021 the Inland Revenue officer wrote to counsel for BF7 Trading Ltd explaining the Commissioner’s reasons. The company filed further evidence in response. This included a schedule of payments to be made under the sale of the “book”. The schedule showed payments totalling $875,000 to the Inland Revenue over eleven months, with the first payment to be $150,000.

[18]   The thrust of the submissions for the company was that this still offered the best chance for the Commissioner to be paid. The core tax payable to the

Commissioner, some $488,000, would be paid by the fourth month. Even if the transaction did not carry through to completion, the Inland Revenue would still benefit more than if the company were put into liquidation now. It was submitted that the Inland Revenue officer had overstated the risk in opposing the arrangement. While the schedule showed payments totalling $875,000 to the Inland Revenue, less than the full debt, it was submitted that some of the debt could be remitted. The prospects of remission would be improved if the court were to give its blessing to the arrangement. The failure to pay the $150,000, as indicated at the adjournment on 13 August, was as a result of an unforeseeable supervening emergency. Now that Auckland is at Alert Level 3, work will start again on construction sites and the agreement with Extrastaff is likely to resurrect. There was no threat to the integrity of the tax system, because the taxpayer was trying to do its utmost to comply with its tax obligations.

[19]   There is another aspect, which I became aware of from dealing with another liquidation application, this one by One World Resourcing Ltd against another company associated with the Bishop family. Mr Roy Bishop, the senior personnel consultant, is an undischarged bankrupt. This is his second bankruptcy. His first bankruptcy was in 2013. He was automatically discharged in 2016. This time, he was adjudicated bankrupt in May 2019. Mr Clews explained that the Official Assignee had given consent under s 149 of the Insolvency Act 2006 to Mr Roy Bishop being employed as a senior recruitment consultant by BF7 Trading Ltd, a company controlled by a relative. After the hearing Mr Clews sent a copy of the Official Assignee’s consent. The consent, given in August 2019, is subject to conditions including that the bankrupt must have no managerial control over the business and its assets; he must not hold himself out to be in a management position within the business; he must not incur any liabilities on behalf of the business; and he was not to have authority or access to the business bank account.

[20]   Notwithstanding the Official Assignee’s consent, Mr Roy Bishop’s involvement in the business gives me concern. From what I can judge in this proceeding, his part seems to be prominent. He swore affidavits in February, March, April and September 2021. No one else has given evidence for the company. In his affidavits, he shows close knowledge of the affairs of the company, especially the negotiations first with One World Resourcing Ltd and second with Extrastaff

Management Ltd. From his presence in court on one occasion when the case was called, he appears to be the person within the company giving instructions to counsel. His affidavits are silent about anyone else actually running the company.

[21]   I acknowledge that I do not have full information. All the same, Mr Bishop’s involvement in the company raises questions whether he may be a de facto director of the company and whether his role in the company amounts to management, something outside the scope of the Official Assignee’s consent. At the least, his employment by a small closely-held company controlled by a relative, his status as an undischarged bankrupt and the company’s ongoing failures to pay taxes are an unhappy combination.

[22]   A commonly cited purpose for making a liquidation order is to allow an independent investigation of the affairs of the company and to safeguard the interests of unsecured creditors.1 That is often applied even if there is little prospect of a distribution for creditors. That may count against acceding to suggestions that liquidation will not serve a useful purpose or that those behind the company can be trusted to realise the assets more efficiently and at less cost than a liquidator would. Liquidation accordingly also serves a public purpose. There is good reason to apply that here.

[23]   The Inland Revenue officer was criticised for suggesting that a liquidator would be able to manage the agreement with Extrastaff. There is something in the criticism, as a liquidator is unlikely to have the industry experience required to make sure that the agreement is completed successfully.

[24]   The sale of the company’s “book” is a relatively unusual transaction. It is more challenging than realising tangible assets such as land, plant and machinery. It has been difficult to negotiate.  Making it work is challenging, as the non-payment of

$150,000 has shown.  Success is not assured, even if no liquidation order were made.

1      Re Feltex Carpets Ltd (in rec) (2006) 3 NZCCLR 714 (HC) at [38]; 90 Nine Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424, [2020] 2 NZLR 1 at [15].

[25]   To sum up. BF7 Trading Ltd is clearly insolvent. For some years now it has defaulted many times in paying taxes. It did not keep to an arrangement made in 2019 to pay its arrears. Its defaults continued after the Commissioner served her statutory demand. Its position has got worse. The company’s proposals in 2021 to sell its “book” are not straightforward. They involve payments over time and depend on ongoing performance by the company. The failure to pay the promised $150,000 shows that the arrangements are fragile and can fall over easily in these uncertain times. There can be no assurance that future difficulties may not come up again. The company has been given the chance to give this matter its best shot, but its financial position has deteriorated. Mr Roy Bishop’s part in the company raises questions which warrant investigation by an independent insolvency practitioner.

[26]   In these circumstances, I do not consider that it is appropriate to give the company more time. I make an order putting BF7 Trading Ltd into liquidation. The time of the order is 4:00pm on Tuesday 28 September 2021.

[27]   I appoint Rhys James Cain and Larissa Helen Logan as liquidators. I approve their rates of remuneration on the normal terms. At the conclusion of the liquidation they are to seek the court’s approval of their overall remuneration.

[28]I award costs to the Commissioner of $1,806.75 and disbursements of

$1,248.81, a total of $3,055.56.

…………………………………….

Associate Judge R M Bell