Commissioner of Inland Revenue v Brown
[2016] NZHC 1232
•8 June 2016
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2015-470-175 [2016] NZHC 1232
UNDER the Insolvency Act 2006 IN THE MATTER OF
the bankruptcy of IAN GRANVILLE BROWN
BETWEEN
COMMISSIONER OF INLAND REVENUE
Judgment Creditor
AND
IAN GRANVILLE BROWN Judgment Debtor
Hearing: 8 June 2016 at 2:15pm Appearances:
C D Walmsley for the Judgment Creditor
A J Bush for the Judgment DebtorJudgment:
8 June 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Inland Revenue (C D Walmsley), Hamilton, for Judgment Creditor
Bush Forbes (A J Bush), Tauranga, for Judgment Debtor.
COMMISSIONER OF INLAND REVENUE v BROWN [2016] NZHC 1232 [8 June 2016]
[1] The Commissioner applies for Mr Brown to be adjudicated bankrupt. The Commissioner obtained judgment against Mr Brown for unpaid taxes, penalties and interest for $221,970.18 in the District Court on 11 September 2015. Mr Brown did not appeal against that decision, and he has not sought a stay of execution. A bankruptcy notice based on that judgment was served on Mr Brown on 13 January
2016. Mr Brown did not comply with the notice within 10 working days of service. The Commissioner has accordingly applied for adjudication, relying on the non- compliance with the bankruptcy notice as the relevant act of bankruptcy.
[2] The bankruptcy application says that Mr Brown owes the Commissioner
$240,342.25. That is the judgment amount plus other taxes, penalties and interest incurred since judgment. At the hearing Mr Walmsley for the Commissioner stated that the amount is now $266,825.37. An officer for the Commissioner has attached to her affidavit a summary of account for Mr Brown as at 16 May 2016. That shows that Mr Brown is indebted for goods and services tax which has accrued from
31 August 2013 to 30 April 2016, totalling $14,576.28. There is also income tax which according to the statement of account has been assessed as falling due for the years ending 31 March 2008 to 31 March 2017. The total income tax is said to be
$255,090.96.
[3] Some adjustments to those figures are required. I am going to disregard the income tax said to be due for the years ending 31 March 2016 and 31 March 2017. While the Commissioner has assessed tax for the year ending 31 March 2017, that income year has not expired. The final tax for that year cannot therefore have been assessed. I am not going to treat Mr Brown as in default for unpaid income tax for the current income year, whatever his provisional tax situation may be.
[4] Equally, if there is unpaid terminal tax for the year ending 31 March 2016, the time for payment has not yet expired. I will not consider income tax for the year ending 31 March 2016 as overdue.
[5] I was also advised that Mr Brown has made a payment of $4,670.68 since the summary of account made on 16 May 2016. There may also be room for another adjustment based on my decision in Commissioner of Inland Revenue v Watkins.1 It is not clear whether the amount for which judgment was entered took into account interest and penalties that had accrued between the date of filing the proceeding and the date judgment was entered. The judgment indicates that certain credits were given, but it is not clear whether extra interest and penalties were added on. As the judgment was entered by default without a hearing, it seems unlikely that the
Commissioner could have entered judgment for further liabilities that had accrued between the date of filing and the date of judgment. Accordingly, it may be that in the Commissioner’s summary of account there are claims that are not eligible, given the merger rule applied in Commissioner of Inland Revenue v Watkins.
[6] For present purposes, I assume that Mr Brown is indebted to the Commissioner for a minimum sum of $221,611.18 being the amount of the judgment. Any payments he has made since then may have been applied towards current tax liabilities. If the Commissioner wishes to establish the true state of indebtedness after applying the merger rule in Commissioner of Inland Revenue v Watkins, I will require clearer evidence than I have been provided with.
[7] Mr Brown does not dispute his indebtedness to the Commissioner and he does not dispute that he has committed an act of bankruptcy. It is not disputed that the Commissioner has satisfied the requirements of s 13 of the Insolvency Act 2006:
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and
(b) the debtor has committed an act of bankruptcy within the period of
3 months before the filing of the application; and
(c) the debt is a certain amount; and
(d) the debt is payable either immediately or at a date in the future that is certain.
1 Commissioner of Inland Revenue v Watkins [2015] NZHC 1780.
Instead, Mr Brown says that the court should, in its discretion, not adjudicate him bankrupt. He relies especially on the just and equitable ground under s 37(c) of the Insolvency Act.
[8] It is necessary to set out some of the background to Mr Brown’s situation. At the heart of his defence is his proposal that he should be given time to pay off all his tax arrears. That entails that he will continue to carry on business in his occupation as an insurance broker.
[9] Mr Brown comes from England. He was born in 1941. That means that he is some 75 years of age. When he first came to New Zealand he worked in pastoral farming and then moved into horticulture. In the 1990s he went to work as an insurance salesman for National Mutual Insurance. With the demutualisation of insurance companies during the 1990s, he became a self-employed insurance advisor. He had a one-man company, Four Oaks Insurance Services Ltd, and was involved in a number of brokerages – Financial Wisdom Ltd, Hammond Brown Financial Services Ltd and finally Planwise Ltd. He became part of Planwise Ltd in
2008. On his evidence, that business was unsuccessful. Hoped-for economies of scale did not eventuate. Sales were not as high as had been targeted. An insurance company had made substantial advances against commission income. There were difficulties in servicing the loan. Mr Brown says that he was expelled from Planwise in 2013. He lost his shares in the company and was removed as director. He then started out afresh. He has had to reduce assets to meet his circumstances. A lifestyle property owned by trusts was sold to pay off the mortgage and to meet other liabilities.
[10] He says that since 2013 he has been trying to rebuild his business as a sole trader working from home, doing all his own administration, marketing and client care work. He has been doing his own tax returns because he can no longer afford an accountant – although he now proposes to engage an independent accountant to assist him. He lives in rental accommodation. He has minimal assets. On his valuation they do not come to more than $27,000. They comprise a business type vehicle, private vehicle, household effects and some business equipment. He has business liabilities, the bulk of which are taxes. He assesses them at $247,000 using
the amount of the tax judgment in the District Court. He has an ANZ overdraft, accountancy fees, and ACC levies. He also has personal liabilities which he puts at
$66,000. Those are all credit card debts.
[11] Mr Brown is a financial service provider under the Financial Service Providers Registration and Dispute Resolution Act 2008. Under that Act, an undischarged bankrupt may not be registered. Mr Brown points out that bankruptcy would inevitably mean that he would lose registration and he would be prohibited from carrying on business in his chosen occupation.
[12] Mr Brown’s proposal entails paying off tax arrears at the rate of, hopefully,
$50,000 a year in addition to meeting his current tax liabilities. To achieve this, he hopes to have gross sales of $300,000 a year. With his evidence, he has included schedules to demonstrate how that income would be applied to meet both tax liabilities and other liabilities. At the hearing I had some difficulty understanding how these schedules worked, but given his counsel’s explanation I accept that on their face, if the sales are achieved, he would be able to meet his living expenses, cut down as they are, and also pay something towards his credit cards.
[13] In the past, Mr Brown has presented proposals to the Commissioner to pay off tax arrears. He appreciates that the Commissioner has brought the current application because the Commissioner does not consider his present proposals realistic.
[14] Even when a creditor satisfies the requirements under s 13 of the Insolvency Act, adjudication does not follow automatically. The court has a discretion under ss 36 and 37 whether to adjudicate the debtor bankrupt. A leading authority on the exercise of the court’s discretion is the Court of Appeal’s decision in Baker v Westpac Banking Corporation:2
The principles governing the exercise of the discretion under s 26 to grant or refuse an order of adjudication in bankruptcy are well settled and have been discussed by this court in recent years in Ellis v NZI Finance Limited and McHardy v Wilkins & Davis Marinas Limited (in receivership). It is proper for the court to consider not only the interests of those directly concerned –
2 Baker v Westpac Banking Corporation CA212/92, 13 July 1993 at 4.
the petitioner, other creditors, the debtor – but also the wider public interest. A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. The court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the Court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made.
[15] Mr Brown’s counsel referred to Associate Judge Faire’s decision in Re Fontein, ex parte Bank of New Zealand.3 I regard what Associate Judge Faire said there as being consistent with the principles laid down in Baker v Westpac Banking Corporation:
[8] In Eide v Colonial Mutual Life Assurance Society Ltd4 the general principles involved in the exercise of the discretion under the then Insolvency Act 1967, s 26 (now the Insolvency Act 2006, s 37) were analysed. The important matters were the following:
1)“A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made.” McHardy v Wilkins & Davies Marinas Ltd (Court of Appeal, Wellington, CA 54/93, 7 April 1993) at p 3.
2)“. . . in the exercise of the discretion under s 26 it is proper for the Court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest.” McHardy v Wilkins & Davies Marinas Ltd (supra) at p 3.
3)In determining whether an order should be made, the wider public interest must be taken into account to determine whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public.” Re Nisbett, ex parte Vala [1934] GLR 553 at p 556.
4)“. . . on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceeding. . . . The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt
3 Re Fontein, ex parte Bank of New Zealand HC Auckland CIV-2009-404-7769, 22 November
2010 at [8]–[9].
4 Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 (HC) at 635 (citations omitted).
collection by his immediate creditors.” Re Fidow [1989]
2 NZLR 431 at p 444.
5) Absence of assets is a factor but:
“. . . even the undoubted absence of assets will not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited with the disqualifications that go with bankruptcy.” McHardy v Wilkins & Davies Marinas Ltd (supra) at p 3.
6) Another matter:
“. . . is the potential for further investigation. A bankruptcy makes available to creditors an array of procedures for investigating the financial circumstances of the debtor. Those procedures are likely to prove more effective than an investigation conducted by other means.” Re Fidow (supra) at p
444.
7) There is a need:
“. . . for the Court to balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made”. McHardy v Wilkins & Davies Marinas Ltd (supra) at p 4.
[9] To the above summary I add that the oppressive use of the bankruptcy process may be a ground for refusing an order: Baker v Westpac Banking Corporation.5
[16] I find it useful in exercising the discretion to take into account five features of bankruptcy. I take those into account because bankruptcy is only one possible response to a debtor’s insolvency. For further elaboration on these five elements see my decisions in Re Cribb, ex parte Evia Rural Finance Ltd and Darby v Official Assignee.6 The five elements are these:
(a) Bankruptcy allows the affairs of the debtor to be brought under the independent control of the Official Assignee so that assets can be realised for the benefit of creditors. That aspect is very much in the
interests of creditors.
5 Baker v Westpac Banking Corporation, above n 2, at 4-5.
6 Re Cribb, ex parte Evia Rural Finance Ltd [2012] NZHC 579 and Darby v Official Assignee
[2013] NZHC 22.
(b)Bankruptcy may be imposed as a punishment on some debtors, (and this case arises very rarely) because of the recklessness with which they have run up credit.
(c) Bankruptcy may be imposed to promote accountability.
(d)Bankruptcy may provide a measure of protection to the public because of the disabilities imposed on the debtor – in particular, there are restrictions on the debtor incurring credit and carrying on business.
(e) Bankruptcy entails a release for the debtor from liabilities which he is unable otherwise to manage. That is the rehabilitative aspect to bankruptcy in that it enables the debtor, once discharged from bankruptcy, to resume a normal life.
[17] Bankruptcy is only one response to a debtor’s insolvency. That is made clear by s 8 of the Insolvency Act which identifies alternatives such as a proposal to creditors under Part 5 sub-part 2 of the Insolvency Act, summary instalment orders and the “no assets” procedure.
[18] In its discretion the court can allow cash-flow difficulties to be addressed by short adjournments under which debtors can pay off their creditors. Equally, arrangements under which debtors may pay off debts over time may be a good reason for not making an order for adjudication. It is to be remembered that on a bankruptcy notice, a debtor may apply to the court for approval of a compromise. If that power is available as a form of compliance with a bankruptcy notice it must surely also be available for consideration on an application for adjudication.
[19] Mr Brown has other overdue creditors besides the Commissioner of Inland Revenue. Those are his credit card debts which he describes as personal. But they are significant - a number of credit card debts totalling $66,000. It is standard for credit card companies to charge significant interest on unpaid accounts. The fact that Mr Brown has a number of overdue credit card debts is a pointer to his using short-
term credit to meet liabilities and is in itself indicative of poor financial management.
[20] Mr Brown has not attempted to deal with his creditors globally. His view seems to be that if he can avoid the present application and deal with the Commissioner, he need not fear proceedings by other creditors. That points to matters being left uncertain. Mr Brown has not applied for approval of a proposal under Part 5 sub-part 2 of the Insolvency Act. It is easy to understand why he has not made that application. That is because the Commissioner would oppose any proposal under Part 5. The Commissioner is the largest creditor and any proposal would not achieve the required votes in favour of it, given that the Commissioner’s vote alone would be enough to defeat any proposal.
[21] Mr Brown has not identified any other creditors who support his proposals to pay off his debt. In effect he is asking the court to approve the proposal to pay off his creditors when there is no evidence that any of his creditors support that proposal.
[22] So far, I have referred only to Mr Brown’s side. It is necessary also to refer to the Commissioner’s evidence. Her position basically is that she does not regard Mr Brown’s proposals as having reasonable prospects of working. The Commissioner’s officer says that according to the Department’s FIRST computer system records, Mr Brown has been the subject of four debt cases since 1999, the last of them in 2008. While details of those matters are not given, the officer does deal with matters concerning Mr Brown from 2014 onwards.
[23] Mr Brown’s company, Four Oaks Insurance Services Ltd, owed the Commissioner some $220,000 in taxes as at January 2014. The Commissioner entered into an arrangement with Mr Brown under which he would pay his personal arrears – which then amounted to $170,000 – at $2,000 a month. But that arrangement soon broke down when Mr Brown failed to keep to the arrangements. The Commissioner had accepted that there would be no point in pursuing his company because nothing would be gained from liquidation. Because Mr Brown did not keep to the arrangements, the Commissioner cancelled the arrangement for
payment of the arrears in February 2015. The Commissioner also points out that Mr Brown has not been keeping up with current tax payments from 1 May 2015 until the beginning of May 2016 (and I exclude the payment that he made during May
2016). Mr Brown paid the Commissioner $13,870.33. During that period, he was also required to pay GST of $14,575.95 plus income tax payments (presumably provisional tax) of $6,889.88. That is leaving aside arrears that had fallen due before
1 May 2015.
[24] In Baker v Westpac Banking Corporation,7 the Court of Appeal noted that the commercial judgment of a petitioner will be taken into account although, of course, it is not determinative.
[25] With the Commissioner, I have misgiving about Mr Brown’s proposal. There is the nature of his liabilities. He has arrears of GST which have fallen due since he left Planwise in 2013. His total GST payments from August 2013 to April 2016 come to $1,687.85. GST is very much a priority payment which any business must pay to be able to stay in business. Failure to account for GST is in itself a sign of bad financial management.
[26] Another aspect is that the income tax situation shows chronic insolvency. In this I am only taking into account unpaid income tax falling due from March 2008 up until the tax assessed for the year ending 31 March 2015. Mr Brown’s total payments for taxes falling due during that period were $11,280.68 even though the core tax was at least some $125,000. Obviously Mr Brown has enjoyed a significant income during those years, yet he has not been able to manage his affairs well enough to be able to meet his tax liabilities. That is not just a temporary cash-flow problem. It is chronic. There are also his credit card debts, which is also indicative of poor financial management.
[27] Mr Brown has tried to address those concerns by his proposal to instruct an accountant and for that accountant to be given his chequebook and for Mr Brown’s
expenditure to be kept under control. While I appreciate that that is well intended, I
7 Baker v Westpac Banking Corporation, above n 2.
share the Commissioner’s concern that the accountant could never be more than an
adviser, at best.
[28] Mr Brown’s proposal contemplates that he may earn up to $300,000 a year. On his records he has never achieved sales that high. For the last income year his tax return shows that his taxable income was $167,039.71. It must surely be the height of optimism to think that he could earn sums significantly above that. He says that he is currently working 60 hours a week, working from home. He is working under a régime under which he should be minimising his expenses through not having an office. Given the hours he is working, it seems unlikely that he will be able to increase his earnings significantly above those he has returned for the last income year.
[29] There are too many risk factors for me Mr Brown’s proposal to be accepted as a viable way of addressing his insolvency. In short, I do not regard it as a realistic alternative to bankruptcy.
[30] Mr Brown fears the disability that goes with bankruptcy and points to his disqualification under the Financial Service Providers Registration and Disputes Resolution Act as being a ground to avoid bankruptcy. I accept, on the other hand that a financial service provider’s insolvency is a factor to take into account by the court. Obviously Parliament was concerned that financial service providers should not be insolvent and that is shown by the disqualification that goes with bankruptcy. The disability is not itself a reason for the court to exercise its discretion in Mr Brown’s favour.
[31] Sometimes bankruptcy is ordered in the expectation that the debtor will be able to resume normal commercial life at the end of their bankruptcy. But in Mr Brown’s case I accept that it would mean the effective end of his working life. On being adjudicated he would come under the normal disabilities of bankruptcy. He would be barred from carrying on business or taking part in the management or control of any business under s 149 of the Insolvency Act, and he would be disqualified from being a director of a company under s 151 of the Companies Act, in addition to the disqualification under the Financial Service Providers (Registration
and Dispute Resolution) Act. He would be effectively unemployable, given his age. That would bring his working life to an effective end.
[32] Mr Brown is entitled to draw national superannuation. At his age withdrawal from a working life is hardly unusual and is not in itself a hardship. Indeed, the alternative of requiring Mr Brown to carry on working for a number of years to get rid of all his liabilities is in itself oppressive. He would, in effect, be required to carry on working at extended working hours while having little in the way of rest or holidays. That would be an imposition of hardship.
[33] I refer again to the bankruptcy elements I identified earlier. The first aspect is that his affairs would be brought under the control of the Official Assignee. Mr Brown points out that he has effectively realised his assets. Unlike some other cases, this is not a situation where there are family trusts under which he is, if you like, feeding at the rich man’s table while giving crumbs to his creditors. In effect, he makes the submission commonly made by debtors, that there is nothing there to investigate. Notwithstanding that, the courts have consistently made adjudication orders even if there are little, if anything, in the way of assets to be realised for creditors.
[34] I do not regard Mr Brown as being a person deserving of punishment. But this is a case for accountability. He has carried on business. It is part of the cost of carrying on business that taxes are paid. He has not managed his tax affairs well even though he has apparently enjoyed a significant income over the years. Bankruptcy is often ordered to ensure accountability for non-payment of creditors, and that is equally applicable in the case of the Commissioner of Inland Revenue.
[35] While Mr Brown may not be a danger to the wider community, there is a risk element. If he continues to trade on his own account, there will be a continuing problem for the Commissioner, given that he has a consistent record of not managing his tax affairs very well.
[36] Finally, there is the discharge aspect. The prospect that these debts can be lifted off his shoulders and that Mr Brown will be able to retire is surely a better
outcome for him than having to struggle on out of some sense of honour against debts that are simply going to increase with added interest and penalties.
[37] In summary, I am satisfied that the appropriate answer is to make an order for
Mr Brown’s adjudication in bankruptcy. The time of the order is 5:17pm.
[38] I make an order for costs in favour of the Commissioner of Inland Revenue in the sum of $8,474.00 plus disbursements of $1,605.62, a total of $10,079.62. This is to be paid to the Commissioner out of Mr Brown’s estate.
………………………............
Associate Judge R M Bell
9
3
0