Commissioner of Inland Revenue v Chesterfields Preschools Ltd (in interim liq)
[2019] NZHC 272
•26 February 2019
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2015-409-000043
[2019] NZHC 272
UNDER the Companies Act 1993 BETWEEN
COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
CHESTERFIELDS PRESCHOOLS
LIMITED (in interim liquidation)
First DefendantAND
THERESE ANNE SISSON
Second Defendant
Hearing: 29 -30 October 2018 Appearances:
P Shamy, S M Kinsler and C L Russell for Plaintiff B M Russell and J C Wedlake for First Defendant T A Sisson (Second Defendant) in person with
D Hampton (as McKenzie friend)
Judgment:
26 February 2019
JUDGMENT OF JUSTICE OSBORNE
(on liquidation application)
COMMISSIONER OF INLAND REVENUE v CHESTERFIELDS PRESCHOOLS LIMITED (in interim
liquidation) [2019] NZHC 272 [26 February 2019]
Introduction [1]
The issues for determination [7]
Ms Sisson’s pleading [9]
History of this proceeding [10]
The appeals [10]
The basis upon which the appeal against the liquidation order succeeded [13]The Commissioner’s figures [22]
The Commissioner’s subsequent evidence [35]
The task for the Commissioner [35]
Mr Doubleday’s verifying affidavit [36]
Ms Sisson’s evidence [40]
Commissioner’s reply evidence [46]
The interim liquidators’ evidence [52]
Ms Sisson’s affidavit in reply [55]
Ms Sisson’s additional document [56]
The task for the Court [59]
The Court’s liquidation jurisdiction [65]
Liquidation – the statutory regime [65]
Is the Commissioner a creditor of CPL? [68]Is CPL unable to pay its debts? [71]
CPL’s debt to the Commissioner [74]
Evidence [74]
Discussion – the amount of the debt owed by CPL to the Commissioner [82]
Input data [89]
Actual and potential common law claims [102]The NOPA and TRA proceedings [105]
NOPA lodged on 31 January 2018 [116]
1 December 2007 tax credit [123]
Application of 15 per cent relief [126]
Methodology of the 15 per cent reduction [128]Stopping the clock [131]
Ms Sisson’s table of CPL tax schedules [146]
Conclusion [149]
Other indebtedness claimed by Commissioner [150]
Summary [150]
GST on 856 – 858 Colombo Street ($85,118.16) [154]GST on insurance proceeds ($117,667.25) [158]
Use of money interest (UOMI) on claimed debts ($104,603.60) [165]Advances by Commissioner to liquidator relies also upon an advance made to the
liquidator [168]
Resulting debt figures [172]
Discussion – inability to pay debts [174]
The statutory regime [174]
The cashflow test of solvency [178]Balance sheet solvency [180]
Evidence of CPL’s financial position [185]
Conclusion as to solvency [200]The Court’s discretion [202]
Outcome [209]
Costs [211]
Orders [210]
Introduction
[1] The Commissioner of Inland Revenue asserts that by reason of tax indebtedness Chesterfields Preschools Ltd (now in interim liquidation) (CPL) is a debtor. She seeks CPL’s liquidation.
[2] The Commissioner commenced this proceeding in 2015 – she relied upon the statutory presumption of CPL’s insolvency arising through CPL not having satisfied the requirements of a statutory demand. CPL had been served with a statutory demand on 5 December 2014.
[3] On 6 October 2015 this Court, following a defended hearing, made an order putting CPL into liquidation (“the 2015 liquidation judgment”).1
[4] Therese Sisson was subsequently joined as a second defendant in this proceeding to enable her to pursue an appeal. Her appeal was successful (“the liquidation appeal judgment”).2 The Court of Appeal allowed the appeal (against the order of liquidation) on condition that Ms Sisson within 15 working days paid into the High Court account a sum of $109,675.22.3 Ms Sisson subsequently successfully appealed the Court of Appeal’s conditional order to the Supreme Court.4 The Supreme Court found that the condition imposed by the Court of Appeal had been based on an incorrect assumption. The Supreme Court allowed the appeal by consent. The Court of Appeal’s order setting aside the liquidation judgment was quashed. The Supreme Court made an order (in its place) setting aside the liquidation order and remitting the proceeding to this Court for rehearing.
[5] The rehearing took place on 29 - 30 October 2018. This is the judgment upon that rehearing.
1 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2015] NZHC 2440, (2015) 27 NZTC 22-029 (“the 2015 liquidation judgment”).
2 Sisson v Commissioner of Inland Revenue [2017] NZCA 326, (2017) 28 NZTC 23-023 (“the liquidation appeal judgment”).
3 The liquidation appeal judgment, above n 2, at [109].
4 Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue [2017] NZSC 176.
[6] In the meantime, interim liquidators were appointed to CPL by this Court on 15 December 2017.5
The issues for determination
[7] The Commissioner asserts that she is a creditor of CPL in relation to an outstanding tax debt of $1,088,461.15. In addition, she is a judgment creditor (for court costs) for $32,105. She further asserts that she is entitled to rely upon contingent debts totalling $587,389.01.
[8] The Commissioner asserts that CPL is insolvent. She invokes the presumption under s 287 Companies Act 1993. She asserts that Ms Sisson has not established that CPL can meet the cash-flow test of solvency. To the extent that Ms Sisson would rely upon the asset position of CPL, the Commissioner says that any prospective realisation of assets is insufficient to negate the presumption of insolvency. She further asserts that, in any event, the prospective realisation of assets which are essential to the continuation of CPL’s business should not be taken into account in the determination of insolvency.
Ms Sisson’s pleading
[9]Ms Sisson pleads in relation to the following matters:
(a)Claimed debt
Ms Sisson asserts that the debt claimed by the Commissioner is not owed on the ground that it was and remains open to CPL to test the accuracy and methodology of the Commissioner’s calculation of a 15 per cent reduction of penalties.6
5 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2017] NZHC 3172, (2017) 28 NZTC 23-046.
6 Ms Sisson relies upon the conclusions and directions contained in the liquidation appeal judgment, above n 2, at [105].
Ms Sisson does not dispute the core tax assessments (although by this pleading she means the core tax as assessed by herself rather than by the Commissioner).
Ms Sisson disputes the penalty accrual debt claims of the Commissioner by reason of:
(i)a Notice of Proposed Adjustment (“NOPA”) lodged on 31 January 2018;
(ii)a Taxation Review Authority proceeding commenced by CPL as TRA no 001/05 as subsequently transferred to the High Court; and
(iii)a civil proceeding commenced by CPL against the Commissioner in this Court in 2009, currently stayed.
(b)Assessment in relation to GST on sale of 856 - 858 Colombo Street ($85,118.16)
Ms Sisson pleaded the absence of an assessment by the Commissioner in relation to this GST.
(c)Ownership of insurance proceeds (including GST)
Ms Sisson pleaded the absence of an assessment by the Commissioner in relation to the estimated GST on insurance proceeds and pleaded that the ownership of the insurance proceeds remained in dispute on an appeal to the Court of Appeal.
(d)Advance of $280,000 by Commissioner to CPL’s liquidator in relation to insurance proceeds litigation (this advance being an item included by the Commissioner in her list of claimed contingent debts of CPL)
Ms Sisson pleads that the claimed debt should not be taken into account having regard to the appeals.
(e)Service of statutory demand
Ms Sisson pleaded the Commissioner was aware at the time the Commissioner issued her demand (5 December 2014), that the amount claimed was disputed by reason of proceedings relating to an earlier statutory demand.
(f)CPL’s asset position
Ms Sisson pleaded that by reason of vesting orders made by this Court,7 CPL has available for realisation a property at 854 Colombo Street valued at approximately $1m and the balance of an insurance claim for damage to the 854 Colombo Street property (stated to be the balance of a claim for $1,872,000). Ms Sisson pleads that by reason of these assets, CPL is balance-sheet solvent in that it can pay its current financial demands from assets currently realisable.
History of this proceeding
The appeals
[10] The Commissioner’s application for an order putting CPL into liquidation has been re-heard by reason of the judgments of the Court of Appeal and Supreme Court.
[11] The relevant history of the litigation is best captured in the Court of Appeal’s identification (in the liquidation appeal judgment) of the “history in brief”. The Court of Appeal introduced its judgment by recording that Ms Sisson had appealed the
7 Chesterfields Preschools Ltd (in liq) v Sisson [2017] NZHC 181.
liquidation order upon the basis that CPL was not insolvent and that the Commissioner’s claim for unpaid tax, interest and penalties was disputed. The Court recorded that the Commissioner had opposed the appeal upon the basis that CPL was precluded by the doctrine of res judicata from asserting that the claim was in dispute by reason of the Court of Appeal’s previous judgment in Commissioner of Inland Revenue v Chesterfields Preschools Limited (“the judicial review appeal decision (CA)”).8
[12]The Court of Appeal then summarised the litigation history:9
Litigation history in brief
[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:10
[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
8 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400, (2010) 24 NZTC 24,500 (“the judicial review appeal decision (CA)”).
9 The liquidation appeal judgment, above n 2.
10 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21,125 (HC) (“the first judicial review decision (HC)”).
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.
Judicial review appeal 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 judicial review appeal 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 judicial review appeal decision contending that he had fully complied with the first judicial review decision and that the judicial review appeal 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 new statutory demand
[41] A conference convened before Associate Judge Osborne on 27 November 2014 addressed the case management of the proceeding relating to the Commissioner’s 2004 statutory demand against CPL. In a subsequent minute dated 1 December 2014 the Associate Judge commented:
[15] I note that this is a very unusual case because of the Stay which had been in place. The underlying demand is now ten years old. Although I did not discuss the matter with the parties at the conference, it occurs to me that a fresh demand might be considered appropriate (although I emphasise that I do not in any sense determine that a fresh demand is actually required). A consideration for the Commissioner must be whether the amounts set out in the table to the statutory demand totalling $620,545.94 are still accurate. If not, the Commissioner may see fit to withdraw that demand without prejudice to the costs of this present proceeding and to replace it with an up- to-date demand.
The minute directed that, in the event the Commissioner elected to proceed on a new statutory demand, any application to set it aside was to be filed and served within 10 working days of service.
[42] On 5 December 2014 the Commissioner served a fresh notice of statutory demand on CPL demanding payment in the sum of $1,231,940.11 detailed in an attached schedule as follows:
Details of how the debt is made up is shown in the attachments to the Commissioner’s letter dated 27/7/12
GST $447,876.24 Inc $759,247.46 Less penalty and interest reductions -$7,288.59 from clear periods Debt owing and collectable $1,199,835.11 Total costs from three court orders $32,105.00
Total debt currently claimed $1,231,940.11
[43] As CPL did not comply with the statutory demand within the requisite period or bring an application to set aside the statutory demand, on 5 February 2015 the Commissioner filed the proceeding seeking liquidation of CPL. Mr Hampton obtained an adjournment of the proceeding while he sought legal representation and a release of frozen funds for that purpose. However a subsequent application filed by Mr Hampton seeking an order to restrain advertising and to stay any further proceedings in relation to liquidation was not progressed because Mr Hampton did not have leave to represent CPL.
[44] Following a conference on 1 April 2015, in a minute dated 13 April 2015 Associate Judge Osborne made timetable directions, including that any statement of defence be filed by 5 May 2015, and allocated a hearing date of 13 May 2015. The hearing date was subsequently changed to 18 June 2015.
[45] On the day prior to the hearing CPL filed an application for leave to file a statement of defence out of time. The application was supported by an affidavit of Mr Hampton sworn on 15 June 2015 which provided details of ANZ Bank deposits and of a freehold property at 854 Colombo Street, Christchurch. That application was opposed by the Commissioner, who filed an affidavit of Mr Doubleday dated 18 June 2015 in support.
The High Court judgment
The Commissioner’s further evidence
[46] Although there is no reference to it in the judgment, it appears that at the hearing of the liquidation application Associate Judge Osborne requested the Commissioner to provide further evidence concerning CPL’s debt as follows:
(a)the affidavit of Mr Doubleday, including the schedules, that was before this Court in the appeal against the judicial review appeal decision;
(b)an approximation of CPL’s debt as at 2006; and
(c)the core tax owed by CPL (noted to be distinct from the “core tax plus shortfall penalties” figure in column C of Table B attached to the Commissioner’s letter of 27 July 2012).
[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
[48] In the course of preparing the calculations of CPL’s debt as at 2006, the Commissioner identified an arithmetical error in the calculation of the 15 per cent reduction of interest and penalties. The Commissioner sought an extension of time to file the evidence until 2 July 2015.
[49] On 2 July 2015 the Commissioner filed an affidavit of Mr A J Brighty which, in relation to the second information request, stated that the debt as at 2 July 2015, with penalties and interest stopped at December 2006, but still allowing the 15 per cent reduction suggested by the Court of Appeal, was
$827,304.62 calculated as follows:
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
[50] The Commissioner also filed a further affidavit of Mr Doubleday, the annexures to which included his June 2009 affidavit and schedules thereto. While stating that the schedules prepared by the Commissioner as at 22 July 2008 were correct as at that date, Mr Doubleday advised that some 18 months after the schedules were prepared a GST tax credit of $102,777.77 was transferred to three GST periods. Hence the following correction was required:
The effect of this transaction on the 15% relief calculation is that the total debt as at 22nd July 2008 will be reduced by the tax credit amount, and the penalties and use of money interest will be reduced for the period from 1
December 2007 through to 22nd July 2008. That is, there is $102,777.77 of debt which as a result of the offset (effective 1 December 2007), is now no longer subject to penalty and interest accumulation.
[51] He went on to explain, apparently in response to the Judge’s third information request, how the revised core unpaid tax figure as at 22 July 2008 was calculated:
Core tax is the assessed tax, either by the taxpayer or as reassessed by the Commissioner. The core tax is $347,183.66. Core tax is just one of the components making up the total tax arrears of the company as shown below:
As at 22nd July 2008 the Commissioner was seeking to recover unpaid tax totalling $1,397,307.14
That figure has been reduced by the effects of the 1 December 2007 tax credit
($102,777.77)
Consequential reduction in penalties and interest
Revised July 2008 unpaid tax debt
($10,113.16)
$1,284.416.21
This revised figure has been reduced by the 15% relief recommended by the Court of Appeal
($195,955.06)
Amended July 2008 Tax Debt
$1,088,461.15
This figure is broken down into two components:
Core Tax (i.e. Assessed Debt as returned and/or reassessed by CIR)
$347,183.66
Late Payment Penalties, Incremental Late Payment Penalties and Use of Money Interest
$741,277.49
$1,088,461.15
[52]The affidavit did not explain the way in which the “core tax” figure of
$347,183.66 was derived or how it related to the figures in Column C of Table B to the Commissioner’s letter of 27 July 2012 referred to in the Associate Judge’s enquiry.
CPL’s grounds of defence
[53] At the hearing Associate Judge Osborne reserved his decision on CPL’s application to file a defence out of time. In his judgment he proceeded to address CPL’s four grounds of defence:
(a)it was solvent;
(b)the amount the Commissioner claimed was not an assessment of tax and was not payable by CPL;
(c)the amount the Commissioner claimed was disputed; and
(d)there remained outstanding issues between the Commissioner and CPL as to liability which required the intervention of the Court.
The conclusions on (a), (c) and (d) are material to this appeal.
CPL’s solvency
[54] The Associate Judge did not consider there was a serious issue as to CPL’s insolvency, succinctly analysing CPL’s contention that it was solvent in this way:
[31] By his affidavit Mr Hampton referred to financial details under a heading “Solvency of CPL”. The details do not establish that [CPL], taking into account the debt to the Commissioner, is solvent, either in a balance sheet or a cashflow sense.
[32] While Mr Weaver for [CPL] submitted that the company is “balance sheet solvent”, that conclusion appears to have been reached by ignoring the core debt to the Commissioner. The submission also fails to address the fact that [CPL] is plainly insolvent on a cashflow basis, in that it is unable to meet such expenses as the interest which will be accruing on the debt to the Commissioner.
The judgment did not identify the amount of the “core debt” which CPL owed to the Commissioner.
A dispute as to the amount claimed
[55] The Associate Judge noted that the context of his consideration was not an application to set aside a statutory demand but an application for CPL’s liquidation. He referred to this Court’s decision in Bateman Television Ltd v Coleridge Finance Company Ltd for the proposition that, while the procedure of petition for a winding up order is not usually a satisfactory one to dispose of the question whether a particular debt is owing, an order will be made if it is patent that there is sufficient owing to found a petition and that the company is insolvent, even though there might be a bona fide dispute concerning the precise indebtedness. The Associate Judge concluded:
[47] In this case, Mr Hampton, in response to the Commissioner’s recalculations and the statutory demand process, has not proposed any arrangement as to payment of what was accepted by Mr Hampton personally in the Court of Appeal as the undisputed core debt. Instead, his responses indicate that he requires some form of settlement of intended cross claims, either before payment of outstanding tax, or to be brought into account as some form of set-off.
[48] The way in which Mr Hampton presented the taxpayers’ case in the Court of Appeal and the findings of the Court itself, are a complete answer to the present assertion of a dispute by way of defence. There are at least three aspects to this:
(a)The ground of defence raised — that the amount claimed in the statutory demand is disputed — is of itself an insufficient defence in terms of the authorities I have cited.
(b)The taxpayers conducted themselves in the judicial review proceedings, including through their appeal, upon the basis
that the core tax was not under dispute, and should not be permitted to resile from that position.
(c)The judgment of the Court of Appeal expressly recognising that the Commissioner should be able to collect immediately at the least the core tax owing and some portion of the associated penalties, is a binding conclusion, pursuant to which this Court has lifted the stay which previously operated to prevent debt collection.
[56] Consequently the Associate Judge concluded that the amount indisputably owed by CPL must, on any approach, be substantial. In addition he noted the expectation of the Court of Appeal that an appropriate outcome would be that the taxpayers would meet core tax together with 85 per cent of accrued penalties.
Outstanding issues between the Commissioner and CPL
[57] CPL had argued that pending the resolution of the TRA proceeding it ought not to be put into liquidation by reason of the tax liabilities which were the subject of the Court of Appeal hearing. It argued that the TRA proceeding had not been consolidated with the first judicial review and was not heard following the first judicial review. The TRA proceeding therefore remained on foot with the legal consequence that the tax liability of CPL was deferred pursuant to s 138I of the Tax Administration Act.
[58] The Commissioner responded that, regardless of the way in which the TRA proceeding may have been “parked”, the decisive answer to CPL’s contention lay in the doctrine of res judicata.
[59] The Associate Judge traced the conclusions in the judicial review appeal decisions of Fogarty J and in the judgment of the Court of Appeal, concluding in this way:
[64] Upon the basis of that process, the Court of Appeal went so far as to recognise the finality which would now attach to the core tax liability and some portion of the associated penalties by observing that the Commissioner should now be able to collect those immediately. While the Court of Appeal necessarily left the process of lifting the stay to the High Court, Glazebrook and Chambers JJ again noted their expectation that, upon the calculations being provided to the High Court, the stay would be lifted so as to allow the Commissioner to effect immediate collection of the undisputed core tax and some associated penalties.
[65] All this indicates an expectation of finality. The elements required for an issue estoppel are met. There is no merit in Mr Hampton’s implicit suggestion that there remained room for the expectation on the part of any party that a remedy for some aspect of the Commissioner’s or Department[’s] earlier conduct should now, through TRA processes be addressed and somehow taken into account.
(Footnotes omitted.)
The basis upon which the appeal against the liquidation order succeeded
[13] The Court of Appeal noted that the order for liquidation had been made on the footing that the amount (of core debt) was “indisputably owed” by CPL must have been on any approach substantial.11 Accordingly, the High Court had not embarked upon an investigation of the precise level of CPL’s liability.
[14] In its judicial review appeal decision the Court of Appeal had identified the approach to calculation of CPL’s taxation debt which would make the calculated debt lawfully recoverable. That was identified as involving a 15 per cent reduction of interest and penalties which had accrued beyond CPL’s core tax figure.
[15] On the appeal from the liquidation judgment, the Court of Appeal upheld the High Court’s determination that the approach to assessment identified in the judicial review appeal decision (CA) constituted as between the parties a final decision on the extent of CPL’s liability, to which the doctrine of res judicata applies.12
[16] The Court of Appeal confirmed that the finality achieved through its judicial review appeal decision (CA) also precluded the revisiting of issues raised by the so- called TRA proceeding and the NOPA proceeding.13
[17] The Court of Appeal further confirmed that CPL was not entitled in the context of the liquidation proceeding to rely on such potential damages claims as they were the subject of the ordinary proceeding commenced by CPL in this Court which were subsequently stayed.14
[18] The Court of Appeal admitted two additional documents into evidence on appeal. They related to CPL’s asset position. The first was a 2016 email from NZI Ltd which indicated that an insurance payout of $138,064.77 was still to be disbursed to CPL.15 The second document was a 2016 market appraisal of the property at 854
11 Liquidation appeal judgment, above n 2, at [56].
12 Liquidation appeal judgment, above n 2, at [99].
13 Liquidation appeal judgment, above n 2, at [102].
14 Liquidation appeal judgment, above n 2, at [106] – [107].
15 Liquidation appeal judgment, above n 2, at [68] and [82].
Colombo Street.16 Consequently the Court of Appeal found CPL’s total assets to be worth $1,017,094.60.17 As the Court of Appeal noted, that total assets figure was slightly shy of the total collectable debt assessed by IRD’s Adrian Brighty in July 2015 ($1,088,461.15) and well above the debt figure originally assessed by Mr Brighty in 2006 ($827,304.62).
[19] Ultimately, the Court of Appeal allowed the appeal upon the basis that there did not appear to have been any actual determination by the High Court as to the precise amount of CPL’s indebtedness. Implicitly, the Court of Appeal was recognising that, on the evidence, it was possible that CPL might be able to meet its debt to the Commissioner, once precisely quantified, through resort to its available assets.
[20] The Court of Appeal’s key summarised conclusions as to the need for this Court to determine the precise level of CPL’s indebtedness, are contained towards the end of the liquidation appeal judgment:
[103] However, while this Court’s approval of an across the board 15 per cent reduction in “penalties” was a final decision as to the appropriate measure of adjustment, the Court was not able to make any determination of the correctness of the calculation required. It envisaged that the calculations would be provided to the High Court in support of a request for a variation of the order for stay of enforcement.
[104] While the stay was duly lifted in response to the Commissioner’s memorandum of 19 August 2014, it does not appear that there has been any actual determination by the High Court, or any other Court, as to the precise amount of the reduction and the consequent level of CPL’s indebtedness.
[105] In our view, while bound by the 15 per cent reduction measure, it remains open to CPL to test the accuracy and methodology of the Commissioner’s calculation. That calculation, as this Court noted at [147], is to be on the most favourable assumptions for the taxpayers. It also needs to reflect the correct amount of core tax and the appropriate adjustment to core tax necessitated by the arithmetical error concerning the GST refund. For the avoidance of doubt, these are issues which CPL is entitled to advance at the hearing before the Associate Judge.
[21] Accordingly, the task for this Court is to determine the Commissioner’s liquidation application upon the basis of the statutory provisions and the application
16 Liquidation appeal judgment, above n 2, at [68] and [80] – [81].
17 Liquidation appeal judgment, above n 2, at [83].
of the usual principles. But there is a required focus in terms of the Court of Appeal’s judgment upon allowing CPL to test the accuracy and the methodology of the Commissioner’s calculations, with the calculations being based on the assumptions most favourable for the taxpayers. This Court’s rehearing, in considering the correct amount of core tax, is also to take into account an arithmetical error concerning a GST tax credit of $102,777.77 identified by Lieuwe Doubleday.18 The Court of Appeal anticipated that, on a rehearing, greater scrutiny would be given to the figures of both sides.19
The Commissioner’s figures
[22]The Commissioner stands by the amended July 2008 tax debt figure of
$1,088,461.15 identified by Mr Doubleday, and summarised in the liquidation appeal judgment at [51] (above at [12]). Mr Doubleday’s calculation made provision for the adjustment of core tax (for the effects of the 2007 GST tax credit issue). He thereby adjusted the Commissioner’s 22 July 2008 total by $112,890.93.
[23] For the purpose of subsequent reconsideration, the Commissioner adopted schedules prepared as at 22 July 2008 which Mr Doubleday has deposed to be correct (subject to the GST tax credit amendment). The Commissioner had elected not to collect a sum of $70,278.09 (being tax owing under default assessments made in the absence of GST returns) and $200 (being late filing penalties). The combination of the correct schedule entries and the Commissioner’s allowances produced the Commissioner’s revised 22 July 2008 “unpaid tax debt” of $1,284,416.21.20
[24] Mr Brighty has given evidence (supported by his and Mr Doubleday’s schedules) as to the Commissioner’s “stopping the clock” with effect from July 2012. From that date, the Commissioner in effect cancelled all subsequent accruing penalties and interest. She has since abided by the re-calculation of interest and penalties to that date as communicated to CPL in late July 2012. Mr Brighty has explained the Commissioner’s rationale for adopting the July 2012 date. The Court of Appeal in the judicial review appeal decision (CA) had required the Commissioner to consider the
18 Liquidation appeal judgment, above n 2, at [48] – [50] and [105].
19 Liquidation appeal judgment, above n 2, at [87].
20 As referred to in the Court of Appeal judgment at [51] (see paragraph [12] above).
remission of penalties incurred while the judicial review litigation was proceeding.21 The Commissioner had regard to the period of litigation which commenced at the beginning of 2005 and which ended with the Commissioner’s notification to CPL on 27 July 2012 of recalculations. As it transpired, the Commissioner’s July 2012 recalculation did not bring finality to the litigation between the parties. Mr Brighty had deposed (uncontradicted) that through the continued “stopping of the clock” concession as at July 2012, the relief afforded under the concession for the period July 2008 to October 2015 amounted to approximately $1,852,000.
[25] As reflected in the liquidation appeal judgment at [51], the Commissioner in applying a 15 per cent reduction had allowed remission of $195,955.06 out of an “unpaid tax debt” of $1,284,416.21.22 In other words, the 15 per cent relief calculated in July 2012 was applied not only to filing penalties, late payment penalties and the use of money interest (“UOMI”), but also to amounts of tax which had been self- assessed by CPL or assessed or reassessed by the Commissioner.
[26] The Court of Appeal recognised the degree of confusion which had arisen in previous decisions (including in the liquidation judgment) in relation to the use of the terms “core tax” and “core debt”.23 Mr Brighty, in his subsequent evidence, has recognised that “core tax” is not a term which occurs in either the Income Tax Act 2007 or the Tax Administration Act 1994 (TAA). He deposes that the term “core tax” is usually used to describe the amount of tax assessed or reassessed by the Commissioner or self-assessed by the taxpayer when the tax return is first filed with the Commissioner. Mr Brighty explains that the term is used to distinguish the amount “assessed” from other components of a tax debt such as additional tax, late filing penalties, late payment penalties, UOMI and costs. Mr Brighty adds that “core debt” is similarly not a term which occurs in the income tax legislation. He describes it as a term commonly describing unpaid tax plus penalties plus interest (meaning the whole debt the taxpayer has relating to a specific tax type and period).
21 Judicial review appeal decision (CA), above n 8, at [145].
22 Above at [12].
23 Liquidation appeal judgment, above n 2, at [71] – [78].
[27] The division between core tax and other calculated liabilities assumed particular significance in the liquidation judgment. In the judicial review appeal decision (CA), the Court of Appeal had recorded that there was core tax owing which was not in dispute.24 On the hearing of the liquidation application, it was argued for CPL that the total amount claimed by the Commissioner was not payable as an assessment of tax. Counsel for CPL argued that tax had not been assessed in the letter of 27 July 2012 by which the Commissioner notified CPL of her calculations. This Court held that the 27 July 2012 letter did not function as an “assessment”. The Court explained:25
The unpaid tax debts date back to the period 2000 to 2003 (for GST) and 1997 to 2003 (for income tax). The last GST payment on account was received by the Commissioner in June 2004 and the last income tax payment on account was received in July 2000. The core tax liabilities were a combination of self- assessed debt (by Chesterfields) and re-assessed debts (by the Commissioner). The core tax had all been assessed.
[28] Mr Doubleday’s evidence and calculations identified the core tax (which he defined to be “assessed debt as returned and/or reassessed by Commissioner of Inland Revenue”) as being $347,183.66 of the total of $1,088,461.15 calculated as the amended July 2008 tax debt (after a 15 per cent reduction of the revised July 2008 unpaid tax debt figure).26 Mr Doubleday identified a balance of $741,277.49 as comprising late payment penalties, incremental late payment penalties and UOMI.
[29] The Court of Appeal subsequently observed that Mr Doubleday’s affidavit explained neither the way in which the “core tax” figure of $347,183.66 was derived nor how it related to figures in the Commissioner’s letter of 27 July 2012.27
[30] The judgment of this Court in the liquidation proceeding treated Mr Doubleday’s 22 July 2008 core tax figure of $347,183.66 as being the undisputed core tax, for the reasons set out at [38] – [40] of the liquidation judgment.28
24 Judicial review appeal decision (CA), above n 8, at [146] – [147].
25 2015 Liquidation judgment, above n 1, at [38].
26 Liquidation appeal judgment, above n 2, at [51].
27 Liquidation appeal judgment, above n 2, at [52].
28 2015 Liquidation judgment, above n 1.
[31] That led this Court, when applying the solvency test in relation to liquidation, to observe that the submissions of counsel for CPL that the company was “balance- sheet solvent” appeared to have been reached by ignoring the core debt. In other words, approaching matters on a balance sheet basis, assets claimed by CPL may arguably have been sufficient to satisfy the debt to the Commissioner in relation to the recalculated “non-core debt”, but CPL had not pointed to any additional asset value which might deal with the core debt.
[32] In its judgment, the Court of Appeal noted that the High Court liquidation judgment did not identify the amount of the “core debt” which CPL owed to the Commissioner.29 The Court of Appeal also noted that Mr Doubleday in his affidavit evidence had not explained the way in which the 22 July 2008 core tax figure of
$347,183.66 was derived.30 The Court of Appeal further noted that it was unclear what amount the Court of Appeal itself in 2009 contemplated as the undisputed “core tax”.31 The judicial review appeal decision (CA) (although referring to undisputed “core tax”) did not identify a particular figure as undisputed.
[33] In the liquidation appeal judgment, the Court of Appeal, having noted that Mr Doubleday’s affidavit had not explained how her “core tax” figure of $347,183.66 had been derived, identified a core tax figure stated by Mr Doubleday to be $109,675.22 in an affidavit filed in June 2009.32
[34] Having regard to the absence of any explanation by Mr Doubleday’s figure which she attributed to core tax ($347,183.66), the Court of Appeal concluded that the
$109,675.22 was the figure which should have been accepted as undisputed core tax.33
On that basis, the Court of Appeal allowed Ms Sisson’s appeal on condition that she paid into the High Court within 15 working days the amount of $109,675.22.34
29 Liquidation appeal judgment, above n 2, at [54].
30 Liquidation appeal judgment, above n 2, at [52].
31 Liquidation appeal judgment, above n 2, at [72].
32 Liquidation appeal judgment, above n 2, at [47] and [76](f).
33 Liquidation appeal judgment, above n 2, at [78].
34 That condition itself subsequently falling away by reason of the later judgment of the Supreme Court: Chesterfields Preschools Ltd (in liq) v Commissioner of Inland Revenue, above n 4.
The Commissioner’s subsequent evidence
The task for the Commissioner
[35] The liquidation appeal judgment, by setting aside the liquidation order, left it to this Court to determine the precise level of CPL’s indebtedness to the Commissioner in the light of CPL’s original total indebtedness (that is core tax together with other imposts) less such sum as falls to be deducted (on the 15 per cent reduction basis) by the Commissioner in accordance with accurate calculations and appropriate methodology.35
Mr Doubleday’s verifying affidavit
[36] By her amended statement of claim, the Commissioner alleges that CPL is indebted to the Commissioner (as at 16 February 2018) in the sum of $1,088,461.15, being the figure previously provided in evidence in 2009 and calculated up to the July 2008 cut-off date.36 In addition, the Commissioner alleges that CPL had contingent debts of an additional $587,389.01 and was a debtor for court costs in the sum of
$32,105.
[37] Mr Doubleday by his initial affidavit verified those allegations. On 10 April 2018, Mr Doubleday swore a further affidavit. The affidavit was provided to address the fresh evidence adduced in the Court of Appeal and to update some matters of valuation and realisation. The affidavit did not address matters relating to the precise calculation of CPL’s indebtedness.
[38] Mr Brighty provided a further affidavit dated 11 April 2018. It is this further affidavit of Mr Brighty that directly addressed the issues raised in the Court of Appeal judgment. In particular, Mr Brighty recorded that his affidavit was intended to deal with four matters:
35 2015 liquidation judgment, above n 1, at [104] – [105].
36 Liquidation appeal judgment, above n 2, at [51].
(a)to identify the correct amount of the core tax and particularly, the correct amount of core tax after adjustment of the tax credit which arose after the 2008 Schedules were completed;
(b)the accuracy and methodology of the calculation of the 15 per cent reduction in interest and penalties based on the most favourable assumptions for the taxpayer allowed by the Court of Appeal in its 31 August 2010 judgment;
(c)the Commissioner’s decision to not impose further interest and penalties after July 2008, described as “stopping the clock”; and
(d)the consequent level of the CPL’s indebtedness (after the 15 per cent relief and the stopping the clock relief).
[39] Mr Brighty dealt with each of these topics in turn. These are the relevant paragraphs and tables from his affidavit):
Identification of the correct amount of the core tax
22.The subtotal debt of $1,088,461.13 included in the Commissioner’s amended statement of claim dated 16 February 2018 is made up of tax owing for seven income tax periods and fifteen GST periods. In only one income tax period and one GST period has a payment been made. The whole amount of core tax assessed for the remaining six income tax periods and 14 GST periods is still owing.
23.The core tax for the 1999 year income tax period was assessed at
$33,000.00. A payment of $33,333.33 was made on 21 July 2000. In terms of the ordering rules the payment is to be allocated to the interest and late payment penalties accrued first, leaving $16,813.95 available to offset against the core tax. This means that the core tax owing was reduced to $16,186.05. That sum is still owing as no further payment has been made for this tax period.
Payment 21/7/2000 $33,333.33 Less Interest accrued $6,962.81 Late payment penalties accrued $9,556.57 Sub-total $16,519.38 $16,519.38 Available to be offset against core tax $16,813.95 Original core tax $33,000.00 Core tax still owing $16,186.05
24.In the GST period ended 31 July 2000 net credits of $57,860.13 (part of the credit input tax claim from the period ended 30 November 2007) were transferred to the period with a date of availability of 1 December 2007. The core tax as assessed was $27,596.25. At the effective date of availability interest accrued to that date was
$44,761.42 and late payment penalties accrued amounted to
$45,461.74 – a combined total of $90,223.16. In terms of the ordering rules the whole of the payment would be offset against the interest and late payment penalties, and none would be available to offset against the core tax. This means that the whole of the core tax is still owing as no further payment has been received.
25.Therefore the core tax still owing is:
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 $27,596.25 Total core tax owing $333,752.26
26.The core tax had not previously been split out as it was considered unnecessary with the Court of Appeal in 2010 having effectively sanctioned the Commissioner to collect the core tax and 85% of the interest and penalties.
27.In Mr Doubleday’s affidavit dated 10 April 2018 he lists in a table at paragraph 19 details of the various periods with tax still outstanding and in the third column shows the core tax (prior to the adjustment arising from the GST period ended 30 November 2007) as totalling
$380,065.43. To get to my figure above:
Total core tax as per Mr Doubleday’s affidavit para 19 $380,065.43 Less – core GST for periods now cleared 31/03/2000 $22,322.33 31/05/2000 $7,176.89 Less part of payment offset against core income tax 1999 $16,813.95 Total core tax owing $333,752.26
Accuracy and methodology of the 15% reduction
28.The factual background to the extensive litigation between the Defendant, parties connected with the Defendant (the Taxpayers) and the Commissioner is set out fully in the Liquidation Judgment at [3] – [18].
29.Briefly, proceedings were commenced in 2004 and 2005 to recover tax debts and in response the Taxpayers filed a tax challenge in the Taxation Review Authority. This tax challenge was transferred to the High Court by way of a decision of Fogarty J on 13 September 2005. It was then “paused” while two judicial review proceedings ran their course.
30.In the first judicial review proceeding, the High Court directed the respondent to reconsider certain decisions relating to the Taxpayers’
tax affairs. In a decision of 5 June 2007, referred to in judgments of the High Court and Court of Appeal as the “Bhudia decision”, the Commissioner attempted to give effect to the High Court’s directions. Most of the Bhudia decision was then set aside by the High Court on 25 November 2008 in a judicial review appeal on the basis the Bhudia decision failed to adequately implement the directions from the First Judicial Review Judgment.
31.The Judicial Review Appeal Judgment was appealed to the Court of Appeal. In its 2010 judgment, the Court of Appeal suggested at paras 91 – 93:
[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 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 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.
(Emphasis added)
32.The adoption of the Court of Appeal’s pragmatic approach of 15% reduction allowed for a simpler cleaner calculation together with the possibility of bringing some finality to the litigation as the Supreme Court had refused to hear an appeal against the Court of Appeal’s 2010 decision.
33.The Court of Appeal described the pragmatic approach as being “merely to reduce penalties by a certain percentage across the board”. This “across the board” adjustment has been taken to mean that we simply take all the periods and revenues that apply to this taxpayer, whether open or closed, add up all the penalties (late filing, late payment, additional tax) and all the interest charged to all these
periods, and simply take 15% of that total. That gives a 15% reduction in the total interest and penalties.
34.I have prepared a table to show the calculation of the 15% reduction. I have taken the initial details from the Schedules; in particular pages 015 and 016 as those pages show separately the amounts for each revenue, and also from page 018 as that page shows the details relating to the GST default assessments.
35.The table does not show any of the core tax for the various revenues only the various interest and penalties to which the 15% reduction is to be applied.
36.I have shown the figures by revenue: Income Tax first, then GST and then the four other revenues together – ACC, SEA, PAY, SLE. Details of the different penalties and interest are shown and totalled. That is then reduced by the debt being excluded (late filing penalties for Income Tax and the interest and penalty on the default assessments for GST), leaving a net total of penalties and interest for the respective revenue. I then calculate 15% of that net total. In the case of the GST, the total penalties and interest has been reduced by the credit of penalty and interest that arises from the GST period ended 30/11/07 adjustment made in 2010.
37.In dealing with the GST default assessments, as the debt for these assessments is not included in our collection action, the interest and penalties have been excluded from the 15% reduction calculations. All the details relating to the GST default assessments as included on page 018 of the Schedules are broken into three years, the years ended 31 March 2006, 2007 and 2008. The totals shown in the table therefore are the individual totals for each year. The late payment penalty total for column K is the individual total for each of the three years ended 31 March 2006, 2007 and 2008 added together, and the same for the interest in column L.
38.The table:
Chesterfields Preschool Ltd 15% calculation on penalties and interest Column Amount Income Tax from page 015 J additional tax $69,389.15 K late payment penalty $325,003.24 L use of money interest $350,202.52 subtotal penalties and interest $744,594.91 Less LFP 2004 late filing penalty -$50.00 2005 late filing penalty -$50.00 2006 late filing penalty -$50.00 2007 late filing penalty -$50.00 subtotal -$200.00 net total penalties and interest $744,394.91 15% relief $111,659.24 GST
from page 015
I late filing penalty $79.87 J additional tax $8,288.89 K late payment penalty $247,321.45 L use of money interest $290,837.19 subtotal penalties and interest $546,527.40 Less default assessments from page 018 K late payment penalty $11,765.08 L use of money interest $11,267.62 subtotal $23,032.70 credit penalty and interest arising from p/e 30/11/07 adjustment $10,113.17
subtotal $33,145.87 net total penalties and interest $513,381.53 15% relief $77,007.23 other revenues
from pages 015 and 016
ACC J additional tax $3,030.42 K late payment penalty $2,542.27 L use of money interest $1,389.02 total penalties and interest $6,961.71 SEA J additional tax $1,315.84 K late payment penalty $3,033.92 L use of money interest $2,018.28 total penalties and interest $6,368.04 PAY J additional tax $19,273.59 K late payment penalty $9,817.60 L use of money interest $5,047.71 total penalties and interest $34,138.90 SLE J additional tax $265.49 K late payment penalty $598.46 L use of money interest $257.98 total penalties and interest $1,121.93 grand total of the 4 totals penalties and interest $48,590.58 15% relief $7,288.59 total 15% relief
$195,955.05
Proof
credit penalty and interest arising from p/e 30/11/07 adjustment $10,113.17 15% thereof $1,516.98 Total 15% relief as per 15% letter dated 27/7/12 $197,472.03
39.One thing that can be noticed is that the figures on the extreme right do not appear to add up, looking just at the cents we have 24c + 23c
+ 59c which equals $1.06 or just looking at the cents 06c whereas my total is 05c. Please see Appendix 2 for an explanation of this.
40.The end result is that the first three figures on the right are those used in the amended proof of debt filed with the liquidator previously and with the amended statement of claim. If the 15% relief ($1,516.98) applicable to the reduction in penalties and interest arising from the GST adjustment made in 2010 is added back, then I come to the figure first advised to the Defendant in the letter of 27 July 2012 signed by Karen Whitiskie advising of the 15% relief granted – see end of page 2 of that letter. A copy of this letter is attached as Appendix 3.
41.Page 016 of the Schedules shows the total debt owing at July 2008 as
$1,467,585.23. This sum reduced by the late filing penalties (INC) and the default assessments (GST) reduces the total to $1,199,835.11
– see Appendix 3, the first attachment thereto (Table A).
42.It can be seen that the figure in the letter of 27 July 2012 at the end of page 2, $1,199,835.11, is that brought to account in the amended statement of claim in line 4 of the table at [4]. That figure, as a result of the adjustment arising from the GST period ended 30 November 2007, 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 – see the line “Less net reductions in penalties and interest arising through the above adjustments”.
43.The Commissioner opted to base the 15% reduction calculations on the Schedules as those Schedules were before the Court of Appeal when it made its 2010 decision giving the Commissioner the option of using the 15% pragmatic approach.
44.The rationales for using the date of the Schedules are administrative ease and better use of the Commissioner’s resources. These reasons carry weight as the decision to use the pragmatic option is an exercise of the Commissioner’s powers under s 6A of the TAA. As part of using ss 6 and 6A of the TAA the Commissioner is to have regard to the resources available to her.
45.The reconstructing of the Schedules at another date would be very resource intense. It took an expert investigator about 6 months to put together the Schedules which involved overnight data runs extracting entries relating to multiple taxpayers, multiple revenues, multiple periods and multiple entries within a period (sometimes in the hundreds), then the consolidation of that data into each period with totals of the interest and various penalties per period, the display of the all that data in a reasonably presentable manner, while all the time trying to grasp the general confusing state of the Taxpayers’ affairs as noted by the courts.
46.The Chesterfields litigation by this point had already consumed significant departmental and litigation resources and the probability of fully recovering the tax owed across the group appeared “poor”. It was considered the resources needed to reconstruct new Schedules, was not warranted.
47.When the Court of Appeal made its decision in 2010, it did not infer that the Commissioner could not continue to impose interest and penalties until the unpaid tax was paid in full or written off as unrecoverable. Say for example we had used the date of the First Judicial Review Judgment as the date the 15% relief should be applied and, as the Commissioner was entitled to do, then continued to accrue penalties and interest until payment in full or write off as unrecoverable.
[153] These various liabilities, asserted in the Commissioner’s amended statement of claim, were the subject of explanation in Mr Doubleday’s affidavit evidence. In his written synopsis Mr Shamy for the Commissioner adopted Mr Doubleday’s explanations in submitting that these additional sums should be included in the sum treated as owing to the Commissioner for the purposes of determining CPL’s solvency or insolvency.
GST on 856 – 858 Colombo Street ($85,118.16)
[154]Mr Doubleday deposes:
On 17 August 2010 CPL sold the property at 856 – 858 Colombo Street (at the insistence of the ANZ bank) at auction for $802,000.00. CPL did not account for GST on the sale in the GST return period ended 30 September 2010 despite prompting from the Commissioner. In the absence of returns from CPL the Commissioner considers that the GST liability after allowance for costs due 29 October 2010 amounts to $85,118.16.
[155] Ms Sisson by her statement of defence pleaded both that the Commissioner has not issued any assessment in relation to the alleged GST liability and that the transaction involved an exempt supply pursuant to s 14(1)(d) Goods and Services Tax Act 1985.73
[156] Ms Sisson’s evidence did not appear to touch on the allegations as to the GST position on the Colombo Street sale. In her oral submissions she repeated what was alleged in her pleading.
[157] The factual matters which would have brought CPL within the scope of the exemption under the Goods and Services Tax Act (such as the prior use of the property) are matters within the peculiar knowledge of Ms Sisson and/or Mr Hampton. In the absence of evidence from them on those matters, the Commissioner (in relation to this potential GST debt) falls within the extended definition of “creditor” (including as it does any contingent or prospective creditor). The $85,118.16 figure may be brought into account in determining CPL’s solvency.
GST on insurance proceeds ($117,667.25)
[158]In his evidence Mr Doubleday explained this claimed contingent debt:
CPL has received insurance proceeds at various times from EQC and NZI (IAG) totalling $936,906.89 and did account for GST on the receipts. The insurance receipts are subject to GST per s5(13) GST Act 1985. GST is due and payable in the GST return periods ended 31 July 2011, 30 September 2011, 30 November 2011, 31 January 2012, 31 May 2012, 31 January 2013,
31 March 2013 and 31 May 2013. This totals $117,667.25.
[159] In her statement of defence, Ms Sisson stated that no assessment has been issued by the Commissioner in relation to the estimated GST on insurance proceeds
73 Section 14(1)(d) deals with the sale of dwellings which have been used for at least the preceding five years before the date of supply exclusively for rental or leasing for accommodation purposes.
and ownership of the insurance proceeds is in dispute in current proceedings on appeal to the Court of Appeal.
[160]In her affidavit, Ms Sisson stated:
Further steps in relation to the insurance claim are being considered by the Court of Appeal in the context of the appeal of the interim liquidation order. As the Commissioner and interim liquidator have filed evidence in this proceeding on the subject, I believe it is appropriate to update the Court on the circumstances of the impact of the insurance claim on the health of my seriously ill daughter, Olivia.
[161] In subsequent paragraphs Ms Sisson expanded upon those matters of health. She explained that full settlement of the insurance claim on terms acceptable to the High Court pending final resolution of the tax dispute would offer the chance to provide housing for her daughter while at the same time maximising assets available to CPL to meet the claims of the Commissioner.
[162] The nature of the issues identified in relation to the GST on insurance proceeds was not further identified by Ms Sisson in the evidence. By the time this liquidation hearing proceeded, the Court of Appeal had dismissed Ms Sisson’s appeal against the appointment of the interim liquidators (having regard to the fact that this hearing was to proceed shortly).
[163] At this hearing, Ms Sisson volunteered further information as to the insurance policy in question having been taken out by herself and held in trust for the company. Those matters are not in evidence in this proceeding. What does not appear to be in dispute is that insurance proceeds relate to an insurance policy which may have been held for the benefit of CPL.
[164] In these circumstances, the Commissioner in relation to this claimed debt also falls within the extended definition of “creditor”. The claimed debt may accordingly be taken into account in this context.
Use of money interest (UOMI) on claimed debts ($104,603.60)
[165] In his initial evidence, Mr Doubleday provided a calculation of the UOMI which will have accrued on the debts claimed on account of GST calculated to have
been $88,173.51 as at 28 February 2017. In his subsequent evidence Mr Doubleday updated that calculation, the UOMI interest calculation, to 16 February 2018 being
$104,603.60.
[166] Ms Sisson did not take issue in either her pleadings or her evidence with the Commissioner’s contention that UOMI would be accruing in the event that either or both the GST claims were established.
[167] Just as the Commissioner qualifies as a creditor in relation to those claims, so too she qualifies in relation to the UOMI which would have accrued pursuant to the provisions of the TAA.
Advances by Commissioner to liquidator relies also upon an advance made to the liquidator
[168]Mr Doubleday gave evidence as to that item:
Legal action was required by the liquidator to secure the assets of the company from Ms Sisson. Litigation has been a feature of the liquidation to date and the Commissioner has advanced funds to the liquidator in anticipation of realisation of CPL’s assets and settlement of its debts. The significant costs awards against Ms Sisson and related parties reflects (sic) the lack of merit in these proceedings.
[169] Ms Sisson by her statement of defence challenged the Commissioner’s entitlement to have the $280,000 taken into account in this proceeding. She pleaded:
The advance of $280,000.00 to the liquidator by Inland Revenue is related to a proceeding commenced by the liquidator for determination of disputed ownership of the insurance proceeds and the property at 854 Colombo Street. The proceeding is under appeal to the Court of Appeal. The advance was made while the liquidation order was under appeal. The appeal of the liquidation order was successful and the matter directed for this rehearing. Costs awarded to the Commissioner and the liquidator in the disputed ownership proceeding are also under appeal. The advance was not disclosed to the second defendant or the Court at the time of the proceeding and appeal. Prior consent was not sought from the second defendant or the Court for such a substantial advance to be made while the appeal of the liquidation order was continuing and the claim of the Commissioner was disputed. The issue of the company’s liability for recovery of the advance in those circumstances is relevant to the grounds of appeal and is to be pursued in the prosecution of the appeals.
[170] Ms Sisson did not give evidence in support of that pleading. The Court is not able to determine whether any of the matters pleaded by Ms Sisson might impact on the Commissioner’s entitlement to recover the sum made available to CPL as a loan.
[171]On the evidence adduced, the Commissioner has lent to CPL a sum of
$280,000. There is no basis on the evidence adduced to conclude that this additional sum is not to be treated as a debt. It is indebtedness to be taken into account as established (rather than contingent or prospective) debt.
Resulting debt figures
[172]The resulting debt figures as proved by the Commissioner are:
(a) Established debt (a) Tax liabilities $1,199,835.11
(b) Court costs
$32,105.00
(c) Loan to CPL
$280,000.00
$1,511,940.11 (b)
Contingent or prospective debts
(a) GST on 856 – 858 Colombo Street $85,118.16
(b) GST on insurance proceeds
$117,667.25
(c) UOMI as at 16 February 2018
$104,603.60
$307,389.01
[173] For the purposes of assessing CPL’s solvency or insolvency the Court must recognise the established debt figure of $1,511,940.11 and the Court may take into account the figure of $307,389.01 for contingent or prospective debts.
Discussion – inability to pay debts
The statutory regime
[174] The Commissioner invokes the power of the Court under s 241(4)(a) of the Companies Act to appoint a liquidator of a company if it is satisfied that the company is unable to pay its debts.
[175] Because CPL failed to comply with the statutory demand issued by the Commissioner the Commissioner relies upon the presumption of insolvency under s 287 of the Act.
[176] By her statement of defence Ms Sisson did not deny the Commissioner’s allegations that the statutory demand had been served on CPL on 5 December 2014 or that CPL had failed to comply with the statutory demand. She made allegations by way of memorandum that he would be relying on grounds contained in a 2007 setting aside application. Ms Sisson pleaded that the Commissioner was aware that the amount claimed in the statutory demand was disputed at the time the demand was issued.
[177] The matters pleaded by Ms Sisson did not contain any denial of the facts (as alleged by the Commissioner) that a demand was issued to CPL and was not met by CPL. The Commissioner’s allegations in relation to the statutory demand were therefore admitted by Ms Sisson.74 Ms Sisson’s allegations as to other steps taken by Mr Hampton and as to the Commissioner’s alleged awareness of a dispute do not detract from those deemed admissions.
74 See High Court Rules, r 5.48(3).
The cashflow test of solvency
[178] The assessment required by the Court was that identified by the Court of Appeal in Yan v Mainzeal Property & Construction Limited (in rec and liq):75 the test is one of solvency, not liquidity. A temporary lack of liquidity may not equate to insolvency if the debtor is able to realise assets or borrow funds within a relatively short time frame in order to meet its liabilities as they fall due. The Court of Appeal adopted the test identified by Barwick CJ in the High Court of Australia’s decision in Sandell v Porter.76 In that case his Honour referred to a possibility that a debtor may be able to procure money for repayment of a debt by realisation by sale or by mortgage or pledging of assets within a relatively short time. He continued:
The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
[179] In Yan, the Court of Appeal concluded this part of its discussion with the observation that a realistic commercial approach to the assessment of solvency is required.77
Balance sheet solvency
[180] It is established that the s 241(4)(a) test of ability to pay debts involves primarily a “cashflow” test of solvency to be contrasted with the “balance sheet” test of solvency. As it was adopted by Plowman J in Re Tweeds Garages Limited.78
In [such cases where a company is unable to meet the current demands on it] it is useless to say that if its assets are realised there will be ample to pay 20 shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realisable; but although this may be so, yet if it had not assets available to meet its current liabilities it is commercially insolvent and may be wound up.
75 Yan, above at n 63, at [59].
76 Sandell v Porter (1966) 115 CLR 666 (HCA) at 670.
77 Yan, above n 63, at [60].
78 Re Tweeds Garages Limited [1962] Ch 406, at 410, citing J B Lindon and others, Buckley on the Companies Acts (13th ed, Butterworth & Co, London, 1957) at 460.
[181] By her statement of defence, Ms Sisson pleaded that CPL is balance sheet solvent. She pleaded in particular that the balance sheet solvency arises through the availability of two assets:
(a)854 Colombo Street, Christchurch with the liquidator having estimated its market value to be approximately $1,000,000.
(b)An insurance claim for $1,872,000, the claim having been partially paid, representing 50 per cent of the claim, with the balance to be accounted for provided certain terms of the cover are complied with.
[182] By her pleading Ms Sisson refers to vesting orders made by the High Court in relation to these assets and there being an appeal concerning the vesting orders.
[183] The Commissioner filed a reply to the affirmative allegations in the statement of defence. In particular she pleaded:
(a)She admitted 854 Colombo Street, Christchurch, is vested in CPL but says the market value is approximately $1,151,150 (GST exclusive).
(b)She said there is uncertainty as to the value of any remaining entitlement under the insurance claim against NZI/IAG.
(c)She pleaded that IAG as at 16 March 2016 advised that $138,064.77 is the residual amount payable under the insurance policy.
[184] The Commissioner further denied that the vested assets of CPL are sufficient to meet the debts owed by CPL to the Commissioner.
Evidence of CPL’s financial position
[185] CPL is in interim liquidation. It is common ground that it has not been in a position to meet debts as they fall due. The business of the company (as a preschool operator) has not operated for many years. All that CPL has from which to meet its debts are any assets over which it may establish its ownership.
[186] In the initial evidence filed for CPL in this liquidation proceeding, Mr Hampton deposed that CPL had not traded for some years but still held a property that was subject to an insurance claim. He identified the property as 854 Colombo Street, with a then rateable land value of approximately $790,000. He deposed that the property was subject to an IAG (NZ) Limited insurance claim in the sum of approximately
$1,800,000 in relation to the building on the property which had been destroyed in the Christchurch earthquake sequence. He recorded that IAG and EQC had paid approximately $830,000 to date in partial settlement of the insurance claims. The payment had paid off the mortgage with the surplus being held at that time (June 2015) in deposits at the ANZ bank ($148,875.54 and $24,154.38).
[187] In the affidavit filed by Mr Doubleday on the application to appoint an interim liquidator (which was admitted to be read also in this proceeding), he addressed matters relating to 854 Colombo Street. At that time of the interim liquidation application, Ms Sisson had a proposed sale of 854 Colombo Street on the open market at $875,000. Ms Sisson also placed on record a proposal made to NZI/IAG that there be paid to CPL $900,000 in settlement of all insurance claims.
[188] On the figures available at that time (1 December 2017) Mr Doubleday estimated the net proceeds potentially available upon the realisation of those two assets being:
(a) 854 Colombo Street section sale $875,000.00 Less GST (estimated)
$114,130.00
Costs of sale (estimated)
$5,870.00
Subtotal
$120,000.00
Net proceeds available to satisfy creditors
$755,000.00
(b)
NZI/IAG insurance claimed by Ms Sisson
$900,000.00
Less GST (estimated)
$117,391.00
Net proceeds available to satisfy creditors $782,608.00
[189] On that basis, combining the two figures ($755,000 and $782,608) CPL would still fall short of realising sufficient sums to discharge its indebtedness to the Commissioner.
[190] By the time the Commissioner filed her additional evidence for this rehearing (the affidavits being sworn in April 2018), fresh evidence had been admitted into the proceeding through the Court of Appeal’s 28 July 2017 judgment. As identified in the liquidation appeal judgment, the fresh evidence was:
(a)An NZI Limited email of 16 March 2016; and
(b)A market appraisal of 854 Colombo Street.79
[191] The NZI email of 16 March 2016 recorded that the insurance pay out yet to be disbursed to CPL was $138,064.77.
[192] The “market appraisal” of 854 Colombo Street was an appraisal by a real estate agent (Harcourts Gold) dated 2 October 2016 which indicated “a market value” for the property of. It was not a valuation by a person qualifying as an expert.
[193] For this rehearing, the Commissioner obtained a valuation report of the 854 Colombo Street property from a registered valuer, Mark Dow. Mr Dow’s report, valuing the property as at 5 April 2018, was that its value was $910,000 (plus GST if any). Mr Dow in his report then also took into account a possible premium if the property were to be sold to the adjoining owner. Mr Dow estimated a premium of around 10 per cent might be achievable, indicating a sale price to the adjoining owner of around $1,151,150 (including GST).
[194] On the basis of this evidence Mr Doubleday calculated the asset position of CPL as at 10 April 2018 to be:
79 Liquidation appeal judgment, above n 2 at [68].
(a) 854 Colombo Street $1,151,150.00 Less GST
$144,900.00
Costs of sale (estimated)
$35,000.00
Net proceeds available to satisfy creditors
$971,250.00
(b)
Residual (NZI) insurance entitlement
$138,064.77
[195] If that evidence is accepted the most favourable outcome for CPL is that asset realisation in due course might achieve funds of $1,109,314.77 for CPL.
[196] By her subsequent statement of defence, Ms Sisson did not take issue with the value ascribed by the Commissioner to the Colombo Street property. She referred without criticism to the liquidators’ estimated market value of $1,000,000 (by inference the value exclusive of GST). That is the value supported by Mr Dow’s valuation.
[197] In her statement of defence Ms Sisson went on to identify the insurance claim which she pleaded to be a claim “for $1,872,000”. Her pleading then acknowledges that the claim has been partially paid “representing 50 per cent of the claim”.
[198] Ms Sisson in her affidavit for this rehearing did not provide any additional evidence as to the value of the residual insurance claim. Accordingly the most recent evidence she has provided in that regard is the NZI email which puts the residual insurance entitlement (as identified by Mr Doubleday) at $138,064.77.
[199] Ms Sisson’s evidence is accordingly consistent with the latest updated figures as provided through Mr Doubleday’s affidavit which indicates a value of unrealised assets of $1,109,314.77. That falls well short of the established debt of CPL to the Commissioner, being $1,511,940.11. It is still further short of the figure including contingent and perspective indebtedness of $1,819,329.12, which includes the
$307,389.01 which this Court may take into account in assessing CPL’s insolvency.
Conclusion as to solvency
[200] Ms Sisson focused her assertion of CPL’s ability to pay its debts on the proposition that CPL is balance sheet solvent.
[201] On the evidence, CPL clearly is not balance sheet solvent. Even were there to be made available to CPL further time to realise its two remaining assets, the realisations would not enable CPL to clear its indebtedness. This is not a case where there has been a temporary lack of liquidity. The lack of liquidity has been long- standing and cannot be resolved through realisation of assets. There has never been any suggestion that the non-trading company would be in a position or willing to raise funds by means other than asset-realisation to discharge the indebtedness to the Commissioner.
[202]Ms Sisson has not rebutted the presumption that CPL is unable to pay its debts.
The Court’s discretion
[203] The Commissioner has established the basis upon which the Court may make an order of liquidation. At this point the Court has an unfettered discretion as to whether to make such an order.
[204] Ms Sisson did not direct her submissions to the exercise of the discretion. Her submissions were focused upon the earlier stage of analysis and in particular the proposition that the Commissioner’s calculations and methodology in the exercise of remitting penalties, were invalid or inaccurate.
[205] Against the background of the huge volume of evidence which has been filed during the course of this proceeding, I do not discern any basis upon which the Court might now appropriately refuse to make an order liquidating this company which for a long period has not been trading and is substantially insolvent.
[206] To the extent there exist other matters in the background which have not been focused upon in this judgment, they uniformly reinforce the appropriateness of liquidation. CPL does not have an effective governance structure. Because of the
personal insolvency situations of both Mr Hampton and Ms Sisson there is no immediate prospect of either of them resuming an active role in the governance of CPL.
[207] As this judgment indicates, CPL has proceedings before this Court which have either been stayed or not progressed over a number of years. The indefinite subjecting of other parties to litigation is undesirable. Liquidators who are experienced in assessing the realistic value of things in action can be expected to appropriately decide whether to continue to pursue claims in the interest of the company.
[208] This is not a case where there are known to be other creditors, let alone creditors who have opposing views.
Outcome
[209] The Commissioner has established the grounds for making an order of liquidation. There are no matters informing the Court’s discretion which cut across the appropriateness of a liquidation order.
Costs
[210] There will be orders fixing the Commissioner’s costs and requiring the second defendant to pay them. The order in relation to the interim liquidators’ costs will be that they be reserved. That is because the liquidators may consider they do not need an order as to costs given the entitlement they have in relation to remuneration as a result of the order of interim liquidation. In the event that for any reason the interim liquidators wish to have a costs order made their memorandum is to be filed and served within 10 working days.
Orders
[211]I order:
(a)There is an order of liquidation. The order is timed at 4.50 pm today.
(b)The liquidators appointed are Malcolm Grant Hollis and Wendy Ann Somerville.
(c)The liquidators’ remuneration is approved at the rates set out in their consent dated 1 December 2017, subject to final approval of fees by the Court at the end of the liquidation.
(d)The liquidators may exercise their powers individually.
(e)The second defendant is to pay to the Commissioner the costs of the steps in the proceeding (to the extent they have not previously been the subject of an order) on a 2C basis plus disbursements to be fixed by the Registrar. There is a certificate for second counsel.
(f)The costs and disbursements of the interim liquidators in relation to the rehearing are reserved, with the Court’s order in the event that the interim liquidators do not file a memorandum in relation to costs within 10 working days being that there will be no order as to costs.
Osborne J
Solicitors:
Meredith Connell, Wellington Lane Neave, Christchurch Counsel: P Shamy, Christchurch Copy to: T A Sisson, Christchurch
SCHEDULE A
CPLTax Schec)ulcs assessments ancl paymcrite (CMS I ‹›n bulk funding irripo scd)
Date
si/or/iooi
28/02/2001
SLE
7O2
7O2
A ssessme rit GST
A,697
ACC SEA INC
Payment TotaI
55,55O
31/O3/ZOO1
878
Z1,6OO 149
5 2, 9SA
1Z1,131
2O/OA/2001
(8T8)
130,253
30/04/2001
70 2
13O,955
yO/05/2001
(702 )
13O,253
31/OS/ZOO1
2O/O6/ZOO1
3O/O6/?OO1
7O2
6,211
(702)
137,166
136,464
13/07/2001
2O/07/ZOO1
( 1 2 !S,000) 12,342
(87B) 2T,464
31/O?/ZOO1
'102
15,869
20/08/2001
(702)
15.167
31/08/2001
30/09/2001
8T8
yO2
16,045
2j,881
31/10/2001702
12/11/2OOl
Z6/11/2001
(TO?) (7O2)
13,1T9
30/11/2001
31/12/ZOO1
2OO2
3 1/0 1/2 OO2
87 8
1, 303
yO2
3,543
2 ,6 3O
17,600
2B,9O3
32,235
28/02/2OO2702
Z9/03/2002
32,937
(7O2) 32,235
31/03/2OO2
8y8
98B
16/OA/2OO2
(8T8)
7 O, •O6
3O/O4/?OO2
?O2
70,263
2O/O5/ZOO2
31/05/1002 878
ZO/O6/2OOZ
5,670
(7oi) 6s,sui
76,109
(878) 75,231
5O/O6/Z0O2
20/07/2002
702
(702)
T5,933
75,231
51/07/2002
702
T1,56S
2O/OB/2OOZ
31/O8/ZOO2878
20/09/2002
702)
(8T8)
70,868
71,741
70,863
30/09/2002
jl/1O/ZOO1
31/12/2002
31/01/ZOO3
WTO?
2, 903
2,903
73,d6B
7 6,669
76,572
7
0