Commissioner of Inland Revenue v Duncan HC Auckland CIV 2006 409 439

[2006] NZHC 781

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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2006 409 000439

BETWEEN  COMMISSIONER OF INLAND REVENUE

Appellant

ANDPHILIP JOHN DUNCAN Respondent

Hearing:         29 May 2006

Appearances: S F Wellik and A Goosen for Plaintiff

P M James for Respondent

Judgment:      7 July 2006

JUDGMENT OF CHISHOLM J

[1]      The Commissioner sought judgment in the District Court against Mr Duncan, in his capacity as trustee of the Duncan Family Trust, for $341,285.70 comprising GST plus penalties  and  interest  alleged  to  be owing  by the trust.    Mr  Duncan defended the claim primarily on the basis that because he had been adjudicated bankrupt and the Commissioner had failed to prove in his bankruptcy, he was automatically released from the debt upon his discharge from bankruptcy.   The District Court agreed with Mr Duncan and entered judgment in his favour.  This is an appeal against that decision.

Background

[2]      In  his  statement  of claim  the  Commissioner  pleaded  that  the  trust  owed

$370,576.99 in respect of unpaid GST, penalties and interest and that pursuant to

COMMISSIONER OF INLAND REVENUE V DUNCAN HC CHCH CIV 2006 409 000439  7 July 2006

ss2(1) and 57(3) of the Goods and Services Tax Act 1985 Mr Duncan was personally liable, as trustee of the trust, for payment of that indebtedness.  Judgment was sought accordingly.   Mr Duncan’s statement of defence denied personal liability on the grounds that he was adjudicated bankrupt and the indebtedness should have been proved in his bankruptcy.

[3]      Facts upon which the parties were agreed are recorded in the District Court judgment at [2]:

“(1)       By Deed of Settlement dated 27 September 1994 the [appellant] was a trustee of the

Duncan Family Trust (“the Trust”).

(2)        The Trust was registered for GST on 1 November 1994.

(3)        The Trust purchased two sections of land in February 1998.

(4)        The [appellant], on behalf of the Trust, prepared and filed GST returns claiming the input tax on the purchase.

(5)        The Trust developed the two sections into seven units which were issued individual titles on 22 July 1999.

(6)        The Trust made GST input tax claims in relation to the development of land and buildings on the sections of $946,875.90.

(7)        The [appellant] was adjudicated bankrupt on 29 September 1998.

(8)        Between the GST periods ending 30 September 1999 and 30 November 2000, seven units developed on the sections were sold and returned in various GST periods.

(9)        On 18 June 2001, the [appellant] retired as a trustee of the trust and was replaced. (10)     The [appellant] was discharged from bankruptcy on 29 September 2001.

(11)       The Trust ceased to be registered for GST on 31 May 2002.

(12)       The [appellant] assessed the Trust for tax revenues of $127,109.02 for the return periods referred to above.

(13)     As a result of the Trust’s default in paying the amount of tax assessed, various late payment penalties and interest amounting to $243,467.97 have been assessed.”

Although the outstanding GST, penalties and interest referred to totals $370,576.99 (which was the amount initially claimed), the Commissioner subsequently acknowledged that penalties amounting to $29,291.29 could not be recovered.  Thus by the time the matter reached a hearing the actual amount in issue was $341,285.70.

[4]      Evidence  was  given  by  Mr  Duncan.    Having  traversed  various  matters covered in the agreed facts, he said that it was always the trust’s intention to develop the properties and on-sell them.   It was a condition of obtaining finance for the development that a minimum number of purchase agreements were to be in place and the sale proceeds of the units were to be applied in reduction of the indebtedness to the financier.   As a result of delays in obtaining titles some of the purchasers withdrew from pre-sale agreements and after his bankruptcy other pre-sale agreements were entered into.  Mr Duncan was not cross-examined.

[5]      In terms of s57(3) of the GST Act (as it read before an amendment effective from 10 October 2000) Mr Duncan was personally liable for GST payable by his trust until such time as he notified the Commissioner of his retirement.  It is common ground that he remained a trustee at all relevant times.  Given this personal liability for GST and Mr Duncan’s bankruptcy the issue arose whether s87(1) of the Insolvency Act 1967 applied:

“87    Provable debts

(1)      … all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the time of his adjudication, or to which he becomes subject before his discharge by reason of any obligation incurred before the time of his adjudication, shall be debts provable in bankruptcy.”

Subject to s98 of the Act which will be considered later, if Mr Duncan’s liability for GST, penalties and interest fell within this provision he would be automatically released  by s114  which  provides  that  a  discharge  from  bankruptcy releases  the bankrupt from all debts provable in the bankruptcy (except in four situations which do not apply in this case).

[6]      The Commissioner argued that s87(1) did not apply because the purchase of the property, including the claiming of input tax, did not give rise to any “liability” or “obligation” to account for output tax in terms of that subsection.  His primary point was that any liability or obligation for output tax only arose when the units were sold by which time Mr Duncan had already been adjudicated bankrupt.  Thus by continuing as a trustee after his adjudication during the period that the units were

sold Mr Duncan became personally liable for the output tax and he was not protected from such liability by ss87(1) and 114.

[7]      Mr Duncan’s response was that once the trust was registered for GST and input tax was claimed on the purchase and development the trust was always going to have to account for output tax on the sale of the units, and in his capacity as trustee he was personally liable for such tax.  It followed that a “contingent liability” or an “obligation” in terms of s87(1) to account for output tax existed at the time he was adjudicated bankrupt.  Given that the Commissioner could have proved in the bankruptcy but had failed to do so, upon discharge he (Mr Duncan) was released by s114 from any obligation to pay the amount claimed by the Commissioner.

District Court Decision

[8]      Having summarised the facts and competing arguments, the Judge addressed the scheme of both the GST Act and the Insolvency Act.   In the course of his analysis he referred to ss8(1), 9, s57(1)(c) and 57(3) of the GST Act, and to ss87(1),

98 and 114 of the Insolvency Act.  Amongst other things, he noted that under s57(3)

of the GST Act as interpreted in CIR v Chester Trustee Services Limited (2002) 20

NZTC 17,925 (CA) the liability of a trustee for GST arises at the same time as the liability of the registered person (the trust).

[9]      It was the Judge’s view that  given the scheme of the GST Act and the decision in CIR v Chester Trustee Services Limited:

“[23] … a GST registered person has a future liability or contingent liability to pay tax on [the] supply of its own goods and services provided it remains registered and carrying on a taxable activity.   The amount of tax payable to discharge the continent liability becomes certain either at the time payout is received or  supply of  invoice (the  time  of  supply) depending upon how the registered person has elected to be treated upon registration ...”.

He went on to observe that in this case the trust remained registered and carried on a taxable activity during all relevant periods.

[10]     With reference to Butterworths New Zealand Law Dictionary (5th Edn, 2002) the Judge defined a contingent liability as “one that may or may not arise;  that is, it is a liability contingent on the happening of an uncertain event”.  He considered that Winter & Others (Executors of Sir Arthur Munro-Sutherland deceased) v Inland Revenue Commissioners [1961] 3 All ER 855 (HL) supported the view that GST which has not yet come “to book” qualifies as a contingent liability.  Passages from the speech of Lord Reid were quoted to illustrate this conclusion.

[11]     Having  noted  that  it  was  not  disputed  that  the  trust  always  intended  to develop and sell the developed properties, the Judge concluded that the contingent liability arose at the time the trust claimed the input tax even though the corresponding liability to account for output tax did not accrue until the date of the invoiced sales.  He believed that to wait until the time of supply to determine the status  of  the  obligation  would  be  to  wait  until  the  liability  had  ceased  to  be contingent and had become an existing obligation.

[12]     Then the Judge distinguished Kaye v Auckland District Law Society [1998] 1

NZLR 151 (HC) which concerned costs awarded by the Disciplinary Tribunal after a practitioner had been adjudicated bankrupt.   It was held in that case that the costs were not covered by s87(1).   The Judge contrasted that situation with the present case where “tax would always have been payable; it was just a matter of when and how much”.   He considered that ss87(1) and 114 reflected a clear Parliamentary intention that bankrupts should have a fresh start and concluded that Mr Duncan’s liability for the trust’s GST output tax was a contingent liability and prima facie provable in Mr Duncan’s bankruptcy.

[13]     Section 98 of the Insolvency Act was also considered by the Judge.   This section provides:

“98    Assignee to estimate value of contingent debt

An estimate may be made by the Assignee of the value of any debt or liability proved under the bankruptcy which, by reason of its being subject to any contingency or contingencies or for any other reason, does not bear a certain value but which the Assignee considers may be fairly estimated. If the Assignee considers that the value cannot be fairly estimated he shall reject the proof.”

While the Judge accepted that there is some leeway in terms of valuing debts or liabilities, it was his view that a fair estimate of the value of output tax payable would require at least some idea of the sale price of the properties once the planned development had occurred.  He noted that there was no evidence or agreement about whether or how a reasonable estimate could have been made at the time of Mr Duncan’s adjudication.   In the Judge’s view the onus fell on the Commissioner to show that the GST debt would not have been provable and on that basis he decided that the Commissioner had not discharged the onus resting on him.

This Appeal

[14]     Unfortunately some of the key points relied on by the Commissioner in this

Court were not argued in the District Court.

Appellant’s Case

[15]     It is alleged by the appellant that the Judge erred in the following respects:

•    As to the meaning of “contingent liability” in terms of s87(1).

•   In finding that the liability for GST output tax was a contingent liability of the trust and of Mr Duncan respectively.

•   By finding that s98 of the Insolvency Act gave rise to an evidential onus on the Commissioner to demonstrate that the GST debt could not be estimated.

[16]     With  reference  to  the  meaning  of  “contingent  liability”,  the  appellant claimed that the Judge failed to recognise that before there can be a contingent liability  under  s87(1)  there  must  be  some  form  of  commitment  by  the  debtor. Support for this contention was derived from the speech of Lord Reid in Winter v Inland Revenue Commissioners.  It was contended that an intention, expectation or possibility of entering into a commitment is not enough.

[17]     The argument continued that at the time of Mr Duncan’s adjudication output tax was not a contingent liability of the trust because the trust was not committed to the taxable supply of the units and there was accordingly no certainty that output tax would become payable.  For example, if the development had been sold as a going concern it would have been zero rated under s11(m) of the GST Act.   Another example was that the units could have been leased, which would have been an exempt supply.  It was acknowledged, however, that this would give rise to a change of use adjustment under s21(1) which would require the payment of output tax of

12.5%.  Thus the argument was that Judge erred by holding that because the trust claimed input tax, output tax would always be payable.  It was submitted that if the trust did not have a contingent liability, neither did Mr Duncan.

[18]     Alternatively, it was argued even if the output tax was a contingent liability of the trust it was not a contingent liability of Mr Duncan at the time of his adjudication for the following reasons:    first, under s57(3) he was only liable for “tax payable” by the trust, which by definition in  s2  means  tax  that  has  been calculated in accordance with the GST Act;  second, the trust might have supplied the units as a going concern in which case the transaction would have been zero rated and there would not have been any “tax payable” by the trust;   third, the respondent could have completely avoided personal liability for GST by resigning as trustee (and notifying the Commissioner) before any supply was made by the trust; finally, anomalies could arise if the Judge’s interpretation is correct.

[19]     With reference to the s98 issue, the Commissioner argued that the Judge’s approach was misconceived because there was no evidence that the Commissioner could have brought to the Court on this issue.   In other words, this was not a situation where the Commissioner could have brought evidence but had failed to do so.  As a matter of law the debt was too remote for estimation and it followed that the debt was not a provable debt and s114 did not apply.

Respondent’s Case

[20]     Mr James complained that the Commissioner’s stance that the trust was not committed to selling the developed units cuts across the Judge’s finding to  the

contrary.  He also complained that the Commissioner was effectively attempting to resile from the District Court finding that a contingent liability arose at the time the trust claimed the input tax.  This submission was based on the premise that it was not disputed that input tax had been claimed and that once that was accepted output tax was always going to be payable, it merely being a matter of when and how much.

[21]     While he accepted that a supply is the actual trigger to the requirement to pay GST,  Mr  James  submitted  that  because  of  the  way  in  which  this  particular transaction had been structured from the outset, the obligation arose before bankruptcy.  His argument was that once the GST input tax had been claimed by the trust there was “unmistakably” a contingent liability for output tax which, in the case of Mr Duncan, came within s87(1).

[22]     The  respondent’s  position  is  that  by asserting  that  a  commitment  by the debtor is required, the Commissioner is attempting to put an unjustifiable gloss on the plain words in s87(1).   In any event, the District Court had found as fact that from the outset the trust was committed to the development of the sections and therefore to the GST liability.   This reflected that legal steps had been taken, the sections had been purchased, GST input tax had been claimed, and that there was always an intention to develop the units and sell them.  Thus Mr Duncan’s liability for GST qualified under s87(1) regardless of the interpretation placed on the subsection.

[23]     With reference to the appellant’s argument that there was uncertainty about whether  GST  would  be payable on  sale,  Mr  James  submitted  that  this  did  not undermine the basic  proposition  that  there  was  an  obligation  to  pay GST.    He claimed that under s98 it was the Official Assignee’s role to quantify the debt or liability proved in the bankruptcy and that in this case where inputs had already been claimed an estimate could have been made by the Official Assignee which would have had the effect of bringing s114 into operation.  Mr James also submitted that a zero rating would not negate an obligation to account for GST.

[24]     Finally, Mr James’ response to the appellant’s alternative argument that Mr

Duncan personally did not have a contingent liability can be summarised:   any

suggestion that Mr Duncan had to be committed to the liability was rejected;   the suggestion that there was no contingent liability flew in the face of CIR v Chester because the personal liability of Mr Duncan in his capacity as trustee represented the whole basis of the claim by the Commissioner;  likewise the suggestion that there was no liability because tax had not been calculated at the time of adjudication was also contrary to CIR v Chester;   and the possibility of selling units as a going concern or Mr Duncan resigning as a trustee “merely obfuscates the issue” because they were not sold as a going concern and the respondent did not resign.

Discussion

[25]     This appeal comes down to two narrow questions:.

•    Was it open to the Judge to find that s87(1) applied?  If so,

•    could Mr Duncan’s debt or liability be fairly estimated in terms of s98? Given the focus on whether there was a “contingent liability” within the meaning of

s87(1) I will begin with that issue.  Then I will consider whether the other limb of s87(1) applies.  Following that I will consider the second question.

The Meaning Of “Contingent Liability”

[26]     As already mentioned, one of the primary arguments in this Court was that a “contingent liability” in terms of s87(1) requires some form of commitment on the part of the debtor.  It appears that this proposition was not advanced in the District Court.

[27]     According to the Commissioner support for the proposition that there must be some form of commitment can be found in the speech of Lord Reid in Winter & Others v Inland Revenue Commissioners which considered the meaning of the words “contingent liability” in s50(1) of the Finance Act 1940 (UK).  At 858 His Lordship said:

“No doubt the words “liability” and “contingent liability” are more often used in connexion with obligations arising from contract than with statutory obligations.  But I cannot doubt that if a statute says that a person who has done something must pay tax, that tax is a “liability” of that person.  If the amount of tax has been ascertained and it is immediately payable it is clearly a liability;  if it is only payable on a certain future date it must be a liability which has “not matured at the date of the death” within the meaning of s.50(1). If it is not yet certain whether or when tax will be payable or how much will be payable why should it not be a contingent liability under the same section.

It is said that where there is a contract there is an existing obligation even if you must await events to see if anything ever becomes payable, but that there is no comparable obligation in a case like the present.  But there appears to me to be a close similarity.  To take the first stage, if I see a watch in a shop window and think of buying it, I am not under a contingent liability to pay the price: similarly if an Act says I must pay tax if I trade and make a profit, I am not before I begin trading under a contingent liability to pay tax in the event of my starting trading.   In neither case have I committed myself to anything.  But if I agree by contract to accept allowances on the footing that I will pay a sum if I later sell something above a certain price I have committed myself and I come under a contingent liability to pay in that event.   This company did precisely that, but its obligation to pay arose not from contract but from statute.  I find it difficult to see why that should make all the difference.” (Emphasis added).

Lord Reid then referred to Erskine’s Institute of the Law of Scotland, Volume 2 including a passage to the effect that the grantor of a conditional obligation does not have the right to revoke or withdraw.  Having equated a conditional obligation with a contingent liability His Lordship observed at 859 that a contingent liability “is a liability which, by reason of something done by the person bound, will necessarily arise or come into being if one or more of certain events occur or do not occur”.

[28]     At a later point Lord Reid considered the observation of Lord Greene MR in Re Duffy (deceased), Lakeman v Attorney-General [1948] 2 All ER 756 (CA) at 760 that he found it impossible to give the words “contingent liability”:

“... a meaning extending beyond what is always ascertainable without any doubt whatsoever, namely, an existing legal liability – a liability actually existing in law at the relevant date. The words cannot be stretched so as to cover something which in a business sense is morally certain and for which every businessman ought to make provision, but which in law does not become a liability until a subsequent date.”

While Lord Reid agreed with the last sentence, he considered that as a general statement of the law the passage was inadequate because it deprived the category of contingent liability of all content.   Lord Birkett and Lord Guest agreed that the expression could not be restricted to existing legal liabilities because a liability is not a legal liability until the contingency has arrived.

[29]     There do not appear to be any New Zealand authorities directly in point, although some of Lord Reid’s comments were cited with approval in Gilbert v Shanahan [1998] 3 NZLR 528 (CA) at 543. Counsel on both sides referred to Kaye v Auckland District Law Society which, as already mentioned, considered whether costs  awarded  by  the  Disciplinary  Tribunal  after  the  practitioner  had  been adjudicated bankrupt came within s87(1).  At 158 the Court concluded:

“The obligation to pay costs awarded by the Tribunal is not incurred before the time of adjudication.  It is only incurred if and when the Tribunal, as a result of a hearing, decides that costs should then be paid.   The practitioner might have been subject to be brought before the Tribunal at the date of his bankruptcy, but it cannot be said that potential created a debt or a liability certain or contingent.”

While the Court did not specifically address the issue whether some form of commitment by the debtor is necessary, it seems to me that the approach taken by the Court is generally compatible with that proposition.

[30]     In the end result  I accept  the Commissioner’s  contention  that  the words “contingent liability” used in s87(1) contemplate some form of commitment on the part of the debtor, at least to the extent that he or she is not free to withdraw from the liability at will.  This seems to be consistent with the requirement that debtor must, at the time of his or her adjudication, be “subject” to the liability.  To my mind use of that word suggests that the debtor is under some form of constraint.

Was There A “Contingent Liability” In This Case?

[31]     I do not think so.   In terms of the GST Act the trust was not under any “liability”, contingent or otherwise, to pay GST output tax until there was a supply of the units:  ss8(1) and 9 of the GST Act.   And given that Mr Duncan was only personally liable under s57(3) for “tax payable” by the trust his liability, contingent or otherwise, could not have arisen at any earlier time.   This interpretation is consistent with CIR v Chester Trustee Services Limited in which the Court of Appeal held that the liability of a trustee to pay the tax due upon provision of goods and services by the trust must fall on the trustee in office at the time of the issue of the invoice.

[32]     As I understand it, Mr James’ proposition is that the claiming of input tax gave rise to a contingent liability, in terms of s87(1), to pay output tax.  Apart from mentioning s5(16) he did not attempt to support that proposition by reference to the GST Act.  Section 5(16) provides:

“(16)     Where a registered person has claimed a deduction in accordance with section

20(3) of this Act in respect of the supply of a dwelling, any subsequent supply by the registered person of—

(a)    The dwelling; or

(b)    Any land or other part of the dwelling that has ceased or will by reason of the supply cease to be appurtenant to or enjoyed with the dwelling,—

will, for the avoidance of doubt but subject to subsections (17), (18), and (19)(b) of this section, be deemed to be a taxable supply.

However, as Mr Wellik pointed out, this cannot alter the fact that the “liability” for GST only arises when the supply is made.   Thus I do not think that Mr James’ proposition is supported by the scheme of the GST Act and I reject it.

Does The Second Limb Of Section 87(1) Apply?

[33]     The second limb of s87(1) refers to:

“… all debts and liabilities … to which [the bankrupt] becomes subject before his discharge by reason of any obligation incurred before the time of his adjudication”.

There is no question that Mr Duncan became subject to a “liability” for GST after his adjudication but before his discharge.   The only issue is whether that was by reason of an “obligation” incurred before his adjudication.

[34]     It is significant that both the word “liability” and the word “obligation” are used in the second limb and Parliament must have intended that they would carry different meanings.   According to the New Shorter Oxford English Dictionary the word “obligation” means:

“the action of constraining oneself by promise or contract to a particular course of action; a mutually binding agreement.  Also, the course of action etc. to which one commits oneself, a formal promise”.

Significantly this definition does not limit the word to something that is legally binding.  In my opinion the structure of s87(1) makes it tolerably clear that the word “obligation” was intended to indicate a less formal commitment than the word “liability”.   Read as a whole the subsection seems to contemplate that when an obligation arising before bankruptcy matures into a debt or liability after bankruptcy but before discharge it will be provable.

[35]     Now I turn to the evidence to determine whether Mr Duncan was subject to an “obligation” in terms of s87(1) before his adjudication.   Unfortunately the evidence, including the agreed statement of facts, is extremely cryptic.

[36]     On Mr Duncan’s uncontested evidence (paragraph 9 of his brief) input tax on the land and building costs was claimed prior to the date of his adjudication.  It must follow that the finance had been uplifted and the financial package relating to the development (referred to in paragraph 5 of the brief) was in place before Mr Duncan was adjudicated bankrupt.  Under that package “a number of purchase agreements” relating to units had to be in place and upon sale the net proceeds of the units had to be paid to the financier until the full amount owing to the financier had been repaid. Thus the evidence indicates that from the outset the trust was committed to the unit sales by the financing package.  It was therefore inevitable that sooner or later there would be liability for GST output tax.

[37]     Given that situation it would appear that  the GST  liability to  which  Mr Duncan  became  subject  before  his  discharge  was  incurred  by  reason  of  the obligations that were in place before Mr Duncan was discharged from bankruptcy. As the Judge said: “… tax would always have been payable;  it was just a matter of when and how much”.  Had the obligation not matured into a debt or liability before Mr Duncan’s discharge, s87(1) could not have applied.  But it did mature before his discharge.  This seems to be the very type of situation contemplated by the second limb of s87(1) where an obligation entered into before bankruptcy has matured into a debt or liability before discharge.  Under those circumstances Parliament has decreed that it should constitute a provable debt.

[38]     Nevertheless before reaching any final conclusion it is necessary to consider two arguments advanced on behalf of the Commissioner, neither of which seem to have been advanced in the District Court.   The first is that s87(1) does not apply because at the time of Mr Duncan’s bankruptcy the whole development could have been sold as a going concern which would have attracted a zero rating under s11(m) of  the  GST  Act.    In  my view  that  is  not  a  plausible  proposition  because  it  is incompatible with the uncontested evidence before the District Court.   The only inference that can be safely drawn is that by the time of Mr Duncan’s adjudication the trust was well and truly committed by the financing arrangements to the sale of individual units.  If the Commissioner wished to mount an argument to the contrary he should have attempted to establish some evidential foundation.  As it is, there is none.

[39]     The second  argument is that Mr Duncan could have completely avoided personal liability for GST by resigning as a trustee before the units were sold and notifying the Commissioner of his resignation in terms of s57(3) of the GST Act. Again this argument runs into evidential problems.  It is based on the premise that Mr Duncan could have resigned.  Given the evidence I do not think that I am in a position to safety draw that inference.   My reluctance reflects the uncontested evidence about the financial package.  As far as I can see Mr Duncan was the sole trustee and the trust seems to have been regarded as “his” trust.   Under those circumstances it would not have been surprising or unusual if the package committed Mr Duncan to the development and his trusteeship until borrowings were repaid. There is no evidence about the extent of the borrowings but it can probably be inferred that they were very substantial.  Apart from that, I do not have any evidence about the trust deed or any provisions concerning retirement.   The fact that Mr Duncan  did  not  retire  until  after  the  units  had  been  sold  could  be  significant. Whatever the position I am not prepared to speculate about Mr Duncan’s ability to resign as a trustee or about his ability to obtain a Court order under s46 of the Trustee Act 1956.

[40]     Another factor also counts against the Commissioner’s second argument.  As Mr James pointed out, the whole basis of the Commissioner’s claim against Mr Duncan is that Mr Duncan in fact remained a trustee until after the units had been

sold and the GST liability had arisen.   By suggesting that Mr Duncan could have resigned the Commissioner seems to be wanting it both ways.  It seems to me that this is a situation where the Court is entitled to take into account what actually happened, namely, that Mr Duncan remained a trustee, and that it should avoid being sidetracked by (at best) a theoretical possibility that we know did not eventuate. Indeed, the second limb in s87(1) has been structured in a way that requires events to be traced beyond adjudication to the point when the debt or liability arises (provided, of course, that it arises before adjudication).

[41]     In the end result, I agree with the District Court Judge that s87(1) applies, although my path to that conclusion is quite different.   I also agree with him that Kaye v Auckland District Law Society is distinguishable.  On the other hand, because I have reached my conclusion on the basis of the second limb in s87(1), which is not replicated  in  the  statute  considered  by  the  House  of  Lords  in  Winter  v  Inland Revenue Commissioners, I do not place any reliance on that decision.   Given the conclusion that I have reached ss87(1) and 114 will provide  an insurmountable obstacle to the Commissioner’s claim unless they are neutralised by s98 of the Insolvency Act.

Section 98 of the Insolvency Act

[42]     Section 98, which has already been quoted at paragraph [13], is included in Part 8 of the Insolvency Act which deals with proofs of debt.   It empowers the Official Assignee to estimate the value of any debt or liability which, by reason of its being subject to any contingency or contingencies or for any other reason does not bear a certain value, so long as the Assignee considers that it can be fairly estimated. If the Assignee considers that the value cannot be fairly estimated he must reject the proof.  Under s99 any person who is aggrieved by an estimate or who has had his proof rejected may appeal to this Court.

[43]   Property Restoration Limited (In Liquidation) v Farquhar (High Court, Auckland Registry, CP338/87, 3 August 1998, Randerson J) illustrates that even debts where the value appears to be relatively uncertain at the time of adjudication may be provable.   Naturally there are limits.   An example is provided by Kaye v

Auckland District Law Society where the Court concluded that a claim for costs which might or might not be awarded against a bankrupt practitioner could not be fairly estimated.  This case is well removed from that situation.

[44]     I find it difficult to understand why there would have been any difficulty in fairly estimating the GST debt in this case.  The evidence of Mr Duncan indicates that  one  of  the  conditions  of  obtaining finance  was  that  a  number  of  purchase agreements were to be in place and that delays in obtaining titles “enabled certain of the purchasers to withdraw from the pre-sale agreements”.  It seems to be implicit that some of the agreements were still in place at the time of adjudication.   In the case of those agreements the GST liability was obviously calculable as at the time of bankruptcy.  Where there was no agreement in place it should have been possible for the units to be valued as at the date of adjudication and GST calculated accordingly.

[45]     There also appears to be an alternative possibility.  According to the agreed facts the units were sold and returned for GST purposes in various GST periods between 30 September 1999 and 30 November 2000.   The appellant was not discharged from bankruptcy until 29 September 2001.   Section 88(1) of the Insolvency Act allows a creditor to prove his debt “as soon as may be after the making of the order of adjudication”.  Similar wording is used in clause 23 of the Insolvency Regulations 1970 in relation to proofs of debt.    Under those circumstances it would appear that the Commissioner could have submitted proofs based on the actual GST liability.  Indeed, as already discussed, in cases where an obligation has been incurred before adjudication but the debt or liability has not arisen by that time s87(1) contemplates that it will be necessary to wait and see whether the obligation matures into a debt or liability before the bankrupt is discharged.

[46]     For those reasons I reject the appellant’s proposition that the GST debt was too remote for estimation in terms of s98.  The Commissioner also submitted that if the debt was provable:

“… the Commissioner of Inland Revenue would have to prove, in every trustee’s bankruptcy, that there was a contingent liability for future GST taxable supplies.   In this way, the creditors of the bankrupt would be disadvantaged.   It is submitted that this cannot be

Parliament’s intention  with  respect  to  the  Insolvency Act,  and  the  overall  purpose  of ensuring an equal distribution of a debtor’s property amongst his or her creditors.”

I cannot understand how the creditors of the bankrupt would be disadvantaged or how there would be an outcome that is contrary to the Insolvency Act.   If s87(1) applies then, subject to the ability of the Assignee to fairly estimate the value of the debt or liability, the debt or liability is provable even though it does not bear a certain value because of any contingency or contingencies or for any other reasons. In this case it would be for “any other reason”.  As I see it, the conclusion that I have reached simply reflects the scheme of the Act.

[47]     Again I have reached the same conclusion as the Judge, albeit by a different path.  This means that the appeal must fail.

Outcome

[48]     The appeal is dismissed.   My preliminary view is that the respondent is entitled to costs on the 2B scale.  If agreement cannot be reached as to costs it will be necessary for memoranda to be submitted so that the issue to be resolved by the Court.

Solicitors:           Crown Law Office, Wellington (S F Wellik) Saunders & Co, Christchurch for Respondent