Commissioner of Inland Revenue v Evaluation Consult (New Zealand) Limited

[2017] NZHC 552

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

CIV-2016-485-571

[2017] NZHC 552

UNDER

the Companies Act 1993

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

EVALUATION CONSULT (NEW ZEALAND) LIMITED

Defendant

Hearing:

21 and 24 March 2017

Appearances:

S K Shaw for the plaintiff

K P Sullivan for the defendant

Judgment:

24 March 2017

ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH

[1]        On 20 July 2016 the plaintiff (the Commissioner) applied for an order putting the defendant (Evaluation) into liquidation. The Commissioner contended that Evaluation had failed to comply with a statutory demand for the sum of $478,314.77 served on it on 7 June 2016, and was accordingly presumed to be unable to pay its debts as they fell due.

[2]        By the time the liquidation claim was filed the debt was said to be $516,091.55. A substantial part of that sum comprised unpaid PAYE deductions with interest and penalties thereon (total $312,162.36 owing in respect of the periods ended 31 October 2014 to 30 April 2016), and unpaid GST with interest and penalties thereon ($62,003.51 owing in respect of the periods ended 31 July 2014 to 31 January 2016). In addition sums of $30,472.15, $40,205.70, and $24,799.78 were said to be owing in respect of (respectively) student loan employer deductions, Kiwisaver employee

THE COMMISSIONER OF INLAND REVENUE v EVALUATION CONSULT (NEW ZEALAND) LIMITED [2017] NZHC 552 [24 March 2017]

deductions, and Kiwisaver employer deductions (in all cases in respect of the period 31 October 2014 to 30 April 2016, and inclusive of penalties and interest). Smaller unpaid sums were said to be owing for employer superannuation contributions ($8,571.27), and income tax ($100.00).

[3]        The liquidation claim was listed for first call in this court on 6 September 2016, but counsel advised in advance of that hearing that the parties were seeking to enter into a payment arrangement to resolve the proceeding, and the claim had not been advertised. They  jointly  sought  an  adjournment  to  the  first  available  date  after 6 November 2016, to allow sufficient time for Evaluation to put forward a repayment proposal and the Commissioner to consider it.

[4]        The matter was adjourned to 15 November 2016, but the hearing did not proceed that day due to the closure of the court following the 14 November 2016 earthquake.

[5]        The case was included in the list for 7 February 2017, and Evaluation’s counsel appeared at the hearing that day to seek a further (and final) adjournment for two weeks. Counsel referred to a payment arrangement in respect of which there had been “some slippage”, but advised that a further proposal had been put to the Commissioner late on 6 February 2017. The Commissioner did not oppose the adjournment application, and I adjourned the case to the next list date, 21 February 2017.

[6]        By that date it appeared that the parties had not reached a binding repayment agreement (or if they had, further defaults by Evaluation in meeting its current tax obligations may have been sufficient to allow the Commissioner to proceed with the liquidation claim). Mr Sullivan asked for “one final adjournment” for four weeks until 20 March 2017.

[7]        In his memorandum filed for the 21 February 2017 hearing, Mr Sullivan sought an agreement that the Commissioner would not advertise prior to 9 March 2017. He noted that if Evaluation had not brought its current payments up-to-date by that date, “it is expected that Inland Revenue will proceed”.

[8]        When the case was called on 21 February 2017, Associate Judge Christiansen adjourned the matter to 21 March 2017 for the Commissioner to advertise the proceeding.

[9]        No resolution was reached, and the Commissioner attended to the required advertising on 9 March 2017.

[10]      On 20 March 2017 Evaluation filed a formal application for an order that the proceeding be stayed pending further order of the court. In the alternative Evaluation sought a further adjournment of four weeks to allow it to repatriate to New Zealand certain funds held by it in Papua New Guinea (PNG), and to “document the repayment arrangement with Inland Revenue”. The funds from PNG would be applied to meeting “lump sum amounts” to be paid to the Commissioner. Further in the alternative, Evaluation sought leave to file a statement of defence in the event that no arrangement with the Commissioner could be finalised within the four week adjournment period.

[11]      The stay application was accompanied by  a  detailed  affidavit  sworn  by  Ms Averill, the Executive Director of Evaluation. Mr Sullivan provided written submissions in support.

[12]      The Commissioner opposed the stay/adjournment application, and I heard oral argument from counsel on 21 March 2017. At the conclusion of the hearing I adjourned the matter to this morning with a view to delivering an oral judgment.

The case for a stay or further adjournment

[13]      As a preliminary matter, I record that Evaluation does not dispute that it owes outstanding taxes. And at the hearing Mr Sullivan sensibly acknowledged that, if I find that there is no binding agreement with the Commissioner for payment over the two year period for which Evaluation contends, the effect of the liability for statutory penalties under the Tax Administration Act 1994 is that Evaluation is insolvent.

[14]      The principal basis for the stay or adjournment is an arrangement Evaluation says it reached with the Commissioner on 22 December 2016.

[15]      There had been a number of proposals and counter-proposals exchanged before that date, at least some of which were described by Ms Averill in her affidavit. Ms Averill began by frankly accepting responsibility for the non-payment of taxes, which she says began in 2014. She referred to “regular default up to the period ending 31 August 2016”, by which date the core tax debt was approximately $330,000, interest

$45,000, and penalties $265,000.

[16]      The proposals which Evaluation put to the Commissioner generally proceeded on the basis that the Commissioner would waive the penalties, and Evaluation would make two lump sum payments, with the balance of the core tax debt paid over time by instalments.

[17]      By 10 November 2016, the Commissioner had expressed a conditional willingness to settle on the basis of payment of all of the core tax debt, by two lump sum payments of $50,000, an instalment period of no more than 24 months, payment of use of money interest by Evaluation, and agreement on what would constitute default events if the Commissioner were to accept the proposal.

[18]      By 21 December 2016, Evaluation had made one payment of $50,000 on account of the tax arrears, and it stood ready to pay a further $50,000 on account just after Christmas. It indicated a willingness to enter into a security agreement with the Commissioner to secure the payment proposal, including the twenty four instalments which would be required to meet the core tax debt (then $373,459.26) plus interest.

[19]      The Commissioner’s solicitors replied by email dated 22 December 2016 as follows:

Referring to your letter sent by email below, I can advise that the Commissioner has in principle agreed to the instalment proposal put forward by Education Consult, namely:

·      The making of a further lump sum payment of $50,000 as soon as possible;

·      The payment over no more than 24 months of all outstanding core taxes;

·      The payment of use of money interest on outstanding all core taxes (which will continue to accrue throughout the arrangement until all core taxes are paid); and

·      The payment of all current taxes (on time) during the instalment period.

As part of this arrangement Inland Revenue would write off the approximately

$296,273.75 of penalties owing by Evaluation Consult.

I emphasise that the proposal by Evaluation Consult has only been agreed in principle. There will be no binding agreement until it is formally documented with terms satisfactory to Inland Revenue. I expect that this can be formalised as soon as possible in the New Year.

If there are questions in the meantime, please let me know.

[20]      The Commissioner’s willingness to consider settlement on the general lines of these proposals appears to have changed fairly early in the new year. The cause appears  to  have  been  Evaluation’s  failure  to  pay  PAYE   instalments  due  on   20 December 2016 and 20 January 2017. The Commissioner sought an explanation for the missed payments, and reasons were offered on Evaluation’s behalf in emails dated 20 January 2017 and 2 February 2017. The explanations were to no avail: on 2 February 2017 the Commissioner’s solicitors wrote advising that the proposed instalment arrangement was declined.

[21]      Evaluation made further attempts through its counsel to modify its proposal, to make it more acceptable to the Commissioner, but again the attempts were unsuccessful. On 22 February 2017 the Commissioner’s solicitors advised that her position was unchanged. The solicitors denied that any arrangement existed for Evaluation to pay its tax arrears by instalments, and advised that the Commissioner intended to advertise the liquidation proceeding at the earliest opportunity.

[22]      The Commissioner was no doubt reinforced in her rejection of Evaluation’s proposal when Evaluation failed to pay a third instalment of PAYE due on 20 February 2017.

[23]      Evaluation and its counsel were still not deterred. A further detailed proposal was put to the Commissioner on 10 March 2017. This proposal reported the good news that a substantial claim Evaluation had pursued for a lengthy period against the Government of PNG, and in respect of which Evaluation had obtained judgment in that country, had finally been paid. A sum of approximately $315,000 is now held in the trust account of Evaluation’s PNG solicitors. In the 10 March 2017 proposal,

Evaluation proposed that in addition to the monthly payments spread out over two years, it would make an additional lump sum payment of $50,000, to be sourced from the money in PNG. There was a problem with the PNG money, however, as under the laws of PNG money could only be remitted to New Zealand at the rate of approximately $4,500 per day, and it would take a considerable time for Evaluation to clear the arrears using the PNG funds.

[24]      Evaluation’s 10 March 2017 proposal accordingly proposed to assign to the Commissioner the PNG debt, together with the anticipated proceeds of a business interruption insurance claim made by Evaluation following the 14 November 2016 earthquake, in sums sufficient to cover the instalment payments.

[25]      In addition, Evaluation advised that it would have its financial and tax arrangements overseen by Deloitte, with all taxes to be set aside in a separate bank account to ensure that PAYE, GST and other deductions at source would be provided for. Evaluation’s counsel referred to the ten staff employed by Evaluation, all of whom hold shares in the company. The staff were said to support the company and the very good work it does with charities around the world.

[26]      Evaluation did receive the proceeds of the business interruption insurance claim ($56,525). Approximately $50,000 of that sum was paid to the Commissioner on 15 March 2017 to bring the current PAYE payments up-to-date.

[27]      A further proposal made by Evaluation to the Commissioner on 15 March 2017 was declined by the Commissioner on 16 March 2017.

[28]      In her affidavit in support of the stay application, Ms Averill accepted that the stay application was very much “the last roll of the dice” for Evaluation. However she insisted that the business is viable and profitable, and contended that no good purpose would be served by putting the company into liquidation and putting the ten staff members out of work.

[29]      Ms Averill explained that Evaluation specialises in “evaluative monitoring of organisations’ strategic and/or operational outcomes”, using a specially designed IT

platform. She deposed that the company has grown significantly over the last five years, particularly in the promotion and use of its IT platforms, which have required significant investment. She says that there were cash-flow problems, which were exacerbated by the non-payment of the PNG debt, which went back to September 2014.

[30]      Ms Averill frankly acknowledges that the unpaid tax is substantial, and she makes no excuses for it. However she says that she did keep the Commissioner regularly updated with details of developments in the recovery action being undertaken in PNG, and also as to the financial position of Evaluation to make other payments. She expresses the view that the Commissioner (correctly) anticipated that she would received a substantial repayment of core taxes once the PNG debt was recovered.

[31]      Ms Averill describes the disruption caused by the 14 November 2016 earthquake, which had a significant impact on Evaluation. Evaluation was forced to vacate its premises, and Ms Averill was forced to relocate the staff to her home for a period. She says that productivity dropped substantially. The result was that there was not enough money to meet all cash obligations, and the PAYE instalments due on 20 December 2016, 20 January 2017 and 20 February 2017 were missed.

[32]      Ms Averill says that she was “not initially made aware by our junior accountant”, but some of the payments missed were PAYE. She says that if she had been advised of the correct dates she “would have made every effort to prioritise the payment of PAYE over other payments, recognising the trust nature of the PAYE”.

[33]      In her affidavit, Ms Averill says that the advertising of the liquidation claim created significant challenges for Evaluation with its funders. However the two banks involved both said they would support the company if it could reach an agreement with the Commissioner.

[34]      On the present state of the business, Ms Averill says it is viable: there was a turnover of $1,000,000 in the 2016 tax year, and a profit of $150,000. She refers to the ongoing contracts the company has, and the important work it is doing with

international development partners and charities. She notes the problems caused by the long delay in recovering the PNG money, and the disruptive effects of the November 2016 earthquake.

[35]      Ms Averill points to the support Evaluation has had from other creditors (who are owed much smaller sums than the Commissioner). She says that Evaluation has been “acting fairly on meeting on a pro-rata basis any deferred creditors, and to ensure that as at 1 April we have very manageable sums agreed to for any deferred creditors (many, relating to costs incurred in PNG seeking to recover the PNG money, have now been paid).

[36]      Finally, Ms Averill points to the systems the company has put in place, including the separate bank accounts for tax payments and the appointment of Deloitte in an oversight role, to ensure nothing like this ever happens again.

[37]      At the hearing on 21 March 2017 Mr Sullivan advised, as an alternative to Evaluation’s proposal for an additional $50,000 lump sum payment and payment of the balance of the core debt and interest by instalments over the next two years, that if a four week adjournment were granted, means might be found to repay the entire

$315,000 held by the PNG solicitors to the Commissioner.

[38]      If such a payment were made, it would almost be sufficient to clear the entire “core” tax debt and interest. However penalties, which I am told now amount to approximately $309,000 could not be paid.1 Mr Sullivan properly acknowledged at the hearing that, if regard is had to the penalties, Evaluation is presently insolvent.

[39]      The proposal of a four week adjournment, with payment of the $315,000 from PNG within that period (if it can be achieved), was rejected by Ms Shaw at the hearing. Her firm instruction was that the Commissioner wished to proceed with the liquidation claim.

1      The Commissioner’s certificate as to unpaid debts dated 23 March 2017 puts the total outstanding debt, including penalties and interest, at $685,349.04

Counsel’s submissions on the stay or adjournment application

[40]      Mr Sullivan submits that the Court’s jurisdiction to grant a stay of a liquidation claim, whether under r 31.11 of the High Court Rules or in the court’s inherent jurisdiction (which is not restricted by r 31.11), is designed to allow the court to prevent an abuse of process, to ensure that the liquidation process is being used properly and fairly. He acknowledges that the onus is on the applicant for a stay, and that it is a serious matter for the court to stay winding up proceedings.

[41]      Mr Sullivan also acknowledges that an applicant for a stay of a liquidation claim must show something more than facts showing that the balance of convenience favours a stay. As he put it, a strong prima facie case is required to show that there is a dispute, or that there are clear and persuasive grounds for a stay.

[42]      Mr Sullivan referred to a number of authorities, while acknowledging that most stay applications have been unsuccessful. Among the cases cited were Commissioner of Inland Revenue v Onsite Roofing and Cladding Ltd, a decision of Associate Judge Bell in which the Associate Judge was prepared to allow a small space of time in which the parties could explore settlement further, in circumstances where the Associate Judge considered that the defendant had “possibly been caught on the back foot”2. Mr Sullivan also properly drew to my attention the case of Fortune Technology Corporation Ltd v The Commissioner of Inland Revenue,3 in which Associate Judge Doogue declined to grant a stay.

[43]      Mr Sullivan summarised the proper approach by submitting that each case must be considered on its own facts, and that the court will apply the principles discussed above fairly, to prevent an abuse of process, there being no inflexible rule.

[44]      In his oral submissions, Mr Sullivan acknowledged that the court would have to find in this case that there were unusual grounds to justify the grant of a stay.

2      Commissioner of Inland Revenue v Onsite Roofing and Cladding Ltd [2013] NZHC 2487, [14]–[15].

3      Fortune Technology Corporation Ltd v The Commissioner of Inland Revenue [2016] NZHC 2489.

[45]      In support of a submission that such grounds do exist, Mr Sullivan pointed to the following four factors:

(1)The parties did agree to a repayment arrangement, when the solicitors for the Commissioner sent their email of 22 December 2016. That email constituted a binding acceptance of the most recently submitted proposal from Evaluation;

(2)The Commissioner proceeded to enter into the repayment arrangement without regard to the monies which Evaluation would ultimately recover from the PNG government. On top of that, lump sum payments of $60,000 have been made, and Evaluation was on track to meet the balance of the instalments when its cash-flow was dealt a serious blow by the 14 November 2016 earthquake. Even then the position has been rectified, with the unpaid PAYE due in December 2016 and January and February of 2017, being paid on 15 March 2017. And the $315,000 is at least now in the hands of Evaluation’s PNG solicitors.

(3)To show good faith, Evaluation offered an additional $50,000 lump sum payment. More recently, it has indicated a willingness to arrange for the entire $315,000 from PNG to be paid to the Commissioner (subject to arrangements being made for the repatriation of that money to New Zealand).

(4)Finally, Mr Sullivan points to the damage the company’s ten staff members will suffer if a liquidation order is made. He also refers to the “valuable lessons” the directors of Evaluation have learned, and the steps they have recently taken to ensure that there will be no further defaults (separate bank accounts and retention of Deloitte in a supervisory role). In all the circumstances he submits there will be no prejudice to the Commissioner in allowing the repayment to run its course.

[46]      For the Commissioner, Ms Shaw submits that no binding repayment arrangement has been reached with the Commissioner, and whether an arrangement for payment by instalments should now be made is a matter for the Commissioner, not the court (relying on Fortune Technology Corporation).

Discussion and conclusions

[47]      I accept Mr Sullivan’s submissions relating to the circumstances in which the court may stay a liquidation claim. While each case will depend on its facts, the principal objective of the jurisdiction is to prevent an abuse of process.

[48]      The applicable principles were helpfully summarised by Associate Judge Doogue in the Fortune Technology Corporation case as follows:4

[16]     The inherent  jurisdiction and the power to stay  that arises under     r 31.11 is designed to prevent an abuse of process. Such an abuse of process would arise in cases where winding up proceedings are taken in circumstances where the debt is the subject of genuine dispute. The governing consideration is whether the proceedings suggest unfairness or undue pressure. Further it is a serious matter to stay winding up proceedings so the decision is never made lightly. The onus is on the applicant and is normally to demonstrate something more than balance of convenience considerations which are usually considered on an application for an interim injunction. The foregoing principles are found in the judgment of Wallace J in Nemisis Holdings Limited v North Harbour Industrial Holdings Limited [citation omitted]. Mrs Scott did not, as I have noted, contend that the defendant was substantially indebted although she was not prepared to accept the exact figure which the Commissioner put forward. However it is clear that the company owes a debt which it cannot dispute because it arises under decisions which the Commissioner had made: See section 109 of the Tax Administration Act 1994. Given that there is such a debt, it cannot be said that the liquidation proceedings represent an abuse of process.

[49]      Considering the application against those principles, I am not satisfied that Evaluation has shown that there has been any abuse of process, or that the proceeding suggests unfairness or undue pressure on the part of the Commissioner. There has been what appears to be a very serious failure by Evaluation to pay GST, PAYE and other taxes required to be deducted at source, going back as far as 2014. And the sums involved are not small. While the Commissioner appears to have been prepared to wait what may perhaps be considered a surprising length of time before pursuing the

4 At [16].

matter, there is no suggestion from Evaluation that the Commissioner was not entitled to commence the liquidation claim when she did — the only argument is that a binding agreement for instalment payments was concluded with the email from the Commissioner’s solicitors dated 22 December 2016.

[50]      In my view no such agreement was concluded. The Commissioner’s solicitors made it very clear in the penultimate paragraph of the email that the proposal by Evaluation had only been agreed in principle, and there would be no binding agreement until it was formally documented with terms satisfactory to the Commissioner. In my view, the language made it very clear that the Commissioner would have no obligation at all, unless and until a formal document was completed containing terms satisfactory to the Commissioner.

[51]      Of course what happened then must have had the effect of causing the Commissioner to re-think the whole proposal.   PAYE  payments due not just on     20 December 2016, but also on 20 January 2017, were not paid.

[52]      In my view it was for the Commissioner to determine whether she wished to proceed with the arrangements which had been under discussion before Christmas 2016, and she plainly did not. I agree entirely with Associate Judge Doogue when he said in the Future Technology Corporation case:5

[17]  Essentially  the position for the defendant is the not uncommon one  that defendants in liquidation proceedings take namely that it would be better for the creditor to accept the proposed compromise offer rather than proceeding to a liquidation hearing. In my view that is not a proper ground upon which the Court can exercise its jurisdiction to stay the proceedings. The Commissioner has a right to bring liquidation proceedings. The Commissioner has a right to bring liquidation proceedings and similarly the question of whether acceptance of a compromise offer is or is not a preferable outcome is entirely a matter for the Commissioner to determine and not for the court.

[53]      I add that I have some concerns over the reasons the PAYE payments were not made in December 2016, January 2017, and February 2017. While some attempt was made to put those defaults down to the 14 November 2016 earthquake (and I acknowledge the disruption that event caused to many businesses in the Wellington

5      At 17.

region), I doubt that the January and February 2017 defaults, at least, can reasonably be attributed to the earthquake. Ms Averill says that she was not advised by the company’s junior accountant of the dates for the PAYE payments, and that if she had been advised of the correct dates she would have made every effort to prioritise the payment of PAYE over other payments, in recognition of the trust nature of PAYE. Given the background at the time, with a liquidation claim pending because of Evaluation’s failure to pay PAYE and other taxes on due date, one would have expected Ms Averill to be acutely aware of the company’s ongoing tax obligations. It is concerning that she apparently was not.

[54]      This is not a case where there is any significant dispute over the debt, and I see no other circumstances which might savour of unfairness or undue pressure, sufficient to justify a stay. Certainly Evaluation has encountered difficulty over a long period of time in recovering a substantial debt from a client, but that is a misfortunate which befalls many businesses, and the Commissioner appears to have been accommodating for a relatively long period of time, possibly acknowledging the difficulties Evaluation was attempting to work through.

[55]      Evaluation might now be “back on track” and have a viable business looking forward, but the penalties due to the Commissioner are now very substantial. Even if the Commissioner were to receive within the next four weeks the full $315,000 from PNG, there might still be a shortfall in the core tax debt and interest. But more importantly Evaluation would appear to have no hope of paying the penalties within any reasonable timeframe, and the Commissioner is not now prepared to remit those penalties. The  penalties  are  recoverable  as  a  debt  due  under  s  156A  of  the  Tax Administration Act 1994, and while the Commissioner may have power to remit them, it is not for the court to direct her to do so.

[56]For all of the foregoing reasons, I decline to grant the stay application.

[57]      Turning to the substantive application for a liquidation order, I think the starting position is that which I described in Satuit Properties Limited v Commissioner of Inland Revenue as follows: 6

6      Satuit Properties Limited v Commissioner of Inland Revenue [2014] NZHC 1300, at [28]–[30].

[28]      Even where there is no dispute over the relevant debt, I accept that the court retains a residual discretion whether to make an order for liquidation. But the general policy of the Companies Act is that insolvent companies should be put into liquidation if a creditor seeks an order, and that policy should not be departed from lightly. In Chester Trustees Services Ltd Tipping J said:⁷

“… To justify such a departure there must be some factor, be it policy, principle or simply the justice of a particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation”

[29]The question is whether it is “plainly unjust” for liquidation to ensue.

[30]      In this case I can see no factor which outweighs the plaintiff’s prima facie entitlement to a liquidation order. Certainly, none of the five factors listed in McPherson’s Law of Company Liquidations (third addition) are applicable:

(1)the applicant’s debt amounts to less than [the statutory minimum].

(2)the debt is bona fide disputed by the company.

(3)the company has paid or tendered payment of applicant’s debt.

(4)winding up is opposed by other creditors; and

(5)the company is in the process of being wound up voluntarily.

[58]      In this case none of the factors quoted in Satuit from McPherson’s Law of Company Liquidations appear to apply, and I see no other factor which would displace the Commissioner’s prima facie entitlement to the liquidation order she seeks. Having regard to Ms Averill’s acceptance that the core debt is owing, and the lack of utility in granting a further adjournment when there appears to be no prospect of the penalties being either paid or remitted, I decline the application for a further adjournment, and also decline the application for leave to file a statement of defence out of time.

[59]      Ms Shaw having produced the appropriate certificate of non-payment of the debt, I make the following orders:

(1)Evaluation is put into liquidation.

7      Commissioner of Inland Revenue v Chester  Trustee  Services  Ltd  [2003] 1 NZLR 395(CA), at [3].

(2)Vivian Judith Fatupaito and Andrew John Hawkes are appointed liquidators.

(3)Evaluation is to pay scale 2B costs to the Commissioner, plus disbursements as fixed by the Registrar.

(4a)The rates of remuneration of the liquidators and staff working under their supervision and control are fixed at the rates set out in the

liquidators’ consents dated 23 August 2016.

(4b)The liquidators are to apply at the conclusion of the liquidation for approval of their overall remuneration.

[60]Orders timed at 9.54am on Friday, 24 March 2017.

Associate Judge Smith

Solicitors:

Meredith Connell, Auckland for the defendant Greenwood Roche, Wellington for the plaintiff