Commissioner of Inland Revenue v Heathcote

[2013] NZHC 461

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2012-435-72 [2013] NZHC 461

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF      the bankruptcy of PAULA MICHELLE HEATHCOTE

BETWEEN  THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

ANDPAULA MICHELLE HEATHCOTE Judgment Debtor

Hearing:         4 March 2013

(Heard at Wellington)

Counsel:         D.P. Padmanabhan - Counsel for Judgment Creditor

P.M. Heathcote - Defendant in Person

Judgment:      27 March 2013

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by me on 27 March 2013 at 3.30 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:   ................................................................................

Solicitors:           Inland Revenue Department, Legal & Technical Services, PO Box 1462, Wellington

THE COMMISSIONER OF INLAND REVENUE V PM HEATHCOTE HC WN CIV-2012-435-72 [27 March

2013]

Introduction

[1]      Before the Court is an application by the judgment creditor seeking an order to adjudicate the judgment debtor bankrupt in terms of s 13 Insolvency Act 2006.

[2]      The application is founded on the judgment creditor’s contention that the judgment debtor committed an act of bankruptcy by failing to comply with a Bankruptcy Notice served upon her claiming the sum of $15,044.11.  This was based upon an order of the District Court at Wellington for this sum following a default judgment against the judgment debtor made over 4 years ago on 2 February 2009.

[3]      That Bankruptcy Notice was deemed to be served on the judgment debtor on

4 May 2012 pursuant to an earlier substituted service order made in this Court.

[4]      The present application however claims from the judgment debtor a total sum of $90,930.13, which sum includes a further $75,886.02 for additional assessed taxes, penalties and interest due.

[5]      The application is opposed by the judgment debtor.

Parties’ Arguments and My Decision

[6]      This application is brought pursuant to s 13  Insolvency Act 2006 which provides as follows:

13        When creditor may apply for debtor’s adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if

(a)        The debtor owes the creditor $1,000.00 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b)        the debtor has committed an act of bankruptcy within the period of

3 months before the filing of the application; and

(c)         the debt is a certain amount; and

(d)        the debt is payable either immediately or at a date in the future that is certain.

[7]      In the present case, the $15,044.11 judgment alone, which had not been the subject of an appeal by the judgment debtor, clearly exceeds the $1,000.00 threshold provided for in s 13(a) Insolvency Act 2006.

[8]      In addition, the judgment debtor has committed an act of bankruptcy within the period of 3 months before the filing of the present adjudication application on 26

July 2012, in that she has failed to comply with the Bankruptcy Notice served on her. Nor did she take any steps to apply to set-aside that Bankruptcy Notice.  It is true that,  at  a  hearing  in  the  District  Court  at  Wellington  on  18  January  2012,  the judgment debtor did seek to have the earlier $15,044.11 judgment   against her set aside, but, in a reserved judgment of Judge S.E. Thomas in that Court dated 24

January 2012, that application was dismissed.

[9] The $15,044.11 Court – ordered debt alone as I have noted above, has itself been outstanding for over four years now, it is payable immediately, and it is clearly a certain amount. This is even leaving aside the additional $75,886.02 for further taxes, interest and penalties noted at [4] above.

[10]    I am satisfied therefore that in the first instance and on their face, the requirements of s 13 Insolvency Act 2006 have been satisfied here.

[11]     The judgment debtor’s opposition to the present application, as best I can tell from the material before the Court, effectively relies upon s 37 Insolvency Act 2006. This section sets out the basis upon which the Court at its discretion may refuse to adjudicate a judgment debtor bankrupt:

37        Court may refuse adjudication

The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if-

(a)        the applicant creditor has not established the requirements set out in s 13;

or

(b)        the debtor is able to pay his or her debts; or

(c)        it  is  just  and  equitable  that  the  court  does  not  make  an  order  of adjudication; or

(d)        for any other reason an order of adjudication should not be made.

[12] Turning to consider these grounds, as I have noted at [10] above, it would seem in the first instance that s 37(a) may not apply here. Notwithstanding this, at the hearing before me, the judgment debtor did endeavour to mount an argument under s 13(a) Insolvency Act 2006 that the amount of the earlier judgment and the additional debts which the judgment creditor says have accrued (the certificate of indebtedness provided to the Court on 4 March 2013 now states that total debts of

$97,737.42 are outstanding from the judgment debtor) are incorrect, and that now there are in fact no monies owing by the judgment debtor to the judgment creditor. This contention was advanced on the basis that the judgment debtor maintained a recent investigation of her affairs and that of a related company PST Images Limited (now struck off) (the company) which employed her, by an accountants firm, Parkers Business Solutions Limited (Parkers) it is said has revealed that the earlier income tax returns filed by the judgment debtor were in error.   The judgment  debtor’s position is that the accounts and returns prepared by her previous tax agent were incorrect.   In particular, she advises that the salary allocated to her as a shareholder/director of the company for the relevant years should not have been so allocated and should either be reduced or totally reversed.  This it is claimed would result in a substantial reduction or extinguishing of the debt owed to the judgment creditor.  It follows therefore that, in fact, no tax assessment should have been made. This aspect, however, is strongly disputed by the judgment creditor.

[13]     Turning now to consider this argument advanced by the judgment debtor that the now long outstanding debts owing by her are in fact not due, those initial debts as I have noted arose through assessments of income tax made with regard to the judgment debtor following returns she herself filed through her tax agent at the time, effectively providing for these taxation debts by way of self-assessment.

[14]     It is only now some years later that the judgment debtor complains that these tax returns and assessments for the 2003, 2004, 2005, 2006 and 2007 taxation years were made in error.   The complaint, as I understand it, relates to completion of annual accounts by the judgment debtor’s previous tax agent for the company, PST Images Limited (which was previously in liquidation and has now been struck off), which the judgment debtor says were completed in error.  That previous tax agent was WHK Sherwin, Chan & Walshe, Chartered Accountants, who had acted in that capacity for the judgment debtor and the company I understand from at least 2002 to

2008.

[15]     As I understand it the investigation of the company by the new accountants, Parkers has focused largely on the company’s GST returns at the time.  Those GST returns I am told were completed by the judgment debtor and her partner Mr Tasi

Matagi Sala (Mr Sala), who is also the subject of a bankruptcy application for outstanding taxation debt incurred from salaries allotted by the company to him in similar circumstances.

[16]     It  is  on  the  basis  of  those  GST  returns  that  Parkers  has  attempted  to reconstruct  the  affairs  of  the  company to  show  what  is  claimed  to  be a  rather different financial position for the company and its shareholders over the years in question.

[17]     In  response,  the  judgment  creditor’s  position  is  that  Mr  Sala  and  Mrs Heathcote have not proven to the Commissioner’s  satisfaction that the accounts prepared by WHK for those 2003, 2004, 2005, 2006 and 2007 years have unambiguous genuine errors.  Therefore, the Commissioner has declined to amend the judgment debtor’s tax assessments.   And, according to the judgment creditor, restoring the company to the register, which would be required here to revise all the tax assessments in question, would not affect that position.

[18]     On all of this, there is evidence before the Court for the judgment creditor in an affidavit of Phillip Austin Steere (“Mr Steere”), a Senior Technical Advisor of the Inland Revenue Department.  It is interesting to note here that Mr Steere has worked for the Commissioner of Inland Revenue for over 30 years of which 23 years have been in technical roles at a senior level.  In his affidavit Mr Steere deposes that he has considered the report and the documents provided by Parkers, the judgment debtor  and Mr Sala.

[19]     Mr Steere is not satisfied that Parker’s report has identified that the accounts filed by WHK are incorrect as first, the report is based solely on the GST returns prepared  by  Mr  Sala,  secondly,  it  mentions  errors  that  are  unsubstantiated  and thirdly, it simply records Parker’s opinion as the current tax agent of the judgment debtor and Mr Sala.  In addition he notes the calculations in the report have not been reconciled with the accounts prepared by WHK and he says they do not show clearly that there are unambiguous errors in those accounts.

[20]     As a result, the judgment creditor takes the position that it is not satisfied that Parkers has identified any unambiguous genuine errors made by WHK when they were preparing the company’s financial statements.  And thus, the judgment creditor reiterates here that, if she is not satisfied that the assessments contain genuine errors, she cannot be compelled to amend the assessments - Wood v Commissioner of Inland Revenue (1999) 19 NZTC 15,255.

[21]     Essentially as I see the position, the judgment creditor here has been provided with information from two tax agents who have differing views on how the company’s accounts should have been treated.   As I have noted above, while the judgment  debtor  and  Mr Sala  say they believe  that  Parker’s  opinion  should  be preferred, the judgment creditor is not satisfied that Parkers have identified any unambiguous  genuine  errors  made  by  WHK  when  they  were  preparing  the company’s financial statements, statements which no doubt at the time utilised information provided by the judgment debtor and Mr Sala.  It is my view that the judgment creditor here is not required to accept Parkers’ opinion if she does not agree with it.

[22]     It is useful also to note at this point that s 109 Tax Administration Act 1994 (the TAA) provides that except in challenge proceedings, no disputable decision may be disputed in a Court or in any proceedings on any ground whatsoever.  Pursuant to s 113 TAA however, the judgment creditor does have a discretion to amend an assessment at any time to ensure it correctness.

[23]     On 31  May 2011 Mr  Sala for himself  and  the judgment  debtor  did  put forward a request  under s  113  for the exercise of this  discretion  to  amend the assessments  in  question.    This  request  however  was  rejected  by  the  judgment creditor.

[24]     And, as noted above, it is clear that if the judgment creditor is not satisfied that  assessments  contain  genuine errors  then he cannot  be  compelled  to  amend assessments under s 113 or otherwise – Wood v Commissioner of Inland Revenue [1989] 19 NZTC 15,255.

[25]     The  exercise  of  the  Commissioner’s  discretion  under  s  113  is  not  a “disputable decision” under s 3 of the TAA and accordingly cannot be subject to the disputes resolution process.  The only avenue to review a decision made under s 113 is through the judicial review process – on this see s 138E(1)(e)(iv) TAA.  But there has been no application to judicially review the judgment creditor’s earlier s 113 decision in this case.

[26]     And relatively recently in September 2012 the judgment debtor and Mr Sala initiated a very late attempt to bring into play the objection or challenge process prescribed in Parts 8 or 8A TAA.   Section 109 of the TAA provides however that except in objection proceedings under Part 8 of the TAA or a challenge under Part

8A of  the TAA,  no  disputable  decision  may be  disputed  in  a  Court  or  in  any proceedings on any ground whatsoever, and every disputable decision and its particulars are deemed to be correct in all respects.   The definition of “disputable decision” in section 3(1) of the TAA includes an assessment.

[27]     In Tannadyce Investments Ltd v Commissioner of Inland Revenue [2012] 2

NZLR 153, the Court held that the effect of section 109 was that no assessment may be disputed in any Court or in any proceedings on any ground whatsoever, except in proceedings taken under the TAA.

[28]     As noted, the judgment debtor and Mr Sala did not initiate the objection or challenge process prescribed in Part 8 or 8A of the TAA until September 2012. Their NOPA has not been considered as an effective NOPA because it was filed out of time and was not accepted as a late NOPA.  Therefore, section 109 of the TAA applies to deem the assessments in question to be correct and the judgment debtor cannot dispute the assessments on any grounds whatsoever.

[29]     Finally,  for  completeness  I  note  r  5.61  of  the  High  Court  Rules  which provides that in a proceeding for recovery of taxes by the Crown, such as the present proceeding, a defendant is not entitled to plead any set-off or counter-claim.

[30]     For all these reasons, and on the basis of all the substantial historical material which is before the Court here, I reject the argument the judgment debtor endeavours

to advance that the judgment creditor has not fully and properly considered her application under s 113 of the TAA to amend or cancel the assessments in question. Further, there is nothing before the Court to support any argument by the judgment debtor that a Late Objection could possibly challenge even a part of the significant tax debt owing here, even if the judgment creditor could consider accepting a late objection – see s 124A(1) and s 126(2) TAA.

[31]     Although  what  I  have  said  above  effectively  disposes  of  the  judgment debtor’s argument that these long outstanding taxation debts are not in fact due from her, there is one other aspect on all of this which in my view is of some relevance here.  This relates to certain other aspects included in the financial accounts for the company prepared by WHK for the years in question.

[32]     In those accounts, which for each year specified director’s salaries allocated to the judgment debtor and Mr Sala, under the heading “Schedule of Shareholder Current Accounts” were other entries each year showing the total drawings from the company made by them as director shareholders.  Those joint drawings for the years ending 2003 to 2007 were substantial and totalled amounts set out in the respective financial statements as follows:

2003  $58,097.00

2004  $72,878.00

2005  $94,912.00

2006  $252,408.00

2007  $275,966.00

(Those total amounts represented drawings each year together with small amounts for interest on the overdrawn advance in each case).

[33]     Totalling up these amounts for drawings and interest taken from the company by the judgment debtor and Mr Sala for this 5 year period reached a figure of

$754,261.00.

[34]     Over this same period, the amounts shown in the WHK financial statements

for the company as directors’ remuneration were:

2003  $  20,747.00

2004  $  80,000.00

2005  $  42,000.00

2006  $140,000.00

2007  $130,000.00

These amounts for directors’ remuneration to the judgment debtor and Ms
Sala totalled $412,747.00.

[35]     Even if the earlier argument from the judgment debtor is accepted that these directors’ salaries should be written back, with the conclusion that she received no income for these respective years, this does not in any way explain the substantial amounts for drawings she and Mr Sala took from the company during these years. Details of these amounts for drawings were presumably provided for inclusion in the annual accounts by the judgment debtor and Mr Sala as directors of the company.

[36]     I do note, however, that in his 14 February 2013 affidavit, Mr Susheel Dutt the  accountant  from  Parkers  who  completed  the  report  on  the  company,  raised certain issues but only as to the sum of $59,000.00 for coding of drawings in the

2006 year and $68,401.00 for coding of drawings in the 2007 year.   No further information concerning these questions have been provided however, and in any event  the  amounts  queried  by  Mr  Dutt  relate  only  to  a  small  portion  of  the

$252,408.00 drawings and interest for the 2006 year and the $275,966.00 for drawings and interest for the 2007 year which the accounts show were allocated.

[37]     In a general sense also at this point I would simply note that it would seem somewhat strange for directors and operators of a privately owned company such as the  company  in  this  case  to  take  from  their  company  substantial  unexplained drawings over a number of years (with few capital transactions being involved) at a time when it is alleged those directors worked for nothing and no directors’ remuneration was properly earned.

[38]     Lastly,  on  this  aspect,  it  is  noted  from  the WHK  March  2007  financial accounts for the company which are before the Court, that at that point the total shareholders current accounts held by the judgment debtor and Mr Sala showed a debit balance of $169,054.00.  And, this of course was calculated on the basis that

the directors had been entitled to remuneration which had been properly credited to their current accounts.

[39]     Even this debit shareholders current account figure of $169,054.00 would mean that at that point the judgment debtor was indebted to the company with Mr Sala for what was a significant amount.   If, as she contends now, the directors’ remuneration figures should be written back in full, then this debit figure by my calculations would increase by a further $412,747.00. The impact of this figure upon the judgment debtor’s solvency need hardly be mentioned.

[40]     Next  I  need  to  consider  the  remaining  provisions  contained  in  s  37

Insolvency Act 2006.

[41]     Turning to s 37(b), there is no evidence of any kind before the Court from the judgment debtor or otherwise to show that she is able to pay her debts here.  She is a student and has said she cannot pay the original $15,044.11 Court judgment debt or indeed the increased debt of $97,737.42 now certified by the judgment creditor to be due.  She appears to have minimal assets and other debts including amounts owing to Westpac  Bank  of  about  $10,000.00,  and  to  Parkers  of  over  $36,000.00,  not  to mention  any  shareholders’ current  account  debt  which  may  remain  due  to  the company. The ground set out in s 37(b) is not met here.

[42]     That   leaves   the   remaining   two   grounds   under   s   37(c)   and   (d)   for consideration.  As noted above, these provide first, that where a judgment debtor is able to establish that it is just and equitable that the Court does not make an order for adjudication or secondly, where for some other reason an order for adjudication ought not to be made, the Court may refuse to make an order for adjudication.

[43]     Dealing with both the s 37(c) and (d) Insolvency Act 2006 requirements together, essentially before me the principal argument advanced by the judgment debtor to suggest that the Court should exercise its discretion to refuse the order for adjudication sought, relates to questions of hardship in that if she is adjudicated bankrupt she says she will no longer have access to obtaining a student loan to complete studies she is undertaking.  This is relevant because the judgment debtor

advises  the Court  that, as  I understand  it,  she is  in  the final  year of her  early childhood teacher training course, she has received a student loan for this purpose to date, and if she ceases to have entitlement to such a loan, she will be unable to complete the course.

[44]     On this aspect, in the past there have been decisions of this Court which have determined that unavailability of a student loan has been a factor taken into account by the Court in exercising its discretion not to order adjudication.  These cases have included  Re:    Pene  ex  p  Colonial  Mutual  Life Assurance  Society  Limited  HC, Palmerston North, 21 May 1992, B25/91, Master Williams QC; and Re:  Timmins ex p Motor Trade Finances Limited, HC Wanganui, 9 March 1999, B56/97, Master Thomson.

[45]     In the Re:  Timmins decision, the debt in question was the result of a personal guarantee given by the debtor as part of the requirements for finance of the debtors former de-facto partner who then resided in the USA, having earlier been made bankrupt in New Zealand.   The judgment creditor wished to avoid bankruptcy because she required a student loan to complete her studies and the Master noted from a report from the Official Assignee that no misconduct on the debtor’s part had been disclosed.  Under those circumstances, he held it was a case where it was just and equitable that the debtor not be made bankrupt.

[46]     Similarly, in Re: Pene the main ground for the Court exercising its discretion to refuse an order for adjudication was that, if the debtor were to be adjudged bankrupt, he would be prevented from continuing with his education as he could no longer obtain a student loan, and thus would be prevented from the possibility of employment  with  a  community  organisation  for  which  he  had  already  done voluntary work.

[47]     In  the  present  case,  the  judgment  debtor  effectively  endeavours  to  align herself with the position of the judgment debtors in the Re:  Pene  and Re:  Timmins cases.

[48]     Whilst the material before the Court confirms that, if the judgment debtor is adjudicated bankrupt she will no longer be eligible for a student loan, it does also appear clear that she is now in the very final stages of her early childhood teacher training course, and there is no evidence of any kind before me to establish that she would not be able to complete that course or her training generally if her student loan is withdrawn.   The possibility that other funds if necessary might be available to complete her studies from family members or others, or that other support, employment or training elsewhere might be available has not been disclosed or even addressed.

[49]     Whilst  some  sympathy  must  be  expressed  for  the  position  in  which  the judgment debtor finds herself, this is a case in my view where albeit by a rather fine margin, those aspects outlined in the preceding paragraphs must be outweighed by the other circumstances prevailing in this case.  These include in my view the need for some investigation of the judgment debtor’s affairs to be undertaken including the family trust that she and Mr Sala operate, her dealings as director with the company, employment matters and the substantial overdrawn current account which the judgment debtor had with the company prior to its liquidation in 2008.

[50]     I am also not entirely satisfied that at this advanced stage of the judgment debtor’s early childhood teacher training course, the late withdrawal of student loan assistance would necessarily mean that she would be unable to complete that course.

[51]     Under all these circumstances, it is clear to me that the judgment debtor has been unable to satisfy the onus upon her of establishing that it is just and equitable that the order for adjudication sought today should be refused.

[52]     In my view there are no other matters of substance in her favour advanced by the judgment debtor here given that she also has the onus in this regard to show the Court that some other good reason exists for an order to be refused.

Conclusion

[53]     For all the reasons outlined above it will be apparent that the bankruptcy application before me succeeds.

[54]     Orders are now made as follows:

(a)       An  order  is  now  made  adjudicating  the  judgment  debtor  Paula

Michelle Heathcote bankrupt.

(b)Costs are awarded to the judgment creditor on a category 2B basis together with disbursements as fixed by the Registrar.

(c)       This order is timed at 3.30 pm today, 27 March 2013.

‘Associate Judge D.I. Gendall’