Commissioner of Inland Revenue v Henson

[2020] NZHC 389

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV 2019-419-155

[2020] NZHC 389

IN THE MATTER

AND

of the Insolvency Act 2006

IN THE MATTER

of the Bankruptcy of JULIAN DOYLE HENSON also known as IAN DOYLE HENSON

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

AND

JULIAN DOYLE HENSON also known as IAN DOYLE HENSON

Judgment Debtor

Hearing:	4 March 2020
Appearances:	T Saunders for Judgment Creditor D Hayes for Judgment Debtor
Judgment:	4 March 2020

ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 4 March 2020 at 4pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:

Inland Revenue, Hamilton, T Saunders ([email protected]) David Hayes, Hamilton ([email protected])

Case Officer:
Sunaina Chand

The Commissioner of Inland Revenue v Henson [2020] NZHC 389 [4 March 2020]

[1]    The judgment debtor (Mr Henson) applies to set aside a bankruptcy notice issued against him by the judgment creditor (the Commissioner) on 17 June 2019. The bankruptcy notice was based on a debt for $56,087.03 owing on a final judgment given in the District Court at Hamilton on 23 October 2015, and registered in this Court at Hamilton on 11 July 2017. The bankruptcy notice was served on Mr Henson on 26 June 2019.

[2]Mr Henson applied to set aside the bankruptcy notice on the following grounds:

(i)Mr Henson had a proposal for payment which the Court should approve.

(ii)There is a partial off-setting amount owed to Mr Henson by the Commissioner.

(iii)The Commissioner’s costs claimed were excessive.

[3]Mr Henson also relied on his own supporting affidavit sworn on 10 July 2019.

Mr Henson’s affidavit

[4]    The judgment obtained against Mr Henson was for a tax debt incurred by a Trust of which he was a trustee. He said in his affidavit that the other trustees are either bankrupt or impecunious, and that there are no assets in the Trust to cover the debt.

[5]    Mr Henson said that the Commissioner already has a charging order dated 19 January 2016 which secured the debt. He said in his affidavit that he believed the property on which the charging order is registered could be sold within 12-18 months.

[6]    The property in question is a 4.7 hectare property in Lee Road, Burbush, jointly owned by Mr Henson and his estranged wife, Carolyn Henson.

[7]    Mr Henson produced an appraisal of the property prepared by Wrightson Real Estate (Wrightson), on 12 July 2017. Wrightson assessed the property as being worth over $5,000,000. As at the date of Mr Henson’s affidavit, the Government Valuation

was $2,700,000. The property has recently been re-zoned from rural to “Residential 1”, and that has increased its value substantially. It can now be subdivided into multiple lots.

[8]    There is a mortgage to Heartland Building Society registered on the title to the property. Mr Henson said that as at 10 July 2019, the mortgage secured approximately

$466,000. He said that he was unable to increase the loan because of the debt owing to the Commissioner, and a lack of cooperation from his wife, Carolyn Henson.

[9]    Mr Henson said that he operates a heating business, installing gas and wood fires. The business provides sufficient income to allow mortgage payments, but in or about March 2019 the ASB and Westpac both withdrew overdraft facilities, apparently as a result of the judgment obtained by the Commissioner. Mr Henson said that the business had stock on hand worth approximately $150,000, although a forced sale would be unlikely to realise that much.

[10]   Mr Henson said that Carolyn lives in the house on the property, while he lives in a rented workshop. Carolyn pays the rates and he pays the mortgage, insurance and maintenance. Mr Henson said that he and Carolyn have not lived together for the past six years, but she has been reluctant to agree to sell the property, for reasons he does not know or understand. He said that he has tried to avoid antagonising her by forcing a sale. In the meantime, the Commissioner’s staff have rejected Mr Henson’s proposals to make payment over time.

[11]   Mr Henson contended that there are currently GST refunds owing to him and his business of about $12,000. He said that sum is due to him, and he has no explanation for the Commissioner retaining it.

[12]   Mr Henson expressed the view that as the debt owing to the Commissioner was secured by the charging order, all that is required is further time to resolve the situation. He proposed that the charging order (or perhaps a replacement mortgage) remain in place until the property is sold. He said that he proposed to apply to the Family Court for an order dividing the relationship property, and for an immediate order for the sale of the property.

[13]   On the issue of the costs claimed by the Commissioner, Mr Henson challenged the “subsequent costs” of $810 claimed relating to the charging order, and also challenged the $769.91 costs claimed on the bankruptcy notice.

[14]   Mr Henson asked the Court to approve his proposal and either adjourn the application to set aside the bankruptcy notice to monitor compliance, or set it aside.

The Commissioner’s notice of opposition

[15]   In her notice of opposition, the Commissioner denied that she is a secured creditor. She also denied that there is any partial set-off or cross claim within the meaning of s 17 of the Insolvency Act 2006 (the Act). In any event, no set-off may be pleaded against the Crown.

[16]   The Commissioner also contended that she cannot be obliged to accept a payment proposal from Mr Henson.1

Evidence for the Commissioner

[17]   An affidavit was provided in support of the Commissioner’s opposition by Ms Kirsty Leslie, a customer services officer with the Inland Revenue Department.

[18]   Ms Leslie explained that the judgment was for taxes assessed to Mr Henson in his capacity as trustee of a Trust known as the Eaton Trust II. She confirmed that no payment has been made in reduction of the debt since the judgment was entered.

[19]   Ms Leslie explained that the charging order over the property was issued (by the District Court) as long ago as 5 January 2016. It was registered on the title to the property on 19 January 2016. The District Court judgment and the charging order were subsequently transferred to the High Court, and on 11 July 2017 the Commissioner obtained the final judgment (in this Court) on which the bankruptcy notice is based.

1      Referring to Commissioner of Inland Revenue v Wilson [2017] NZCA 100.

[20]   Ms Leslie said that the difference between the District Court judgment and the High Court judgment is comprised of costs and disbursements awarded by the Court on removal.

[21]   Ms Leslie referred to an offer made by Mr Henson on 29 August 2017, under which he would repay the debt at the rate of $250 per week. That offer was declined by the Commissioner.

[22]On 5 January 2018, the charging order over the property lapsed.

[23]   The Commissioner has decided that because Mr Henson owned an undivided half share in the property, enforcement of the judgment by way of order for sale would be an uncertain process. Ms Leslie noted that the judgment was entered in the District Court as long ago as October 2015, so Mr Henson has had plenty of time to arrange payment of the debt.

[24]   In response to Mr Henson’s affidavit, Ms Leslie said she could find no record of the Commissioner contacting ASB or Westpac in connection with her judgment.

[25]   Apart from the offer Mr Henson made in August 2017, the Commissioner has received no contact from Mr Henson.

[26]   Ms Leslie said that she has searched the Commissioner’s records and can find no record of any GST refund due to Mr Henson or his business.

[27]   With additional penalties and interest, Ms Leslie said the debt owing to the Commissioner as at 24 July 2019 was $94,136.10.

Applications to set aside bankruptcy notices – legal principles

[28]Section 17 of the Act materially provides:

17 Failure to comply with bankruptcy notice

(1)A debtor commits an act of bankruptcy if—

(a)  a creditor has obtained a final judgment or a final order against the debtor for any amount; and

(b)  execution of the judgment or order has not been halted by a court; and

(c)  the debtor has been served with a bankruptcy notice; and

(d)   the debtor has not, within the time limit specified in subsection (4),—

(i)  complied with the requirements of the notice; or

(ii)  satisfied the court that he or she has a cross claim against the creditor.

(2)The form that the bankruptcy notice must take is set out in section 29.

…

(4)The time limit referred to in subsection (1)(d) is,—

(a)  if the debtor is served with the bankruptcy notice in New Zealand, 10 working days after service; or

…

(7)In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—

(a)   is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and

(b)  the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.

[29]   The learned authors of Brookers Insolvency Law & Practice note that a debtor arguing that he or she has a cross claim under s 17(7) must demonstrate that he or she has a cross claim of true substance which he or she genuinely proposes to pursue, or a “genuine triable claim”.2

[30]   In addition to the “cross claim” ground of opposition, the Court retains inherent jurisdiction to prevent any abuse of process in the issue of a bankruptcy notice,3 but the Court will only intervene in the exercise of its inherent jurisdiction to prevent an abuse of process in very special circumstances.4 The “abuse of process” ground is unlikely to be available to a debtor whose real argument is over a claim which could have been brought before the Court which entered the judgment relied upon by the creditor.5

2      Brookers Insolvency Law & Practice (online loose leaf ed, Thomson Reuters) at [IN 17.10] citing

Sharma v ANZ Banking Group (1992) 6 PRNZ 386 (CA) at 389.

3      Re Wise, exparte Benecke HC Auckland B227/95, 21 June 1995.

4      Re Kruikziener, exparte Hanover Finance Ltd HC Auckland, CIV 2007-404-2896, 12 August 2008 at [36].

5      Re Saker, exparte Benecke HC Wellington, CIV 2008-485-124, 26 May 2008, at [26].

[31]   In Commissioner of Inland Revenue v Wilson, the Court of Appeal addressed the question of whether the High Court has jurisdiction, either under s 29 of the Act or inherent, to approve a payment proposal by a debtor served with a bankruptcy notice. Section 29 of the Act relates to the required form of a bankruptcy notice, and s 29(1)(b) provides that a bankruptcy notice must require the debtor to:

(i)Pay the amount owing, plus costs; or

(ii)Give security for the amount owing that satisfies the Court or the creditor; or

(iii)Compromise the amount owing on terms that satisfy the Court or the creditor.

[32]   In Commissioner of Inland Revenue v Wilson, the  Court  of Appeal held that s 29 of the Act is merely a process provision: its purpose is not to confer on the High Court power to approve a compromise.6 The words “to compromise the amount owing on terms that satisfy the Court or the creditor” in s 29(1)(b)(iii) do not confer on the Court power to approve a compromise. That power resides elsewhere, in s 333 of the Act relating to insolvency proposals.7

[33]   The Court of Appeal in Commissioner of Inland Revenue v Wilson, also held that, where the debtor is a taxpayer seeking to compromise a debt owed to the Commissioner, the debtor must do so by applying for  financial  relief  in  terms of  ss 177 to 177B of the Tax Administration Act 1994 (the TAA).8

Submissions for the Commissioner

[34]   First, Mr Saunders submitted that the Commissioner is not a “secured creditor”. Thus the provision at s 14 of the Act that an adjudication order cannot be made on the application of a secured creditor unless the value of the debt exceeds the value of the charge by at least $1,000, does not have any application. A “secured

6      Commissioner of Inland Revenue v Wilson, above n.1, at [22].

7 At [30].

8 At [31].

creditor” is defined in s 3 of the Act as “a person entitled to a charge on or over a property owned by a debtor”, and a “charge” is defined in the same section of the Act to exclude a charge under a charging order issued by a court in favour of a judgment creditor.

[35]   In this case, the charging order registered on the title to the property does not constitute a security, and in any event it has now lapsed. The result is that the Commissioner does not hold any relevant security for the debt.

[36]   Such negotiations as have taken place between Mr Henson and the Commissioner do not provide any basis to set aside the bankruptcy notice, and there is no basis in the evidence for the Court to exercise any inherent jurisdiction it might have to set aside the bankruptcy notice.

Submissions of Mr Henson

[37]In his written submissions, Mr Hayes accepted the following:

(i)a payment proposal cannot be imposed on the Commissioner;

(ii)the Commissioner is not a secured creditor; and

(iii)a set-off cannot be raised.

[38]   Mr Hayes nevertheless submitted that the bankruptcy notice should be set aside, in the exercise of the Court’s inherent jurisdiction to prevent an abuse of process.9 He submitted that the Court may exercise this jurisdiction in any circumstances where it considers it necessary to do so to prevent injustice.10

[39]   In support, Mr Hayes referred to the Commissioner’s failure to seek an order for the sale of the property for two years, submitting that there is nothing to suggest that Mr Henson’s assets are worth less than he has said they are worth. And although

9      Referring to Re Krukziener, ex parte Hanover Finance Ltd, above n.4, and Re Wise, ex parte Benecke, above n.3

10     Re Krukziener, above n.4, at [28].

the charging order might not constitute a security, it has remained on the title, indicating to potential purchasers that any sale might be a distressed sale.

[40]   Mr Hayes submitted that the Official Assignee would be needlessly troubled if the Commissioner were to proceed to a bankruptcy adjudication, and the property were then sold, with a substantial return to Mr Henson and his wife. Annulment of the bankruptcy would follow, and significant costs would have been incurred in the meantime.

[41]   Mr Hayes then submitted that, if the present application is declined, Mr Henson would have the right to apply for judicial review of the Commissioner’s decision not to accept a payment arrangement. There would be further unnecessary wastage of Court resources if that occurred.

[42]   Mr Hayes next submitted that contact the Commissioner’s staff made with ASB has contributed to cashflow issues for Mr Henson.

[43]   Mr Hayes summarised the position by submitting that it would be an abuse of process for the Commissioner to proceed down the bankruptcy path.

Memorandum for the Commissioner in reply

[44]   In response, Mr Saunders submitted that abuse of process was not a ground relied upon by Mr Henson in his notice of opposition, and he should not be allowed to raise it now. Also, Mr Hayes’ submissions should have been filed by 19 February 2020, but they were not received until 2 March 2020.

[45]   If the Court should accept that Mr Henson may argue the abuse of process ground, Mr Saunders submitted that Mr Henson has failed to show that there are “very special circumstances”, the test adopted in Re Krukziener, ex parte Hanover Finance Ltd, for the abuse of process ground for setting aside a bankruptcy notice.11

11     Re Krukziener, ex parte Hanover Finance Ltd, above n.4, at [36].

Discussions and conclusions

[46]   Mr Henson has not established any grounds for setting aside the bankruptcy notice.

[47]   First, his counsel accepts that his unaccepted payment proposal cannot provide a ground for setting aside the bankruptcy notice.

[48]   Secondly, he does  not  now  rely on any cross claim  within  the  meaning of s 17(7) of the Act. He has provided no detail of the $12,000 refund he claimed was due to himself or his business, and I think Mr Hayes correctly abandoned the set-off argument.12

[49]   Thirdly, Mr Henson’s concerns over the costs claimed by the Commissioner were not argued by Mr Hayes in his submissions, and in my view the concerns were not justified. The certified final judgment of the District Court was correctly stated in the bankruptcy notice at $56,087.03, and the claim made by the Commissioner relating to the issue and service of the bankruptcy notice is appropriate.

[50]   On the abuse of process arguments made by Mr Hayes, I note first that Mr Henson’s submissions and casebook should have been filed and served by 19 February 2020, but in the event they were not prepared until 28 February 2020 and Mr Saunders says that he did not see them until the evening of 2 March 2020. Mr Hayes explained that the delay was caused by the parties’ ongoing attempts to resolve the matter, which in the end were unsuccessful.

[51]I do not see any merit in the abuse of process submission.

12 Even if there had been some evidence to support the set-off argument, the claimed set-off would appear to have been precluded by r 5.61(2) of the High Court Rules 2016. Set-off argument, in that rule provides:

5.61 Restriction when the Crown involved

…

(2) In a proceeding of any nature by the Crown, a defendant is not entitled to advance any set-of or counterclaim arising out of a right or claim to payment in respect of any taxes, duties, or penalties.

…

[52]   First, the judgment for the outstanding tax was entered in the District Court as long ago as October 2015, and no abuse of process by the Commissioner has been suggested in obtaining the judgment. Mr Henson has since had ample time to take steps to realise his interest in the property, but he has failed to take those steps.

[53]   I do not consider in those circumstances that the Commissioner has acted oppressively, or otherwise abused the Court process, by failing to enforce her judgment by applying for a sale order. Mrs Henson is also a joint owner of the property, and it is her home. Relationship property issues have not been dealt with between Mr and Mrs Henson, and it appears that she has been unwilling to agree to a sale. I think the Commissioner was entitled in those circumstances to take the view that she should not be required to concern herself with the potential complications of execution against the interest of one of two joint owners, where the other joint owner might not be willing to co-operate with a sale of the property. Those were matters for Mr Henson to deal with.

[54]   Nor do I need to be concerned at this stage with the broader equitable considerations that may come into play under s 37 of the Act on a bankruptcy adjudication application. The issue here is simply whether or not the bankruptcy notice should be set aside.

[55]   Whether Mr Henson does or does not intend to apply for judicial review of the Commissioner’s decision not to enter into a payment arrangement with him cannot in my view be a circumstance amounting to an abuse of process by the Commissioner, calling for the Court’s intervention to prevent an injustice. And if there are further costs to be incurred in a bankruptcy adjudication proceeding, that will simply be the result of Mr Henson’s failure to make timely payment – it could not amount to an abuse of process by the Commissioner, or other ground justifying the exercise of the Court’s inherent jurisdiction.

[56]   The various difficulties Mr Henson has described, including apparent difficulty in arranging a sale of the property, and ASB and Westpac apparently becoming aware of his unsatisfied debt to the Commissioner, are not in my view matters which could amount to “special circumstances”, and thus provide a ground for setting aside the

bankruptcy notice in the Court’s inherent jurisdiction. Ms Leslie said she had no knowledge of any contacts the Inland Revenue Department made with ASB and Westpac around March 2019, which Mr Henson said caused the banks to withdraw his overdraft facilities. There is no evidence from either bank on the topic, but even if there was some contact between the Commissioner’s staff and the banks relating to the long-outstanding debt, that would not in my view amount to a special circumstance capable of forming the basis for a setting aside order made in the Court’s inherent jurisdiction. Any difficulties in effecting a sale might or might not be considerations the Court will take into account if and when the Commissioner issues a bankruptcy adjudication application, but they are not relevant for present purposes.

Result

[57]   For the above reasons, Mr Henson’s application to set aside the bankruptcy notice is dismissed.

[58]   Costs are awarded to the Commissioner on a 2B basis, plus disbursements to be fixed by the Registrar.

Associate Judge Smith