Commissioner of Inland Revenue v Jollands
[2012] NZHC 1672
•12 July 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-3564 [2012] NZHC 1672
UNDER the Insolvency Act 2006
IN THE MATTER OF the bankruptcy of CJ Jollands (in partnership with Peter Reginald Jollands trading as Jollands Callander)
BETWEEN COMMISSIONER OF INLAND REVENUE
Judgment Creditor
ANDCATHERINE JANE JOLLANDS Judgment Debtor
Hearing: 11 July 2012
Counsel: CK Wood for judgment creditor
AAH Low and VM Lawler for judgment debtors
Judgment: 12 July 2012
JUDGMENT OF ASSOCIATE JUDGE FAIRE
[on applications for setting aside bankruptcy notices]
Solicitors: Meredith Connell, PO Box 2213, Auckland 1140
Buddle Findlay, PO Box 1443, Auckland 1140
COMMISSIONER OF INLAND REVENUE V JOLLANDS HC AK CIV-2011-404-3564 [12 July 2012]
CIV-2011-404-3580
UNDER the Insolvency Act 2006
IN THE MATTER OF the bankruptcy of PR Jollands (in partnership with Catherine Jane Jollands trading as Jollands Callander)
BETWEEN COMMISSIONER OF INLAND REVENUE
Judgment Creditor
ANDPETER REGINALD JOLLANDS Judgment Debtor
The applications
[1] The applications for all intents and purposes are in identical form. They are made by Mr and Mrs Jollands, who seek orders setting aside bankruptcy notices that have been issued against them by the Commissioner of Inland Revenue. This judgment deals with both applications. There are no special features identified in one which does not apply equally to the other. Accordingly, I proceed on that basis.
[2] The grounds set out in the two applications are:
(a) The judgment on which the bankruptcy notices are based is defective in that:
(i) The nature of the debt underlying the judgment creditor’s
bankruptcy notices is incorrect; and
(ii) Consequentially the quantum of the debt is overstated;
(b)Judgment was entered in circumstances beyond the control of the judgment debtors;
(c) It would therefore be an abuse of process for the Commissioner to rely on the bankruptcy notices in the circumstances.
History of these applications
[3] The bankruptcy notices which are the subject of these applications were issued on 16 June 2011. Applications were made by the judgment debtors to set aside the bankruptcy notices on 8 July 2011. The applications were called on 28 July
2011 and were adjourned for a fixture which was scheduled for 13 October 2011. In a joint memorandum filed on 10 October 2011, counsel sought an adjournment of the fixture conditional upon the judgment debtors filing and serving applications to set aside the judgment given in the District Court on which the bankruptcy notices were
based. The applications were duly adjourned. Further adjournments were granted whilst the District Court judgment was awaited.
[4] On 3 April 2012 District Court Judge Blackie issued a reserved decision in which he refused the judgment debtors’ applications to set aside the judgment. Following that judgment there were further calls in the High Court which led specifically to directions being made by Associate Judge Bell leading to this fixture.
Grounds in support of the applications
[5] The judgment debtors no longer rely on any ground that relates to the judgment in the District Court. They do not wish to criticise the decision of District Court Judge Blackie when he refused their applications to set aside the judgment. Counsel confirm that they do not seek to relitigate the matters which were raised in the District Court in support of the applications.
[6] What the judgment debtors raise is that there is an extant application before the Commissioner of Inland Revenue pursuant to s 113 of the Tax Administration Act 1994. That application invites the Commissioner of Inland Revenue to amend assessments made by the Commissioner in respect of the judgment debtors from
1997 to 2010. The request is made in an undated letter, but which has been identified as having been issued on or about 11 October 2011. The judgment debtors say that it would be an abuse of process if the bankruptcy notices are not stayed whilst the s 113 application is extant.
Background
[7] In or about April 1991 an accountancy practice known as Newman Jollands commenced. The original partners were Craig Newman and Mr Jollands. No formal partnership agreement was entered into. Mrs Jollands purchase Mr Newman’s share of the partnership shortly after. The partnership changed its name to Peter Jollands and Associates in 1992. In May 2000 the partnership changed its name to Jollands Callander and has traded as Jollands Callander ever since.
[8] When Mrs Jollands joined the partnership she took over the administration of the partnership affairs and accounts. From the date that she joined the partnership, the partners drew a salary and treated the salary as being subject to PAYE. Mrs Jollands did this because she had an erroneous understanding that there was a partnership deed and that the deed provided for the partners to receive remuneration.
[9] The correctness of the approach to partners’ salaries was raised by the Commissioner. Mr and Mrs Jollands discussed the matter and became specifically aware of the fact that there appears to be no formal partnership agreement.
[10] Section 27 of the Partnership Act 1908 provides that partners in a partnership may not receive a salary unless an agreement is made that the partners can do so. Unless there is an express agreement to the contrary, partners can only return a share of the partnership income or loss in their tax return. The judgment debtors now accept that the amounts that they have treated as being subject to PAYE by way of the salaries which they paid themselves should not have been treated as such. That, they say, means that the assessments that were made in respect of their income from
1997 onwards may not be correct and should be reconsidered by the Commissioner.
[11] What is important for the purposes of this case is that the periods that the judgment debtors have asked the Commissioner to look at are outside those periods for which tax has been assessed and which are the subject of the judgment which is the foundation for the bankruptcy notices.
[12] The Commissioner has accepted in part in a letter dated 2 December 2011 that there should be a consideration of the assessments made pursuant to s 113 of the Tax Administration Act 1994 In that letter the Commissioner advised:
Pursuant to ss 107A and 108 of the TAA, the Commissioner cannot increase tax assessments after four years from the end of the income year in which the taxpayer provides the tax return. For this reason we can only reassess income tax periods for the years ended 31 March 2007, 2008 and 2009.
[13] The letter then recorded the PAYE periods which were affected. It then recorded that the Commissioner was in the process of reassessing the affected
periods and “will advise once the necessary amendments and payment transfers had been actioned”.
[14] It is common ground that the Commissioner is now currently looking at an amended assessment beyond the period initially advised. Counsel currently anticipate that that process should be completed within approximately eight weeks.
[15] The above history discloses that the first ground on which the judgment debtors sought to rely to set aside the bankruptcy notices, namely whether the founding judgment should be set aside, is no longer pursued. What is advanced in support of the applications is an outstanding consideration of the judgment debtors’ assessable income for periods other than those which were the subject of the judgment in the District Court.
Grounds in opposition
[16] Mr Wood submitted that it is no longer open to the judgment debtors to say that the nature of the debt underlying the judgment is incorrect or that the quantum of the debt is overstated. The concession made by counsel for the judgment debtors accepts this position. The applications to set aside the judgment, which were dismissed by District Court Judge Blackie on 3 April 2012, have not been the subject of any appeal. Accordingly, matters relating to the judgment itself are not grounds for setting aside the bankruptcy notices.
[17] Mr Wood drew attention to r 5.61 of the High Court Rules which prohibits defences based on a set-off or counterclaim being used. It is understandable that he should raise such submission because the nature of the applications under s 113 of the Tax Administration Act 1994 is that it could potentially lead to a credit in respect of taxes due for the period other than the period which was the subject of the District Court judgment. I need not analyse that matter further for reasons which I will shortly set out.
[18] This is not a case where the usual grounds for setting aside a bankruptcy notice can be advanced. They are the grounds that rely on s 17 of the Insolvency Act
2006.
[19] What is relied upon is an invitation to the Court to exercise its inherent jurisdiction. The debtors' submission in respect of this matter relies upon the judgment of Master Kennedy-Grant in re Wise, ex parte Benecke.[1] In that case Master Kennedy-Granted noted that relief was not available to the debtors in that case pursuant to the present s 17 of the Insolvency Act 2006 and the appropriate Rule. After analysing the authorities, however, he concluded that the Court has an
inherent jurisdiction where the debtors' case is based on an alleged defect in the process by which a judgment was obtained or where there is an arguable defence to the claim for which judgment was given. After satisfying himself that there was a foundation for the debtors' claim based on the two circumstances to which I have made reference, Master Kennedy-Grant then adjourned the application so that the Court could determine if the debtors' application to the District Court to set aside the judgment against them had been heard and determined. He ordered that a further adjournment would only be entertained if the debtors satisfied the Court that they had taken every step possible to ensure that their application to set aside the District Court judgment had been undertaken.
[1] Re Wise, ex parte Benecke HC Auckland B 227/95 and B228/95, 21 June 1995.
[20] Mr Wood accepted that if the Commissioner were to reassess the taxpayers in reliance on the jurisdiction vested in him under s 113 of the Tax Administration Act
1994, that would mean that the Commissioner would then invite the Court to either withdraw the bankruptcy notices if the result completely extinguishes the debt or to amend the bankruptcy notices in reliance on s 30 of the Insolvency Act 2006.[2] That position would be reached, not by applying any question of set-off but simply by accepting that there had been proven a credit in favour of the taxpayer which now must be applied against the judgment debt. Of course, matters have not yet got to
that stage. The question, however, is whether this is an appropriate case to exercise
the Court’s jurisdiction to stay the bankruptcy notices for a short period to ascertain the outcome of the applications under s 113 of the Tax Administration Act 1994.
[2] Re Ebbett, ex parte Fletcher Merchants Ltd, HC Tauranga B109/92, 9 October 1992, Fisher J.
[21] Mr Wood properly advised me from the Bar that the applications would be completed within a six to eight week period. Armed with that information it seemed to me that a relatively short adjournment and stay was appropriate in this case. The only matter that troubled me, was whether the judgment debtors’ financial circumstances might affect the exercise of that discretion. The financial material that has been made available for the purposes of this hearing is not complete. There is insufficient information for me to tell precisely what value can be ascribed to assets which are strictly legally owned by the judgment debtors, as opposed to assets which are owned by trusts or companies in respect of which they have some interest.
[22] But for the fact that it is a relatively short adjournment I would have called for further information before being satisfied that this was an appropriate case to exercise the Court’s inherent jurisdiction. For the reasons I have given, that is not necessary, however, in this case.
Orders
[23] I order that:
(a) the bankruptcy notices be stayed until 11:45am on 13 September
2012;
(b) the applications to set aside the bankruptcy notices are adjourned until
11:45am on 13 September 2012;
(c) costs in relation to these applications are reserved.
JA Faire
Associate Judge
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