Commissioner of Inland Revenue v Manukau Family Doctors, Accident and Medical Limited

[2023] NZHC 1355

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2022-404-1319

[2023] NZHC 1355

IN THE MATTER

of the Companies Act 1993

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

MANUKAU FAMILY DOCTORS, ACCIDENTS AND MEDICAL LIMITED

Defendant

Hearing:	31 May 2023 (by AVL)
Appearances:	C van der Merwe for Plaintiff No appearance for Defendant
Judgment:	31 May 2023

ORAL JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 31 May 2023 at 1.00pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

THE COMMISSIONER OF INLAND REVENUE v MANUKAU FAMILY DOCTORS, ACCIDENTS AND MEDICAL LIMITED [2023] NZHC 1355 [31 May 2023]

[1]        Manukau Family Doctors, Accidents and Medical Limited (Manukau), was incorporated on 7 March 2006 and as its name suggests, is a general practice in South Auckland.

[2]        Manukau  has  failed   to   pay   GST   and   other   tax   as   assessed   by   The Commissioner of Inland Revenue (The Commissioner) for an extended period resulting in a statutory demand being issued by The Commissioner in May 2022 in the sum of $310,409.44. That sum is made up of GST but also what are called employer activities of $65,280.00 and a small amount of income tax of $100. Employer activities is a catchall for PAYE, KiwiSsaver employer deductions, student loan deductions and specified superannuation contributions. It is noteworthy that PAYE arrears commenced August 2019, Goods and Services arrears commenced May 2019. I say that is noteworthy as the main reason given by the defendant company for not paying its tax was the impact of  COVID  but  the  lockdown  did  not  occur  in  New Zealand until April 2020.

[3]        Manukau has previously defaulted in its tax obligations and in March 2015 it was liquidated on the application of The Commissioner but was able to clear its indebtedness and in April 2015 obtained an order terminating the liquidation.

[4]        It is no longer open to Manukau to dispute or challenge The Commissioner’s assessment of what it owes. Manukau has not exercised the statutory procedures available to it to challenge the assessment by The Commissioner meaning the debt is deemed to be correct.

[5]        It is clear The Commissioner is entitled to seek an order that Manukau be placed in liquidation. The statutory demand issued against Manukau was not met and therefore Manukau is presumed to be insolvent and unable to pay its debts.

[6]        Following The Commissioner in August 2022 applying for an order of liquidation, Manukau filed a statement of defence. As I have said, Manukau has said it finds itself in its present situation due to the impact of the COVID pandemic on its business. Again, that cannot be entirely correct given when the arrears first started to accrue.

[7]        Manukau says it wants to settle The Commissioner’s debts and said it is able to do so now that its business has returned to normal and it asserts that The Commissioner has a duty to act reasonably to resolve the debt.

[8]        As I have noted, the statutory demand amount was just over $310,000.00. As at the date of this hearing, 31 May 2023, it owes approximately $309,000.00 notwithstanding that Manukau has recently paid $50,000.00. Accordingly, in the time since the statutory demand, its net tax position has hardly changed.

[9]        In an open letter, the director of the defendant, says it will pay $50,000.00 and then make monthly payments of $20,000.00 against the arrears. However, I note that Manukau has also defaulted in filing its income tax returns for the years ended       31 March 2020 and 31 March 2021. The director said at the end of March 2023 that those returns were now signed and that Manukau would shortly file returns for the March 2022 year. However, it seems that any income tax that becomes due as a result of those returns will also have to be subject to a payment programme.

[10]      The company’s proposal hardly gives grounds for confidence. Manukau does not have the ability to clear its existing tax liability and its reference to the potential for it to have to pay off income tax by instalments indicates that Manukau is simply unable to meet its obligations as they fall due.

[11]      It is not for Manukau to bargain with The Commissioner as to how it would meet its liabilities. The situation would look very different if Manukau had paid the

$50,000.00 offered at the time of the statutory demand or even at the time of the liquidation proceedings and then maintained its monthly payments of $20,000. Manukau’s proposal is too little too late and Manukau is trading while it is insolvent.

[12]      Here, there is no genuine dispute as to the level of the debt, as I have said, that is an option no longer open to Manukau. There are no other creditors in the liquidation though I note that a creditor in support, the Auckland Council, which was owed just over $30,000.00 has apparently been paid. This is a neutral factor. Really, the only option open to Manukau is to have recourse to the Court’s residual discretion. In that regard, the starting position is Manukau’s insolvency, in which case a liquidation order

will ordinarily follow. The onus is on Manukau to show that the circumstances warrant the Court exercising its residual discretion not to make a liquidation order. That discretion is exercised sparingly.

[13]      As to whether The Commissioner had to enter a payment arrangement, it is clear that The Commissioner  does  not  have  to  make  such  an  arrangement  with a defaulter. Were that the case, then a tax payer would be free to not to pay their tax and when enforcement action was commenced by The Commissioner, say that The Commissioner had to enter a payment programme, in effect turning The Commissioner into a bank of last resort.

[14]      The Court has held there is no primary obligation on The Commissioner to maximise the recovery of taxes but rather, the duty is to collect over time the highest net revenue that is practicable within the law. The Commissioner is entitled to take into account Manukau’s history of non-compliance, its failure to file returns on time and its inability to meet current taxes, in deciding to decline the proposal.1 This hearing is not a de facto judicial review of The Commissioner’s decision to decline the proposal that has been made.

[15]      The Commissioner is also entitled to take into account Manukau’s attitude to its tax obligations which is summed up by its director saying that if its offer is not accepted, then its director will “need to set up another company to operate the medical practice”. This gives the impression that the director considers that he can discard companies simply because of insolvency and start afresh.

[16]      At the end of the day, Manukau is trading while it is insolvent. The fact its director has to make the payment offers set out above, confirms that insolvency – it cannot pay its liability to The Commissioner which is unquestionably due. There is no dispute in respect of the amounts owed and it seems clear that Manukau has chosen to use GST and PAYE to subsidise its own trading.

1      Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 which involved an application for judicial review of a decision of the Commissioner not to accept a proposal.

[17]      While no doubt Manukau has done good work in its community, that is not    a justification for it not meeting its obligations to The Commissioner. Manukau operates as a business and it is not open to the Court to allow it to trade while insolvent in the absence of a settlement with The Commissioner.

[18]      I am satisfied there is no basis for declining The Commissioner’s application and there  is  an  order  placing  Manukau  Family  Doctors,  Accidents  and  Medical Limited in liquidation.

[19]      Janet Sprosen and Leon Francis Barker are appointed liquidators. Their remuneration as set out in their consent of 23 November 2022 is confirmed.

[20]The liquidation order is timed at 10:25am.

[21]The Commissioner is entitled to actual costs of $766.50 and disbursements of

$1,321.21, a total of $2,087.71.

[22]      I conclude by noting that the day before the hearing, submissions were received by the Court for counsel apparently newly appointed for the defendant, earlier counsel having been given leave to withdraw. Those submissions relied on the idea of time being sought for a proposal to be put. Counsel did not appear when the proceeding was called on the morning of 31 May 2023 and I requested that the Registrar ask in the Court’s precinct whether there was an appearance, and there was none.

Associate Judge Lester