Commissioner of Inland Revenue v McGuire
[2024] NZHC 2404
•26 August 2024
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV-2023-454-5
[2024] NZHC 2404
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Judgment Creditor
AND
JEREMY JAMES MCGUIRE
Judgment Debtor
Hearing: 26 August 2024 Appearances:
K Naik-Leong for Judgment Creditor G Woollaston for Judgment Debtor
Judgment:
26 August 2024
JUDGMENT OF ASSOCIATE JUDGE SKELTON
[1] This is an application by Mr McGuire, the judgment debtor, to halt bankruptcy proceedings against him, brought by the Commissioner of Inland Revenue (the Commissioner). The application is made under s 38 of the Insolvency Act 2006.
Procedural history
[2] On 7 March 2024, I part-heard Mr McGuire’s application to halt the bankruptcy proceedings. The basis for the application is that Mr McGuire has applied for judicial review of the District Court judgment underlying the Commissioner’s application for bankruptcy. At the time of the hearing on 7 March 2024, an application by the Commissioner for strike out of the judicial review proceeding had been heard but not determined. I adjourned the halt application pending the determination of the strike out application.
THE COMMISSIONER OF INLAND REVENUE v JEREMY JAMES MCGUIRE [2024] NZHC 2404
[26 August 2024]
[3] Justice Johnstone issued a judgment on 22 April 2024 in favour of the Commissioner by striking out Mr McGuire’s amended statement of claim and dismissing his judicial review.1 For convenience, I adopt the summary of the procedural history outlined by Johnstone J in that decision:
[1] On 16 July 2022, Judge S B Edwards sitting in the Palmerston North District Court struck out Jeremy McGuire’s defence to the Commissioner of Inland Revenue’s claim for $39,763.48 in unpaid tax, entered judgment in that amount, and awarded costs.2
[2] On 1 March 2023, the Commissioner initiated bankruptcy proceedings against Mr McGuire by serving him with a bankruptcy notice. Mr McGuire initially responded by:
(a)filing a claim in the Wellington District Court seeking variation or rectification of a settlement deed dated 9 December 2020, the terms of which informed Judge Edwards’ judgment; and
(b)applying to the Palmerston North District Court for orders staying enforcement of Judge Edwards’ judgment.
[3] Judge Collins declined the Palmerston North stay application on 3 April 2023. Judge Kelly granted the Commissioner’s application to strike out Mr McGuire’s claim in the Wellington District Court on 29 June 2023.
[4] In the meantime, Mr McGuire had applied to this Court for an order setting the bankruptcy notice aside. But on 29 May 2023, his setting aside application was dismissed.3 By application dated 13 June 2023, the Commissioner proceeded to apply for an order adjudicating Mr McGuire bankrupt.
[5] Mr McGuire next responded by filing this proceeding seeking judicial review of Judge Edwards’ judgment. By application dated 28 August 2023, the Commissioner applies to strike out Mr McGuire’s amended statement of claim dated 17 August 2023 (Mr McGuire’s Claim) and for costs, and alternatively, for orders for security for costs.
[4] As noted, Johnstone J granted the Commissioner’s application to strike out Mr McGuire’s amended statement of claim and for costs. Mr McGuire has since filed a notice of appeal to the Court of Appeal in respect of Johnstone J’s decision to strike out his judicial review claim.
1 McGuire v The Commissioner of Inland Revenue [2024] NZHC 883.
2 Commissioner of Inland Revenue v McGuire [2022] NZDC 12179.
3 The Commissioner of Inland Revenue v McGuire [2023] NZHC 1314.
[5] The Commissioner has filed a further memorandum dated 12 July 2024, and Mr McGuire has filed a further memorandum and affidavit dated 18 July 2024, and an updating memorandum and submissions dated 23 August 2023.
Legal principles –– application to halt bankruptcy proceedings
[6] Section 38 of the Insolvency Act provides that the court may at any time halt the creditor’s application for adjudication,4 on the terms and conditions (if any), and for the period, that the court thinks is appropriate.5 Section 38 does not set out the particular matters the court must consider; the rule is intended to provide a flexible discretion which enables the courts to take into account varying circumstances.6 The considerations that are invariably brought into account include:7
(a)the history of the litigation and the conduct of the parties in the same;
(b)the impression that the court can gain of the merits of the appeal;
(c)the stage reached in the appeal and any information to hand as to when it may be disposed of;
(d)the relative consequences for both parties of making or refusing the order sought;
(e)any known consequences for third parties.
Submissions
For Mr McGuire
[7] Mr Woollaston, for Mr McGuire, submits that it would be premature to decide the halt application when the “disputed debt” between the parties over which the halt application applies, is subject to an appeal in the Court of Appeal. The judgment
4 Insolvency Act 2006, s 38(1).
5 Section 38(2).
6 Re Koroniadis ex parte Bank of New Zealand [2013] NZHC 2865 at [11].
7 Waimauri Ltd v Mahon [2022] NZHC 1622 at [40] citing Michael Wilson & Partners Ltd v Sinclair [2020] NZHC 2546 at [9].
debtor does not have a tax debt if the appeal is successful and the application for judicial review is also successful, because it would result in the District Court’s judgment (which is the basis of the application for adjudication) being set aside. In fact, Mr Woollaston submits, Mr McGuire will have a significant tax credit. Mr Woollaston refers to other cases where applications for bankruptcy have been halted on the basis of ongoing appeals, Re Bank of New Zealand ex parte Koroniadis, and Waitomo Adventures Ltd v O’Hagan.8
[8] Mr Woollaston submits that the appeal to the Court of appeal is underway and the case on appeal has been filed and served. A hearing is yet to be scheduled. He submits that a halt should be granted otherwise the opportunity of appeal will be rendered nugatory. He submits that there are ongoing factual disparities between Mr McGuire and the Commissioner as to subsequent tax periods.
For the Commissioner
[9] The Commissioner submits that Mr McGuire’s judicial review application and his appeal against strike out have no prospect of success.
[10]The Commissioner submits that there is no question that Mr McGuire owes the
$39,763.38 amount settled by the District Court judgment. Section 43 of the Insolvency Act (court may halt application so the disputed debt can be resolved at trial) has no application as the question of whether Mr McGuire owes the amount claimed was finally settled by the judgment, against which no appeal was brought and the time to appeal has expired. The Commissioner submits it is instructive that Mr McGuire has not applied under s 43, being the relevant provision to seek a halt when the debt is not resolved. The Commissioner submits that the debt is owed.
[11] The Commissioner submits that the application for halt is a delay tactic and therefore an abuse of process. Instead of appealing the underlying judgment within the prescribed timeframe, Mr McGuire filed judicial review proceedings on 5 July 2023 nearly one year after the judgment was issued and after the Commissioner and
8 Re Bank of New Zealand ex parte Koroniadis, above n 6; Waitomo Adventures Ltd v O’Hagan
[2014] NZHC 2477.
filed the creditor’s application for adjudication on 13 June 2023. Since then, Mr McGuire has unsuccessfully pursued a number of avenues to avoid adjudication.9
[12] The Commissioner submits it will be further prejudiced if the proceedings are halted. The Commissioner obtained judgment in 2022 and is entitled to enforce it. It has been required to oppose meritless litigation filed by Mr McGuire for the purpose of obstructing the proceedings, and incurred costs (five outstanding costs orders) which remain unpaid by Mr McGuire.
Analysis
History of litigation and current position
[13] The District Court decision (which is the basis for the bankruptcy application) determined the dispute as to the debt. As summarised by Johnstone J, the District Court found:10
(a)Section 109(a) of the TAA operates to deprive the District Court of jurisdiction to hear and determine disputes over the correctness of assessments of tax or the amounts imposed for penalties and interest such as those which underpinned the Commissioner’s claim.
Mr McGuire therefore had no reasonably arguable defence.11
(b)In any event, dealing with Mr McGuire’s arguments substantively:
(i)Section 109(b) of the TAA deemed the income tax assessments upon which the Commissioner was relying to be correct.12
(ii)Rule 5.63(1) of the District Court Rules 2014 prevented Mr McGuire from raising his set-off defence.13
(iii)Section 163 of the TAA overrode any statutory limitation period in respect of the recovery of tax. And the four-year limitation upon amending tax assessments arising under s 108
9 Above at [3]. On 10 March 2023, Mr McGuire filed a statement of claim and notice of proceeding in the Wellington District Court seeking to vary or rectify the deed of settlement entered into with the Commissioner on 9 December 2020. The claim was struck out on 29 June 2023 with costs awarded to the Commissioner. On 13 March 2023, Mr McGuire applied for a stay of Edwards J’s judgment, which was dismissed for want of jurisdiction (filed in the wrong Court) with costs awarded to the Commissioner. On 15 March 2023 Mr McGuire applied to the High Court to set aside the bankruptcy notice, which was dismissed on 29 May 2023.
10 McGuire v The Commissioner of Inland Revenue, above n 1, at [14] –[15].
11 At [35].
12 At [37], citing Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153, at [52]–[55].
13 At [39].
of the TAA did not apply to establish a time-bar in this case, because Mr McGuire did not file the income tax returns the subject of the Commissioner’s reassessment until February 2017, and the reassessments occurred well within the four- year period after that.14
(iv)Properly interpreted, the settlement agreement entered between the Commissioner and Mr McGuire on 9 December 2020 did not extend to the claims the subject of the Commissioner’s proceeding.
[14] As already noted, Mr McGuire did not appeal the judgment, and the alternative steps he took, after service of a bankruptcy notice, were unsuccessful.15 Ultimately, nearly a year after the judgment, and after bankruptcy proceedings had been issued, Mr McGuire applied for judicial review. It is now over two years since the District Court judgment was issued.
[15] In his judicial review claim, Mr McGuire pleaded mistake of fact; unreasonableness; ultra vires; and breaches of natural justice. The essence of the application was Mr McGuire’s continued assertion that he did not in fact owe the tax debt to the Commissioner. Justice Johnstone determined that Mr McGuire’s judicial review pleadings disclosed no reasonably arguable cause of action and should be struck out:
[41] ... The plain evidence comprised in the business documents put before this Court by way of affidavit, including the deed of settlement, serves to undermine Mr McGuire’s pleadings suggesting that the various assessments of tax upon which Judge Edwards founded her judgment remain in dispute. As discussed, Mr McGuire’s Claim discloses no reasonably arguable cause of action. They are so clearly untenable that they cannot possibly succeed.
[16] Justice Johnstone awarded indemnity costs, noting that “Mr McGuire’s Claim is properly described as “hopeless””16 and it was “unlikely Mr McGuire commenced this proceeding anticipating any real prospect of success, beyond achieving simple delay.”17
[17] As noted above, a notice of appeal has been filed in the Court of Appeal. Mr Woollaston advises that the case on appeal has been filed and served. As yet, there
14 At [40]–[49].
15 See above n 9.
16 At [47].
17 At [49].
is no scheduled hearing date, but it seems likely that there will not be a hearing until mid-2025.
[18] The history of the proceedings, including the fact that Mr McGuire has only sought to challenge the underlying judgment after enforcement action was taken, and the further delay before the outcome of the appeal are all factors against halting the Commissioner’s application for adjudication.
Impression as to merits of appeal
[19] Unlike the cases relied on by Mr Woollaston,18 in this case the merits of Mr McGuire’s challenge to the underlying judgment debt have already been tested in the strike out application. The outcome of that application is that Mr McGuire does not have a reasonably arguable cause of action. Justice Johnstone also found in the context of considering indemnity costs that Mr McGuire’s claim was “hopeless” and that it is “unlikely Mr McGuire commenced this proceeding anticipating any real prospect of success, beyond achieving simple delay”.19 These findings give me a clear “impression” that the appeal, which raises the same issues, has little prospect of success. This is further factor against halting the Commissioner’s application for adjudication.20
Relative consequences for both parties and any third parties
[20] Mr Woollaston submits that if a halt is not granted then Mr McGuire faces the risk of being adjudicated bankrupt which will have significant implications for his professional career, and the opportunity of appeal will be rendered nugatory.
[21] However, that is not the inevitable consequence of declining the halt. The evidence of Mr McGuire is that he is the primary beneficiary of a trust which has sufficient assets to be able to make capital distributions to him as necessary to satisfy any sum determined to be properly due to the Commissioner. Therefore, it seems unlikely, in the event that a halt is not granted, that Mr McGuire would ultimately be
18 See [7] above.
19 At [49].
20 See RPW v H [2022] NZHC 2344 at [43] where the Court found that it was unlikely that the judicial review proceedings would succeed and that was one of the reasons that a halt was not granted.
adjudicated bankrupt. It seems more likely that Mr McGuire would pay the amount claimed by the Commissioner as the debt due to avoid bankruptcy while continuing to pursue his appeal. That would avoid further interest accruing on the debt while the appeal was pursued. If the appeal and judicial review were ultimately successful, then the Commissioner would be required to repay the appropriate amount together with interest.
[22] I also note that, even if Mr McGuire was adjudicated bankrupt, that would not necessarily render the appeal nugatory. It would remain open for the appeal to be conducted under the control of the Official Assignee. This can be useful as it might allow for an independent review of the merits of the case.21
[23] Alternatively, if a halt is granted, the Commissioner will be further delayed from collecting the debt, in circumstances where the Commissioner has had to oppose a number of applications made by Mr McGuire at a significant cost. There is public interest in bankruptcy proceedings being determined expeditiously and in not allowing meritless litigation to consume public resources and delay the collect of tax that is owed.
[24]There are not any known consequences to third parties.
[25] On the facts of this case, the relative consequences for both parties goes against halting the Commissioner’s application.
Conclusion
[26] For the reasons set out above, I am not satisfied that it is appropriate to grant a halt of the Commissioner’s application for adjudication pending the outcome of the appeal to the Court of Appeal.
[27] However, during the hearing, I discussed with counsel for the parties whether Mr McGuire could be given a certain period in which to pay the debt and accrued interest and unpaid costs to the Commissioner, and there would be a temporary halt of
21 Re Bank of New Zealand ex parte Koroniadis, above n 6, at [12].
the Commissioner’s application for bankruptcy for that period. If the relevant amount is paid within the period, then the bankruptcy proceedings would likely be discontinued. If the relevant amount is not paid within the period, the bankruptcy proceedings would continue.
[28] Counsel for the parties did not have instructions to consent to any such order. However, Ms Naik-Leong advised that, if I was inclined to make such an order, the Commissioner would be seeking payment of the sum of $92,858.67, which covers the remaining debt and interest, unpaid costs awards already made, and the indemnity costs sought in the judicial review proceedings (the costs judgment determining the quantum of indemnity costs has not yet been issued). Mr Woollaston submitted that Mr McGuire would require 28 days for the trust to explore refinancing options so that any such payment could be made to the Commissioner.
Result
[29] There is a temporary halt of the bankruptcy proceedings for 28 calendar days from the date of this judgment to allow Mr McGuire the opportunity to pay the sum of $92,858.67 to the Commissioner. If that sum is not paid by Mr McGuire to the Commissioner within the 28-day period, then the bankruptcy proceedings will continue. If that sum is paid by Mr McGuire to the Commissioner within the 28-day period, then it is likely that the Commissioner will seek leave to discontinue the proceedings.
[30] In the meantime, the issue of costs on the application to halt the bankruptcy proceedings is reserved.
[31] The matter is to be listed for a telephone conference on 1 October 2024 at 2.15pm for monitoring and for orders/directions to be given as appropriate.
Associate Judge Skelton
Solicitors:
Crown Law Office, Wellington for Judgment Creditor Dewhirst Law, Palmerston North for Judgment Debtor
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