Commissioner of Inland Revenue v New Orleans Hotel (2011) Limited

[2017] NZHC 2769

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2016-409-814

[2017] NZHC 2769

BETWEEN

COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

NEW ORLEANS HOTEL (2011) LIMITED

Defendant

Hearing:	7 November 2017
Appearances:	P Saunders and G McGillivray for the Plaintiff R Hearn for the Defendant
Judgment:	10 November 2017

JUDGMENT OF MANDER J

[1]                  The Commissioner of Inland Revenue (the Commissioner) has filed liquidation proceedings against New Orleans Hotel (2011) Limited (New Orleans). The Commissioner seeks to advertise the proceeding to enable her to obtain an order liquidating the company.1

[2]                  New Orleans applied to restrain advertising and to temporarily stay the proceeding in order to allow for the sale of the company’s business. In the alternative, New Orleans sought leave to file a statement of defence out of time. Associate Judge Osborne dismissed New Orleans’ applications.2 The defendant company now seeks to review that decision.3

1      High Court Rules 2016, r 31.9.

2      Commissioner of Inland Revenue v New Orleans Hotel (2011) Limited [2017] NZHC 2500.

3      Judicature Act 1908, s 26P; High Court Rules 2016, r 2.3.

COMMISSIONER OF INLAND REVENUE v NEW ORLEANS HOTEL (2011) LIMITED [2017] NZHC 2769

[10 November 2017]

Background

[3]                  In July 2016, the Commissioner served a statutory demand on New Orleans for unpaid tax in the sum of $140,257.44. It failed to pay. As a result, the Commissioner filed liquidation proceedings on 1 September 2016. New Orleans did not file a statement of defence. However, on 23 September, New Orleans agreed terms for the settlement of the outstanding tax.

[4]                  New Orleans agreed to pay its debt in full, together with any ongoing interest, by 22 December 2016. It would make payment of $1,500 per week and the Commissioner would receive a mortgage over a property at Amherst Terrace and three sections situated in Akaroa, owned by the company’s sole director, Mr Peter Whittaker, and a company associated with him. These properties were to be sold prior to Christmas 2016.

[5]                  The Commissioner agreed to suspend the advertising of the liquidation proceeding pending payment of the debt in full by 22 December of that year. After New Orleans provided the Commissioner with a signed Mortgage and Financial Relief Agreement, the proceedings were adjourned to 26 January the following year.

[6]                  New Orleans did not pay its debt to the Commissioner by 22 December. Thereafter and throughout the first half of 2017 the proceedings were the subject of a number of adjournments to accommodate delays associated with the sale of the properties.4   Settlement  of the sale of the Amherst property finally took  place  on    2 June. The Commissioner was paid $56,000 on 8 June.

[7]                  When the proceeding was called again on 15 June, New Orleans sought a further adjournment, without opposition, to 21 September on the understanding the Commissioner would receive before the next hearing a $50,000 lump sum payment, a further $10,000 from a GST refund personally owed to Mr Whittaker, $50,000 arising from a GST refund from a property purchased in Rapaki and weekly payments of

$2,500 commencing 1 July 2017. The adjournment was granted on that basis.

4      There were adjournments on 9 March, 6 April, 4 May and 15 June 2017.

[8]                  On 26 June, $50,000 was paid and credited to the company’s GST arrears. However, none of the $2,500 weekly payments due to commence on 1 July were made, nor was  the  personal  GST  refund  credited  to  New  Orleans’  tax  account.  By  19 September, the defendant company’s outstanding debt to the Commissioner had increased to $185,288.67. Against that background, when the proceedings were called again on 21 September, the Commissioner sought an adjournment for one month to allow for the proceeding to be advertised. New Orleans’ response was to file the interlocutory applications that were the subject of Associate Judge Osborne’s decision.

[9]                  As at the date of the hearing of the review application, New Orleans’ tax debt stands in the sum of $209,638.62, of which $157,863.68 comprises outstanding GST and $51,160.83 PAYE. The growing tax debt represents the continuing failure by New Orleans to meet its ongoing tax liabilities. The existence of the tax debt has never been disputed by the company.

New Orleans’ business

[10]              The defendant company operates the New Orleans Hotel in Arrowtown which is a combined pub and restaurant with attached boutique accommodation. Its cash flow is said to fluctuate with the seasons, being particularly busy December through March during the summer and in the peak winter season during July and August. New Orleans leases it premises. The landlord has a right of re-entry which, as submitted on behalf of the company, is arguably triggered in the event of liquidation proceedings. Mr Whittaker has deposed of his belief the landlord would cancel the lease in the event of the proceedings being advertised. The business employs some 25 staff.

[11]              At the time New Orleans’ applications were heard by Associate Judge Osborne, Mr Whittaker was in the process of exploring the sale of New Orleans’ business, and had asked two brokers to present offers. By the end of September 2017, Mr Whittaker expected offers from two interested parties “within the next fortnight” and deposed that should there be any further buyers introduced they were not likely to make offers before early November. At that stage, he expected the sale of the business to fetch “at an absolute minimum” $350,000. He had rejected an offer earlier in 2017 for that sum.

[12]              Since Associate Judge Osborne’s decision there have been further developments regarding the sale of the business which New Orleans relies upon in support of its review application. It is contended on behalf of New Orleans that the business’s value is in its good will, and that the continuation of the lease is essential to the operation of the business. The company maintains that cancellation of the lease would destroy value in the business. Further, that to advertise the proceeding would have a prejudicial effect on the realisation of the full value of the business and have a detrimental impact on the prospects of recovery for all creditors.

The Associate Judge’s decision

[13]              Associate Judge Osborne observed that the predominant feature of the setting against which New Orleans made its application was that the company had been unable to pay its debts since mid-2016, and that its tax liability had continued to increase despite some payments having been made and adjournments obtained in response to assurances of imminent settlement. The Associate Judge considered the Commissioner’s lack of confidence in the company’s ability to clear its debt through the sale of the business before Christmas 2017 was unsurprising.

[14]              It was not disputed that New Orleans was indebted to the Commissioner for more than $188,000 (as at the time of the hearing before the Associate Judge). Associate Judge Osborne noted that represented a figure some 35 per cent greater than when the Commissioner had served her statutory demand in July 2016. He accepted the company must be presumed to be unable to pay its debts as a result of failing to meet the statutory demand, and he rejected Mr Whittaker’s analysis that New Orleans was solvent on a balance sheet basis.5

[15]              The defendant company’s counsel, Mr Hearn, sought to rely on the proposition that a temporary lack of liquidity may not amount to insolvency if the debtor is able to realise assets or borrow funds within a relatively short time to meet its liabilities as they fall due.6 However, Associate Judge Osborne rejected that such a principle had application to New Orleans’ situation. In coming to that conclusion it was noted the

5      Companies Act 1993, s 287(a).

6      Yan v Mainzeal Property & Construction Ltd (in rec and liq) [2014] NZCA 190.

company’s lack of liquidity had remained unaltered for over a year since the proceeding had issued, and that the subsequent failure to repay the debt over that period constituted incontrovertible evidence of New Orleans’ insolvency.

[16]              Associate Judge Osborne applied the recognised approach to an application to stay liquidation proceedings; namely, that in the absence of a genuine dispute about the debt, the governing consideration is whether the proceeding savours of unfair or undue pressure, and that the jurisdiction exists to prevent abuse of process.7 A submission that where a temporary stay is being sought the lesser test for an interim injunction should be applied was rejected. The Associate Judge did not consider the Commissioner’s approach to the proceeding was unfair, nor that it involved the exertion of undue pressure capable of being proximate to an abuse of process. New Orleans had throughout the proceeding owed the (increasing) tax debt. It had been insolvent at the outset of the proceeding and, a year later, remained insolvent.

[17]              The application for leave to file a statement of defence was declined. New Orleans had no arguable basis available to it by which it could dispute its liability for the outstanding tax debt and the Associate Judge found that, in any event, leave should not be granted where the applicant was insolvent.8

Approach to the review application

[18]              The approach to the review of an Associate Judge’s decision, which proceeds by way of rehearing, is not in dispute.9 New Orleans has the burden of showing the Judge was wrong.10 Where the decision under review involves the exercise of a discretion, as is acknowledged by New Orleans was the situation in the present case, the applicant must show the Associate Judge erred in law, was plainly wrong, took into account irrelevant considerations, or failed to take into account relevant

7      Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA).

8      Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC); Fresh Cut Flower Wholesalers Ltd v The Living and Giving Gift Company Ltd (2001) 16 PRNZ 173 (HC).

9      High Court Rules, r 2.3(5).

10 Ophthalmological Society of New Zealand Inc v Commerce Commission  [2003] 2 NZLR 145 (CA).

considerations.11     However, the review Court may also justifiably reconsider the matter afresh if there have been significant developments since the decision.12

[19]              In support of its applications New Orleans sought leave to file further affidavit evidence. The Commissioner did not object to the admission of that evidence other than to the extent it included hearsay statements. The additional affidavits were admitted on that basis.

Grounds for review

[20]              New Orleans brings its review application on dual grounds. Firstly, that the Associate Judge erred in the exercise of his discretion. Secondly, that since his decision there have been material developments relating to the sale of the business which require its application to restrain publication and stay the proceeding to be examined afresh.

Erroneous exercise of discretion

[21]              Mr Hearn submitted the Associate Judge erroneously exercised his discretion because he either made errors of law, or he failed to take into account relevant considerations, or considered irrelevant factors. Mr Hearn acknowledged the majority of the grounds relied upon could not individually have had a material effect on the decision, but that when taken cumulatively they amounted to reviewable error. It is convenient to approach the alleged errors under the following headings:

(a)Errors of fact and assessment.

(b)The treatment of New Orleans’ debt to a related entity.

(c)The inclusion of New Orleans’ past failures when assessing its current insolvency.

(d)The approach taken to mortgages relating to the Akaroa properties.

11     McCullagh v Robt Jones Holdings Ltd [2016] NZHC 263.

12     Wilson v Neva Holdings Ltd [1994] 1 NZLR 481 (HC); Robinson v Whangarei Heads Enterprises Ltd [2013] NZHC 2247.

(e)The failure to take into account securities offered by related companies.

(f)The test for granting a temporary stay.

(g)The position of other creditors.

(a)Errors of fact and assessment

[22]              In summarising New Orleans’ arrangements to settle the debt, Associate Judge Osborne recorded two payments totalling $106,000 which had been made by New Orleans. It is accepted the evidence established that three payments totalling approximately $156,000 had been paid and that an additional $50,000 payment was omitted. However, the Court correctly identified the total debt owed by the company. I do not consider the omission of the third payment had any material bearing on the Associate Judge’s assessment of the defendant’s attempts to pay the debt. The oversight does not detract from the indisputable position that whatever attempts have been made to reduce its indebtedness, New Orleans’ tax liability has grown since the statutory demand issued in July 2016.

[23]              New Orleans also disputed the Associate Judge’s conclusion that the interest and penalties which would accrue over the period of any temporary stay would significantly add to the debt. Mr Hearn submitted that, on his calculation, under the Tax Administration Act 1994 interest and late payment penalties would amount to approximately $4,000. He contended, in the context of the total debt and current arrangements to realise the company’s assets, this represented a minor additional cost.

[24]              The point raised on behalf of the company is irrelevant. The Associate Judge’s reference to interest and penalties sought to highlight the ever-increasing nature of the tax debt. Debate as to whether these could be described as significant is overtaken by the fact that in the month since Associate Judge Osborne’s decision New Orleans’ tax liability has increased by a further 11 per cent. A debt which stood at $188,000 on 9 October (when the matter was heard by Associate Judge Osborne) now stands at

$209,600 as at 6 November.

(b)The treatment of New Orleans’ debt to a related entity

[25]              New Orleans owes a debt of $772,530.54 to a related entity, 3H Limited (3H). Mr Whittaker deposed that he does not intend to take any funds from the company to pay 3H until all the other company’s creditors, including the Commissioner, are paid in full. 3H has not yet formally waived its debt, but it was submitted that Mr Whittaker was prepared to formalise such a waiver and render the debt, which is the subject of a general security agreement, subordinate (to the extent necessary) to allow the Commissioner and other creditors to be paid in full.

[26]              Mr Hearn submitted that, based on the willingness for the 3H debt to be formally subordinated to all other creditors, it was no longer in substance owed by New Orleans, and this would allow the Court to proceed on the basis that the defendant company is solvent, at least on a balance sheet basis, by ignoring the debt recorded to 3H. Mr Hearn submitted that Associate Judge Osborne’s statement that the 3H debt remains owing by New Orleans, and that if put in to liquidation 3H would share pro- rata in any distribution to unsecured creditors, was in error. I do not accept New Orleans’ contention which I consider is based on a false premise.

[27]              The approach sought to be taken by Mr Whittaker to the 3H debt is effectively an attempt to wipe the debt from New Orleans’ balance sheet in order to achieve a net equity position and claim the company to be solvent. However, the defendant company is not entitled to simply ignore debts to related parties for the purpose of assessing whether or not it is solvent. New Orleans and 3H are separate legal entities, and, whatever arrangement Mr Whittaker seeks to put in place as between the companies, it does not alter the fact that New Orleans’ debt remains owing to 3H. It is immaterial whether 3H is a secured or unsecured creditor, as is its priority against other creditors. The debt owed by New Orleans to 3H remains extant and is required to be included in the assessment of its solvency.

(c)The inclusion of New Orleans’ past failures in assessing its state of insolvency

[28]              In concluding that New Orleans had no substantial argument of solvency to take to trial, Associate Judge Osborne observed that New Orleans’ lack of liquidity had been unaltered for more than a year since the proceeding was issued. He held that

these failures constituted incontrovertible evidence of the defendant company’s inability to pay its debts, and of its insolvency.

[29]              Mr Hearn submitted the Court erred in taking into account the defendant’s past failures when making its assessment as to whether New Orleans could pay its debt within a reasonable time. He submitted the past failures by the company to meet its obligations were not relevant, and that the test for insolvency is to be judged on a prospective basis, as at a particular point in time, namely the date of the hearing.

[30]              The Associate Judge’s reference to New Orleans’ past lack of liquidity must be read in the context of New Orleans’ preceding submission which was based on the proposition that “a temporary lack of liquidity may not equate to insolvency if the debtor is able to realise assets or borrow funds within a relatively short timeframe in order to meet its liabilities as they fall due”.13 Associate Judge Osborne remarked that such an argument may have been available to New Orleans in September 2016 when Mr Whittaker proposed to repay the debt by Christmas 2016 by realising related parties’ assets. Such a proposal at that time may have been capable of falling within the “relatively short timeframe” recognised by the Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in rec and liq). However, over a year had by then passed since the commencement of the proceeding.

[31]              New Orleans’ inability to meet its liabilities as they fall due represents a demonstrable long-term failure, and its solvency is required to be assessed through that lens. I do not consider the Associate Judge erred in approaching his assessment in that way. Indeed, he was obliged to do so. As submitted on behalf of the Commissioner, the failure of the defendant company to pay the statutory demand by 18 August 2016, its failure to pay its tax debts as they fall due since the liquidation was commenced, and the steadily rising level of tax over the course of the year are all factors which clearly evidenced New Orleans’ insolvency and its deteriorating position.

13     Yan v Mainzeal Property and Construction Ltd (in rec and in liq), above n 6, at [59].

(d)The approach taken to mortgages relating to the Akaroa properties

[32]              Mr Hearn submitted the Court erred in holding that the Commissioner could not enforce mortgages over the Akaroa properties, which he argued must have been material to the Court’s consideration of potential prejudice to the Commissioner should a temporary stay be granted.

[33]              The Commissioner accepts the Associate Judge’s reference to her not accepting mortgages over the Akaroa properties as securities in late 2016 was erroneous, and that, while no mortgages were executed, their availability was part of the package the Commissioner accepted for the purpose of agreeing to adjournments at an earlier stage in the proceeding.

[34]              Evidence was tendered in explanation of why, shortly prior to the hearing before the Associate Judge, the value of the security was significantly reduced. The revised value of the properties was the subject of some limited adverse comment by the Associate Judge, who referred to the inadequate security as perhaps having resulted from a combination of Mr Whittaker’s over-optimism and a lack of appropriate qualified advice as to the value of the assets. The Commissioner did not contest evidence that the value of the proposed security was adversely affected by a recently discovered easement which neither Mr Whittaker, nor registered valuers who had provided earlier valuations, had been aware.

[35]              Again, I do not consider this aspect of the challenge to the Associate Judge’s decision is of material consequence. The inadequacy of the Akaroa properties as security remains unchanged. I accept the Commissioner’s submission that the Associate Judge’s concern regarding the combination of securities being offered by the defendant company was not over whether they had been accepted by the Commissioner, but whether they were capable of securing the full amount of the debt. Similarly, whatever the root cause of the overvaluation of the properties, the revised valuation contradicted numerous assurances provided by New Orleans to the Commissioner that the tax debt was fully secured. Successive adjournments of the proceeding were obtained in reliance of that representation.14

14     Adjournments were granted on 21 February, 9 March, 10 March, 16 March, 3 May and 19

(e)The failure to take into account securities offered by related companies

[36]              Mr Hearn submitted the Associate Judge erred by failing to take into account securities that were offered by way of guarantees from related companies (The Rockpool and Hotel Ashburton). He submitted these securities offered the Commissioner some guarantee of part payment which was relevant to what he stressed was the temporary, as opposed to permanent, nature of the stay being sought to allow the sale of New Orleans’ business and the payment of the debt.

[37]              Both these related companies were assessed by the Commissioner as being non-compliant, with each owing outstanding amounts of tax. The Rockpool has unpaid GST and PAYE as at 4 October 2017 of $217,489, and Hotel Ashburton, similarly, unpaid GST and PAYE in the sum of $152,827. New Orleans sought to rely on forecast cash flows for those two companies for the October 2017 to March 2018 period, which Mr Whittaker deposed was based on last year’s trading figures. I do not consider those projections assist New Orleans. They only beg the question, why, if those companies are so profitable, are hundreds of thousands of dollars owed in unpaid GST and PAYE? That question was not addressed in Mr Whittaker’s evidence, nor by Mr Hearn before me.

[38]              Having regard to the size of both companies’ tax indebtedness, it could not realistically be suggested that any omission to refer to proposed guarantees from these two related companies was material either to Associate Judge Osborne’s deference to the Commissioner’s assessment of the unsuitability of the proposed package of securities, or his conclusion that the bundle of securities being offered did not realistically, on any commercial analysis, provide reasonable assurance to the Commissioner.

(f)The test for granting a temporary stay

[39]              Mr Hearn submitted the Court erred in applying the same test for granting a temporary stay as for a permanent stay. He submitted that, because of the temporary

September 2017. While the Associate Judge was in error in his belief the Commissioner had not accepted the Akaroa mortgages were available to her and had no ability to enforce the security, it was formally acknowledged on the Commissioner’s behalf that if the review application is declined she will not take steps to enforce the security.

nature of the orders being sought, a lower threshold should be required. He acknowledged the high test required to be met to obtain a permanent stay, but submitted the policy reasons behind that requirement did not apply where the stay being sought was merely temporary.

[40]              Associate Judge Osborne rejected the proposition that a different standard applied to an application under r 31.11 of the High Court Rules where a defendant elected to seek only a “temporary” stay. He noted that no authority was cited to support the suggestion of different standards.

[41]              Mr Hearn sought to rely upon a decision of this Court, Camanda Boy Pty Ltd v Bierton Downs Ostriches, to illustrate the Court’s ability to grant temporary restraint and stay orders.15 However, in that case the temporary orders granted by the Court were made “in the interests of all parties concerned” and without opposition by the plaintiff for the purpose of allowing the defendant to obtain instructions.16 That is a situation far removed from the present case. The Commissioner opposes New Orleans’ application for a temporary stay and clearly does not view it as being in the Revenue’s interest for a temporary stay to be granted.

[42]              I do not consider the categorisation of the stay as “temporary” supports any lesser test being applied to prevent an applicant progressing its liquidation proceeding. This is apparent from a review of the relevant legal principles concerning the Court’s jurisdiction to stay liquidation proceedings, which were summarised by Wallace J in Nemesis Holding Ltd v North Harbour Industrial Holdings Ltd.17 In that case, Wallace J provided what has been described as a “classic summary of the principles”:18

(a)The Court has an inherent jurisdiction to stay proceedings where the debt upon which the proceeding is founded is the subject of genuine dispute. In such circumstances the plaintiff cannot show itself as having the status of a creditor or there having been a failure by the company to pay.

15     Camanda Boy Pty Ltd v Bierton Downs Ostriches HC Rotorua M349/97, 21 May 1997.

16 At [12].

17     Nemesis Holding Ltd v North Harbour Industrial Holdings Ltd, above n 8, at 385.

18     McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR 31.11.02].

(b)The jurisdiction is an inherent one to prevent abuse of process although there is no inflexible rule.

(c)The governing consideration is whether the proceedings suggest unfairness or undue pressure.

Wallace J observed it is a serious matter to stay a winding up proceeding, and that the decision to do so is never to be made lightly.

[43]              Mr Hearn submitted the Court’s jurisdiction to impose a stay extended beyond the situation where there was a genuine dispute regarding the outstanding debt. I accept that is so. However, in discharging the onus upon it, an applicant is clearly required to demonstrate “something more” than simply where the balance of convenience may fall. In the absence of the debt being in genuine dispute, the effect of a stay is to prevent a creditor accessing a legitimate legal remedy. While a Court may make an order on whatever terms it thinks just (which could include the imposition of a stay for a limited period), the threshold for restraining a creditor requires the defendant company to demonstrate the Court’s process is being used unfairly, or to exert illegitimate pressure.

[44]              It is necessary to establish such an abuse in order to justify the Court’s intervention to prevent a creditor from accessing what would otherwise be its rightful and legitimate use of the Court’s process to obtain a remedy in the face of the undisputed default. If the threshold is not maintained an application for a temporary stay or the restraint of advertising risks becoming the equivalent of a contested adjournment. Such an approach jeopardises the rights of the litigant creditor being relegated to considerations of convenience. Furthermore, the equating of the test for a temporary stay pursuant to r 31.11 with that for an interim injunction ignores that to secure the latter, the applicant must demonstrate there is a serious question to be tried. Where neither the company’s insolvency, nor its outstanding debt, is seriously contestable New Orleans’ argument that a lesser threshold should apply to obtain a temporary stay does not ultimately advance its position.

(g)The position of other creditors

[45]              New Orleans contended the Court erred in holding the interests of other creditors was not an appropriate focus when assessing the stay application. Mr Hearn submitted that in the present case the position of other creditors will likely be affected by advertising the proceeding, and that their interests “plainly” require to be considered. He submitted the Court should take into account the best interests of those creditors notwithstanding their ignorance of the application.

[46]              Associate Judge Osborne’s response to that submission was that the interests of creditors can properly be addressed by the Court at the hearing of the Commissioner’s application after advertising. Such creditors will be free to appear either in support or opposition of the liquidation proceeding. The Associate Judge considered that advertising the proceeding would likely enhance the interests of other creditors by preserving “their right of engagement” in the proceeding should they so choose.

[47]              There is no evidence before me as to the position taken by other creditors, and it would be speculative to suggest the approach they may consider best secures or advances their interests. I do not consider such an uninformed consideration assists New Orleans’ argument. The objective of advertising is to provide notification to other creditors in order to provide them with the opportunity to make their own informed decisions in response to another creditor’s initiative. Preventing the proceeding from being advertised because the defendant company itself is of the view that such a course would not be in the interests of other creditors assumes a dubious prerogative on the part of the debtor.

Conclusion on challenge to discretion

[48]              I do not consider that either individually or collectively the grounds raised by New Orleans substantiates its contention that the Associate Judge erred in the exercise of his discretion.

Developments since the previous hearing

[49]              Since the hearing, New Orleans has entered into a conditional contract for the sale of its business for the sum of $400,000. A number of conditions, including those relating to the purchaser’s due diligence and the landlord’s consent to the assignment of the lease were due for confirmation on 6 November. At the purchaser’s request, these conditions have been extended to 13 November. Should the sale become unconditional, settlement will take place on 18 December.

[50]              The defendant company’s solicitor has deposed that, based on his discussions with the purchaser’s solicitor, he is not aware of any concern the purchasers have with the business or its sale. While the solicitor acknowledges confirmation of due diligence and the obtaining of liquor licence conditions are at the purchasers’ discretion, he anticipates the contract being confirmed.

[51]              Based on the recent progress to secure a contract for the sale and purchase of New Orleans’ business, Mr Hearn submitted I could re-examine New Orleans’ applications afresh. In support of such a course, Mr Hearn advised that it was proposed that an immediate payment of $65,000 together with guarantees provided by Mr Whittaker and related entities could be imposed as conditions to the grant of any stay. On the basis the sale of the business would generate $380,000 after payment of commission fees, and the subordination of the 3H debt, Mr Hearn, by reference to the August 2017 balance sheet, submitted that all creditors would be paid in full.

[52]              However, a difficulty for New Orleans is that since the drafting of the August balance sheet it has incurred further tax debts in the order of $25,000. Putting to one side the $770,000 debt to 3H, there remains a shortfall of $66,000 after deducting the prospective net proceeds of the sale of the business ($380,000) from the company’s current liability (including the tax debt as it then stood) of $446,609. With the approximate $25,000 in unpaid taxes, the shortfall amounts to $91,000. It follows that, on the company’s own figures, New Orleans remains insolvent. Even including the proposed $65,000 cash which Mr Whittaker has now paid into his solicitor’s trust account, there still remains a shortfall of $26,000.

[53]              As an aside, it was not explained to me why Mr Whittaker was not prepared to pay the $65,000 directly to the Commissioner in reduction of New Orleans’ tax debt which includes some $51,000 in unpaid PAYE deducted from employees’ salaries that was required to be held on trust by the company. Mr Whittaker advises that this money will be applied to New Orleans’ debts only in the event the defendant company is permitted time to sell its business.

[54]              Mr Hearn argued that the Commissioner’s decision to pursue the liquidation proceeding was unfair. He submitted that both parties had proceeded to date on an erroneous belief that New Orleans’ position was secured and that, once it became apparent this was not the case, the company had taken immediate steps to sell its business. He referred to potential detrimental consequences to New Orleans’ business in the event of advertising, including the possible cancellation of its lease and the frustration of the conditional sale. This was contrasted with the Commissioner’s position. Mr Hearn submitted there would be no prejudice to the Commissioner by allowing further time for New Orleans to complete the sale contract, and that while the present debt is only partly secured, there would be minimal exposure to further debt.

[55]              Finally, Mr Hearn emphasised that only a temporary stay was being sought and that, as an alternative course, only the advertising need be restrained while other steps relating to the proceeding could be advanced. He suggested that a fixture for a defended hearing could be obtained for the new year and timetabling directions made, with advertising to occur at a specified date prior to the hearing. However, he acknowledged that leave to file a statement of defence out of time would be required.

[56]              I do not consider the conditional sale of the business provides a sufficient basis to restrain advertising and stay the proceeding. Even approaching the matter afresh, the fundamental elements entitling the Commissioner to proceed with the liquidation proceeding remain. New Orleans has never been able to assert any genuine dispute about the existence of the tax debt. Despite arguments to the contrary, it is equally clear that throughout the proceeding the defendant company was insolvent and remains so. Its debt to the Commissioner has increased substantially throughout this period and its tax obligations are ongoing.

[57]              As matters presently stand, there is no impediment to the winding up of the defendant company.19 As previously observed, over the course of the previous year, and notwithstanding the Commissioner’s extant application, New Orleans’ debt position has steadily worsened. Even since Associate Judge Osborne’s decision last month there has been a further default. The GST for the period ending 30 September 2017 ($15,477.78) remains unpaid. Effectively, New Orleans is seeking an indulgence to further delay the proceeding because it has advanced the sale of its business. Justification for that approach is based on a submission that a balance of convenience test should be applied which would favour a temporary stay of proceeding, or, alternatively, a restraint of advertising until mid-January 2018.

[58]              For the reasons set out earlier in this judgment, I do not consider that represents a legitimate approach to the assessment of whether a stay should be granted, or publication of an advertisement restrained. Having regard to the history of the proceeding, I do not consider the Commissioner’s approach savours of unfairness or undue pressure from which the Court must protect its processes. In the absence of such a conclusion, any further forbearance is a matter for the Commissioner, and not the discretion of the Court.

[59]              I do not demur from Associate Judge Osborne’s observations that New Orleans has received the benefit of the Commissioner’s patience and leniency in an effort to resolve its tax liability for over a year, yet its indebtedness has not reduced. The Commissioner’s view is no doubt legitimately informed by the history of this matter and the repeated failures by the defendant company to abide by previous arrangements to meet its outstanding tax obligations. Notwithstanding the current progress to complete the sale of the company’s business, after applying the relevant principles to the exercise of the power to stay and/or restrain the advertising of the liquidation proceeding, I have concluded that neither injunction can justifiably be imposed on the Commissioner.

19     Commissioner of Inland Revenue v Property Ventures Ltd HC Christchurch CIV-2010-409-123, 27 July 2010 at [43].

Leave to file a statement of defence out of time

[60]              The High Court Rules provide that a person who fails to file a statement of defence is not allowed to appear at the hearing of the proceeding without special leave of the Court.20 In declining New Orleans’ application for special leave, Associate Judge Osborne applied Paterson J’s distillation of the applicable principles which he set out in Fresh Cut Flower Wholesalers Ltd v The Living and Giving Gift Company Ltd.21 Leave should not be granted unless the applicant can show on the papers an arguable basis upon which it is not liable for the amount claimed. Even should there be an arguable defence available, leave should not be granted if the applicant is insolvent. Because there was no dispute that New Orleans was liable for the tax debt and the defendant company had been insolvent for a lengthy period, the Court declined its application.

[61]              Mr Hearn sought to challenge the Associate Judge’s conclusion by arguing that his finding of insolvency on a balance sheet basis failed to take into account the representations made regarding the discounting or subordination of the 3H debt. It was further submitted that because Associate Judge Osborne had applied a “backward looking analysis” to the question of insolvency, he failed to appreciate that the assessment of a temporary lack of liquidity, of the type discussed in Yan v Mainzeal Property and Construction, was required to be considered by looking forward from the date of the hearing.22

[62]              I have already discussed the status of the 3H debt, at [25]-[27], and rejected New Orleans’ submission that this liability can be ignored for the purpose of determining the company’s insolvency. Similarly, I have held, at [28]-[31], that when assessing whether the company’s lack of liquidity can be considered temporary, its indebtedness over the prior period of the proceeding is not to be artificially ignored.

[63]              Even if Mr Hearn’s submission is accepted and the issue of New Orleans’ “temporary lack of liquidity” should be judged as at the date of hearing without regard to how long it has been insolvent to that point, should the sale agreement settle, the

20     High Court Rules, r 31.20.

21     Fresh Cut Flower Wholesalers Ltd v The Living and Giving Gift Company Ltd, above n 8, at [9].

22     Yan v Mainzeal Property and Construction, above n 6.

funds generated will still not meet the defendant company’s present liabilities, even after putting the 3H debt to one side. Furthermore, notwithstanding the expected increase in turnover and cash flow over the summer, New Orleans will have to meet its ongoing tax obligations which will include at least one further period of PAYE and GST over the proposed period of the stay.

[64]              In the absence of New Orleans demonstrating the Associate Judge erred in finding that it had no arguable basis to contend it is not liable for the outstanding tax, its challenge to his refusal to grant leave must fail. In any event, because of the company’s present insolvency, leave should not be granted.

Result

[65]              New Orleans’ application to review the Associate Judge’s refusal to restrain advertising and grant a temporary stay of the Commissioner’s proceeding is declined. The defendant company’s application to review the decision to decline special leave is also dismissed.

[66]The proceeding is adjourned for a further call on 16 November at 10.00 am.

Solicitors:

Inland Revenue Department, Christchurch Corcoran French, Christchurch