Commissioner of Inland Revenue v Official Assignee Ca216/99

[2000] NZCA 418

IN THE COURT OF APPEAL OF NEW ZEALAND  CA 216/99

BETWEENTHE COMMISSIONER OF INLAND REVENUE

Appellant

AND                THE OFFICIAL ASSIGNEE

Respondent

Hearing:  20 March 2000

Coram:Thomas J Doogue J Salmon J

Appearances:             A C Beck and S Weston for Appellant

D I Jones for Respondent

Judgment:                 23 March 2000

JUDGMENT OF THE COURT DELIVERED BY THOMAS J

The questions in issue

[1]The primary question in issue in this appeal is whether goods and services tax which has not been paid by a partnership registered as a “registered person” for the purposes of the Goods and Services Tax Act 1985 is recoverable as a priority debt due to the Crown pursuant to s 42(2)(a) of that Act in the application of the assets of the bankrupt members of that partnership.

[2]A further issue is whether the Commissioner is entitled to priority in respect of the GST in the liquidation of the joint estate of the members of the partnership pursuant to s 17B of the Judicature Act 1908.

[3]Each issue will be dealt with in turn.

The facts

[4]In December 1998, Mr and Mrs Mehrtens were both adjudged bankrupt. They were the only partners in a partnership registered with the Commissioner of Inland Revenue for the purposes of accounting for GST pursuant to the above Act.

[5]When Mr and Mrs Mehrtens were adjudged bankrupt their partnership owed GST  of  $9,887.65,  together  with  penalties  of  $3,979.37.    On  or  about  8 January 1999 the Commissioner filed two proofs of debt with the Official Assignee in relation to the partners’ debts and penalties. The proofs of debt claimed priority for the GST debts but not the penalties.

[6]By separate notices dated 29 March 1999, the Official Assignee advised the Commissioner that it rejected the claim for priority of the GST debts. Accordingly, the Official Assignee advised that he would defer payment of the Commissioner’s claim until all personal creditors were paid in full pursuant to s 106 of the Insolvency Act 1967. In fact, the Official Assignee did not receive any personal claims on the estates of Mr and Mrs Mehrtens (aside from claims for accident compensation levies, penalties and income tax). Mr and Mrs Mehrtens have, however, approximately 60 unsecured creditors through the partnership of the estate who are collectively owed a sum in the region of $220,000. Approximately $20,000 only is available for distribution to creditors.

A.     Section 42

The statutory provisions

[7]Section 42(2) is the critical section. It reads:

42. Recovery of tax - (1) Tax payable by any person shall be recoverable as a debt due to the Crown.

(2)   Where a person has not paid the amount of the tax payable or any part thereof in the manner required by Part III of this Act, the amount of the tax for the time being unpaid to the Commissioner shall, in the application of the assets of the person, rank as follows:

(a)Where the person is an individual, upon that person's bankruptcy or upon that person making an assignment for the benefit of

that person's creditors, the amount of the tax payable shall rank without limitation in amount, in order of priority immediately after preferential claims for wages or other sums payable to or on account of any servant or worker or apprentice or articled clerk, and in priority to all other claims:

(b)Where the person is a company, upon the liquidation of the company, the amount of the tax payable shall have the ranking provided for in the Seventh Schedule to the Companies Act 1993 (whether or not the company has been incorporated or registered under that Act):

(ba) Where the person is a company, upon the appointment of a receiver on behalf of the holder of any debenture given by the company secured by a charge over any property of the company or upon possession being taken on behalf of the debenture holder of the property, the amount of the tax payable shall have the ranking provided for in the Seventh Schedule to the Companies Act 1993 (whether or not the company has been incorporated or registered under that Act), as if the receiver or person taking possession were a liquidator:

(c)Where a person is a body (as defined in section 57 (1) of this Act), upon the appointment of a receiver on behalf of any person pursuant to any order by the Court, the amount of any tax payable shall rank immediately after any preferential claims for any wages or other sums payable to or on account of any servant or worker or apprentice or articled clerk, and in priority over any claims of holders of debentures under any floating charge created by the person and be paid accordingly out of any property comprised in or subject to that charge.

(3)    This section shall apply notwithstanding anything in any other Act.

(4)   For the purposes of this section, a floating charge shall include a charge that conferred a floating security at the time of its creation but has since become a fixed or specific charge.

[8]Subsection (2) of s 42 refers to tax payable “in the manner required by Part III of this Act”. Part III contains s 23. Subsection (1) of that section reads as follows:

23. Payment of tax - (1) Every registered person, for each taxable period, shall, not later than the last day allowed under this Act for furnishing a return for that taxable period, pay to the Commissioner the tax payable for that period as calculated pursuant to section 20 of this Act.

[9]Section 57, which relates to unincorporated bodies, is also relevant.     The relevant subsections read as follows:

57.  Unincorporated bodies - (1) For the purposes of this section- “Body” means an unincorporated body of persons; and includes-

(a)  A partnership:

…

“Member” means a partner, a joint venturer, a trustee, or a member of any body:

“Partnership” and “partner” have the same meanings as in the Partnership Act 1908.

(2)    Where a body that carries on any taxable activity is registered pursuant to this Act,-

(a) The members of that body shall not themselves be registered or liable to be registered under this Act in relation to the carrying on of that taxable activity; and

…

(d) That registration shall be in the name of the body, or where that body is the trustees of a trust, in the name of the trust; and

…

(3)   Notwithstanding anything in this section, every member is liable jointly and severally with any other members for all tax payable by the body while that member remains a member of that body, and, where that member is an individual, after that member's death, that member's estate shall be severally liable in due course of administration for such tax payable as far as it remains unpaid:

…

(5) Subject to subsection (6) of this section, where anything is required to be done pursuant to this Act by or on behalf of any body, it shall be the joint and several liability of all the members to do any such thing:

Provided that any such thing done by one member shall be sufficient compliance with any such requirement.

…

The judgment of the High Court

[10]In the High Court both parties acknowledged that as no receiver had been appointed the Commissioner could not obtain priority under s 42(2)(c). But  as the partners had each been declared bankrupt, the Commissioner argued that he was entitled to priority under s 42(2)(a). The Official Assignee responded by claiming that the separate paragraphs in s 42(2) are mutually exclusive. As partnerships come within the definition of “body” contained in s 57(1) of the Act, s 42(2)(c) is therefore the correct paragraph to apply to a

partnership. If priority is not available under that paragraph, it was argued, the Commissioner could not resort to s 42(2)(a).

[11]In an oral judgment Chisholm J agreed that the paragraphs were mutually exclusive. He considered the Official Assignee’s argument that, although s 42(2) in general, and s 42(2)(a) in particular, provide that GST is recoverable from “persons”, that word should be construed to mean “registered persons”. As only partnerships, and not individual partners, can be registered under the Act pursuant to s 57(2)(a), s 42(2)(a) could not apply. The learned Judge attributed the seeming anomaly that the Commissioner could claim priority where a partnership was put into receivership but not where the partners had been made bankrupt to a drafting oversight.

Section 42(2)

[12]We accept that Parliament intended to create categories where, if GST was not paid, the Commissioner would obtain priority over other claims. In our view, however, it is not necessary, at least initially, to decide whether the categories are intended to be mutually exclusive. The preferable approach is to determine whether, on the correct interpretation of s 42(2)(a), the Commissioner is entitled to priority under that paragraph.

[13]Section 42(2) applies where a person has not paid the GST payable “in the manner required by Part III of the Act”. It becomes essential, therefore, to determine whether payment of the GST in issue is required pursuant to that Part.

[14]As it falls within Part III, s 23 is the operative provision. As evident from its terms as set out above, subs (1) of that section requires every registered person to furnish a return for the taxable period in question and to pay to the Commissioner the GST payable for that period as calculated pursuant to s 20 of the Act. Section 23 would not in itself apply to Mr and Mrs Mehrtens as they were not registered persons. But that is not the end of the matter.

[15]Section 57 must be taken into account, even though it is not in Part III. Pursuant to subs (2)(a) of that section it is the partnership and not the members of the partnership which are to be registered under the Act. Subsection (3) then provides that every member is liable jointly and severally with any other members for all tax payable by the partnership. Subsection

(5)   stipulates that where anything is required to be done pursuant to the Act by or on behalf of any partnership it is to be the joint and several liability of all the members to do that thing.

[16]We are of the view that as a result of subs (3) and (5), particularly the latter subsection, the members of the partnership become severally liable for payment of the GST payable under s 23. Under subs (3) both Mr and Mrs Mehrtens are severally liable for the partnership’s indebtedness under s 23. Under subs (5) they are severally responsible for all that is required to be done by the partnership pursuant to the Act which, of course, includes the payment of GST under s 23.

[17]We therefore consider that there is a clear link between ss 23 and 57 so that it can be properly held that Mr and Mrs Mehrtens had not paid the tax payable “in the manner required by Part III of the Act”.

[18]For this reason we respectfully disagree with the learned Judge in the Court below that s 42(2)(a) refers only to “registered persons”.

[19]Nor is it now necessary to hold that the paragraphs in subs (2) are intended to be mutually exclusive. Paragraph (a) applies in the application of the assets  of the bankrupt members of the partnership for the reasons given above. If a receiver had been appointed to the partnership, para (c) would have applied to the application of the assets of the partnership. Of course, no double  recovery of the GST would be permitted.

[20]We acknowledge the force of Mr Jones’ submissions to the effect that the Official Assignee is concerned, not with the question of Mr and Mrs Mehrtens’ liability for the payment of GST, for that is certain, but with the

question whether the Commissioner obtains priority under s 42. Once it has been decided, however, that the GST is payable by Mr and Mrs Mehrtens in the manner required by Part III as a result of the combined effect of ss 23 and 57 of the Act, this argument loses its force.

[21]The interpretation of s 42 which we have adopted accords with the purpose of the section and avoids a patent anomaly in the legislation. The purpose of the statutory provision is clearly to accord the Commissioner priority in the payment of GST from the assets of a person, body or corporation where that person, body or corporation has become bankrupt, gone into liquidation, or had a receiver appointed, as the case may be. It would be a serious anomaly  if the Commissioner were to obtain priority in recovering GST where a receiver had been appointed to a partnership but not where a receiver had not been so appointed, especially as the members of the partnership are jointly and severally liable for that payment and for making that payment by or on behalf of the partnership. In this respect it is to be borne in mind that the legislature has provided for the partnership only to be registered under the Act as a matter of commercial expediency. It would obviously be inconvenient for each of the individual members of a partnership, some of which have many members, to be “registered persons”.

[22]Furthermore, this approach falls squarely within the principles now accepted for the interpretation of tax statutes. The rules which are applicable are no different from those applicable to any other statute. See Inland Revenue Commissioners v McGuckian [1997] 3 All ER 817. Lord Steyn, delivering the main judgment, confirmed (at 824) that the modern purposive approach to statutory construction applies to tax legislation no less than other legislation. The literal interpretation of tax statutes has given way to the purposive approach which requires the Court to consider the context and scheme of the Act as a whole and to have regard to the purpose of the legislative provision. See also WT Ramsay Ltd v IR Commrs [1982] AC 300, per Lord Wilberforce at 323. See, too, Hotdip Galvanisers (Christchurch) Ltd v Commissioner of Inland Revenue (1999) 19 NZTC 15,337, at 15,341. Nor does s 5(1) of the new Interpretation Act 1999, which requires the meaning of an enactment to

be ascertained from its text and in the light of its purpose, exempt tax statutes.

[23]It follows from what we have said that we do not accept the contrary view expressed in para 513 of the title on “Insolvency” in Laws of New Zealand.

B.     Section 17B

[24]Mr Beck also argued that the Commissioner was entitled to priority under     s 17B of the Judicature Act 1908 which provides that Part XVI of the Companies Act 1993 applies to the “liquidation of an association” in a modified manner. Part XVI includes s 312 which requires a liquidator to distribute the assets of a company in accordance with the Seventh Schedule  to the Act. Clause 5 of that Schedule would give the Commissioner preference in respect of tax owing by the partnership.

[25]We agree with Mr Jones that, while “association” is defined under s 17A to include a partnership, s 17B only applies where the association has been liquidated. As the partners in this case were each adjudged bankrupt, s 17B does not apply.

[26]Mr Beck contended that the partnership is “effectively” in liquidation as a result of the bankruptcy of the two partners. But this argument, we consider confuses liquidation with dissolution. For s 17B to apply a liquidator would need to be appointed. That appointment has not been made.

Our decision

[27]For the reasons we have given in relation to s 42 of the Goods and Services Tax Act, the appeal is allowed. As both the Commissioner and the Official Assignee regarded the matter as a test case no costs were sought and no award is made.

Solicitors

Crown Law Office, Wellington for Appellant

NZ Insolvency & Trustee Service, Christchurch for Respondent