Commissioner of Inland Revenue v Reeve

[2020] NZHC 1989

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE

CIV-2019-470-000123

[2020] NZHC 1989

UNDER

of the Insolvency Act 2006

IN THE MATTER OF

the bankruptcy of JUDITH MAREE REEVE

BETWEEN

COMMISSIONER OF INLAND REVENUE

Judgment Creditor

AND

JUDITH MAREE REEVE

Judgment Debtor

Hearing:	5 August 2020
Appearances:	C D Walmsley for Judgment Creditor Judgment Debtor in Person
Judgment:	5 August 2020

ORAL JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

COMMISSIONER OF INLAND REVENUE v REEVE [2020] NZHC 1989 [5 August 2020]

Introduction

[1]    These are adjudication proceedings brought by the Commissioner of Inland Revenue. They are based on a failure by the judgment debtor, Ms Reeve, to comply with a Bankruptcy Notice. That notice was issued after judgment was obtained against Ms Reeve in the District Court, in her capacity as a trustee of the Phoenix Trust (the Trust). Ms Reeve, the Commissioner says, is personally liable for the judgment debt which, as at July 2020, amounted to $557,750.92.

Background facts

[2]    Between 1 April 2002 and 31 March 2004, Ms Reeve, the judgment debtor, was a trustee in the Trust.

[3]    The Commissioner assessed the judgment debtor in relation to income tax for the tax years ending 31 March 2002, 2003 and 2004, and imposed a shortfall penalty for gross carelessness on the judgment debtor (the assessments).

[4]    As the assessments were not paid, the judgment debtor was additionally liable for use of money interest and late payment penalties.

[5]    A claim was subsequently filed by the Commissioner in the District Court at Tauranga in relation to the unpaid amount.

[6]    On 8 October 2015, judgment was entered in favour of the Commissioner, and against the judgment debtor.

[7]    On 5 December 2019, the Commissioner served a Bankruptcy Notice  on   Ms Reeve based on the judgment awarded in her favour in October 2015, and because Ms Reeve has failed to comply with the Bankruptcy Notice, the Commissioner has now brought these adjudication proceedings.

[8]    In June 2020, and by consent, I made an order setting aside an earlier order for adjudication, which was made in the absence of Ms Reeve during the COVID-19 lockdown, on 11 May 2020.

[9]    So, the application today is essentially a re-hearing of the Commissioner’s application for adjudication.

Relevant legal principles

[10]Section 13 of the Insolvency Act 2006 (2006 Act) provides:

When creditor may apply for debtor’s adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if –

(a)  the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b)                   the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and

(c)the debt is a certain amount; and

(d)                   the debt is payable either immediately or at a date in the future that is certain.

[11]   Under s 16(1) of the 2006 Act, a debtor must not be adjudicated bankrupt on a creditor’s application, unless the debtor has committed an act of bankruptcy within a period of three months before the creditor files the application.

[12]   Under s 17(1) of the 2006 Act, a debtor commits an act of bankruptcy if he or she has been served with a bankruptcy notice, and has not within the time specified complied with the requirements of the notice, or satisfied the Court that he or she has a cross-claim against the creditor. It is that section that the Commissioner relies upon in the present application.

[13]   Section 36 of the 2006 Act provides that the Court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in s 13.

[14]   Under s 37 of the 2006 Act, the Court has a discretion to refuse to adjudicate the debtor bankrupt if it is just and equitable to do so.

Analysis and decision

[15]   I now turn to address the issue of whether the Commissioner has established the requirements of s 13 of the 2006 Act.

[16]   I am satisfied the Commissioner has established the threshold. She has established to my satisfaction that, as at 13 July 2020, the judgment debtor owes the Commissioner $557,750.92, and I accept the Commissioner’s submission that the judgment debtor is personally liable for those amounts, as she was a trustee of the Trust.

[17]   I am also satisfied that the judgment debtor committed an act of bankruptcy on 20 December 2019 by failing to comply with the Bankruptcy Notice. It is also clear that the debt is for a certain amount, and that the debt is payable immediately.

[18]   As Mr Walmsley submits, having established the requirements under s 13, the critical issue – and this is essentially Ms Reeve’s defence here – is whether or not, as a matter of discretion, I should decline to make an order for adjudication. There is, in the circumstances, an obligation, an onus of some sort, on the judgment debtor, to make out a case as to why I should not make an order for adjudication.

[19]   The judgment debtor has filed a number of documents in opposition to the application for adjudication. This includes the following:

(a)A “Memorandum and Requiring Definition Rules and Grammar Styles Being Used” dated 22 June 2020;

(b)An affidavit of Ms Reeve dated 17 June 2020;

(c)A further affidavit of Ms Reeve dated 5 June 2020; and

(d)A “Memorandum of Evidence” dated 28 July 2020.

[20]   Ms Reeve has made a wide-ranging challenge to the actions of the Commissioner and this includes some very serious allegations. It is alleged, in

substance, that the Commissioner has made an assessment without due diligence.  Ms Reeve has also claimed that the Commissioner has committed theft, and that she essentially (Ms Reeve says) has created a figure out of thin air then added penalties and interest and all for the sole purpose – it is claimed – of generating wealth from nothing. Ms Reeve has also referred to a Deed of Assignment. She also says that she has tendered payment slips to the Commissioner and that these constitute promissory notes. She further claims that an artificial entity – and which I understand to be the Trust – needs to be described correctly.

[21]   I find that there is no substance to any of these claims and Ms Reeve has not established a proper basis for me to decline to exercise my discretion to adjudicate her bankrupt. As Mr Walmsley has submitted, the tax regime depends in large measure on a self-assessment regime. If a taxpayer – which might include a trust – does not file the necessary returns and provide necessary self-assessment, then under the legislation the Commissioner is entitled to make her own assessments. She is also entitled, as was the case here, where a trust has no ID registration number, to allocate a registration number.

[22]   Once an assessment has been made by the Commissioner under the legislation, there is a statutory process which the taxpayer can invoke to challenge the assessment. That involves provisions under Part 4A of the Tax Administration Act 1994 (the TAA). There is provision for a notice of proposed adjustment process within four months, and then a process for issuing objection proceedings and/or challenge proceedings, either in the Taxation Review Authority or in the High Court.

[23]   Importantly, s 109 of the TAA provides that until such time as an assessment is set aside by way of a proper challenge process, the assessments are deemed to be correct. In the circumstances here, that is the position. The assessments are deemed to be correct.

[24]   It is also correct, as Mr Walmsley has submitted, that in the case of adjudication proceedings where there is a challenge to the underlying debt, there is a particular process which the Court expects a judgment debtor to go through. I refer in that regard to the High Court decision of Re James ex parte Nightingale, where Mathews AJ set

out the approach to be taken where issues are raised in relation to the underlying judgment.1 I note in this case that no steps have been taken to set aside the underlying judgment of the District Court (it was given in 2015), and together with s 109 of the TAA, there is no legitimate basis for me to have any concerns about the reliability or accuracy of the judgment debt which underpins the Bankruptcy Notice, and upon which the application for adjudication is based.

[25]   I turn and address a number of the other grounds or matters that Ms Reeve has raised in her submissions before me today.

[26]   Ms Reeve has challenged the manner in which the Commissioner’s proceedings have been drafted. There is a complaint about the way the Commissioner has capitalised each letter of her name. There is also an allegation that the Commissioner has not correctly described the Trust. I am of the view, however, that there is no merit in those contentions. The Commissioner made an assessment. That assessment relates to a particular trust. In the absence of successful challenge proceedings, those assessments are deemed to be correct. I am in no position to second-guess those matters.

[27]   Ms Reeve has also raised the issue of a Deed of Assignment. I have to say that I have some difficulty in understanding that submission. The Commissioner is not contending for any Deed of Assignment. The Commissioner’s position is very clear that tax liabilities incurred by a trustee in relation to a trust are always the personal liabilities of the trustee. That is the essential principle on which the Commissioner proceeds, and as to authority for that proposition, I rely upon the Supreme Court case of AMP General Insurance Ltd v McAllister Todd Phillips & Bodkins.2

[28]   As to Ms Reeve’s claim that she has provided, by way of the payment slips, promissory notes – again, I do not see that there is any merit at all in that defence. As Mr Walmsley submitted, a promissory note is simply a promise to pay a debt, so essentially, what Ms Reeve has done here is substitute one debt for another debt.3

1      Re James, ex parte Nightingale [2018] NZHC 965 at [22].

2      AMP General Insurance Ltd v McAllister Todd Phillips & Bodkins [2006] NZSC 105 at [42].

3      Mr Walmsley did not concede that there was in any event a valid promissory note as such.

Clearly, that does not go anywhere near refuting either the requirements or the grounds under s 13, which I find that the Commissioner has established. There is a clear outstanding debt which is owing.

[29]   So, for all those reasons, I conclude that there is no just or equitable reason for me to decline to make an order for adjudication. I find that the grounds have been established by the Commissioner, and that the appropriate course is to make an order for adjudication accordingly.

Result

[30]   So in terms of the result therefore, I adjudicate the judgment debtor, Judith Maree Reeve, bankrupt, and my orders are timed at 3.30 pm.

Costs

[31]   I award costs on an actual costs basis, in favour of the Commissioner, in the sum of $3,474.93; plus disbursements, as sought, of $1,535.65.

[32]   Ms Reeve, a copy of my judgment, obviously, will be typed up and made available to you as soon as reasonably practicable.

Associate Judge P J Andrew