Commissioner of Inland Revenue v Sala

[2013] NZHC 640

IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY

CIV-2012-435-21 [2013] NZHC 640

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF     the bankruptcy of TASI MATAGI SALA

BETWEEN  THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

ANDTASI MATAGA SALA Judgment Debtor

Hearing:         4 March 2013

(Heard at Wellington)

Counsel:         D.P. Padmanabhan - Counsel for Judgment Creditor

T.M. Sala - Judgment Debtor in Person

Judgment:      27 March 2013

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by me on 27 March 2013 at 3.45 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:  ..........................................................................

Solicitors:           Inland Revenue Department, Legal & Technical Services, PO Box 1462, Wellington

THE COMMISSIONER OF INLAND REVENUE V TM SALA HC MAS CIV-2012-435-21 [27 March 2013]

Introduction

[1]      Before the Court is an application by the judgment creditor seeking an order to adjudicate the judgment debtor bankrupt in terms of s 13 Insolvency Act 2006.

[2]      The application is founded on the judgment creditor’s contention that the judgment debtor committed an act of bankruptcy by failing to comply with a Bankruptcy Notice served upon him claiming the sum of $54,591.76.   This was based upon an order of the District Court at Wellington for this sum following a default judgment against the judgment debtor made over 4 years ago on 6 October

2008.

[3]      That Bankruptcy Notice was served on the judgment debtor on 16 April 2012. [4]      The present application however claims from the judgment debtor a total sum

of $149,387.98, which sum includes a further $94,796.22 for additional assessed taxes, penalties and interest due.

[5]      The application is opposed by the judgment debtor.

Parties’ Arguments and My Decision

[6]      This application is brought pursuant to s 13  Insolvency Act 2006 which provides as follows:

13        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 $1,000.00 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.

[7]      In the present case, the $54,591.76 judgment alone, which had not been the subject of an appeal by the judgment debtor, clearly exceeds the $1,000.00 threshold provided for in s 13(a) Insolvency Act 2006.

[8]      In addition, the judgment debtor has committed an act of bankruptcy within the period of 3 months before the filing of the present adjudication application on 30

July 2012, in that he has failed to comply with the Bankruptcy Notice served on him. Nor did he take any steps to apply to set-aside that Bankruptcy Notice.  It is true that, at a hearing in the District Court at Wellington on 18 January 2012, the judgment debtor did seek to have the earlier $54,591.76 judgment  against him set aside, but, in a reserved judgment of Judge S.E. Thomas in that Court dated 24 January 2012, that application was dismissed.

[9] The $54,591.76 Court – ordered debt alone as I have noted above, has itself been outstanding for over four years now, it is payable immediately, and it is clearly a certain amount. This is even leaving aside the additional $94,796.22 for further taxes, interest and penalties noted at [4] above.

[10]    I am satisfied therefore that in the first instance and on their face, the requirements of s 13 Insolvency Act 2006 have been satisfied here.

[11]     The judgment debtor’s opposition to the present application, as best I can tell from the material before the Court, effectively relies upon s 37 Insolvency Act 2006. This section sets out the basis upon which the Court at its discretion may refuse to adjudicate a judgment debtor bankrupt:

37        Court may refuse adjudication

The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if-

(a)        the applicant creditor has not established the requirements set out in s 13;

or

(b)        the debtor is able to pay his or her debts; or

(c)        it  is  just  and  equitable  that  the  court  does  not  make  an  order  of adjudication; or

(d)        for any other reason an order of adjudication should not be made.

[12] Turning to consider these grounds, as I have noted at [10] above, it would seem in the first instance that s 37(a) may not apply here. Notwithstanding this, at the hearing before me, the judgment debtor did endeavour to mount an argument under s 13(a) Insolvency Act 2006 that the amount of the earlier judgment and the additional debts which the judgment creditor says have accrued (the certificate of indebtedness provided to the Court on 4 March 2013 now states that total debts of

$167,034.47 are outstanding from the judgment debtor) are incorrect, and that now there are in fact no monies owing by the judgment debtor to the judgment creditor. This contention was advanced on the basis that the judgment debtor maintained a recent investigation of his affairs and that of a related company PST Images Limited (now  struck  off)  (the  company)  which  employed  him,  by  an  accountants  firm, Parkers Business Solutions Limited (Parkers) it is said has revealed that the earlier income  tax  returns  filed  by the  judgment  debtor  were  in  error.    The  judgment debtor’s position is that the accounts and returns prepared by his previous tax agent were incorrect.   In particular, he advises that the salary allocated to him as a shareholder/director of the company for the relevant years should not have been so allocated and should either be reduced or totally reversed.  This it is claimed would result in a substantial reduction or extinguishing of the debt owed to the judgment creditor.  It follows therefore that, in fact, no tax assessment should have been made. This aspect, however, is strongly disputed by the judgment creditor.

[13]     Turning now to consider this argument advanced by the judgment debtor that the now long outstanding debts owing by him are in fact not due, those initial debts as I have noted arose through assessments of income tax made with regard to the judgment debtor following returns he himself filed through his tax agent at the time, effectively providing for these taxation debts by way of self-assessment.

[14]     It is only now some years later that the judgment debtor complains that these tax returns and assessments for the 2003, 2004, 2005, 2006 and 2007 taxation years were made in error.   The complaint, as I understand it, relates to completion of annual accounts by the judgment debtor’s previous tax agent for the company, PST Images Limited (which was previously in liquidation and has now been struck off), which the judgment debtor says were completed in error.  That previous tax agent was WHK Sherwin, Chan & Walshe (WHK), Chartered Accountants, who had acted in that capacity for the judgment debtor and the company I understand from at least

2002 to 2008.

[15]     As I understand it the investigation of the company by the new accountants, Parkers has focused largely on the company’s GST returns at the time.  Those GST returns I am told were completed by the judgment debtor and his partner Ms Paula

Michelle Heathcote (Ms Heathcote), who is also the subject of a bankruptcy application for outstanding taxation debt incurred from salaries allotted by the company to her in similar circumstances.

[16]     It  is  on  the  basis  of  those  GST  returns  that  Parkers  has  attempted  to reconstruct  the  affairs  of  the  company to  show  what  is  claimed  to  be a  rather different financial position for the company and its shareholders over the years in question.

[17]     In  response,  the  judgment  creditor’s  position  is  that  Mr  Sala  and  Mrs Heathcote have not proven to the Commissioner’s satisfaction that the accounts prepared by WHK for those 2003, 2004, 2005, 2006 and 2007 years have unambiguous genuine errors.  Therefore, the Commissioner has declined to amend the judgment debtor’s tax assessments.   And, according to the judgment creditor, restoring the company to the register, which would be required here to revise all the tax assessments in question, would not affect that position.

[18]     On all of this, there is evidence before the Court for the judgment creditor in an affidavit of Phillip Austin Steere (“Mr Steere”), a Senior Technical Advisor of the Inland Revenue Department.  It is interesting to note here that Mr Steere has worked for the Commissioner of Inland Revenue for over 30 years of which 23 years have been in technical roles at a senior level.  In his affidavit Mr Steere deposes that he has considered the report and the documents provided by Parkers, the judgment debtor  and Ms Heathcote.

[19]     Mr Steere is not satisfied that Parker’s report has identified that the accounts filed by WHK are incorrect as first, the report is based solely on the GST returns prepared  by  Mr  Sala,  secondly,  it  mentions  errors  that  are  unsubstantiated  and thirdly, it simply records Parker’s opinion as the current tax agent of the judgment debtor and Ms Heathcote.  In addition he notes the calculations in the report have not been reconciled with the accounts prepared by WHK and he says they do not show clearly that there are unambiguous errors in those accounts.

[20]     As a result, the judgment creditor takes the position that it is not satisfied that Parkers has identified any unambiguous genuine errors made by WHK when they were preparing the company’s financial statements.  And thus, the judgment creditor reiterates here that, if she is not satisfied that the assessments contain genuine errors, she cannot be compelled to amend the assessments - Wood v Commissioner of Inland Revenue (1999) 19 NZTC 15,255.

[21]     Essentially as I see the position, the judgment creditor here has been provided with information from two tax agents who have differing views on how the company’s accounts should have been treated.   As I have noted above, while the judgment debtor and Ms Heathcote say they believe that Parker’s opinion should be preferred, the judgment creditor is not satisfied that Parkers have identified any unambiguous  genuine  errors  made  by  WHK  when  they  were  preparing  the company’s financial statements, statements which no doubt at the time utilised information provided by the judgment debtor and Ms Heathcote.  It is my view that the judgment creditor here is not required to accept Parkers’ opinion if she does not agree with it.

[22]     It is useful also to note at this point that s 109 Tax Administration Act 1994 (the TAA) provides that except in challenge proceedings, no disputable decision may be disputed in a Court or in any proceedings on any ground whatsoever.  Pursuant to s 113 TAA however, the judgment creditor does have a discretion to amend an assessment at any time to ensure it correctness.

[23]     On 31 May 2011 Mr Sala for himself and Ms Heathcote did put forward a request under s 113 for the exercise of this discretion to amend the assessments in question. This request however was rejected by the judgment creditor.

[24]     And, as noted above, it is clear that if the judgment creditor is not satisfied that assessments contain genuine errors then she cannot be compelled to amend assessments under s 113 or otherwise – Wood v Commissioner of Inland Revenue [1989] 19 NZTC 15,255.

[25]     The  exercise  of  the  Commissioner’s  discretion  under  s  113  is  not  a “disputable decision” under s 3 of the TAA and accordingly cannot be subject to the disputes resolution process.  The only avenue to review a decision made under s 113 is through the judicial review process – on this see s 138E(1)(e)(iv) TAA.  But there has been no application to judicially review the judgment creditor’s earlier s 113 decision in this case.

[26]     And, relatively recently in September 2012 the judgment debtor and  Ms Heathcote initiated a very late attempt to bring into play the objection or challenge process prescribed in Parts 8 or 8A TAA.  Section 109 of the TAA provides however that except in objection proceedings under Part 8 of the TAA or a challenge under Part 8A of the TAA, no disputable decision may be disputed in a Court or in any proceedings on any ground whatsoever, and every disputable decision and its particulars are deemed to be correct in all respects.   The definition of “disputable decision” in section 3(1) of the TAA includes an assessment.

[27]     In Tannadyce Investments Ltd v Commissioner of Inland Revenue [2012] 2

NZLR 153, the Court held that the effect of section 109 was that no assessment may be disputed in any Court or in any proceedings on any ground whatsoever, except in proceedings taken under the TAA.

[28]     As noted, the judgment debtor and Ms Heathcote did not initiate the objection or challenge process prescribed in Part 8 or 8A of the TAA until September 2012. Their NOPA has not been considered as an effective NOPA because it was filed out of time and was not accepted as a late NOPA.  Therefore, section 109 of the TAA applies to deem the assessments in question to be correct and the judgment debtor cannot dispute the assessments on any grounds whatsoever.

[29]     Finally,  for  completeness  I  note  r  5.61  of  the  High  Court  Rules  which provides that in a proceeding for recovery of taxes by the Crown, such as the present proceeding, a defendant is not entitled to plead any set-off or counter-claim.

[30]     For all these reasons, and on the basis of all the substantial historical material which is before the Court here, I reject the argument the judgment debtor endeavours

to advance that the judgment creditor has not fully and properly considered his application under s 113 of the TAA to amend or cancel the assessments in question. Further, there is nothing before the Court to support any argument by the judgment debtor that a Late Objection could possibly challenge even a part of the significant tax debt owing here, even if the judgment creditor could consider accepting a late objection – see s 124A(1) and s 126(2) TAA.

[31]     Although  what  I  have  said  above  effectively  disposes  of  the  judgment debtor’s argument that these long outstanding taxation debts are not in fact due from him, there is one other aspect on all of this which in my view is of some relevance here.  This relates to certain other entries included in the financial accounts for the company prepared by WHK for the years in question.

[32]     In those accounts, which for each year specified director’s salaries allocated to the judgment debtor and Ms Heathcote, under the heading “Schedule of Shareholder  Current Accounts”,  were  other  entries  each  year  showing  the  total drawings from the company made by them as director shareholders.   Those joint drawings for the years ending 2003 to 2007 were substantial and totalled amounts set out in the respective financial statements as follows:

2003  $58,097.00

2004  $72,878.00

2005  $94,912.00

2006  $252,408.00

2007  $275,966.00

(Those total amounts represented drawings each year together with small amounts for interest on the overdrawn advance in each case).

[33]     Totalling up these amounts for drawings and interest taken from the company by the judgment debtor and Ms Heathcote for this 5 year period reached a figure of

$754,261.00.

[34]     Over this same period, the amounts shown in the WHK financial statements

for the company as directors’ remuneration were:

2003  $  20,747.00

2004  $  80,000.00

2005  $  42,000.00

2006  $140,000.00

2007  $130,000.00

These amounts for directors’ remuneration to the judgment debtor and Ms
Heathcote totalled $412,747.00.

[35]     Even if the earlier argument from the judgment debtor is accepted that these directors’ salaries should be written back, with the conclusion that he received no income for these respective years, this does not in any way explain the substantial amounts for drawings he and Ms Heathcote took from the company during these years.    Details  of  these  amounts  for  drawings  were  presumably  provided  for inclusion  in  the  annual  accounts  by the  judgment  debtor  and  Ms  Heathcote  as directors of the company.

[36]     I do note, however, that in his 14 February 2013 affidavit, Mr Susheel Dutt the  accountant  from  Parkers  who  completed  the  report  on  the  company,  raised certain issues but only as to the sum of $59,000.00 for coding of drawings in the

2006 year and $68,401.00 for coding of drawings in the 2007 year.   No further information concerning these questions have been provided however, and in any event  the  amounts  queried  by  Mr  Dutt  relate  only  to  a  small  portion  of  the

$252,408.00 drawings and interest for the 2006 year and the $275,966.00 for drawings and interest for the 2007 year which the accounts show were allocated.

[37]     In a general sense also at this point, I would simply note that it would seem somewhat strange for directors and operators of a privately owned company such as the  company  in  this  case  to  take  from  their  company  substantial  unexplained drawings over a number of years (with few capital transactions being involved) at a time when it is alleged those directors worked for nothing and no directors’ remuneration was properly earned.

[38]     Lastly,  on  this  aspect,  it  is  noted  from  the WHK  March  2007  financial accounts for the company which are before the Court, that at that point the total shareholders  current  accounts  held  by  the  judgment  debtor  and  Ms  Heathcote showed a debit balance of $169,054.00.  And, this of course was calculated on the

basis that the directors had been entitled to remuneration which had been properly credited to their current accounts.

[39]     Even this debit shareholders current account figure of $169,054.00 would mean that at that point the judgment debtor was indebted to the company with Ms Heathcote for what was a significant amount.  If, as he contends now, the directors’ remuneration figures should be written back in full, then this debit figure by my calculations would increase by a further $412,747.00. The impact of this figure upon the judgment debtor’s solvency need hardly be mentioned.

[40]     Next  I  need  to  consider  the  remaining  provisions  contained  in  s  37

Insolvency Act 2006.

[41]     Turning to s 37(b), there is no evidence of any kind before the Court from the judgment debtor or otherwise to show that he is able to pay his debts here. Although he is currently employed he has said he cannot pay the original $54,591.76 Court judgment debt or indeed the increased debt of $167,034.47 now certified by the judgment creditor to be due.   He appears to have minimal assets and other debts including amounts owing to Westpac Bank of about $10,000.00, and to Parkers of over $36,000.00, not to mention any shareholders’ current account debt which may remain due to the company. The ground set out in s 37(b) is not met here.

[42]     That   leaves   the   remaining   two   grounds   under   s   37(c)   and   (d)   for consideration.  As noted above, these provide first, that where a judgment debtor is able to establish that it is just and equitable that the Court does not make an order for adjudication or secondly, where for some other reason an order for adjudication ought not to be made, the Court may refuse to make an order for adjudication.

[43]     Dealing with both the s 37(c) and (d) Insolvency Act 2006 requirements together, essentially before me the principal argument advanced by the judgment debtor to suggest that the Court should exercise its discretion to refuse the order for adjudication sought, relates to questions of hardship in that if he is adjudicated bankrupt he says he will lose his current employment which would affect he and his family in a dramatic way.

[44]    That employment is with a Masterton Roading and General Contracting Company, Bruce Buchanan Limited, with whom the judgment creditor has an Individual Employment Agreement which I am told commenced on 19 November

2012.    Under  this  contract  the  judgment  creditor  is  employed  as  a  “Contract Manager” he says at an ordinary annual income of $60,000.00 per annum.   The Employment Agreement was initially for a trial period of 90 days, but the judgment debtor advises that this trial period successfully expired and he now has a permanent employment contract.

[45]     According to the judgment debtor, it is significant that a ground for his dismissal as serious misconduct under the Employment Contract (he says as outlined at p 27 of the Agreement he has attached) is the event of his being declared bankrupt.

[46]     In addition, the judgment creditor has placed before the Court a letter dated 4

March 2013 from Bruce Buchanan Limited with respect to this matter which states:

With Tasi’s position as a Contract Manager for Bruce Buchanan Limited he is responsible for the pricing, running and invoicing contracts of a large dollar value which also involves day-to-day spending of company finances at his own discretion. Tasi’s performance in his position, good, bad or otherwise, effects directly on the company’s performance.

Because of the key position Tasi holds within Bruce Buchanan Limited, should he be made bankrupt, his future and his current position at Bruce Buchanan Limited would be put in jeopardy.

[47]     This letter from Bruce Buchanan Limited is addressed “To Whom It May Concern” and notes that it relates to tax debts involving the judgment debtor and Ms Heathcote. The letter is signed by the General Manager of Bruce Buchanan Limited.

[48]     As a result, the judgment debtor contends that, if the Court does not exercise its discretion to refuse the bankruptcy order sought here, he will lose his job with Bruce Buchanan Limited and as a result he and his family will suffer considerable hardship.

[49]     On this aspect, in the past there have been decisions of this Court which have determined that one of the factors to be taken into account by the Court in exercising its discretion not to order adjudication, is a debtor’s loss of employment or possible lost business opportunities.   To this end, in Re: Smith ex p AGC (New Zealand)

Limited HC, Auckland, 1 September 1995 B1603/94, Master Ann Gambill refused an order for adjudication indicating that there was no public interest in putting the debtor in that case in the position that she was likely to lose her job and a future career as a policewoman.

[50]     By way of contrast, in Re: Tier ex p CIR (1994) 16NZTC 11,183 and in Re: Craig ex p BNZ HC, Hamilton, 29 May 1998, B32/97, Master Faire, the debtors flagrant disregard of his obligations under the taxation acts in the first case prevented the exercise of the discretion in his favour and an order for adjudication was made. In the second case, again an order for adjudication was made notwithstanding that employment was an issue when it was considered what was a question of overall business morality in the circumstances of that case.

[51] In the present case, an issue arises concerning the particular provision at p 27 of the judgment debtor’s Employment Contract to which he has referred the Court, as noted at [45] above. This is because a further copy of this Employment Contract has been obtained and provided to the Court by the judgment creditor, she says directly from Bruce Buchanan Limited. This employer’s copy of the contract appears to omit the relevant provision at p 27 that being declared bankrupt is deemed to be “serious misconduct” and warranting dismissal under the contract. There may be a simple explanation for this discrepancy although, if not, it must be a matter of some possible concern for the Court. Nevertheless, and leaving this on one side, the letter from Bruce Buchanan Limited dated 4 March 2013 does appear to confirm that the judgment debtor’s “current position at Bruce Buchanan Limited” would be put in jeopardy if he is bankrupted. Significantly in my view, this does not say that he would necessarily lose his employment altogether with that company. It may well be that his duties would simply change and he would no longer be involved with “spending of company finances at his own discretion”. It would also seem to be clear that Bruce Buchanan Limited will be aware now that these bankruptcy proceedings have been initiated against the judgment debtor, and that in itself may mean any further orders of this Court would not change the position.

[52]     Also, in my view, there has been nothing placed before the Court to indicate that if bankrupted the judgment debtor would find himself in a position where he

would be quite unable to obtain alternative employment if his contract with Bruce

Buchanan Limited is ended.

[53]     Whilst it would be unfortunate if the judgment debtor was to lose his current employment altogether as a result of bankruptcy, this can often be an incident of any adjudication order made in the wider public interest.  And, hopefully any employer assessing the value of a judgment debtor’s skills, even once bankrupted, would be keen to retain them in some suitable position in an appropriate case.  That said, this is a case in my view where those employment aspects and concerns outlined in the preceding paragraphs must be outweighed by the other circumstances prevailing here.   These include in my view the need for some investigation of the judgment debtor’s affairs to be undertaken including the family trust that he and Ms Heathcote operate, his dealings as director with the company, employment matters and the substantial overdrawn current account which the judgment debtor had with the company prior to its liquidation in 2008.

[54]     Under all these circumstances, it is clear to me that the judgment debtor has been unable to satisfy the onus upon him of establishing that it is just and equitable that the order for adjudication sought today should be refused.

[55]     In my view there are no other matters of substance in his favour advanced by the judgment debtor here given that he also has the onus in this regard to show the Court that some other good reason exists for an order to be refused.

Conclusion

[56]     For all the reasons outlined above it will be apparent that the bankruptcy application before me succeeds.

[57]     Orders are now made as follows:

(a)       An order is now made adjudicating the judgment debtor Tasi Mataga

Sala bankrupt.

(b)Costs are awarded to the judgment creditor on a category 2B basis together with disbursements as fixed by the Registrar.

(c)       This order is timed at 3.45 pm today, 27 March 2013.

Associate Judge D.I. Gendall