Commissioner of Inland Revenue v Smith

[2017] NZHC 868

IN THE HIGH COURT OF NEW ZEALAND GISBORNE REGISTRY

CIV-2016-416-000037 [2017] NZHC 868

IN THE MATTER

of the Insolvency Act 2006

AND

IN THE MATTER

of an application for Bankruptcy of
Christine Tracy Smith

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

AND

CHRISTINE TRACY SMITH Judgment Debtor

CIV-2016-416-000038

IN THE MATTER             of the Insolvency Act 2006

AND-

IN THE MATTER             of an application for Bankruptcy of

Moehau Smith

BETWEEN  THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

ANDMOEHAU SMITH Judgment Debtor

Hearing:	2 May 2017
Appearances:	F Cleary for Judgment Creditor W T Nabney for Judgment Debtors
Judgment:	3 May 2017

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

THE COMMISSIONER OF INLAND REVENUE v C T & M SMITH [2017] NZHC 868 [3 May 2017]

[1]      The Commissioner of Inland Revenue applies for orders adjudicating each of the judgment debtors bankrupt.  Each application is opposed.

[2]      On 14 July 2016 the Commissioner obtained judgment against Ms M Smith and others in the District Court at Wairoa in the sum of $269,223.05.  On 18 July

2016 the Commissioner obtained judgment against Ms C T Smith and others in the

District Court at Wairoa in the sum of $446,133.

[3]      Ms M Smith was sued as a partner in the M Smith and R Poter Partnership, and Ms C T Smith was sued as a partner in the C & D Smith Partnership.  Ms C T Smith is the daughter of Ms M Smith.   The partnerships operated businesses in conjunction with each other.

[4]      The judgments were not met and in due course the Commissioner issued bankruptcy notices against each defendant under the Insolvency Act 2006.  Neither notice was met and the Commissioner commenced the current proceedings.

[5]      The Commissioner has laid criminal charges under s 228(b) of the Crimes Act 1961 against both judgment debtors, alleging in each case intentional filing of false GST returns on behalf of the partnerships in which they were, respectively, members.  Both judgment debtors have entered not guilty pleas and intend to defend the criminal charges.  It is common ground that the charges relate to the GST returns in respect of which the indebtedness of each defendant to the Commissioner has arisen and which, therefore, forms the basis of the bankruptcy proceeding against each.

[6]      Each defendant says that each of the present proceedings, and the criminal proceedings, are linked, and each criminal prosecution should be determined before the bankruptcy proceedings are heard.  Each defendant asks therefore that the Court halt the Commissioner’s applications until such time as the criminal charges against each  of  them  have  been  determined.    Section  38  of  the  Insolvency Act  2006 empowers the Court to so order, on such terms and conditions and for such a period as the Court thinks appropriate.

[7]      Courts in New Zealand have consistently adopted relevant guidelines which the Court may consider in deciding whether a civil proceeding should be delayed while a criminal proceeding is taking its course.  The guidelines are set out in the judgment of the New South Wales Supreme Court in McMahon v Gould,1 and have been applied in numerous New Zealand cases including Commissioner of Police v Burgess,2 and Commissioner of Police v Wei.3   Mr Nabney for the judgment debtors relied on four guiding factors identified in this case.

[8]      First, Mr Nabney says the first guiding factor, that prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the Court, does not apply where the plaintiff in the civil proceeding is the Commissioner of Inland Revenue.   In Commissioner of Police v Wei in the High Court the Judge found that the Commissioner is not a plaintiff asserting a personal or corporate right to damages or to reinstatement that should not be delayed because the defendant faces criminal proceedings (Wei v Commissioner of Police HC Auckland CIV-2010-404-5461, 24 November 2011). The Court of Appeal endorsed this.

[9]      Based on this proposition Mr Nabney says that little weight should be given to the first guiding factor because the judgment creditor is the Commissioner of Inland Revenue who is also the prosecuting authority in the criminal proceedings.

[10]     Secondly, Mr Nabney says that once the criminal proceedings are determined his  clients  will  have  a  right  to  approach  the  Commissioner  of  Inland  Revenue seeking relief from payments of the tax in respect of which judgment has been entered, pursuant to ss 176 and 177 of the Tax Administration Act 1994.  In support of such applications the judgment debtors would need to submit evidence to the Commissioner which they do not wish to present now as it may prejudice their defences of the criminal proceedings.  The prosecutions allege criminal conduct by the judgment debtors in filing GST returns which were false and which they knew to be false.  Mr Nabney says that on applications for relief, evidence may be presented to the Commissioner in relation to how the false GST returns came to be prepared

and filed, which is material which should be withheld until the criminal prosecutions

1      McMahon v Gould (1982) 7 ACLR 202 (NSWSC) at 206 – 207.

2      Commissioner of Police v Burgess [2011] 2 NZLR 703 (HC).

3      Commissioner of Police v Wei [2012] NZCA 279.

are before the Court as otherwise it would prejudice the defences to be presented. Mr Nabney says, further, that if the Commissioner declined applications for relief filed now, the judgment debtors would have a right to apply to this Court for judicial review of those decisions and those applications, too, would be based on evidence which should not be presented prior to the criminal trial.

[11]     Thirdly, Mr Nabney says that if the bankruptcy applications continue and result in adjudication, associated publicity in relation to the decisions of the Court on these applications may prejudice a jury deliberating on the criminal trial even though not strictly relevant to the issues which the jury would be required to decide.

[12]     Finally,   Mr   Nabney   says   that   there   would   be   no   prejudice   to   the Commissioner from delaying consideration of the bankruptcy applications until the criminal proceedings have been decided.   Mr Nabney advises that there will be procedural steps in relation to the trials in July.   Ms Cleary for the Commissioner indicates from her knowledge of the trials pending in the Gisborne District Court, where the trials would take place, that they may be held in the final quarter of this year, but, if not, then in the first quarter of 2018.  In effect, therefore, the judgment debtors ask that the bankruptcy applications not be heard for around one year, but Mr Nabney says this is not prejudicial to the Commissioner.

Discussion

[13]     First, I accept that as the Commissioner is the applicant for adjudication the first principle identified in McMahon v Gould, that a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the court, does not apply.4   However, the case now before the Court is not a civil proceeding.  It is an application for adjudication of each of the judgment debtors on the basis of default judgments entered against them for unpaid tax.  They have not satisfied the judgments, nor met bankruptcy notices issued against them.  Each of the judgment debtors has therefore committed an act of bankruptcy in terms of s 17(1) of the

Insolvency Act.  This entitled the Commissioner to apply for adjudication under s 13

of that Act.   As well, any other creditor of either debtor may, on the application

4      Commissioner of Police v Wei, above n 3.

relating to that debtor, apply to be substituted as the applicant creditor if the circumstances set out in s 44 apply.  No applications to be substituted are before the Court, but this section underscores the public interest in the financial position of judgment  debtors.    It  is  a  principle  to  be  taken  into  account  by this  Court  on applications  for  bankruptcy  that  there  is  a  public  interest  in  protecting  the community from the financial activities of those who have not met judgment debts and who have committed acts of bankruptcy.  Therefore, whilst the first principle in McMahon v Gould does not apply in its terms, a principle of equal if not greater weight is a relevant consideration on the applications now before the Court.

[14]     I now turn to consider the effect of continuing the bankruptcy applications on the right of each of the judgment debtors to a fair trial.  Section 25(d) of the New Zealand Bill of Rights Act 1990 prescribes an entitlement to a right of silence as one of the minimum standards of criminal procedure.    In  response to the argument presented on this point by Mr Nabney, Ms Cleary notes that Mr Nabney did not specify the information that might be put before the Commissioner in support of an application for relief from payment of the tax in question and that, as she put it, it is hard to envisage what material might be put in.   The bankruptcy applications are based on judgments entered by default, and those judgments are based on self- assessments of GST liability presented to the Commissioner as amended assessments by the judgment debtors’ own advisors. Amended assessments were submitted when the Commissioner called into question the original GST returns submitted by the judgment debtors themselves, on behalf of the partnerships of which they were respectively members.  In essence the judgments were entered by default for the tax which  the  judgment  debtors  themselves  say  they  owe,  and  the  bankruptcy applications follow as a result of that tax not being paid.

[15]     As well, Ms Cleary says that the judgment debtors have provided to the Commissioner all relevant financial information which might be available to support an application for relief.

[16]     There is force in the argument presented by Ms Cleary.   The basis upon which any applications for relief might be made is not explained.  However, I accept that if there is relevant material which the judgment debtors would wish to put

before the Commissioner on an application for relief, which might prejudice their criminal trials, then equally, putting that material to the Court on this application would have the same effect.  It cannot, therefore, count against the judgment debtors that the material I have to consider on this point is sparse.   But it is necessary to consider the ambit of material that is relevant to an application for relief.

[17]     On the prosecutions the Court will have to decide whether either of the judgment debtors deliberately intended to falsify GST returns.   They will each be entitled to present evidence at that trial on that issue, and that is the correct forum for that material to first be presented if fair trial rights are to be protected.   Section

176(2) of the Tax Administration Act 1994 provides that the Commissioner may not recover outstanding tax to the extent that recovery would place a taxpayer, being a natural person, in serious hardship.  Section 177 provides that a taxpayer may apply for financial relief either by making a claim stating why recovery of outstanding tax would place the taxpayer in serious hardship, or requesting the Commissioner to enter into an instalment arrangement.    Section 177(1B) provides that the Commissioner must consider the taxpayer’s financial position at the date on which the application for financial relief is made.

[18]     Section 177A(1) sets out the way in which the Commissioner is to decide applications under ss 176 and 177.  It is clear from these sections that the question of serious hardship which must be determined under s 176 or 177 is specifically related to financial difficulty.   The Commissioner is required to make a decision by determining whether financial information provided to the Commissioner shows that the taxpayer would have significant financial difficulties because the taxpayer has a serious illness, the taxpayer would be unable to meet minimum living expenses, the cost of medical treatment or the cost of education for a dependant, or because other factors that the Commissioner thinks relevant would likely arise.

[19]     It is clear from these sections that the financial assessment is to be made at the time of the application.   Thus, although the Commissioner has financial information at present, that information may not be the information which is relevant for consideration at the time any application is made.  So, if applications for relief were to be pursued after the outcome of the criminal trials, it may be that the

applicants would wish and be able to provide fresh financial information.   That, however, could also be done now, if the information available to the applicants differs from that which the Commissioner already has.

[20]     Section 177A(3) of the Tax Administration Act provides:

Compliance with, and non-compliance with, tax obligations must not be considered by the Commissioner when making a decision under this section.

[21]     Given this direction the Commissioner would not be able to take into account the undisputed fact that each of the judgment debtors did in fact file returns which were wrong.  I say undisputed, because correct amended returns were filed by them later, and accepted by the Commissioner. Therefore any reason the judgment debtors may have had for filing incorrect returns in the first place is not a relevant factor for consideration by the Commissioner in terms of s 177A.  Therefore, for the proper consideration of applications for relief to take place, the judgment debtors need not place before the Commissioner material which may support their defences of charges of deliberately filing false returns.  As a result there does not seem to be any reason why they cannot bring their applications for relief now, rather than awaiting the outcome of the criminal trials.

[22]     As is apparent from the brief summary of the facts set out at the beginning of this judgment, each of the judgment debtors has had a significant period of time within which to apply to the Commissioner for relief under s 176 and to put before the Commissioner such material as may be relevant to the Commissioner’s determination.   Neither has applied.   Analysis of the material relevant to the Commissioner’s decision on such an application would have indicated to the judgment debtors that they could have proceeded well before now with applications under s 176 notwithstanding extant criminal prosecutions, as material which they may wish to put forward in their defence of the criminal charges is not material relevant to the Commissioner’s decision.  Therefore I do not find their wish to make applications under s 176 at a later date a compelling reason to halt the present bankruptcy proceedings  given the ample opportunity each defendant has had  to pursue this course.

[23]     The next point made by Mr Nabney is that publication of bankruptcy orders against the judgment debtors will prejudice a jury considering criminal prosecutions. He relies on Wei v Commissioner of Police.  Ellis J said:5

There is a degree of “real” (rather than notional) danger of injustice in the criminal proceedings because determining the forfeiture application ahead of trial does put the presumption of innocence at risk.  More particularly there is  a  possibility that  any publicity arising from the forfeiture  application might reach and influence jurors in the subsequent criminal trial.  If it did, there can in my view [be] little doubt that the fact that the Court had already found that the accused had been engaged in significant criminal activity might influence their determination of the criminal charges.

[24]     The issue to be decided at the criminal trial is not whether incorrect returns were filed, but whether these steps were taken with criminal intent in terms of the section of the Crimes Act under which each of the defendants has been charged. Each of the defendants has already been found liable to pay arrears of tax by default judgments entered in the District Court.  In my opinion adjudication in bankruptcy does not put the presumption of innocence at risk.   Even if publicity about adjudication in bankruptcy did reach jurors, I do not think that an inference can be drawn that the jurors would be affected by that fact in making a decision in relation to the key element of each alleged crime, criminal intent.  Unlike the position in Wei, I think there is real doubt that if the Court found that the judgment debtors should be adjudicated bankrupt on the basis of not paying tax which they accept is properly assessed, this might influence their decision in relation to criminal intent.   If that were to be the case, it might equally be so as a result of judgments having been entered in the District Court for the same tax, a situation which each of the judgment debtors allowed to take place without proffering a defence. Any possible risk can be addressed by a direction from the trial judge.

[25]     I find that there is not a material risk of interference with the fair trial rights of either of the judgment debtors from publicity caused by the bankruptcy proceedings continuing to adjudication.

[26]     Mr Nabney says there is no prejudice to the Commissioner in the bankruptcy applications awaiting the outcome of the criminal trial.   Ms Cleary says that the

5      Wei v Commissioner of Police HC AK CIV-2010-404-5461, 24 November 2011 at [61].

Commissioner would be prejudiced by additional costs associated with delay, and by the prospect of the taxation which is owed becoming increasingly irrecoverable.

[27]     Each of the judgment debtors says she is intending to apply for relief from her obligation to pay the tax owed.  This is an indication that there are insufficient funds available in the hands of either judgment debtor to satisfy her judgment debt. The debts are substantial, as I have recorded.  Interest and penalties have accrued on the judgment sums.  The Commissioner has a statutory obligation to recover tax – s

176(1) provides that the Commissioner must maximise the recovery of outstanding tax from a taxpayer.  That obligation is subject to the direction in s 176(2) that the Commissioner may not recover tax from a taxpayer in circumstances of serious hardship.  I have canvassed the latter issue, and in the absence of serious hardship having been properly raised with the Commissioner in the ample time available, the mandate in s 176(1) stands.  Further delay would hamper the Commissioner in the fulfilment of her statutory duty.

[28]     Finally, Mr Nabney says that in the event that the judgment debtors  are adjudicated bankrupt, representation on the criminal trials which will occur late this year or early next year will be on legal aid.  He predicts this will in all likelihood involve a change of counsel, as the trials will take place in Gisborne and Mr Nabney is based in Tauranga.  He says that Legal Services are unlikely to fund the cost of a defence counsel from outside the district of the trial court.

[29]     Mr Nabney indicated to me that he would be prepared to act on legal aid. Even if his continuing representation cannot be approved, it would appear that legal representation will be available to each of the judgment debtors.   The trial is not imminent. Whilst it is not desirable that the judgment debtors should change counsel I do not see that access to legal representation is an issue relevant to my decision on the present applications.

Outcome

[30]   I am satisfied the applications for adjudication should proceed.   Both applications are adjourned to the Bankruptcy List on 13 June 2017 at 10.00 am.

[31]     The defendants will pay the judgment creditor one award of costs on a 2B

basis plus disbursements fixed by the Registrar.

J G Matthews

Associate Judge

Solicitors:

Inland Revenue Department, Legal & Technical Services, Hamilton
Burley Attwood Law, Tauranga