Commissioner of Inland Revenue v Sure Services Limited

[2024] NZHC 298

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-000504

[2024] NZHC 298

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

SURE SERVICES LIMITED

Defendant

Hearing:	19 February 2024
Appearances:	C Van Der Merwe for the Plaintiff T J P Bowler for the Defendant
Judgment:	23 February 2024

JUDGMENT OF ASSOCIATE JUDGE GARDINER

This judgment was delivered by me on 23 February 2024 at 4.15 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date.......................................

Solicitors: Neilsons, Auckland

Inland Revenue, Auckland

IRD v SURE SERVICES LTD [2024] NZHC 298 [23 February 2024]

Introduction

[1]    This is an application by the Commissioner of Inland Revenue (the Commissioner) for an order that Sure Services Limited (Sure Services) is put into liquidation, on the basis that Sure Services is indebted to the Inland Revenue Department for unpaid GST, PAYE, and penalties and interest. When the proceedings were filed, the debt was said to be in the amount of $635,761.14. At the hearing the Commissioner provided a solicitor’s certificate certifying that the debt stood at

$1,031,154.49.

[2]    On 16 February 2024 at 11.49 am Sure Services filed an interlocutory application on notice for an adjournment of the hearing. I heard, and dismissed, that application, before hearing the liquidation application. I reserved my decision on the liquidation application.

[3]    This judgment records my reasons for refusing the adjournment and gives my judgment on the liquidation application.

Application for adjournment

[4]    Sure Services advanced two reasons for why the hearing should be adjourned. First, that Sure Services’ counsel, Mr Bowler, was unaware until 15 February 2024 that the Commissioner intended to rely on submissions it had filed in August 2023. Sure Services claimed to be prejudiced by this fact.

[5]    Second, Sure Services argued that an adjournment was justified to give it time to arrange a loan and/or to sell the business, or for its shareholders to sell certain assets.

[6]    The application for an adjournment was strongly opposed by the Commissioner, especially as it was Sure Services’ second adjournment application.

[7]I dismissed the application for an adjournment, for the following reasons.

[8]    First, I could see no reasonable basis for Mr Bowler being unaware that the Commissioner would be relying on written submissions they had already filed for the hearing.

[9]    The background is that the liquidation application was originally set down, on 15 June 2023, to be heard on 2 October 2023. The Commissioner was directed by the Court to file and serve their submissions on 18 August 2023. The Commissioner filed and served their submissions for the hearing according to that direction. Sure Services was directed to file and serve its submissions by 25 August 2023. Sure Services did not comply with that direction.

[10]   On 21 September 2023, Sure Services applied without notice for interim orders restraining advertising of the proceeding and adjourning the hearing. The grounds on which the orders were sought included that Sure Services was able to meet its financial obligations as they fell due, and that it had made a proposal to the Commissioner which would see the core debt of $675,661.00 paid within four to six weeks. In an accompanying memorandum, Mr Bowler informed the Court that the application had been served on the Commissioner on a Pickwick basis. However, before the Commissioner had the opportunity to respond, an interim order was made restraining advertising and adjourning the hearing to a date to be allocated by the Registry at least four weeks later.1   The Registry set down the proceeding for a half-day fixture on   29 February 2024.

[11]   Counsel for the Commissioner then applied for orders that they be entitled to advertise the liquidation of Sure Services, or that that matter be listed in the first available Miscellaneous Companies List to consider whether the Commissioner should be entitled to proceed with advertising the liquidation application, and if possible, that the hearing date be brought forward. The matter was duly listed in the Miscellaneous Companies List on 15 December 2023.

[12]   On 15 December 2023, Associate Judge Taylor directed that the hearing was brought forward to 19 February 2024. The Associate Judge did not direct the

1      Minute of Associate Judge Taylor dated 21 September 2023.

Commissioner to file updating submissions, nor is there any record of the Commissioner indicating that they intended to do so.

[13]   Sure Services  refers to  an email  to  the parties  from  the Case Officer  on   8 February 2024, in which they said:

Mr Cloete, please advise if you are filing submissions for the matter, as they are due tomorrow afternoon. If no documents are filed by tomorrow, the matter will be listed in the list for non-compliance on Monday 12 February 2024.

As Mr Trent will also need to file his submissions in reply, as nothing recent has been filed in regards to the proceeding.

…

Non-compliance with timetabling directions and regulations 9(3) and 10 of the High Court Fees Regulations 2013 may result in the matter being placed in the Duty Judge List.

[14]    I could not see any objective basis, based on the procedural background described, for Mr Bowler’s purported uncertainty about the Commissioner’s submissions. The Commissioner’s submissions were filed and served for the hearing in August 2023 according to the Court’s directions. The hearing was adjourned on Sure Service’s application, but there was no reason to consider that the Commissioner’s submissions might materially change from those they had already filed and served. When the submissions were provided all the evidence had been filed. All that happened in the intervening period was that Sure Services made a proposal to the Commissioner that was rejected, and the debt increased in amount due to penalties and interest continuing to accrue.

[15]   Even if it was unclear to Mr Bowler whether the Commissioner was intending to rely on the submissions already filed, I was not persuaded that Sure Services was materially prejudiced. The Commissioner relies on those submissions and the evidence filed in October 2022 with the statement of claim, and in July and August 2023. The only new information relied on by the Commissioner is the updated debt amount, of which Sure Services would have been aware. Mr Bowler had everything he needed to prepare Sure Services’ submissions well in advance of the hearing.

[16]   Nor was I persuaded that the hearing should be adjourned again to provide Sure Services with a further opportunity to obtain a loan or to sell the business.

[17]   The essential question for the Court is whether an adjournment is in the interests of justice.2

[18]   Sure Services submits that considerations of prejudice weigh heavily in its favour, as a liquidation order is serious and irreversible. It submits that a liquidation order  will  have  a devastating  effect on the  families of its directors  and around   30 employees.

[19]   Tanja Huggins, director of the company, deposes in her affidavit dated 3 August 2023 that the company is solvent, and that the issues relating to payment of the IRD arrears are due to numerous issues, particularly those relating to COVID-19 and the lockdown period.

[20]   Ms  Huggins  confirms  that  the  shareholders,  she  and  her  husband   Stuart Huggins, are committed to supporting the company. She has provided a valuation report which values a residential property owned by them at $2.95 million. She has provided a screenshot of their mortgage statement which records debt of

$1,319,535.80. She says that there is enough equity in the home to arrange finance to satisfy the debt owed to the IRD. She deposes that she and her husband are talking to several lenders to obtain a second mortgage over the property, and that the finance arrangements should be in place “very soon”.

[21]   Further, in evidence given from the bar, Mr Bowler says that Sure Services has received an appraisal for the value of the business of $2.1 million and has put the business on the market. The appraisal is attached to his written submissions.

[22]   He also says, again giving evidence from the bar, that a loan offer has been received for approximately $185,000, conditional on agreement with the Commissioner being reached.

2       High Court Rules 2016, r 10.2.

[23]   Mr Bowler refers to various decisions of this Court where the defendant was granted a further adjournment to provide them with a final opportunity to settle the remaining debt.3

[24]   I rejected this ground for an adjournment. Sure Services has had plenty of time to take any available steps to enable it to clear the debt owed to the IRD. The Commissioner served a statutory demand on Sure Services for the debt as it stood at that time on 25 August 2022. Sure Services has been on notice since then that the Commissioner was serious about the debt. The Commissioner filed and served proceedings in April 2023. There is a dispute about when the proceedings were in fact filed which I will address later, but that dispute does not change the fact that Sure Services has been aware since August 2022 that it faced the prospect of liquidation if it did not settle the debt. In June 2023, the liquidation application was set down for hearing. From then at the latest Sure Services was on notice that it needed to take urgent steps to pay the outstanding sums.

[25]   The property discussed by Ms Huggins is not an asset of Sure Services. It is a residential property owned by her and her husband, who are the shareholders of the company. Its only relevance to the financial position of Sure Services is that it is claimed that the shareholders are committed to supporting the company and that they intend to raise a further loan against the property to pay the company’s debt to the IRD. In her affidavit of August 2023, Ms Huggins deposed that financing arrangements to repay the debt would be in place imminently. Yet it is six months later, and the finance has not transpired, and the debt remains outstanding.

[26]   There is no evidence before the Court of a loan proposal. Mr Bowler’s attempt to give evidence from the bar of such a proposal is not accepted. Ms Huggins could have filed a supplementary affidavit to provide evidence of a loan proposal but did not do so. In any case, Mr Bowler states in his submissions that the purported loan proposal is conditional on Sure Services reaching an agreement with the Commissioner.

3      Commissioner of Inland Revenue v Aotearoa Coolstores Ltd HC Palmerston North CIV-2008-454- 000940, 5 October 2009; Plumbing World Ltd v Supreme Construction Civil and Drainage Works Ltd [2015] NZHC 2330; and Commissioner of Inland Revenue v Retro Civil Construction Ltd [2017] NZHC 309.

[27]   There is no evidence before the Court that the business has been listed for sale. Mr Bowler purports to rely on an email from a business broker dated 15 January 2024 providing  an  appraisal  for  the  business  of  Sure  Services  of  $1.85  million  to

$2.1 million. This is said to equate to the market value of the assets and equipment at approximately $1.85 million, and goodwill based on average profits of approximately

$235,000 over the previous three years. It is not apparent that the company’s liability of over $1 million to the Commissioner has been factored into the appraisal. Further, Ms Huggins has not sworn an affidavit confirming that the company is listed for sale.

[28]   I was not persuaded that it was in the interests of justice for the hearing to be adjourned to enable Sure Services a further opportunity to settle the debt. The company has had long enough. It is relevant that the GST arrears date back to March 2020 and the PAYE arrears date back to December 2021. Moreover, between when the proceeding was first set down for hearing in June 2023 and today, only two proposals have been made to the Commissioner. The first, made on 15 September 2023, was rejected by the Commissioner on 21 September 2023. Sure Services made a further proposal on 15 February 2024, which was rejected on 16 February 2024.

[29]   As to the authorities relied on by Sure Services, each case turns on its own facts. The Aotearoa Coolstores Ltd case, for example, involved an application for a liquidation order, not an application for an adjournment. Associate Judge Gendall found that the defendant had not satisfied the onus upon it to prove its ability to pay its debts. This was despite the director having filed an affidavit annexing a statement of the financial position of the company. Despite that, the Associate Judge gave the defendant one final opportunity to clear its debts because the company’s director had filed a supplementary affidavit exhibiting a conditional offer of finance from a finance company to settle the debts owing to the plaintiff and other creditors. There is no equivalent evidence before the Court in this case. There are other factors that distinguish Aotearoa Coolstores Ltd, including that in that case the defendant had paid the debt in the statutory demand in full.

[30]   For these reasons I refused to adjourn the liquidation hearing. I proceeded to hear submissions on the application for an order placing Sure Services into liquidation. I turn to that application now.

Application for liquidation order

[31]   The Commissioner applies for an order placing Sure Services into liquidation based on the unmet statutory demand served on Sure Services on 25 August 2022.

[32]    As  noted,  in  its  statement  of  claim,  the  Commissioner  claims  that   Sure Services is indebted to the Commissioner for $635,761.14 in unpaid GST, PAYE and penalties and interest.

[33]   The notice of proceeding and statement of claim were served on Sure Services on 18 April 2023.

[34]   The matter was called on 15 June 2023 and Sure Services was directed to file any statement of defence and supporting affidavit by 30 June 2023. Sure Services purported to file a statement of defence and supporting affidavit on 8 August 2023. Sure Services requires the leave of the Court to file this statement of defence and affidavit out of time.

[35]   Accordingly, Mr Bowler seeks the leave of the Court, submitting that there is no prejudice to the Commissioner because they have had the defence since August 2023 when Sure Services purported to file it. He explains that the reason for the lateness was a delay in having the accompanying affidavit of Ms Huggins sworn.

[36]   That is not a satisfactory reason and had this issue fallen for consideration before the hearing I would have denied Sure Services leave. However, as the liquidation application has been set down for a defended hearing, I will consider the matters raised by Sure Services in its statement of defence and supporting affidavit.

[37]   The Commissioner submits that Sure Services is plainly insolvent and is subsidising its commercial activities through GST and PAYE paid to it which should have been paid to the IRD without delay.

[38]Sure Services raises two matters in its defence.

[39]   First, it pleads that it is solvent and able to pay its debts as they fall due. In its statement of defence Sure Services says that it owns a property valued at $2.95 million, with total borrowing in relation to the property of $1,319,515.80, providing enough equity to raise finance to pay the debt or provide a charge to secure the debt. It pleads that it is also solvent on a balance sheet basis in that its assets exceed its liabilities. It says that it is arranging finance to pay the IRD.

[40]   Second, Sure Services pleads that there is no evidence that it is insolvent pursuant to s 288 of the Companies Act 1993 because the statutory demand is “stale”. It says that the liquidation proceeding was incorrectly filed in the Whangarei High Court on or about 22 October 2022, when it does not have a registered office or other presence in Whangarei. It says that a new proceeding was filed in the correct Auckland Registry in May 2023. It says that because the proceeding was filed outside the statutory time of 30 working days from the last day of compliance with the statutory demand, the s 288 presumption of insolvency does not arise.

[41]   Relatedly, Sure Services pleads that the Commissioner is estopped from denying that the statutory demand relied on does not provide an evidential basis to establish insolvency under s 288 of the Act, given the extraordinary delay between service of the statutory demand and service of the liquidation proceedings. In support of this submission Ms Huggins deposes that she believed that the Commissioner was taking no steps due to the significant delay in the liquidation proceedings being filed and served on the company.

[42]   Sure Services also pleads that its financial position has significantly improved since when the statutory demand and liquidation proceedings were served, and that it is not just and equitable for an order to be made placing Sure Services into liquidation.

Assessment

[43]   A creditor of a company may apply to this Court for a company to be placed into liquidation.4 The Court may exercise its discretion to place a company in

4      Companies Act 1993, s 241(2)(c)(iv).

liquidation if satisfied that, amongst other things, the company is unable to pay its debts, or it is just and equitable that the company is put into liquidation.5

[44]   A company that has failed to comply with a statutory demand is presumed to be unable to pay its debts.6 The presumption is rebuttable.7 The company must present cogent evidence of solvency.8

[45]   I am satisfied that an order for liquidation is appropriate on the grounds that Sure Services is unable to pay its debts.

[46]   There is some uncertainty about whether the statutory presumption of insolvency arises pursuant to s 288 of the Act, because of confusion about the Registry in which the notice of proceeding and statement of claim were originally filed. It seems that the original documents, filed in the Auckland Registry in October 2022, bore the CIV number of the Whangarei Registry (CIV 2023-488-). The Auckland Registry gave the documents a Whangarei CIV number (CIV 2023-488-504). After Sure Services was served with these documents in April 2023, Mr Bowler raised that the proceedings should have been filed in the Auckland Registry as the company’s registered office came within the Auckland jurisdiction. By agreement, the proceeding was “transferred” to Auckland and given the CIV number 2023-404-504. The Auckland Registry informed the parties of this transfer by an email dated 1 May 2023.

[47]   The Commissioner contends that the proceeding was filed in October 2022, within the 30 working days, and simply transferred between registries. Sure Services argues that a fresh proceeding was filed in May 2023, and therefore the statutory presumption of insolvency does not arise because the proceedings were not filed within 30 working days of the expiry of the statutory demand.

[48]   Whatever the answer on that issue, it does not matter. Even if the Commissioner is unable to rely on the statutory demand as creating a presumption that Sure Services is unable to pay its debts, the Commissioner can prove that the company

5      Section 241(4)(a) and (d).

6      Section 287.

7      Heron’s Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC) at [23].

8      Duffill Watts Ltd v Mogans Homes Ltd HC Auckland CIV-2009-404-1483, 28 May 2009 at [28].

is unable to pay its debts by other means.9 In my assessment the Commissioner has proven that the company is insolvent even without relying on the statutory demand.

[49]   As noted, the statement of claim pleads that Sure Services is indebted to the Commissioner for a total of $635,761.14 as of 10 October 2022. This amount comprises $279,552.20 of core debt attributable to unpaid GST assessed from  March 2020 to July 2022, $341,377.59 of core debt attributable to unpaid Employer Activities (such as PAYE) assessed from December 2021 to August 2022, and penalties and interest. The claim notes that interest and penalties continued to accrue. Attached to the statement of claim is a debt summary statement which sets out the amounts owing. The statement of claim pleads that there are no outstanding objections or challenges to the assessment of these debts. Grant McMurtrie, Customer Services Officer, swore an affidavit dated 21 October 2022 that he had knowledge of the matter, was duly authorised by the Commissioner to make the affidavit, and that the statements in the statement of claim are true.

[50]   In a supplementary affidavit sworn on 17 July 2023, Mr McMurtrie confirms that Sure Services was assessed for GST for the periods 31 March 2020 to 31 July 2022, for Employer Activities for the periods 31 December 2021 to 31 August 2022, and that Sure Services filed late Income Tax returns for the tax years ending 31 March 2020 and 31 March 2021. Mr McMurtrie deposes that Sure Services has not disputed any of the assessments by utilising the statutory procedure in the Tax Administration Act 1994. He confirmed that penalties and interest continue to accrue according to that legislation and as of 12 July 2023, the outstanding tax due to the Commissioner amounted to $896,164.21. He attached a debt summary of account dated 12 July 2023 to his affidavit.

[51]   As noted, by the time of the hearing, according to the Commissioner’s solicitor’s certificate, the debt stood at $1,031,154.49, of which $449,008.43 was attributable to GST and $621,026.57 to Employer Activities, including penalties and interest.

9      Companies Act 1993, s 288(2).

[52]   It is settled law that the effect of s 109 of the Tax Administration Act 1994 is that once a tax assessment has been made, its correctness can only be challenged in proceedings under the Tax Administration Act.10 It is not disputed by Sure Services that there is no outstanding challenge to the assessments that gave rise to the debt in issue. The debt is due and owing and cannot be disputed in this Court.

[53]   Clearly Sure Services is insolvent in that it is unable to pay its debts as they fall due. The debt to the IRD dates back to 2020 and 2021. Sure Services has not disputed the debt through the statutory procedure. The only available inference is that it is unable to pay the debt. The evidence of Ms Huggins is consistent with that inference in that the only options she describes for paying the debt are the shareholders raising finance against their residential property or selling the business.

[54]   In terms of balance sheet solvency, Ms Huggins has not provided any evidence about the company’s assets. The only asset discussed by Ms Huggins is a personal asset of the shareholders. There is therefore no evidence to support the assertion that the company’s assets exceed its liabilities.

[55]   Overall, the company has not provided any cogent evidence to substantiate the claim that it is solvent. The director has not provided a statement of the company’s assets or liabilities, any financial statements, or cash flow projections.

[56]   While the Court has a discretion as to whether to place a company that is unable to pay its debts into liquidation, companies that are clearly insolvent should not be allowed to continue to trade.11 Based on the evidence before me, Sure Services is trading whilst insolvent. An immediate order placing the company into liquidation is appropriate.

[57]   I note that Mr Bowler requested, if I was minded to order liquidation, that the order lie in Court for five working days to permit Sure Services to appeal my refusal to adjourn the hearing. That request is refused for the obvious reason that an appeal

10     Taylor v Commissioner of Inland Revenue [2023] NZCA 515, (2023) 31 NZTC 26-014 at [6].

11     Bank of New Zealand Ltd v Rada Corporation Ltd [1989] 1 NZLR 750 (CA) at 757.

would serve no purpose as the liquidation application was heard immediately after the adjournment application was dismissed.

Result

[58]I order:

(a)Sure Services Limited is put into liquidation.

(b)Steven Robert White and Craig Alexander Sanson are appointed liquidators. The liquidators will be paid the remuneration set out in their consent dated 13 June 2023. They are to apply at the conclusion of the liquidation for approval of their overall remuneration.

(c)The Commissioner will be paid its actual costs of $2,263 plus disbursements of $1,314.25, a total of $3,577.25.

1. The orders are timed at 4.15 pm, 23 February 2024.

Associate Judge Gardiner