Commissioner of Inland Revenue v Tower City Holdings Limited
[2020] NZHC 2239
•31 August 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-1331
[2020] NZHC 2239
IN THE MATTER OF the Companies Act 1993 BETWEEN
THE COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
TOWER CITY HOLDINGS LIMITED
Defendant
Hearing: 11 February 2020 and further submissions 24 & 26 February 2020 Appearances:
K Naik-Leong for the Plaintiff TJP Bowler for the Defendant
Judgment:
31 August 2020
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 31 August 2020 at 3pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Crown Law, Wellington Neilsons Lawyers, Auckland
The Commissioner of Inland Revenue v Tower City Holdings Ltd [2020] NZHC [2239] [31 August 2020]
[1] The plaintiff (the Commissioner) applies for an order under s 241(4) of the Companies Act 1993 (the Act) to put the defendant (Tower) into liquidation. The liquidation proceeding was commenced in July 2019, and on 8 July 2019 Vivian Fatupaito and Elizabeth Kenne were appointed interim liquidators.
[2] The liquidation claim was not preceded by any statutory demand under s 289 of the Act.
[3] With the liquidation claim, the Commissioner filed a without notice application for an order under s 246 of the Act appointing interim liquidators to Tower. In a judgment given on 8 July 2019,1 Associate Judge Andrew appointed Vivian Fatupaito and Elizabeth Keene as joint and several interim liquidators of Tower. Tower and its director Lawrence Chek Wai Chan (Mr Chan) were given leave to apply to the Court to vary or rescind the order appointing the interim liquidators, but no such application has been made.
[4] Tower filed a statement of defence to the liquidation claim, dated 9 August 2019.
The liquidation claim
The Commissioner’s causes of action
[5]In her claim, the Commissioner pleaded four separate causes of action.
[6] First, she contended that Tower is unable to pay its debts, being a ground for winding-up by the Court under s 241(4)(a) of the Act.
[7] Secondly, the Commissioner alleged that Tower has failed to keep proper accounting records that enable its financial position to be determined without requiring explanation or reconstruction.
1 Commissioner of Inland Revenue v Tower City Holdings Ltd [2019] NZHC 1577.
[8] Thirdly, the Commissioner contended that the directors of Tower have failed to comply with their duties under the Act, in the following respects:
(i)Failing to ensure that Tower met its tax obligations;
(ii)Failing to ensure that Tower kept proper accounting records;
(iii)Allowing its assets (properties and funds) to be consistently stripped by its directors for their personal benefit, in priority to applying them to payment of Tower’s creditors (including its tax liabilities);
(iv)Advancing their personal interests over those of Tower.
[9] In her fourth cause of action, the Commissioner says that, in the circumstances of the case, it is just and equitable that Tower should be put into liquidation by the Court. She contends that an objective observer would justifiably lack confidence in the conduct and management of Tower, and that there is a need for a thorough and independent investigation of Tower’s affairs. She also contends that it is in the public interest to maintain the integrity of the tax system, which includes the Commissioner’s ability to collect tax when it is due and the liquidation of entities that are unable to meet their tax debts (or show a blatant disregard for complying with their statutory obligations).
Tower’s directors and shareholders
[10]Mr Chan has been a director since Tower was incorporated on 12 March 2009.
[11] Between 17 June 2011 and 16 August 2011 Mr Stewart Clarke (Mr Clarke) was registered as a director with Mr Chan.
[12] For a period between 23 December 2015 and 9 February 2018, Mr Ethnik Krasniqi was also a director of Tower. From 9 February 2018, however, Mr Chan has been the sole director of Tower.
[13] Initially, the shares in Tower were held by Wellpark Trustees No.2 Limited, a company of which Mr Clarke was the sole director and shareholder. In April 2012, the shares were transferred to Mr Chan, who has remained the sole shareholder in Tower since then.
[14]The Commissioner says that Mr Chan was largely out of New Zealand between
29 September 2014 and 11 June 2017. He has not communicated with the Commissioner about Tower’s tax affairs.
[15] Mr Clarke acted as Tower’s tax agent, or contact person for GST purposes, and he has filed some tax returns for Tower. Mr Clarke also nominated a bank account under his control to receive payments from the Commissioner for Tower, and he has directed where GST refunds for Tower were to be paid by the Commissioner.
[16] Mr Clarke is an undischarged bankrupt, and in March 2019 he received a three- year custodial sentence for offences under the Insolvency Act 2006.
[17] The Commissioner says that Mr Krasniqi was purportedly engaged on 1 June 2012 by Tower to work on the sale and marketing of its properties. Under a marketing agreement he had with Tower, he was to be paid a retainer of $250,000 per annum. The Commissioner says that Mr Krasniqi facilitated the property transactions, and that he (or an entity associated with him) received the proceeds of sale of Tower’s properties. The Commissioner says that Mr Krasniqi owes $10,287,005.85 for personal income tax covering the income tax years from 2005 to 2018.2
The tax audit
[18] The Commissioner carried out an audit of Tower commencing in 2015. The principal targets of the audit were GST for the period between October 2012 and August 2014, and income tax for the period 1 April 2012 to 31 March 2013.
2 By memorandum dated 13 August 2020, Mr Bowler advised that the issues between Mr Krasniqi and the Commissioner have now been resolved. That was disputed in a memorandum filed for the Commissioner on 17 August 2020. There is no need to address the issue further, however, as I am able to determine the liquidation claim without reference to Mr Krasniqi’s personal tax position.
[19] The Commissioner says that information requested from Tower was not provided, but she was able to identify from information obtained from third parties a number of property transactions entered into by Tower that had not been returned for income tax or GST purposes.
The default assessments
[20] In May 2017, the Commissioner issued default assessments in respect of income tax for the years ended 31 March 2014 to 31 March 2016. Of the default assessments, only the assessment for the year ended 31 March 2016 resulted in Tower having a liability to pay tax. Losses were available from the earlier years for Tower to carry forward into the 2016 tax year.
[21] The notice of assessment issued for the 2016 income year recorded an assessed amount of $4,084,478.22 payable by Tower. That assessment related to the sale of properties by Tower at 223 Kohimarama Road, 7 John Rhymer Place, and 3-5 Eltham Road, Kohimarama, for a total price of $32,180,000. The Commissioner also assessed Tower for an evasion shortfall penalty of $3,063,358.70.
[22] In May 2017, the Commissioner made default assessments in respect of GST for the period ended 31 July 2016. GST of $273,913.04 was assessed on the sale of a property owned by Tower at 10 Huka Road, Birkenhead. The Commissioner also assessed Tower for an evasion shortfall penalty of $205,434.78 for failing to declare the sale for GST purposes in its return for the period ended 31 July 2016.
[23] The total amount of these assessments came to $7,627,184.74. The Commissioner says that interest and late payment penalties have continued to accrue on that sum in accordance with the Tax Administration Act 1994 (the TAA). Tower has made no payment in reduction of the outstanding amount.
Tower files some returns
[24] In March 2019, Tower filed two income tax returns for the tax years ending 31 March 2017 and 31 March 2018. It also provided completed IR10 financial statements
summary forms for those tax years. The 2017 income tax return declared $46,331 to pay. That sum fell due on 7 February 2018, but it has not been paid by Tower.
[25] Tower also filed GST returns in March 2019, covering the periods ended 31 May 2016, 31 August 2016, 31 December 2017, 28 February 2018 and 30 June 2018. The returns for four of these periods claimed expenses, but recorded no sales. GST refunds were claimed for these four periods.
[26] The GST return for the period ended 31 December 2017 returned taxable sales of $4,500,000, and zero-rated sales of $2,300,000. Expenses of $546.25 were claimed, leaving tax to pay of $286,885.27. That sum was due to be paid by 28 February 2019, but it has not been paid.
Tower disputes the default assessments
[27] On 11 September 2017, Tower issued notices of proposed adjustment (“NOPA’s”) to the Commissioner, disputing the default assessments. With the NOPA’s, Tower provided financial statements for the tax year ended 31 March 2015, which showed comparative figures for the 31 March 2014 year. The NOPA’s also disputed the 2016 income assessment, although no financial statements were provided to support an adjustment for the 2016 tax year. The adjustments for the 2016 tax year contained in Tower’s NOPA relating to that tax year were recorded as “provisional at this stage”, and “TBC”.
[28] Mr Clarke emailed financial statements for Tower for the tax year ended 31 March 2016 to the Commissioner, on 5 October 2017. He had prepared these statements, and also those submitted for the 2015 tax year, himself. The Commissioner says that, in certain instances, the figures in the 2015 financial statements did not match the figures included under the same headings in the comparative figures shown in the 2016 financial statements.
The Commissioner rejects Tower’s NOPA’s
[29] The Commissioner issued notices of response (“NOR”s) rejecting Tower’s NOPA’s on 9 November 2017 (in respect of the GST default assessment) and 4 December 2017 (in respect of the income tax default assessment).
[30] The dispute has not been resolved, and is currently in the conference phase under the dispute resolution procedures.3
Concerns over Tower’s record-keeping
[31] The Commissioner says that Tower has not provided her with general ledgers, capable of verifying the financial records. Nor does Tower hold a bank account in its own name – Tower’s business has all been transacted through its solicitors’ trust accounts.
Transfers of properties since the tax audit
[32] The Commissioner says that Tower has transferred a number of properties out of its ownership since the tax audit began, but the proceeds of sale have not been applied to reduce the outstanding tax debts. Instead, the proceeds appear to have been applied for the benefit of Mr Krasniqi, Mr Chan and Mr Clarke.
[33] On 22 December 2017, Tower transferred six properties in Tukairangi Road, Taupo (the Taupo properties), to a company called Ten Abbotts Limited (Ten Abbotts). Tower has not applied any of the proceeds of these sales to its tax debts.
Allegation that Tower cannot pay its debts
[34] In support of her contention that Tower is unable to pay its debts, the Commissioner says that Tower currently owns three properties, the combined value of which is not sufficient to meet its tax liabilities. On that basis, she says that Tower is insolvent. In the alternative, she says that Tower is unable to pay its debts because
3 Once a NOPA and NOR have been issued, s 89M of the TAA provides for each side to submit to the other a statement of its position, which must include an outline of the facts and evidence on which it intends to rely, and an outline of the issues that it intends to raise and the propositions of law on which it will rely. Normally a facilitated conference is arranged. The objective of these “pre-litigation procedures” is to promote the prompt and efficient resolution of the dispute by requiring the issues and evidence to be considered by the parties before proceedings are commenced (s 89A(1) of the TAA). The disputes procedure just described is in the nature of a negotiation process; if agreement is not reached (or one party is deemed to have agreed to the other party’s position by failing to take a step in the process within a prescribed time), proceedings may follow in either the Taxation Review Authority or in this Court (Allen v Commissioner of Inland Revenue [2006] NZSC 19; [2006] 3 NZLR 1 at [9]).
those with effective control and management of Tower have been making decisions to ensure that Tower does not pay its debts as they fall due.
Tower’s statement of defence
[35] In its defence, Tower generally admits the Commissioner’s allegations relating to the shareholding and directorships in Tower.
[36] Allegations relating to the tax audit conducted by the Commissioner are generally denied, but the notices of assessment are acknowledged to have been issued or proposed. They are said to be the subject of a challenge under Part 8A of the TAA.
[37] Tower says that some disputed assessments constitute deferrable tax, and it is not liable to pay deferrable tax in relation to the challenge (or any penalty or interest) until the expiry date of the deferral, which has not yet occurred. It says its challenge has not yet been determined, and its final liability has not been determined.
[38] In respect of its returns, Tower says that it has lost confidence in Mr Clarke, and the returns filed are being reviewed with a new accountant. It says that in any event Tower has significant tax losses, which would be available to set off against tax liabilities in any liquidation.
[39] In respect of the sales of the properties referred to by the Commissioner, Tower admits that it sold the Huka Road properties, and that it also sold the six Taupo properties to Ten Abbotts Limited at market value (purchase price $4,500,000).
[40] Except for a 2017 GST liability ($286,885.27, due in respect of the GST period ended 31 December 2017), Tower denies that it has any tax liability to the Commissioner. It says that the Commissioner is holding GST refunds payable to it which can be offset against any GST liability it has.
The Commissioner’s reply
[41] In her reply, the Commissioner denied an allegation that she is holding GST refunds payable to Tower, and that those refunds can be offset in a liquidation against
any debt owed by Tower to the Commissioner. She acknowledged that a dispute with Tower has been commenced under Part 4A of the TAA, but she denied that a challenge under Part 8A of the TAA has been commenced.
[42] In response to Tower’s denial of the Commissioner’s allegation that between 9 and 11 May 2017 Notices of Assessment reflecting Tower’s income tax defaults were sent to Tower, the Commissioner stated that Notices of Assessment reflecting the default assessments in respect of the income tax years from 31 March 2014 to 31 March 2016 were sent to both directors of Tower at that time (Mr Chan and Mr Krasniqi) at particular stated addresses.
[43] The Commissioner denied allegations in the defence that Tower, having lost confidence in Mr Clarke, is having the returns filed on its behalf reviewed by a new accountant. She also denied Tower’s pleading that it has significant tax losses, and that “such amounts are set off in liquidation”.
[44] In response to Tower’s contention that the Commissioner is holding GST refunds payable to Tower, the Commissioner stated:
(i)a GST refund claimed by Tower for the GST period ended 31 August 2014, in the sum of $133,317.26, is not payable to Tower. The refund was withheld by the Commissioner, under s 46 of the TAA, and Tower was notified that the refund was being withheld. Supporting documents were requested to substantiate the refund claim. To date, Tower has not responded to the s 46 letter or provided documents supporting the refund claimed for the August 2014 GST period.
(ii)Mr Clarke filed GST returns for Tower in March 2019, for each of the GST periods ended 31 May 2016, 31 August 2016, 28 February 2018 and 30 June 2018. GST refunds totalling
$5,635.26 were sought in these returns. The Commissioner made a nil assessment of GST in respect of the May 2016 period, and that has not been disputed. The amounts claimed by
Tower in respect of the other periods were credited (less a $250 late filing fee in respect of each period) against outstanding amounts owed by Tower in respect of earlier GST periods.
(iii)The GST returns for the periods ended 31 August 2016, 28 February 2018 and 30 June 2018 were not accompanied by any substantiating documents. Those returns are being reviewed by the Commissioner.
The evidence for the Commissioner
[45] Mr Lorigan, a customer compliance specialist employed by the Commissioner, provided the usual affidavit verifying the allegations in the statement of claim. He also filed a lengthy affidavit in support of the application to appoint interim liquidators.
[46] In view of the conclusion I have reached on the Commissioner’s second cause of action (alleged failure by Tower to keep proper accounting records that enabled its financial position to be determined without requiring explanation or reconstruction), it is not necessary to refer to most of the evidence given by Mr Lorigan. It is enough to refer to the following.
[47] In a section of his evidence headed “Inaccuracies in accounting records provided by Tower”, Mr Lorigan demonstrated that the financial statements for the 2016 financial year provided by Tower could not have been correct. For example, the 2016 financial statements purported to show that Tower sold the Taupo properties in the course of the year for $5,999,999, but the documentary evidence held by the Commissioner supports a conclusion that the Taupo properties were not sold by Tower until 22 December 2017. Indeed, the purchaser, Ten Abbotts, was not incorporated until 20 September 2016.
[48] Mr Lorigan also noted that the comparative figures for 2015 included in the 2016 financial statements differed from the actual figures contained in the 2015 financial statements. The figures included for the items “Related Entity Loan
Accounts”, “Accrued Mortgage Interest”, and “Term Loan Funding” did not match.4 That resulted in the “Total Liabilities” and “Net Assets” figures changing significantly. In the 2015 financial statements the “Total Liabilities” figure was $3,981,963, while the “Net Assets” figure was $487,780. In the figures for 2015 that were included in the 2016 financial statements for comparison purposes, the “Total Liabilities” figure was ($5,785,099 and the “Net Assets” figure was ($1,315,356)).
[49] Mr Lorigan noted that it was unusual for figures in financial statements for a certain period to change in the comparative figures for the same period which are included in the financial statements for the following year. Normally the figures would be the same, and represent the starting point for the calculations in the later reporting period. The difference in these particular financial position items did not have any material effect on the tax payable by Tower, apart from the calculation of the interest expense in the statement of financial performance in the 2016 financial statements. However, Mr Lorigan said that the inconsistency raised questions, which he was not able to answer by reference to any underlying accounting records.
[50] Mr Lorigan also referred to an item “Interest – Development Loans” recorded as $4,217,857 in Tower’s statement of financial performance for the 2016 year. He said that there was a lack of supporting documentation to verify this substantial interest deduction.
[51] Mr Lorigan said that the inconsistency in the figures made it difficult to establish the solvency of Tower. For example, the actual 2015 financial statements for Tower suggested that the company was then solvent on a balance sheet basis. However the 2015 figures as set out for comparison purposes in the 2016 financial statements showed that Tower would have been insolvent on a balance sheet basis during the 2015 tax year.
4 The Statement of Financial Position for the 2015 tax year showed “Accrued Mortgage Interest” at
$536,661. The same item in the “2015 Comparison” column in the 2016 Statement of Financial Position was shown as $823,323. The item “Related Entity Loan Accounts” was shown in the 2015 Statement of Financial Position as $1,564,313, but the “2015 Comparison” column in the 2016 Statement of Financial Position showed the same item as ($238,823). The 2015 Statement of Financial Position showed Total Term Loan Funding of $3,429,777, while the “2015 Comparison” column in the 2016 Statement of Financial Position recorded the same item as
$4,946,251.
[52] The IR10 financial summary forms produced by Tower for the years ended 31 March 2017 and 31 March 2018 also appeared to be inaccurate. While the figure for closing stock in Tower’s financial statements for the year ended 31 March 2016 was shown as ($3,135,996), the opening stock figure recorded in the IR10 form for the ensuing tax year was $7,285,996. Mr Lorigan said in his evidence that the effect of this was to minimise Tower’s gross profit and assessible income by approximately
$4,000,000, which he described as a “substantial error”.
[53] Mr Lorigan said that the IR10 summary form provided by Tower for the 2017 tax year showed a grossly understated sales figure of $4,482,000. Evidence obtained by the Commissioner from third party sources showed that sales in the 2017 year totalled approximately $14,582,000. The IR10 form for the 2017 tax year also recorded $754,490 of purchases made by Tower, but the only evidence of purchases the Commissioner has been able to obtain, relating to a deed of nomination supporting the purchase of certain properties at Horeke, supported a purchases figure of only
$30,000.
[54] Given the inaccuracies in the accounting records provided by Mr Clarke on behalf of Tower for the 2015, 2016 and 2017 tax years, Mr Lorigan said that it was unclear what the sales purportedly declared in the 2018 IR10 form provided by Tower could be, apart, possibly, from the sale of the Taupo properties. However the sale of the Taupo properties had been included in the 2016 financial statements, so they could not also have been included in the 2018 IR10 form.
[55] Mr Lorigan said that no ledgers for Tower had been provided for any years. Ledgers might have assisted the Commissioner to reconstruct the financial position of Tower. He said that there was no evidence to suggest that ledgers even exist. Also, as Tower has not had any bank account in its name, it has not been possible to reconstruct its financial position from bank statements. He said that the Commissioner has endeavoured to get a picture of Tower’s transactions from tracing funds through accounts controlled by Mr Clarke, Mr Chan and Mr Krasniqi, and ledgers of various solicitors’ trust accounts, but he was not confident that the documents obtained for this purpose provided the full extent of transactions Tower had been involved in or undertaken.
Evidence for Tower
Mr Chan
[56] Mr Chan expressed the view that Tower has no tax liability to the Commissioner. On the contrary, he said that he believed Tower has outstanding GST refunds and substantial losses. Any proposed assessments which would change that are presently the subject of a dispute which has not yet been concluded.
[57] Mr Chan said that Tower was nothing more than a property development company that had run into some difficulties with one of its developments. He referred to a GST dispute with the Commissioner in relation to the sale of a property at 2 Huka Road. Tower’s position is that the sale should have been zero-rated because the ultimate purchaser was GST-registered. The Commissioner’s position is that the transaction should be standard-rated, because the party who signed the sale agreement was not GST-registered. Mr Chan said that dispute is ongoing, and it extends to the issue of Tower’s liability for income tax. He asserted that, unless and until the tax disputes are completed, Tower does not owe the Commissioner anything.
[58] Mr Chan accepted that Tower was behind in filing its income tax returns. He said his error, if any, had been in engaging Mr Clarke to assist him. He also accepted that there had subsequently been delays in providing documents to the Commissioner, but he understood the Part 4A dispute was in the conference phase, and that there would be time to provide documents.
[59] Mr Chan expressed the view that the Commissioner had made insufficient efforts to contact him about her concerns. He said that he found it difficult to believe that the Commissioner could not contact him, as he has always responded to the Commissioner by email. Nor could he understand why the Commissioner could not keep in touch with Tower’s solicitors. He denied receiving any letter from the Commissioner advising that Mr Clarke had been removed from her list of approved tax agents, and he said he was first made aware of the Commissioner’s concerns when he was contacted by the office of the interim liquidators on 10 July 2019.
[60] Mr Chan denied any knowledge of Mr Clarke’s tax issues, or the fact that Mr Clarke had been made bankrupt and could no longer act as a tax agent. He said he did not know about Mr Clarke’s criminal convictions, noting that he had spent much of the last several years working out of New Zealand. His contact with Mr Clarke had generally been by email.
[61] Mr Chan expressed concern that the Commissioner appeared to be using the appointment of the interim liquidators to seek information about third parties, and that had nothing to do with Tower or himself. He suggested that the appointment of the interim liquidators may have been intended to allow the Commissioner to go on a fishing expedition in relation to the third parties, noting that “Mr Krasniqi is clearly of interest”.
[62] Mr Chan acknowledged that, when he was overseas, Mr Clarke did contact him to ask for information to complete the GST and income tax returns. When Mr Clarke contacted him, he instructed one of Tower’s former solicitors to forward the information to Mr Clarke to complete the returns. He said that the solicitors were not very cooperative, and were very slow to respond to any communication. When he returned to New Zealand, he found that the law firm no longer existed, and its partners were in dispute. The particular partner with whom he had corresponded was now acting in his own firm, and Mr Chan said he was struggling to obtain documents for Tower from the solicitor.
[63] Mr Chan said that all the income tax returns for Tower were completed using this lawyer’s trust account statements, as the lawyer paid all Tower’s bills.
[64] Mr Chan said that he had been unaware that Mr Clarke was not handling Tower’s tax affairs appropriately. Since he became aware of that, he has personally engaged a new accountant. The new accountant would have taken over for Tower and continued to assist with the dispute, but for the appointment of the interim liquidators.
[65] Mr Chan described difficulties Tower ran into with a development at Lot 4, Huka Road. He said that Tower engaged a firm of consultants on the development, and the consultants quoted between $500,000 and $600,000 in development costs for the
completion of six new land titles within 12 months. However the consultants’ budget blew out to a figure in excess of $3,000,000, and the estimate of 12 months for the development extended to three years. The consultants were then removed, and Mr Chan took over managing the project while he was present in New Zealand.
[66] By 2014, because of the penalty interest rates and blow out in expenses and time, the debt to the lender (Aston Investments) exceeded the value of the property. Mr Chan said that he had other business interests he had to deal with overseas, and at that point he handed over the day-to-day management of Tower to Mr Krasniqi, later appointing him a director of Tower so that he could handle the completion of the project. Mr Krasniqi was left to manage Huka Road and any other projects undertaken by Tower, as he saw fit.
[67] Mr Chan said that he appreciated that “on paper” Tower appeared to be insolvent. However, as its director and shareholder, he has been working through its issues with a view to resolving them. He said that he has had a good relationship with Tower’s secured creditors, and has been sufficiently successful in other matters to have confidence in obtaining a good outcome. He said that he has a number of other business interests that are successful, and that he did not appreciate the Commissioner’s attempt to sully his reputation because she has issues with third parties.
Mr Krasniqi
[68] Mr Krasniqi said he resides in Australia, and is in the process of renewing his residency in Dubai. He said that, due to his absence from New Zealand, he had limited documentation available relating to the matters in issue.
[69] Mr Krasniqi said that he acted as an adviser to Tower, and was a director of Tower from the latter half of 2015 until 9 February 2018.
[70] Mr Krasniqi did not suggest that Tower maintained accounting records at its registered office, or indeed that records such as ledgers explaining day-to-day transactions were maintained. However he did say in respect of the development at Huka Road, Birkenhead, which related to the completion of a six-lot subdivision and
the building of approximately 22 terrace houses, that all the information was recorded in multiple files that were in the possession of the solicitors then acting for Tower. The solicitors firm has since been dissolved, and Mr Krasniqi assumed that the documents would be held by the partner who did the work for Tower.
[71] Mr Krasniqi understood that Mr Clarke was preparing the GST returns for Tower in 2014, but he said he was not privy to the returns. He contended, however, that there would be a considerable GST claim due to Tower because the works on the Huka Road site cost in excess of $3,000,000, and in the end the principal owing and capitalised penalty interest resulted in the costs of the development exceeding the value of the completed lots.
[72] Mr Krasniqi explained the acquisition of the Taupo properties, which involved a swap transaction which is at the heart of the income tax dispute for the 2016 tax year. Tower acquired two contiguous properties in Kohimarama (the Kohimarama properties) for $14,998,000, and it immediately sold the Kohimarama properties for
$29,380,000. The sale price of $29,380,000 was satisfied in part by the transfer of six titles of land at Taupo owned by the purchaser (the Taupo properties), to which a value of $6,000,000 was allocated, intellectual property valued at $8,000,000 associated with the Taupo properties, and a cash component of $15,308,000. In cash terms, Tower paid out $14,998,000 to acquire the Kohimarama properties, and it received
$15,308,000 on the sale of the Kohimarama properties. The modest surplus of
$382,000 was applied to agent’s fees, and specialist consultants’ and legal fees. Mr Krasniqi summarised the result of the swap transaction, saying that Tower came away with $382,000 in cash, $6,000,000 in the value of the Taupo properties, and $8,000,000 worth of intellectual property associated with the Taupo properties.
[73] Mr Krasniqi explained that the intellectual property value was associated with the potential to developing a geothermal power station on the Taupo properties, which it was thought would have a value of roughly $300,000,000 when constructed.
[74] In the event, there proved to be no value in the intellectual property – after settlement, Tower ascertained from specialist testing that the contemplated power station could not be erected on the site, and that a smaller power station would not be profitable. The $8,000,000 attributed to the intellectual property had to be written off.
[75] Mr Krasniqi then began to look at selling the Taupo properties. He formed the view that the Taupo properties were then worth no more than $3-4,000,000. Their value was written down to approximately $4,000,000 in the tax returns completed by Mr Clarke for Tower, and they were later sold to Ten Abbotts for approximately
$4,500,000. Mr Krasniqi said that the sale of the Taupo properties to Ten Abbotts was an arms-length transaction, in no way connected to him. He said he has received no remuneration from the on-sales of the Taupo properties by Ten Abbotts.
[76] Mr Krasniqi contended that the Commissioner has failed to consider the intellectual property value in the Taupo properties.
[77] Mr Krasniqi concluded by expressing the belief that Tower has sufficient tax losses to cover any income tax arising, and that it remains in a GST refund position.
The order appointing interim liquidators
[78] In his judgment of 8 July 2019, Associate Judge Andrew noted that an application for an interim order appointing a liquidator must show a good prima facie case for the liquidation order. On the facts before him, His Honour concluded that the application for the liquidation order would in all probability succeed.5 The Associate Judge took the view that the disputes raised by Tower did not appear to be genuine, and in any event a portion of the tax debt had been self-assessed by Tower (total
$333,216.27), and was not currently subject to any dispute.6
5 Commissioner of Inland Revenue v Tower City Holdings Ltd, above n 1, at [9]-[10].
6 Income tax of $46,331 was self-assessed by Tower for the tax year ended 31 March 2017, and
$286,885.27 was self-assessed for GST in respect of the period ended 31 December 2017.
[79] The Associate Judge considered that the Commissioner had made out a good prima facie case on the issue of persistent and serious failure by Tower to comply with the Act, in particular by failing to keep accounting records as required by s 194 of the Act.
[80] On the issue of persistent or serious failure to keep accounting records, the Associate Judge said:
[24] Financial statements for the years ending 31 March 2015 and 31 March 2016 were provided to the Commissioner by Mr Clarke, for Tower. The Commissioner requested copies of ledgers, journals, trial balances, chart of accounts, working papers for returns and bank statements for Tower. None of those records have ever been provided, and part of the Commissioner’s reason for imposing the evasion or similar at shortfall penalty in the 2016 year was the failure of Tower to maintain records as required under s 22 of the TAA.
[25] The Commissioner contends there is no evidence to suggest that ledgers even exist. She has been unable to verify the financial statements provided and to establish Tower’s financial position. The [affidavit of Mr Lorigan, a customer compliance specialist employed by the Commissioner] notes there are significant differences in the figures included in the 2015 financials and the comparative figures for 2015 which have been included in the 2016 financials. The differences culminate in the “net assets” changing significantly. In the 2015 financials, the “net assets” figure is $487,780. In the comparative figures for 2015 and the 2016 financials, the “net assets” figure is $1,315,356.
[26] Furthermore, the sales and purchase figures in the 2017 IR10 are inconsistent with the documentation held by the Commissioner. The sales figures included in the 2017 IR10 is $4,482,000. The Commissioner has documents which show that Tower’s sales should be approximately
$14,582,000 in the year ended 31 March 2017. The 2017 IR10 includes purchases of $754,490. The only evidence the Commissioner holds supports Tower’s purchases of $30,000 in the year ended 31 March 2017.
[27] I accept that the Commissioner is unable, in the absence of proper accounting records, to re-construct the financial position of the company using as her starting point the company’s bank statements. Tower does not hold any bank accounts in its name and aside from that being, as the Commissioner submits, unorthodox, the absence of a bank account clearly means it would be very difficult to re-construct the financial position of Tower.
[81] The Associate Judge was satisfied that there was very good reason for the Commissioner to conclude that Tower was insolvent on a balance sheet test (on the evidence, Tower’s assets of $1,390,000 fell far short of the claimed tax liability ($7,627,184.74), let alone its total liabilities figure). His Honour also accepted that there was prima facie evidence that the case was one where those having effective
control and management of a company had used their power to ensure that the company did not pay its debts that were lawfully due. In such circumstances, a company will be held to be unable to pay its debts.7
[82] Finally, the Associate Judge considered that there was a good prima facie case that it would be just and equitable to put Tower into liquidation. His Honour accepted that a prima facie case had been made out of “a justifiable lack of confidence by the Commissioner in the conduct and management of [Tower’s] affairs”. A variety of matters led the Associate Judge to that conclusion, including property transactions conducted by Tower with unusual features, such as contemporaneous same-day purchase and sale of single properties, significant changes to purchase price close to settlement, and large parts of the purchase price being satisfied through the transfer of other properties. His Honour also noted that Tower had transferred properties worth approximately $14,000,000 out of its ownership after the Commissioner had issued the Notices of Assessment.
Interim liquidators’ reports dated 17 September 2019 and 8 October 2019
[83] In their first report dated 17 September 2019 (the First Report), the interim liquidators included a section headed “Books and records”.
[84] In this section, the interim liquidators recorded that they had received a copy of Tower’s financial statements for the years ended 31 March 2015 and 2016. The statements appeared to have been prepared by Mr Clarke, and one of the interim liquidators interviewed him on 12 August 2019. Mr Clarke said that he took instructions from Mr Chan and Mr Krasniqi. The records that he was provided with to prepare accounts and GST returns often consisted of solicitor trust account records. Mr Clarke expressed the opinion that there was a significant amount Tower would owe to the Commissioner, but he wasn’t sure exactly how much.
7 Forward Plastics Ltd v NZ Distilled Water Ltd [2012] NZHC 1383 at [41], approved by the Court of Appeal in Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408 at [35].
[85] The interim liquidators said in the First Report that they had not received any work papers or other supporting documents to support Tower’s financial statements for the years ended 31 March 2015 and 2016. They confirmed that Tower did not have a bank account held in its own name, and that it appeared to have exclusively conducted its financial affairs from an assortment of solicitors’ trust accounts. They reported that they had received copies of various trust account statements from the Commissioner and from solicitors who had acted for Tower, and they were working to reconstruct a consolidated set of receipts and payments from those records.
[86] Under a section in their report headed “Adequacy of books and records”, the interim liquidators said in the First Report that they had formed the view that Tower had not kept adequate accounting records as required under s 194 of the Act. They reached that view for the following reasons:
(i)they had not received any evidence that Tower kept records of its transactions outside of the aggregate of solicitor trust accounts;
(ii)Mr Clarke advised them that he had had difficulties preparing accounting records from the information he was provided;
(iii)Tower’s financial statements for the years ended 31 March 2015 and 2016 reported inconsistent figures; and
(iv)Tower may have materially misrepresented its tax position to the Commissioner.
[87] The interim liquidators considered that, due to the inadequacy of Tower’s accounting records, further analysis was required to understand the financial implications of the transactions it was a party to, and its true financial position.
[88] The interim liquidators noted a number of indicators of apparent insolvency, and concluded that, at the date of their appointment, it was likely that Tower was insolvent on a balance sheet basis.
[89] The interim liquidators identified a number of transactions they considered would require more detailed investigation and analysis. First, they identified 10 separate transfers from trust accounts which they considered merited further investigation. The payments made included payments totalling approximately
$400,000 to Mr Krasniqi or members of his family, and a payment of $83,047 to a company called Crimsonbox Company Limited (Crimsonbox), that was substantially owned and controlled by Mr Chan.
[90] In addition, the interim liquidators identified for further consideration Tower’s acquisition of the Taupo properties, and the sale of a property Tower owned at 10 Huka Road, Birkenhead. With regard to the Taupo properties, the interim liquidators noted that on 28 May 2015 Tower sold two properties in Auckland to Rainbow Holdings, for
$30,680,000. Under the agreement for sale and purchase, $14,000,000 of the purchase price was satisfied by the transfer of the Taupo properties to Tower. Tower later sold the Taupo properties to Ten Abbotts for only $4,500,000.
[91] With regard to the 10 Huka Road property, the interim liquidators noted that on 17 April 2019 the property was transferred to Mr Warwick Choy. Although a neighbouring and almost identical property had been valued a few months earlier at
$2,900,000, the sale price to Mr Choy, who was an existing lender to Tower, was
$2,000,000. The sale agreement was contemporaneous with the execution of an agreement to lease the property to Crimsonbox for the purposes of developing the land, and there was a separate sale-back agreement, under which Tower agreed to purchase the property back from Mr Choy within 12 months. It appears that Mr Choy only paid $1,400,000 of the $2,000,000 purchase price, and the $600,000 balance appears to have been treated as a deposit payable by Tower to Mr Choy under the buy- back agreement.
[92] In their second report dated 8 October 2019 (the Second Report), the interim liquidators reported that they had been advised that the buy-back agreement with Mr Choy may have been cancelled, but they had been unable to obtain any information as to who cancelled the agreement, when any cancellation took place, and how any cancellation affected the $600,000 deferred consideration due from Mr Choy.
[93] The interim liquidators also noted in the Second Report that Mr Chan had personally received $385,000 from Tower’s trust account with a law firm. Approximately $98,000 of that sum was paid to Mr Chan on 24 May 2018, and the balance on 17 April 2019.
Applications for liquidation orders – legal principles
[94]Section 241 of the Act materially provides:
241 Commencement of liquidation
(1) A company may be put into liquidation by the appointment as liquidator of a named person or of an Official Assignee for a named district.
(2)A liquidator may be appointed by—
…
(c) the court, on the application of—
…
(iv)a creditor (including any contingent or prospective creditor); or
…
(4)The court may appoint a liquidator if it is satisfied that—
(a)the company is unable to pay its debts; or
(b)the company or the board has persistently or seriously failed to comply with this Act; or
(ba)the company, or 1 or more of its directors or shareholders, has intentionally provided the Registrar with inaccurate information; or
(bb)the company, or 1 or more of its directors or shareholders, has in a persistent or serious way failed to comply with duties relating to the company—
(i)under this Act; or
(ii)under the Financial Reporting Act 1993 while in force, except that this subparagraph does not apply after 5 years have elapsed after this subparagraph came into force; or
(c)the company does not comply with section 10; or
(d)it is just and equitable that the company be put into liquidation.
(5)The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed.
[95] It will be seen (from s 241(2)(c)) that, in order to have standing to apply for a liquidation order, the Commissioner needs to qualify as a “creditor” of Tower, whether actual, contingent, or prospective.
[96] A creditor whose debt is only prospective or contingent must obtain the leave of the Court if that creditor wishes to obtain a liquidation order on the ground that the debtor is unable to pay its debts. The Court may grant such leave, with or without conditions, only if it is satisfied that a prima facie case has been made out that the company is unable to pay its debts.8
[97] Where a liquidation claim is made on the basis that the defendant is unable to pay its debts (s 241(4)(a) of the Act), the defendant may defend the claim either by showing that it is solvent (able to pay its debts) or that there is a genuine and substantial dispute as to the existence of the debt. In Yan v Mainzeal Property and Construction Ltd (in rec and in liq), the Court of Appeal summarised the applicable principles as follows:9
(a)A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;
(b)In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;
(c)The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced, might nonetheless be available;
(d)The governing consideration is whether proceeding with an application savours of unfairness or undue pressure;
…
[98] The Court must keep in mind throughout that the task for the Judge is not to resolve the actual dispute, but to determine whether there is a substantial dispute as to whether or not the debt is due.10
8 Companies Act 1993, s 288(5).
9 Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 190 at [61].
10 Link Electrosystems Ltd v GPC Electronics (NZ) Ltd [2007] NZCA 501, (2007) 18 PRNZ 946 at [17].
[99] The list of grounds in s 241(4) of the Act is a disjunctive list; the Court need only be satisfied that one of the statutory grounds alleged by a plaintiff has been satisfied.
[100] In her first cause of action, the Commissioner contends that Tower is unable to pay its debts not only because it is an insolvent, but also because the wilful actions and conduct of those with control and management of Tower are preventing it from paying its debts.11
[101] For her second cause of action, the Commissioner relies on s 241(4)(b) of the Act. She says that Tower has persistently or seriously failed to comply with the Act by failing to keep the required accounting records.
[102] The relevant section of the Act relating to accounting records is s 194. That section materially provides:
194 Accounting records must be kept
(1)The board of a company must ensure that there are kept at all times accounting records that—
(a)correctly record the transactions of the company; and
(b)will enable the company to ensure that the financial statements or group financial statements of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and
(c)will enable the financial statements or group financial statements of the company to be readily and properly audited (if those statements are required to be audited).
…
(2)The board of a company must establish and maintain a satisfactory system of control of its accounting records.
…
(4)If the board of a company fails to comply with the requirements of this section, every director of the company commits an offence and is liable on conviction to the penalty set out in section 374(3).
11 Relying on Forward Plastics Ltd v NZ Distilled Water Ltd, above n 7.
[103] In R v Bennett, the Court of Appeal held that the word “kept” in the introductory part of s 194(1) of the Act is not limited to retaining or restoring such records as happened to come into the company’s possession, but includes an obligation to create those records necessary to conform with the descriptions in the section which may not already be in existence and in the company’s possession.12
[104] The purpose of s 194 is not made explicit in the section itself. In its judgment in Bennett, the Court of Appeal stated:13
Section 151(1) [the equivalent of s 194(1) in the Companies Act 1955] does not stipulate the accounting records to be kept save by the purposes they are to serve and the information they are to provide. What is necessary will vary with the nature of the business and the urgency and state of its affairs.
Further than this we do not at present go. On some future occasion it may be necessary to decide whether among the objects of s 151 is that of having the management of a company know of its financial state at all times …
[105] In Commissioner of Inland Revenue v Jackson Property Group Ltd, Associate Judge Doogue noted that although Bennett was decided under the predecessor section to s 194 of the Act, there is no reason to suppose that what the Court of Appeal said in that case does not remain applicable.14 Generally, Associate Judge Doogue considered it likely that one of the roles played by s 194 is to impose specific record-keeping responsibilities on those who take advantage of limited liability by adopting an incorporated body as the vehicle for their business.15
[106] In Mizeen Painters Ltd (in liquidation) v Tapusoa, the liquidators commenced proceedings against the company’s former directors and shareholders.16 The claims included a claim under s 300 of the Act relating to the defendants’ failure to keep adequate accounting records for the company, as required by s 194. Muir J noted that although financial statements had been prepared for three financial years, there were no accompanying general ledgers provided to the liquidators. The balances recorded in the company’s financial statements could not therefore be verified, and they were
12 R v Bennett (1985) 2 NZCLC 99,279 (CA) at 5.
13 At 99,282.
14 Commissioner of Inland Revenue v Jackson Property Group Ltd [2017] NZHC 1014, [2017] NZCCLR 30 at [148].
15 At [149].
16 Mizeen Painters Ltd (in liquidation) v Tapusoa [2015] NZHC 826, (2016) NZAR 423.
not a reliable starting point for calculation of the shareholder current account balances at liquidation. In the absence of proper accounting records, the liquidators were required to reconstruct the financial position of the company using as their starting point the company’s bank statements.17 Muir J referred to the decision of this Court in Maloc Construction Ltd (in liquidation) v Chadwick,18 in support of the proposition that the records to be held by a company under s 194 must be such that they will, at any time, enable the financial position of the company to be determined without requiring explanation or reconstruction.19 Muir J was satisfied that a breach of s 194 had clearly been made out. While financial statements had been prepared for the three financial years, no general ledgers were maintained from which the statements could be verified, no cash books were provided to the liquidators, and no accounting software package appears to have been used to record the day-to-day transactions of the company.20
[107] In Maloc Construction, Tompkins J considered that the expression “accounting records” was deliberately not defined in the Act. That was because the scheme of the section was to require a company to keep whatever records in whatever form may be necessary to achieve the objectives specified. The Judge said:21
The records must speak for themselves. They must, without more, do or enable to be done, the matters spelt out in the four paragraphs of subs (1). It does not avail a company to say, as was said here, that those objectives could be achieved by reference to the accounting records available, plus further information and explanations that can be furnished by a company officer or employee.
The records themselves do not have to show the financial position of the company. They must be such that they will, at any time, enable that position to be determined. This requirement is not complied with if the company keeps only basic accounting records such as chequebooks, deposit books, bank statements, invoices and the like. It may be that using such basic records an accountant could construct further records that would enable the financial position of the company to be determined but the section requires that this basic accounting information should be assembled and recorded in such a way
17 Mizeen Painters Ltd (in liquidation) v Tapusoa, above n 16, at [12]-[13].
18 Maloc Construction Ltd (in liquidation) v Chadwick (1986) 3 NZCLC 99,794 (HC).
19 Mizeen Painters Ltd (in liquidation) v Tapusoa, above n 16, at [47].
20 At [48]
21 Maloc Construction Ltd (in liquidation) v Chadwick, above n 18, at 22 and 23. Maloc Construction has been followed in a number of cases in addition to Mizeen, including Grant v Guo [2015] NZHC 2480; [2015] NZAR 1585 at [17], Grant v Gifford [2018] NZHC 26 at [10], and NZ Natural Therapy Ltd (in liq) v Little [2018] NZHC 2164 at [119].
that the record itself will not only enable the financial position to be determined, but will enable that to be done at any time …
[108] In addition to s 194, s 189(1) of the Act requires a company to keep the following documents at its registered office:
…
(a)the constitution of the company:
(b)minutes of all meetings and resolutions of shareholders within the last 7 years:
(c)an interests register:
(d)minutes of all meetings and resolutions of directors and directors’ committees within the last 7 years:
(e)certificates given by directors under this Act within the last 7 years:
(f)the full names and addresses of the current directors:
(g)copies of all written communications to all shareholders or all holders of the same class of shares during the last 7 years, including annual reports made under section 208:
(h)copies of all financial statements and group financial statements required to be completed by this Act or any other enactment for the last 7 completed accounting periods of the company:
(i)the accounting records required by section 194 for the current accounting period and for the last 7 completed accounting periods of the company:
(j)the share register.
[109] In her third cause of action, the Commissioner relies on s 241(4)(bb) of the Act. She says that Tower’s directors have, in a persistent and serious way, failed to comply with duties relating to Tower under the Act. Specifically, the directors are said to have seriously and persistently failed to comply with their duties under ss 131, 135, and 137 of the Act.
[110] Generally, s 131 of the Act requires a director, when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company. In this case, the Commissioner says that Tower’s directors have advanced their personal interests rather than acting in the best interests of Tower.
[111]Section 135 of the Act provides:
135 Reckless trading
A director of a company must not—
(a)agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
(b)cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
[112] In this case, the Commissioner contends that Tower’s directors have carried on Tower’s business, or allowed it to be carried on, in a manner likely to create a substantial risk of serious loss to Tower’s creditors.
[113] The last relevant section of the Act relied upon by the Commissioner in her third cause of action is s 137, which imposes a duty of care on a company director. Section 137 provides:
137 Director’s duty of care
A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation,—
(a)the nature of the company; and
(b)the nature of the decision; and
(c)the position of the director and the nature of the responsibilities undertaken by him or her.
[114] The Commissioner says that Tower’s directors failed to exercise the care, diligence and skill expected of a reasonable director.
[115] In her last cause of action, the Commissioner relies on s 241 subs (4)(d) – it is just and equitable that the company be put into liquidation. The Commissioner contends that the improper conduct of Mr Chan, Mr Krasniqi, and Mr Clarke has led to a justifiable loss of confidence in the conduct and management of Tower. The Commissioner refers in support to Morgan Roche Ltd v Registrar of Companies.22
22 Morgan Roche Ltd v Registrar of Companies (1987) 3 NZCLC 100,189 (HC) at 14.
Preliminary question – does the Commissioner have standing to claim as a “creditor” of Tower?
[116]I am satisfied that she does.
[117] While a number of default assessments made by the Commissioner were and remain subject to NOPAs issued by Tower, and those NOPAs are currently still in the negotiation phase applicable under Part 4(A) of the TAA (following the service of NORs by the Commissioner), two returns submitted by Tower are not presently the subject of any dispute. These are the self-assessed sums of $46,331 in income tax for the year ended 31 March 2017, and $286,885.27 in GST for the period ended 31 December 2017.23 Both those sums are long overdue,24 and neither has been paid.
[118] Tower contends that it is entitled to set off against these acknowledged tax debts a number of refunds it contends it is entitled to in respect of other income tax and GST periods. However, all of Tower’s claims to refunds are disputed, and I am satisfied that the Commissioner is entitled to take advantage of r 5.61 of the High Court Rules 2016, which precludes the set-offs Tower claims.
[119]Rule 5.61 materially provides:
5.61 Restriction when the Crown involved
(1)In a proceeding by the Crown for the recovery of taxes, duties, or penalties, a defendant is not entitled to advance any set-off or counterclaim.
(2)In a proceeding of any nature by the Crown, a defendant is not entitled to advance any set-off or counterclaim arising out of a right or claim to payment in respect of any taxes, duties, or penalties.
…
[120] In Commissioner of Inland Revenue v FB Duvall Ltd, this Court held that the defendant’s argument that “complicated and extensive unresolved issues between the defendant and the plaintiff regarding GST” might lead to a sizeable GST refund, was
23 The four month periods for Tower to dispute these self-assessments (Tax Administration Act 1994, s 89AB(3)) both expired in July 2019, and no disputes have been raised in respect of them. The effect of s 109 of the Tax Administration Act is that these self-assessments are deemed to be correct.
24 The GST for the 31 December 2017 period was due on 28 January 2018, and the income tax for the year ended 31 March 2017 was due on 7 February 2018.
squarely caught by r 5.61.25 A similar conclusion was reached by Associate Judge Doogue in Commissioner of Inland Revenue v Jackson Property Group Ltd. Jackson Property Group contended that it was entitled to set off its claims for GST refunds to prove its solvency, but that argument was rejected by the Associate Judge. His Honour considered that the Commissioner was able to take advantage of r 5.61(1), which forbids a taxpayer from raising a set-off.26
[121] Mr Bowler relied on the judgment of Associate Judge Bell in Commissioner of Inland Revenue v The Fishing Company Ltd.27 In that case, the Associate Judge referred to s 310 of the Act, which deals with the question of set-off after a company has been put into liquidation. The Associate Judge considered that, once a company goes into liquidation, r 5.61(1) no longer applies, and set-offs are allowed under s
310.28 Associate Judge Bell accepted that r 5.61(1) is a “pay now argue later”
provision, but he considered that it was an error to rely on r 5.61(1) as stating any final position. The claim for the GST refund in that case was considered a relevant factor in the exercise of the Court’s discretion whether to make a liquidation order.29
[122] In my view, Commissioner of Inland Revenue v The Fishing Company Ltd cannot help Tower on the standing issue. The question of standing to bring a claim has to be assessed at the time the liquidation claim is made, and on my reading of the case nothing in The Fishing Company Ltd suggests that r 5.61(1) does not continue to apply up to the point a liquidation order is made. If it appears likely that a liquidator would allow the defendant’s claimed set-offs after liquidation under s 310, and that allowing the set-offs would or might extinguish the debt owed to the Commissioner, those may be matters to be taken into account in the exercise of the Court’s discretion as to whether a liquidation order should be made (just as the Court might take into account the defendant’s prospects of making a substantial recovery on a claim it has against a third party). But those considerations could not affect the Commissioner’s standing to bring the liquidation claim.
25 Commissioner of Inland Revenue v FB Duvall Ltd, HC Auckland, CIV-2007-404-2708, 13 November 2008 at [22].
26 Commissioner of Inland Revenue v Jackson Property Group Ltd, above n 14, at [51].
27 Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5 (HC).
28 At [24].
29 At [37]-[38].
[123] For those reasons, I accept Ms Naik-Leong’s submission that the Commissioner was and is an actual creditor of Tower, based on Tower’s two self- assessed returns showing a total indebtedness of $333,216.27. The Commissioner thus has full access to all of the grounds available to a creditor under s 241(4) of the Act, including the “unable to pay its debts” ground in s 241(4)(a). She did not require leave (as a prospective or contingent creditor would have done) to access the s 241(4)(a) jurisdiction.
Issues
[124]The following issues arise:
(1)Is the liquidation proceeding vexatious, and/or an abuse of process?
(2)Has the Commissioner shown, on the balance of probabilities, that Tower has persistently or seriously failed to comply with s 194 of the Act?
(3)Has the Commissioner shown, on the balance of probabilities, that Tower is unable to pay its debts?
(4)Does Tower have a genuine and substantial argument that there are GST set-offs which do or may exceed any amount owing to the Commissioner?
(5)Has the Commissioner shown, on the balance of probabilities, that Tower’s directors have, in a persistent and/or serious way, failed to comply with duties relating to Tower under ss 131, 135, and/or 137 of the Act?
(6)Has the Commissioner shown, on the balance of probabilities, that it would be just and equitable to put Tower into liquidation?
[125]I will address each issue (as necessary) in turn.
Issue (1): Is the liquidation proceeding vexatious, and/or an abuse of process?
Submissions for Tower
[126] For Tower, Mr Bowler noted that the Commissioner’s ex parte application for an order appointing liquidators sought to expressly reserve Tower’s right to challenge or dispute an assessment under the TAA. However the Commissioner now seeks to remove Tower’s rights under the TAA completely, without offering any reason for the change in position.
[127] In his judgment on the application for appointment of the interim liquidators, Associate Judge Andrew relied and acted on that reservation of Tower’s rights as one of the grounds justifying the making of the interim order.30 There has been no material change in the position since the Associate Judge gave his judgment, and the status quo should be preserved. The Commissioner should not now be permitted to resile from the position she took when she applied to have interim liquidators appointed.
[128] Further or alternatively, Mr Bowler submitted that the liquidation proceeding has been brought for vexatious or ulterior motives, namely:
(i)so that the Commissioner can avoid determining Tower’s GST returns and/or making refunds to Tower;
(ii)to obtain information about third parties;
(iii)to deny Tower its rights to dispute and/or challenge the Commissioner’s application under the TAA.
[129] The Court should dismiss the liquidation application for those reasons. There would be no prejudice to the Commissioner if the application were dismissed. The interim liquidators would remain in place until such time as Tower has exhausted its rights under the TAA.
30 Commissioner of Inland Revenue v Tower City Holdings Ltd, above n 1, at [22] and [48(b)].
Submissions for the Commissioner
[130] For the Commissioner, Ms Naik-Leong submitted that, in considering the application to appoint interim liquidators, Associate Judge Andrew accepted the Commissioner’s submission that the disputes raised by Tower did not appear to be genuine, and appeared to be only a delaying tactic.
[131] Ms Naik-Leong acknowledged that the Court has a residual discretion in relation to the appointment of a liquidator, but the onus is on Tower to establish that the whole of the debt is subject to a genuine dispute, and that the Commissioner is acting unfairly, and seeking to put undue pressure on Tower.31 Ms Naik-Leong referred to the decision of this Court in Commissioner of Inland Revenue v Erueruiti Investments Ltd, where the Court stated:32
[5] The company’s application and the submissions supporting it were heavily focussed on arguments that the Commissioner’s assessment of the company’s tax liability is the subject of dispute. In that regard the company’s arguments missed the point that the application to put the company into liquidation is based on a number of facts – other facts (beyond the legal status of the tax liability) justify the application …
Discussion and conclusions
[132]I do not consider there is anything in this Issue raised by Tower.
[133] I have looked at the application to appoint interim liquidators, and the affidavit of Mr Lorigan and memorandum of counsel filed in support, and I have seen nothing to suggest that the Commissioner gave anything in the nature of an undertaking not to continue with the liquidation claim pending completion of the procedures under Parts 4A and 8A of the TAA. That is expected: having filed a liquidation claim, the onus was on the Commissioner to pursue the claim to a hearing with all reasonable expedition.
[134] That is consistent with Ms Naik-Leong’s memorandum dated 3 July 2019 in support of the application to appoint interim liquidators, where she said:
31 Pink Pages Publications Ltd v Team Communications Ltd [1986] 2 NZLR 704 (HC).
32 Commissioner of Inland Revenue v Erueruiti Investments Ltd (2009) 24 NZTC 23,520 (HC) at [5].
[102] The appointment of an interim liquidator would not prejudice the pursuit of a genuine dispute of the debt by Tower. In the Application the Commissioner has sought orders preserving Tower’s ability to pursue its dispute. In any event, a liquidator would be able to engage with the Commissioner in the statutory disputes process stipulated in the TAA and pursue a tax challenge on behalf of Tower in the event the liquidator considers there is value in doing so.33
[135] The broad purpose of appointing an interim liquidator is to maintain the value of assets owned or managed by a company,34 and the Court’s orders are generally limited accordingly. The specific order sought in the application in this case (that would allow Tower to continue to pursue its rights under Parts 4A and 8A of the TAA) effectively confirmed that the interim liquidators’ asset preservation powers would extend to pursuing Tower’s rights under those parts of the TAA while they remained in office as interim liquidators. But I do not think it was intended to go beyond that. The passage quoted at paragraph [134] made it clear that a liquidation order might be made before the Part 4A and 8A procedures had been completed. And consistent with that, Tower filed a statement of defence on 22 August 2019, and participated in the making of timetable orders required to bring the substantive liquidation claim on for hearing, without applying to have the proceeding stayed until any Part 8A challenge had been determined.
[136] In addition to those considerations, the Commissioner’s contention that Tower and its directors have seriously and persistently failed to comply with their obligations under s 194 of the Act is a matter standing separate and apart from any Part 8A challenge proceeding either party might commence after the parties have worked through the Part 4A negotiation procedures. If there are grounds for liquidation on the basis of serious or persistent failure to comply with s 194 of the Act, why would that claim be deferred, possibly for some years, pending the completion of a Part 8A challenge proceeding? Also, there is an undisputed debt to the Commissioner of approximately $333,000, which would not be touched by any Part 8A challenge proceeding that might be issued.
33 Referring to s 248 of the Companies Act 1993.
34 Companies Act 1993, s 246(2).
[137] I see no basis for the other allegations of abuse of process made by Mr Bowler in his submissions. There is nothing to suggest that the Commissioner has been motivated by any desire to avoid determining Tower’s GST claims, or avoid making refunds. Indeed, Mr Lorigan said the Commissioner has credited some refunds to Tower’s account, and it appears that the problem with other GST refund claims is that Tower has failed to provide sufficient supporting documents. Nor is there any apparent basis in the evidence for the submission that the Commissioner has been motivated by an improper desire to obtain information about third parties.
[138]For those reasons, I find for the Commissioner on Issue 1.
Issue (2): Has the Commissioner shown, on the balance of probabilities, that Tower has persistently or seriously failed to comply with s 194 of the Act?
Submissions for the Commissioner
[139] For the Commissioner, Ms Naik-Leong referred to Maloc Construction Ltd, and Mizeen Painters Ltd, in support of the submission that a company must keep records that speak for themselves. She submitted that the records must, without more, do or enable to be done the matters spelt out in s 194(1) of the Act. It is not enough for a company to say that the objectives of that section can be achieved by reference to the accounting records which are available, supplemented by further information and explanations that might be furnished by a company officer or employee. The records must be such that they will, at any time, enable the company’s financial position to be determined. Section 194 requires that basic accounting information should be assembled and recorded in such a way that the record itself will not only enable the financial position to be determined, but will enable that to be done at any time.35 Ms Naik-Leong noted that in Mizeen Painters Ltd Muir J held that a breach of s 194 was made out in circumstances where financial statements had been provided, but no general ledgers had been maintained from which the financial statements could be verified, and there were no cash books or accounting software packages used to record the day-to-day transactions of the company.36
35 Maloc Construction Ltd (in liq) v Chadwick, above n 18, at 22-23.
36 Mizeen Painters Ltd (in liquidation) v Tapusoa, above n 16, at [48].
[140] On the facts, Ms Naik-Leong referred to Mr Lorigan’s evidence that the Commissioner requested copies of ledgers, journals, trial balances, chart of accounts, working papers for returns, and bank statements for Tower, but none of those records have been provided.37 That was part of the reason the Commissioner imposed penalties in the 2016 income year.
[141] Ms Naik-Leong relied on the following evidence provided by Mr Lorigan. First, there were inconsistencies in the financial statements, including significant differences between some figures included in the 2015 financial statements and the comparative figures for 2015 that were included in the 2016 financial statements. The differences were significant: in the 2015 financial statements the net assets figure was shown as $487,780, while in the 2016 financial statements the 2015 net assets figure was said to be ($1,315,356). Mr Lorigan also gave evidence of inconsistencies between the 2016 financial statements produced by Tower, and documents obtained by the Commissioner from third parties. In particular, the 2016 financial statements included income from the sales of certain properties that were not transferred out of Tower’s ownership until 22 December 2017.
[142] The IR10 financial summary forms produced by Tower for the years ended 31 March 2017 and 31 March 2018, provided by Mr Clarke, also appeared to be inaccurate. While the closing stock figure in Tower’s financial statements for the year ended 31 March 2016 was shown as ($3,135,996), the opening stock figure recorded in the IR10 form for the ensuing tax year was $7,285,996. Mr Lorigan said that the effect of this inconsistency was to minimise Tower’s gross profit and assessible income by approximately $4,000,000.
[143] Mr Lorigan gave evidence that the IR10 summary form provided by Tower for the 2017 tax year was also inconsistent with documents held by the Commissioner. The form showed total sales of $4,482,000, but the Commissioner has obtained documents showing that Tower’s sales should have been approximately $14,582,000 in that year. Also, the form showed purchases of $754,490, but the only evidence the Commissioner has been able to obtain supports purchases of $30,000 in that year.
37 It is common ground that Tower did not maintain a bank account. Payments and receipts were made and received through various solicitors’ trust accounts.
[144] Ms Naik-Leong relied on the concerns expressed by the interim liquidators in the First Report, and she noted that Tower did not provide in its statement of defence any particulars of records that had been created or maintained in satisfaction of its s 194 obligations – it simply denied the Commissioner’s claim that it had failed to keep accounting records, pleading that Mr Clarke was responsible for keeping the records and was paid to do so.
[145] Ms Naik-Leong also referred to Mr Chan’s acceptance in his evidence that there was a delay in providing documents to the Commissioner. She referred to Mr Krasniqi’s evidence that files relating to the Huka Road properties were in the possession of one of the law firms that acted for Tower, and that he assumed that they would still be held by the solicitor (formerly from that firm) who was then acting. Ms Naik-Leong submitted that, if there were simply a delay in providing the records and they were available to be supplied in time, or if amended records were being prepared by a new accountant, it would be reasonable to expect evidence of that to have been provided for Tower. No such evidence was provided.
[146] Finally, Ms Naik-Leong submitted that the lack of records cannot be effectively blamed on Mr Clarke. The obligations under s 194 are imposed on the board of the company.
Submissions for Tower
[147] Mr Bowler noted that Mr Chan had been overseas for a number of years, and left matters in the control of other individuals. He submitted that, although Mr Chan’s absence was, with hindsight, a matter of regret, Mr Chan has confirmed that he has engaged a new accountant to deal with Tower’s financial affairs. He noted Mr Chan’s evidence that the new accountant was also reviewing the financial statements prepared by Mr Clarke, and that the absence of company records was the fault of Mr Clarke.
[148] Neither Mr Chan nor Mr Krasniqi nor Mr Bowler challenged Mr Lorigan’s evidence of deficiencies in the financial statements and IR10 summary forms submitted for Tower.
Discussion and conclusions
[149] I have no doubt that the Commissioner has made out her case that Tower has seriously and persistently failed to comply with its obligations under s 194 of the Act. Indeed, the failures have not really been denied by Mr Chan or Mr Krasniqi.
[150] While there may be some question over the exact extent of the accounting records Tower was required to maintain, the authorities consistently say that the records had to be such that they would, at any time, enable the company’s financial position to be determined.
[151] In Mizeen Painters Ltd, Muir J considered that the absence of any general ledgers, cash books, or accounting software recording day-to-day transactions put the company in breach of s 194, and I think the position for the Commissioner is if anything stronger in this case. It was simply not good enough for Tower to say to the Commissioner, in effect, “go and talk to the solicitors who acted for us in the various transactions, to get the supporting documentation you need”. For one thing, s 189(1) of the Act required Tower to keep its accounting records for the last seven completed accounting periods at its registered office, not scattered among a number of law firms, at least one of which appears to be no longer in existence. But more fundamentally, it appears that Tower never kept any ledgers, cash books or other such documents that would have allowed its financial position to be determined at any time.
[152] I take into account also that Tower acted as a developer who entered into a number of transactions which, on their face, were complex enough to require supporting explanatory documents to show what had happened and why. The inconsistencies between the financial statements for the 2015 and 2016 tax years, and the inconsistency between the 2016 closing stock figure shown in the 2016 financial statements and the 2017 opening stock figure shown in the IR10 form, only highlight the fact that this is a situation where more, rather than less, was required in the way of underlying accounting records sufficient to support the financial statements.
[153] It is not necessary for the purposes of this judgment to describe all of the unusual financial transactions entered into by Tower over the period since 2014, as I agree with the view expressed by Associate Judge Andrew in his judgment on the application to appoint interim liquidators that:38
[37] … Tower has engaged in property transactions with unusual features, including contemporaneous same-day purchase and sale of single properties, significant changes to purchase price close to settlement and large parts of the purchase price being satisfied through the transfer of other properties.
[154] The failure to keep proper accounting records was highlighted in Tower’s NOPA in respect of the 2016 tax year, where it was apparently only able to say that the adjustment it sought to the Commissioner’s default assessment was “TBC”. Evidently, Mr Clarke himself did not have adequate documentation to put together the true position for the 2016 tax year.
[155] Another matter is that the substantial payments made from Tower’s funds to Mr Krasniqi or his family members, and to Mr Chan, should have been supported by adequate accounting records, but it appears they were not. In the end, neither the Commissioner nor the interim liquidators have been able to piece together the true financial position of Tower.
[156] It is no answer for Tower to say that responsibility for the accounting records was delegated to Mr Clarke. Mr Clarke was only a director of Tower between 17 June 2011 and 16 August 2011, well before the events with which this proceeding is primarily concerned. And of course the obligation to comply with s 194 of the Act rested with the board. It is apparent that there has been little or no monitoring of the company’s record keeping over the period Mr Clarke was entrusted with such matters as preparing and filing GST and income tax returns, and I have no doubt that the failure to keep proper accounting records was both persistent and serious.
[157] Mr Chan has said that Tower has engaged (or is engaging) a new accountant to go over the work performed by Mr Clarke. But no affidavit has been provided from any new accountant, notwithstanding the fact that the audit of Tower commenced some
38 Commissioner of Inland Revenue v Tower City Holdings Ltd, above n 1, at [37].
years ago and Tower was made aware of the interim order putting it into liquidation in July of 2019. The only sensible inference to draw is that, if a new accountant has been instructed, that accountant has encountered the same difficulties unravelling Tower’s financial position as did the Commissioner and the interim liquidators.
[158] As Mr Lorigan’s affidavit made clear, the inconsistencies in the financial statements and IR10 summary forms provided by Tower are not inconsequential. They involve substantial sums, and adequate accounting records would be required to sort out the true position.
[159] As I have said, Tower’s obligation to keep accounting records that complied with s 194 was a stand-alone obligation, which existed regardless of the Part 4A dispute procedure in which it was engaged with the Commissioner. The only real relevance of the Part 4A procedure, and the possibility of a Part 8A challenge later, is that the parties’ respective positions in getting to the truth of the matter have been made immensely more difficult by what appears to have been a deliberate failure by Tower to maintain accounting records which would readily explain its various transactions.
[160] I conclude that the Commissioner has made out her case for a liquidation order under ss 241(4)(b) and 194 of the Act.
[161] I add that I see nothing which would persuade me to exercise my discretion against making a liquidation order. The company appears to be no longer trading, and Mr Chan acknowledged in his affidavit that “on paper” Tower appears to be insolvent. Mr Lorigan’s evidence was to the effect that the value of the remaining assets held by Tower is substantially less than the claimed tax liability, and of course Tower has not paid the self-assessed amounts, for which it accepted liability. Those factors do not suggest any sound basis on which the Court should exercise its discretion against making a liquidation order, and if the liquidators consider that there is merit in Tower’s position on any of the tax issues which are presently in dispute, they will no doubt pursue those matters with the Commissioner.
[162] I also consider the circumstances (including the substantial payments made to Mr Chan and/or Mr Krasniqi or his family members, and the inadequately explained land transactions involving the features referred to at paragraph [153] above), call for examination by liquidators having the full array of investigative tools available under the Act. Mr Krasniqi has provided some details of the Huka Road development and the acquisition and sale of the Taupo properties, but it seems to me that there are or may be aspects of those transactions that would properly be the subject of scrutiny by liquidators. The acquisition of the Taupo properties, in particular, may merit further examination. The circumstances appear to be that Tower acquired the Kohimarama properties for $14,998,000 from Education Holdings (2008) Limited in July 2015, and sold them to Rainbow Holdings (the owner of the Taupo properties) for $29,308,000 the same day. According to Mr Lorigan’s evidence, property sales reports for the Kohimarama properties showed that they had combined capital values in 2014 of approximately $7,570,000. Then, within a relatively short time after the transaction, it appears that the intellectual property said to be associated with the Taupo properties, valued at $8,000,000 in the transaction, proved to be worthless. It may be that there are good explanations for all of those matters, but it seems to me that they are at least worthy of further consideration by liquidators, to see if there may be any avenues of recovery for Tower’s creditors (including the Commissioner if her claims are accepted by the liquidators).
[163] For all those reasons, I see no reason for the Court to stay its hand. There will be a liquidation order accordingly.
Issue (3): Has the Commissioner shown, on the balance of probabilities, that Tower is unable to pay its debts?
[164] There is strictly no need for me to address this issue, but I record that, if necessary, I would have held for the Commissioner on this issue. The evidence shows that Tower is at least “balance sheet insolvent”, and Mr Chan himself acknowledged that “on paper” Tower appeared to be insolvent. Any challenge by Tower under Part 8A, even if successful, would not affect its self-assessed income tax liability of
$46,331 for the 2017 tax year. Any losses Tower may have suffered in later tax years could not be carried backwards to provide an off-set against this liability, and r 5.61 of the High Court Rules 2016 would preclude any set-off of any GST refunds to which
Tower might prove to be entitled. Similarly, Tower appears to have no defence in respect of the self-assessed GST debt of $286,885.25 owing in respect of the December 2017 GST period. Tower’s claims for GST refunds are not presently payable, and there is nothing to suggest that Tower has other actual or contingent assets that would be sufficient to cover the admitted income tax and GST liabilities as well as Tower’s other liabilities.
Issue (4): Does Tower have a genuine and substantial argument that there are GST set-offs which do or may exceed any amount owing to the Commissioner?
[165] In view of my conclusion on the preliminary issue relating to the Commissioner’s standing as a creditor, my answer to this question, if an answer had been necessary, would have been “no”. It is not disputed that Tower owes the self- assessed amounts totalling approximately $333,000, and r 5.61 of the High Court Rules 2016 precludes any set-off against that debt.
Issue (5): Has the Commissioner shown, on the balance of probabilities, that Tower’s directors have, in a persistent and/or serious way, failed to comply with duties relating to Tower under ss 131, 135, and/or 137 of the Act?
[166] My conclusions on Issues 1 and 2 mean that no answer is required, and I consider it neither necessary nor appropriate to embark on an analysis of the performance of the directors, in a number of complex transactions, in order to make findings on whether they discharged their respective duties under ss 131, 135, and 137 of the Act (and to the extent that they did not, whether their defaults can be characterised as “persistent” or “serious”, so as to justify the making of a liquidation order).
Issue (6): Has the Commissioner shown, on the balance of probabilities, that it would be just and equitable to put Tower into liquidation?
[167] Again, in view of my conclusions on Issues 1 and 2 there is no need to address this issue. The need for a liquidation order is clear on the issue of serious and persistent breach of s 194 of the Act, and I do not consider anything useful would be added by making findings on the question of whether the circumstances are also caught by the broad “just and equitable” jurisdiction in s 241(4)(d) of the Act.
Result
[168]I make the following orders:
(1)Tower is put into liquidation.
(2)Vivian Judith Fatupaito and Helen Elizabeth Keene are appointed liquidators.
(3)Costs are awarded to the Commissioner on a 2B basis, with disbursements to be fixed by the Registrar.
(4)The fees of the liquidators and staff working under their supervision and control are fixed at the rates set out in the liquidators’ consent dated 21 August 2019.
(5)The liquidators are to apply at the conclusion of the liquidation for approval of their overall remuneration.
[169]The foregoing orders are timed at 3pm on 31 August 2020.
Associate Judge Smith
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