Commissioner of Inland Revenue v Wilson
[2018] NZHC 236
•26 February 2018
IN THE HIGH COURT OF NEW ZEALAND ROTORUAREGISTRY
I TE KŌTI MATUA O AOTEAROA TE ROTORUA-NUI-Ā-KAHU ROHE
CIV-2015-463-000129
[2018] NZHC 236
UNDER the Insolvency Act 2006 BETWEEN
THE COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
RONALD MAXWELL WILSON
Defendant
Hearing: 7 December 2017 Appearances:
K Naik-Leong for the Judgment Creditor K Badcock for the Judgment Debtor
Judgment:
26 February 2018
COSTS JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 26 February 2018 at 10.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Crown Law, Wellington K Badcock, Auckland
COMMISSIONER OF INLAND REVENUE v WILSON [2018] NZHC 236 [26 February 2018]
[1] The Commissioner for Inland Revenue applies for an order adjudicating Mr Ronald Wilson bankrupt.
[2] Mr Wilson opposes the application. His principal ground of opposition is that it would be just and equitable for the Court to exercise its discretion under s 37(c) of the Insolvency Act 2006 to refuse to adjudicate him bankrupt.
[3] I find that an order of adjudication is inevitable and that grounds for refusal of such an order are not made out.
Background
[4] Mr Wilson was a trustee of the Il Mondo Trust. In the monthly periods ending 30 November 2001, 31 January 2002, 31 March 2002, 31 May 2002, 31 January 2003, 31 March 2003 and 31 July 2003 the Commissioner assessed goods and services tax (GST) owing by the Trust. The total amount of GST assessed against the Trust was
$17,693.65 as at 31 July 2003. As trustee, Mr Wilson was personally liable for this debt.
[5] Mr Wilson made attempts to resolve the GST debt with the Commissioner over the period of 2004-2008, but these were ultimately unsuccessful. Over this time (and continuing into the future) penalties and interest have accrued against the GST debt. By June 2015 the debt had grown considerably, reaching the figure of $137,303.10.
[6] On 17 June 2015, the Commissioner obtained judgment against Mr Wilson in the Rotorua District Court for the outstanding debt.
[7] On 8 October 2015, at the Commissioner’s request, the High Court issued a bankruptcy notice against Mr Wilson founded upon the judgment debt. This notice was served on Mr Wilson on 5 November 2015. A week later, Mr Wilson made a payment proposal to the Commissioner in respect of the debt. Then, on 17 November 2015, he applied to the High Court for orders to set aside the bankruptcy notice and approve the terms of the payment proposal he had offered to the Commissioner.
[8]The Commissioner declined the payment proposal on 8 December 2015.
[9] On 22 April 2016, the High Court, invoking its inherent jurisdiction, approved Mr Wilson’s payment proposal to the Commissioner and held that as such the bankruptcy notice issued against Mr Wilson would be deemed to have been complied with.1 Associate Judge Christiansen noted that as neither side disputed the existence of such jurisdiction,2 he held it was limited to cases involving special circumstances and where the Court assessed the interests of justice as necessitating intervention.3 Costs were left to lie where they fell.4
[10] On 23 May 2016, the Commissioner lodged an appeal against the decision of the High Court on the basis that it lacked an inherent jurisdiction to approve the payment proposal of a taxpayer. Mr Wilson cross-appealed on the costs order. In a judgment issued on 31 March 2017, the Court of Appeal allowed the appeal and dismissed Mr Wilson’s cross-appeal.5 The Court determined that on the correct interpretation of s 29(1)(b)(iii) the High Court does not have statutory jurisdiction to approve a payment proposal offered by a debtor, in circumstances where the creditor, or creditors, have not accepted that proposal.6 Similarly, the High Court does not have an inherent jurisdiction to approve a payment proposal, because such a jurisdiction would cut across the statutory scheme for creditors approving such proposals.7
[11] On 15 June 2016, while the appeal was still to be determined, Mr Wilson applied to the District Court for an order setting aside the judgment debt. The order was refused on 25 October 2016.8
[12] On 7 December 2017, the application for adjudication came before me for hearing.
1 Wilson v Commissioner of Inland Revenue [2016] NZHC 87, (2016) 27 NZTC 22-047 at [64].
2 At [6].
3 At [6].
4 At [64].
5 Commissioner of Inland Revenue v Wilson [2017] NZCA 100, (2017) 28 NZTC 23-009 at [45]– [47].
6 At [26]–[30].
7 At [38].
8 Commissioner of Inland Revenue v Wilson [2016] NZDC 20012 at [26].
[13] Throughout the period of litigation, penalties and interest have continued to accrue against Mr Wilson, in relation to the unpaid GST.
Order for adjudication
[14] Mr Wilson properly concedes that the jurisdictional requirements, in s 13, for an order of adjudication are made out.
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a)the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and
(b)the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c)the debt is a certain amount; and
(d)the debt is payable either immediately or at a date in the future that is certain.
[15] The Commissioner is a creditor of Mr Wilson’s to whom Mr Wilson owes a substantial judgment debt of a certain amount; and an ongoing liability for interest and penalties that are fixed and ascertained by calculation under the Tax Administration Act 1994.
[16] Further, Mr Wilson committed an act of bankruptcy within the period of 3 months before the Commissioner’s application for adjudication was filed.
[17]Section 17 relevantly states:
17 Failure to comply with bankruptcy notice
(1)A debtor commits an act of bankruptcy if—
(a)a creditor has obtained a final judgment or a final order against the debtor for any amount; and
(b)execution of the judgment or order has not been halted by a court; and
(c)the debtor has been served with a bankruptcy notice; and
(d)the debtor has not, within the time limit specified in subsection (4),—
(i)complied with the requirements of the notice; or
(ii)satisfied the court that he or she has a cross claim against the creditor.
(2)The form that the bankruptcy notice must take is set out in section 29.
(3)The debtor must have been served with the bankruptcy notice in New Zealand, unless the court gave permission for the service of the notice on the debtor outside New Zealand.
(4)The time limit referred to in subsection (1)(d) is,—
(a)if the debtor is served with the bankruptcy notice in New Zealand, 10 working days after service; or
…
[18] Rule 24.10 of the High Court Rules extends the time limit referred to in s 17 in cases where an application is made to set aside a bankruptcy notice and cannot be heard within that time limit. It extends the time limit for compliance up until the point that such an application is determined, thus extending the date on which an act of bankruptcy is completed if the application ultimately fails and payment is still not made:
24.10 Setting aside bankruptcy notice
(1)If an application to set aside a bankruptcy notice cannot be heard until after the expiration of the time specified in the notice as the day on which the act of bankruptcy will be complete, the time is treated as extended until the application has been determined.
(2)An act of bankruptcy is not committed by reason only of non- compliance with the notice until the application has been determined.
[19] In terms of s 17 and r 24.10 Mr Wilson has committed an act of bankruptcy. The execution of the final judgment for $137,303.10 that the Commissioner obtained against him has not been halted by a court; on 5 November 2015 he was served with a valid bankruptcy notice issued against him by the High Court and to this day he has not complied with it; and his application to set aside the notice ultimately failed on appeal on 31 March 2017. Further, the judgment debt continues to attract interest and penalties.
[20] On 11 April 2017, the Commissioner filed her application for Mr Wilson to be adjudicated bankrupt based on the act of bankruptcy, which became complete on 31 March 2017.
Just and equitable
[21] The real issue I am asked to consider, therefore, is whether this Court, in its discretion, should nevertheless refuse to adjudicate Mr Wilson bankrupt, on the basis that it would be just and equitable to do so.
[22]Section 37 states:
37 Court may refuse adjudication
The court may, at its discretion, refuse to adjudicate the debtor bankrupt if—
(a)the applicant creditor has not established the requirements set out in
section 13; or
(b)the debtor is able to pay his or her debts; or
(c)it is just and equitable that the court does not make an order of adjudication; or
(d)for any other reason an order of adjudication should not be made.
[23] The general principles relevant to the exercise of the discretion under s 37 can be drawn from the case law. Those most relevant to the present case are:
(a)whether the debtor has the ability to meet his or her debts over time and whether that would meet the requirement of achieving finality within a reasonable period;9
(b)making the debtor accountable for those debts;10
9 Re Epirosa ex parte Diners Club (NZ) Limited & American Express International Inc HC Wellington B498/91, 6 March 1992 at 6, cited with approval in Re Rabobank Australia Ltd, ex parte Tootell [2013] NZHC 2975 at [8].
10 Re Coromandel Independent Living Trust, ex parte Hamon [2016] NZHC 392 at [13].
(c)the wider public interest in determining whether adjudication is conducive or detrimental to commercial morality and the interests of the general public;11
(d)what were the circumstances in which the debtor became insolvent;12
(e)whether the debtor will be able to support him or herself;13
(f)what were the circumstances in which the debt was incurred, and do those circumstances suggest the creditor is unreasonable in pursuing adjudication;14
(g)whether adjudication would be pointless.15
[24] It is for Mr Wilson to show that an order adjudicating him bankrupt should be refused. It is for the Court to balance the relevant considerations and determine whether it has been shown that an order should be refused.
[25] In submissions and oral argument Mr Wilson relied on a number of grounds in pursuance of his argument under s 37(c). These are:
(a)that he has been prejudicially affected by the Commissioner’s delay in enforcing the debt against him; and
(b)the Commissioner has acted unreasonably in refusing to accept a perfectly reasonable payment proposal; and
11 Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 (HC) at 635, cited with approval in Re Fontein, ex parte Bank of New Zealand HC CIV-2009-404-7769, 22 November 2010 at [8].
12 Re Taylor ex parte Greenwood (1992) 4 NZBLC 102,875 (HC) at 102,879.
13 Re Epirosa ex parte Diners Club (NZ) Limited & American Express International Inc HC Wellington B498/91, 6 March 1992 at 7, cited with approval in Re Rabobank Australia Ltd, ex parte Tootell [2013] NZHC 2975 at [8].
14 Re Epirosa ex parte Diners Club (NZ) Limited & American Express International Inc HC Wellington B498/91, 6 March 1992 at 6, cited with approval in Re Rabobank Australia Ltd, ex parte Tootell [2013] NZHC 2975 at [8].
15 Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 (HC) at 635, cited with approval in Re Fontein, ex parte Bank of New Zealand HC CIV-2009-404-7769, 22 November 2010 at [8].
(c)that bankruptcy would be pointless because Mr Wilson has a total absence of assets; and
(d)that the Commissioner’s use of bankruptcy proceedings is oppressive.
Prejudiced by delay
[26] The judgment entered against Mr Wilson in the District Court relates to a core debt of $17,693.65 from July 2003. Mr Wilson contends that from 2004-2008 he made various attempts to resolve his tax liability with the Commissioner, though with no success. He further contends that the Commissioner took no steps towards resolving the tax debt between 2008-2014.
[27] Mr Wilson is now 66 and has been receiving superannuation for almost the past 2 years. He owns and operates a small business selling used vehicles and employs two staff. The business returns him a small income, which in conjunction with his superannuation payments, allows him to get by. Should he be adjudicated bankrupt, the Official Assignee will take control and dispose of his business to meet the demands of his sole creditor, the Commissioner. Mr Wilson contends that due to his age and ill health he has no reasonable opportunity of finding paid employment and thus supporting himself by any other means.
[28] As a result of the Commissioner’s delay in seeking and enforcing judgment, Mr Wilson contends that an order for adjudication against him will give him no chance of recovering from bankruptcy prior to his retirement. His argument proceeds on the basis that had the Commissioner taken steps to bankrupt him in 2005, at which point the debt was only two years overdue and comparatively small, he may have been able to pay it, or he would have had the last 12 years to recover from bankruptcy.
[29] I am not unsympathetic to Mr Wilson’s plight, and the decision of Thomas J in Re Taylor ex parte Greenwood provides some support for taking into consideration the age, employment and prospects of the debtor recovering from bankruptcy when exercising the discretion to refuse adjudication.16
16 Re Taylor ex parte Greenwood (1992) 4 NZBLC 102,875 (HC).
[30] In Taylor, the debtor’s business of selling bathroom fittings, which previously operated successfully, “went down the drain” during the economic and political upheaval of the early 1990s.17 Thomas J was swayed by the fact that the debtor had limited to no job prospects considering his age, had no assets which his creditors might satisfy their debt with, had found himself in this predicament through no fault of his own, and that there was no public interest in adjudicating him bankrupt.18
[31] However, unlike in Taylor, I note that Mr Wilson has not found himself in his predicament through no fault of his own and that there is a strong public interest in adjudication. Mr Wilson’s debt to the Commissioner arose for no other reason than he failed to pay the trust’s GST bill promptly. The public interest lies in the protection of the integrity of the tax system and promoting voluntary compliance with tax obligations. By relieving Mr Wilson of his tax burden, this Court would risk diminishing other taxpayers’ perceptions of the tax system as fair and promoting a view that compliance with tax obligations is optional.
[32] I reject the evidence of Mr Wilson that the Commissioner made no attempt to resolve the debt between 2008-2014. From 18 January 2008 until 4 February 2016, 90 statements of account were issued to the Trust notifying it of its debt.
[33] At any rate, the predicament which Mr Wilson has found himself in is one of his own making. The delay he complains of is the Commissioner legitimately pursuing a debt, which he had no reason not to pay and never made any voluntary payment towards. Moreover, if Mr Wilson seriously contends that his preference would have been to be adjudicated in 2005, one might have expected him to avail himself of his entitlement to voluntary bankruptcy. Under s 21 of the Insolvency Act 1967,19 he was entitled at that time to petition the Official Assignee to have himself adjudged bankrupt on his own initiative. Further, there has never been any bar to Mr Wilson paying off the debt. It was entirely up to him to pay it before it escalated to unmanageable proportions.
17 At 102,876.
18 At 102,879.
19 Compare Insolvency Act 2006, s 12.
Unreasonable rejection of payment proposal
[34] Mr Wilson contends that the Commissioner’s refusal to accept his payment proposal is unreasonable and that the Court may take this into consideration in exercising its just and equitable discretion under s 37.
[35] The Commissioner rejects this and contends that a decision to decline a payment proposal cannot give rise to a just and equitable reason for refusing an order of adjudication.
[36] I agree with the Commissioner that the decision to decline a payment proposal is not a matter, in and of itself, which this Court may consider when deciding whether it would be just and equitable to refuse to adjudicate a debtor bankrupt. As the Court of Appeal noted, in the related litigation, the decision whether to accept the proposal is for the Commissioner.20
[37] The relevant principle for the court to consider is what were the circumstances in which the debt was incurred and whether that suggests the creditor is unreasonable in pursuing adjudication.
[38] The GST obligation to which the judgment debt attaches relates to an assessment from almost 15 years ago. During that time, though Mr Wilson has attempted to negotiate payment, he has made no voluntary payments towards that amount. The evidence shows that Mr Wilson has a poor history of compliance with his tax obligations, including his personal tax obligations.
[39] At any rate, I do not accept that the Commissioner has been unreasonable in pursuing adjudication. As noted above, the Commissioner has a role in protecting the integrity of the tax system and promoting voluntary compliance. The Commissioner may be fully justified in rejecting a payment proposal, even though that will result in collecting less tax from an individual taxpayer, if accepting the proposal might give
20 Commissioner of Inland Revenue v Wilson [2017] NZCA 100, (2017) 28 NZTC 23-009 at [40].
the general impression that the tax system is unfair and that voluntary compliance is merely optional.21
[40] For these reasons the Commissioner has not done anything which suggests unreasonable conduct sufficient to justify refusing adjudication.
Pointless to adjudicate
[41] Mr Wilson contends that granting the Commissioner’s application or adjudication would be pointless in this case. He makes this argument on the basis that his assets are minimal and that the Commissioner has little, or nothing, to gain through an order for adjudication.
[42] I am swayed by the fact that though the assets of Mr Wilson may appear minimal, the Official Assignee’s powers upon adjudication extend beyond assets owned personally by the debtor.
[43] The evidence presented to me by the Commissioner regarding a potential stream of income into Mr Wilson’s bank account, which was not declared when he made his payment proposals, together with the association of Mr Wilson to two other trusts and a company, provide good justification for the making of an order.
[44] Furthermore, the public interest in adjudication, being the protection of the tax system and promotion of voluntary compliance, provides strong justification for an order of adjudication and strongly suggests that an order will not be pointless.
Adjudication is oppressive
[45] I accept the Commissioner’s submission that this is not an oppressive use of the bankruptcy procedure.
[46] As the Court noted in Re Marra, ex p Commissioner of Inland Revenue, “the Commissioner is charged with the care and management of our taxation system.”22
21 Russell v Commissioner of Inland Revenue [2015] NZCA 351, [2015] BCL 364 at [21].
22 Re Marra; ex parte Commissioner of Inland Revenue (2004) 21 NZTC 18,494 (HC) at [17].
The Commissioner has a duty to protect the integrity of the taxation system. It cannot be oppressive conduct of the Commissioner to pursue action against taxpayers who fail or refuse to comply with their legitimately incurred tax liabilities.
Conclusion
[47] As Mr Wilson has not satisfied me that this Court should exercise its discretion under s 37, I therefore make the appropriate order under s 36 of the Act adjudicating him bankrupt. The order is to take effect today (26 February 2018) and is accordingly timed at 3.30 p.m.
[48] As costs follow the event under the statutory costs regime, I make an order, in favour of the Commissioner, for costs on a 2B basis plus disbursements as fixed by the Registrar.
Associate Judge Sargisson
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