Commissioner of Inland Revenue v Wright

[2016] NZHC 2125

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-003671 [2016] NZHC 2125

UNDER

Part 10 of the Tax Administration Act

1994 and Part 3 of the Goods and Services
Tax Act 1985

IN THE MATTER

of an application for judgment for a tax debt arising under a deed of guarantee

BETWEEN

COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

HADLEY JOHN WRIGHT Defendant

Hearing:	7 September 2016
Appearances:	J V Angelson for the Plaintiff No appearance by or on behalf of the Defendant
Judgment:	7 September 2016

ORAL JUDGMENT OF FITZGERALD J

Solicitors:           Crown Solicitors, Auckland

Shieff Angland, Auckland

COMMISSIONER OF INLAND REVENUE v WRIGHT [2016] NZHC 2125 [7 September 2016]

Introduction

[1]      The plaintiff is the Commissioner of Inland Revenue (“Commissioner”).  The Commissioner seeks judgment against the defendant (“Mr Wright”) for $414,317.00 (“Debt”).   The Debt arises from a contract of guarantee (“Guarantee”) given by Mr Wright  in  favour of  the Commissioner,  in respect  of  a tax  debt  owed  by a company associated with Mr Wright, Eagle Wire Products Limited (in liquidation and receivership) (“Eagle”).

[2]     It appears that, from around 2009, Eagle had problems meeting its tax obligations.  The Guarantee was given by Mr Wright effectively as a pre-condition to the Commissioner entering into an arrangement with Eagle, to permit Eagle to pay its tax debt by instalments (and for the Commissioner to withdraw then pending liquidation proceedings against Eagle).   Under the instalment arrangement, in the event that Eagle failed to meet its instalment obligations, the Commissioner was entitled to terminate the arrangement, with Mr Wright being obligated to pay Eagle’s then tax debt within 10 working days after being given notice of the cancellation.

[3]      Eagle failed to meet its obligations under the instalment arrangement, which was duly cancelled by the Commissioner.  Notice of that cancellation was given to Mr Wright and the Commissioner demanded payment by Mr Wright of Eagle’s then tax debt pursuant to the Guarantee.  Payment was not made by Mr Wright.

[4]      These  proceedings  were  commenced  some  time  ago,  on  29  July  2013. Mr Wright filed a statement of defence on 13 September 2013.   In his defence, Mr Wright did not challenge the guarantee (and indeed admits the Commissioner’s pleading in respect of the guarantee),1  or that Eagle had breached its obligations under the instalment arrangement, or that that arrangement had been cancelled by the Commissioner.  Mr Wright’s defence was based on an alleged set-off, arising from

another claim (by another company associated with Mr Wright) against the Crown.

The Commissioner disputed Mr Wright’s defence, but was content for this matter to

be adjourned from time to time over the intervening two and a half years, pending

1      Statement of Claim dated 29 July 2013 at 2.1; Statement of Defence dated 13 September 2013 at 2.1.

the outcome of that other proceedings.     The other proceeding was resolved by

agreement in 2015, but Eagle’s tax debt remains unpaid.

[5]      Sadly, since the events outlined above, Mr Wright has had a stroke and is without capacity to instruct lawyers.   His wife has an enduring power of attorney over him, and by memorandum dated 1 August 2016, counsel for the defendant advised  that  Mrs  Wright  has  decided  not  to  defend  the  proceedings,  and  that counsel’s instructions were not to defend these proceedings.

Factual background

[6]      An affidavit in support of the Commissioner’s formal proof application has been filed.   The affidavit is of Graham Gerald Humphreys.   Mr Humphreys is a Collections Officer employed by the Inland Revenue Department (“IRD”), and is the Case Officer for the files relating to Mr Wright and also Eagle.  My summary of the factual background is based on Mr Humphreys’ undisputed evidence.

[7]      At all relevant times, Mr Wright has been the sole director of Eagle, and is also the sole director of the 100 per cent shareholder company, Tawil Holdings Ltd. Both of these companies are now in receivership and liquidation.

[8]      Mr Humphreys deposes that from 2009, Eagle had difficulty paying its tax obligations and incurred substantial GST and PAYE debts. Due to that non- compliance, in late 2011 and early 2012, statutory demands were served on Eagle by the Commissioner.  By October 2012, although partial payments had been made by Eagle of its outstanding tax debts, the Commissioner was taking steps to liquidate Eagle.    Eagle  offered  to  pay  its  arrears  by  way  of  an  instalment  arrangement. Because of Eagle’s previous history, Mr Humphreys deposes that the Commissioner was reluctant to do so and committed to such an arrangement only on the basis that Mr Wright provided a guarantee in respect of the payment (i.e. the Guarantee).

[9]      The Guarantee was recorded in writing on 18 October 2012, within a deed entitled Instalment Arrangement and Guarantee.  The parties to the written document were  Eagle  (as  taxpayer),  Mr  Wright  (as  guarantor)  and  the  Commissioner  (as payee).

[10]     The Guarantee, at paragraph 5.1 of the document, records that:

In the event of default by the Taxpayer of the instalment arrangement and the Payee giving notice in writing to the Taxpayer and Guarantor of cancellation of  the  instalment  arrangement,  the  Guarantor  will pay to  the  Payee  the balance then owing by the Taxpayer under this Deed within 10 working days after receipt of notice of cancellation.

[11]     The Commissioner says that Eagle subsequently fell into arrears  with its arrangement.  By letter to Eagle dated 14 March 2013, the Commissioner cancelled the arrangement because of that non-compliance.  At exhibit F to Mr Humphreys’ affidavit is a letter to Mr Wright dated 14 March 2013, giving notice of the cancellation  of  the  instalment  arrangement.     That  letter  also  gave  notice  of Mr Wright’s obligation under the Guarantee to pay the sum of $414,317.00, within

10 working days of the written notice.  Mr Wright admits in his statement of defence that he was given such notice.2

[12]     A final demand letter was issued on 19 July 2013, requiring payment by

26 July 2013. This proceeding was then commenced.

[13]     As noted above, the statement of claim was filed on 29 July 2013, and a statement of defence was filed by Mr Wright on 13 September 2013.  The reason for the delay until today’s hearing was the parties’ agreement to await the resolution of the other proceeding referred to above (“WBD proceeding”).

[14]     By joint memorandum dated 13 July 2015, counsel for the Commissioner and Mr Wright confirmed the WBD proceeding had been resolved by agreement. Despite attempts to also resolve these proceedings, no agreement was reached.

[15]     Further memoranda were submitted to the Court.   By memorandum dated

1 August 2016, counsel for the defendant notified the Court that the defendant did not intend to defend this proceeding.   By minute dated 5 August 2016, Associate Judge Christiansen directed that this matter be set down today to enable formal proof

to be presented.

2 Statement of Defence dated 13 September 2013 at 4.1 and 4.2.

Commissioner’s submissions

[16]     Mr  Angelson  for  the  Commissioner  submitted  that  all  the  necessary ingredients for this claim have been met, namely that:

[17]     There was an enforceable guarantee;

[18]     It was given from Mr Wright to the Commissioner;

[19]     The Guarantee required Mr Wright to pay to the plaintiff a specified amount in the event of default by Eagle;

[20]     There was a default by Eagle; and

[21]     The amount of the Guarantee remains unpaid.

[22]     In terms of formal requirements for the Guarantee, Mr Angelson submitted that  Mr Wright  gave  a  personal  guarantee  enforceable  and  consistent  with  the requirements set out in s 27 of the Property Law Act 2007 (the terms of which are recorded below).  Mr Angelson pointed to the fact that, in the statement of defence, Mr Wright admits that he entered into a written contract guaranteeing Eagle’s performance of the interim payment arrangement.  Mr Angelson also referred to the various paragraphs of the statement of defence, where Mr Wright has admitted:

[23]     Eagle’s    failure    to    meet    its   obligations    under   the    instalment

arrangement;3

[24]     the subsequent cancellation of that arrangement;4

[25]     the giving of notice to Mr Wright of that cancellation;5 and

3 Statement of Defence dated 13 September 2013 at 3.1 and 3.3.

4 Statement of Defence dated 13 September 2013 at 3.2.

5 Statement of Defence dated 13 September 2013 at 4.1 – 4.3.

[26]     Mr Wright has not paid the amount demanded by the Commissioner in

respect of Eagle’s tax debt, or any part of it.6

[27]     As flagged at the outset, the only matter denied by Mr Wright in his statement of defence was that there was in fact a debt owing to the Commissioner, given the alleged set-off as a result of monies said to be owing to a related company and being pursued in the WBD proceedings.   However, and as noted, that proceeding was resolved by agreement between the parties over a year ago, yet the debt in this matter remains outstanding.

Approach

[28]     Rule 10.7 of the High Court Rules provides that if the plaintiff appears at trial and the defendant does not, the plaintiff must prove the cause of action so far as the burden of proof lies on the plaintiff.

[29]     Other rules in relation to judgment by default, in the case of a liquidated demand (r 15.7) or other claims (r 15.9) are predicated on the fact that no statement of defence has been filed.  As is immediately apparent, that is not the case here.  I therefore accept Mr Angelson’s submissions that the matter is to proceed on the basis that r 10.7 is the applicable rule.  To the extent required, I will also make an order pursuant to r 9.56(a) that the facts requiring proof on this matter may be proved by affidavit.

Contract of guarantee

[30]     Section 27 of the Property Law Act sets out the formal requirements for a contract of guarantee.  Section 27 provides as follows:

27       Contracts of guarantee must be in writing

(1)      This section applies to contracts of guarantee coming into operation on or after 1 January 2008.

(2)      A contract of guarantee must be—

(a)      in writing; and

6 Statement of Defence dated 13 September 2013 at 7.1.

(b)      signed by the guarantor.

(3)       Subsection (2) does not require the consideration for a contract of guarantee to be in writing or to appear by necessary implication from a writing.

(4)       In this section, contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.

Analysis

[31]     Having reviewed the evidence before me, I am satisfied that the Guarantee given by Mr Wright in favour of the Commissioner meets the requirements of s 27 of the Property Law Act.   In particular, it is in writing and is signed by Mr Wright. There is in fact no dispute of this on the pleadings.

[32]     Further, in terms of the requirements of the Guarantee itself, I am satisfied on the evidence that:

[33]     Eagle   has   defaulted   in   its   obligations   under   the   instalment arrangement;

[34]     The Commissioner had cancelled the instalment arrangement and has given notice in writing to Eagle and Mr Wright of that fact; and

[35]     Mr Wright has not paid the sums demanded by the Commissioner under the guarantee within 10 days of notice of cancellation of the instalment arrangement.

[36]     Again, these matters are not in dispute on the pleadings.

[37]     In terms of the amount that Mr Wright is indebted to the Commissioner under the guarantee,  Mr Angelson  took  me to  the various  paragraphs  in  the  Deed  of Instalment and Guarantee itself, including paragraph 1.1 which defines “tax debt”. The Deed of Instalment and Guarantee also sets out the then agreed amount of the tax debt, which was somewhat higher than the claim now sought, given some further interim payments made by Eagle between the time of the Deed of Instalment and

Guarantee being entered into and the sums being demanded from Mr Wright.  The definition of “tax debt” in paragraph 1.1 also makes it clear that included in the “tax debt” is use of money interest that has accrued on the core tax obligations to that point in time.

[38]     Mr   Angelson    also    took    me    to    exhibit    D    to    the    affidavit    of Ms Tomairangi Rogers, which is itself at exhibit F to the affidavit of Mr Humphreys. This includes a schedule entitled “Summary of tax periods previously under instalment arrangement as at 30 March 2013”, which sets out the various amounts then said to be due and owing by Eagle under the instalment arrangement.  At the bottom   of   that   schedule,   the   balance   owing   of   $414,317.00   is   set   out. Mr Humphreys also deposes at paragraph 3.12 of his affidavit that, as at the date of swearing his affidavit (namely 30 August 2016), the amount owing under the Guarantee remains at that figure, namely $414,317.00.

[39]     To  the standard required,  namely the balance  of probabilities,  I have  no reason to doubt that those calculations or Mr Humphreys’ evidence is incorrect.  I am not aware of any other matters arising which means judgment ought not be entered for the Commissioner in that amount.

Interest

[40]     The Commissioner also seeks interest pursuant to s 87 of the Judicature Act

1908.   I queried with Mr Angelson whether there were issues in relation to this, given the amounts sought include a component of interest, being the use of money interest  payable  pursuant  to  the  underlying  taxation  legislation.    However,  as Mr Angelson rightly submitted, the use of money interest was incorporated into the figure of $414,317.00, which at the date that amount became due and payable by Mr Wright pursuant to the Guarantee, crystallised as a contractual debt.   Further interest on that amount as a tax debt has not been sought by the Commissioner.  I am therefore satisfied that the prohibition in s 87(1)(a) of the Judicature Act of awarding interest on interest does not apply.

[41]     I also questioned Mr Angelson on the date from which interest ought to run, if I am prepared to award it.   The Commissioner seeks interest under s 87 of the

Judicature Act from the date of the statement of claim, being 29 July 2013.   I discussed with Mr Angelson whether there should be a later date, given the Commissioner’s agreement to stay these proceedings pending the outcome of the WPD  proceedings.    Mr  Angelson  submitted  that  interest  was  claimed  in  the statement of claim (expressly pursuant to s 87 of the Judicature Act) and there was no agreement or other arrangement between the parties that interest would, in effect, be stayed pending the outcome of the WBD proceedings.  Mr Angelson characterised the Commissioner’s stance as an “indulgence” to Mr Wright in those circumstances. I accept Mr Angelson’s submissions on that point and am therefore prepared to make an order that interest apply from the date of the statement of claim.

Costs

[42]     The Commissioner also seeks  costs  of these proceedings  on  a 2B basis. Mr Angelson confirmed that they would be sought on the basis of a formal proof hearing (as the matter has obviously not progressed to a full trial).  I am prepared to make an order to that effect, subject to costs in respect of the various memoranda filed   on   behalf   of   the   Commissioner   subsequent   to   the   Commissioner’s memorandum for the first case management conference being payable on a 2A basis. Mr Angelson was content with that approach.

Result

[43]     Accordingly:

[44]     I make an order pursuant to r 9.56(a) that the matters requiring proof on this hearing may be proved by affidavit.

[45]     I grant judgment to the Commissioner in the sum of $414,317.00.

[46]     I award interest on that sum pursuant to s 87 of the Judicature Act

1908 at the prescribed rate from the date of the statement of claim, being 29 July 2013, to the date of this judgment.

[47]     Mr Wright is to pay the costs of these proceedings on a 2B scale basis, other than in respect of the memoranda filed by the Commissioner subsequent  to  the  first  case  management  conference,  the  costs  of

which are to be paid on a 2A scale basis, together with disbursements

as fixed by the Registrar.

Fitzgerald J