Commissioner of Inland Revenue v Yip
[2013] NZHC 495
•20 March 2013
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2011-454-656 [2013] NZHC 495
IN THE MATTER OF the Insolvency Act 2006
AND
IN THE MATTER OF the bankruptcy of CHI W ERIC YIP
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Judgment Creditor
ANDCHI W ERIC YIP Judgment Debtor
Hearing: 14 March 2013
(Heard at Palmerston North)
Counsel: P. Ridling - Counsel for Judgment Creditor
R.B. Hucker - Counsel for Judgment Debtor
Judgment: 20 March 2013
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment was delivered by me on 20 March 2013 at 3.30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ...........................................................................
Solicitors: Inland Revenue Department, PO Box 1462, Wellington
Hucker & Associates, Solicitors, PO Box 3843, Shortland Street, Auckland
THE COMMISSIONER OF INLAND REVENUE V CWE YIP HC PMN CIV-2011-454-656 [20 March 2013]
Introduction
[1] Before the Court is an application by the judgment creditor filed 9 October
2012 seeking an order to adjudicate the judgment debtor bankrupt in terms of s 13
Insolvency Act 2006.
[2] This application is founded on the judgment creditor’s contention that the judgment debtor committed an act of bankruptcy by failing to comply with a Bankruptcy Notice dated 20 September 2011 served upon him claiming the sum of
$1,870,840.83. This relates to a judgment obtained in the District Court at Waitakere against the judgment debtor on 4 May 2009 for that sum of $1,870,840.83 which represented outstanding income tax, GST, interest and penalties claimed by the judgment creditor.
[3] On 28 November 2011 the judgment debtor did apply to set-aside that Bankruptcy Notice, but in a judgment I gave on that application on 24 July 2012 the application was dismissed, although the time for compliance with the Bankruptcy Notice was enlarged to 31 July 2012. The judgment debtor however did not comply with the Bankruptcy Notice.
[4] The present bankruptcy application however claims from the judgment debtor a total sum of $3,263.002.65 which comprises the original judgment debt of
$1,870,840.83 together with additional taxes assessed penalties and interest incurred since that date up to October 2012 totalling $1,391,613.82 together with additional amounts for solicitors’ costs and a service fee.
[5] The bankruptcy application is opposed by the judgment debtor.
Parties’ Arguments and My Decision
[6] The present application is brought pursuant to s 13 Insolvency Act 2006 which provides as follows:
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 $1,000.00 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.
[7] In the present case, the $1,870,840.83 judgment alone, clearly exceeds the
$1,000.00 threshold provided in s 13(a) Insolvency Act 2006.
[8] In addition, it is clear that the judgment debtor here has committed an act of bankruptcy within the period of three months before the 9 October 2012 filing of the present adjudication application, in that he failed to comply with the Bankruptcy Notice served on him and in the extended time for compliance provided for in my 24
July 2012 judgment noted above.
[9] That $1,870,840.83 debt, originally ordered by judgment of the Waitakere District Court on 4 May 2009, has itself been outstanding for well over three years now, it is payable immediately and it is clearly a certain amount. This is even leaving aside the additional $1,391,613.82 claim for further taxes, interest and penalties noted at para [4] above.
[10] I am satisfied therefore that in the first instance the requirements of s 13
Insolvency Act 2006 have been satisfied here.
[11] The judgment debtor’s opposition to the present application outlined in his
Notice of Opposition dated 27 November 2012 lists the following grounds:
(a) It is just and equitable under s 37(c) of the Insolvency Act 2006 that he not be bankrupted.
(b) Other reasons exist under s 37(d) of the Insolvency Act 2006 that he ought not to be bankrupted.
(c) The judgment debtor has not had his application under s 113 of the Tax Administration Act fully and properly considered by the judgment creditor and while such grounds were insufficient to lead to the setting-aside of the Bankruptcy Notice on which this application for adjudication is based the non-consideration are discretionary factors that can be taken into account in determining whether to adjudicate the judgment debtor bankrupt.
(d) The judgment debtor is finalising a Late Objection for submission to the
Commissioner which is intended to be submitted this week and upon its
submission the very basis on which the judgment is based can be called into question.
(e) The financial circumstances of the judgment debtor have arisen in part as a result of the financial situation and a general decline in the property market following the global financial crisis ....
[12] I will turn to consider these grounds of opposition shortly but in the meantime note that the judgment debtor’s opposition to the present application essentially relies upon s 37 Insolvency Act 2006 which 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 s 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.
[13] As I have noted at para [11] above the grounds advanced in opposition to the present application by the judgment debtor rely essentially on s 37(c) and (d) Insolvency Act 2006. No argument was advanced before me in terms of s 37(b) Insolvency Act 2006 that the judgment debtor is able to pay his or her debts. Significantly, in my view, the judgment debtor here has chosen to provide no evidence of any kind to the Court as to his present financial position or means. This is notwithstanding the fact that earlier material as to his financial position provided in loan applications made by him and bank documentation some years ago is before the Court. More on this aspect later.
[14] Next, although the judgment debtor does not specifically state that the requirements of s 13 Insolvency Act 2006 are not established, there is a suggestion from him by implication that the large outstanding taxation debt due from him is not in fact owed and the judgment debtor should exercise his discretion under s 113 Tax Administration Act 1994 to reconsider this.
[15] That aspect, however, in my view is quickly disposed of and I now turn to deal with it.
Section 113 Tax Administration Act
[16] As I have noted above the judgment debtor’s original application to set-aside the Bankruptcy Notice issued against him here was dismissed in a judgment I gave on 23 July 2012. That judgment referred to the long history of this matter and in fact dealt with and dismissed this s 113 argument. In doing so, it noted that s 109 of the Tax Administration Act 1994 (the TAA), provides that except in challenge proceedings, no disputable decision may be disputed in a Court or in any proceedings on any ground whatsoever. The decision, however, went on to note that pursuant to s 113 TAA the Commissioner did have a discretion to amend an assessment at any time to ensure its correctness.
[17] Several requests in the past have been made by the judgment debtor under s
113 for the exercise of this discretion to amend the assessments in question, all of which have been rejected by the judgment creditor. As I understand it, Mr Hucker for the judgment debtor endeavoured to claim here that a s 113 request from the judgment debtor still remained outstanding.
[18] It is clear that if the Commissioner of Inland Revenue, the judgment creditor is not satisfied that assessments contain genuine errors then he cannot be compelled to amend assessments under s 113 or otherwise – Wood v Commissioner of Inland Revenue [1989] 19NZTC 15, 255.
[19] My 24 July 2012 judgment noted that the exercise of the Commissioner’s discretion under s 113 is not a “disputable decision” under s 3 of the TAA and accordingly cannot be subject to the disputes resolution process. The only avenue to review a decision made under s 113 is through the judicial review process. There has been no application to judicially review any of the judgment creditor’s earlier s
113 decisions in this case.
[20] Finally, my judgment of 24 July 2012 noted that r 5.61 of the High Court Rules provides that in a proceeding for recovery of taxes by the Crown, such as the present proceeding, a defendant is not entitled to plead any set-off or counter-claim.
[21] That 24 July 2012 decision therefore rejected the judgment debtor’s argument that he has not had any of his applications under s 113 TAA fully and properly considered by the judgment creditor. In addition, there has been nothing placed before the Court between July 2012 and the present time on behalf of the judgment debtor by way of any new material which might mean that this conclusion needs to be revisited.
[22] This s 113 argument has effectively been disposed of in my earlier judgment on the application to set-aside the Bankruptcy Notice. Nothing new is before the Court regarding this aspect.
[23] For all these reasons I reject the argument the judgment debtor endeavours to advance that there remains any outstanding s 113 request here, or that the judgment creditor has not fully and properly considered any of his applications under s 113 of the TAA to amend the assessments in question. Further, there is nothing before the Court to support any argument by the judgment debtor as noted at [11](d) above that a Late Objection could possibly challenge even a part of the substantial tax debt owing here, even if the judgment creditor could consider accepting a late objection – see s 124A(1) and s 126(2) TAA. And, as I understand the position, it was as recently as 13 March 2013 that the judgment debtor has filed ongoing proceedings in the Taxation Review Authority, but these I am told relate only to the 2007 and 2008 taxation years (which are after the taxation years the subject of the present debt claim) and the total tax assessment at issue in those proceedings is only about
$60,000.00.
Section 37(c) Insolvency Act 2006
[24] I turn now to consider the second argument advanced by the judgment debtor here that, pursuant to s 37(c), it is just and equitable that the Court does not make an order of adjudication.
[25] Before considering this aspect in detail it is useful to look at the general principles to be applied by the Court in exercising its discretion under s 37. These are set out in the Brookers Insolvency Law & Practice at para IN37.02 as follows:
IN37.03 Court's discretion — general principles
In Baker v Westpac Banking Cop 13/7/93, CA212/92, the Court of Appeal discussed the principles applicable to the Court's discretion under s 26 Insolvency Act 1967. Richardson J said (at p 4):
“It is proper for the Court to consider not only the interests of those directly concerned — the petitioner, other creditors, the debtor — but also the wider public interest. A creditor who establishes the jurisdictional facts as set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. The Court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of the a bankrupt's affairs and the disqualifications that go with bankruptcy. In the end the Court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not be made.”
The main factors affecting the Court's exercise of its discretion are: (a) The creditor's entitlement to an order;
(b) The wishes of the petitioner, the creditors, or the debtor; (c) The public interest;
(d) Whether such discretion is just and equitable; and
(e) The ability of the debtor to pay his or her debts.
These factors are similar to those considered relevant by the Court when exercising its discretion under s 42 of the Act to halt or refuse an application when the judgment is under appeal: see further IN42.01 and Re Wang, ex parte Westpac New Zealand Ltd (1763882) (2011) 25 NZTC 20-015.
[26] It is clear that this “just and equitable ground” confers on the Court a relatively broad discretion, although this discretion must always be exercised on a principled basis.
[27] As best I can tell from the submissions advanced to me by Mr Hucker for the judgment debtor, a major argument on this just and equitable ground relates to the requirement that the correctness of the Commissioner’s taxation assessments must always be seen as a paramount consideration in the tax administration system. Here, it does appear that Mr Hucker is continuing to argue that, the issue whether or not the judgment debtor is able to maintain his contention that the taxation assessments against him are wrong (despite the many and lengthy procedural and objection steps he has taken in the recent past) should go to this question as to whether it is just and equitable for an order for his adjudication to be made.
[28] Although in my view this matter has essentially been disposed of with my earlier July 2012 decision refusing to set-aside the Bankruptcy Notice, there is a further aspect here which as I see it reinforce this conclusion.
[29] This relates to the judgment debtor’s contention that the taxation assessments are wrong because they are based purely upon untrue statements he made in loan applications to the Westpac Bank, the ANZ National Bank and lending institutions at the relevant time that he had an annual income in excess of $800,000.00.
[30] The judgment debtor now deposes that this statement was wrong, was a lie and was concocted purely for the purposes of persuading the bank in question to make a substantial loan advance to him.
[31] On this, it is clear that copies of various loan applications in early 2006 signed by the judgment debtor are in evidence before the Court. From the applications themselves and from a 2006 ANZ/National Bank loan analysis document which is before the Court relating to an application by the judgment debtor and his wife to extend a $3.2 million loan, it is clear that the judgment debtor confirmed he had a substantial annual income at the time. Indeed, in not less than three signed 2006 loan applications which are before the Court, the judgment debtor states specifically that his annual income is $843,000.00 being $70,250.00 per month.
[32] It is presumed that income at that level was required to provide adequate servicing ability for the substantial loan of $3.2 million on the judgment debtor’s nominated commercial developments at the time – a proposed 26 house residential development on a Horsham Downs, Hamilton property and a purchase of a 9.5 hectare property and executive home at Wades Road, Whitford, Auckland with a 5 lot subdivision.
[33] It is hard to see how such substantial commercial developments which the judgment debtor proposed and which he suggested had ultimate achievable values of many millions of dollars, could have even been contemplated by him in the event, as he now alleges, that he had no taxable income of any kind at the time. Further, and
in my view quite tellingly, in that independent 2006 ANZ/National Bank loan analysis document, the bank sets out a list of assets and liabilities of the judgment
debtor and his wife at the time as follows:
Assets
(000’s)
Liabilities
(000’s)
Sandringham Road, Sandringham Althen Avenue, Sandringham Owens Road, Epsom
Horsham Downs, Hamilton
2004 Mercedes 500SEL
2002 BMW Z4Cash ASB Cash HSBC
Cash Bank of China
Deposit Paid Wades Road360
5502,500
1,50085
55100
600*780
200
Bank Debt ASB Credit Card
1,390
10
6,730
1,400
Surplus $5,330.00
* Adjusted by 20% for Exchange Rate Management Risk, vetted by NBNZ Asian Banking.
[34] Although in his evidence now before the Court the judgment debtor contends that he lied in the loan application about his income, he does not deal in any way with his asset and liability position as outlined in this documentation before the Court. It is difficult to reach any other conclusion but that therefore he is confirming these details were accurate at the time.
[35] As such, this asset and liability statement as outlined at [33] above showed a net equity in assets which the judgment debtor and his wife held at the time of some
$5.3 million. There is no explanation from the judgment debtor as to how that position resulted if he had little or negligible income. Interest alone on the bank deposits would have provided taxable income and be significant.
[36] Leaving that on one side, however, more importantly coming forward to the present, the judgment debtor has placed no up-to-date information before the Court as to his present asset and liability position. If indeed this position at the time of the
2006 loan applications was as stated with a net equity for he and his wife exceeding
$5 million, unless that has changed dramatically in the last 7 years, it might have been reasonably expected that the current position would have been disclosed to the Court to indicate that the judgment debtor is not insolvent.
[37] All this is rather confusing and in my view provides a significant reason why the judgment debtor’s affairs should be thoroughly investigated by the Official Assignee.
[38] But, if indeed the judgment debtor’s financial position is found to be such that he does have substantial equity in assets exceeding his current liabilities, then it should be a rather speedy process first, to clear those debts from the sources he specified originally in the bank documentation and secondly, to have any bankruptcy order which follows here annulled under s 309(1)(b) Insolvency Act 2006.
[39] On this I refer to the decisions in Commissioner of Inland Revenue v Kaimai Palms Golf Resort Limited HC, Rotorua, 28 September 2010, CIV-2009-463-541, Associate Judge Faire (relating to a company liquidation), FM Custodians Limited v E Serepisos HC, Wellington, 26 September 2011, CIV-2011-485-279, Associate Judge Gendall (relating to a bankruptcy adjudication) and Croad and Dunphy v Rabson HC, Wellington, 18 March 2013, CIV-2011-485-2437, [2013] NZHC 472, Associate Judge Gendall (again relating to a bankruptcy adjudication) where similar considerations were applied.
[40] But I must conclude here, as I note at [36] above, that there is nothing of substance before the Court to outline the judgment debtor’s current financial position or to confirm that he is presently solvent and able to meet his debts within a reasonable time, and thus s 37(b) cannot assist him. Indeed, it is significant in my view that the judgment debtor, in his Notice of Opposition to the present application and in Mr Hucker’s submissions before me, has neither pleaded s 37(b) nor maintained that he is able to pay his debts. An obvious conclusion as to his solvency would seem to flow from this.
[41] And, returning generally to the just and equitable ground in s 37(c) Insolvency Act 2006, it is clear from McHardy v Wilkins & Davies Marinas Limited (in rec), 7 April 1993, Court of Appeal 54/93, that the onus of satisfying the Court either that it is just and equitable not to make an order of adjudication, or that for other sufficient cause no order ought to be made, is on the debtor. (On this aspect, see Brookers Insolvency Law & Practice para IN37.09(4)).
[42] In my judgment, the judgment debtor under all the circumstances prevailing in this case clearly has not satisfied the onus on him of showing the Court that it is just and equitable that an order for adjudication should not be made.
[43] As I have noted above, this whole matter has a long and drawn-out history. The judgment debtor has had ample opportunity to put before the Court a complete and up-to-date picture of his financial position, to show why an order for adjudication should not be made, but he has failed to do so.
[44] There has been no verified evidence of any kind placed before the Court by the judgment debtor to establish his asset and liability position, and indeed on several occasions he has made claims that he has in fact taken steps “to lie to my bankers”.
[45] All this is rather unsatisfactory. Applying here the suggestions made in the decisions in this Court in Re Buckley ex p Carter Holt Harvey Limited HC Hamilton,
11 October 1995, Master Ann Gambrill, B111/95, and in McHardy v Wilkins & Davies Marinas Limited (in receivership) 7 April 1993, I am satisfied in the present case that the interests of both the judgment creditor and the debtor’s other creditors and the wider public interest require an order for adjudication to be made, and for a thorough investigation of the judgment debtor’s affairs to be undertaken – Re: Kennedy ex p Countrywide Banking Corp Limited, HC Auckland, 12 November
1992, Master Towle.
Section 37(d) Insolvency Act 2006
[46] Finally, and for the sake of completeness, I turn to consider the judgment debtor’s alternative argument that other reasons exist in terms of s 37(d) that mean he ought not to be bankrupted here.
[47] First, the judgment debtor’s claim that his financial situation arises in part due to the global financial crisis in my view must be seen as without foundation. The judgment debtor has not provided any information as to either his financial situation or to verify how the global financial crisis has contributed to this.
Furthermore, the tax debts in question are in relation to periods prior to the global financial crisis (between 2003 and 2006), and the assessments were made in 2006, two years before that crisis. In addition, the judgment creditor made no attempt to pay any of his taxation debt during this time.
[48] And, I conclude that it would not be in the general public interest here for the Court to exercise its discretion to decline an order for adjudication here. Under sections 6 and 6A TAA, the judgment creditor’s duty to protect the integrity of the tax system and promote voluntary compliance is paramount. The judgment creditor, himself a Chartered Accountant who would have been well aware of taxation compliance issues, clearly chose not to file his tax returns for the periods in question, and as I understand it elected not to enter the disputes resolution process. It is said first, that he has provided inadequate information for the Commissioner to make a decision under section 113 despite repeated requests for him to do so, and secondly, that he continues to be non-compliant with his current tax obligations. Accordingly, following the decision of this Court in Re: Dumergue HC, Christchurch, 12
February 1997 Master Venning arguably there has been a history of non-compliance here, which must be relevant in any decision not to exercise the Court’s discretion.
[49] In addition, as I understand it, the judgment debtor has not made any attempt to pay any part of the tax owing, or at any time to come to an arrangement with the judgment creditor. It is said too, and does not seem to be contradicted, that the judgment debtor at the relevant times also had large amounts going through his bank accounts.
[50] For these, and the other reasons outlined earlier in this judgment, I am satisfied that no other proper reasons exist in terms of s 37(d) Insolvency Act 2006 for the Court to exercise its discretion to refuse an order for adjudication in this case. Public interest factors in this case also in my view support an order for adjudication being made.
[51] I repeat that it is my view that an investigation into the affairs of the judgment debtor by the Official Assignee is warranted here not only for the benefit
of the judgment creditor but also for the benefit of all other creditors of the judgment debtor, and the wider business and general community.
Conclusion
[52] For all the reasons outlined above I conclude that there is no proper basis in this case for declining the order for adjudication sought. It will be apparent therefore that the judgment creditor’s application before me succeeds.
[53] Orders are now made as follows:
(a) An order is made adjudicating the judgment debtor Chi W Eric Yip bankrupt.
(b)Costs are awarded to the judgment creditor on this application on a category 2B basis together with disbursements as fixed by the Registrar.
(c) This order is timed at 3.30 pm today 20 March 2013.
‘Associate Judge D.I. Gendall’
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