Elementary Solutions Limited v Commissioner of Inland Revenue
[2017] NZHC 32
•27 January 2017
ORDER RESTRICTING ACCESS TO AND PUBLICATION OF EVIDENCE (BUT NOT PLEADINGS) PENDING FURTHER ORDER OF THE COURT.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-891 [2017] NZHC 32
UNDER the Companies Act 1993 IN THE MATTER OF
an application that a statutory demand dated 18 February 2016 be set aside
BETWEEN
ELEMENTARY SOLUTIONS LIMITED Applicant
AND
COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 9, 10 August 2016 Appearances:
C Orton for Applicant
A B Goosen for RespondentJudgment:
27 January 2017
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 27 January 2017 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Corban Revell (Craig Orton), Waitakere City, for Applicant
Crown Law (A B Goosen), Wellington, for Respondent
ELEMENTARY SOLUTIONS LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZHC 32 [27
January 2017]
Contents
Paragraph no.
Setting aside under s 290 3 Facts
7
The Commissioner’s ability to enter into agreements for the
collection of taxes
18
The meeting of 8 May 2013 and following events
19
The meeting of 17 September 2013
27
Cancellation of the agreement of September 2013
34
Elementary’s estoppel argument
51
Counterclaim under s 290(4)(b)
56
Other grounds under s 290(4)(c)
61
Outcome
66
[1] Elementary Solutions Ltd applies to set aside a statutory demand dated
18 February 2016 the Commissioner of Inland Revenue served on it on 15 April
2016. The demand is for $343,182.30 for unpaid taxes: $159,711.26 for GST falling due between July 2009 and November 2015 and $183,471.04 for income tax for years ending 31 March 2008, 2010, 2011, 2012 and 2014.1 The company does not dispute its liability for any of the taxes, but it says that the demand should be set aside under s 290(4)(a) of the Companies Act 1993 because it made an arrangement with the Inland Revenue in May 2013 for enforcement of its tax debts to be stayed to
await the outcome of a defamation proceeding and for the gross proceeds of that case to be paid to the Commissioner. It says that the statutory demand is in breach of contract and also that the Commissioner is estopped from claiming payment. While the application pleaded substantial dispute under 290(4)(a), in submissions Elementary also ran arguments as to counterclaim under s 290(4)(b) and other grounds under s 290(4)(c).
[2] The Commissioner denies making any binding arrangements in May 2013 but says that she entered into an agreement with Elementary and its director in September 2013 to stay enforcement against them in return for receiving the proceeds of the defamation case. She says that it was a term of that agreement that they would meet their ongoing tax obligations. She was entitled to cancel it because they breached it.
Setting aside under s 290
[3] The purpose of a demand under s 289 of the Companies Act is to create a presumption of insolvency if the company served with the demand does not comply with it within 15 working days of service. The presumption arises under s 287(a) of the Companies Act. It can be rebutted. There are, however, cases where it would be unjust to allow the presumption of insolvency to arise on non-compliance with the demand. The general purpose of s 290 is to allow statutory demands to be set aside.
Section 290(4) sets out one general and two particular grounds where it would be
1 The amount for 2014 is insignificant – a $50 penalty for not filing a return.
unjust for the presumption of insolvency to arise. The discretion under s 290(4) is accordingly limited to the question whether the statutory demand ought to stand so that non-compliance with it will give rise to the insolvency presumption. That is a relatively confined discretion. On a liquidation application the court has a wider discretion. At that stage the court may have to take into account competing considerations: not only the interests of the creditors seeking the liquidation of the company but also the interests of other stakeholders, including shareholders and other creditors who see benefits in the company not going into liquidation. I have set that out to make it clear that on this application I am only concerned to exercise the discretion under s 290(4) of the Companies Act. I am not required to predetermine how a liquidation application might be decided.
[4] On an application under s 290(4)(a), the onus is on the applicant to show a substantial dispute. Mere assertion of a dispute is not enough. The applicant has to show a fairly arguable basis for the dispute. The court does not resolve disputed questions of fact on affidavits, and it does not decide the substantive merits of the dispute. If there is a genuine dispute, it should more properly be decided in other proceedings.
[5] Under s 290(4)(b) a demand may be set aside if the company has a counterclaim, set-off or cross-demand and the amount in the demand less the amount of the cross-claim is less than $1,000. It is helpful to compare this with the application of insolvency set-off under s 310 of the Companies Act. Insolvency set- off arises when there have been mutual dealings between a person and a company. The set-off is substantive, not procedural. It is self-executing and mandatory.2
Contracting out is not permitted.3 The set-off establishes a new net balance, which
replaces the earlier claim and cross-claim. Insolvency set-off under s 310 applies to government claims for taxes, even if procedural set-off may not be available if the
taxpayer were not in liquidation.4 It applies to all claims that may be made in a
2 See Lord Hoffmann’s exposition in Stein v Blake [1996] 1 AC 243 (HL) at 250-255.
3 National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] AC 785 (HL), Rendell v Doors and Doors Ltd [1975] 2 NZLR 191 (SC) at 197.
4 Re DH Curtis (Builders) Ltd [1978] 1 Ch 162, Secretary of State for Trade & Industry v Frid [2004] UKHL 24, [2004] 2 AC 506 and Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5.
liquidation, including contingent claims.5 A creditor’s claim will be extinguished if the company’s cross-claim against it is for a greater sum. Section 290(4)(b) can be seen as anticipating the effect of insolvency set-off. If on liquidation there will not be a net indebtedness to the creditor so that it will not be able to claim, it should not be allowed to use non-compliance with a statutory demand to create a presumption of insolvency. Nevertheless there are differences between the provisions. The power to set aside under s 290(4)(b) is discretionary, not mandatory. In some cases “pay now, argue later” considerations have been allowed to prevail over the effect of liquidation.6 While “counterclaim, set-off, or cross-demand” is to be given broad scope, it is doubtful that it applies to claims that are not actionable, such as contingent claims. To show a claim within the subsection the company must show a real basis for it with evidence. It cannot rely on assertion alone, but must show clear and persuasive grounds.7
[6] As for the general “other grounds” provision in s 290(4)(c), I follow the approach of the English Court of Appeal in Re a Debtor (No.1 of 1987) where Nicholls LJ said in respect of the English Insolvency Rules 1986 (which has a similar “other grounds” provision):8
The circumstances which normally will be required before a court can be satisfied that the demand ought to be set aside are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.
Nicholls LJ was there referring to the injustice of the presumption of insolvency arising.
Facts
[7] Elementary Solutions Ltd was incorporated in 2006. Its director is Mr Daniel
Ayers. Its business is in the field of computer forensic consulting, IT security and
5 Companies Act, s 303.
6 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC),
Browns Real Estate Ltd v Grand Lakes Ltd [2010] NZCA 425, (2010) 13 NZCPR 349.
7 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.
8 Re a Debtor (No.1 of 1987) [1989] 1 WLR 271 (CA) at 276.
electronic discovery. Mr Ayers has qualifications and experience in that field. In
2009 he wrote an article in NZ Lawyer magazine about flaws in a computer program. In a later edition the magazine published two letters, one from the creator of the program and the other from one of his competitors, replying to his article. Mr Ayers considered that the letters defamed him and the company and began a
defamation proceeding against the publisher of the magazine.9 The case has not
been heard. It has made fitful progress and is presently stayed.
[8] Mr Ayers has certain health problems. It is not necessary to go into them in detail. The Commissioner does not contest this part of Elementary’s evidence. Its case is that his health problems affected his ability to run its business. At least from
2013, if not earlier, the Inland Revenue has been aware of his health problems.
[9] Mr Ayers and the company did not keep up with their tax obligations. The
Inland Revenue had been dealing with Elementary as a non-compliant taxpayer since
2009. Towards the end of 2012 it gave Elementary notice that a statutory demand would be served. It repeated the warning in a letter of 22 March 2013. On 15 April
2013 the Commissioner served a statutory demand on the company. In a letter of
23 April 2013 Elementary’s tax agent requested a meeting, explained Mr Ayers’ difficulties, steps being taken to improve compliance and a proposal for payment from the proceeds of the defamation claim. As a result there was a meeting on
8 May 2013 which Elementary relies on to say that it made a binding agreement with the Inland Revenue that it would cease enforcement action in return for receiving the proceeds of the defamation proceeding. The details of the meeting, what followed, and the parties’ respective contentions will be addressed later.10 At present it is enough to say that the Inland Revenue did not accept that it had made a binding agreement and carried on as if there were none. One reason for the Inland Revenue’s position is that the defamation lawyer acting for Mr Ayers and Elementary refused to give any waiver or undertaking to the Inland Revenue.
[10] In June 2013 the Commissioner began a liquidation proceeding against
Elementary. Under its case the proceeding was a breach of the agreement made in
9 Ayers and Elementary Solutions Ltd v LexisNexis New Zealand Ltd HC Wellington CIV-2010-
485-1274.
10 Below at [19]-[27].
May. In response Elementary applied for a stay. In July 2013 the Inland Revenue advised Elementary of its decision to withdraw the liquidation proceeding. On
21 August Mr Ayers made a complaint to the Inland Revenue headed “Corruption, Criminality and Poor Governance within the Inland Revenue Department.” On
17 September 2013 there was a meeting between Mr Ayers and two Inland Revenue officers, the Acting Group Collections Manager and a Collections Principal Advisor. The parties’ have competing positions on what came out of the meeting. Elementary says that it did not change what had been agreed in the May meeting. The Inland Revenue says that an agreement was made that it would stay enforcement action and would be paid out of the proceeds of the defamation proceeding, but that was subject to a requirement that Mr Ayers and Elementary would comply with their tax
obligations for the next 12 months. I will deal with those aspects later.11
[11] There was further correspondence between Mr Ayers and the department. Mr Ayers did not arrange for a formal contract recording the agreement made on
17 September to be prepared. He did not file outstanding returns, blaming poor health and his outstanding account with his tax agent. On 12 May 2014 the manager sent a lengthy letter to Mr Ayers addressing complaints he had made about the department. It pointed out that he had not complied with his tax obligations as arranged on 17 September 2013. It warned that the department may consider whether to continue with that arrangement. An attachment to the letter showed outstanding returns and taxes owed by Elementary, Mr Ayers and related companies.
[12] There followed further correspondence and telephone contacts between the department, Mr Ayers and his tax agent. In general the department chivvied Mr Ayers and Elementary to comply with their obligations, but to little avail. To try to generate some payments in November 2014 the department proposed that Mr Ayers begin making monthly payments of $250 towards his personal liabilities. That took time to set up. Mr Ayers made only three payments: in March, April and May 2015.
[13] Letters from the department to the tax agent dated 12 June 2015, 19 August
2015 and 14 October 2015 identified outstanding returns and payments and warned
11 Below at [28]-[34].
of possible cancellation of arrangements. Mr Ayers contacted the department on
23 October 2015 to say that he would talk to his tax agent and get back, but the department did not hear further from him.
[14] On 19 January 2016 the department wrote to Mr Ayers cancelling the arrangement for the monthly payments. It included this:
Next Steps
Due to the lack of commitment on your part to deal with these long standing issues and your failure to meet the terms we agreed, recovery and enforcement action will now resume for the debts owed by yourself and your companies and will continue until such time as they are resolved.
[15] The electronic copy of the letter sent to Mr Ayers’ email address bounced back. The department sent a copy to his tax agent and hard copies to two addresses associated with Mr Ayers. He does not deny receiving the letter. Mr Ayers did not contact the department until after the statutory demand was served on 18 April 2016. In response the department sent a letter of 28 April explaining the grounds for the cancellation.
[16] The evidence shows Elementary’s tax liabilities at certain stages. A statement of account as at 8 May 2013 shows unpaid GST of $111,566.57. There was also unpaid income tax of $120,768.23, making a total of $232,334.80.12 Mr Ayers’ unpaid income tax was $469,763.94. All amounts include interest and penalties. At
9 May 2014 Elementary’s unpaid GST came to $137,997.30 and its unpaid income
tax $141,398.80, a total of $279,396.19. Mr Ayers’ unpaid income tax was
$544,213.32. The statutory demand sets out Elementary’s unpaid taxes at
18 February 2016.
[17] There is only fragmentary information about the defamation proceeding. On
16 May 2014 Mr Ayers sent the department a copy of a new statement of claim and a copy of a memorandum for a case management conference. On 15 June 2015
Associate Judge Smith gave his decision on applications by LexisNexis for strike out
12 The statement of account also shows provisional income tax of $64,792 for the year ending 31
March 2013, but that was not included in later accounts. I have not taken it into account.
and security for costs.13 He struck out part of a fourth amended statement of claim, declined to order Mr Ayers to provide security, but ordered Elementary to pay security of $20,000 and stayed its claim until the security was paid. In a minute of
16 March 2016 Associate Judge Smith recorded that Elementary’s claim remained stayed because the security had not been provided. He stayed the claim by Mr Ayers for failure to pay an order for costs. There is no evidence that the stays have been lifted.
The Commissioner’s ability to enter into agreements for the collection of taxes
[18] Elementary’s grounds for saying that the debt in the statutory demand is disputed are based on its arguments that it entered into a binding contract with the Commissioner as to payment of its tax arrears and that the Commissioner is estopped from serving the demand because of representations by her officers. There is no dispute that the Commissioner is able to enter into binding agreements under which she may accept payment of less than the full amount of tax that she considers is
lawfully due.14 That is seen as consistent with the Commissioner’s obligations under
s 6(1) of the Tax Administration Act 1994 to use her best endeavours to protect the integrity of the tax system, her responsibilities under s 6A(2) for the care and management of the taxes under the Inland Revenue Acts and her duty under (3) to collect over time the highest net revenue that is practicable within the law. Similarly
the Commissioner may be estopped.15 The Commissioner acts through officers of
the Inland Revenue. Under s 7 she may delegate her powers under the Inland Revenue acts. Inland Revenue staff can bind the Commissioner only if they have delegated authority. For this case ordinary principles of contract law, agency law and the law as to equitable estoppel apply.
The meeting of 8 May 2013 and following events
[19] On 2 May 2013 a collections officer who had just taken over dealing with
Elementary Solutions Ltd and Mr Ayers wrote with a proposal for a meeting and
13 Ayers v LexisNexis New Zealand [2015] NZHC 1348. The decision records some procedural history.
14 Accent Management Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21.366 (CA).
15 Fairbrother v Commissioner of Inland Revenue [2000] 2 NZLR 211 (HC).
advised that no further action would be taken on the statutory demand “until the above mentioned meeting is held and expected payment settlement granted full consideration.” Four people attended the meeting: Mr Ayers, his tax agent and two collections officers. Mr Ayers’ account is little more than assertion: an agreement was reached that the Commissioner would cease enforcement action against himself and the company in return for receiving the proceeds of the defamation litigation
when it concluded. The tax agent’s affidavit is similarly conclusionary.16 The first
collections officer says that the meeting discussed the possibility of their tax arrears being satisfied by the sale of assets and the expected proceeds of the defamation claim. The Inland Revenue wanted an undertaking from Mr Ayers’ solicitor. The collection officer’s note made after the meeting includes:
We requested Mr Ayers to provide us with their solicitors undertaking that the funds from the defamation case will be paid to us when settled and that in the mean time he is going to make payments to reduce the debts. Mr Ayers said that he is happy to do that. We agreed to put a stop on the legal proceedings to liquidate the company once we have received the undertaking from Mr Ayers Solicitor.
She also noted that the company had minimal assets and liquidating the company will not result in a large recovery. Mr Ayers did not have sufficient personal assets and bankrupting him would not result in any recovery. She adds that she had authority to enter into instalment arrangements with taxpayers where the amount of the debt did not exceed $50,000. She did not have authority to bind the Commissioner to Mr Ayers’ proposal. That would require the approval of the Group Manager of Collections. She is not confident that she explained to Mr Ayers and the tax agent that any proposal would be subject to management approval. She intended to obtain the undertaking from the lawyer and submit the proposal to the manager for approval.
[20] The other collections officer says that the option of the Commissioner being paid from the proceeds of the defamation claim was discussed and the meeting concluded with an agreement that the option would be pursued. Her understanding was that that would involve obtaining an appropriate undertaking from Mr Ayers’
solicitor. Mr Ayers and the tax agent were advised of this requirement. She also did
16 Her affidavit was sworn in support of the stay application in 2013, but there was no objection to my reading it.
not have authority to make any binding arrangements on behalf of the Commissioner as she could only enter into instalment arrangements where the debt was not more than $75,000.
[21] In the days following the meeting the first collections officer followed up obtaining an undertaking from Mr Ayers’ defamation lawyer. Mr Ayers confirmed his understanding that that was required in a telephone conversation with the collections officer on 9 May recorded by both of them. After that conversation, Mr Ayers emailed the officer recording his version of the agreement reached on
8 May but also confirming that the Inland Revenue could contact his lawyer. The undertaking would require Mr Ayers’ approval. There were further conversations over the following days to similar effect.
[22] On 15 May the lawyer handling the defamation proceeding advised that he had never agreed to give an undertaking of any kind and he and his firm would not be doing so. He was however instructed to draft an agreement whereby Mr Ayers and Elementary assigned or undertook to pay the gross proceeds of the defamation case to the Inland Revenue. He had heavy workload commitments that prevented him from dealing with matter immediately.
[23] He did send a draft to Mr Ayers on 21 May. The collection officer’s response to the lawyer’s unwillingness to provide an undertaking was to advise Mr Ayers on that day that in the circumstances there was insufficient certainty that the proceeds of the claim would be paid exclusive of costs. The Inland Revenue would continue with a liquidation application. This produced a strongly-worded response from Mr Ayers complaining about to the Inland Revenue’s conduct and advising that the matter would be taken up with management. After further communications also involving the tax agent, a further meeting was agreed for 27 May 2013. The first collections officer was not able to attend, but the second was. Others at the meeting were Mr Ayers, his tax agent and two Inland Revenue team leaders. The Inland Revenue notes of the meeting show that its recovery options would need to be discussed with the Area Manager. Mr Ayers was requested to provide further information, including a report from a health professional. The notes were circulated.
Mr Ayers did not agree with them. He maintained that he had a binding agreement with the Inland Revenue.
[24] It is not possible on the untested affidavit evidence to say that Mr Ayers’ version of the meeting of 8 May is unarguable. Admittedly the evidence for the Inland Revenue appears more persuasive but that is not enough. At a full hearing of the evidence with cross examination Mr Ayers may be preferred. But there are obstacles to a binding agreement. First, even Mr Ayers accepted the Inland Revenue requirement for his defamation lawyer to give an undertaking so as to assure payment of the litigation proceeds. That is shown by the conversation on 9 May. The solicitors would have a lien over the litigation proceeds. Their unwillingness to give an undertaking may have been a reluctance to waive the lien, even though the
Inland Revenue appears to have sought only the proceeds after costs had been paid.17
When the undertaking was not forthcoming, any agreement foundered. Second, the collections officers did not have authority to enter into an agreement binding the Commissioner when the unpaid taxes were more than the limits of their authority and the proposal involved more than paying by instalments. The arrangement could not bind the Commissioner until an officer with delegated authority agreed to it. That never happened. Another aspect is to consider whether the agreement was overtaken by arrangements make on 17 September 2013.
[25] Nor can Elementary improve its case with an argument as to equitable estoppel. Disregarding other elements of that estoppel, the defence founders on the collection officers’ lack of authority to enter into arrangements binding the Commissioner. Elementary cited Western Fish Products Ltd v Penwith District Council in support of a submission that assurances by officers of a public body may be binding, even if they did not have actual authority.18 That case discussed a dictum by Lord Denning MR in an earlier case, Lever (Finance) Ltd v Westminster Corpn,
suggesting that representations by officers acting within their ostensible authority
17 For a solicitor’s lien over the proceeds of litigation, see Garrow & Fenton’s Law of Personal
Property, 7th ed, LexisNexis vol 1, 7.29.
18 Western Fish Products Ltd v Penwith District Council [1981] 2 All ER 204 (CA).
may bind a public body in the same way as a private entity.19 In Western Fish
Products Ltd the English Court of Appeal distinguished the earlier case and said:20
In our judgment it is not authority for the proposition that every representation made by a planning officer within his ostensible authority binds the planning authority that employs him. For an estoppel to arise there must be some evidence justifying the person dealing with the planning officer for thinking that what the officer said would bind the planning authority. Holding office, however senior, cannot, in our judgment, be enough by itself.
[26] On the facts in this case there is nothing in the evidence to suggest the collections officers were clothed with any ostensible authority to bind the Commissioner by arrangements for which Elementary is contending. Besides, any such arrangements were always subject to the defamation lawyers providing an appropriate undertaking.
The meeting of 17 September 2013
[27] Mr Ayers refers to meeting only the Group Manager Collections on
17 September. He says that he never conceded that the Commissioner had not already agreed to cease enforcement action against himself and Elementary in return for receiving the proceeds of the defamation claim. He does not accept that he entered into a new agreement on that date. He may have advised that he would try to maintain future tax obligations for the next 12 months but only to the extent that compliance was not impeded by his ill health.
[28] The Collections Principal Advisor says that he was present at the meeting. The Group Manager acknowledged that Mr Ayers may have left the meeting on
8 May under the impression that an agreement had been reached, even though the Inland Revenue position was that none had been. Notwithstanding that, as a show of good faith the Inland Revenue would accept the proposal to be paid the proceeds of the defamation case without requiring a solicitor’s undertaking. The manager stressed the need to meet filing and payment obligations on time. Otherwise “All
bets were off.” The advisor’s notes made after the meeting record this as an essential
19 Lever (Finance) Ltd v Westminster Corpn [1971] 1 QB 222 (CA) at 230.
20 Above 9, at 220.
component. Mr Ayers agreed to make additional voluntary payments towards the historic debt. No instalment arrangement was made because Mr Ayers had variable income. Penalties and interest would be remitted on the historic debt as long as other conditions were met. The manager agreed that Inland Revenue would pay Elementary’s legal bill for defending the liquidation proceeding.
[29] The Group Manager Collections has not given an affidavit. He was overseas when the Commissioner was to file her evidence. He was unavailable under s 16(2) of the Evidence Act 2006. Another Inland Revenue officer has put in evidence copies of emails passing between Mr Ayers and the manager.
[30] On 18 September 2013 Mr Ayers sent an email to the manager dealing with the tax debt issue. Under the heading “Daniel Ayers & Elementary Solutions Ltd – Tax Debts” the email included the following:
In our meeting you relayed that the Department will honour the agreement of
8 May 2013, namely that in return for myself and ESL giving the
Department first call upon any proceeds of the defamation litigation (Ayers
& Elementary Solutions Ltd v LexisNexis NZ Ltd; High Court at
Wellington) the Department will cease any legal action or other enforcement steps.
You said this would be conditional upon myself and ESL maintaining future compliance with tax obligations for 12 months, and that condition was accepted by myself and ESL.
You stated that any penalties and interest would be written off, so the debt that myself and ESL are to repay is the core tax only.
I indicated that I would make voluntary repayments as I was able, so that I was not completely reliant on the uncertain outcome of litigation to repay the debt.
It was agreed that the mechanism for implementing this would be an agreement between myself, ESL and the Department – not an undertaking from a solicitor.
You also stated that the Department would cover the full legal costs incurred with Corban Revell in June and July 2013 (the two invoices you have), and that a payment would be made into the trust account of Corban Revell.
To avoid doubt, this agreement relates to the tax debts only and does not constitute full and final settlement of all matters between myself & ESL on one hand and the Department and its officers on the other. In particular this agreement does not prevent myself and/or ESL from bringing any claim against the Department or its officers, except for the recovery of Corban Revell’s costs once those costs have been reimbursed by the Department.
If you could please respond to this email to either confirm that the above is an accurate record of our agreement, or if not to suggest any corrections, once we have that confirmed I will make arrangements for the agreement to be drawn up for execution.
In his reply the manager agreed with each of these matters. He gave comments on some of them and invited Mr Ayers to raise any concerns about them, but none were forthcoming. The Commissioner paid the costs as agreed.
[31] Notwithstanding the last sentence in Mr Ayers’ email, nothing was done to formally document the agreement. All the same, the email exchange shows that Mr Ayers, Elementary and the Inland Revenue entered into a binding agreement. Even if there were any uncertainty as to what was discussed on 17 September, that was cleared up by the emails. There is an agreement for payment at a later date with some of the debt written off, but in my judgment there is no difficulty with questions
of consideration, as under Foakes v Beer.21 The agreement resolved a dispute –
whether an agreement was made on 8 May. Whatever had been discussed then had been replaced by the new agreement. Both Mr Ayers and Elementary were parties, giving cross-undertakings as to each other’s tax obligations, whereas before the Commissioner could look to each of them only for their own tax liabilities.
[32] The agreement provides for performance by Elementary in these respects: (a) Ongoing compliance with tax obligations for the next 12 months;
(b)Continuing with the defamation case. That arises I mplicitly from the promise to pay from the litigation proceeds.
(c) Voluntary payments as and when able.
Mr Ayers claims that the first term was subject to a condition that his compliance was not to be impeded by his health. There is nothing in his email of 18 September to support that. It is not seriously arguable. The third term cannot be considered an
obligation as payments are voluntary rather than enforceable.
21 Foakes v Beer (1884) 9 App Cas 605: the rule under which a promise to pay part of a debt is not consideration for forgiveness of the balance.
[33] Given my conclusion that no agreement was made in the meeting of 8 May, it does not make sense for Elementary to deny that it made the agreement shown in the email exchange. In the absence of an agreement under which the Inland Revenue undertook to hold its hand, Elementary would remain exposed to further tax recovery steps. Notwithstanding that, it denied that there was a binding agreement because the only person with authority to enter into such an agreement on behalf of the Commissioner was the Group Manager of Collections. The manager at the meeting was the Group Manager of Collections (acting). I reject that. There is nothing to suggest that an acting manager does not have the same authority and powers as an ordinary manager.
Cancellation of the agreement of September 2013
[34] Under the agreement the Commissioner agreed to withhold debt recovery action in return for receiving payment from the litigation proceeds. To be able to serve a statutory demand now the Commissioner has to be able to call the agreement off. There are no grounds for treating the agreement as voidable or subject to rescission. The terms requiring performance by Elementary are not contingent conditions, but promises.22 Accordingly the Commissioner cannot rely on non- satisfaction of conditions. Instead the only avenue is to cancel for breach under s 7 of the Contractual Remedies Act 1979:
(1) Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may … treat it as discharged, for … breach.
…
(3) Subject to this Act, … a party to a contract may cancel it if—
…
(b) a term in the contract is broken by another party to that contract;
…
(4) Where … subsection (3)(b) applies, a party may exercise the right to
cancel if, and only if,—
(a) the parties have expressly or impliedly agreed that … the performance
of the term is essential to him; or
22 For the distinction between contingencies and promises, see ANZ Bank Ltd v Holt [2013] NZHC
923 at [52]-[53].
(b) the effect of the breach is…—
(i) substantially to reduce the benefit of the contract to the cancelling party; or
(ii) substantially to increase the burden of the cancelling party under the contract; or
(iii) in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
[35] The Commissioner relies on failures to comply with tax obligations for the next 12 months. It can be noted that the undertaking to make voluntary payments was no more than an expression of good faith and is not enforceable. To use delay in prosecuting the defamation claim as a breach justifying cancellation would first require notice to be given making time of the essence and requiring performance by a given date, allowing adequate time.23 That is because the agreement does not fix any time for completing the proceeding. There is no evidence of the Commissioner taking steps along these lines.
[36] The Commissioner says that these were breaches of the agreement by
Mr Ayers and Elementary:
(a) Elementary did not file a GST return for the taxable period ending
30 September 2013 by the due date, 28 November 2013;
(b) Elementary did not file a GST return for the period ending 31 January
2014 by the due date, 28 March 2014;
(c) Elementary did not file a GST return for the period ending 31 March
2014 by the due date, 7 May 2014; and
(d) Mr Ayers filed his income tax return for the year ending 31 March
2013 late, on 7 August 2014. It was due by 31 March 2014. It showed overdue tax of $3,865.61.
23 See Mt Pleasant Estates Co Ltd v Withell [1996] 3 NZLR 324 (HC) at 329, Steele v Serepisos [2006] NZSC 67, [2007] 1 NZLR 1 at [40], Practical Civil Services Ltd v Commissioner of Inland Revenue [2016] NZHC 593, (2016) 27 NZTC 22-046.
[37] Elementary does not contest the defaults shown by the Commissioner, but claims that there was no breach because it had an out if Mr Ayers’ health prevented him from making returns and payments. The agreement does not however provide that as an excuse.
[38] These breaches under the agreement were still outstanding at the date of cancellation. The statutory demand shows that GST assessed for the periods ending
30 September 2013, 31 January 2014 and 31 March 2014 remained outstanding, but the amounts are relatively small, a total of $2,237.46. When the Inland Revenue sent its letter of 19 January 2016, the GST remained unpaid. The 2015 payments of $750 towards Mr Ayers’ personal tax were not enough to cover his income tax for the year ending 31 March 2013.24
[39] The letter of 19 January 2016 informed Elementary that the Commissioner no longer considered herself bound by earlier agreements for payment to be deferred. That was notice appropriately given to Elementary under s 8 of the Contractual Remedies Act.
[40] The Commissioner’s letter of 28 April 2016 may also be a notice of cancellation, but that is irrelevant for this decision. The Commissioner needs to show that the debt had become due before the statutory demand was served. Under s 289 of the Companies Act a statutory demand is for “a debt owing by a company”. Contingent liabilities, such as Elementary’s liability for the historic debt before cancellation, cannot be the subject of a demand under s 289. And a statutory demand
cannot create a debt.25
[41] To be effective in this case the cancellation must come within s 7(4)(a) or (b) of the Contractual Remedies Act. The Commissioner has not made out a case for substantial breach under s 7(4)(b). The real benefit under the contract would be payment of the litigation proceeds, if the case were successful. Compared to that,
the taxes not paid in the year after the agreement were relatively insignificant.
24 The Commissioner’s evidence also refers to non-compliance by other companies associated with Mr Ayers and to later defaults by Mr Ayers and Elementary, but only breaches in the 12 months after 17 September 2013 are relevant.
25 Keene v Okere Holdings Ltd (1996) 7 NZCLC 261,034 (HC).
Instead the Commissioner can only succeed in the cancellation if there were breaches of an essential term under s 7(4)(a). In that case it does not matter how minor the breaches were.
[42] In Mana Property Trustee Ltd v James Developments Ltd the Supreme Court gave helpful guidance to establish whether a term of a contract is essential:26
Professor Burrows also observes that subs (4)(a) in essence preserves the common law concept of a “condition”: a term which is so important that any breach of it justifies the innocent party in cancelling. He notes too that the subsection emphasises that it is essentiality to the cancelling party which is relevant: it is not necessary, if it ever was, that the term should be essential to both parties. With that possible difference, the common law concerning identification of conditions continues to be relevant. It is helpfully addressed by Dawson and McLauchlan in the following way:
We consider that, as in the old law, the question whether a term is an essential term will fall to be decided by ascertaining the intention of the parties to be collected from the terms of the whole contract and the subject matter to which it relates. Since the question is one of the express or implied agreement of the parties, it will be the intention of the parties at the time of entering into the contract and the effect likely to be produced on the foundation of the adventure that is relevant. Strictly speaking, therefore, the consequences of the breach that have in fact taken place are immaterial to the question whether a term is essential. One useful indicator of whether a term has been agreed by implication to be essential is to ask whether the term is of such importance that it may reasonably be supposed that without such term the party not in default might never have entered into the contract at all.
The indicator mentioned in the last sentence was drawn from the judgment of Jordan CJ in Tramways Advertising. His statement of the law was endorsed in Associated Newspapers Ltd v Bancks by the High Court of Australia, which also approved a test formulated by Morison:
You look at the stipulation broken from the point of view of its probable effect or importance as an inducement to enter into the contract.
Subsection (4)(a) contemplates that the parties either have expressly agreed that a particular term in their contract is to be regarded as essential (to the cancelling party or to both of them) or must be taken to have impliedly so agreed. In both cases it is a matter of interpretation of the contract. The use of words such as “performance being essential” or “strict performance being required” would plainly fall within the former category, but no special form of words is necessary provided that it can be seen that the parties have indeed agreed that adherence to the provision in question is being treated by them as essential. The latter category, of implied agreement on the
26 Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3 NZLR 805 at
[23]-[25].
essentiality of a term which appears in the contract, may sometimes be more difficult to establish. But, again, it will be a question of interpretation, that is, ascertaining the intention of the parties as to the essentiality of the particular term from its language read in the context of the whole of the contract and the surrounding circumstances when the contract was made. Of particular importance will be what must then have been in the contemplation of the parties concerning the likely effect of a breach of the term. It will include whether a term of the same kind has customarily been treated as a condition or as an essential term under the Act, such as, in relation to a land sale agreement, a requirement for payment of a deposit within a particular time. It will also include a consideration of the type of contract and whether it is one, like a mercantile contract, which normally requires strict performance. The court must ask itself whether, without expressly stating that the term is essential – that is, using a form of words equivalent to the expressions of which we have given instances – the parties can be seen, in context, to have intended that that should be the position. Obviously there will be some cases where what is express shades into what must be taken to be implied.
In the end, the preferable approach is to ask whether, unless the term in question was agreed at the time of contracting to be essential, the cancelling party would more probably than not have declined to enter into the contract. That question must be answered by an objective contextual appraisal which disregards what a party may unilaterally have said about its intention in that regard.
(Citations omitted)
[43] The principal advisor’s evidence is that the group manager made it clear in the meeting of 17 September 2013 that it was essential that Mr Ayes and Elementary comply with their ongoing tax obligations, but that is not supported by the email exchange of 18 September. The advisor’s evidence is contestable. It would not be safe in a setting aside application to rely on it alone. Accordingly in the absence of adequate evidence of express agreement that compliance with tax obligations was essential it is necessary to see whether the parties impliedly agreed that it was.
[44] The purpose of the agreement was to provide for payment of historic tax debt out of the proceeds of the defamation claim, given the absence of other sources of payment. That did not extend to waiving compliance with ongoing tax obligations. Mr Ayers and Elementary could be expected to meet their ongoing obligations from further earnings. The Commissioner’s responsibility to protect the integrity of the tax system would count in her not accepting future defaults. That is often seen in practice in liquidation lists. The Commissioner’s lawyers often require as a condition of an adjournment that a company meet its ongoing tax obligations.
[45] For the moratorium on payment of historic debt under the agreement to be effective it was necessary for Elementary to comply with its ongoing tax obligations. The moratorium could be undone by later defaults. Ongoing tax defaults may lead to statutory demands and liquidation applications, standard measures by the Commissioner to enforce tax obligations against insolvent companies. In dealing with insolvency proceedings, the unpaid historic debt would become relevant, even if there had been no breach of other terms of the agreement. On liquidation the historic debt would be part of the Commissioner’s claim and that would count in deciding how to deal with the company’s insolvency. Elementary could accordingly not realistically resist having the term for payment of ongoing tax included as a term of the agreement.
[46] I conclude that if it had been proposed not to have a term of the agreement that Elementary would be required to meet its ongoing tax obligations, the Commissioner would have turned that down flat and would have refused to enter into the agreement at all. The term was accordingly essential. No question arises as to making time of the essence as the tax legislation fixes times for performance. A promise to comply with tax obligations is a promise to make returns and payments by the dates fixed under the legislation. The breaches allowed the Commissioner to cancel the agreement.
[47] Elementary says however that it was not open to the Commissioner to cancel because she affirmed the agreement under s 7(5) of the Contractual Remedies Act. It relies on the Commissioner’s letters of 12 May 2014 and 27 February 2015. The first letter replied extensively to complaints Mr Ayers had made. In it the group manager referred to the agreement of September 2013, recorded that Elementary and Mr Ayers had not complied with their ongoing tax obligations,27 and sought information from Mr Ayers including as to addressing tax obligations. It included a warning that if Mr Ayers did not respond or the manager concluded that it was not
appropriate to continue with the agreement, the Inland Revenue would start recovery
27 Paragraphs 27(b), 80.
again.28 A party affirms under s 7(5) if he or she refuses to accept a breach as a discharge of the contract. In Jansen v Whangamata Homes Ltd Randerson J said:29
It must be shown that the electing party made a firm and settled choice and does not intend to go back on it. Putting it another way, the electing party must be shown to have committed irrevocably to one of two inconsistent courses of action.
While the letter recorded breaches of the agreement, its warning of possible cancellation cannot be taken as an affirmation of the contract.
[48] The letter of 27 February 2015 dealt with arrangements being made for Mr Ayers to pay $250 a month towards his personal tax liabilities. It included the following:
Accordingly, this payment arrangement does not supersede the arrangement conditions agree to as at 17 September 2013 and set out in my 12 May 2014 letter.
That does not mean that the Commissioner has chosen not to cancel the agreement. It notes that the agreement continues to apply but is otherwise equivocal as to cancellation or not.
[49] Even if these letters were affirmations under s 7(5), the breaches continued so that the Commissioner was entitled to cancel on the basis of breaches after the letters.30 For completeness none of the Commissioner’s chivvying letters after
18 September amount to affirmations under s 7(5). They do no more than draw attention to breaches of the agreement and require them to be remedied. That is not an election not to cancel if the breaches continue.
[50] In paragraph [38] I noted that the unpaid GST that had accrued in the
12 months after 17 September 2013 came to $2,237.46. As that debt is not part of the moratorium for the historic debt under the agreement, the Commissioner is
entitled to recover it without first cancelling the agreement. Once Mr Ayers’ claim
28 Paragraph 86.
29 Jansen v Whangamata Homes Ltd HC Hamilton CIV-2003-419-1511, 29 November 2004.
Overturned on appeal on the facts, but not the law in Jansen v Whangamata Homes Ltd [2006] 2
NZLR 300(CA).
30 Jolly v Palmer [1985] 1 NZLR 658 (HC), Kumar v Station Properties Ltd [2015] NZSC 34, [2016] 1 NZLR 99 at [54].
that Elementary did not have to pay if his health prevented it is put to one side, there cannot be any substantial dispute as to the company’s liability for this part of the statutory demand. As the amount is more than the prescribed sum of $1,000, the demand is also sound for that component, even if the Commissioner had not effectively cancelled the agreement. As it is, the Commissioner’s cancellation was effective and she is able to recover both historic tax debt and taxes that fell due after
17 September 2013.
Elementary’s estoppel argument
[51] Elementary says that the Commissioner is estopped from serving the statutory demand because of representations made in the September 2013 meeting. For this submission Elementary accepts that the group manager had the requisite authority to bind the Commissioner. If I am wrong in holding that there was consideration for the agreement, the estoppel submission requires consideration. Otherwise it will not make any difference.
[52] The current formulation of the estoppel defence is:31
(a) A belief or expectation has been created or encouraged through some action, representation, or omission to act by the party against whom the estoppel is alleged;
(b) The belief or expectation has been reasonably relied on by the party alleging the estoppel;
(c) Detriment will be suffered if the belief or expectation is departed from; and
(d) It would be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation.
[53] Elementary’s argument is that relying on the manager’s representation that enforcement of the tax debt would be suspended and payment could be made out of the litigation proceeds, it acted to its detriment in continuing with the proceeding and incurring legal costs. The Commissioner should not be allowed to shift from the
expectation she created.
31 James Every-Palmer “Equitable Estoppel” in Andrew Butler (ed) Equity and Trusts in New
Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [19.2].
[54] Any estoppel argument must fail in the light of the Commissioner’s entitlement to cancel the contract and no longer be bound by any representations she made. The meeting also set expectations for Elementary. It was required to meet its ongoing tax obligations for the next 12 months. When it failed to meet those expectations in circumstances where the Commissioner was entitled to cancel the agreement, it cannot be unconscionable to allow the Commissioner to move from the arrangements made in September 2013.
[55] For the above reasons, Elementary has not persuaded me that under s 290(4)(a) of the Companies Act there is a substantial dispute whether the debt in the demand is owing or due.
Counterclaim under s 290(4)(b)
[56] Elementary says that it has a counterclaim against the Commissioner for breach of the agreement alleged to have been made on 8 May 2013 by filing and serving the liquidation application in June 2013. This is said to have caused Elementary to stop business and it thereby suffered a loss of earnings. While its losses had not been calculated, given the company’s past profitable trading there was good reason to believe that it would well exceed the amount of the demand,
$343,182.30.
[57] There is a procedural problem. Elementary did not say in its notice of application that it had a counterclaim under s 290(4)(b). Its evidence did not expressly assert any counterclaim. While Mr Ayers’ evidence referred to his health problems and asserted that the Commissioner’s actions had harmed Elementary, the Commissioner did not address those parts as she did not understand them to be
relevant to any question of substantial dispute.32 The counterclaim was raised for the
first time in counsel’s submissions. That was too late. In my judgment the Commissioner has been prejudiced by this issue being raised late as she prepared her case on the reasonable assumption that it was not in issue. It would be unfair to the
Commissioner to find against her on the counterclaim allegation.
32 Affidavit of S M Martin, paragraph 6.
[58] In any event I am not satisfied that Elementary has shown a case to the required clear and persuasive standard. The Commissioner did not enter into a contract with Elementary in the meeting on 8 May 2013 and therefore Elementary can have no claim for breach of any such agreement.
[59] Besides the claim is implausible on questions of causation and damage. The alleged breach was the filing and service of the application in June 2013. It was withdrawn in the following month. That suggests that any effect of starting the proceeding can have been fleeting only. Mr Ayers has included in his reply affidavit a copy of a report by a health professional which records information he gave her, including that the initial defamation had had a serious effect on the company, his health problems had also affected its business for some time already and the company lost money in the year ending 31 March 2013. Mr Ayers shut down the company website in 2012, but reopened it in 2013. Business remained flat. Aside from that information, it is also clear that Elementary had a serious cash flow insolvency problem. Its only apparent assets of any possible significance were Mr Ayers’ own expertise and the defamation proceeding. Against that it had very heavy tax liabilities that were long overdue. The only reason why the Inland Revenue was prepared to consider an arrangement to be paid out of the litigation proceeds was because there was no other likely prospect of payment. Given that state of affairs it may be wondered how Elementary could have continued trading. Mr Ayers risked breaching his duties as a director if he were to do so. The suggestion that the Commissioner caused the downfall of the company by her
liquidation application is fanciful.33
[60] Accordingly the Commissioner’s statutory demand cannot be set aside under
s 290(4(b).
Other grounds under s 290(4)(c)
[61] When creditors press insolvent debtors for payment, it is not unusual for the debtors to try to square matters by blaming the creditors for the straits they are in.
33 I have ignored Associate Judge Smith’s findings in the security for costs decision, as they are
inadmissible under s 50(1) of the Evidence Act 2006.
Elementary’s attempted counterclaim is one example of this trait in action. Judges remain sceptical at such tactics. Elementary’s argument as to “other grounds” is another case. The notice of application pleads that the statutory demand is an abuse of process. I take that as putting s 290(4)(c) in issue.
[62] The argument runs that the difficulties Mr Ayers and the company have in funding the defamation proceeding and paying their overdue taxes is a direct and foreseeable consequence of the actions of the Inland Revenue. Elementary was supposedly operating profitably up until the Commissioner served the statutory demand in April 2013. The effect was to cause a downturn in Mr Ayers’ health, he moved back from Auckland to his home town, Christchurch, Elementary lost contact with its customers and stopped trading. It lost funding and therefore could not meet its commitments. This was supported with references to s 6 of the Tax Administration Act, assertions that the Inland Revenue’s conduct did not reach the required standards of integrity and a submission that it would also put the Commissioner in breach of her duty under s 6A(3) to collect over time the highest net revenue that is practicable within the law.
[63] The issue here is whether the statutory demand should be allowed to stand so that non-compliance with it would give rise to a presumption of insolvency. This is against the background that there is no dispute as to Elementary’s indebtedness to the Commissioner, it does not have an arguable claim for breach of contract, it has not paid anything to reduce its indebtedness to the Commissioner, its debt has continued to grow, it is clearly cash flow insolvent and is likely balance sheet insolvent. At this stage I am not required to decide whether Elementary should go into liquidation – that discretion comes later if there is a liquidation application.
[64] Even before the Commissioner served the statutory demand in April 2013, Elementary had been in default of its tax obligations since 2009. A continuing failure to pay undisputed debts on their due dates is a strong sign of insolvency. I take a counter-factual. Suppose that in May 2013 the Inland Revenue had taken a less accommodating attitude. It had rejected any suggestion of giving Elementary the opportunity to pay from the proceeds of the defamation claim as it was uncertain, speculative and unlikely to be cost effective. Rather than listen to Mr Ayers and his
tax agent, it filed a liquidation application forthwith. It would then be up to Mr Ayers to persuade the court in its discretion not to order a liquidation. But no-one could say that such a liquidation application was an abuse of process. The Commissioner would not face any liability (except for costs) if the court did decide not to appoint liquidators. Given those matters it cannot be an abuse of process for the Commissioner to do what happened in this case: listen to Mr Ayers and his tax agent, consider a proposal, issue but then withdraw a proceeding, make an agreement which defers payment of historic tax debts until the defamation case has been heard, while requiring current tax obligations to be met and only cancel after the company had been given generous time in which to comply. Any difficulties in funding both litigation and taxes were there from the time of the statutory demand of April 2013. The demand did not cause the difficulties, it exposed them. These are not the circumstances which would make it unjust for non-compliance with the demand to lead to a presumption of insolvency.
[65] In summary I see no basis for setting aside the statutory demand under s 290(4)(c).
Outcome
[66] Elementary Solutions Ltd has not made out of any its grounds for setting aside the statutory demand of 18 February 2016. I make these orders:
(a) The application is dismissed.
(b)Under s 291(1)(a) of the Companies Act, Elementary Solutions Ltd is to pay the Commissioner of Inland Revenue $343,182.30 by
24 February 2017.
(c) The time for complying with the statutory demand, which was extended in my minute of 20 May 2016, will expire on 24 February
2017.
(d)Elementary Solutions Ltd is to pay the Commissioner of Inland Revenue costs on the application. If the parties cannot agree costs, memoranda may be filed and I shall decide costs on the papers.
(e) Pending further order of the Court access to and publication of evidence (but not pleadings) are restricted.34
………………………............
Associate Judge R M Bell
34 See Minute issued with this judgment.
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