Montgomerie v Commissioner of Inland Revenue

[2000] NZCA 16

IN THE COURT OF APPEAL OF NEW ZEALAND CA191/99

BETWEEN	BERNARD SPENCER MONTGOMERIE
Appellant

AND	THE COMMISSIONER OF INLAND REVENUE
Respondent

Hearing:	16 February 2000
Coram:	Blanchard J McGechan J Fisher J
Appearances:	D J Chisholm for Appellant A C Beck for Respondent
Judgment:	17 February 2000

JUDGMENT OF THE COURT DELIVERED BY MCGECHAN J

1. This is an appeal against a decision on a liquidator’s originating application for directions relating to liability for GST on recoveries made of voidable payments pursuant to the Companies Act 1993 ss292 and 296.  The decision below is reported at (1999) 19 NZTC 15, 368.

2. The factual situation, put very briefly, is that following the liquidation of the company concerned the liquidator served various voidable transaction notices pursuant to ss292 and 294 Companies Act 1993.  Outcomes included settlement in full or in part between the liquidator and the company creditor concerned.  In no case, however, was any agreement reached under which creditors concerned agreed not to prove in the liquidation of the company for the debt or balance debt remaining.

3. Questions arose whether recoveries so effected were liable to GST.  The liquidator, having received conflicting advice, applied for a protective ruling.

4. It was conceded by the Commissioner in the High Court, and remains conceded, that recoveries so effected were not a “taxable activity” under s6(1), a “supply of goods or services” under s8(1), or a “taxable supply” within s2.  The Commissioner’s contention in the High Court was that such recoveries nevertheless attracted GST due to the provisions of s25.  [Credit and debit notes].

5. The Judge agreed in part.  The Judge regarded partial recoveries as coming within s25(1)(b) which applies where “the previously agreed consideration for that supply of goods and services has been altered, whether due to the offer of a discount or otherwise”.  The Judge took a different view in relation to the full recoveries, reasoning that in the latter situations there was no alteration of consideration. 

6. The liquidator appeals against the ruling that partial recoveries attract GST.  The Commissioner originally cross-appealed against the ruling that full recoveries did not, but shortly before hearing abandoned that cross-appeal.  Instead, the Commissioner sought to support the decision in relation to part recoveries on a different ground, pointing to the possible case where a creditor might reach a compromise by way of part repayment coupled with binding agreement not to prove in the liquidation for the balance.  Response by counsel for the liquidator, which we accept, is that in fact there are no transactions of this latter variety involved in this particular appeal.

7. When the appeal was called before us, on inquiry made, counsel for the Commissioner conceded the appeal subject to the reservation of that latter factual scenario, the Court having indicated it was not minded to make a ruling either way on that latter presently theoretical question.  We are moved to say we think the concession, subject to that understandable reservation, was wise.  We are not attracted to the concept that a recovery in part only amounts in itself to alteration of consideration provided for in the underlying agreement in terms of s25(1)(b).  The contract price is not reduced merely because pursuant to Court order or agreement reached between liquidator and creditor the latter restores to the company all or part of value received from the company during the “specified period” in s292.

8. The appeal, accordingly, is allowed in part inasmuch as the direction in the Court below that goods and services tax is payable on less than full recoveries by the liquidator, however arising, pursuant to the Companies Act 1993 ss292 and 296 is quashed, and we substitute a direction that goods and services tax is not payable on recoveries by the Appellant pursuant to those provisions.  For avoidance of doubt, we are specifically leave open the question whether goods and services tax is payable on recoveries where the creditor concerned has reached binding agreement with the liquidator not to prove in the liquidation for the balance debt involved.

9. Costs should follow the event, but can be moderated in view of the Commissioner’s ultimately realistic approach very considerably reducing hearing time.  The Appellant will have costs of $2,500 plus reasonable disbursements and travel and accommodation expenses as approved by the Registrar.

   Solicitors

   Kensington Swan, Auckland, for Appellant

   Crown Law Office, Wellington, for Respondent