Rob Mitchell Builder Ltd (in liquidation) v National Bank of New Zealand Ltd

[2003] NZCA 276

IN THE COURT OF APPEAL OF NEW ZEALAND

CA16/03

BETWEENROB MITCHELL BUILDER LIMITED (IN LIQUIDATION)

Appellant

ANDTHE NATIONAL BANK OF NEW ZEALAND LIMITED

Respondent

Hearing:1 October 2003

Coram:Blanchard J
Tipping J
Anderson J

Appearances:  A C Beck for Appellant

S A Barker and S D Barker for Respondent

Judgment:26 November 2003 

JUDGMENTS OF THE COURT

Judgments
Para No
Blanchard and Tipping JJ	[1] – [30]
ANDERSON J	[31] – [32]

BLANCHARD AND TIPPING JJ (DELIVERED BY BLANCHARD J)

Introduction

[1]       In Commissioner of Inland Revenue v Edgewater Motel Limited [2003] 1 NZLR 425 the Court recently determined that when a mortgagee sells land under a power of sale the claim of the Commissioner for payment of GST takes priority over the mortgagee’s right to recover the principal sum and interest under the mortgage. The decision was based upon certain provisions of the Goods and Services Tax Act 1985, namely ss5(2) and 17.

[2]       The present appeal concerns a different situation to which neither of those provisions applies.  It is about a sale of land entered into by a mortgagor company before it went into liquidation but completed by the liquidators.  The mortgagee at no stage took any step to enforce its security.  Since, however, the amount secured exceeded the sale price, the mortgagee claims that the proceeds of sale, after deduction of agent’s commission, legal fees and rates, must be paid to it and that it has no obligation to account for GST.  On the other hand, the liquidators, pointing to what they say is the component of GST in the price, wish to retain that portion of the moneys and account for it to the Commissioner.

[3]       The Commissioner, having made submissions in the High Court at the request of the Judge, has effectively abandoned his own appeal and it has been dismissed accordingly.  Mr Beck, who appeared below for the Commissioner, now has instructions on behalf of the liquidators.

Facts

[4]       The company, Rob Mitchell Builder Ltd, carried on the business of buying and selling land on which it erected or renovated homes.  It was registered for GST purposes.  On 27 February 2002 the company entered into a conditional agreement to sell one of these properties at Taylor’s Mistake, near Christchurch, for $430,000 inclusive of GST.  The property was mortgaged to the National Bank of New Zealand Ltd for a sum exceeding $430,000.  The agreement became unconditional on 2 April 2002 and on 3 April the real estate agent accounted to the company’s solicitors for the deposit which had previously been held by the agent as stakeholder.  There was at that time, at the latest, a supply of the land for GST purposes:  s9(1) of the GST Act.  The company was then required to account for GST on a two monthly basis, namely on 31 May 2002.

[5]       However, on 15 April 2002 the company was placed in liquidation and the liquidators were appointed.  They considered that they should complete the sale.  They settled it and received the balance of the price from the purchaser on 1 May 2002.  Because of uncertainty over whether they had an obligation to account to the Commissioner for GST, they came to an arrangement with the bank for the disputed amount of $47,777 to be held in trust pending resolution of the GST issue.  They made an application to the High Court for directions under s284 of the Companies Act 1993. 

The High Court judgment

[6]       In a judgment delivered at Christchurch on 17 December 2002, Venning J said that a taxpayer’s liability for GST is calculated as the net figure due to the Crown after offsetting credits against output tax.  For that reason, he said, GST on a sale of a property “cannot constitute a portion of the purchase price”.  There is no trust for the Crown.  The bank had a right to insist on full repayment.  The practical situation was that, unless the bank had provided the necessary discharge of mortgage on terms acceptable to it, the sale of the property would not have settled. 

[7]       The Judge said that although the amount of tax payable for the period could not be calculated until the end of the period, the liability to pay GST in respect of the sale of the Taylor’s Mistake property arose on the supply of the goods (the land) on 3 April.

[8]       Upon the liquidation on 15 April, the Judge said, that date was deemed to be the last day of the company’s taxable period:  s15(8) of the GST Act.  By virtue of s58, the company was deemed to be an incapacitated person and the liquidators were its specified agents.  The period of their agency ran from 15 April and they were responsible for GST liability for supplies made after commencement of the agency period.  But the liquidators had no personal responsibility for GST incurred in relation to supplies provided up to the date and time of liquidation:  s58(1D).

[9]       Venning J said that the fact that a return may not be required until on or before the last working day of the month following the last day of every taxable period recognises that it is necessary to calculate the tax payable after taking account of outputs and inputs, but does not create the liability: 

The liability to pay the GST is created by the supply which took place prior to the commencement of the agency period.  Section 20(4) provides that the output tax on, in this case, the sale of the property is attributable to the taxable period during which the supply was made.  The supply in this case was made on 3 April.  The liability for the GST and the payment due date are separate and distinct concepts.  (para [19]).

[10]     The Judge rejected a submission that the liquidators were acting as agents for the bank.  He said the equity in the property had already passed to the purchaser before the liquidation.  Section 248(1)(c) of the Companies Act, requiring a court order or agreement of the liquidators before a person (the purchaser) may exercise or enforce a right or remedy over or against the property of the company, had no application.  The liquidators had agreed to complete the settlement.  No issue arose as to the enforcement of rights or remedies by the purchaser.  There had been no suspension of the sale.  Because the liquidators chose to complete the sale the bank had not been required to act under s305 of the Companies Act, which sets out certain rights of a secured creditor in relation to the charged property.

[11]     Venning J also rejected a submission that the liquidators had to account for GST because its payment was a necessary expense incurred by them in the course of the liquidation.  He said that GST was a preferential debt in the liquidation in accordance with clause 5 of the Seventh Schedule to the Companies Act, not a liquidator’s expense in terms of that Schedule.  Nor was s104 of the Land Transfer Act 1952 applicable as the sale was not by the bank as mortgagee.  The Judge considered and distinguished the Edgewater Motel case. 

Argument and discussion

[12]     In this Court Mr Beck repeated the arguments put to the High Court on behalf of the Commissioner and the liquidators, but we are in agreement with Venning J that those arguments must be rejected.

[13]     The supply in this case occurred, and the GST liability in respect of the sale accordingly arose, prior to the liquidation.  The liquidators have no personal liability for it under s58 because they are not personally responsible for liabilities incurred before the agency period began under that section.  Section 58(1D) expressly so provides.

[14]     There was no new (replacement) supply when the liquidators decided to complete the settlement.  They were merely recognising an obligation which already bound the company before it went into liquidation and pursuant to which there had already been a supply of the land, not merely of some fraction or proportion of it.  No court order was required by the purchaser.  The bank took no step to enforce its security.  It merely rested on that security and made available a discharge in exchange for payment.  The arrangement made in respect of the $47,777 was merely to accommodate the obtaining of a ruling on the disputed question, and does not affect that position.  That sum was simply a portion of the price.  It was not received by the mortgagor (or its liquidators) as a payment of GST: Nicholls v Commissioner of Inland Revenue (1999) 19 NZTC 15,233.

[15]     Mr Beck argued that there was a supply when the liquidators decided to proceed with the sale because until that decision was made the possibility existed that a court would refuse to make a decree of specific performance in favour of the purchaser.  He gave as an example a situation, not said to have existed in this case, where the price is obviously inadequate and a court may in its discretion decline a purchaser’s application for specific performance, leaving the purchaser to a damages remedy.  That argument finds no support in s9 of the GST Act or elsewhere in that Act and, if it did have validity, it would follow that as specific performance is always a discretionary remedy – though the discretion is exercised in accordance with well understood principles – arguably there would never be a supply before a vendor of land had finally decided to settle.  Any such conclusion would not only be contrary to the Act but it would also be productive of much uncertainty concerning when a GST liability accrued.  With respect to counsel, the argument lacks any merit.

[16]     Equally unpromising was the submission that in some manner the liquidators were acting as agents for the bank when they settled the sale.  Mr Beck was unable to refer us to any appointment by the bank, nor is there evidence even of a tacit understanding that the liquidators would act on its behalf.  In fact, they seem to have negotiated with the bank at arm’s length.

[17]     On the basis that there was no such agency, Mr Beck accepted that s104 of the Land Transfer Act had no application because it is a provision concerned with how a mortgagee must deal with purchase moneys arising from a sale conducted by or on behalf of the mortgagee.  But Mr Beck introduced instead a new argument, which was apparently not put before the High Court Judge.  It relied upon s98(2) of the Property Law Act 1952:

98       Mortgagee's receipts, discharges, etc.

…

(2)       Money received by a mortgagee under his mortgage, or from the proceeds of securities comprised in his mortgage, shall be applied in like manner as in this Act directed respecting money received by him arising from a sale under the power of sale conferred by this Act, but with this variation: that the costs, charges, and expenses payable shall include the costs, charges, and expenses properly incurred of recovering and receiving the money or securities, and of conversion of securities into money instead of those incident to sale.

[18]     Mr Beck’s argument was that this subsection required that the GST liability of the company be treated as an expense of sale in the same manner as s104 requires when there has been a mortgagee sale.  But, as Mr Barker responded, there are insuperable difficulties in the path of the liquidators which this argument cannot overcome.  The first is the practical difficulty for them that s98(2) does not begin to operate until the moneys in dispute have been received by the mortgagee.  Thus, if the argument were otherwise correct, the GST could not simply be deducted by the liquidators and paid to the Commissioner.  The amount in question would first have to be paid over to the bank.

[19]     Section 98(2) directs a different application of moneys from that required where the mortgagee has itself sold the property under power of sale.  But the variation does not relate to s104.  What is required by s98(2) is a departure from the position “as in this Act [i.e. the Property Law Act] directed respecting money arising from a sale under the power of sale conferred by this Act”.  Mr Barker correctly identified the provision being varied.  It is the power of sale to be found in clause (8) of the Fourth Schedule to the Property Law Act, and relevantly the portion which we highlight:

(8)       That where the mortgagor makes default for the space of 2 months in payment of the principal sum and interest, or any part thereof, or in the performance or observance of any other covenant expressed or implied in the mortgage, and thereafter at least one month's notice in writing of his intention so to do has been served by the mortgagee on the mortgagor in accordance with section 152 of the Property Law Act 1952, the mortgagee may sell the mortgaged property, or any part thereof, either altogether or in lots, by public auction or by private contract, or partly by the one and partly by the other of those modes of sale, and subject to such conditions as to title or evidence of title, time or mode of payment of purchase money, or otherwise as the mortgagee thinks fit, with power to the mortgagee to buy in the mortgaged property or any part thereof at any sale by auction, or to rescind any contract for the sale thereof, and to resell the same without being answerable for any loss or diminution in price, and with power to execute assurances, give effectual receipts for the purchase money, and do all such other acts and things for completing the sale as he may think proper: And also that the mortgagee may exercise such other incidental powers in that behalf as are conferred upon mortgagees by law:

And that the mortgagee will apply the money arising from any such sale as aforesaid, in the first place in payment of the costs and expenses incidental to the sale or otherwise incurred in respect of the mortgage, and in the second place in satisfaction of the principal, interest, and other money for the time being owing under the mortgage, and in the third place in payment of money owing under the subsequent registered mortgages (if any) in the order of their priority; and will pay the surplus (if any) to the mortgagor:

Provided that a purchaser at any sale as aforesaid shall not be answerable for the loss, misapplication, or non-application of the purchase money by him paid; nor shall he be obliged to see to the application thereof; nor shall he be concerned to inquire whether any default has been made as aforesaid, or whether any notice has been given as aforesaid, or otherwise as to the necessity, regularity, or propriety of the sale; nor shall he be affected by notice that no such default has been made or notice given as aforesaid, or that the sale is otherwise unnecessary, irregular, or improper.

[20]     Section 78 of the Property Law Act implies the covenants, powers and conditions found in the Fourth Schedule in all mortgages of land except as varied or negatived in the mortgage or by deed.  The mortgage granted by Rob Mitchell Builder Ltd did not vary or negative clause (8). 

[21]     We agree with Mr Barker that it is also apparent that s98(2) is substituting an element, not adding an additional element.  That is clear from the words “instead of those incident to sale”.  The word “include”, which appears earlier in the subsection, may have suggested the contrary but is explained by the fact that the portion of clause (8) which we have highlighted requires application of sale proceeds “in the first place” not merely for costs and disbursements incident to a sale but also for costs and disbursements “incurred in respect of the mortgage”, which would not necessarily have been incurred in relation to a sale, for example, costs and expenses of collecting rentals paid by tenants of the mortgaged property.  The substitution directed by s98(2) relates to the first of these types of expense only.  As required by s98(2), the relevant part of clause (8) has to be read as follows in the circumstances contemplated by that subsection:

And that the mortgagee will apply the money arising from any such sale as aforesaid, in the first place in payment of [the costs, charges and expenses properly incurred of recovering and receiving the money or securities, and of conversion of securities into money] or otherwise incurred in respect of the mortgage …

[22]     We have thought it appropriate to clarify how, in our view, the Fourth Schedule is to be read in a situation to which s98(2) applies.  But the real difficulty for Mr Beck’s argument is more fundamental than any problem with that language of the Property Law Act.  The fundamental difficulty is that there is nothing in the GST Act which requires a mortgagee receiving money under its mortgage in circumstances where it has not exercised a power of sale, and was not in possession of the mortgagor’s land, to pay GST relating to those moneys.  There are no provisions comparable to ss5(2) and 17 under which the selling mortgagee is deemed to have made a supply in the course of a taxable activity (even if it is not registered for GST purposes), and where the transaction is segregated from other supplies and recorded in a “special return”.

[23]     Even if the mortgagee were liable for GST, there is nothing in the GST Act which would relieve the mortgagor of its obligation to account for GST on the sale.  This would, therefore, lead either to a double recovery of the GST, or recovery against the mortgagee with a residual claim against the mortgagor where the mortgagee fails to pay or is not registered.  This would clearly be an uncertain and unsatisfactory outcome and can be contrasted with that arising on a mortgagee sale where s17(2) explicitly removes any GST obligation upon the mortgagor.

[24]     In Edgewater Motel it was not the fact that GST could be regarded as an expense under s104 which led to the conclusion that the mortgagee must pay GST.  On the contrary, as the Court made clear in para [18] of the judgment, priority of a tax depends upon what is dictated by the taxing statute.  In that case the GST Act required the mortgagee to pay the tax in priority to the mortgage debt.  The GST was therefore an expense deductible by the mortgagee when it accounted under s104.  It would also have been an expense, we think, under the (unvaried) language of clause (8) of the Fourth Schedule.  But, in circumstances in which the GST Act does not make the mortgagee liable to pay GST on receiving proceeds of sale from the mortgagor, clause (8) of the Fourth Schedule, as varied by s98(2), has no relevance.

[25]     In summary, the supply giving rise to liability to pay GST occurred before the liquidation and thus before the agency period under s58.  Liability for GST rested with the company, and is an unsecured debt in the liquidation.  The liquidators have no personal liability for it.  As the entire proceeds are charged under the bank’s mortgage security, the liquidators are obliged to pay them to the bank, subject to the prior charge for rates and to the agent’s commission and solicitors’ fees and disbursements which were protected by liens and by rights of set-off exercised when the agents and solicitors accounted to the liquidators.  The bank has no obligation to pay GST from the money it receives.  The Commissioner’s only recourse is to prove in the liquidation as a preferential creditor, for what that may be worth.

[26]     Counsel for the liquidators suggested that such a result is unfair because, he said, in obtaining all of the purchase price the bank is exceeding its property interest.  It was also said to be unfair because the mortgagor had to “fund the GST twice,” and because a conclusion in favour of the mortgagee means that different consequences follow depending upon whether the sale is conducted by an insolvent mortgagor or by a mortgagee under power of sale. 

[27]     Considerations of equity or fairness have little or no weight in a tax case.  But, in any event, counsel’s arguments mis-state the position.  The bank is receiving in priority to other creditors, including the Commissioner, no more than is secured to it under its mortgage.  In some cases, of which this is not one, the price a purchaser is prepared to pay may be increased to reflect the vendor’s GST liability arising from the sale, because the purchaser will be in a position to claim a GST reduction or refund.  Where the mortgage indebtedness exceeds the value of the land, the mortgagee’s recovery will be enhanced, but it is still only a recovery of moneys owing by the mortgagor and for which the mortgagee has a security affording it priority.  In this case, involving a sale of a residential property to a private purchaser, the price merely reflected the value of the property over which the mortgagee held a security.

[28]     The GST certainly does not have to be funded twice.  The mortgagor is no worse off than it would be if the mortgagee had conducted the sale and accounted for GST.  It is true that the mortgagor continues to have a debt to the Commissioner for the amount of GST in the present case.  But it owes a reduced balance to its mortgagee.  Its net financial position is the same as if there had been a mortgagee sale.

[29]     As to the different consequences, depending upon whether it is the mortgagee or the mortgagor who sells, the first response must be that, even if this were undesirable, the distinction is one clearly drawn by the GST Act.  It is also one which is unlikely in practice to lead to a different result when a sale is made during the agency period, ie. after commencement of a liquidation.  The specified agent will appreciate that he or she will be personally liable for GST on any such sale.  Where the mortgage debt plus GST will exceed the price a purchaser is prepared to offer, but the mortgagee is insisting on receiving the proceeds without deduction of GST, the liquidator is likely to tell the mortgagee to conduct the sale itself, with the consequences found in Edgewater Motel.  It is only in the present situation of a supply by an insolvent company prior to the appointment of a specified agent, that the mortgagee will in practice obtain priority over the Commissioner.  But that is because of the timing of the supply, as dictated by the Act, and because the Commissioner’s claim has no priority over other creditors, save for preferential status.  If a sale of a mortgaged property by a registered person has been completed before liquidation, without payment of GST, the Commissioner ranks as an unsecured (preferential) creditor, with no claim against the mortgagee which has received the proceeds from the mortgagor in terms of its security.

Result

[30]     The Court being unanimous, we dismiss the appeal by the liquidators and direct that they pay the bank costs on the appeal in the sum of $6,000.00 together with its reasonable disbursements, to be fixed if necessary by the Registrar.

ANDERSON J

[31]     I have had the advantage of reading in draft the judgment of Blanchard and Tipping JJ and agree that the appeal should be dismissed with costs.  Except in one respect, I concur with the reasons expressed in that judgment.  The exception is with respect to s98(2) of the Property Law Act which, in my opinion, has no application to a case such as the present where monies secured by a mortgage have been paid in consideration for a discharge.  The subsection is concerned with monies received by a mortgagee “under his mortgage” a term which, to my mind, connotes an entitlement, by virtue of a provision in the mortgage, to receive monies accruing to or payable to a mortgagor.  These might, for example, include rents or other debts which, being received by the mortgagee in lieu of the mortgagor are different in nature from funds repaid by a mortgagor.  A mortgagee would ordinarily be entitled to deal with the monies received in payment of a mortgage debt as his own funds, without there being any need for a statutory regime for priority of payment as appears, for example, in the second paragraph of clause (8) of the Fourth Schedule to the Property Law Act.  One might ask why a mortgagee would need a statutory authority to pay his own debts incurred in the recovery and receipt of  debts secured by a mortgage.

[32]     However, the respect in which I differ from the other members of the Court is only incidental and not material to the outcome of the appeal.

Solicitors:
Anderson Lloyd Caudwell, Christchurch for Appellant
Buddle Findlay, Wellington for Respondent