Sheehan, ex parte Commissioner of Inland Revenue HC Auckland CIV 2009 412 608

[2010] NZHC 747

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV 2009 412 608

IN THE MATTER OF     the Insolvency Act 2006

AND IN THE MATTER OF  the Bankruptcy

BETWEEN  NEIL ANTHONY SHEEHAN Judgment Debtor

ANDTHE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

Hearing:         13 April 2010

Appearances: B Tasker and K Reid for Judgment Creditor

K Tohill for Judgment Debtor

Judgment:      21 May 2010 at 3pm

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

Introduction

[1]      This is the Commissioner’s application for an order adjudicating Mr Sheehan bankrupt.

[2]      Mr Sheehan opposes his adjudication.  He relies on s 37(c) – (d) Insolvency

Act 2006.

Insolvency under the Act

[3]      By  s  36  of  the  Act  the  Court  may  adjudicate  a  debtor  bankrupt  if  the requirements set out in s 13 are established.

NEIL ANTHONY SHEEHAN V THE COMMISSIONER OF INLAND REVENUE HC DUN CIV 2009 412

608  21 May 2010

[4]      In this case Mr Sheehan does not dispute that the s 13 requirements are established.

[5]      In particular, in terms of s 13, I find:

(a)Mr Sheehan owed the Commissioner on account of tax liabilities at the date of the application on 23 November 2009 $194,682.16.   Of that  a  sum  of  $120,938.15  was  the  subject  of  a  District  Court judgment  entered  on  28  May  2008.    The  debt  has  continued  to increase because no payment has been made on account of tax since this proceeding was commenced; and

(b)Mr Sheehan committed an act of bankruptcy in the 3 months before the application in that he failed to meet the requirements of a bankruptcy notice served on him on 18 August 2009; and

(c)       The debt by its nature is a debt for a certain amount. (d)        The debt is payable immediately.

[6]      Section 37 of the Act permits the Court in its discretion to refuse adjudication in four events.  The events referred to in s 37(a) and (b) are not applicable in this case because the s 13 requirements have been met and Mr Sheehan does not suggest that he is able to pay his debts.  Mr and Mrs Sheehan own a company called Sheehan Limited which has had a distribution contract with a national food manufacturer. The company was formed on 20 March 2000.  In his affidavit Mr Sheehan explained his financial position thus:

Because of costs associated with the running of the Company and the purchase, maintenance and operation of the various vehicles required for the distribution I found myself unable to make personal tax payments.

I have been working hard to ensure that the Company stays solvent and not had the cash flow to meet the personal tax payments as they became due and payable.  Therefore with interest and penalties the personal tax payable has escalated.

[7]      The debt owed to the Commissioner has built up in every income tax year since that beginning 1 April 2000.  Additionally, there was a small sum of income tax  not paid for the  year ending 31 March 1998.   The debts are now together accruing penalties and interest.  At the date Jenifer Ellen Kino swore an affidavit in support of the Commissioner’s application (8 March 2010) the total debt owing to the Commissioner (including penalties and interest) was $213,848.92.

[8]      The  core  income  tax  not  paid  from  1  April  2000  to  31  March  2009  is

$77,298.66.  In no year has the non-payment of core tax been less than $6,600.00.

The Court’s “just and equitable” discretion – s 37(c) of the Act

[9]      For Mr Sheehan, Mr Tohill primarily invokes the discretion imposed in the Court by s 37(c) of the Act – the Court may refuse adjudication if it is just and equitable that the Court not make an order of adjudication.  At the time he filed his affidavit in opposition, Mr Sheehan essentially identified two related grounds going to this jurisdiction.

[10]     The  first  ground  was  that  any adjudication  would  probably result  in  the termination of his company’s distribution contract by the other party, thereby removing any ability he has to obtain further income.   The implication was that although in legal terms Mr Sheehan has been employed by the company, he is effectively a sole trader.   He would by bankruptcy no longer have the right to be either a sole trader or to control a company.  However, in his submissions Mr Tohill conceded that this ground of opposition could only bite in relation to a stay of the proceeding – the reality is that Mr Sheehan’s personal liabilities greatly exceed his assets.   Against this background Mr Sheehan and his wife have accepted the inevitable need to dispose of the company or its assets.  Mr Sheehan gave evidence that they had been endeavouring to do so.   Indeed, on the eve of the hearing Mr Sheehan and his wife joined in swearing an affidavit to which they exhibited a conditional   contract   dated   12   April   2010   by   which   a   third   party   agreed (conditionally) to purchase the business of the company for $130,000.00.   After allowing for secured debt and costs directly associated with the sale there is likely to be a surplus available to the Sheehans on such sale of approximately $100,000.00.

[11]     The  second  ground  which  Mr  Tohill  submitted  constituted  a  reason  for refusing adjudication lies in permitting Mr Sheehan to maximise recovery from the company.  This judgment was reserved for four weeks partly to enable the Court and the parties to know the outcome of the due diligence process which the intending purchaser was to embark upon.   The Court was advised by Mr Tohill on 18 May

2010 that the intending purchaser was yet to advise whether it had finance. Accordingly, five weeks on from the hearing, Mr Sheehan has not been able to complete a sale on his own terms.  Ms Reid for the Commissioner has requested that the Court now proceed to give judgment.  She has provided an up-to-date certificate as to the unpaid debt.

[12]     I therefore return to deal with the financial position in more detail.

[13]     While  Mr  Sheehan  discloses  the  Commissioner  as  his  only  unsecured creditor, the outcome of a sale of business is likely to mean that he personally has a deficit (liabilities over assets) in excess of $100,000.00.

[14]     Apart from the business, Mr Sheehan discloses no other available assets.  Mr

Sheehan in his initial affidavit sworn on 4 February 2010 swore:

I will as shareholder of the company and beneficiary of the Trust utilise the sale funds to repay the Taxation debt of the Inland Revenue Department.

My wife Susan as Director of Sheehan Limited and Trustee of the Trust has agreed to utilising her share of the funds to repayment of her Taxation debt also.

[15]     By way of brief explanation –

•Mr and Mrs Sheehan disclose that they live in a family home owned by their family trust.   Mr Sheehan refers to that home as having an equity of approximately $77,500.00.

•    Mrs Sheehan also has personal tax arrears.

[16]     Although Mr Sheehan’s February 2010 affidavit referred to the agreement of

Mrs  Sheehan  to  distribute  trust  equity,  it  did  not  indicate  her  agreement  to  a

distribution to assist the payment of Mr Sheehan’s personal taxation liability.  Rather it referred to an agreement to distribution to meet Mrs Sheehan’s taxation debt.  At the hearing before me Mr Tohill indicated that there were now in any event disagreements between Mr and Mrs Sheehan as to the distribution of trust assets with the consequence that Mr Sheehan was unable to give any commitment to the Commissioner or to the Court as to assistance from the trust with regard to Mr Sheehan’s debts.

[17]     In the event, Mr Tohill accepted that he could not tenably submit that Mr Sheehan’s inability to be self-employed was a strong factor going to justice and equity.

[18]     In  his  oral  submissions, Mr  Tohill  focussed  upon  the general  interest  in maximising recovery for the creditors as the principal matter he could advance going to justice and equity.

[19]     The distribution contract allows the other party to immediately terminate the contract in the event that the company or any of its shareholders becomes bankrupt or insolvent or is unable to pay debts as they fall due.  One can reasonably anticipate that the other party would be likely to  move to cancellation of the distribution contract in the event Mr Sheehan is adjudicated bankrupt.  While the contract would permit immediate cancellation even in Mr Sheehan’s current position of insolvency rather than adjudicated bankruptcy it can be envisaged that the other party might take a  more  immediate  and  serious  view  of  adjudication  and  bankruptcy  than  of insolvency short of bankruptcy.

[20]     Mr Tohill submitted that the only conceivable way for a substantial recovery for creditors in this case is if the contract of sale becomes unconditional and is performed.  While it might be considered to be overstating the matter to say that that is the “only conceivable” way of maximising recovery, it would certainly appear possible, if not probable, that the present potential purchaser (or other purchasers) would be looking for a forced sale price rather than a fair market value if Mr Sheehan were adjudicated bankrupt and that became known to a potential purchaser.

[21]     As well as Mr Tohill developed his submissions on behalf of Mr Sheehan, the argument as to maximising recovery might realistically support an argument for adjournment (which Mr Sheehan has effectively received for five weeks) but cannot on the facts of this case appropriately constitute grounds of justice and equity of a strength to overcome the creditor’s prima facie right to an order of adjudication.

[22]     The five week period from hearing to delivery of this judgment has in itself provided the opportunity for Mr Sheehan’s company to secure the sale of the asset on the most advantageous terms possible.  Since the entry of judgment by default in the  District  Court  in  May  2008  the  Sheehans  have  had  almost  two  years  to themselves obtain an outcome which maximised recovery for the creditor.  It appears that only one conditional contract has been obtained and that only on the eve of this hearing.  Fairness and equity do not require the Court to give Mr Sheehan a further opportunity in that regard.   The Official Assignee can be expected in relation to Mr Sheehan’s  shareholding  in  the  company  to  diligently  pursue  the  maximum recovery for  the  creditor.    The  fact  that  in  this  case  the Commissioner,  as  the applying creditor, supports that method of realisation of assets must, against the background of the time taken by Mr Sheehan to address his liability, count against any further delay.

[23]     Mr Tasker in his submissions emphasised that in addition to issues relating to the maximising of recovery, the Court must also take into account other matters of public interest which arise in a case such as this.   I group his submissions in this regard under three heads and I accept that each has force.

(a)      The cases recognise that even where there is an apparent lack of assets available for  creditors, a benefit of adjudication lies in the potential for further investigation:  see Re Fidow (a debtor) [1989] 2

NZLR 431 at 444.    I accept, as Mr Tasker submitted, that there are factual areas in this case which may warrant further investigation. One lies in the fact that the family home is owned by a trust.   The Court  has  no  evidence  as  to  the  relevant  trust  documents.    The

contract by which the family home was transferred into the trust is not before the Court.  It may be, as Mr Tasker submits might be the case, that monies are owed by the family trust to the vendors (who may be Mr and Mrs Sheehan).

(b)Secondly, as a matter of public interest transcending the interest of the immediate parties to the proceedings, there is an interest in exposing and controlling an insolvent debtor which exists independently of the separate question of debt collection by immediate creditors: see Re Fidow, also at 444.  As authority referred to by Fisher J in that case indicates, there is an interest in protecting the business community from irresponsible financial conduct.   In such cases the stigma of bankruptcy is  itself a deterrent to others from  behaving in  a like manner.   In the present case for his own reasons Mr Sheehan has elected to continue the operations of a company in such a way that the company kept making payments to him (and his wife) on account of income without any apparent intent or ability on their part to pay the income tax which attached.   This is not a case of a business encountering difficulty for a couple of months or even a couple of years.   There was a persistent and flagrant breach of the principles which underlie insolvency legislation, namely that those in business who cannot pay their debts as and when they fall due should not continue in the business which is leading to that situation.

(c)Thirdly,  and  related  to  the  second  area  of  submission,  there  is  a particular public interest attaching to the Commissioner’s carrying out of his obligations in relation to tax collection: see Cook v Commissioner of Inland Revenue (1994) 16 NZTC 11,004 at 11,005.

[24]     Mr Tasker was entitled to submit, as he did in this case, that the evidence is of a flouting of tax obligations and of a delinquent taxpayer.   The effect of an adjudication would be to ensure that Mr Sheehan does not continue to trade on his own account.  The risk of his doing so is removed vis-a-vis both the Commissioner and any other creditors.

[25] The Court may refuse an application “for any other reason” (that is a reason other than those set out earlier in the section). Mr Tohill submitted that even if there are no grounds to refuse an application for reasons of justice and equity, the prospect of a greater recovery through sale of the business as a going concern should count against adjudication. I am not persuaded that the possibility of greater recovery in this case should cut across the creditor’s application – the considerations I have discussed at [23] above apply as much under s 37(d) as they do under s 37(c).

Personal effect on Mr Sheehan

[26]     Although it formed no part of the formal grounds of opposition, Mr Tohill emphasised in the course of his submissions that the bankruptcy procedures and the current financial situation have been extremely stressful to Mr Sheehan and his wife. In addition to there being no ground of opposition based on personal circumstances, there is no evidence before the Court in this regard.   The Court cannot in this jurisdiction, and on the facts of this case, give any significant weight to personal factors.  Even in cases where serious health issues have been raised, the Courts have recognised that personal circumstances and future livelihood will fall well behind the primary public interest considerations.   Thus in McHardy v Wilkins and Davies Mariners Limited (In Receivership) CA54/93, 7 April 1993, the Court of Appeal dismissed an appeal against an order for adjudication in a case where detailed evidence had apparently been put forward as to personal factors.

Conclusion

[27]     Nothing in the circumstances of this case constitutes a proper ground for the

Court to conclude that there should not be an order of adjudication.

Order

[28]     I order that the judgment debtor be adjudicated bankrupt.

[29]     I order that he pay the costs of and incidental to this proceeding on a 2B

basis, together with disbursements to be fixed by the Registrar.

[30]     This order is timed at 3pm 21 May 2010.

Solicitors

Inland Revenue Department, Dunedin

Bodkins, Alexandra