Simpson v Commissioner of Inland Revenue HC Wellington CIV-2010-485-1860

[2011] NZHC 490

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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-485-1860

BETWEEN  RICHARD GRANT SIMPSON AND TIMOTHY WILSON DOWNES Applicants

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:         30 March 2011

Counsel:         J Toebes and C Carey for applicants

H Ebersohn and P O'Regan for respondent

Judgment:      17 May 2011

RESERVED JUDGMENT OF DOBSON J

Contents

Introduction ....................................................................................................................................... [1] The provisions...................................................................................................................................[11] Approach to interpretation............................................................................................................. [15] Position as caveator ......................................................................................................................... [45] Alternative bases for attributing liability to the receivers ........................................................... [51]

Introduction

[1]      In form, these proceedings constitute an originating application by receivers under  s 34  of  the  Receiverships  Act  1993  for  directions.     In  substance,  the proceedings reflect a dispute as to whether the receivers are personally liable to account for goods and services tax (GST) on the sale of six properties effected by

them.

SIMPSON AND DOWNES v COMMISSIONER OF INLAND REVENUE HC WN CIV-2010-485-1860 17

May 2011

[2]      The extent of GST without the addition of any interest or penalties amounts to some $1.215 million.  The respondent (the Commissioner) is holding an amount which it is agreed would be accepted in full and final settlement of the GST liability in respect of the relevant supplies, in the event that the receivers are held to be personally liable to pay the GST.  On the other hand, if it is decided that there is no personal liability on the receivers, then it is agreed that the money would be returned to them with the consequence that the Commissioner would be left as an unsecured creditor of the company in respect of which the receivers have been acting.

[3]      The parties also agreed on a set of facts treated as sufficient to assess the arguments arising, and on the terms of the questions that would be posed in order to obtain the directions sought by the receivers.

[4]      The  company  in  receivership,  Capital  +  Merchant  Investments  Limited (CMI) is owned by the same shareholders as a former finance company, Capital + Merchant Finance Limited (CMF), which is in receivership and liquidation.   CMI was formed to acquire all the assets of CMF, which acquisition CMI financed by borrowings from Fortress Credit Corporation (Australia) II Pty Limited (Fortress). To secure those advances, Fortress took a General Security Agreement over all the assets of CMI, which comprised the assets it had acquired from CMF.  Those assets included secured loans over the properties, the subsequent sale of which are the taxable supplies giving rise to the GST liabilities relevant in the present proceedings.

[5]      After CMI defaulted on its obligations to Fortress, the present applicants were appointed as receivers of CMI.   There were instances of default by the mortgagors of each of the mortgaged properties, and the receivers have exercised powers of sale contained in the mortgages over the six properties.   CMI’s indebtedness to Fortress exceeded the gross realisation of all assets including the proceeds of the mortgagee sales.

[6]      I  was  not  advised,  but  assume,  that  the  indebtedness  of  each  of  the mortgagors to CMI was greater than the amounts realised on sale of their properties. Certainly,  there  was  no  reference  to  any  competing  claim  to  account  to  the mortgagors for amounts beyond what was owing by them.

[7]      A sample of the agreements for sale and purchase that was exhibited to an affidavit from Mr Downes used the form approved by the Real Estate Institute of New Zealand Inc and the Auckland District Law Society, in which the provision for payment of the purchase price is stipulated as the price agreed by the parties, ―…plus GST (if any)‖.   The agreement stipulated CMI (In Receivership) as the vendor, acting in exercise of its mortgagee’s powers.  The settlement statement identified the vendor in the same way, and stipulated the purchase price as the price agreed in the agreement for sale and purchase, plus GST on that amount.  I am to assume that all of the transactions were settled in accordance with settlement statements prepared in that way.

[8]      The essence of the argument for the receivers is that the provisions of the Goods and Services Tax Act 1985 (GST Act) attribute the liability to pay that GST to the mortgagee, that the Commissioner is an unsecured creditor of the mortgagee, and that there are no grounds for attributing personal liability to the receivers to pay the amounts of GST included in the sales, and recovered by them.  That analysis would leave the receivers free to account to Fortress for the net proceeds of sale, plus the amount recovered from the purchasers as the GST payable on the sales.

[9]      The contrary stance for the Commissioner is that the GST Act imposes a tax on supplies, levied upon those effecting taxable supplies so that liability is imposed on those through whose hands the consideration for the taxable supplies had to pass. Here, the relevant provisions are to be interpreted as attributing the liability to the receivers as the persons in effective control of the taxable supplies of property. There  were  certain  additional  and  alternative  arguments  advanced,  and  I  shall address them later in this judgment.

[10]     Mr Toebes argued that if the approach just described was intended, then it has not been achieved in the anomalous situation where the mortgagee exercising powers to sell (supply) property belonging to the mortgagor was not obliged to be registered for GST because its business was solely that of exempt supplies, in the nature of financial services.  He argued that the receivers are not caught as suppliers by any of the provisions of the GST Act.  They are exercising the mortgagee’s powers so that their conduct comprises a supply by the mortgagee.  Here, CMI filed a GST return

but did not make payment of the amounts involved. The Commissioner had rights as an unsecured creditor of CMI.

The provisions

[11]     The directly relevant provisions of the GST Act are ss 5, 17 and 58, the material parts of which provide:

5        Meaning of term “supply”

(1)       For the purposes of this Act, the term supply includes all forms of supply.

(2)       For the purposes of this Act, where any goods acquired (whether in terms of a hire purchase agreement  … or otherwise) or produced by a person (that person being referred to hereafter in this subsection as the first person)  are  sold, under a  power  exercisable  by another person (that person being referred to hereafter in this subsection as the second person), in or towards the satisfaction of a debt owed by the first person, those goods shall be deemed to be supplied in the course or furtherance of a taxable activity carried on by the first person (being deemed a registered person), unless—

[two exceptions then follow which are not relevant for present purposes]

17       Special returns

(1)       Where goods are deemed to be supplied by a person pursuant to section 5(2) of this Act, the person selling the goods, whether or not that person is a registered person, shall —

(a)      Furnish to the Commissioner in the prescribed form a return showing—

(i)       That person's name and address and, if registered, registration number; and

(ii)      The name,  address, and, if registered, registration number of the person whose goods were sold; and

(iii)     The date of the sale; and

(iv)     The description and quantity of the goods sold; and

(v)      The  amount  for  which  they  were  sold  and  the amount of tax charged on that supply; and

(vi)     Such other particulars as may be prescribed; and

(b)      Pay to the Commissioner the amount of tax charged on that supply; and

(c)       Furnish to the person whose goods were sold, details of the information shown on the return referred to in paragraph (a) of this subsection,—

and the person selling the goods and the person whose goods were sold  shall  exclude  from any  return,  other  than  a  return  required pursuant to this subsection, which either or both may be required to furnish under this Act, the tax charged on that supply of goods.

[12]     By the terms of s 58(1), for the purposes of that section:

―Incapacitated person‖  means a registered person who dies, or goes into

liquidation or receivership, or who becomes bankrupt or incapacitated.

―Specified agent‖  means a person carrying on any taxable activity in a capacity as personal representative, liquidator or receiver of an incapacitated person, or otherwise as agent for or on behalf of or in the

stead of an incapacitated person.

[13]     The operative provision in s 58(1A) is as follows:

58       Personal representative, liquidator, receiver, etc

…

(1A)     Despite sections 5(2) and 60, a person who becomes a specified agent is treated as being a registered person carrying on the taxable activity of the incapacitated person during the agency period, and the incapacitated person is not treated as carrying on the taxable activity during the period.

[14]     Although  not  directly  relevant  to  analysis  of  the  capacity  in  which  the receivers participated in the relevant supplies, s 51B is also relevant in broadening the categories of persons to whom liability will be attributed in other circumstances where taxable supplies occur.  It provides:

51B     Persons treated as registered

(1)      For the purposes of Parts 3 and 6, and of Part 9 of the Tax Administration Act  1994,  the  following  are  treated  as  registered persons:

(a)       a person who is not otherwise a registered person but who supplies goods or services, representing that tax is charged on the supply:

(b)      if goods are treated by section 5(2) as being supplied by a person—

(i)       the  person  selling  the  goods,  if  subparagraph  (ii)

does not apply; or

(ii)      the  person  whose  goods  are  sold,  if  the  person supplies a written statement under section 5(2)(a) to the person selling the goods and the Commissioner considers that the written statement is incorrect:

(c)      a person whose registration has been cancelled under section

52(5) with effect from the original date of registration.

(2)       If a person referred to in subsection (1) represents that tax is being charged on a supply that they make in a taxable period, the person is liable to pay the amount of the tax.

(3)       If  a  person  is  treated  by subsection  (1)(c)  as  being  a  registered person, the person is treated as being registered from the original date of registration to the date when the Commissioner cancels the registration.

(4)       For the purposes of this Act, in relation to a supply to which section

11(1)(mb) applies, a recipient who is treated as a supplier under section 5(23)—

(a)      is treated as registered from the date of the supply under section 5(23); and

(b)      must  apply under  section 51(2)  to  the  Commissioner  for registration.

Approach to interpretation

[15]     Mr Ebersohn urged that I adopt a purposive approach to the interpretation of the relevant provisions.   He cited the judgment of Elias CJ and Anderson J in Ben Nevis Forestry Ventures Ltd & ors v Commissioner of Inland Revenue as reflecting the current approach.1    In endorsing a purposive approach, that judgment observed that the meaning of any term used by the statute in a particular provision must be contextually accurate. That was followed by:2

…we do not therefore accept that when considering the application of a specific tax provision, and before considering the question of avoidance, the Court is concerned primarily with the legal structures and obligations created

1      Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009]

2 NZLR 289 at [2], [4]-[5].

2 At [5]. The quotation is from Barclays Mercantile Business Finance Ltd v Mawson [2005]

1 AC 684 at [32].

by the parties, and not with the economic substance of what they do.   It depends on the context.   The critical question is whether ―the relevant provision of the statute, upon its true construction, applies to the facts as found‖.

[16]     In  Ben  Nevis,  the  Supreme  Court  was   considering  the  approach   to interpretation of specific taxing provisions in the Income Tax Act 1994 in the context of their relationship with a general anti-avoidance provision.  However, I consider the passage just cited to be appropriate in considering the scope of the provisions of the GST Act that are relevant in the present case.

[17]   I note that a somewhat different emphasis on a purposive approach to interpretation of revenue statutes may be discerned from the judgment of Tipping, McGrath and Gault JJ in Ben Nevis, but I do not discern a relevant difference on this present point.   In that judgment, there is more caution suggested in adopting the approach from English cases on use of a purposive approach to interpretation, in light of the absence from the United Kingdom statutes of general anti-avoidance provisions.  More generally, however, both judgments for the Supreme Court in Ben Nevis  recognise  the  appropriateness  of  a  purposive  approach  to  specific  taxing

statutes.3

[18]     I  also  acknowledge  that  the  requirement  for  prospective  certainty of  the application of taxing statutes, and the potential severity of the consequences of taxpayers being found liable for income tax or other taxes on a construction of a taxing statute that was not literally and abundantly clear, have been among reasons previously cited for a narrower approach to interpretation in the cases of taxing statutes, than more liberal approaches perceived as appropriate for statutory interpretation in other contexts.  In light of the approach to a purposive interpretation in the judgments in Ben Nevis, and having regard to the context in which this particular  dispute  has  arisen,  I  am  not  persuaded  that  purposive  considerations should be excluded from the analysis as to the proper interpretation to be applied.

[19]     The first issue is what interpretation is to be given to the breadth of those

contemplated as ―the second person‖ for the purposes of s 5(2) of the GST Act.  The

3 See, for example, [109]-[110].

Commissioner urges that it is capable of a wider interpretation, so that a receiver of a mortgagee who is in control of the supply in commercial and practical terms, and who has the consideration for the supply (including the payment of GST) passing through their hands, could be treated as ―the second person‖.  The receivers argue for a narrower interpretation so that ―the second person‖  can only be the mortgagee whose powers to procure a sale of the mortgagor’s property must be invoked in the name of that mortgagee to enable the transaction to occur.

[20]     The evident purpose of s 5(2) is to address the consequences of supplies occurring where the owner of goods has granted security over them, and after default on the terms of secured borrowings the secured creditor has effected the supply of the goods to a third party, to reduce the debt owing by the owner/debtor.

[21]     Achieving complementarity in respect of taxable supplies and receipts is a basic aim of this tax on supplies. Although some anomalies may not be avoided, the aim is to match a buyer’s entitlement to an input tax credit on the GST component of the cost of acquisition, against the seller’s obligation to account for output tax on its sale.  There is also a complementarity for the same registered person obtaining the benefit of an input credit when being supplied, and the off-set of that when the same person assumes the burden of an output tax when making on-supplies to others.  To facilitate that matching of credits on the way in and liabilities on the way out, s 5(2) deems supplies in the name of a secured creditor, exercising powers of sale, to be supplies by the mortgagor.

[22]     Section 5(2) applies in all cases where a sale is effected by the exercise of powers vested in someone other than the owner.  Within that category, it will apply in relation to the person who exercises the powers over the property of another. Because the purpose of the provision is to catch and re-categorise transactions involving supply, arguably the critical element  is not the identity of the person empowered to sell, but the identity of the person practically responsible for that power being exercised.  The relevant elements of the identity of the ―second person‖ as that expression is used in the sub-section is that the second person be the person who has sold, under a power exercisable by a person other than the owner, for the purposes of satisfying a debt owed by the owner.  The section does not specify that

the second person has to be the person to whom the debt was owed.  Given those criteria, on the wording of the section the ―second person‖  could conceivably be a mortgagee, or where the mortgagee is in receivership, the receiver of the mortgagee, where that person effects the transaction that is to be deemed a supply by the ―first person‖, ie the owner/mortgagor.

[23]     Mr Toebes resisted any means by which the definition of ―second person‖ in s 5(2) can be extended in this way.  He argued that the critical element is the identity of the person by whom the power of sale was exercisable, and the answer in all respects can only be the mortgagee. The receivers did not have independent standing to conduct the sale, and rather did so as agents of the mortgagee.  He cited s 6(3) of the Receiverships Act 1993 which provides for the status of receivers as agents of the company to be the default position, unless the security under which they are appointed specifies otherwise.  In this case, Mr Toebes advised that the terms of the security do  not  alter that  default  position.   The sample agreement  for  sale and purchase   annexed   to   Mr Downes’  affidavit   specifies   that   the   company   (in receivership) was the vendor in exercise of the power of sale under the specified mortgage.  He signed as vendor, without any stipulation as to the capacity in which he did so.

[24]     The receivers resist any attribution of personal involvement in the sales as cutting across the settled pattern of receivership law in which receivers act in the name of the company, and only have status as its agents.   Exceptions to that will arise where receivers elect to conduct the business of a company in receivership, and in certain such circumstances are treated as assuming personal liability for business transacted at their direction.

[25]     The status of receivers as agents of the company acting without the prospect of personal liability is not entirely sacrosanct.  Were it necessary to do so in order to make the provisions work,  I would be prepared to  consider adopting the wider interpretation of s 5(2) so that in circumstances such as the present, receivers would have standing as ―the second person‖ where they exercised commercial and practical control over the transaction involving a taxable supply.   It is artificial to treat the sales as being conducted by the mortgagee when the power to do so has been taken

out of its hands, and may have occurred contrary to its wishes.   I accept that to attribute separate status  to  the receivers would  be inconsistent  with  the general structure of the law in relation to the conduct of receiverships.  However, had it been necessary, that would at least arguably have been justified on the purposive and contextual  approach  to  interpretation  adopted  in  Ben  Nevis,  when  supported  by public policy concerns to promote the effective working of the GST provisions in

accordance with their evident purpose.4

[26]     The focus on the person actually effecting the taxable supply is supported by the terms of s 17 of the GST Act.5    Section 17(1) imposes the obligation to file a special return on ―the  person selling the goods‖,  and the obligation is imposed on that person whether or not he, she or it is a registered person for the purposes of the GST  Act.    The  details  required  to  be  furnished  to  the  Commissioner  require relatively detailed knowledge of the circumstances of the supply, consistent with the person completing the return having had actual involvement in it.  Section 17(1)(b) imposes the obligation on the person completing the return to pay the Commissioner the amount of tax charged on the supply.  It is a fair assumption that Parliament has

imposed this obligation in those terms because of an expectation that the person completing the return and effecting the sale will be the person who received the consideration for the supply, including the charge for GST.  Read together, ss 5(2) and 17 reflect the purpose of the GST Act to impose the obligations to account for GST, where someone other than an owner makes taxable supplies, on the person with practical control of that supply.

[27]     However, the Commissioner did not suggest that it was necessary to read ss 5(2) and 17 so widely in the present circumstances because the GST Act contains another provision which explicitly addresses situations such as those in which a mortgagee exercising powers of sale is itself ―incapacitated‖.

[28]     This  analysis  relies  on  s 58  of  the  GST Act.    Mr Ebersohn’s  argument

accepted that in present circumstances, the ―second  person‖  for the purposes of

s 5(2) may well be CMI.  However, CMI’s status as an incapacitated person for the

4 See, for example, [62] to [64] below.

5 Cited at [11] above.

purposes of s 58 means that the receivers, as its specified agent, are deemed to be carrying on the taxable activity, which in any event is deemed to be that of the mortgagor.

[29]     Section 58 appears in Part 9 of the GST Act which is headed ―Special cases‖. The sections in that part deal with the attribution of liability in cases such as groups of companies, branches and divisions of a registered person, and unincorporated bodies.  Part 9 includes s 60 (referred to in the opening words of s 58) which deals with the position of liability for agents and auctioneers.  The purpose of that part of the GST Act is to relate the participation in the provision of taxable supplies to the attribution of the GST liability consequences of doing so.

[30]     In s 58, receivership is treated as a form of ―incapacity‖ so that conduct by receivers is treated as being that of a ―specified agent‖ of a company in receivership. When those circumstances apply, the taxable supplies effected by a specified agent on behalf of the incapacitated person are attributed to the specified agent. Accordingly, on Mr Ebersohn’s analysis, if ―the second person‖ for the purposes of s 5(2) was CMI, then s 58 recognises that it is not participating in its own right because of its receivership, and the receivers are to be treated as ―the second person‖.

[31]     However, Mr Toebes objected to this approach on the ground that CMI was not a registered person because all of its own business was exempt.  It therefore falls outside the definition of ―incapacitated person‖ and furthermore, it did not carry on a taxable activity within the meaning of that phrase in s 58(1A).

[32]     Mr Toebes’s attempt to exclude CMI overlooks the structure of s 5(2) of the GST Act.  When sales occur in satisfaction of debts, the GST Act deems it not to be the activity of the second person (mortgagee), but rather that of a supply in the furtherance of the taxable activity carried on by the first person (each of the mortgagors, who were all registered persons).  Consistently with that, on the terms of s 17, persons involved in supplies that are caught by s 5(2) are obliged to furnish a return  whether  or  not  that  person  is  registered.    Section  17  also  imposes  the obligation on that person, whether registered or not, to pay the amount of tax charged on that supply.

[33]     The structure of these provisions, and in particular s 58, would be frustrated unless  the  reference  to  ―a  registered  person‖  in  the  definition  of  ―incapacitated person‖ were interpreted to include persons who would otherwise be liable to file a return under s 17, whether or not they were registered.  That interpretation achieves consistency, when there can be no suggestion that s 58 was intended to create an anomaly for those situations where the obligations of being registered apply, irrespective of whether the person is actually registered.

[34]     I do not consider that the drafting is inadequate to effect this outcome, which I treat as consistent with the purpose of the GST Act, and the particular provisions that are relevant to it.   The contrary outcome contended for by Mr Toebes could certainly not credibly be attributed to Parliament as an intentional outcome of the drafting of this revenue statute.   Nor is the inter-relationship between the various provisions and the interpretation I have settled on for each of them so forced as to do any form of violence to the words used in each of those sections.

[35]     In his submissions for the Commissioner, Mr Ebersohn made a concession that the provisions of s 58 do not apply to the GST liability of a mortgagee for sales conducted in its name when that mortgagee is in receivership.   This was because mortgagee sales are not conducted in the course of the mortgagee’s business when the GST Act treats them as being in the course of the mortgagor’s taxable activity. Rather, Mr Ebersohn treated s 58 as only applying to the taxable supplies of the mortgagee within its own business, and not to the GST consequences of transactions it effects as a deemed part of the business of the mortgagor.

[36]     I am not persuaded that that concession is necessary, so as to exclude the application  of  s 58  to  the  present  circumstances.    The  effect  of  s 58(1A)  is  to substitute the receivers for a company in receivership in relation to taxable activity of the company in receivership.  The effect of ss 5(2) and 17 is to attribute to the mortgagee responsibility for taxable activity that is treated as if it was the activity of the mortgagor.   It is nonetheless conducted by the mortgagee, except where the mortgagee’s incapacity means that that activity is carried out by a receiver in the mortgagee’s name.  In that chain of involvement, the receiver becomes the second

person contemplated in s 5(2) and the person ―selling the goods‖ for the purposes of

s 17.

[37]     Mr Ebersohn’s alternative was to invoke the provisions of s 51B of the GST Act, which he argued constituted ―another route to the same end‖.  That section is set out in [14] above.

[38]     However, I am not satisfied that s 51B is indeed an alternative.   What it illustrates is that the structure of the GST Act is intended to operate by imposing liability for taxable supplies on those responsible for effecting the transaction.   In circumstances that are likely to be quite distinct from those applying when ss 5(2) and  17  are  invoked,  s 51B(1)(a)  catches  the  consequences  of  an  otherwise unregistered person making a supply on terms representing that tax is charged on that supply.  Then s 51B(1)(b) treats the person selling the goods in circumstances caught by s 5(2) as a registered person.  The consequence is that that representor will be treated as a registered person and under s 51B(2) is liable to pay the amount of the tax that has been represented.

[39]     If Mr Toebes is correct that the person who sells the goods on the present facts remains the mortgagee, then the representation that tax is charged on the supply is a representation attributable to the mortgagee and not the receivers.

[40]     However, given the recognition of companies in receivership as having an incapacitated status, I treat the terms of s 51B as supporting the extension I have proposed to the scope of ―registered  person‖  in the definition of  ―incapacitated person‖ in s 58.  Because s 51B(1)(b) treats the person selling the good under s 5(2) (ie on this analysis, the mortgagee) as a registered person, this mortgagee is indeed an  incapacitated person  as  that  expression  is used in  s 58.    Consistently,  if  the receivers’ conduct in representing that tax is charged on the supply, as that concept is addressed in s 51B(1)(a), is to be treated as the conduct of the mortgagee, then again that person is to be treated as registered, also bringing the mortgagee within the definition of an ―incapacitated person‖ in s 58.

[41]     Mr Toebes  argued  that  s 51B  has  no  relevance  to  the  present  argument because it only introduces an extended definition of the persons who are to be treated as registered for the purposes of the GST Act, for the purposes of three parts of the Tax Administration Act 1994.  He further argued that none of those parts of that Act are relevant for present purposes.   I did not raise with Mr Toebes the effect that should be given to the punctuation in the opening sentence of s 51B(1).  I consider that  the  comma  after  the  references  to  Parts  3  and  6  is  intended  to  delineate references to those parts of the GST Act, from Part 9 of the Tax Administration Act

1994, which is provided for separately after the comma.   If s 51B was introduced only for the purposes of provisions in the Tax Administration Act, the draftsperson could reasonably be expected to have expressed the cross-reference differently, such as ―…for the purposes of Parts 3, 6 and 9 of the Tax Administration Act…‖.    It would also be unusual to effect an amendment intended only to apply to discrete parts of another Act, at this point in the GST Act.

[42]     Section 51B appears in Part 8 of the GST Act, which deals with registration, and is reasonably referable to Part 3, dealing with returns and payment of tax, and Part 6, dealing with recovery of tax.

[43]     Mr Toebes cited the decision of the Taxation Review Authority in Y2 for the proposition that a special return under s 17 is distinguishable from the generality of provisions requiring the on-going provision of returns in relation to each GST return period for a registered person.6    I am not satisfied that the distinction drawn in that case could have any influence on the application of s 58 to the provisions of s 5(2) and 17.

[44]     I also acknowledge that Mr Toebes relied on the decision of the Federal Court of Australia in Deputy Commissioner of Taxation v PM Developments Pty Ltd.7   That judgment decided that a liquidator was not personally liable for the GST debt created on  a sale of residential  premises  where the contract  had  been  entered  into  and completed after the order for winding up.  It was also held that the Commissioner would, as a result, simply rank with other unsecured creditors to be paid equally with

them.  However, the statutory provisions for attribution of liability for GST to others than the taxpayer whose assets were being supplied are materially different.   As noted in the judgment itself, there is no equivalent in the Australian GST legislation of s 58 of the New Zealand GST Act.8    In these circumstances, the reasoning relied on by Mr Toebes is not strictly analogous, and it cannot assist the receivers here in contending for a narrow interpretation of the provisions of the New Zealand Act.

Position as caveator

[45]     A further factual feature that was raised as supporting the receivers’ denial of any personal liability is that Fortress had lodged caveats against the titles of all the mortgaged properties, claiming a caveatable interest in them by virtue of its rights under the GSA granted by CMI in its favour.

[46]    In the process of effecting settlement of the various properties, Fortress purported to make it a condition of providing releases of the caveats that it be paid all monies available from the mortgagee sale, including the amount paid by the purchaser in relation to GST.

[47]     It is not possible for that purported contractual stipulation to alter the manner in which the relevant provisions of the GST Act apply to these taxable supplies.  In particular, those demands by Fortress cannot influence the proper interpretation of who is attributed with the liability to pay the output tax charged on the sale/―supply‖ of the properties.

[48]     If I am right in interpreting the provisions of the GST Act as creating liability for the receivers to account for the output tax they have charged and recovered on the sales, then the secured creditor of the incapacitated mortgagee has no lawful entitlement to withhold a release of the caveat until the GST is paid to it.  CMI as the mortgagee was only entitled to the net proceeds of the mortgagee sale after the payment of all expenses incurred in the realisation of the property and Fortress

cannot assert any claim greater than that of CMI.

8      See PM Developments at [55].

[49]     Conversely, if I am wrong in applying the provisions of the GST Act to attribute personal liability to the receivers, then it was merely ―window dressing‖ for Fortress to insist on being paid the GST.  The receivers could avoid liability for the GST and, in maximising the return to the secured creditor who appointed them, could  have  paid  on  the  GST,  irrespective  of  any  posturing  by  Fortress  as  to conditions for release of the caveats.

[50]     Accordingly, on the view I have taken, it is no answer for the receivers to say that they cannot be liable for the GST because they were obliged to pay it over to Fortress in order to obtain releases of the caveats to complete settlement of the sale of the properties.

Alternative bases for attributing liability to the receivers

[51]     If the relevant sections of the GST Act did not apply to impose liability on the receivers, then it was argued for the Commissioner that in the alternative scenario where that liability rested only on the mortgagee, there were nonetheless grounds for imputing personal liability to the receivers because of the nature of their involvement and the creation of liability under common law and the equitable doctrine of the duty to account.

[52]     Section 185 of the Property Law Act 2007 provides for the sequence in which the proceeds of a mortgagee sale must be applied.   The first category includes amounts reasonably paid or advanced at any time by the mortgagee with a view to the realisation of the security (s 185(2)(d)).  The imposition of a liability for GST output  tax  is  an  inevitable  consequence  of  a  sale  effected  in  realisation  of  the security.   The Court of Appeal in Commissioner of Inland Revenue v Edgewater

Motel Ltd accepted that this was so.9   The Court of Appeal’s approach was adopted

by the Privy Council.10

[53]     The  sequence  for  the  application  of  the  proceeds  of  sale  of  mortgaged

property is mandatory.  So, on the Commissioner’s analysis, even if the receivers are

not liable under the  provisions  of the  GST Act,  because  they are  effecting  the transaction  in  the mortgagee’s  name, the receivers are obliged  to  deal  with  the proceeds in accordance with the sequence provided for in s 185 of the Property Law Act 2007.  In Edgewater Motel, the comparable obligation existed in the predecessor of  s 185,  namely  s 104  of  the  Land  Transfer  Act  1952.    The  Commissioner’s

argument relied on the following observations in the Court of Appeal’s judgment:11

…Section 104 is a general provision which gives priority to expenses occasioned by the sale.  In this case the GST Act, by imposing a tax on the sale transaction, creates an expense of sale which ranks under s 104 ahead of the mortgage debt.  That it might not do so where the tax is imposed under a different section of the GST Act is beside the point when s 17 is so clearly worded.

…the selling mortgagee is obliged to pay the GST charged on the supply of the  land  in  priority  to  any  payment  in  respect  of  secured  debts.    Such payment is an expense occasioned by the sale and must ultimately be borne by the mortgagor by way of deduction from the purchase price under para (a) of s 104(1) of the Land Transfer Act.

[54]     The Privy Council’s approach was consistent:12

Once the mortgagee has paid the GST, the question of the priority of his claim for  reimbursement  will  arise.   Their  Lordships  consider  that  it  is plainly an ―expense occasioned by the sale‖ within the meaning of para (a). It is an obligation imposed upon the mortgagee by virtue of his having sold the property.  He is therefore entitled to deduct it from the proceeds before payment of his own debt and is accountable to subsequent encumbrancers only for the balance.

[55]     Mr Ebersohn submitted that the reasoning of both the Court of Appeal and the  Privy Council  applied  to  whomever  was  exercising  the  power  of  sale  of  a mortgagor’s property – the obligation imposed by virtue of having sold the property was personal to whomever undertook that activity.

[56]     To the contrary, and consistent with his analysis of the provisions in the GST Act, Mr Toebes submitted that the Commissioner’s reliance on this reasoning in Edgewater Motel was misconceived because the judgments did no more than recognise a liability on the mortgagee to pay the costs of sale, including GST.  If the receivers are correct that they have no independent status under the provisions in the

GST Act, and therefore incur a liability only in the name of the mortgagee, then the reasoning in Edgewater Motel must be confined to the position of the mortgagee, even if the mortgagee is incapacitated and a receiver is acting in its stead.  The Privy Council’s  analysis  of  the  structure  of  the  GST Act  was,  Mr Toebes  submitted, reflected in the following:13

…in claiming payment of the GST, the Crown is not seeking to assert a priority in the distribution of the assets of the mortgagor, any more than an estate agent instructed by the mortgagee and claiming commission on the sale. The claim lies directly against the mortgagee.

[57]     Even  if  the  receivers  can  avoid  any personal  liability by  virtue  of  their conduct  all  being  in  the  capacity  of  an  agent  for  the  company,  then  the Commissioner would contend that a failure to account for the output tax paid to them would constitute a failure to account resulting in liability for them.   Mr Ebersohn

cited the English decision in Sargent v Customs and Excise Commissioners.14   In that

litigation, receivers were appointed to those parts of the business of a company which constituted the leasing of three properties of which it was the landlord.  The receivers continued to collect rent, and VAT (the United Kingdom equivalent of GST) was charged in respect of the rentals.  The receivers argued that the company, and therefore they, could not be compelled to account to the Commissioners for the VAT received.  The Court of Appeal held that notwithstanding that the failure to pay the tax would not be a criminal offence, the absurdity remained that the receivers could,  on  behalf  of  the  company,  collect  VAT  and  not  pay  it  on  to  the Commissioners.  In those circumstances, the Court of Appeal held that as a matter of public policy, the receivers had to account for the VAT.   It was reasoned that the adverse consequences for the company of failure to account for VAT received were potentially so serious that the receivers could not exercise a discretion as to whether to account to the Commissioners or not, in any other way than doing so.

[58]     Sargent is commented on in the text  Private Receivers of Companies  in

New Zealand.15  The authors comment:

13 At [10].

14     Sargent v Customs and Excise Commissioners [1994] 1 WLR 235 (HC) and [1995] 1 WLR 821 (CA).

15     Peter  Blanchard  and  Michael  Gedye  Private  Receivers  of  Companies  in  New Zealand

(LexixNexis, Wellington, 2008) at 298.

…In many cases the statute itself would impose liability on those in control of the company, including the receiver.  The receiver would obviously then be entitled to do whatever was necessary to repay the company’s default.  On the basis of the Sargent decision, the receiver may in fact be obligated to take this course even if no personal liability is imposed.

[59]     The cynical reality is that receivers accountable to the secured creditor of a mortgagee in circumstances such as the present may be far less concerned about the adverse consequences for the mortgagee of its being found in default of obligations to account for GST, than the expectation of both the English Court of Appeal in Sargent and, to the extent that the learned authors of the New Zealand text endorse it, their observations on the consequences of the approach in Sargent.

[60]     In Sargent, there was only a partial receivership in respect of three properties so that the remainder of the company’s business continued to be managed by it.  That would create a serious  concern for the directors if the receivers  ―overpaid‖ the appointing creditor by the extent of the VAT, whilst creating an additional debt and the prospect of penalties for the company.  In that context, Nourse LJ for the Court of Appeal emphasised that the receivers owed duties to the company as well as to the

appointing creditor.16

[61]     In  the present  case,  the  receivers’ preference to  pay the GST they have received to Fortress demonstrates an indifference to the consequences for CMI of it being found in breach of obligations to account for the output tax recovered on the sales of all of the properties.

[62]     I accept that, in public policy terms, it is undesirable to permit receivers to charge 12.5 per cent (now 15 per cent) more than the mortgagor could have retained for sale of its own property, thereafter leaving the Commissioner out of pocket by that same amount by virtue of having to permit the purchaser an input tax credit for paying that amount.  Mr Toebes denied that this was in any way an unsatisfactory outcome, or one inconsistent with the scheme of the Act.  He emphasised that the Commissioner does not have any protection under the GST Act as a secured creditor, and in numerous situations will be left unpaid if the party liable for output tax

becomes insolvent.

16 [1995] 1 WLR 821 at 829F.

[63]     I do not accept that Mr Toebes’s points are a sufficient answer to this valid concern.   Even in the absence of an anti-avoidance provision in the GST Act, the prospect of abuse of these provisions by engineering a receivership for the sake of a

15 per cent premium on recoveries in such situations and at an equivalent cost to the

Revenue cannot be lightly dismissed.

[64]     If my interpretation of the GST Act is wrong, so that purposive principles do not warrant an interpretation that creates liability for receivers, then there is certainly scope to adopt the stance suggested by the observations in Private Receivers of Companies in New Zealand, so that receivers in such circumstances are obliged to account, even if personal liability is not attributed to them in terms of the statute. Ultimately, however, I would be reluctant to impose a liability on the receivers merely as a matter of public policy.  Mr Ebersohn’s additional arguments did raise further issues that also warrant consideration.

[65]     The issue in the proceedings was formulated as to whether the receivers had personal liability.  The agreement of the parties was that if personal liability was not made out, then GST would be released by the Commissioner and paid to Fortress. After the dispute was defined in those terms, Mr Ebersohn sought to alter the terms for resolution of the dispute by focusing more on whether the Commissioner or Fortress could claim priority to the amount held by the receivers on account of the GST output tax received by them.   The receivers were not prepared to revisit the terms of the agreement and, in those circumstances, the Commissioner argued for a further basis on which the receivers could be made liable to account for the GST received by them, namely that paying it to Fortress rather than the Commissioner would constitute the tort of breach of statutory duty, that duty being imposed by s 185 of the Property Law Act 2007 when read together with ss 5(2) and 17 of the GST Act.

[66]     This argument for the Commissioner relied on a further analysis in the text Private   Receivers   of   Companies   in   New Zealand.      The   passages   cited   in Mr Ebersohn’s submissions included the following:17

…It is, however, clearly established that receivers are liable in damages in tort to preferential claimants if, when they are or should be aware of preferential  claims,  they  exhaust  such  assets  in  making  payment  to  the holder of the security under which they were appointed or to other creditors, without first applying them in satisfaction of the preferential claims.  That constitutes a breach of their statutory duty.

…

The moral is that once receivers become aware of the existence of a preferential debt and they have funds in hand derived from accounts receivable or inventory, they fail at their peril to pay the debt.  It is wise that they should ensure that the assets left in their hands are never run down to a level below that necessary to discharge preferential claims.

[67]     On this argument, the Commissioner’s status as a preferential claimant for the

GST depends on the priority it is accorded under s 185 of the Property Law Act

2007.

[68]     The text on Private Receivers cites the relatively old decision in Woods v Winskill.18    In that Chancery Division case, it was held that a receiver and manager with notice of a preferential claim is liable for damages in tort if he exhausts the then assets of the company in making payment to the ordinary creditors without first applying the same or a sufficient part thereof in satisfying such preferential claims.

[69]     Mr Toebes  denied  that  there  could  be  any  tort  committed  because  the proceeds of the mortgagee sale were to be paid to the secured creditor rather than to an unsecured creditor, and there could be no tortious duty to do anything else.  He accepted that the sequence of payments from mortgagee sales is to be governed by s 185 of the Property Law Act 2007, even when the mortgagee is in receivership, and discharge of the obligation imposed by s 185 was solely the responsibility of the mortgagee, whether acting itself, or if in receivership, by the receivers as the mortgagee’s agent.

[70]     The context in which this argument would arise would be if the relevant provisions of the GST Act do not impose any obligations on the receivers to account for the output tax.  In that event, the receivers would be free to pass the amounts of GST received over to Fortress as the secured creditor of the mortgagee.  That would

leave the Commissioner to pursue claims as an unsecured creditor against the likely or potentially insolvent mortgagee in circumstances where the directors and management of the mortgagee could disavow any involvement in the relevant transactions.

[71]     In that scenario, the Commissioner would be claiming that (notwithstanding acceptance of the receivers’ involvement for the purposes of the GST Act solely as agent for the mortgagee) as the persons in effective control of the transactions, the receivers had knowingly procured a breach of their principal’s obligation to apply the proceeds of mortgagee sales in accordance with the sequence required by s 185 of the Property Law Act 2007. Alternatively, a claim may lie against the receivers as a party to the mortgagee’s breach of statutory duty.   The cause of action is not

without difficulties,19 and it is inappropriate to attempt any definitive ruling without

the evidence and argument that could influence the existence and scope of such tortious obligation.

[72]     Nevertheless, I consider this analysis suggests a credible cause of action. Although it was not part of the agreed facts, Mr Toebes was not able to resist my inference that receivers in situations such as the present would generally negotiate the benefit of an indemnity from the appointing creditor, in respect of liabilities arising  in  the  course  of  carrying  out  the  receivership  in  the  secured  creditor’s interests, notwithstanding the receivers’ legal status as agents of the company.

[73]     Accordingly, this final argument, whilst accepted by Mr Ebersohn as outside the scope of the issues as formulated in terms of the agreement between the parties, would raise the prospect of a further means of achieving the outcome sought by the Commissioner.  In the absence of an agreement such as that reached in this case, if receivers collected the  GST and  complied with  a direction  from  the appointing creditor to pay the GST on to the creditor as if part of the net proceeds of sale, then, in the absence of personal liability imposed by the terms of the GST Act, such receivers would be on notice that they had facilitated a breach by the mortgagee of

the mortgagee’s obligations under s 185 of the Property Law Act.

19     See, for example, Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Thomson Reuters, Wellington, 2009) at Chapter 8.

[74]     It is entirely tenable that in such circumstances the receivers would be liable in tort for having procured or been a party to a breach of the statutory duty imposed under s 185 of the Property Law Act.  In situations such as the present, it can readily be inferred that appropriation of the GST in this way would be against the wishes of the mortgagee, were it a free agent.

[75]   The tenability of this possible basis for a claim against receivers in circumstances such as the present provides a measure of support for the principal conclusion I have come to on the application of the relevant provisions of the GST Act.  The purposive interpretation renders the receivers liable, but if that approach is not valid, then it is a liability that they cannot avoid in any event.

[76]     Accordingly, the answer to the receivers’ application for directions is that they are liable to account to the Commissioner for the GST charged as an output tax on the respective sales of the relevant properties.  In terms of the agreement between the parties, the issue is to be determined simply on the basis of the Commissioner retaining the amount already paid in relation to those liabilities, in full and final

settlement of them.  No issue as to interest or costs arises.

Solicitors:

JTLaw, Wellington for applicants

Crown Law, Wellington for respondent

Dobson J