Ward v Official Assignee
[2020] NZHC 1991
•7 August 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-2722
[2020] NZHC 1991
UNDER the Insolvency Act 2006 IN THE MATTER OF
an application to annul a bankruptcy
BETWEEN
GORDON HAROLD LESLIE WARD
Applicant
AND
OFFICIAL ASSIGNEE
Respondent
Hearing: 3 August 2020 Appearances:
C McLean for the Applicant C Jones for the Respondent
C van der Merwe for the Commissioner of Inland Revenue
Judgment:
7 August 2020
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 7 August 2020 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
McLean Law Limited (Callum McLean), New Lynn, Auckland, for the Applicant Official Assignee’s Office (Charles Jones), Auckland, for the Respondent
Inland Revenue (Cloete van der Merwe), Manukau, for the Commissioner
WARD v OFFICIAL ASSIGNEE [2020] NZHC 1991 [7 August 2020]
[1] Mr Ward applies for his bankruptcy in 2015 to be annulled on the ground that he ought not to have been adjudicated bankrupt.1 That is a difficult application because Mr Ward applied for his own adjudication. The reason for his application is to obtain standing under s 329 of the Companies Act 1993 to apply for NZ Wheel Clamping Co Ltd to be restored to the Companies register.
[2] Mr Ward was a director and fifty per cent shareholder of NZ Wheel Clamping Co Ltd. It was ordered into liquidation on 11 March 2014 on the application of the Commissioner of Inland Revenue because it was unable to pay its debts. At the end of the liquidation, it was removed from the register on 26 June 2019.
[3] Mr Ward wants to restore the company to the register because he believes that the company has an asset which the liquidators did not realise, a GST refund. One difficulty for his application to restore the company under s 329 of the Companies Act 1993 is that he does not have standing. When the company was removed from the register, he was not a shareholder or a director, because he had become bankrupt in 2015. On his bankruptcy his shares in the company vested in the Official Assignee and he was disqualified from holding office as a director. With that he did not have standing to apply for the company to be restored to the register.2 To overcome the standing problem, he has applied to annul his bankruptcy. He wants the annulment to be retrospective from his adjudication on 15 July 2015 so that he can be treated as a shareholder of the company when it was removed from the register. Section 309 of the Insolvency Act 2006 provides for the annulment of adjudications, but there is only one ground for which an annulment is retrospective from the date of adjudication – s 309(1)(a). Under that ground, the court can annul an adjudication if the court considers that the bankrupt should not have been adjudicated bankrupt.
[4] Mr Ward became bankrupt on his own application on 15 July 2015. That was shortly after being sued by the liquidators of New Zealand Wheel Clamping Co Ltd,
1 Insolvency Act 2006, s 309(1)(a).
2 He does not satisfy the standing requirement under s 329(2)(a)(i) of the Companies Act 1993. He may still be able to apply if the court grants leave under s 329(2)(c).
claiming he was liable to the company for an overdrawn shareholder’s current account, unauthorised salary, and breaches of director’s duty causing losses to creditors.
[5] He was automatically discharged from bankruptcy on 15 July 2018. According to the report of the Official Assignee, the undisputed claims in his bankruptcy came to
$74,404.86. There was also a disputed claim by the liquidators of NZ Wheel Clamping Co Ltd for $712,316.09. The Official Assignee investigated a number of assets and other potential avenues of recovery but was unable to realise anything for Mr Ward’s creditors. The Official Assignee reports that Mr Ward co-operated and there was nothing untoward regarding his conduct before or after adjudication. To that extent, his bankruptcy was unremarkable.
[6] To understand why Mr Ward wants NZ Wheel Clamping Co Ltd restored to the register, it is necessary to give the background to his belief that further GST refunds may be recovered from the Inland Revenue. NZ Wheel Clamping Co Ltd was incorporated in February 2004. As its name suggests, the company carried on a wheel- clamping business. Owners gave the company authority to enforce parking rules in their carparks. If a vehicle was parked without authority or for longer than the authorised time, the company clamped a wheel. The clamp was removed upon payment to the company. Those payments were the company’s income. The company was registered under the Goods and Services Tax Act 1985, made GST returns and paid GST. Over time, the company defaulted in paying its taxes, including GST and PAYE. The company ceased trading in mid-2013. In 2014, the Commissioner of Inland Revenue served a statutory demand for $310,311.32 for unpaid taxes, including
$192,170.20 for PAYE and $115,712.11 for GST. In her liquidation proceeding she alleged that the unpaid taxes came to $300,017.19. The court made a liquidation order on 14 March 2014. The Commissioner was not the only creditor in the liquidation. Preferential and non-preferential claims came to $430,101.
[7] In 2015, the liquidators began a proceeding against Mr Ward and his mother- in-law. They sued Mr Ward for $200,000 on his shareholder’s current account. There were also causes of action against him under ss 297 and 298 of the Companies Act for related party transactions at an undervalue, a cause of action for alleged unauthorised salary of $78,000 and claims of breaches of director’s duties under ss 131, 135 and
136 of the Companies Act. His mother-in-law settled her claim with the liquidators. Mr Ward, on the other hand, applied to be made bankrupt. That led to the liquidator’s disputed claim in his bankruptcy.
[8] In 2016, at Mr Ward’s behest, tax advisers successfully persuaded the Inland Revenue that wheel-clamping was not a taxable activity under the Goods and Services Tax Act, as it did not involve a taxable supply. Initially the tax advisers put the case for Elite Parking Ltd, a new company which carried on the same business as NZ Wheel Clamping Co Ltd. The tax advisers submitted that a driver using a carpark under the control of the company only becomes liable to pay if the driver breaches the terms of use of the carpark. Payment is in the nature of a penalty or damages. There is not the required reciprocity for a taxable supply. The Inland Revenue accepted the argument. I suppose that under that principle kidnappers are not required to pay GST on ransom money. Having succeeded with Elite Parking Ltd, the tax advisers also persuaded the Inland Revenue that NZ Wheel Clamping Co Ltd had been wrongly charged GST. The tax advisers calculated the total refund payable for the years May 2007 to March 2013 at $397,768.89. The Inland Revenue paid a refund of $190,913.62 to the liquidators, the most significant recovery in the liquidation. Under s 45 of the Goods and Services Tax Act 1985, excess tax may be refunded if the tax was paid four years before. Under s 45(4), that four year period can be extended for a further four years if the overpayment of tax was the result of a “clear mistake or simple oversight”. The Inland Revenue accepted that the extra four years applied. Mr Ward believes that the
$190,913.62 was an underpayment and that the company can claim back GST paid more than the eight years before. That prospect has spurred his applications to restore the company to the register and to annul his bankruptcy.
[9] Although I am not dealing with the application to restore the company to the register, I note certain matters that may need attention at that hearing. Mr Ward believes that once the Commissioner’s claim for GST in the liquidation is removed and the Commissioner pays a further refund of GST going back to the company’s incorporation, there will be enough money to clear the company’s insolvency and there will be funds available for himself and his mother-in-law. Issues for consideration include these:
(a)There is a question about PAYE. The company had not been paying PAYE. When the Commissioner issued the statutory demand, the company owed more for PAYE than GST. Even if the Commissioner had to reverse GST, on liquidation insolvency set-off would operate under s 310 of the Companies Act. Any refund of GST could be applied against outstanding PAYE. If the Commissioner paid a GST refund to the liquidators when NZ Wheelclamping Co Ltd’s debt for other taxes was for a greater amount than the refund, it could be recovered.3 There is no clear evidence as to the PAYE tax liability. Counsel’s suggestions were speculative. Having taken instructions, Mr van der Merwe said that the Inland Revenue had written off the PAYE. Nevertheless, it might be written back to allow insolvency set-off to be applied against any further claim for GST refunds.
(b)Mr McLean submitted that the company’s right to recover GST refunds was not limited to the eight years under s 45 of the Goods and Services Tax Act, but it could sue under the principle in Woolwich Building Society v Inland Revenue Commissioners.4 But there are limitation difficulties. A claim to recover money paid under a mistake of law or for excess or unlawful taxes is a claim for money had and received. The Limitation Act 1950 applies, as the payments in question were made before the Limitation Act 2010 came into force. The limitation period is six years under s 4(1)(a) of the Limitation Act 1950.5 As the company has recovered eight years of refunds, a claim at common law to recover taxes paid more than six years ago would be statute-barred.
(c)If the company were restored, it would be in liquidation again. The liquidation would not be terminated because the company’s creditors have not all been paid. The liquidation produced only enough to pay
3 Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] NZCA 357, [2013] 3 NZLR 650 and
Commissioner of Inland Revenue v Robertson [2017] NZHC 31.
4 Woolwich Building Society v Inland Revenue Commissioners [1993] AC 70 (HL).
5 Re Diplock [1948] Ch 465 (CA) at 514; Kleinwort Benson v Sandwell BC [1994] 4 All ER 890, 942-3; Charles Mitchell, Paul Mitchell, and Stephen Watterson Goff and Jones on the Law of Unjust Enrichment (9th ed, Sweet and Maxwell, London, 2016), 33-004 – 33-008.
the liquidators’ remuneration and expenses, the Commissioner’s costs on the liquidation application and to repay funds the Commissioner had provided to the liquidators. There were no other payments to preferential creditors, let along unsecured creditors. Until the further costs of liquidation and all creditors have been paid, there will be nothing for Mr Ward.
A procedural matter
[10] A procedural ruling was required at the start of the hearing. Mr McLean gave notice to the Commissioner of Inland Revenue that he wished the departmental officer who had given an affidavit to attend court to be cross-examined. The officer did not come. Mr van der Merwe submitted that Mr McLean had given his notice late, and the officer had made other arrangements. I asked Mr McLean to identify those parts of the officer’s affidavit on which he wished to cross-examine. On the whole, those parts contained argument and speculation rather than factual evidence. I ruled that the fact that he had not cross-examined the officer would not count against his submissions.
Clearing away possible objections
[11] Before addressing the substance of Mr Ward’s annulment application, I note three matters that do not count against his application.
[12] First, the fact that Mr Ward became bankrupt on his own application does not mean that there cannot be an application to annul his bankruptcy. Bankruptcies can be annulled, whether they are made on a creditor’s or a debtor’s application. These provisions of the Insolvency Act show this:
10 Adjudication
(1)Adjudication occurs when a debtor is adjudicated bankrupt.
(2)A debtor is adjudicated bankrupt if either—
(a) a creditor of the debtor applies to the court for an order of adjudication, and the court makes the order; or
(b) the debtor files an application with the Assignee for adjudication.
12 Adjudication on debtor’s initiative
(1) A debtor may be adjudicated bankrupt by filing an application for adjudication with the Assignee.
(2) The requirements for a debtor’s application are set out in sections 45 and 46.
(3) The procedure for filing a debtor’s application is set out in section 49.
47 Debtor automatically adjudicated bankrupt
(1) A debtor who files an application with the Assignee to have himself or herself adjudicated bankrupt is automatically adjudicated bankrupt when the application is filed.
(2) The adjudication has the same consequences as if the debtor had been adjudicated bankrupt by the court.’=
Under s 49(2) an application is not filed until the Official Assignee endorses it as having been received. One of the consequences of an adjudication by the court is that the adjudication may be annulled under s 309. Similarly, a debtor’s application may also be annulled.
[13] There are good reasons why debtors’ adjudications should be able to be annulled. Applications under s 309 of the Insolvency Act to have an adjudication annulled may be made by the Assignee or by “any person interested”. Interested persons under s 309 include the debtor’s creditors. In a case where a debtor has applied for his own bankruptcy, a creditor may wish to apply to have the adjudication annulled, as where the creditor contends that the adjudication was an abuse of process.6
[14] Second, under s 310 of the Insolvency Act the Official Assignee may annul an adjudication if the adjudication was made on a debtor’s application. One of the grounds on which the Assignee may annul an adjudication is if the Assignee considers
6 See the discussion in “Annulment of Bankruptcy and Review of Sequestration Orders” D A Hassall (1993) 67 ALJ 762 at 766-767.
that the bankrupt should not have been adjudicated. An annulment under that ground is retrospective – it is backdated to the date of adjudication.7
[15] Mr Jones for the Official Assignee explained that the Official Assignee exercises his power of annulment only in the clearest of cases, as, for example, where it turns out that the bankrupt’s assets are more than enough to clear his liabilities.8 In other cases, the Official Assignee leaves it for the court to decide. I agree with that approach. Section 310 offers an alternative to annulment by the court under s 309, where the circumstances may not require a court proceeding with notice to creditors and for the application to be tested by cross-examination and submissions. An application to the court remains available. Section 310 does not bar Mr Ward’s application to the court.
[16] Third, Mr Ward has been discharged from bankruptcy. Section 305 of the Insolvency Act says:
305 A discharge is conclusive evidence of the bankruptcy and of the validity of the proceedings in the bankruptcy.
That section does not, however, bar Mr Ward from showing that he should not have been adjudicated bankrupt.9
The merits of the annulment application
[17] This application is unusual as Mr Ward is contending that he should not have been adjudicated bankrupt, even though he applied for his own adjudication. His case is that NZ Wheel Clamping Co Ltd should not have been assessed for GST, as the tax was never payable. If the company had not paid the GST and if it had not incurred arrears of GST with associated penalties and interest, the company would not have been insolvent and the Commissioner would not have brought an application for the company to be put into liquidation. If the company had not been put into liquidation, it would have continued trading solvently. His shareholder’s current account would
7 Section 310(2)(a) and s 310(4)(a) overlap with the court’s powers to annul a bankruptcy under s 309(1)(a).
8 The ground under s 310(2)(b).
9 Keung v Official Assignee [2020] NZHC 32 at [55].
not have been called up and he would never have received the demand from the liquidators, which forced him to apply for his own adjudication in bankruptcy.
[18] Mr Ward bases his application on a counterfactual: how matters might have been, instead of how they actually were. That is not the way that annulment applications under s 309(1)(a) are decided. In Holdgate v Blocassa Limited, a case under the equivalent provision of the Insolvency Act 1967, the Court of Appeal said:10
In this case the application was made under s 119(1)(a). In exercising its discretion under that provision, a court must approach the matter on the basis of the facts as they were at the time of adjudication. Those facts may not necessarily have been before the court which made the adjudication, but they must be the true facts at that time.11
[19]In this case the true facts included:
(a)NZ Wheel Clamping Co Ltd had been put into liquidation because it had not been paying its taxes.
(b)Mr Ward was indebted to NZ Wheel Clamping Co Ltd for drawings on his shareholder’s account, even if his indebtedness was not as great as the liquidators claimed.
(c)Mr Ward was under a potential liability to the liquidators for alleged breach of director’s duties. His liability was not necessarily as great as the liquidators contended. One possible defence was that the Commissioner could not claim to be a creditor in the liquidation for unpaid GST, because the unpaid GST was not lawfully recoverable.
(d)The company’s right to a refund of GST had not been established at the time of his adjudication.
(e)Mr Ward had other creditors of about $74,000.
10 Holdgate v Blocassa Limited [2007] NZCA 132 at [21].
11 The approach is similar in Australia and is derived from s 29(1) of the English Bankruptcy Act 1914. See “Annulment of Bankruptcy and Review of Sequestration Orders” D A Hassall (1993) 67 ALJ 762 at 763-764.
(f)Mr Ward had insufficient assets to pay his creditors.
(g)He was insolvent when he applied to be adjudicated bankrupt.
[20] On those facts, should Mr Ward not have been adjudicated bankrupt? Applications for annulment under s 309(1)(a) on the ground that the bankrupt should not have been bankrupted are relatively rare. They are usually made when the debtor has been adjudicated bankrupt on a creditor’s application. Applications by a bankrupt to annul a bankruptcy made on his own application are much rarer.
[21] I have had one other case, Chean v Official Assignee.12 Mr Chean had applied for his own bankruptcy under the Insolvency Act 1967. He entered into a deed of settlement with the Official Assignee and his creditors, which settled all his liabilities. I annulled his bankruptcy under s 119(1)(b) of the Insolvency Act.13 Mr Chean wanted me to go further and annul his bankruptcy retrospectively under s 119(1)(a). He said that he had been badly advised to petition for his own bankruptcy. I made obiter comments doubting whether that would justify an annulment.14 I gave Mr Chean the opportunity to come back to court to develop his case further. In the event, he did not.
[22] It is possible to think of cases where a court would accept that there should not have been an adjudication, even though the adjudication was apparently made on the debtor’s application. Suppose a mischief-maker impersonating a debtor filed an application in the name of the debtor. That would be a clear case where the adjudication should not have been made. Mr Jones gave another example. Suppose a debtor files the papers for his adjudication but changes his mind and advises that he wishes to withdraw his application. Unaware that the debtor has given notice of his withdrawal, the Official Assignee endorses the application, thereby adjudicating the debtor bankrupt. And if the debtor’s intentions in applying for his adjudication were subject to some vitiating factor such as fraud, duress or lack of capacity, it may be found that he ought not to have been adjudicated.
12 Chean v Official Assignee HC Auckland, CIV-2007-404-2297, 22 February 2011.
13 The counterpart to s 309(1)(b) of the 2006 Act.
14 At [15]-[17].
[23] In applications to annul applications made on creditors’ applications, the focus has typically been on whether there was some flaw that made the adjudication legally unsound, such as abuse of process, defect in form or procedure, or some material fact was not disclosed.15 But the court will not annul an adjudication merely because the exercise of the discretion to bankrupt the debtor is alleged to have been mistaken.16 That distinction gives useful guidance in deciding whether an adjudication made on a debtor’s application should be annulled.
[24] Mr Ward has not shown that his adjudication was legally flawed. He apparently followed the appropriate procedures in filing his own application with the Official Assignee. He has not suggested that there was anything that made his adjudication invalid or legally unsound. He says that he made his application after taking advice from his accountant and his lawyer. There is nothing to suggest that the advice was unsound. He has not given chapter and verse on the advice he was given. There is no reason to think that, given his insolvency, the advice was unsound. Instead he considers that it would have been better not to go bankrupt, now that there is the possibility of a GST refund for the company. Such hindsight reviews fall well short of showing a case that he should not have been adjudicated bankrupt.
[25] Debtors who apply for their own adjudication in bankruptcy are invariably in financial difficulties. Bankruptcy is not the only answer. There are alternatives.17 Bankruptcy involves loss of status, a loss of ability to trade on their own account or to manage a business, the surrender of assets to the Official Assignee and restrictions. It also gives immediate relief from pressing creditors and ultimately the discharge of debts. The fact that the debtor elects bankrupty, rather than alternatives, and the fact that with hindsight the debtor believes that other alternatives would have been better, does not mean that the debtor should not have been adjudicated bankrupt. Accordingly, Mr Ward has not made out the ground under s 309(1)(a).
15 An annulment application does not however give the debtor the right to challenge a judgment debt on which he was adjudicated: Keung v Official Assignee [2020] NZHC 32 at [56]-[62].
16 Re Hunter , ex p Commissioner of Inland Revenue (2000) 19 NZTC 15,722 (HC); Minter Ellison Rudd Watts v Hampton [2013] NZHC 2434 at [27].
17 Insolvency Act 2006, s 8.
[26] Another factor counting against Mr Ward is his delay in applying for annulment.18 The basis for Mr Ward saying that he should not have been adjudicated bankrupt is the realisation that NZ Wheel Clamping Co Ltd was never liable for goods and services tax. That was established in 2016. The time for applying for an annulment ran from then. Since then, the Official Assignee has completed the administration of the bankruptcy, Mr Ward has had his discharge, the liquidation of NZ Wheel Clamping Co Ltd has been completed and the company has been removed from the register. In the light of those events, it would be hopelessly impractical to annul the bankruptcy retrospectively and wind the clock back. The value of finality should not be disturbed by Mr Ward’s wish to annul his bankruptcy.
[27] Mr McLean submitted that Mr Ward could not begin his annulment application until after the NZ Wheel Clamping Co Ltd had been removed from the register. That does not make sense. If anything, Mr Ward should have moved much earlier, while the liquidation was still on foot and before the company had been removed from the register.
Outcome
[28] For the above reasons, Mr Ward has not succeeded in his application to annul his own adjudication in bankruptcy. The application is dismissed.
[29] Counsel did not address me on costs. If any party seeks costs, memoranda may be filed. Any responses to a costs application should be filed within a further week. I record that both the Commissioner and the Official Assignee were represented by in- house counsel.
…………………………………
Associate Judge R M Bell
18 Keung v Official Assignee [2020] NZHC 32 at [74]-[76].
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