Application by Trinity investors to stay liquidation proceedings

Summary

The Court dismissed the defendant's application to stay liquidation proceedings brought by the Commissioner of Inland Revenue ("the Commissioner"), finding the Commissioner was a creditor for the purposes of recovering tax and appointing the liquidator did not perpetuate an unlawful order.

Impact of decision

This is a further judgment of Courtney J rejecting applications by Trinity investors to stay liquidation proceedings. As with previous judgments, it confirms the Commissioner's ability to take enforcement/recovery action.

Facts

Accent Management Ltd and Lexington Resources Ltd ("the defendants") were party to a forestry venture (known as the Trinity scheme) which was held to be a tax avoidance scheme by the High Court (Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC)), Court of Appeal (Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230; (2007) 23 NZTC 21,323 (CA)) and Supreme Court (Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115; [2009] 2 NZLR 289). The Commissioner applied to appoint a liquidator in respect of unpaid tax assessments confirmed by the Supreme Court. This proceeding concerned an application by the defendants to stay those proceedings.

Decision

Would appointing liquidators perpetuate an unlawful or illegal order?

The defendants argue there was an unlawful/illegal imposition of tax by Venning J at first instance (Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC)). Acting as a hearing authority under the Tax Administration Act 1994 ("TAA"), his Honour's failure to assess under subpart EH of the Income Tax Act 1994  meant his orders were either of no effect or exceeded the jurisdiction conferred by sections 138B and 138P of the TAA.

This argument was raised in the context of the defendants' further applications to set aside statutory demands issued by the Commissioner. Associate Judge Faire (as he was then) considered the argument had already been determined by an earlier decision of Priestley J (Accent Management Ltd v Attorney-General [2013] NZHC 1447, (2013) 26 NZTC 21,020). Associate Judge Faire dismissed those applications and required the defendants to pay the Commissioner the amount of tax being sought (Accent Management Limited v Commissioner of Inland Revenue [2013] NZHC 3197).

The defendants argued that Associate Judge Faire's order amounted to the unlawful and illegal imposition of tax and determination of the proceedings would perpetuate an unlawful and illegal order. Further, the Commissioner could not bring proceedings in reliance on that order.

Her Honour pointed out the fact that the subpart EH argument had already been raised by the defendants in the Priestley J proceedings. His Honour had dismissed the proceedings, finding that they were a collateral and impermissible attack on the judgments of the Supreme Court and Venning J.

On appeal, the Court of Appeal upheld Priestley J's decision and rejected the argument that the failure to assess the tax under subpart EH led to Venning J levying a tax in breach of section 22(a) of the Constitution Act 1986 as being a tax levied other than by an Act of Parliament (Accent Management Ltd v Attorney-General [2014] NZCA 351). The Court of Appeal also rejected the argument that acting as a hearing authority limited the High Court's jurisdiction.

In a separate appeal, the Court of Appeal also upheld the decision of Associate Judge Faire.

Her Honour rejected the defendants' submission that the present proceedings have been brought in reliance on the defendants' failure to comply with Associate Judge Faire's orders, as the validity of those orders would not affect the Commissioner's right to bring the proceedings in the form they were brought. It was clear from the Statement of Claim that the application was not made solely on the orders made by Associate Judge Faire.

Her Honour also rejected the defendants' submission that Associate Judge Faire's order requiring defendants to pay the sum of money demanded by the Commissioner amounted to the imposition of a tax for which the Associate Judge had no authority. The order did not create any new debt, much less a tax, it was merely a step in the enforcement process relating to the tax that was the subject of the statutory demand.

In relation to the defendants' subpart EH argument, her Honour noted that it was rejected by the Court of Appeal, with her Honour noting she agrees with and, in any event, is bound to follow that decision.

Is the Commissioner a creditor?

The defendants argue that, although the Commissioner has the power to sue in her own name under section 156 of the TAA, by virtue of section 14(1) of the Crown Proceedings Act 1950, liquidation proceedings are not an action for recovery of tax within the meaning of section 156.

Her Honour noted that this argument had already been rejected in the applications for stay of liquidation proceedings brought by the other Trinity scheme participants (Commissioner of Inland Revenue v Ben Nevis Forestry Ventures Ltd [2014] NZHC 1746 and Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2014] NZHC 1877). The definition of "creditor" in section 240 of the Companies Act 1993 encompasses the Commissioner in relation to proceedings brought to recover or pay tax debt. Therefore, the Commissioner is a creditor for the purposes of liquidation proceedings brought under section 241 of the Companies Act 1993.

Are the proceedings an abuse of process?

The defendants submitted that the proceedings were an abuse of process as the Commissioner obtained the orders requiring payment of outstanding tax by deliberately or recklessly misleading the hearing authority. The defendants also relied on Notices of Proposed Adjustment ("NOPAs") served earlier this year, arguing that those notices must be determined before any further steps could be taken.

Her Honour found that the current proceedings were not an abuse of process, noting that those NOPAs are based on the subpart EH argument and this issue had already been determined by the Court of Appeal.

Balance of convenience

Her Honour found that, given the Supreme Court had confirmed the assessments as correct in 2008 and the taxpayers continue to engage in costly litigation even though they cannot meet the debt, there was prejudice to the Commissioner in not having the matter finally disposed of.

Courtney J found in the Commissioner's favour on every issue and dismissed the stay applications.