Application by Trinity investors to strike out or stay Commissioner's liquidation proceedings

Summary

Courtney J dismissed the defendants' application to strike out or stay the Commissioner of Inland Revenue's ("the Commissioner") liquidation proceedings. She found the Commissioner was a creditor for the purposes of recovering tax and further that the application to appoint liquidators was not premature on the part of the Commissioner.

Impact of decision

The decision clearly affirms the Commissioner's powers to pursue liquidation steps against litigious debtors. The judgment discusses the public interest in the Commissioner pursing liquidation to maintain the integrity of the tax system.  

Facts

This judgment relates to an application made by the Commissioner to have liquidators appointed to the defendants.

The defendants were involved in the Trinity tax avoidance scheme and the debts relate to their 1997/1998 assessments, which were ultimately confirmed by the Supreme Court in Ben Nevis Forestry Ventures Ltd & Ors v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.

The defendants applied to strike out the Commissioner's application on the ground that she is not a creditor of the companies and therefore lacks standing to bring the proceedings. In the alternative, they sought a stay of the proceedings.

In addition to the above, the defendants also say the liquidation would be premature because there are decisions pending on various appeals and separate proceedings afoot, which, if successful, may result in the tax claimed being extinguished.

Decision

The strike out

Are the liquidation proceedings a suit?
First, Courtney J considered whether liquidation proceedings are a suit for the purposes of section 156 of the Tax Administration Act 1994 ("TAA").

She considered the Commissioner's power to recover unpaid taxes under sections 6A(2) and 6A(3) of the TAA, plus the power and method conferred on the Commissioner under section 156, which provides:

• All unpaid tax shall be recoverable by the Commissioner on behalf of the Crown by suit in the Commissioner's official name.

She also noted the effect of the Crown Proceedings Act 1950, which is specifically preserved under section 164 of the TAA.

Are the liquidation proceedings a suit for the recovery of tax?
Satisfied the liquidation proceedings are a suit for the purposes of section 156 of the TAA, Courtney J went on to look at whether a liquidation proceeding was a suit for the recovery of unpaid tax as contemplated by section 156 of the TAA.

She found the liquidation proceedings are a form of debt recovery and therefore the Commissioner's application for an order that a liquidator be appointed was a suit for the recovery of unpaid tax.

Her Honour relied on the Privy Council decision Cambridge Gas Transport Corp v Unsecured Creditors of Navigator Holdings PLC [2006] UKPC 26, [2007] 1 AC 508 at [14]-[15] where Lord Hoffman said:

• The purpose of bankruptcy proceedings ... is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established. That mechanism may vary in its details ... The important point is that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them.

Is the Commissioner a creditor for the purposes of the liquidation proceedings?
Her Honour then considered whether the Commissioner is a creditor under section 241(2)(c) of the Companies Act 1993 ("Companies Act"). The defendants argued the Commissioner is not a creditor because tax is public money and a property of the Crown. They argued this makes the Crown the creditor and the Commissioner an agent charged with the collection of a debt.

Courtney J found the Commissioner is a creditor for the purposes of section 241(2)(c)(iv). She found the opening words of section 240(1) "unless the context otherwise requires" meant the definition of creditor under section 241(2)(c) is not exhaustive and the context may require it to be interpreted more widely than is set out. She considered that the context in this case did require a wider interpretation basing this on both the purpose of the Companies Act and other provisions relating to creditors.

Courtney J therefore dismissed both the defendant's strike-out application arguments.

The stay application

Application for stay principles
To begin, Courtney J set out the principles relating to an application for stay in winding up proceedings. Summarised by Wallace J in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379, citing Exchange Finance Co Ltd v Lemington Holdings Ltd [1984] 2 NZLR 242 (CA); Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA); Fletcher Development & Construction Ltd v New Plymouth Hotels Holdings Ltd [1986] as:
 

The outstanding appeals and proceedings
Courtney J rejected the defendants' submission that the strike-out application raised complex issues of law, stating: "the issue raised in this appeal cannot truly be described as complex nor is it novel; it has been raised and rejected in other proceedings".

She went on to say for the many pending appeal decisions at [40] (CIV-2013-404-004673; CIV-2013-204-004676 [2014] NZHC 1746):

• I do not accept that these circumstances justify staying the Commissioner's proceedings. This is not an application for a stay sought for a short time pending the determination of a genuinely new point where the decision would assuredly spell the end of the litigation. There is no reason to think that if the outcome of the appeals or the proceeding against the Attorney-General in this Court is adverse to the defendants, it will be accepted as determinative of the defendants' position. The history of this matter shows only that the defendants will continue to litigate, notwithstanding their insolvent state, until they get the answer they want.
  Further, there is no prejudice to the defendants in the appointment of a liquidator, since they are not trading and have no assets. It was not suggested that, even if the appeals were successful, this position would change …

Her Honour concluded at [43]:

• I am mindful of the Court of Appeal's caution in Anglian Sales against too readily precluding the exercise of the Commissioner's statutory rights. Although it seems very unlikely that the tax will be paid, that fact should not be determinative. There is a significant public interest in maintaining the integrity of the taxation system through the resolution of unpaid tax debt. It ought not to be the case that apparently insolvent companies owing large amounts of tax can simply not pay while at the same time continuing to engage the Commissioner in costly and time-consuming litigation. That is a spectacle that surely undermines the taxation system and risks bringing it into disrepute in the eyes of other taxpayers.

Consequently Her Honour also rejected the defendants' stay application.