THE COMMISSIONER OF INLAND REVENUE V THE FISH & CHIP SHOP LIMITED HC CHCH CIV 2009 409 672 [2009] NZHC 821 (14 July 2009)

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
                                                                  CIV 2009
409 672



                 BETWEEN                THE COMMISSIONER OF INLAND
                                        REVENUE
  
                                     Plaintiff

                 AND                    THE FISH & CHIP SHOP LIMITED
           
                            Defendant


Hearing:         13 July 2009

Appearances: K Clark QC for Plaintiff (appearing 13 July 2009)
             S Weston for Plaintiff (appearing 14 July 2009)
             A J Forbes QC for Defendant

Judgment:        14 July 2009


                 JUDGMENT OF ASSOCIATE JUDGE OSBORNE




Background


[1]    The plaintiff on 13 February 2009 served a notice
of statutory demand (under
s289 Companies Act 1993) upon the defendant. The notice incorporated calculations
of goods and services
tax which the plaintiff calculated as owing from four revenue
periods being 31 March 2008, 31 July 2008, 30 September 2008 and
30
November 2008.       Of the approximately $30,600.00 owing by way of GST
slightly less than $5,500.00 was owing by way of late payment
penalties and interest
and the balance by GST itself. There was included within the statutory demand $50
of income tax.


[2]   
The defendant did not seek to set aside the statutory demand.



THE COMMISSIONER OF INLAND REVENUE V THE FISH & CHIP SHOP LIMITED
HC CHCH CIV
2009 409 672 14 July 2009

[3]     This proceeding was commenced on 6 April 2009. The plaintiff relied upon
the presumption
of insolvency and inability to pay debts arising by reason of the
expiration of the s289 statutory demand, together with the Court's
equitable
jurisdiction.


[4]     The proceeding was served on the defendant at its registered office on
16 April 2009. The notice
of proceeding notified the defendant that the application
was to be heard on 2 June 2009 and contained the other prescribed information
including the requirement to file any statement of defence within 10 working days
after service.


[5]     The notes attached to
the notice informed the defendant in the normal way
that if a statement of defence is not filed within the prescribed time, counsel
for the
defendant company will not without an order for extension of time or the special
leave of the Court be allowed to appear
at the hearing.


[6]     The defendant did not file a statement of defence within 10 working days
after service. Nor did the defendant
seek leave to file a statement of defence before
the hearing on 2 June 2009. However, at that hearing the proceeding was adjourned
to 13 July 2009 following a request by the Commissioner to enable the
Commissioner to consider a request which had been made by the
defendant for
financial relief.


[7]     That is the background as the Court file discloses it through the period of the
adjournment.


Updating affidavit of Fraser John Hawkins


[8]     On 10 July 2009 the plaintiff filed a second affidavit of Fraser John Hawkins,
who had sworn the initial affidavit verifying the statement of claim. Mr Hawkins'
updating affidavit contained a record of events
concerning the indebtedness and
attached exchanges of correspondence and information which had occurred. I will
return to some of
that.

Adjourned hearing on 13 July 2009


[9]    At the hearing on 13 July 2009 Ms Clark appeared for the plaintiff and
indicated
that the plaintiff was ready to proceed.


[10]   Mr Forbes attended Court and indicated that he wished to be heard. As much
of what
he then indicated to the Court appeared to be in support of an application for
adjournment, Mr Forbes was constrained to clarify
at the conclusion of his
comments that his submissions were also in support of an application for special
leave under r 31.20 High
Court Rules.


[11]   The request made by Mr Forbes therefore required me to consider the matter
at two levels. First I need to consider
whether special leave should be granted. In
such event, I need to consider whether there should be an adjournment.


Basis of plaintiff's request


[12]   Mr Forbes outlined
a number of propositions which I summarise into the
following:


               (a) The Commissioner (the plaintiff) has a statutory
obligation under
                   s6A(3) Tax Administration Act 1994 to collect over time the
                   highest net revenue
that is practicable within the law.      Three
                   considerations are required under s6A(3) including the importance
                   of promoting compliance, especially voluntary compliance, by all
                   tax payers.    Mr Forbes noted
that against that background the
                   Department of Inland Revenue allows tax payers to put forward a
            
      tax proposal to allow tax situations to be worked through ­ such
                   indulgence is permitted for a tax payer
only once.


               (b) The defendant (as tax payer) in relation to this debt put forward a
                   proposal which
was rejected by the Commissioner on 3 July 2009
                   with reasons to follow. The 3 July position was in response to
an
                   instalment arrangement submitted by a Mr Hunt who occupied a

   managerial position in the group of companies
of which the
   defendant is one. Between 28 May and 3 July there had been
   further information provided by the defendant at the
request of the
   plaintiff.


(c) By the plaintiff's 3 July letter, the plaintiff also put forward a
   counter offer. The counter
offer contained essentially the same
   base provisions as proposed by Mr Hunt (namely fortnightly
   repayments spread over six
months) but contained a number of
   other conditions including personal guarantees from Messrs David
   Henderson and Ian Hyndman
by 9 July 2009 (time being strictly
   of the essence) and a mortgage from Mr Hyndman over two
   parcels of land (in a form satisfactory
to the plaintiff).     The
   counter offer itself was required to be accepted in writing by the
   defendant on or before 1pm on
8 July 2009 (time being strictly of
   the essence). (By reason of the requirement as to the form of
   mortgage, Mr Forbes noted
that in reality the defendant needed to
   await the Commissioner's required forms).


(d) Mr Hyndman had prior to 3 July 2009 travelled
overseas to
   Canada and from that time his phone had not been answered.
   This had made it impossible to comply with the conditions
of the
   plaintiff's proposals. Both in correspondence from the defendant
   and in Mr Forbes's comments to the Court it was emphasised
that
   the unavailability of Mr Hyndman was not a delaying tactic. He
   had had to travel overseas for personal reasons.      It
was now
   understood that he was due back "this week" ­ subsequently
   clarified by Mr Forbes to be a return date of 21 July 2009
but with
   phone access available again at some point this week. Mr Forbes
   noted that this was Mr Hyndman's "principal business",
although
   Mr Forbes subsequently clarified that it was in fact not correct to
   describe this as Mr Hyndman's "principal business"
­ rather it
   was a significant business interest for him. In any event, he and
   Mr Henderson are the co-directors with personal
interests.

              (e) Having regard to the nature of the instalment proposal that had
                  been under discussion
(approximately $10,000.00 per month) Mr
                  Forbes indicated that the defendant would have available for
         
        payment to the plaintiff $20,000.00 on the day of the hearing (i.e.
                  13 July 2009).


              (f)
Mr Forbes indicated that the accounts manager of the defendant
                  company who had worked for the defendant company
for some
                  six years had created the GST issue which the defendant now
                  faces.


              (g)
Finally, Mr Forbes advised the Court that the defendant had
                  available to it the option of an application under s236 Companies
         
        Act 1993 (for approval of an arrangement or compromise of
                  creditors.) Mr Forbes indicated that his instructions
were that DB
                  Breweries, as by the far the largest secured creditor of the
                  defendant (beyond 75%
of value), would likely consider a s236
                  arrangement a preferable outcome to the liquidation of the
           
      defendant. Mr Forbes noted also that a substantial proportion of
                  unsecured liabilities of the defendant arise
through inter-company
                  advances and that those creditors will certainly support a s236
                  application.


[13]   For all these reasons Mr Forbes sought an adjournment of the proceeding.


Submissions for the defendant


[14]   Ms Clark
opposed any suggestion of adjournment and emphasised that she
did not accept the appropriateness of any request for adjournment given
that the
defendant may not appear without special leave. She noted no application for special
leave had been made.


[15]   Ms Clark
noted that the Commissioner was not satisfied as to the prospect of
the resolution of the debt. She questioned the credibility of
a situation where a key

director, who must have known of the adjournment of the proceeding from 2 June
2009 to 13 July 2009, could
leave New Zealand after 2 June 2009 with no contact
details.


[16]       Ms Clark took the Court to the detail of the chronology
provided by Mr
Hawkins in his second affidavit. While I have had regard to the full chronology and
supporting documents, I particularly
note the following points identified by Ms
Clark in an email from Mr Hunt to the Department on 23 June 2009. Mr Hunt was
replying
to points raised by the Commissioner in order to consider the defendant's
request for financial relief. Ms Clark noted particularly
the facts that:


·   While Mr Hunt for the defendant was reporting that other companies in the group
    owed a substantial total
to the defendant, none had repaid any of the debt in the
    interim.


·   Each of the companies had overdue tax.


·   As at 23
June none of the companies was in any position to repay significant
    amounts.


·   No demands for payment had been made by the
defendant on any of the group
    companies.


·   The reason no demands had been made was that the group companies were run
   
as a group.


[17]       Ms Clark further observed that as disclosed by Mr Hawkins' updating
affidavit, the total amount owing to
the Commissioner had increased from the time
of service of the statutory demand ($30,693.81) to $64,462.44.


[18]       Ms Clark
submitted that on the papers before the Court the company is prima
facie insolvent.      I took Ms Clark to mean that this is a case
in which the
Commissioner has not merely entitlement to rely on the statutory presumption of
insolvency but is also able to point
to evidence establishing insolvency.

[19]     Ms Clark submitted that the defendant has not made out a case for special
leave.
With the Court's necessary focus on solvency, the focus of the material relied
upon by the defendant is relevant only to the success
or ability in concluding
counteroffer arrangements. Nothing put forward for the defendant is relevant to the
defendant's ability
to pay. Ms Clark submitted that the granting of special leave and
an adjournment would be contrary to the sound policy of the legislation
which is
against the protraction of liquidation proceedings for procedural reasons.


[20]     In conclusion, Ms Clark noted the
defendant's failure to meet the statutory
demand; the fact that the defendant has not disputed the account; the fact that this
hearing
has not been a first call; and the fact that the company has appeared to have
the ability to strategically position itself when it
wishes to do so.


Reply for the defendant


[21]     I offered Mr Forbes a reply.


[22]     In the course of that reply he clarified the matters I have referred to above
as
being clarified.


[23]     Mr Forbes advised that Mr Hyndman had travelled overseas on 28 June 2009
before any issue had been
raised as to a counter offer (which was made on 3 July
2009.)


[24]     Mr Forbes emphasised again the importance of the Commissioner's
duties
under s6A Tax Administration Act.


[25]     Mr Forbes raised a further matter in relation to the defendant's creditors. He
commented that while DB Breweries is noted in Statements of Financial Position
provided by the defendant as the defendant's secured
creditor, the defendant also has
a liability as guarantor to Secured Finance Limited (which is not shown on
Statements of Financial
Position as a guarantee liability ­ Mr Forbes indicated that
the principal debtors are Atlas Food & Beverage Limited and another
company.) Mr
Forbes explained that the situation of the defendant through a liquidation would be

exacerbated as Secured Finance
Limited would undoubtedly move to take control of
the defendant's fit-out and other assets. Mr Forbes noted that Secured Finance
act as
the group's accountants and through that close association have a detailed
understanding of the financial relationships.


[26]   Finally, Mr Forbes explained an item of $200,767.00 which had been
identified by Mr Hawkins in his analysis of the financial
information provided to the
plaintiff. Mr Hawkins' analysis had shown that a company called RFD Investments
Limited (not a member
of the group but one of which Mr Henderson is a director )
had had the debt of $964,860.00 owed to it as at 31 March 2008 reduced
by
$200,767.00 by 31 March 2009. Mr Hawkins took that transaction to indicate that
the group of the companies had elected to pay
another company under the control of
Mr Henderson in preference to meeting the statutory GST obligations of members of
the group.
Mr Forbes indicated that the $200,767.00 was in a sense part of the
difficulties that had arisen from the period of management involving
the manager I
have earlier referred to. Mr Forbes explained that the transaction in question was not
a cash payment but had come
from Minx Limited in the form of a write off. Mr
Forbes indicated that the defendant had been seeking explanation from the former
manager, who had since been dealt with and was no longer in the company, but that
no further explanation was available.


Leave applications
­ the principles


[27]   I did not receive detailed submissions on the law applicable to an application
for special leave in this
case. I consider there is no better starting point than the
judgment of Paterson J in Fresh Cut Flower Wholesalers Limited v The
Living and
Giving Gift Company Limited  (2001) 16 PRNZ 173 at 175, where his Honour said:

       The law

       [9] Neither counsel made submissions on the law applicable to an
       application
for special leave. There are several helpful decisions of Masters
       referred to in para HR700T.04 of McGechan on Procedure.
With respect, I
       adopt the principles applied by the Masters. First, leave should not be
       granted unless the applicant
can show on the papers an arguable basis upon
       which it is not liable for the amount claimed. Further, in my view, even if

       there is an arguable defence, leave should not be granted if the applicant is
       insolvent.

[28]   In her submissions
as to the care which the Court must exercise in relation to
special leave, Ms Clark clearly had in mind the following discussion
from
McGechan on Procedure HR31.20.01, where the authors were referring to authority
from the State of Victoria, where it was observed:

       ...the Court stressed the adjective "special" and stated that it is for the
       applicant to make out a case to justify
this, the general policy being that
       winding-up proceedings are not to be protracted for procedural reasons.

[29]   In relation
to applications for extension of time to file a statement of defence,
it has been held that an applicant must demonstrate an arguable
defence on the
papers ­ see Mosaed v Roy Turner Ski Shop Limited HC Wanganui M63/92 10.12.92
Master Williams QC. As Master Faire
held, when approving the same approach in
Orme v Parkway Investments Limited HC Hamilton M149/00 7.5.01, in principle
the test to
be applied is the same as in an application to set aside a statutory demand.


Consideration of factors for exercise of discretion


[30]   The defendant has suggested no arguable basis that it is not liable for the sum
demanded.


[31]   The defendant has not
suggested it is other than insolvent. It has not filed
any evidence on the issue. Having regard to the emphasis which the defendant
places on the group of companies of which it is part, I attach substantial weight to
the uncontradicted evidence of Mr Hawkins. In
his evidence Mr Hawkins deposes
that the insolvency of the defendant is most strikingly demonstrated by the increase
in outstanding
tax liabilities owing to the Commissioner since the serving of the
statutory demand on 13 February 2009. But he further notes that
from the financial
information provided to him by the defendant it appears that the total net liability
position of the companies
in the group as at 31 March 2009 was $2,110,045.00. For
the defendant Mr Forbes did not suggest that there was evidence of solvency.
In his
submissions he did not challenge the evidence of Mr Hawkins or the basis of his

conclusions (save in relation to the RFD
Investments Limited point to which I have
referred.)


[32]   Having regard to the submissions made by Mr Forbes, and the evidence
of
insolvency before the Court, I conclude that this is not a case on which the Court
should consider granting special leave for
an extension of time. To do so would be
to grant leave to the defendant to file a pleading ( a statement of defence) which
asserts
a position when it is not a position put forward by the defendant.


Disposition


[33]   I dismiss the defendant's informal application
for special leave pursuant to
r 31.20 High Court Rules.


[34]   I have considered whether the Court should grant the indulgence
of a further
brief adjournment to enable the defendant to clear the debt.


[35]   Mr Forbes for the defendant stresses that there
has been no attempt to avoid
the issues and that the absence of Mr Hyndman at short notice, uncontactable and out
of the jurisdiction,
was a genuine misfortune. He suggests that the outcome of
liquidation is not desirable from the general tax payer perspective as
the proposal for
full payment (albeit by instalments) is more than will come from a liquidation. Mr
Forbes further submits that while
the defendant was not in a position to give a
commitment as to Mr Hyndman's involvement in security arrangements, the Court
could take it that Mr Hyndman was extremely likely to
agree to the requirements
given the lack of options.


[36]   Ms Clark for the plaintiff however emphasised that the Commissioner's
counter offer was no longer open for acceptance. It had lapsed on 3 July 2009. It is
the plaintiff's position that he can have little
confidence in the workability of any
arrangements that would be entered into by the defendant having regard to the
defendant's performance
through the period of the adjournment.

[37]   This Court will not, despite Mr Forbes' invitation to it to do so, embark on an
exercise
of critiquing the willingness of the plaintiff (who happens to be the
Commissioner of Inland Revenue) when it comes to the acceptance
or rejection of an
instalment payment arrangement by a company which is on the prima facie evidence
insolvent. In terms of an instalment
proposal along the lines previously discussed
between the parties, there is no point of even a short further adjournment for the
consideration of an instalment arrangement when the plaintiff's position is that he is
no longer prepared to enter into an instalment
arrangement.


[38]   That would leave as the sole purpose of a further adjournment the enabling of
the defendant to satisfy the
debt in full. That would carry with it the complication
that over the period since the issue of the statutory demand in February,
the total debt
owing by the defendant to the plaintiff has been appreciably growing without
reduction. Unless the defendant paid
the total debt as it now stands the plaintiff
would be in a position, relying on the evidence of insolvency, to nevertheless have
the company wound up on insolvency grounds.


[39]   In these circumstances I am not prepared following my refusal to grant leave
for the filing of a statement of defence to exercise a discretion to adjourn the hearing
to a later date. Accordingly, pursuant to
the terms or r 31.20 the defendant must not
be allowed to appear at the hearing of the plaintiff's application.


[40]   I will now
hear from counsel for the plaintiff.


Addendum


[41]   Having heard from counsel I stand the matter down to 4pm today



________________________


Solicitors
K Clark QC and S Weston for Plaintiff
A J Forbes QC for Defendant