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Satuit Properties Limited v Commissioner of Inland Revenue [2014] NZHC 1300 (6 June 2014)

Last Updated: 18 June 2014


IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY



CIV-2014-441-000009 [2014] NZHC 1300

BETWEEN
SATUIT PROPERTIES LIMITED
Plaintiff
AND
THE COMMISSIONER OF INLAND REVENUE
Defendant


Hearing:
6 June 2014
Counsel:
R H Hill for defendant in support
L R Stothart for plaintiff
Judgment:
6 June 2014




ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH





[1] This is an application by the defendant for an extension of time to file a statement of defence to the plaintiff ’s claim for an order putting the defendant into liquidation. The liquidation claim was served on the defendant on 7 February 2014, and the statement of defence was due, in accordance with r 31.16 of the High Court Rules, by 21 February 2014. In the event, the statement of defence was not filed until 12 March 2014. The defendant’s application for extension of time to file the defence was filed on the same date.

[2] Rule 31.20 of the High Court Rules provides:

31.20 Effect of failure to file statement of defence or appearance

If a person who is entitled to file a statement of defence or an appearance in a proceeding commenced by the filing of a statement of claim under rule

31.3 fails to file a statement of defence or an appearance within the time prescribed, that person must not, without an order for extension of time

granted on application made under rule 31.22 or the special leave of the

court, be allowed to appear at the hearing of the proceeding.

SATUIT PROPERTIES LIMITED v THE COMMISSIONER OF INLAND REVENUE [2014] NZHC 1300 [6

June 2014]

[3] Rule 31.22 provides that an application for extension or abridgment of prescribed time periods may be made by interlocutory application without leave.

[4] The defendant relies on the following grounds:

(a) It was unable to consult its solicitor until 17 February 2014.

(b) The matter has a complicated background, and the defendant had to obtain access to records stored offsite since 2010.

(c) A draft statement of defence was provided to the Commissioner on

27 February 2014.

(d) “The [defendant] contends that the evidence confirms that it was not liable to pay the sum sought, and these proceedings are ill founded”.

[5] The application is supported by an affidavit of Mr Nicholls, a director of the defendant.

[6] The plaintiff filed a notice of opposition on 25 March 2013. The grounds of opposition are:

(a) Pursuant to section 109 of the Tax Administration Act 1994, the High Court does not have the jurisdiction to hear and determine a tax dispute in relation to the assessments or amounts of penalties and interest that have been imposed and which have been claimed in the Plaintiff’s Statement of Claim;

(b) Jurisdiction to hear tax disputes is vested in the Taxation Review Authority and the High Court, when a valid challenge to assessments has been made in a timely fashion;

(c) The defendant company has filed its statement of defence outside the statutory timeframe of 10 days;

(d) The defendant company has disclosed no arguable defence in its statement of defence;

[7] In support of its opposition, the plaintiff relies on an affidavit of Ms La’aiva, a case officer of the Inland Revenue Department who has been assigned to deal with the defendant’s tax affairs.

Background

[8] Mr Nicholls’ evidence was that around 2006 the defendant company embarked on a project developing a former wool store known as Shed 5 at Ahuriri. There was to be ground floor retail premises, some first floor commercial offices, and the balance would be residential apartments. The residential units were to be sold from the plans.

[9] A number of sale agreements were entered into, but difficulties arose with the project and a number of the sale agreements were cancelled. Five contracts remained on foot.

[10] The financier and mortgagee for the Shed 5 project was South Canterbury Finance Limited (SCF). When the project ran into difficulties there were a number of meetings between Mr Nicholls and Mr McGillivray of SCF, the outcome of which was that the defendant was permitted to continue with the management of the project, subject to what appears to have been fairly close supervision by SCF.

[11] The financial difficulties were not overcome, and on 24 October 2008 SCF

issued a default notice to the defendant under section 119 of the Property Law Act

2007. Total arrears as at 24 October 2008 were said to be approximately $24 million including principal and interest. The notice advised that if the defaults were not remedied by 8 December 2008, the mortgagee would have the right to sell the land described in the mortgage or enter into possession of the land.

[12] The defaults were not remedied and on 10 December 2008 SCF’s solicitors advised that their client intended to take possession of the property as mortgagee early the following week.

[13] There is a dispute as to whether that happened. The defendant, through its solicitors, argued (for example, in an email dated 19 February 2009) that SCF was not then a mortgagee in possession, and that the sale of unit 316 in the development which occurred at about that time was not a mortgagee sale. Consistent with that claim, the settlement statement for the sale of unit 316 was issued on 18 February

2009 by the defendant’s solicitors.

[14] The significance of whether this was or was not a mortgagee sale by SCF is as follows. It is common ground that the sale of the unit attracted output tax under The Goods and Services Tax 1985. That fact was appreciated by both the defendant and SCF at the time. The defendant expected that the GST liability would be discharged out of the proceeds of sale of unit 316, but SCF insisted on receiving the entire net proceeds of the settlement in exchange for the relevant partial discharge of its mortgage.

[15] Under s 5(2) of The Goods and Services Tax Act, where goods acquired or produced by one person are sold by a second person in the exercise of a power of sale held by that second person, the goods are deemed to have been supplied in the course or furtherance of a taxable activity carried on by the first person. Under s

17(1) of the Act, it is the person exercising the power of sale in such circumstances who is obliged to pay the Commissioner the amount of tax charged on the relevant supply.

[16] In the event, the defendant’s solicitors proceeded with the sale of unit 316 without obtaining any clear assurance from SCF that it would pay the GST on the transaction. SCF never did pay it.

[17] Two partners in BDO, (chartered accountants) were appointed receivers of the defendant on 23 March 2009. They filed a GST return dated 14 May 2009, showing a liability of $88,702.27 in respect of the period prior to their appointment as receivers. It is this sum, which represents GST payable on the sale of unit 316, together with interest and penalties, which forms the basis of the Commissioner’s present liquidation claim for a figure which is now in excess of $193,000.

[18] Mr Nicholls says that he effectively lost control of the company when the receivers were appointed, and he only became aware of the Commissioner ’s outstanding claim in March 2013. He was not aware that no steps had been taken to refer the issue of pre-receivership GST liability to the Taxation Review Authority or to the Court. He says further that he was told by Mr McGillivray of SCF that SCF would pay the GST on the sale.

[19] The defendant has taken no step to object to the assessment for the GST liability under part 8 of the Tax Administration Act 1994, or to challenge it under part 8A of that Act.

[20] When the defendant applied for the extension of time to file a defence in this proceeding, the Commissioner treated the application and the statement of defence as an application under s 113 of the Tax Administration Act to amend the assessment. (Under that section, the Commissioner may at any time amend an assessment if she considers it necessary in order to ensure its correctness.) By letter dated 25 March

2014 the Commissioner declined to amend the assessment, saying that she was not satisfied that it was incorrect for the defendant to return the proceeds from the sale of unit 316 in the GST return for the period ending 31 March 2009.

Discussion

[21] Counsel were agreed that the only real issue on the extension of time application is whether the defendant has shown that it has an arguable case to oppose the liquidation. I am satisfied that if an arguable defence does exist, the defendant should not be precluded from running that defence because its statement of defence, a copy of which was provided to the plaintiff in draft form only six days late, was not filed for a further period of approximately two weeks.

[22] Turning to the arguable defence question, the defendant’s principle stumbling

block is s 109 of the Tax Administration Act 1994. That section provides:

109 Disputable decisions deemed correct except in proceedings

Except in objection proceedings under Part 8 or a challenge under Part

8A,—

(a) no disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and

(b) every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.

[23] In Accent Management Limited v Commissioner of Inland Revenue,1

Associate Judge Faire noted the Commissioner’s submission that there was no substantial dispute in the case because a substantial part of the debt contained in the statutory demands resulted from a tax assessment. The Commissioner in that case relied on s 109 of the Tax Administration Act in submitting that tax assessments are deemed to be correct in all respects and are prohibited from being disputed except in challenge proceedings. In that case, challenge proceedings were issued, but the assessments had been upheld by the Supreme Court. The Associate Judge

concluded:2

As a result, it is no longer open to the plaintiffs [who were applying to set aside statutory demands] to claim that there is any substantial dispute in respect of the tax assessments.

[24] Mr Hill endeavoured to persuade me that s 109 is only applicable in cases where the quantification of the tax debt is in question, and does not apply where the taxpayer’s position is that someone else owes the tax. But he could not refer me to any authority in support of the proposition, and I can see no reason why the section should be read down in that way.

[25] Mr Hill also submitted that it would be unfair to allow the defendant to be liquidated when it had received no notice of the assessment, and had no knowledge of it. But it seems to me that that is really a submission that Mr Nicholls had no knowledge of the assessment. In circumstances where receivers had been appointed and were in charge of the company (and indeed filed the relevant GST return), it is their knowledge which is relevant. The defendant was a separate legal entity from

Mr Nicholls.

1 [2013] NZHC 3197, (2013) 26 NZTC 21-050.

2 Accent Management Ltd v Commissioner of Inland Revenue, at [23].

[26] Mr Hill argues forcefully that it would not be just or equitable to liquidate the defendant, when there remains a fundamental issue as to whether SCF sold unit 316 as mortgagee in possession, and thereby assumed responsibility to account to the Commissioner for the GST. There would be significant difficulties for the defendant with this argument, particularly as their own solicitors were contending right up to the point of sale that SCF was not in the position of a mortgagee in possession. Also, it might be argued that the defendant’s real problem at the time was not intransigence on the part of SCF, but the defendant’s own insolvency rendering it unable to pay the GST without having recourse to part of the proceeds of sale of unit 316. But even if there were any merit in the defendant’s arguments, I am of the view that they are trumped by s 109 of the Tax Administration Act, at least on the central question of whether the debt is owed by the defendant.

[27] I accordingly find that it is not reasonably arguable for the defendant that it is not liable for the debt, or that the Commissioner has acted improperly in filing the liquidation proceeding.

[28] Even where there is no dispute over the relevant debt, I accept that the Court retains a residual discretion whether to make an order for liquidation. But the general policy of the Companies Act is that insolvent companies should be put into liquidation if a creditor seeks an order, and that policy should not be departed from

lightly. In Chester Trustee Services Limited, Tipping J said:3

...To justify such a departure there must be some other factor, be it policy, principle or simply the justice of a particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation.

[29] The question is whether it is “plainly unjust” for liquidation to ensue.

[30] In this case I can see no factor which outweighs the plaintiff’s prima facie

entitlement to a liquidation order. Certainly, none of the five factors listed in

MacPherson’s Law of Company Liquidations, (3rd edition)4 are applicable:5

3 Commissioner of Inland Revenue v Chester Trustee Services Limited [2003] 1 NZLR 395 (CA)

at [3].

4 Referred to by Baragwanath J in Chester Trustee Services Limited, above n 2, at [47].

5 At [47].

(1) the applicant’s debt amounts to less than [the statutory minimum]; (2) the debt is bona fide disputed by the company;

(3) the company has paid or tendered payment of applicant’s debt;

(4) winding up is opposed by other creditors; and

(5) the company is in the process of being wound up voluntarily.

[31] A further consideration is that where, as in this case, the real (and apparently only) issue is whether the debt is owed, exercising the court’s discretion against the making of a liquidation order would or might effectively undermine the clear intent of s 109 of The Tax Administration Act.

[32] In all of the foregoing circumstances, I am satisfied that the defendant has no arguable defence. The application for extension of time is accordingly refused, and the statement of defence filed by the defendant is struck out.

[33] Mr Hill indicated following the making of the order striking out his client’s statement of defence that he does not seek any adjournment of the proceeding for the purpose of looking at a possible arrangement to settle the debt. For the Commissioner, Mr Stothart seeks a liquidation order, and has produced the appropriate solicitor’s certificate showing that the debt remains unpaid as at today’s date. In the circumstances, I make the following further orders:

(a) The defendant company is put into liquidation.

(b) The Official Assignee at Napier is appointed liquidator.

(c) The defendant company is to pay scale 2B costs to the plaintiff, plus disbursements as fixed by the registrar.

[34] Those orders are timed at 12.45pm on 6 June 2014.

Associate Judge Smith



Solicitors:

Hilden Law, Napier for defendant

Leo Raymond Stothart, Wellington for plaintiff


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