Commissioner of Inland Revenue v Wright [2016] NZHC 2125 (7 September 2016)

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UNDER	Part 10 of the Tax Administration Act 1994 and Part 3 of the Goods and Services Tax Act 1985
IN THE MATTER	of an application for judgment for a tax debt arising under a deed of guarantee
BETWEEN	COMMISSIONER OF INLAND REVENUE Plaintiff
AND	HADLEY JOHN WRIGHT Defendant

Hearing:	7 September 2016
Appearances:	J V Angelson for the Plaintiff No appearance by or on behalf of the Defendant
_Judgment:	_{7 September 2016}

[1] The plaintiff is the Commissioner of Inland Revenue (“Commissioner”). The Commissioner seeks judgment against the defendant (“Mr Wright”) for $414,317.00 (“Debt”). The Debt arises from a contract of guarantee (“Guarantee”) given by Mr Wright in favour of the Commissioner, in respect of a tax debt owed by a company associated with Mr Wright, Eagle Wire Products Limited (in liquidation and receivership) (“Eagle”).

[2] It appears that, from around 2009, Eagle had problems meeting its tax obligations. The Guarantee was given by Mr Wright effectively as a pre-condition to the Commissioner entering into an arrangement with Eagle, to permit Eagle to pay its tax debt by instalments (and for the Commissioner to withdraw then pending liquidation proceedings against Eagle). Under the instalment arrangement, in the event that Eagle failed to meet its instalment obligations, the Commissioner was entitled to terminate the arrangement, with Mr Wright being obligated to pay Eagle’s then tax debt within 10 working days after being given notice of the cancellation.

[3] Eagle failed to meet its obligations under the instalment arrangement, which was duly cancelled by the Commissioner. Notice of that cancellation was given to Mr Wright and the Commissioner demanded payment by Mr Wright of Eagle’s then tax debt pursuant to the Guarantee. Payment was not made by Mr Wright.

[4] These proceedings were commenced some time ago, on 29 July 2013. Mr Wright filed a statement of defence on 13 September 2013. In his defence, Mr Wright did not challenge the guarantee (and indeed admits the Commissioner’s pleading in respect of the guarantee),¹or that Eagle had breached its obligations under the instalment arrangement, or that that arrangement had been cancelled by the Commissioner. Mr Wright’s defence was based on an alleged set-off, arising from

The Commissioner disputed Mr Wright’s defence, but was content for this matter to

_{be adjourned from time to time over the intervening two and a half
years, pending}

[5] Sadly, since the events outlined above, Mr Wright has had a stroke and is without capacity to instruct lawyers. His wife has an enduring power of attorney over him, and by memorandum dated 1 August 2016, counsel for the defendant advised that Mrs Wright has decided not to defend the proceedings, and that counsel’s instructions were not to defend these proceedings.

[6] An affidavit in support of the Commissioner’s formal proof application has been filed. The affidavit is of Graham Gerald Humphreys. Mr Humphreys is a Collections Officer employed by the Inland Revenue Department (“IRD”), and is the Case Officer for the files relating to Mr Wright and also Eagle. My summary of the factual background is based on Mr Humphreys’ undisputed evidence.

[7] At all relevant times, Mr Wright has been the sole director of Eagle, and is also the sole director of the 100 per cent shareholder company, Tawil Holdings Ltd. Both of these companies are now in receivership and liquidation.

[8] Mr Humphreys deposes that from 2009, Eagle had difficulty paying its tax obligations and incurred substantial GST and PAYE debts. Due to that non- compliance, in late 2011 and early 2012, statutory demands were served on Eagle by the Commissioner. By October 2012, although partial payments had been made by Eagle of its outstanding tax debts, the Commissioner was taking steps to liquidate Eagle. Eagle offered to pay its arrears by way of an instalment arrangement. Because of Eagle’s previous history, Mr Humphreys deposes that the Commissioner was reluctant to do so and committed to such an arrangement only on the basis that Mr Wright provided a guarantee in respect of the payment (i.e. the Guarantee).

[9] The Guarantee was recorded in writing on 18 October 2012, within a deed entitled Instalment Arrangement and Guarantee. The parties to the written document were Eagle (as taxpayer), Mr Wright (as guarantor) and the Commissioner (as payee).

In the event of default by the Taxpayer of the instalment arrangement and the Payee giving notice in writing to the Taxpayer and Guarantor of cancellation of the instalment arrangement, the Guarantor will pay to the Payee the balance then owing by the Taxpayer under this Deed within 10 working days after receipt of notice of cancellation.

[11] The Commissioner says that Eagle subsequently fell into arrears with its arrangement. By letter to Eagle dated 14 March 2013, the Commissioner cancelled the arrangement because of that non-compliance. At exhibit F to Mr Humphreys’ affidavit is a letter to Mr Wright dated 14 March 2013, giving notice of the cancellation of the instalment arrangement. That letter also gave notice of Mr Wright’s obligation under the Guarantee to pay the sum of $414,317.00, within

10 working days of the written notice. Mr Wright admits in his statement of defence that he was given such notice.²

[13] As noted above, the statement of claim was filed on 29 July 2013, and a statement of defence was filed by Mr Wright on 13 September 2013. The reason for the delay until today’s hearing was the parties’ agreement to await the resolution of the other proceeding referred to above (“WBD proceeding”).

[14] By joint memorandum dated 13 July 2015, counsel for the Commissioner and Mr Wright confirmed the WBD proceeding had been resolved by agreement. Despite attempts to also resolve these proceedings, no agreement was reached.

1 August 2016, counsel for the defendant notified the Court that the defendant did not intend to defend this proceeding. By minute dated 5 August 2016, Associate Judge Christiansen directed that this matter be set down today to enable formal proof

[16] Mr Angelson for the Commissioner submitted that all the necessary ingredients for this claim have been met, namely that:

[19] The Guarantee required Mr Wright to pay to the plaintiff a specified amount in the event of default by Eagle;

[22] In terms of formal requirements for the Guarantee, Mr Angelson submitted that Mr Wright gave a personal guarantee enforceable and consistent with the requirements set out in s 27 of the Property Law Act 2007 (the terms of which are recorded below). Mr Angelson pointed to the fact that, in the statement of defence, Mr Wright admits that he entered into a written contract guaranteeing Eagle’s performance of the interim payment arrangement. Mr Angelson also referred to the various paragraphs of the statement of defence, where Mr Wright has admitted:

[27] As flagged at the outset, the only matter denied by Mr Wright in his statement of defence was that there was in fact a debt owing to the Commissioner, given the alleged set-off as a result of monies said to be owing to a related company and being pursued in the WBD proceedings. However, and as noted, that proceeding was resolved by agreement between the parties over a year ago, yet the debt in this matter remains outstanding.

[28] Rule 10.7 of the High Court Rules provides that if the plaintiff appears at trial and the defendant does not, the plaintiff must prove the cause of action so far as the burden of proof lies on the plaintiff.

[29] Other rules in relation to judgment by default, in the case of a liquidated demand (r 15.7) or other claims (r 15.9) are predicated on the fact that no statement of defence has been filed. As is immediately apparent, that is not the case here. I therefore accept Mr Angelson’s submissions that the matter is to proceed on the basis that r 10.7 is the applicable rule. To the extent required, I will also make an order pursuant to r 9.56(a) that the facts requiring proof on this matter may be proved by affidavit.

[30] Section 27 of the Property Law Act sets out the formal requirements for a contract of guarantee. Section 27 provides as follows:

(1) This section applies to contracts of guarantee coming into operation on or after 1 January 2008.

(3) Subsection (2) does not require the consideration for a contract of guarantee to be in writing or to appear by necessary implication from a writing.

(4) In this section, contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.

[31] Having reviewed the evidence before me, I am satisfied that the Guarantee given by Mr Wright in favour of the Commissioner meets the requirements of s 27 of the Property Law Act. In particular, it is in writing and is signed by Mr Wright. There is in fact no dispute of this on the pleadings.

[32] Further, in terms of the requirements of the Guarantee itself, I am satisfied on the evidence that:

[34] The Commissioner had cancelled the instalment arrangement and has given notice in writing to Eagle and Mr Wright of that fact; and

[35] Mr Wright has not paid the sums demanded by the Commissioner under the guarantee within 10 days of notice of cancellation of the instalment arrangement.

[37] In terms of the amount that Mr Wright is indebted to the Commissioner under the guarantee, Mr Angelson took me to the various paragraphs in the Deed of Instalment and Guarantee itself, including paragraph 1.1 which defines “tax debt”. The Deed of Instalment and Guarantee also sets out the then agreed amount of the tax debt, which was somewhat higher than the claim now sought, given some further interim payments made by Eagle between the time of the Deed of Instalment and

Guarantee being entered into and the sums being demanded from Mr Wright. The definition of “tax debt” in paragraph 1.1 also makes it clear that included in the “tax debt” is use of money interest that has accrued on the core tax obligations to that point in time.

[38] Mr Angelson also took me to exhibit D to the affidavit of Ms Tomairangi Rogers, which is itself at exhibit F to the affidavit of Mr Humphreys. This includes a schedule entitled “Summary of tax periods previously under instalment arrangement as at 30 March 2013”, which sets out the various amounts then said to be due and owing by Eagle under the instalment arrangement. At the bottom of that schedule, the balance owing of $414,317.00 is set out. Mr Humphreys also deposes at paragraph 3.12 of his affidavit that, as at the date of swearing his affidavit (namely 30 August 2016), the amount owing under the Guarantee remains at that figure, namely $414,317.00.

[39] To the standard required, namely the balance of probabilities, I have no reason to doubt that those calculations or Mr Humphreys’ evidence is incorrect. I am not aware of any other matters arising which means judgment ought not be entered for the Commissioner in that amount.

[40] The Commissioner also seeks interest pursuant to s 87 of the Judicature Act

1908. I queried with Mr Angelson whether there were issues in relation to this, given the amounts sought include a component of interest, being the use of money interest payable pursuant to the underlying taxation legislation. However, as Mr Angelson rightly submitted, the use of money interest was incorporated into the figure of $414,317.00, which at the date that amount became due and payable by Mr Wright pursuant to the Guarantee, crystallised as a contractual debt. Further interest on that amount as a tax debt has not been sought by the Commissioner. I am therefore satisfied that the prohibition in s 87(1)(a) of the Judicature Act of awarding interest on interest does not apply.

[41] I also questioned Mr Angelson on the date from which interest ought to run, if I am prepared to award it. The Commissioner seeks interest under s 87 of the

Judicature Act from the date of the statement of claim, being 29 July 2013. I discussed with Mr Angelson whether there should be a later date, given the Commissioner’s agreement to stay these proceedings pending the outcome of the WPD proceedings. Mr Angelson submitted that interest was claimed in the statement of claim (expressly pursuant to s 87 of the Judicature Act) and there was no agreement or other arrangement between the parties that interest would, in effect, be stayed pending the outcome of the WBD proceedings. Mr Angelson characterised the Commissioner’s stance as an “indulgence” to Mr Wright in those circumstances. I accept Mr Angelson’s submissions on that point and am therefore prepared to make an order that interest apply from the date of the statement of claim.

[42] The Commissioner also seeks costs of these proceedings on a 2B basis. Mr Angelson confirmed that they would be sought on the basis of a formal proof hearing (as the matter has obviously not progressed to a full trial). I am prepared to make an order to that effect, subject to costs in respect of the various memoranda filed on behalf of the Commissioner subsequent to the Commissioner’s memorandum for the first case management conference being payable on a 2A basis. Mr Angelson was content with that approach.

[44] I make an order pursuant to r 9.56(a) that the matters requiring proof on this hearing may be proved by affidavit.

1908 at the prescribed rate from the date of the statement of claim, being 29 July 2013, to the date of this judgment.

[47] Mr Wright is to pay the costs of these proceedings on a 2B scale basis, other than in respect of the memoranda filed by the Commissioner subsequent to the first case management conference, the costs of

High Court of New Zealand Decisions

Commissioner of Inland Revenue v Wright [2016] NZHC 2125 (7 September 2016)