Commissioner of Inland Revenue v Musuku [2016] NZHC 2773 (17 November 2016)

Last Updated: 2 December 2016

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-3155 [2016] NZHC 2773

IN THE MATTER	of the Insolvency Act 2006
IN THE MATTER	of the Bankruptcy of Jawahar Bhaskar Musuku
BETWEEN	COMMISSIONER OF INLAND REVENUE Judgment Creditor
AND	JAWAHAR BHASKAR MUSUKU Judgment Debtor

Hearing:	17 November 2016
Appearances:	Mr Walmsley for judgment creditor Mr Thwaite for judgment debtor
Judgment:	17 November 2016

_{ORAL JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE}

COMMISSIONER OF INLAND REVENUE v MUSUKU [2016] NZHC 2773 [17 November 2016]

[1] This is an opposed application which the Commissioner brings seeking an order for the adjudication of the judgment debtor in bankruptcy.

[2] The relevant background to this matter is that the judgment debtor was formerly resident in New Zealand where he carried on the business of a pharmacist. However he encountered difficulties in relation to his tax returns. This has led to a lengthy series of cases which concern the taxation liabilities of the judgment debtor going back as far as 2001. I will have cause to mention some of that litigation in the course of this judgment.

[3] While this judgment is not concerned with the rights and wrongs of the litigation between the parties in the tax arena, the fact that disputes are continuing and have now reached appellate level does have some bearing on the outcome of today’s hearing. The position is, though, that apart from the taxation questions that are yet to be determined by the continuing litigation between the parties, the judgment debtor does owe a debt to the judgment creditor. Further, the judgment debtor has committed an act of bankruptcy in that he has not responded to the bankruptcy notice which has been served upon him. He had until 2 May 2016 to comply with that bankruptcy notice but has not done so. There is no evidence before the Court which would suggest that the judgment debtor is in a position to pay that debt. Currently according to a certificate which the Commissioner has filed in the proceeding the amount owed is $92,843.10 and it is on the basis of that debt that the judgment creditor seeks adjudication.

[4] For the judgment debtor Mr Thwaite presented comprehensive and well developed grounds for the opposition which the judgment debtor has put forward. He submits that the Court ought not to make an order of adjudication. He says it should dismiss the application, or alternatively defer further consideration of the matter pending the outcome of the further cases involving these parties next year. The Taxation Review Authority is scheduled to hear one such case in January of next year and I am told that the Court of Appeal has allocated a fixture for February 2017.

[5] Before I consider the grounds upon which the judgment debtor opposes the making of an order of adjudication it is necessary to make brief reference to the authorities which contain statements about the way in which the discretion to adjudicate is to be exercised. The focus in this case is plainly on the question of discretion because, as Mr Walmsley for the Commissioner has submitted, the judgment debtor has established all the matters that it needs to in order to give rise to the Court jurisdiction to make an order in adjudication.

[6] The question of the discretion was dealt with in a Court of Appeal decision in

Baker v Westpac Banking Corporation and in particular in the following paragraph:¹

The principles governing the exercise of the discretion under s 26 to grant or refuse an order of adjudication in bankruptcy are well settled and have been discussed by this court in recent years in Ellis v NZI nuance Limited (CA253/89 judgment 24 July 1989) and McEddy v Wilkins & Davies Marinas Limited (in receivership) (CA54/93 judgment 7 April 1993). It is proper for the court to consider not only the interests of those directly concerned - the petitioner, other creditors, the debtor - but also the wider public interest. A creditor who establishes the jurisdictional facts set out in s23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. The court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt's affairs and the disqualifications that go with bankruptcy. In the end the court must balance the various considerations relevant to the case and determine whether the debtor has

[7] That statement of principle is not materially different from that which Mr Thwaite relied upon, Eide v Colonial Mutual Life Assurance Society.² The only other authority which I would refer to is that of Re Fidow.³

Section 26(1) of the Act provides that the Court on being satisfied that the allegations stated in a creditor's petition are true, may in its discretion, adjudge the debtor bankrupt. I find that the allegations in this petition are true. For these reasons I conclude that in terms of s 26(1) -- and putting to one side all discretionary matters - there are prima facie grounds for an adjudication here.

¹ _{Baker v Westpac Banking Corporation CA 212/92 at 4.}

² _{Eide v Colonial Mutual Life Assurance Society [1991] 3 NZLR 632-635,636.}

³ Re Fidow [1989] NZHC 298; [1989] 2 NZLR 431 at 439.

[8] The first ground that the judgment debtor advanced in support of his opposition was that it would be contrary to the public interest if the judgment debtor were prevented from exercising his rights in the Taxation Review Authority and in the Court of Appeal against the Commissioner. Mr Thwaite told me that his client’s position is that the Commissioner has wrongly interpreted legislation in this case and that it is in the public interest that any uncertainty about that matter should be resolved.

[9] This judgment is not the place within which to attempt a detailed statement of the issues that are involved but they have to deal with the question of the appropriate interpretation of s 108B of the Tax Administration Act as to the time limits within which any assessment of the taxpayer is to occur. I cannot comment whether the case which the judgment debtor puts forward is likely to succeed or even whether it is a substantial one. But I accept that it has been progressed diligently to this point and that counsel has formulated a coherent and intelligible case so it cannot be said that the appeal and the TRA proceedings are not being pursued bona fide.

[10] Whether or not it is in the public interest to ensure that the judgment debtor is in a position to pursue this litigation is a question I shall consider further on in this judgment.

[11] Mr Thwaite also submitted that a bankruptcy would compromise the judgment debtor’s right to a lawyer under the New Zealand Bill of Rights Act 1990. He referred to ss 23 and 24 of that Act as being engaged. The significance of this remark is that in addition to the litigation involving taxation assessments, he is also facing 76 charges brought under the Crimes Act in relation to his tax returns. If he to be bankrupted, it is said that he would not be able to afford appropriately competent counsel to assist him with that proceeding.

[12] I must say I am not persuaded by this ground. If the judgment debtor is adjudicated bankrupt there must be a reasonable prospect that he should be able to obtain legal aid so that he would have counsel at his trial. Whether that counsel would be counsel of his choice or someone of the seniority that he would desire is

not a matter that I think needs to be considered when considering if the sections of the NZBOR are being violated or not. I therefore do not consider there is anything in this ground.

[13] The judgment debtor then asserts that a bankruptcy would not be consistent with the objectives of insolvency law in several areas. First he says that it would not be conducive to providing him with a “fresh start”. Second, it would not result in a pool of assets for distribution amongst creditors being recovered by the Official Assignee and thirdly it is not necessary for the purposes of ensuring commercial morality in New Zealand.

[14] I am not aware of any authority covering the question of the desirability of providing a fresh start to a debtor. The submission seems to be related to a connected issue which is the consequence that adjudication would have on the ability of the judgment debtor to earn a living if he or she is adjudicated bankrupt.

[15] I do not understand that it is contended that the judgment debtor would not be able to work as a pharmacist if he were adjudicated bankrupt. There is certainly no evidence that that would be the case. He would of course be under a disability of taking part in the management of a business but that is not the same thing as being left in a position where he cannot earn his living.

[16] The next point was the one concerning the issue of whether there is likely to be a pool of assets recovered in the event of an adjudication. There have been cases decided in New Zealand where this ground has been put forward as a reason for opposing the making of an order of adjudication. One such case was McHardy v Wilkins & Davies Marinas Limited (in receivership) where the Court of Appeal said:⁴

“[E]ven the undoubted absence of assets will not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited with the disqualification’s that go with bankruptcy.

⁴ McHardy v Wilkins & Davies Marinas Limited (in receivership) CA 54/93 at p 3.

[17] The judgment creditor has given evidence that the judgment debtor has apparently disposed of property which was under his control. The Commissioner would, if an adjudication was ordered, expect the Official Assignee to investigate whether such a transaction/s amounted to the judgment debtor taking steps to defeat his creditors which would open the door for steps being taken to recover any affected assets. My conclusion is that it cannot be ruled out that in this case there is some merit in a potential investigation of matters such as this by the Official Assignee. This is not a case where the affairs of the judgment debtor appear to be simple and transparent. My impression from the evidence is that the judgment debtor was involved in business enterprises of medium complexity and that more than one entity was used for trading and carrying on business. The interaction of the judgment debtor with those entities and movements of property between them are matters that could well merit investigation.

[18] The next issue is that of commercial morality. I consider that Mr Walmsley was on firm ground when he submitted that the Court is justified in taking into account the desirability of maintaining the integrity of the tax system as an aspect of public interest and that payment of tax is a matter which is inseparable from considerations of commercial morality. Therefore making a person such as the judgment debtor accountable for failure to pay the tax which is the subject of the debt would be enhanced, not defeated, by making an order for adjudication. I agree with those contentions.

[19] Mr Thwaite next set forward a ground that the judgment creditor is the only creditor pressing for bankruptcy. He referred to an authority in Re Hequard⁵as an example of a case where it was held that it was inappropriate for bankruptcy to be adjudged on the petition of a single creditor. That case in turn was referred to in the judgment of Robertson J in Re Hunter where His Honour said that:⁶

At most it could be said that the fact there was only a single creditor was not a reason for dismissing a petition but was a factor which could be taken into account.

⁵ _{Re Hequard (1989) 24 QBD 71.}

⁶ Re Hunter v Commissioner of Inland Revenue B515-IM99 at [66].

[20] I am not convinced that the fact that there is only one creditor seeking adjudication will ever be relevant to the question of the Court exercising its discretion to adjudicate or not. Quite apart from anything else it is the experience of the Court that often, where persons become insolvent, the only party who is interested in proceeding is the Commissioner of Inland Revenue. There may be various reasons for this including the fact that the Commissioner has priority over other creditors. It may be that this explains why she is frequently taking a step which is of no interest to the other general body of creditors. It is also the concern of the Commissioner to uphold the integrity of the tax system and so her interest in pursuing an adjudication on bankruptcy may go beyond the simple debt collecting aspects that Fisher J referred to. There would not be any rational reason, in my view, to conclude that in those cases because the Commissioner was the sole creditor pursuing the matter that the court ought not to order an adjudication.

[21] It is then said that the judgment creditor ought to take steps to enforce rights in regard to assets which she has identified in her case before the Court. It may be the case that there is potentially an entitlement on the part of the judgment creditor to recover assets but it is also undoubted that the position about that is not clear. Even if there are such assets investigating the position would be more easily and desirably carried out in the context of a bankruptcy and thereafter, if a decision was made to take enforcement action, the Official Assignee has an array of powers which can be usefully deployed to recover such property for the benefit of creditors.

[22] It is also said that the judgment debtor has no assets. I consider I have already dealt with this ground in passing when considering the earlier points discussed in this judgment. Even if there is no asset immediately in the control of the judgment debtor there may be good reasons for a bankruptcy to be imposed in order to permit an investigation of the situation and a recovery of any assets illicitly transferred away by the judgment debtor.

[23] As Fisher J stated in Re Fidow:⁷

On a bankruptcy petition the court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceeding.

⁷ Re Fidow at 444.

...The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt-collection by his immediate creditors.

[24] As well, it is inherently desirable that a party who is insolvent should be brought under the control of the Official Assignee to restrict the harm that unpaid debts will cause to other creditors who will potentially be left unpaid if the judgment debtor is permitted to continue in an uncontrolled way.

[25] A further ground is that the judgment debtor is said to have valid reasons for not paying the debt owed to the judgment creditor. This, I understand is a reference to the cases which the judgment debtor has pending before other tribunals in regard to disputed tax points. It needs to be made clear though that those disputes do not relate to the liability which the current proceeding is based upon. There is a judgment in existence as I have said and that judgment is for all practical reasons now beyond attack by the judgment debtor. It is appropriate to deal with the other litigation at this proceeding because it is a central part of the case which Mr Thwaite put forward on behalf of the judgment debtor.

[26] The starting point is to assess what affect, if any, the litigation between the parties before the TRA and the Court of Appeal would have on the judgment debtor’s overall indebtedness. In regard to the period of 2001-2005 the present position is that the Commissioner considers that assessable income of $2,000,000 was earned but the tax has not been paid on that amount and that tax would come to approximately $600,000. This is to be contrasted with the amount of tax which the judgment debtor in his self-assessments carried out in 2007 considers ought to be paid. He returned total income of $75,000 which would attract a taxation liability of approximately $25,000. But the important point is that even if the judgment debtor is successful in those proceedings in their entirety, his financial position will not improve. At best he will be limiting the extent of any additional debt. That debt, it should be observed, is likely to go unpaid because of the impecunious position of the judgment debtor. This is not the type of case, Mr Walmsley submitted, where there might be a claim available to the judgment debtor which, if he is given time, he can take through the courts and which has a good chance of resulting in a judgment

which will lead to the augmentation of the judgment debtor’s assets and which could

even change his status from being an insolvent to being a solvent person.

[27] There is also litigation involving the 2006 year. This is to be the subject of the Court of Appeal hearing in 2017. Again though the best result which the judgment debtor could obtain would be recognition of a debt owed to the judgment creditor of $15 – $20,000 whereas the worst case could result in a liability of $75 –

$80,000. Again, there is no advantage to the judgment creditor in staying her hand to enable the judgment debtor to bring these proceedings to completion. Similarly there is no justification for this Court dismissing the current proceedings or staying them for this litigation to reach its conclusion.

[28] There are other aspects of the taxation litigation, though, that as I have mentioned Mr Thwaite raised. He said that there was a public interest in the litigation being completed in the respective tribunals where fixtures are pending in order to clarify the law and or to indicate the correctness of the judgment debtor’s position and to publicly identify wrongdoing on the part of the Commissioner. In theory I agree that there would be some public advantage if those outcomes were to be achieved. On the other hand, not only will the proceedings not benefit the relative financial position of the judgment debtor but they could have the potential to deteriorate further. It has not been explained to me who will provide the funds necessary for counsel to be retained to argue those cases but I assume that in the absence of information to the effect that the judgment debtor is in receipt of legal aid, that these costs will be met out of his resources. This seems to be inconsistent with a suggestion that he has no assets. It is also a luxury which someone in the position of the judgment debtor, who is plainly insolvent, is not entitled to in my view. As well, there must be a risk that if the judgment debtor pursues this litigation that he will be unsuccessful and that additional court costs orders will be made against him thus swelling the size of his debt.

[29] The judgment debtor also says that it is relevant that he has attempted to settle his liabilities with the Commissioner. His counsel wrote to the Commissioner offering that his client would make a payment of $65,000 on the basis that would be an end to all litigation between the parties. The offer was apparently rejected. If it is

suggested that the Commissioner acted unreasonably in rejecting that offer, then I am not able to accept that submission. In the first case the Court would be slow to go behind the judgment of the Commissioner as to what was in the best interests of the taxpayer in a matter such as this. Secondly, having regard to the size of the potential debt which is thousands of dollars, the offer does not seem to be a large one and that may be the reason why the Commissioner decided that the preferred course would be for her to explore other means of recovery which could result in a larger recovery being achieved than would have been available under the proposed settlement.

[30] There were other elements to the arguments that Mr Thwaite put forward on behalf of his client but I have covered what I understand are the central aspects of the case for the judgment debtor.

[31] Standing back and looking at matters overall I consider that the judgment creditor has made out a compelling case for the adjudication of the judgment debtor and there will be an order pursuant to s 36 of the Act adjudicating him bankrupt. The order is made at 1.16 p.m. on 17 November 2016. The judgment debtor is to pay the costs of this application pursuant to costs category 2B together with disbursements to

_{be fixed by the Registrar.}

J.P. Doogue

Associate Judge