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High Court of New Zealand Decisions |
Last Updated: 12 February 2019
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2016-404-001816
[2018] NZHC 1173 |
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BETWEEN
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THE COMMISSIONER OF INLAND REVENUE
Judgment Creditor
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AND
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JOHN MICHAEL KENNEDY
Judgment Debtor
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Hearing:
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26 April 2018
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Appearances:
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M Hartfield for the Judgment Creditor T J P Bowler for the Judgment
Debtor
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Judgment:
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24 May 2018
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JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 24 May 2018 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors: Neilsons, Auckland
COMMISSIONER OF INLAND REVENUE v KENNEDY [2018] NZHC 1173 [24 May 2018]
[1] The Commissioner of Inland Revenue applies for an order adjudicating him bankrupt. This has come about because of Mr Kennedy’s failure to meet long outstanding tax debts.
[2] Mr Kennedy opposes the application. He acknowledges that the jurisdictional grounds for an order for his adjudication have been made out, but he contends it would be just and equitable for the Court to exercise its discretion under s 37(c) of the Insolvency Act 2006 to refuse to adjudicate him. He seeks that the Court dismiss the application for adjudication, or (as his less preferred option) that the proceeding be adjourned once more. He hopes that within two or three months he will be able to pay all of his tax debts (or most of them).
[3] Late last year Mr Kennedy recovered a significant sum from the sale of relationship property. He believes that if given the extra time he should be able to recover still more from his estranged partner as a contribution to his tax debts, based on their being relationship debts. The extra time would also enable him to put a compromise proposal to the Commissioner if the ultimate outcome is that he cannot pay all of those tax debts.
[4] Counsel for the Commissioner posits that the time has come when Mr Kennedy cannot reasonably expect further indulgences (there have been several lengthy adjournments), and that an order of adjudication is now warranted. He points out that Mr Kennedy has not honoured promises made during the course of this litigation to pay his undisputed tax debts, and he submits that granting any further indulgence will not promote the need to maintain the integrity of the tax system.
[5] For reasons that I will turn to, I am satisfied that grounds for refusing an order of adjudication are not made out. An order of adjudication is therefore inevitable. Further adjournments are not appropriate.
Background
[6] Mr Kennedy operates a floor sanding business and has done so successfully for some years. However, he failed to meet all his tax obligations for the tax year ending 31 March 2008, when he struggled with personal health issues. The tax debts for that year have remained unpaid. They comprise goods and services tax, income tax, and instalments on his student loan. Penalties and interest have continued to accrue on the outstanding tax debts under the statutory tax regime.
Bankruptcy proceeding
[7] Mr Kennedy’s present problems began in earnest when judgment was entered against him in the District Court on 14 October 2015 for these outstanding taxes and accumulated penalties and interest. The amount of the judgment debt was for
$73,656.03 inclusive of costs and disbursements.
[8] On 8 August 2016, at the Commissioner’s request, the High Court issued a bankruptcy notice against Mr Kennedy for the judgment debt. This notice was served on Mr Kennedy on 19 September 2016.
[9] Mr Kennedy took no steps to comply with the bankruptcy notice or to challenge it. As a result he committed an act of bankruptcy on 4 October 2016 under s 17 of the Act.
[10] The Commissioner filed an application to the Court on 8 November 2016 to have Mr Kennedy adjudicated bankrupt, on the ground of his failure to comply with the bankruptcy notice. When the application came before the Court for the first time in early 2017, it was adjourned to 28 March 2017 to enable Mr Kennedy to make arrangements for the sale of the former family home and to pay the debt from his share of the proceeds. Mr Kennedy advised the Court that the equity in the property was substantial; that he expected the property to sell quickly; and that he would soon have sufficient funds from his share of the sale proceeds to pay the outstanding tax debts. He advised that apart from what was owed to the Commissioner, he had no other debts that were due and owing.
[11] There were several more adjournments. They were sought because of unexpected delay in the sale process and were not opposed. Additional time was also needed for settlement. Mr Kennedy says the time involved would have been much briefer than transpired had his former partner, Ms Pike, been more co-operative.
[12] The Commissioner says the total outstanding tax debts now owed by Mr Kennedy (including penalties and interest that have continued to accrue against him in relation to the unpaid goods and services tax, income tax and student loan instalments) currently stand at $350,676.33. Mr Kennedy does not dispute this amount.
The present position
[13] Settlement of the sale finally occurred in October 2017. From the net proceeds of sale Mr Kennedy was paid out 50%, and his former partner the other 50%.
[14] Despite his promise to apply his share of the proceeds of sale to the outstanding tax debts, Mr Kennedy has not paid anything toward those debts.
[15] The jurisdictional requirements, as set out in s 13, for an order of adjudication are made out. Section 13 provides:
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and
(b) the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c) the debt is a certain amount; and
(d) the debt is payable either immediately or at a date in the future that is certain.
[16] Mr Kennedy’s concession that the Commissioner has satisfied the jurisdictional requirements for his adjudication is appropriate. It is not in dispute that:
- (a) He owes the Commissioner $1,000 or more;
(b) He has committed an act of bankruptcy in terms of s 17 within the 3 months preceding the filing of the Commissioner’s application; the judgment against him was final; execution of the judgment was not stayed; and he failed to take any steps within the time allowed to comply with the notice or to satisfy the Court that he had any kind of challenge to it;
(c) The debt owed is for a certain amount; and
(d) The debt is now well overdue.
[17] The sole issue for determination is therefore whether it is just and equitable to exercise the Court’s discretion, under s 37(c) to refuse to adjudicate Mr Kennedy. He bears the onus of showing that the order for adjudication should be refused. It is for the Court to balance the relevant considerations and determine whether it has been shown that the order should be refused.
[18] In submissions and oral argument counsel for Mr Kennedy relied on a number of grounds in pursuance of his argument under s 37(c). These were essentially as follows:
(a) That Mr Kennedy has sufficient funds to pay the judgment debt, and has every intention of doing so; however, he seeks a contribution from his former partner, Ms Pike, as the debt is almost certainly a relationship debt.
(b) The fact that he needs time to sort out his financial affairs and to realise a further asset (his entitlement to compensation for 50% of the relationship debt) does not mean he cannot pay the debt.
(c) An order of adjudication would do more harm than good. It would mean Mr Kennedy cannot provide for his young family, and prevent him from pursuing Ms Pike for her half share of the debt.
(d) The circumstances in which the debt arose are relevant. He was the sole income earner for his partner and three young children for over 17 years. The debt is not the result of a reckless or extravagant lifestyle or poor business decisions. The delays in making payment are not of his making.
(e) There is no need to investigate his affairs.
[19] By way of elaboration, counsel further submitted that:
(a) Mr Kennedy believes he can pay all, or most, of his tax debt, and plans to do just that.
(b) Responsibility for the delay in implementing his plans lies principally with his former partner and her solicitors. Ms Pike delayed signing an agreement for sale and purchase, and her solicitors ignored Mr Kennedy’s request to hold enough of the sale proceeds in trust to cover the tax debts pending resolution of the question whether they are relationship debts.
(c) He has promptly commenced proceedings in the Family Court to seek a declaration as to his further entitlement to the proceeds of sale.
(d) The time he needs to implement his plans is short, as he expects that the Family Court will allocate a fixture fairly shortly. Two or three months should be sufficient. Once the declaration of the classification of the debt is received from the Family Court he will be able to pursue Ms Pike for her share of the debt.
(e) There is good reason to be confident he will obtain the declaration he seeks. Though he does not contemplate Ms Pike will withhold payment, it will be a simple matter to bring enforcement proceedings should they be needed to recover what more is due to him.
Discussion - just and equitable?
[20] The Court’s discretion to refuse adjudication is provided for in s 37, which states:
37 Court may refuse adjudication
The court may, at its discretion, refuse to adjudicate the debtor bankrupt if—
(a) the applicant creditor has not established the requirements set out in section 13; or
(b) the debtor is able to pay his or her debts; or
(c) it is just and equitable that the court does not make an order of adjudication; or
(d) for any other reason an order of adjudication should not be made.
[21] A number of general principles relevant to the exercise of the discretion can be drawn from the case law. Those most relevant to the present case are:
(a) Whether the debtor has the ability to meet his or her debts over time and whether that would meet the requirement of achieving finality within a reasonable period;1
(b) Making the debtor accountable for those debts;2
(c) The wider public interest in determining whether adjudication is conducive or detrimental to commercial morality and the interests of the general public;3
(d) What were the circumstances in which the debt was incurred and the debtor became insolvent,4 and do those circumstances suggest the creditor is unreasonable in pursuing adjudication;5
2 Re Coromandel Independent Living Trust, ex parte Hamon [2016] NZHC 392 at [13].
4 Re Taylor ex parte Greenwood (1992) 4 NZBLC 102,875 (HC) at 102,879.
(f) Whether adjudication would be pointless.7
[22] I agree with counsel for the Commissioner that of particular significance in this case are the following factors:
Ability to pay over time and within reasonable period
(a) Mr Kennedy asserts that he will be able to pay the outstanding tax debt, but by his own assessment this outcome is conditional upon whether or not his claim for compensation from Ms Pike for a share of the tax debts succeeds. The tax debts may be relationship debts, but whether or not he will succeed in his claim for a declaration to that effect is uncertain. Further, even if the claim succeeds, whether or not that would put him in a position where he would be able to meet his tax debts is also uncertain. He has already used some of his share of the sale proceeds. He was unable to advise the Court how much he has retained. There could in fact be a significant shortfall even with the anticipated additional recovery – a fact that Mr Kennedy’s counsel concedes.
(b) As counsel for the Commissioner submitted, a successful claim for a declaration is one thing, but that alone will not put Mr Kennedy in further funds. A lengthy enforcement process may follow. There is reason therefore to be sceptical about the ease and speed with which Mr Kennedy might achieve actual recovery.
Accountability for the debt and the public interest
(d) He has not disclosed how much money he received from the distribution of the sale of the former family home, and appeared reluctant to do so. Indeed, his counsel was able to advise the Court in vague terms only that the amount was “around $250,000”. Acknowledging that some of that money was gone, counsel was unable to say how much has been retained.
(e) Mr Kennedy has offered no adequate explanation as to why he has paid nothing towards his tax debts, both following the sale of the family home and in the decade prior. He went no further than to say that some of the money, realised from the sale, has been used for family expenses, and that he expects to recover more from Ms Pike and believes he will do so.
(f) Mr Kennedy has failed to provide details on oath of his actual financial position including his assets, liabilities and income.
(g) All these factors point to the inevitable conclusion that investigation by the Official Assignee is indeed warranted, in order to hold Mr Kennedy to account, and avoid the risk that the available funds are further depleted before any of them find their way to the Commissioner.
Circumstances giving rise to the debt, and whether those circumstances suggest adjudication is unreasonable
(h) I agree that the circumstances in which the debt arose are relevant. I am willing to accept that at least some responsibility for Mr Kennedy’s present difficulties lies with his former partner. Had Ms Pike agreed to sell the former family home in a timely way instead of delaying, and
had more of the sale proceeds been held pending resolution of the amount of relationship debt, Mr Kennedy’s tax debts could well have been significantly lower.
(i) But it should not be overlooked that Mr Kennedy incurred the core debt quite some years ago, in 2008, and though he has suffered health problems, he has managed to run a business since 2008 and has had ample time to deal with that debt.
(j) As counsel for the Commissioner also points out, a significant cause of his present difficulty is his own conduct, being that he has not lived up to his commitment made in the course of this litigation to apply his share of the proceeds of sale to the long-standing debt.
(k) So, while Mr Kennedy appears justified in asserting that there is no indication of an extravagant lifestyle, there is ample indication that his financial difficulties are in substantial part because he himself has not managed his tax obligations or met his commitments to pay them as funds have materialised.
Will Mr Kennedy be able to support himself?
(l) There is no evidence of substance to show that adjudication would mean Mr Kennedy could not provide for his family. As counsel for the Commissioner submits, it is open to him to seek the approval of the Official Assignee, to allow him to continue to manage a floor sanding business. And if unsuccessful in obtaining approval, there is no reason to suppose he would not secure employment as a floor sander.
Loss of cause of action
(m) Mr Kennedy submits that the Court should take into account the fact that he will lose a good cause of action against his Ms Pike for a contribution to relationship debt.
(n) I do not accept that it is necessarily the case. The Official Assignee has the ability to pursue Ms Pike for her alleged half share of those debts, and may well do so if the case is as clear cut as Mr Kennedy submits. Mr Kennedy also has the option of seeking the Official Assignee’s agreement to assign the action for a declaration to him.
Would adjudication be pointless?
(o) I am satisfied adjudication would not be pointless. There is a real risk, given Mr Kennedy’s failure to honour his commitment, and his self- confessed choice to dissipate part of the sale proceeds, that funds that should be applied to meet his debts will be used for other purposes.
(p) If the Official Assignee or Mr Kennedy is successful in recovering further funds from Ms Pike, and they are sufficient to meet his tax debts, then he will of course be at liberty to seek annulment of his adjudication.
[23] Weighing all of the factors that Mr Kennedy has stressed, alongside the wider public interest in avoiding significant delay in bringing Mr Kennedy’s affairs under the Official Assignee’s control, I am satisfied that the public interest in his adjudication outweighs any private interest. Mr Kennedy has failed to discharge his burden to satisfy me of the contrary.
[24] I am not satisfied that the Court should exercise its discretion to refuse to adjudicate Mr Kennedy bankrupt, and I am satisfied the Court should exercise its discretion to adjudicate him bankrupt.
Result
[25] I make an order for Mr Kennedy’s adjudication. The order is timed at 3.30 pm on 24 May 2018.
[26] I reserve costs. If the Commissioner seeks costs, a memorandum is to be filed within 5 working days. Counsel for Mr Kennedy has a further 5 working days to file a memorandum in response.
[27] I draw counsel’s attention to the recent decision of Associate Judge Matthews in Commissioner of Inland Revenue v New Orleans Hotel (2011) Ltd.8
Associate Judge Sargisson
8 Commissioner of Inland Revenue v New Orleans Hotel (2011) Ltd [2018] NZHC 971.
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/1173.html