Taxpayer challenges Commissioner's power to enforce a guarantee

Summary

The Applicant gave the Commissioner a guarantee in respect of his company's tax debt. The company went into liquidation with the debt outstanding and Commissioner called on the applicant to honour the guarantee. The review proceedings were commenced on the grounds that Commissioner had no power to recover monies other than tax and that the guarantee fell outside the legislation. The Court held that the power to receive a guarantee also included the power to collect on it.

Facts

The applicant was the director of a company which, after the loss of some lucrative agencies, found itself with large debt and tax arrears. The company negotiated an instalment arrangement with the department but fell behind with its payments.

In an attempt to avoid liquidation of the company, the director sought to re-negotiate another instalment arrangement. The department agreed to withdraw liquidation proceedings only if the director provided a personal guarantee in respect of the company's tax debt. At that stage the debt amounted to $76,223.20 and the applicant provided the guarantee in the form of an executed deed for that sum. Four months later the company was placed in liquidation by resolution of its shareholders. The guarantee was sought in reliance upon section 7A Tax Administration Act 1994 (TAA).

The department made demand for the amount outstanding under the guarantee and when it was not forthcoming, commenced proceedings in the District Court to recover the amount. The applicant then commenced these proceedings for judicial review alleging the Commissioner had acted ultra vires in seeking to collect the debt.

Decision

The applicant submitted that recovery under a guarantee is damages (relying upon the decision of the House of Lords in Moschi v Lep Air Services Limited [1972] All ER 393) and that the Commissioner does not have the power to seek damages under the Inland Revenue Acts. He submitted also that it follows that section 7A is ineffective when it comes to the enforcement of securities as they are not taxes.

The Commissioner argued that it was irrelevant whether the security was owing as a debt or in damages as the language and intent of section 7A was clear, unambiguous and consistent with the Commissioner's section 6A duty to collect the highest net revenue over time. He also argued that, if it were necessary to determine the matter, the deed characterised the sum as debt rather than damages in Moshi terms.

His Honour Justice Lang noted that their Lordships in the Moshi case considered that there were two types of guarantee: the first where a guarantor undertook to assume the principal debtor's liability in the case of that person's default; and the second where the guarantor assures the creditor that the principal debtor will perform its liabilities. In this latter case the default of the debtor places the guarantor in breach of his or her contract. Thus the creditor can sue the guarantor for damages. The applicant argued that the deed in question fell into that category. His Honour said:

"In the circumstances of this case, however, I have concluded that it does not matter whether the Commissioner's claim is characterised as one for damages or for the recovery of a debt. The real issue in either case is whether the Commissioner has the power to enforce the guarantee by instituting proceedings..."

Having reviewed both sections 6 and 7A Justice Lang said that "If the Commissioner was entitled to accept Mr Peterson's guarantee, it would seem logical that he must also be entitled to enforce it."

"It needs to be remembered, however, that the purpose of most, if not all, securities is to secure the performance of an obligation. It does not matter whether the obligation is primarily that of the principal debtor or a guarantor who provides the security. The importance and value of the security flows from the fact that it provides the recipient with security for the performance of the obligation, regardless of the identity of the person having the primary responsibility for performing that obligation."

His Honour also said that the wording of the section was "sufficiently wide to enable the Commissioner to take security in any situation where that may be necessary to secure the performance of a taxpayer's obligations."

Justice Lang also confirmed that money collected under a guarantee or other security is collected in respect of a tax obligation in one form or other. He referred by way of analogy to the Commissioner's right to enforce other securities such as mortgages or charges. "The fruits of any judgment would then be applied in satisfaction of the tax obligation..."

He concluded:

"I consider that the meaning of the legislation is plain. Once it has been established that the Commissioner has validly accepted a security in terms of section 7A(1)(a), it must follow that he is also entitled under section 7A(1)(e) to enforce or realise that security in any way that is open to him."