Who is liable for GST: the receiver or the partnership?

Summary

The sale of a forest by a partnership (each party of which was in receivership) created a goods and services tax (GST) liability of $127 million. The receivers paid the GST to the Commissioner and sought a Court order to return the funds. The Commissioner was unsuccessful in having the claim struck out.

Impact of decision

This decision has limited tax-technical implications, but is of interest for its analysis of section 95 of the Personal Property Securities Act 1999 (PPSA) and of the law regarding mistaken payments. The decision is being appealed by the Commissioner.

Facts

The plaintiffs in this case are:

• two companies, and the receivers of those companies, which were the partners in the Central North Island Forestry Partnership (CNIFP)
• the secured creditors of the CNIFP.

The partner companies were each placed in receivership by a secured creditor. The CNIFP itself was not in receivership.

The CNIFP sold a forest for US$621 million, plus GST of approximately NZ$127 million. There were insufficient funds to repay secured lenders as well as the GST on the sale, which resulted in a dispute as to the priority of the GST amount. The receivers paid the GST to the Commissioner and commenced proceedings to claim the funds back. The plaintiffs sought:

• an order that the receivers were not liable to pay the GST
• the return of the funds as money paid under a mistake of law (a restitutionary claim).

The Commissioner applied to strike out the claim, on the grounds that the:

• receivers were liable to pay the GST amount
• Commissioner is nevertheless entitled to retain the funds under section 95 of the PPSA
• Commissioner provided good consideration for the funds
• companies and the receivers did not have standing to bring the proceedings.

Decision

The receivers were not liable to pay the GST; the liability was that of the partnership [32]-[48].

• The sale of the assets was not a taxable activity of the partners; it was part of the taxable activity of the partnership. The partners (in being members of the partnership) were not conducting any taxable activity:

... Section 58(1A) imposes upon a specified person liability only in respect of the taxable activities of the incapacitated person concerned [ie the partner companies], and not in respect of the taxable activities of some other person registered in respect of those activities [ie the partnership] [41].

• His Honour held at [42] that while the partners were jointly and severally liable for the GST liability of the partnership under section 57(3), that liability:

is not dependent upon or related to the carrying on by partners of their own taxable activity. The subsection simply imposes statutory liability for the GST responsibilities of another (registered) entity.

• The receivers of companies that are partners in a partnership are not members of the partnership:

Although the definition of "member" in section 2(1) is not a closed definition, the Court would not, in my view, be justified in extending it to a receiver, given that the legislature has seen fit to specify four categories of legal person who come within that definition [44].

Section 95 of the PPSA applied, but did not operate to prevent in personam claims such as a claim for money had and received [49]-[73].

• The payment was a debtor-initiated payment, notwithstanding it was paid under compulsion or pressure as a result of exposure to interest and penalties:

... There is nothing in the language or purpose of s 95 which requires that a gloss be placed on the meaning of the term "debtor-initiated payment". There can be no question here but that the payment was initiated by or on behalf of the debtor in the sense that a conscious decision was taken by the receivers to forward a cheque to the Commissioner for the amount of the GST liability. The fact that they did so because they believed that they were or might be personally liable for the amount of the GST concerned could not justify the conclusion that the payment was other than debtor-initiated. Although the payment was made for motives associated with the sanctions for late payment imposed by the relevant statutory regime, it could not be said that the payment thereby lost its debtor-initiated status [72].

• Section 95 of the PPSA did not prevent the plaintiffs claiming restitution on the ground of mistaken payment. His Honour noted at [60] that nothing in the section or Act shows a legislative intention to exclude overarching legal principles, and went on to state at [64]:

While I accept that section 95 protects a creditor from a proprietary claim to a negotiable instrument falling within the section, as against the holder of a relevant security interest, a claim in personam does not conflict with the creditor's rights in a negotiable instrument.

At [107]-[122]:

• While the liability was the CNIFPs, and the CNIFP made the payment, the CNIFP understood the receivers to be liable for the debt and made the payment to avoid that liability. The payment would not have been made but for that mistaken belief [103]-[104], [117], [120]-[122].
• There may have been some doubt on behalf of the receivers as to the correct position (as opposed to a fully fledged mistaken belief). His Honour noted there is authority that says mere doubt does not amount to a mistake, but there is also authority holding that doubt is not necessarily sufficient to rule out an argument based on mistake. His Honour stated at [119]:

I do think that the fact that the plaintiffs had doubts as to whether the receivers were personally liable for the GST payment is determinative of the question of whether they are acting under a mistake.

The Commissioner provided good consideration, but may not have acted in good faith. His Honour decided that, due to the novel nature of the fact scenario, and that this is a developing area of the law, that this question should only be addressed after hearing fuller evidence and submissions, and it was not appropriate to determine it at the strike-out stage [123]-[140].

• His Honour found on the facts that the CNIFP made the payment to discharge its GST liability, and that the discharge of the liability constituted good consideration by the Commissioner [125].
• His Honour noted that the receivers had little choice but to take the course that they did, in paying the disputed amount and then commencing proceedings. His Honour stated at [137]:

... Although the Commissioner did not acknowledge any mistake, he was on notice by the time of receipt that the plaintiffs challenged the validity of the payment. There is an argument to make that in those circumstances, the Commissioner did not receive the payment bona fide for the purposes of the provision.

• His Honour went on to note at [138]:

The law relating to recovery of payments made under a mistake (and particularly under a mistake of law) is still evolving. Goff and Jones observe that questions about the scope of the defence of good consideration have not been definitively answered. Those questions include the good faith requirement. I recognise that questions of law will ordinarily be determined on a strike-out application even where difficult and troublesome but in my opinion, this unusual combination of factual and legal issues is best resolved at trial and not on the present application.

The circumstances are not sufficiently clear to say that the plaintiffs do not have standing to bring the proceedings [141]-[144].