Debtor-initiated payments

Summary

The Court of Appeal considered the issues of debtor-initiated payments under section 95 of the Personal Property Securities Act 1999 ("PPSA") and how such payments effected priorities and claims in restitution for payments made by mistake. The Court of Appeal found that not only had the Commissioner of Inland Revenue ("the Commissioner") provided good consideration, but he had also acted in good faith in receiving payment of goods and services tax ("GST") from the receivers. The Court of Appeal dismissed the Appellants' appeal.

Impact of decision

This decision, although significant in terms of quantum has limited tax technical implications. However, the decision is very significant for its analysis of section 95 of the PPSA dealing with debtor-initiated payments and how it relates to the law of restitution regarding mistaken payments.

Facts

The respondents in this case are:

• two companies, who were partners in the Central North Island Forestry Partnership ("CNIFP") and the receivers of those companies
• 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 respondents 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 in the High Court.¹ The Court found in favour of the respondents. The Commissioner subsequently appealed the High Court's decision to decline to strike out the respondents' claim to the Court of Appeal.

The issues for the Appeal were:

1. whether the receivers were liable for the GST
2. whether section 95 of the PPSA operates so as to confer priority to the Commissioner over any claim the respondents have to the GST
3. whether the respondents could recover the GST from the Commissioner on the basis it was paid under a mistake of law namely that the receivers were personally liable to pay the GST.

Decision

The Court of Appeal affirmed the decision made by the High Court that the receivers were not liable to pay the GST; the liability was that of the partnership.

The Court of Appeal was not persuaded by the Commissioner's argument that the combined relevant purposes of sections 57 and 58 of the Goods and Services Tax Act 1985 ("GST Act") are to achieve efficiency and to ensure that a receiver pays the registered person's GST liabilities during a receivership.

• We are not persuaded that this interpretation is available to the Commissioner and agree with Mr Simcock's submissions on this issue. First, this interpretation would require the notional insertion of words in s 58 which are not there. Secondly, and more importantly, this approach would directly contradict s 57(2)(a) which provides that partners shall not be registered persons. The Commissioner's approach would mean that partners in a partnership were effectively made registered persons in respect of the partnership's taxable activities whenever the partners went into receivership, despite the clear wording of s 57(2)(a). Thirdly, such an interpretation is not "required" because the Commissioner has a secondary right of recovery against the members of the partnership by virtue of s 57(3) and (5). [24]

The Court of Appeal held that the GST Act contemplates that primary liability for the payment of GST falls on the unincorporated body as the registered person. Secondary liability under subsections 57(3) and (5) falls only upon the members of that body:

• The section does not, for example, provide that directors or executives of a company which is a member of a partnership might become liable for GST because they somehow participate in the taxable activities of the partnership. Secondly, the GST Act provides that receivers only become personally liable to pay GST in the carefully defined circumstances of s 58, which we have found do not apply here.

The Court of Appeal held that the receivers were not carrying on the taxable activities of the partnership:

• Thirdly, although the receivers manage the partner companies and, through them, the affairs of the partnership, it does not follow that they are deemed for the purposes of the GST Act to be carrying on the taxable activities of the partnership. The partnership (CNIFP) continues to conduct its own activity for GST purposes and, as such, is primarily liable for the payment of GST. [27]

The Court of Appeal agreed with the High Court that the payment of GST by the receivers to the Commissioner was a debtor-initiated payment within the meaning of section 95 of the PPSA on the footing that the receivers, as agents for the two partners (and through them the CNIFP), initiated payment to the Commissioner:

• ... Importantly too, the payment was made from funds belonging to the CNIFP and with the express consent of the BNZ on behalf of the senior secured creditors. There is no question that the CNIFP owed the GST sum to the Commissioner whether or not the receivers may have believed they were also personally liable for payment of this sum. [67]

Whether the security interests had crystallised and whether the payment was made in the ordinary course of business were not relevant to the operation of section 95. 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]

The Court also considered it was a factor that the members of the partnership, the receivers and the BNZ as the security trustee for the senior secured creditors all agreed that GST should be paid from the sale proceeds and authorised the receivers to proceed accordingly. The Court also noted that:

• We add that the receivers no doubt required the purchaser to pay GST on the purchase price so they would have the necessary funds to discharge the GST liability to the Commissioner. At the time the payment was made, it was never contemplated that the secured creditors would receive the windfall benefit of the GST collected on the sale of the partnership assets.

The Court of Appeal did not accept the respondents' submission that the issue of whether this was a debtor-initiated payment should have been left for trial rather than being dealt with on a strike-out application.

• ... This was a straightforward issue capable of ready determination as a matter of law on the undisputed facts before the Court. Counsel did not elaborate on what further factual material might have been relevant. [71]

The Court of Appeal concluded that the Commissioner was prima facie entitled to priority over the secured creditors in relation to the GST payment subject to the possibility of in personam claims.

The Court of Appeal found that not only had the Commissioner provided good consideration, but that he had also acted in good faith in receiving payment of the GST from the receivers. The Court rejected an argument by the receivers that the CNIPF (through its member companies) had no authority to make the GST payment as the payment was made with the express authority of the BNZ as the security trustee for the secured creditors and, more importantly, section 95 of the PPSA recognises that a debtor is entitled to make a payment to a creditor notwithstanding the existence of a security interest over the assets from which payment is made.

The Court of Appeal confirmed the approach of the High Court that defences to a restitutionary remedy may include the giving of good consideration by the payee or alteration of position by the payee and concluded that:

• It is unnecessary for us to enter further into this debate other than to note that the giving of good consideration has been accepted as a proper ground upon which a court may determine that the defendant has not been unjustly enriched. This follows on the simple footing that, if the defendant is entitled to the money, then it cannot be said to be unjust, or against conscience, to require repayment. [94]

The Court found that there was no suggestion that the Commissioner knew of the receiver's mistaken belief that they were personally liable to pay GST. The issue was whether mere notice of an adverse claim is sufficient to demonstrate an absence of good faith on the part of the Commissioner. The Court considered that the current authorities and academic commentary were of no real benefit because they had no direct relevance to where the defence is that the Commissioner gave good consideration for the payment. Accordingly the Court found:

• All the Commissioner has done in the present case is to receive the GST payment in the belief that it was properly due, a view which was shared at the time by the receivers and their advisers. Although the Commissioner was advised prior to the making of the payment that the secured creditors claimed to be entitled to the money, there is no suggestion that the Commissioner doubted his entitlement or had reason to believe there was a likelihood he would have to repay the money. Indeed, he rejected the Notice of Proposed Adjustment later issued by the receivers under the Tax Administration Act and has consistently maintained the view that he is entitled to the payment. [105]

The Court of Appeal also made a further point, not addressed by counsel, that it may be inappropriate to engraft good faith requirements upon the statutory regime under the Tax Administration Act 1994 for the resolution of disputes of this kind. The Court explained that:

• When the Commissioner receives a payment of GST he does so with the knowledge that any dispute over liability to pay the GST is subject to the dispute resolution processes under that Act. Absent dishonesty or some other wrongdoing, no question of bad faith arises.

¹ Stiassny v Commissioner of Inland Revenue HC Auckland CIV-2008-404-549, 4 November 2010.