2012 case note – debtor-initiated payments and the law of restitution regarding mistaken payments – consideration, good faith, mistake of law.
The Supreme Court considered the issue 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 Supreme Court found that not only had the Commissioner of Inland Revenue ("the Commissioner") provided good consideration, but she had also acted in good faith in receiving payment of the goods and services tax ("GST") from the receivers. The Supreme Court 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 the analysis of section 95 of the PPSA and how it relates to the law of restitution regarding mistaken payments.
The appellants in this case were:
- two companies, and the receivers of those companies, who were the partners in the Central North Island Forestry Partnership ("CNIFP"); and
- the secured creditors of the CNIFP.
The partner companies were placed into 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. They 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 unsuccessfully applied to strike out the claim at the High Court and subsequently appealed the High Court's decision to decline to strike out the respondents' claim to the Court of Appeal. The Court of Appeal allowed the Commissioner's appeal holding that section 95 of the PPSA gave the Commissioner the priority. The Court of Appeal did however find that the receivers were not personally liable to pay the GST. The appellants were granted leave to appeal to the Supreme Court.
The Supreme Court affirmed the decision made by the High Court, and by the Court of Appeal that the receivers were not liable to pay the GST; the liability was that of the partnership.
The Commissioner's first argument advanced was that in effect section 58 of the Goods and Services Tax Act 1985 ("GST Act") should be read as if section 57 did not appear in the Act. Absent section 57, each partner would be treated as carrying on the partnership's taxable activity and would be required to register. As each partner in the CNIFP was an incapacitated person because they were each in receivership then, the receivers would then be their specified agents and must under section 58(1A) be treated as carrying on the taxable activity and so be liable to pay the GST incurred. The Supreme Court held at :
- The argument is ingenious but, like the Courts below, we do not accept it. It requires the carefully crafted and very clear directives in section 57(2) that members of an unincorporated body are not liable to be registered and that the body's taxable supplies are deemed not to be made by any member to be disregarded or, as the Court of Appeal said, contradicted; and it would require a reading of the definition of "incapacitated person" in section 58(1) as if it said "a registered person (or someone who would be required to be registered but for section 57)". It would be wrong to ignore the directives in section 57 and to put into section 58 additional words which are not obviously required by the sense of the provision.
The second and alternative argument advanced by the Commissioner was in respect of section 57(3) of the GST Act, which makes a member of an unincorporated body jointly and severally liable for all the tax payable by the body during that person's membership. A "member" is defined in section 2 as including a partner, a joint venture, a trustee, or a member of an unincorporated body. The Commissioner submitted that section 57(3) should be read as also including a receiver of a member. The Supreme Court held at :
- ... Once more, and in common with the High Court and the Court of Appeal, we decline to accept this argument. It again involves reading into the statute something which is certainly not implicit. Those expressly designated as members by the definition are all persons who would be the owners of the assets of, or a share or interest in, the unincorporated body. It is a stretch too far to treat as a member for the purposes of section 57 someone like a receiver who has no legal or beneficial entitlement to any such assets or share or interest – in this case, to the assets of the partners. And it would involve the imposition of a receiver's personal liability in circumstances where section 58, directed, inter alia, at the position of insolvency administrators, does not do so.
The Supreme Court agreed with the High Court and Court of Appeal that the payment of the 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.
The Supreme Court did not accept the appellants' argument that even if the partnership did have legal title to the proceeds of sale and made the payment of the GST, those proceeds were to be viewed as held on a bare trust for the secured creditors, and so, in equity, the payment to the Commissioner utilised their property, which they could recover. In essence, the appellants were seeking to overcome section 95 of the PPSA by arguing that if the payment was made using funds in a partnership bank account, in circumstances where at common law the partnership had only a bare legal title to the chose in action represented by the credit balance in the bank account from which the cheque was drawn, the payment was not debtor-initiated. Accordingly, it cannot be treated under section 95 of the PPSA as a payment by the debtor partnership.
The Supreme Court also did not accept the appellants' argument that the Commissioner could not rely on section 95 of the PPSA because she had actual knowledge or notice when she received the GST that the payment to her was in breach of the terms of the security interests in the proceeds of sale held by the Bank of New Zealand ("BNZ") and CNIFP and that she had not acted in accordance with the requirements of section 25 of the PPSA to exercise good faith.
The Supreme Court did accept the appellants' argument that even if section 95 of the PPSA would give the Commissioner a priority over the secured creditors, that did not prevent any of them from arguing their case as a claim for recovery of the GST as a payment made by mistake or under compulsion. Moreover, the Supreme Court accepted that the receivers had made a mistake about the law when they caused the partnership to make the GST payment, thinking that they were personally liable for the GST. However, the Supreme Court found that the partnership's claim must nevertheless fail on restitutionary principles (at ):
- The partnership did owe the Crown the amount of GST which it paid to the Commissioner. Therefore the Commissioner gave good consideration in accepting its payment in discharge of the debt.
The Supreme Court concluded that (at ):
- It has not been shown by the Commissioner at this stage of the case that the receivers were personally liable for the GST. The payment was made by the partnership. On the basis that the receivers were not personally liable, it was made because of a mistake by them. But it is not recoverable from the Crown. The claim of the partnership for recovery of a payment made by mistake or under compulsion fails because the Commissioner gave good consideration. The claim of the secured creditors fails because of section 95. The receivers have no independent claim.
Goods and Services Tax Act 1985, Personal Property Securities Act 1999