Commissioner's statutory demands upheld
2013 case note – CIR's statutory demands upheld - substantial dispute, abuse of process, liquidation.
The companies challenged the statutory demands issued by the Commissioner of Inland Revenue ("the Commissioner") on the grounds that there was a substantial dispute whether or not the debts were owing or due and that the demands ought to have been set aside as an abuse of process. The Court upheld the statutory demand and ordered that the companies pay the amount demanded within 10 working days.
Impact of decision
If Accent Management Limited ("Accent") and Lexington Resources Limited ("Lexington") fail to pay the amount demanded within 10 working days of the judgment the Commissioner may apply to liquidate both companies.
Accent and Lexington were both issued with statutory demands on 18 April 2013 by the Commissioner. Accent and Lexington are both parties associated with the Trinity scheme and had their tax liability confirmed by the Supreme Court in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  NZSC 115,  2 NZLR 289 ("Ben Nevis").
In the statutory demands, the Commissioner demanded payment of $3,250,265.74 from Accent for amounts owing under the 1998 tax year and $2,115,309.48 from Lexington for amounts owing under the 1997 tax year.
Both Accent and Lexington applied to set aside the statutory demands on the grounds that:
- there was a substantial dispute whether or not the debts were owing or due relying on section 290(4)(a) of the Companies Act 1993 ("Companies Act"); and
- the demands ought to have been set aside on other grounds, in that in the circumstances of the case, serving the statutory demands was an abuse of process (this ground relied on section 290(4)(c) of the Companies Act).
The applicants sought orders declaring that the document purporting to be a statutory demand was not a statutory demand or, in the alternative, setting aside the statutory demand.
The Court ordered that Accent and Lexington pay the amount demanded within 10 working days of the judgment and, should a default in payment be made, the defendant may make an application to put Accent and Lexington into liquidation.
Grounds for setting aside statutory demands
Under section 290(4)(a) of the Companies Act, the High Court may set aside a statutory demand if there is substantial dispute whether or not the debt is owing or due. Faire AJ stated that for the Court to determine this, the applicant must show a fairly arguable basis upon which it is not liable for the amount claimed (as approved in United Homes (1998) Ltd v Workman  3 NZLR 447 (CA), at 451–452).
The Court may also set aside a statutory demand if it is satisfied that the demand ought to be set aside on other grounds (Companies Act, section 290(4)(c)). To do this, the Court must determine whether the creditor's prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue (Commissioner of Inland Revenue v Chester Trustee Services Limited  1 NZLR (CA) 395, at ). A company may not allege solvency as a ground for setting aside a statutory demand. A company cannot avoid paying a debt, merely by proving that it is able to pay the debt (AMC Construction Ltd v Frews Contracting Ltd  NZCA 389, (2008) 19 PRNZ 13, at ).
Commissioner's authority to issue statutory demands
Faire AJ rejected the plaintiffs' submission that the Commissioner was not authorised to issue a statutory demand on behalf of the Crown. His honour found that the Commissioner is the creditor in respect of a taxpayer who has not paid his or her tax. In the matter of taxes, the Commissioner is the statutory agent of the Crown (Cates v Commissioner of Inland Revenue  1 NZLR 530 (CA), (1982) 5 NZTC 61,237).
Further, the issuing of a statutory demand is one of the steps necessary to bring a suit against a company and within the Commissioner's authority (Tax Administration Act 1994, section 156).
Faire AJ found that there is no longer any substantial dispute in respect of the tax assessments because the assessments were upheld by the Supreme Court in Ben Nevis. Further, an additional part of the debt related to a sealed cost order which cannot be disputed.
The plaintiffs asserted that an active appeal against a decision of Priestley J, dismissing their claim that the original High Court Ben Nevis decision was a "nullity" (Accent Management Ltd v Attorney-General  NZHC 1447, (20113) 26 NZTC 21-020), meant there was still a substantial dispute in respect of the tax assessments. This argument was rejected by Faire AJ who found that Priestley J's decision stands until it is successfully appealed.
A question was raised on the issue of the quantum of the statutory demand. The Court was asked to determine whether or not a GST credit available to Accent could be off-set against Accent's income, in reliance on the Goods and Services Tax Act 1985, section 46(6). In an affidavit for the Commissioner it was asserted that the credits could be transferred to the 1994 year, where there is a substantial debt for unpaid taxes owing. This was accepted by AJ Faire.
Companies Act 1993, Tax Administration Act 1994, Goods and Services Tax Act 1985