Court of Appeal confirms High Court decision

Summary

The Court of Appeal confirmed the High Court decision that "accounts receivable" is not limited to "book debts" overturning the decision in Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) (2008) 23 NZTC 22,074 (HC) ("Northshore").

Impact of decision

The decision affirms that the Commissioner of Inland Revenue ("the Commissioner"), as preferential creditor, will have priority over a secured creditor in this context.

Facts

Takapuna Procurement Limited (in liquidation) ("Takapuna") was a property development company involved in the development of a property at Anzac Avenue, Takapuna known as "Shoalhaven". Takapuna's directors were Messrs Robert and Kelly McEwan who were adjudicated bankrupt as of 26 February 2009 and May 2009 respectively.

Strategic Finance Limited (in receivership and in liquidation) and Strategic Nominees Limited (in receivership) ("Strategic") advanced funds to Takapuna for the completion of Shoalhaven. At the date of Takapuna's liquidation, Strategic was owed in excess of $4,800,000 plus interest and costs secured by a registered General Security Agreement.

Strategic is the only remaining secured creditor of Takapuna and the Commissioner the only remaining preferential creditor in the liquidation. The dispute relates to various categories of funds totalling $782,108.18 plus accrued interest.

The funds in question held by Messrs Burns and Agnew (the liquidators) were made up as follows:

• refunds to Takapuna from the North Shore City Council ("NSCC") of development contributions ($451,176.94) and bonds ($3,000);
• a goods and services tax ("GST") refund of $169,349.86 released by the Commissioner to Takapuna in error; and
• various funds held by Takapuna's solicitors which related to earlier property developments ($158,581.38).

In the High Court, Strategic argued that the Commissioner's claim to the funds as a preferential creditor was limited to "book debts". Strategic also argued that the GST refund released in error by the Commissioner of $169,349.86 should not in any event be repaid to the Commissioner. These claims were rejected by the Court, Gendall AJ finding in favour of the Commissioner. The grounds for his decision were:

1. it would be unfair and unconscionable for the GST refund of $169,349.86 to be retained by the liquidators;
2. the expression "accounts receivable" in schedule 7, clause 2(2) of the Companies Act 1993 is not limited to book debts; and
3. the funds held by the liquidators of Takapuna were "accounts receivable" and therefore payable to the Commissioner as the only preferential creditor.

Strategic challenged each of these grounds, but advanced their appeal first through grounds (b) and (c). Ground (a) arises only if Strategic is successful in their challenge to grounds (b) and (c).

Decision

In the High Court decision, Gendall AJ concluded that the term "accounts receivable" was not limited to book debts, overturning the decision of Hole AJ in Northshore. The High Court held that the Companies Act 1993 expressly adopts section 16 of the Personal Property Securities Act 1999 definition of "accounts receivable". If Parliament had intended to limit "accounts receivable" to "book debts", it would have done so expressly.

The Court of Appeal accepted the interpretation of the High Court. They held that the definition included, but was not limited to, debts or "book debts". It would also include other legally enforceable rights under deeds, statutes and other court judgments whether or not earned by performance. They also held that money held in a bank account would be an "account receivable" because the bank will be under a legally enforceable obligation to pay the money to the account holder.

The Court of Appeal then applied the definition to the funds in this case. They held that the crucial date for determining whether the funds constituted "accounts receivable" was the date on which Takapuna was placed into liquidation.

Development contribution refunds

The NSCC had acted ultra vires in collecting development contributions from Takapuna relying on its 2004 development contributions policy (carried over into its 2006 policy). As confirmed in Woolwich Equitable Building Society v Inland Revenue Commissioners (No 2) [1993] AC 70 (HL) at [103] - [104], because the NSCC had collected funds from Takapuna unlawfully, the amount paid was repayable at the exact moment it was paid. Accordingly, the Court of Appeal held that the refunds of the development contributions constituted monetary obligations within the definition of "accounts receivable" and should be paid to the Commissioner as the remaining preferential creditor.

Engineering and constructions bonds

Bonds of $3,000 paid by Takapuna were lawfully received by the NSCC in securing the performance of resource consents. The NSCC was not satisfied that the development complied with its standards until after the liquidation of Takapuna. The Court of Appeal held that, as at the date of the liquidation, they were not a monetary obligation of the NSCC and therefore not "accounts receivable" to be collected by the Commissioner as a preferential creditor.

GST refunds

At all materials times, Takapuna had GST arrears exceeding $3,600,000. The Commissioner is entitled to offset this debt against any credits Takapuna could raise in subsequent or prior periods. Takapuna had no right to recover that refund; the GST refund was not an existing monetary obligation within the definition of "accounts receivable". However, the Commissioner could recover the mistaken refund based on restitution principles and the rule in Re Condon, ex parte James (1974) LR 9 Ch App 609 (CA).

Carter Atmore funds

The money held in the Carter Atmore (Takapuna's lawyers) trust account was determined "accounts receivable" because Carter Atmore, like a bank, is under a legally enforceable obligation to pay the money to Takapuna.