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17 Dec 2013
Appeal Status

Liquidation triggers statutory set-off; set-off not a "transaction" for the purposes of the voidable transaction provisions

2013 case note – liquidation triggered a statutory set-off, and liquidator's application for orders that the set-off was a voidable transaction were declined.

David Harlock v Commissioner of Inland Revenue [2013] NZHC 3389


At the date of liquidation, Raiz Enterprises Ltd ("the company") owed outstanding pay as you earn ("PAYE") and goods and services tax ("GST"), but was owed a refund for overpaid withholding tax. The Commissioner of Inland Revenue ("the Commissioner") set off the refund against the amount owed. The liquidator's application for orders that the set-off was a voidable transaction was declined.

Impact of decision

There are no implications arising from this judgment.


This decision relates to an application for orders under section 295 of the Companies Act 1993 ("the CA") that the set-off of an income tax refund against outstanding PAYE and GST was a "voidable transaction" for the purposes of section 292 of the CA.

The applicant, David Harlock, was the liquidator of the company. The Commissioner claimed that when the company ceased business it owed her the sum of $77,055.51 for unpaid PAYE and $179,264.27 for unpaid GST, a total of $256,319.78.

On 22 May 2013, prior to the company going into liquidation, it filed its income tax return for the 2013 year. The return gave rise to an income tax refund of $98,998.88. The company offered the refund as part of a payment proposal to pay its outstanding arrears over time.

On 28 May 2013, the Commissioner declined the payment proposal but advised the company's accountant that the refund would be set off against the arrears.

However, the refund was not transferred until 18 June 2013, after the Commissioner received legal advice about the transfer on 12 June 2013.

By then the company had been placed into voluntary liquidation (on 5 June 2013).

On 25 July 2013, the applicant issued a voidable notice. The Commissioner did not respond to the voidable notice within the statutory timeframe, or at all. Pursuant to section 294(3) of the CA, a voidable transaction is automatically set aside if a voidable notice is not responded to within the statutory timeframe.

On 25 September 2013, the applicant filed these proceedings to enforce payment of the voidable notice.


Section 292

The parties were not able to agree about the circumstances in which the Commissioner applied the refund. The applicant argued that the offer of the refund as part of the payment proposal amounted to a "request" pursuant to section RM 10(2) of the Income Tax Act 2007 ("the ITA") so the set-off was, therefore, a "transaction" between the company and the Commissioner. The Commissioner argued that the set-off was a unilateral action, which did not constitute a "transaction" as defined in the ITA.

The Court found that there was no evidence to suggest that the set-off was carried out at the request of the company, noting that the payment proposal had been declined (Harlock v Commissioner of Inland Revenue [2013] NZHC 3389, at [35]). The Court concluded that the set-off was not a voidable transaction that was caught by section 292 because it did not literally fall within the description of a transaction. That was because it took place after the end of the specified period (at [38]).

The Court also noted that section 292 referred to transactions "by the company", which suggested that the expression did not extend to unilateral actions or decisions of third parties which the company did not participate in. In addition, the definition was phrased as meaning specific categories of transactions, which did not include being subjected to a set-off under the taxation legislation (at [41]).

Further, there was persuasive authority of the Court of Appeal that a set-off is not a transaction to which section 292 applies (Commissioner of Inland Revenue v Smith [2000] 2 NZLR 147 (CA)).

The Court also rejected the applicant's submission that amounts due to be refunded under section RM 2 of the ITA were held in trust by the Commissioner pending payment (at [51]).

The Court later went on to consider whether the operation of section 294 of the CA (which automatically voids a transaction if a voidable notice is not responded to within the statutory timeframe) prevented the Commissioner from arguing that the set-off was not a "transaction".

The Court found that the giving of a notice under section 294 was not sufficient to deem what would otherwise not be a "transaction" under section 292, to be such (at [72]). Therefore, section 294 did not prevent the Commissioner from arguing that the set-off was not a transaction.

Section 310

The Court suggested that the liquidation of the company triggered the operability of section 310 of the CA as the statutory authority for the set-off, rather than section RM 10 of the ITA (at [62]). The Court observed that the Commissioner is subject to the provisions of the CA just as any other individual is (at [63]).

Noting that section 310 takes effect upon the liquidation of a company, the Court stated (at [68]):

  • Therefore it was the statutory and automatic netting that took effect with the commencement of liquidation on 5 June 2013 rather than the account that the respondent stated on 18 June 2013 which was of crucial effect. That conclusion must mean that any entitlement that the Commissioner had to the $99,000 approximately was not referable to a transaction which breached section 292 CA …

Requirement of a preference

Given the conclusion above that the set-off was not a "transaction" within section 292 of the CA, the Court was not required to determine this issue. However, it noted that a "reasonably complex calculation" would need to have been carried out to determine the matter (at [76]).

Companies Act 1993, Income Tax Act 2007