Outstanding proceedings not a "substantial dispute" for the purpose of setting aside a statutory demand where there are finalised tax challenges

Summary

The Judgment dismissed an application by Trinity investors to set aside statutory demands based on assessments confirmed by the Supreme Court. The application relied on another proceeding seeking to dispute the validity of the Court's previous decisions in relation to the Trinity scheme.

The Judge declined to make an order for immediate liquidation but required full payment in 10 working days, failing which liquidation can be applied for.

Costs were awarded to the Commissioner of Inland Revenue.

Impact of decision

There is no substantial dispute for the purposes of section 291 of the Companies Act 1993 where an assessment, which has been challenged and confirmed, might be set aside in some future appeal.

Facts

The Judgment relates to applications made by Bristol Forestry Venture Limited ("Bristol") and Ben Nevis Forestry Ventures Limited ("Ben Nevis"), ("the plaintiffs") to set aside statutory demands.

The plaintiffs were involved in the Trinity tax avoidance arrangement and the statutory demands relate to their 1998 assessments, which were ultimately confirmed by the Supreme Court in Ben Nevis Forestry Ventures Ltd & Ors v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.

The plaintiffs' application seeks to have the statutory demands set aside or (in the alternative) an order declaring that the documents are not statutory demands. The application relies primarily on another proceeding which seeks to dispute the validity of the Court's previous decisions in relation to the Trinity scheme (Ben Nevis Forestry Ventures Limited & Bristol Forestry Venture Limited & Bradbury & Peebles v Commissioner of Inland Revenue [2013] NZHC 2361; this decision was reserved at the date of hearing).

Decision

Associate Judge Faire dismissed the application to set aside the statutory demands. Having reached that conclusion, the Judge considered that the appropriate course in this case is not to order the immediate liquidation of the companies but, rather, to make an order in terms of section 291(1)(a) of the Companies Act 1993. Accordingly, the Judge ordered that both plaintiffs pay the sums due under the statutory demands within 10 working days, failing which the Commissioner may apply to put the plaintiffs into liquidation.

Substantial dispute

The Court was required to determine whether there was a substantial dispute as to whether or not the debt is owing or is due. It was for the plaintiffs to show a fairly arguable basis upon which they are not liable for the amounts claimed.

In considering whether the ongoing proceeding (which disputes the validity of previous decisions in relation to the Trinity scheme) is a substantial dispute as to whether or not the debt is owing or is due, the Court held (at [39]):

• The challenge judgments, unless declared invalid, bring to an end any right to question liability to pay the shortfall penalties and interest by the operation of section 109 of the Tax Administration Act 1994. The result is that, as the position currently stands, the debt is not a contingent or prospective debt. It is a debt which is currently due.

The Judge also stated:

• [41] Unless a judgment is stayed, there cannot be a substantial dispute over the debt it establishes. The possibility that a present existing and enforceable debt might be set aside in the future under a subsequent appeal does not give rise to a general dispute about the existence of the debt.
  [42] Accordingly, I conclude that the first ground advanced by the plaintiffs in reliance on section 290(4)(a) of the Companies Act 1993 fails. The ancillary ground related to it, namely that the debt is not yet due, fails for the same reason. The challenge process has been completed. Section 109 of the Tax Administration Act 1994 applies. There is, therefore, a debt that satisfies the definition of a statutory demand as prescribed by section 289 of the Companies Act 1993.

Serving the statutory demands was an abuse of process and they could be set aside on other grounds

The Court considered whether or not the demands ought to be set aside on other grounds under section 290(4)(c) of the Companies Act 1993. Associate Judge Faire held (at [48]):

• I cannot, in this case, find any specific factor - whether it is policy, a matter of principle or the justice of this case - that would justify the application of section 290(4)(c) of the Companies Act 1993 in respect of the application. The defendant was entitled to issue a statutory demand in reliance on judgment which brought to an end the challenge process and which, as a consequence of section 109 of the Tax Administration Act 1994, prevents the position being disputed in a court, or in any proceedings "on any ground whatsoever".

The statutory demands were not capable of being statutory demands

The Judge recorded that the plaintiffs relied on other matters and that this ground had been pleaded simply to emphasise the plaintiffs' proposition that any debt owed to the Commissioner was not yet due, and therefore a demand for it did not satisfy the requirements of section 290(4)(a). The Judge considered that this submission was encompassed in the other grounds.

What is the appropriate order?

Having reached the conclusion that the statutory demands should not be set aside, the Court considered whether to make an order under section 291(1)(a) or 291(1)(b) of the Companies Act 1993. The Commissioner invited the Court to place the companies into immediate liquidation under section 291(1)(b).

The Court reviewed the authorities and considered that the general rule is that a winding-up order will not be made on a petition founded on a debt which was genuinely disputed. When the Court makes an immediate order for liquidation under section 291(1)(b), it bypasses the normal procedures of a liquidation application. There is no advertising and no opportunity is given to shareholders or other creditors to be heard about whether a liquidation order should be made or not. The scope for an inquiry to exercise discretion under section 241 is limited. Even though a presumption of inability to pay debts under section 287(a) may not be established, the company will be treated as unable to pay its debts. This means before taking the "short-cut route" under section 291(1)(b) there must be clear evidence the company is insolvent.

The Court further noted a number of factors for not placing the plaintiffs into immediate liquidation, namely:

1. the indebtedness to the Commissioner could well be satisfied by the shareholders and no evidence was before the Court as to the shareholders' ability to adopt this course;
2. no advance warning of the immediate liquidation application was given to the companies and perhaps the opportunity for evidence of the shareholders ability to satisfy the debt was not available;
3. the liquidation of the plaintiffs will not bring the matter to a conclusion as the shareholders can carry on with the proceedings that they have signalled;
4. it was not readily apparent that there was a need for an early appointment of a liquidator; and
5. wider considerations arise at the point that the Court must determine whether it will exercise its discretion to order a liquidation of a company than those that apply to an application to set aside a statutory demand.

The Court concluded the appropriate course of action was an order under section 291(1)(a) of the Companies Act 1993 (rather than section 291(b)(1)) ordering the plaintiffs to pay within 10 working days, failing which the Commissioner can apply to have the plaintiffs liquidated.