Application to set aside bankruptcy notice declined
2015 case note – High Court declined application - proposal, bankruptcy notice, just and equitable, public interest, integrity of the tax system.
The High Court declined Mr Russell's application for approval of payment terms of $1,000 per week. Accordingly, the High Court declined to set aside the bankruptcy notice issued to Mr Russell by the Commissioner of Inland Revenue ("the Commissioner").
Impact of decision
The duty to maximise the recovery of outstanding tax does not mean the Commissioner is required to accept any repayment proposal made to her. Preserving the integrity of the tax system and promoting compliance by other taxpayers are engaged when considering whether to set aside a bankruptcy notice.
Mr Russell owes the Commissioner, his sole creditor, a debt of over $400 million as a result of tax liabilities, penalties and interest accrued over a period of years.
Mr Russell applied to the High Court to exercise its discretion and approve his proposal in respect of his judgment debt and to set aside a bankruptcy notice issued by the Commissioner in respect of his proposed bankruptcy.
Mr Russell's proposal was:
- to pay the Commissioner $1,000 per week for the rest of his life; and
- to permit the Commissioner to prove in his deceased estate for the remainder of any debt claimed to be owing to her at the time of his death.
Mr Russell had previously made a proposal to the Commissioner on terms substantively similar to the current proposal that was refused and Mr Russell was not successful in his subsequent application to have the refusal judicially reviewed.
The Commissioner opposed the proposal on the basis that she not only has a duty to maximise the recovery of outstanding tax but also to preserve the integrity of the tax system, including promoting taxpayer compliance.
The Court acknowledged that in reality Mr Russell's proposal is concerned with a disguised write-off of a massive debt owed to the Commissioner, which he openly acknowledges neither he nor his estate can pay.
Mr Russell's application was made on a somewhat confused basis. Initially he purported to rely on s 29(1)(b)(iii) of the Insolvency Act 2006, contending that the subsection required the Commissioner to accept an adequate compromise if one were made. At the hearing it became clear that Mr Russell's argument was that he was unable to pay the debt, he had made an informal proposal for a modest part-payment and that should be sufficient justification for the Court to exercise its discretion so as to pre-empt Mr Russell being adjudicated bankrupt.
The Court does have an inherent jurisdiction to set aside bankruptcy notices but this is aimed at preventing serious abuses of processes arising from procedural defects. No allegation made in this case could found an application under that inherent jurisdiction.
Associate Judge Sargisson identified issues of res judicata and issue estoppel as the present application traversed almost exactly the same ground as the judicial review proceedings. If the High Court here were to reach a conclusion that would allow Mr Russell to impose his proposal on the Commissioner, it would amount to a collateral attack on the High Court and Court of Appeal judgments in the judicial review.
Mr Russell also contended that the Court should consider how the debt came about, that it was attributed to him as a debt he was responsible for despite actually being incurred by various companies and this was a factor that weighed against allowing the bankruptcy to proceed. Associate Judge Sargisson found that to do so would be a collateral attack on decisions of the Taxation Review Authority, High Court, Court of Appeal, as well as possibly the Supreme Court and she cannot, and will not, differ from the Courts' previous conclusions on the legitimacy of the debt.
In response to Mr Russell's argument that bankruptcy would not be a just and equitable outcome, Associate Judge Sargisson found his arguments unconvincing. Though the Commissioner has a duty to recover as much tax as possible, that does not mean accepting any proposal made to her. The goals of preserving the integrity of the tax system and promoting compliance by other taxpayers are reasonable ones. The Court agreed with the Commissioner that in the present situation where Mr Russell has knowingly engaged in large-scale tax avoidance over a period of years and wasted large amounts of public money on unmeritorious challenges, the broader public interest considerations are clearly not to set aside the bankruptcy notice.
The Court noted how the core tax debt was a very small proportion of the total debt, but the situation was one of Mr Russell's own making created by his failure to recognise the core debt and either pay it or reach a compromise with Inland Revenue at an early stage.
Mr Russell's "informal" proposal was demonstrably not a ground for setting aside the bankruptcy notice. Associate Judge Sargisson dismissed the application, declined to set aside the bankruptcy notice issued by the Commissioner and held that the Commissioner may proceed with filing an application for adjudication.
Insolvency Act 2006