Impact of bankruptcy on ability to bring challenge proceedings
2016 case note – appeal dismissed as the disputant bankrupt, and the CIR correct to assess the appellant as agent for the purposes of the Income Tax and GST Acts.
Insolvency Act 2006, Goods and Services Tax Act 1985,Ç?¶ÿIncome Tax Act 2007
The High Court dismissed an appeal from a Taxation Review Authority ("TRA") decision, upholding the TRA's decision to dismiss a challenge proceeding on the basis that:
- The disputant, as a bankrupt, had no standing to bring the proceeding; and
- Even if the standing issue was not correct, the Commissioner of Inland Revenue ("the Commissioner") was correct to assess the appellant as agent for the purposes of s HD 15 of the Income Tax Act 2007 ("ITA") and s 61 of the Goods and Services Tax Act 1985 ("GST Act").
The decision ultimately turns on the issue of standing however the case also provides some High Court commentary on s 61 of the GST Act and s HD 15 of the ITA in its current form.
The appellant was the manager of Property Ventures Limited ("PVL"), which acted as the representative member for a number of companies that were part of a GST group of companies ("the GST Group"). FM1, FM3 and PVIL were included in the GST Group. The appellant was a director of each of FM1, FM3 and PVIL.
By April 2008 PVL and a number of its subsidiaries had substantial outstanding liabilities to creditors (including the Commissioner). PVL was also owed significant amounts by some of its subsidiaries, including FM1, FM3 and PVIL. The directors of PVL decided to sell off properties owned by FM1, FM3 and PVIL to generate funds to pay PVL's debts. To this end the appellant negotiated agreements for sale of the properties to the Christchurch City Council ("the Sale").
Back in July 2006 PVL had provided a financial guarantee to a finance company in relation to the indebtedness of the largest subsidiary in the GST Group. In July 2008 the finance company placed the subsidiary into receivership.
The directors of PVL were concerned that if the subsidiary's receiver became aware of the sale of the properties to the Council, it would take action to ensure it received the net sale proceeds and appoint receivers to all of PVL's assets.
It was decided to incorporate ILR Holdings Limited ("ILR") and for that company to acquire shares in certain subsidiaries of PVL (including FM1, FM3 and PVIL) and for ILR to acquire, by way of assignment, the intercompany debts owed by those subsidiaries to PVL.
ILR was incorporated on 1 August 2008 with the appellant as its sole director. On the same date, the Council signed sale and purchase agreements with FM1, FM3 and PVIL.
On 4 August 2008 PVL assigned intercompany debts totalling $14,932,498 to ILR. On the same day PVL transferred a number of its shares in FM1, FM3 and PVIL to ILR for nominal consideration. Also on that date, the Commissioner received separate applications from PVL (dated 31 July 2008) seeking to exclude 8 companies from the GST group, including FM1, FM3 and PVIL.
On 6 August 2008 the solicitors acting for FM1, FM3 and PVIL issued GST invoices for the sale of the properties to the Council. The sales settled on 8 August 2008. The proceeds were used to discharge registered mortgages in relation to the properties and pay costs of sale. The net proceeds were then paid to ILR.
The companies were left with no remaining funds or assets left in FM1, FM3 or PVIL to pay the GST liabilities due on 28 September 2008. When FM1, FM3 and PVIL were placed into liquidation in June 2010, their GST liabilities totalled $1,779,568. PVL was placed in liquidation the following month.
On 25 August 2009 the appellant was assessed as agent for the companies' GST liabilities incurred in relation to the Sales. The appellant was adjudicated bankrupt in 2010 and the Commissioner filed a proof of debt in the bankruptcy. The Official Assignee ("OA") never admitted, rejected or quantified any of the claims on the basis that there were no funds available to meet any provable debts.
The appellant then brought a challenge proceeding in the TRA disputing the correctness of the GST assessments made against him personally under s 61 of the GST Act.
The TRA found against the appellant on the basis that as a bankrupt he had no standing to bring the challenge proceeding. In the event that she was wrong on that point, the TRA found the requirements of s 61 of the GST Act were met and the assessment made against the appellant as agent for the companies was therefore correct.
The appellant appealed to the High Court.
While the appellant addressed only a few of the grounds raised in the Notice of Appeal at the hearing, the Court in its decision addressed all points raised by the appellant in his Notice of Appeal and at the hearing.
Application of s 76 of the Insolvency Act 2006 ("IA")
The appellant argued that s 76 of the IA prevented the Commissioner from contesting the challenge as he contended that the challenge was in reality directed specifically to "recover a debt".
Gendall J dismissed this argument and noted that the challenge had in fact been brought by the appellant himself. A separate debt recovery proceeding would be required to enforce payment.
A debt owing but payable in the future is not a contingent debt
The Notice of Appeal raised the issue as to whether the debts were only contingent at the time the appellant was adjudicated bankrupt. The Judge upheld the TRA's finding that a debt which is subject to a challenge is not a contingent debt. His Honour found that the debt was an actual debt presently owing albeit not presently payable due to the challenge being on foot.
This finding was supported by the policy underpinning s 109 of the Tax Administration Act 1994 ("TAA") and the fact that s 138I(2)B of the TAA provides that the Commissioner may require a disputant to pay all tax in dispute that is subject to a challenge in certain circumstances.
Challenge proceeding constitutes "property" under s 101 of the IA
A further ground raised in the Notice of Appeal but which the Judge considered had not been furthered in written or oral submission was an argument that challenge proceedings are not "property" under s 101 of the IA and so does not vest in the OA on adjudication.
Gendall J supported the TRA's reasoning that the term property is defined widely and tended to the view that the TRA did not err in finding that the challenge right was property which vested in the OA. His Honour did not however find it necessary to make a final decision on that aspect given his conclusions on the other grounds of appeal.
Right to bring challenge not assigned by the OA to the appellant
The appellant also chose not to further in his submissions the listed ground of appeal on the issue of whether the OA had assigned the right to issue challenge proceedings to the appellant, or otherwise had consented to the appellant doing so.
His Honour found there was little in this ground and found the TRA was correct in concluding the appellant had no standing to commence the challenge proceedings.
The existence of an "arrangement"
Gendall J noted the appellant appeared to argue there was no arrangement either because the transfer of assets satisfied pre-existing debts or because the appellant unilaterally chose to pay ILR.
His Honour found the TRA was correct to determine there was an arrangement entered into and to reject the appellant's arguments. The Court had no doubt the steps were taken as part of an overall plan to strip the companies of funds with the effect of rendering them unable to meet their tax liabilities.
The effect of the arrangement - companies unable to meet their tax liabilities
Gendall J was left in no doubt that the inability of the companies to meet their GST debts was the end result of the arrangement and an effect irrespective of any other motives which may have existed in relation to the arrangement. The Court found the TRA was correct to find this requirement under s 61 of the GST Act was satisfied.
Reasonable conclusion that a purpose of the arrangement was to render the companies unable to meet their tax liabilities
Gendall J noted this required an objective examination. His Honour found the TRA was correct to find objectively that it was a purpose of the arrangements put in place that each company transacted so the effect would be the company in question could not meet its GST liability.
Reasonable conclusion that a director making reasonable enquiries could have anticipated the GST liabilities would, or would likely, be required to be met
Gendall J noted that again the test here is an objective one. The appellant admitted in an Agreed Statement of Facts that he was aware at the time the sale and purchase agreements were entered into that 12.5% GST was required to be added to the agreed purchase prices. The Court found that admission led to little doubt that at the time of the arrangement the appellant had presumably made reasonable enquiries and anticipated that GST liabilities arising at the time of supply of the properties under the sales to the Council would need to be met.
The Court found the appellant was unable to establish that the TRA erred in its decision and therefore dismissed the appeal, awarding the Commissioner costs on a 2B basis.