Issued
2017
Decision
31 Mar 2017
Appeal Status
Not appealed

Court of Appeal finds High Court has no jurisdiction to approve a payment proposal under s 29(1)(b)(iii) of the Insolvency Act 2006

2017 case note - Court of Appeal finds the High Court has no jurisdiction to approve a payment proposal under the Insolvency Act 2006.

Case
Commissioner of Inland Revenue v Wilson [2017] NZCA 100
Legal terms
Payment proposal, inherent jurisdiction, s 29(1)(b)(iii), Insolvency Act 2006

Summary

The Court of Appeal allowed the Commissioner of Inland Revenue's ("Commissioner") appeal, finding that the High Court has no jurisdiction, neither inherent nor express under s 29(1)(iii) of the Insolvency Act 2006 ("the Act") to approve a payment proposal in the context of an application by a judgment debtor to set aside a bankruptcy notice.

Facts

The Commissioner appealed a decision given in the Rotorua High Court, per Christiansen AJ, approving a proposal by Mr Wilson ("the respondent") to pay a debt he owed to the Commissioner (Wilson v Commissioner of  Inland Revenue  [2016] NZHC 87). The Court of Appeal noted that the Commissioner's appeal raised issues of general importance. The respondent cross-appealed the Associate Judge's order for costs to lie as they fall. The respondent claimed that as his application had succeeded, the Associate Judge should have awarded him costs.

On 17 June 2015, prior to the High Court proceeding, the Commissioner obtained a judgment of $137,353.10 against the respondent for unpaid goods and services tax. On 5 November 2015, the Commissioner served a bankruptcy notice on the respondent in relation to the judgment debt.

The respondent then made a payment proposal to the Commissioner. The Commissioner declined that payment proposal initially on 25 November 2015, and by letter dated 8 December 2015.

On 17 November 2015, after making his payment proposal to the Commissioner, but before the Commissioner had responded to it, the respondent applied to the High Court for orders approving the proposal and setting aside the bankruptcy notice. On 21 December 2015, the respondent asked the Commissioner to reconsider his payment proposal. The Commissioner did so, but on 3 February 2016 again declined the proposal.

The High Court heard the respondent's application, and on 22 April 2016, delivered judgment in favour of the respondent. Following delivery of the High Court judgment, the respondent also applied to the District Court, unsuccessfully, to set aside the judgment debt on which the Commissioner based her bankruptcy notice (Commissioner of Inland Revenue v Wilson  [2016] NZDC 2012).

Decision

The Court of Appeal noted that, given the Associate Judge had invoked its inherent jurisdiction in approving the respondent's payment proposal; the Commissioner's submissions had focused on the High Court's inherent jurisdiction and had advanced a detailed argument as to why it was not available.

The Court then noted that the respondent had submitted in his written submissions that the High Court had properly exercised its inherent jurisdiction. However, in his oral argument, the respondent changed direction; his primary submission being that s 29 of the Act gave the Associate Judge an express statutory power to approve the respondent's payment proposal.

The statutory provisions – s 29(1)(b)(iii) and part 5 subpart 2 of the Insolvency Act 2006

The respondent submitted that s 29(1)(b)(iii) of the Act gave the Court an express statutory power to approve a payment proposal (whether or not the creditor accepted the proposal). The Court of Appeal did not agree with this argument, stating that it did not accord with the interpretation of s 29 required by s 5 of the Interpretation Act 1999.

The Court of Appeal found that the purpose of s 29 was to set out the requirements for a valid bankruptcy notice. The Court noted that per s 29 the notice must set out the options available to a debtor to avoid bankruptcy (one being set out in s 29(1)(b)(iii) - to compromise the debt).

The Court also held that the purpose of s 29 was not to confer on the High Court a power to approve a compromise, noting that its purpose was confirmed by the context of s 29 and its position in the Act. The Court found s 29 to be merely a process provision. Further, the Court said that the limited purpose and meaning of s 29 was reinforced by the scheme of the Act, stating that the ability of a debtor to make a payment proposal, and the requirements for such a proposal, were dealt with in Subpart 2 of Part 5.

The Court of Appeal then considered the appropriate meaning to be given to s 29(1)(b)(iii), which provides "[t]he bankruptcy notice must … require the debtor … to compromise the amount owing on terms that satisfy the Court or the creditor."

The Court agreed with the Commissioner's submission that "Court" in s 29(1)(b)(iii) should be construed as referring to the Court in its role in approving proposals under Subpart 2 of Part 5, and "creditor" as unrelated to that regime. The Court found support for the Commissioner's interpretation in the prescribed form of the Bankruptcy Notice and in principles of statutory interpretation, noting that the features of Subpart 2 Part 5 achieved results that were sensible, just and workable.

The respondent was constrained to accept that the power in s 29(1)(b)(iii) would not work in circumstances where a debtor had multiple creditors, and sought the Court's approval of a compromise with only the creditor who had served the bankruptcy notice. The Court of Appeal therefore surmised that the respondent was contending for an interpretation of s 29 that would not produce a sensible, just, and workable result.

The Court of Appeal held that the words in s 29(1)(b)(iii) do not confer on the Court the power to approve a compromise and instead the power resided in s 333 of Subpart 2 Part 5.

The statutory provisions – ss 177 to 177B of the Tax Administration Act 1994

The Court of Appeal also significantly held that, where the debtor is a taxpayer seeking to compromise a debt owed to the Commissioner, the debtor must do so by applying for financial relief in terms of ss 177 to 177B of the Tax Administration Act 1994 ("TAA"). The Court listed the following, as reasons for its finding:

  1. Unique considerations restrain the Commissioner when deciding whether to accept an instalment arrangement, such as, maximising the recovery of outstanding tax, and the proscription on the Commissioner from entering into an instalment arrangement which would place the taxpayer (if a natural person) into serious hardship.
  2. The Commissioner may decline to enter into an instalment arrangement in circumstances set out in s 177B(2) of the TAA, which cannot be reconciled with the creditor voting provisions in s 331 of the Act.
  3. The ability of the Commissioner to cancel an instalment arrangement in the circumstances set out in s 177B(6), again cannot be reconciled with Subpart 2 Part 5, where if creditors vote to accept the payments proposal and the Court approves it, it is binding on all creditors.
  4. A broad application of the maxim that general provisions must yield to specific provisions.

The respondent submitted that the relevant provisions of the TAA were no longer available to the Commissioner once she had obtained judgment in court. He maintained that a "taxpayer" as defined in s 3 of the TAA ceases to be a taxpayer once that person becomes a judgment debtor. The Court of Appeal rejected this argument and stated that entry of judgment against the respondent did not discharge him from his tax obligations, whether accrued or future.

Section 37 discretion exercisable at the ‘s 29 stage'

Section 37 of the Act sets out the circumstances in which the Court may, in its discretion, refuse to adjudicate a debtor bankrupt when hearing a creditor's application. The respondent contended that the Court could exercise this discretion earlier, when considering whether to approve a payment proposal by a debtor served with a bankruptcy notice.

The Court of Appeal rejected this argument on a number of grounds. Firstly, on the basis that they had held firmly against the submission that s 29(1)(b)(iii) gave the Court power to approve a payment proposal. Secondly, s 333 of the Act (a provision in Subpart 2 Part 5) contained detailed provisions as to the Court's approval of a payment proposal. Lastly, on the ground that it "mauls" the language of s 37 to suggest that the discretion applies earlier in the bankruptcy process.

Commissioner bound by concession as to jurisdiction

The Court also rejected the respondent's final argument, that the Commissioner was bound by her purported concession before the Associate Judge "that the Court has an inherent jurisdiction to entertain … a payment proposal when considering an application to set aside a bankruptcy notice".

The Court of Appeal did not consider that the Court has an inherent jurisdiction to approve a payment proposal by a debtor, when the creditor or creditors have rejected the proposal. The Court found that such an inherent jurisdiction would cut right across the proposals regime in Subpart 2 Part 5 of the Act. The Court also noted that a party or parties cannot, by consent or by concession, vest in a Court a jurisdiction which it does not have.

The Court agreed with the Commissioner that if the respondent wished to challenge the Commissioner's decision to reject his payment proposal, his remedy was to apply for judicial review of the Commissioner's decision.

The Court of Appeal also explicitly overruled the decision FM Custodians (FM Custodians Ltd v McNally [2013] NZHC 34),(which had been relied upon by Christiansen AJ in the High Court judgment) in so far as it held s 29(1)(b)(iii) gave the Court the power to approve a payment proposal.

Cross-appeal

The Court of Appeal provided that, given their finding that the High Court lacked the jurisdiction to approve the respondent's payment proposal, the cross-appeal against the Associate Judge's costs order went away. 

Result

The Court of Appeal allowed the Commissioner's appeal and dismissed the cross-appeal of the respondent.

Insolvency Act 2006, ss 29, 37 and Part 5 Subpart 2 Tax Administration Act 1994, ss 176, 177, 177A and 177B