Issued
2017
Decision
28 Jul 2017
Court
NZCA
Appeal Status
Pending

Court of Appeal remits Liquidation matter back to High Court

2017 case note - Court of Appeal remits Liquidation matter back to High Court - insolvency, core debt, issue estoppel, res judicata, off-set, counterclaim.

Case
Sisson v Commissioner of Inland Revenue [2017] NZCA 326
Legal terms
Liquidation, insolvency, core debt, issue estoppel, res judicata, off-set, counterclaim

Summary

Chesterfields Preschools Ltd (“CPL”) was placed into liquidation by the High Court following the issuing of a statutory demand by the Commissioner of Inland Revenue (“the Commissioner”). CPL appealed that decision on the basis that it was not insolvent and the debt was disputed. Following a one-day hearing in the Court of Appeal, the Court allowed the appeal on the basis that the amount of “core debt” was not quantified by the High Court (Sisson v Commissioner of Inland Revenue [2017] NZCA 326). The variability in the figures relied on by the Commissioner and the unchallenged value of CPL’s assets meant that it was at least open to doubt that the Court could properly make a liquidation order.

Facts

CPL was placed into liquidation by Associate Judge Osborne in the High Court on 6 October 2015, having failed to comply with a statutory demand for $1,231,940.11 served by the Commissioner (Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2015] NZHC 2440, (2015) 27 NZTC 22-029.

Ms Sisson (a director of CPL) appealed that decision on behalf of CPL, and contended that CPL was not insolvent and that the Commissioner’s claim for unpaid tax, interest and penalties is disputed. The Commissioner responded that CPL is precluded by the doctrine of res judicata from asserting that the claim is in dispute in view of an earlier judgment of the Court of Appeal (Commissioner of Inland Revenue v Chesterfields Preschools Limited [2010] NZCA 400, (2010) 24 NZTC 24,500).

Decision

After running through the lengthy background to the litigation, the Court held that at no point had the amounts of “undisputed core debt” or “core tax” been considered or identified by the High Court (at [54]). The Court found that the core tax not in dispute was $109,675.22. This was the difference between $1,136,138.36 (the amount identified by Mr Doubleday in his 2009 affidavit as being core tax plus shortfall penalties) and $1,026,463.14 (the amount paid by CPL according to the Commissioner’s letter setting out the proposed 15% reduction in penalties and interest) (at [76(f)]).

The Court went on to find that the evidence suggested that CPL had total assets of $1,017,094.60, made up of term deposits at ANZ Bank, the property at 854 Colombo Street, and an as yet unpaid insurance pay-out of $138,064.77 (at [80] – [83]). The Court noted that this was slightly shy of Mr Doubleday’s calculation of the total debt at July 2008 of $1,088,461.15, and exceeded by a wide margin Mr Brightly’s calculation of the total debt at December 2006 of $827,304.62 (at [83]).

The Court held that the difference between the revised debt claim and CPL’s asset position appeared to be comparatively narrow. Further, the variability in the figures relied on by the Commissioner and the unchallenged value of CPL’s assets meant that it was at least open to doubt that the High Court could properly have made a liquidation order (at [86]).

The proper course was to allow the appeal, set aside the liquidation order, and remit the matter back for rehearing in the High Court where greater scrutiny can be given to the figures of both sides.

However, that order was conditional on Ms Sisson, on behalf of CPL, paying into the High Court at Christchurch the amount of $109,675.22 within 15 working days of this judgment (at [88]).

Aside from the liquidation issue, the Court also held that the doctrine of res judicata applied to any challenge to CPL’s liability for 85% of the penalties. As such, the so-called Taxation Review Authority and Notice of Proposed Adjustment proceedings did not live on in isolation from the conclusions reached by the Court of Appeal in the judicial review proceedings. However, the precise amount of the reduction and the consequent level of CPL’s indebtedness had not been determined, and so CPL could test the accuracy and methodology of the Commissioner’s calculation in the High Court (at [102] – [103]).

The Court also held that CPL could not rely on potential damages claims associated with the alleged failure of the Commissioner to disclose information as an off-set or counterclaim against amounts owed in core tax and penalties (at [107]).

Insolvency Act 2006